<PAGE> 1
As filed with the Securities and Exchange Commission on October ___, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
ACCESS BEYOND, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------------
<TABLE>
<S> <C> <C>
Delaware 3661 52-1987873
- ------------------------------- ---------------------------- ----------------------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
Mark Fields
Acting Chief Financial Officer
1300 Quince Orchard Blvd. 1300 Quince Orchard Blvd.
Gaithersburg, MD 20878 Gaithersburg, MD 20878
(301) 921-8600 (301) 921-8600
- --------------------------------- ------------------------------------
(Address, including Zip Code, and (Name, Address, Including Zip Code,
Telephone Number, Including Area and Telephone Number, Including Area
Code, of Registrant's Principal Code, of Agent for Service)
Executive Offices)
----------------------
Copy to:
Stephen I. Budow, Esq.
Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, New York 10022
(212) 735-8600
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
----------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ___________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ] ___________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
Title of Each Class of
Securities to be Amount to be Proposed Maximum Aggregate Aggregate Offering Amount of Registration
Registered registered Offering Price per Share (1) Price Fee
===========================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, par value 503,704 $5.5625 $2,801,854 $849.05
$.01 per share
===========================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended, and
constitutes the average of the bid and asked price of the Company's Common
Stock on the Nasdaq National Market on October 24, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
<PAGE> 2
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED OCTOBER ___, 1997
503,704 SHARES
ACCESS BEYOND, INC.
COMMON STOCK
(Par Value $.01 Per Share)
The shares of Common Stock, $.01 par value per share (the "Common
Stock"), of Access Beyond, Inc. (the "Company" or "Access Beyond") that relate
to this Prospectus consist of 503,704 shares of the Company's Common Stock (the
"Shares") offered for sale by Paradyne Corporation (the "Selling Shareholder").
See "Selling Shareholder." The Company has agreed to pay all of the expenses of
this offering but will not receive any of the proceeds from the sale of the
Shares being offered hereby.
All brokerage commissions and other similar expenses incurred by the
Selling Shareholder will be borne by the Selling Shareholder. The aggregate
proceeds to the Selling Shareholder from the sale of the Shares will be the
purchase price of the Shares sold, less the aggregate agents' commissions and
underwriters' discounts, if any, and other expenses of issuance and distribution
not borne by the Company. See "Use of Proceeds" and "Plan of Distribution."
The Common Stock is quoted on the National Association of Securities
Dealers Automated Quotations/National Market System (NASDAQ/NMS) under the
symbol "ACCB." The closing price per share reported on the NASDAQ/NMS on October
24, 1997 was $5.5625.
The Selling Shareholder and any broker-dealers, agents or underwriters
that participate with the Selling Shareholder in the distribution of the Shares,
may be deemed "underwriters," as that term is defined in the Securities Act of
1933, as amended (the "Securities Act"), and any commissions received by them
and any profit on the resale of the Shares purchased by them may be deemed
underwriting commissions or discounts under the Securities Act. The Shares to be
offered by the Selling Shareholder may be offered in one or more transactions in
the over-the-counter market or in negotiated transactions or a combination of
such methods of sale, at market prices prevailing at the time of sale, the
prices related to such prevailing market prices or at negotiated prices. The
Shares to be offered by the Selling Shareholder may be sold either (a) to a
broker or dealer as principal for resale by such broker or dealer for its
account pursuant to this Prospectus (for example, in transactions with a "market
maker") or (b) in brokerage transactions, including transactions in which the
broker solicits purchasers.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 9 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER __, 1997
<PAGE> 3
All dealers effecting transactions in the securities offered hereby may
be required to deliver a copy of this Prospectus.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy any
security other than the securities offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy the securities by anyone in
any jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any offer or sale made hereunder shall,
under any circumstances, create any implication that there has been no change in
the affairs of the Company since the date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copies may be obtained at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, as well as at the Regional Offices
of the Commission at Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such information may also be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Commission's web
site can be accessed at http://www.sec.gov. Any such reports, proxy statements
and other information filed or to be filed by the Company may also be inspected
at the offices of the National Association of Securities Dealers, Inc., Market
Listing Section, 1735 K Street, N.W., Washington, D.C. 20006. The Common Stock
is traded on NASDAQ/NMS, and the Company's reports (and proxy and information
statements when filed) may be inspected at the offices of The Nasdaq Stock
Market, Inc., located at 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on
Form S-1 and amendments thereto (the "Registration Statement") under the
Securities Act, of which this Prospectus is a part. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to herein are not
necessarily complete. In each instance, for a more complete description of the
matter involved, reference is made to such contract, agreement or other document
filed as an exhibit to the Registration Statement, and the Registration
Statement shall be deemed qualified in its entirety by such reference.
The Company intends to furnish to holders of Common Stock for each
fiscal year an annual report which contains consolidated financial statements
prepared in accordance with United States generally accepted accounting
principles and audited and reported on, with an opinion expressed by, an
independent public accounting firm, and such other reports as may be required by
law.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
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<PAGE> 4
SUMMARY
The following is a summary of certain information contained elsewhere
in this Prospectus and is qualified by the more detailed information set forth
elsewhere in this Prospectus which should be read in its entirety. Unless
otherwise indicated, (i) all references to the operations of the Company in this
Prospectus shall include the operations of the Remote Access Business (as
hereinafter defined) of Penril DataComm Networks, Inc. ("Penril") prior to
November 18, 1996; and (ii) all references to Hayes capital stock, options and
warrants assume the application of the Conversion Ratio. Capitalized terms used
but not defined in this Summary have the respective meanings ascribed to them
elsewhere in this Prospectus. Portions of this Prospectus contain certain
"forward looking" statements which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward looking statements. Factors that might cause such a difference
include, but are not limited to, market acceptance of the Company's products and
services, other factors discussed in this Prospectus, including factors
discussed in "RISK FACTORS," as well as factors discussed in other filings made
with the Commission. Although the Company believes that the assumptions
underlying the forward looking statements contained herein are reasonable, any
of the assumptions could prove inaccurate, and therefore, there can be no
assurance that the forward looking statements included herein will prove to be
accurate.
THE COMPANY
The Company is in the business of developing and marketing products
which enable local, remote or mobile users to access network resources (the
"Remote Access Business"). The Company was incorporated on July 23, 1996 and was
spun-off from Penril on November 18, 1996 pursuant to the distribution (the
"Distribution") to the Penril stockholders on such date of shares of Common
Stock in connection with the merger of Penril with a wholly-owned subsidiary of
Bay Networks, Inc. (the "Penril/Bay Merger"). The Company retains the historical
financial information of Penril through November 18, 1996.
The Company's product line consists of the product family called Access
Beyond, serving the remote access market and products which serve the LAN and
Host Access product markets.
The Company's Access Beyond product family is targeted at the remote
access market, providing a scalable modular platform combining advanced modem,
ISDN BRI/PRI, remote access, internet working and terminal connectivity
capabilities within a single family of products. The Access Beyond products
currently use three chassis configurations supporting from one to eight
interface modules for end users to choose from, based on current needs and
anticipated future growth. Interface modules are then selected based upon WAN
and LAN technology and port density requirements. The result is a fully
integrated solution that effectively solves the end user's specific remote
access needs.
The Access Beyond advanced remote access software delivers complete IP,
IPX and Appletalk routing, remote node and remote control capabilities including
NACS/NASI, all combined with full support for PPP, SLIP, CSLIP, LAT, Telnet, and
a wealth of security and management capabilities. In addition to full support
for SNMP, it provides an advanced, easy to use Windows based management and
configuration utility.
The Company recently introduced a new class of remote access solutions
that integrates both T1 and PRI-ISDN directly within Microsoft Windows NT
servers. This new technology, dubbed "Hawk", supports either digital or analog
(modem or ISDN) remote access transmission and can be easily plugged into any
Microsoft Windows NT or Novell Netware Connect and Border Manager configured
server. Servers can be configured to simultaneously support existing network
applications as well as remote access, with the Dynamic Access Switching
available in the Hawk solution. This substantially reduces network traffic by
connecting users directly into the server hosting the network applications.
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<PAGE> 5
The LAN and Host Access Products currently sold by the Company include
statistical multiplexers and host access servers (VCX) and Ethernet terminal
servers (CSX), Ethernet local and remote bridge routers (BRX), and a line of
CSU/DSU wide area products. Each of the LAN and Host Access Products provides
the Company with an existing revenue stream as well as an installed base.
The VCX product line of multiplexers ranges from 4-port remote site
multiplexers to enterprise solutions providing up to 304 ports or 36 trunk lines
and multipurpose communication servers that combine both WAN and LAN
capabilities. These products can function as a data PBX, X.25 PAD, statistical
multiplexer, terminal server or any combination of these. Although the market
for these products is in decline, the Company continues to serve the installed
base and fulfill customer applications.
The CSX Ethernet communications server family provides local and dialup
access to Ethernet LANs. Available as either 8-port or 16-port stand alone units
or as a modular chassis based solution, the CSX server provides terminal and
dialup access for TCP/IP networks.
Pending Merger. On July 29, 1997, the Company entered into an Agreement
and Plan of Reorganization (the "Merger Agreement") with Hayes Microcomputer
Products, Inc., a Georgia corporation ("Hayes"). Under the terms of the Merger
Agreement, H & A Merger Sub, Inc., a Georgia corporation ("Subsidiary") and a
wholly-owned subsidiary of the Company, will merge with Hayes. As a result of
the Merger, Hayes will become a wholly-owned subsidiary of the Company, and the
shareholders of Hayes at the time the Merger becomes effective (the "Effective
Time") will own approximately 79% of the outstanding equity securities of the
Company. After giving effect to the Merger and assuming that (x) all then vested
and exercisable options and warrants to purchase Hayes common stock are
exercised and (y) none of the then vested and exercisable options to purchase
Access Beyond's common stock are exercised, the Hayes shareholders will own
approximately 80.15% of the issued and outstanding securities of the Company. At
the Effective Time, (a) each outstanding share of Hayes (i) common stock, $.01
par value per share ("Hayes Common Stock"), will be converted into a right to
receive such number of shares of the Company's Common Stock, as is equal to the
Conversion Ratio (as defined below), (ii) Series A Preferred Stock, no par value
("Hayes Series A Preferred Stock"), will be converted into the right to receive
such number of shares of Common Stock as is equal to the Conversion Ratio
multiplied by the number of shares of Hayes Common Stock into which such shares
of Hayes Series A Preferred Stock is then convertible, and (iii) Series B
Preferred Stock, no par value ("Hayes Series B Preferred Stock"), will be
converted into the right to receive such number of shares of the Company's
Series A Preferred Stock (the "Series A Preferred Stock") as is equal to the
Conversion Ratio multiplied by the number of shares of Hayes Common Stock into
which such shares of Hayes Series B Preferred Stock is then convertible; (b) the
Company will amend its certificate of incorporation to (i) change its name to
Hayes Communications Inc., (ii) increase the number of authorized shares of
capital stock and (iii) create the Series A Preferred Stock; (c) the Board of
Directors of the Company will be increased to seven members, five of whom will
be designated by the Hayes shareholders; and (d) the obligations of Hayes under
the Hayes Stock Option Plan will be assumed by the Company. Based on the number
of Hayes and Company shares outstanding as of September 30, 1997, the Conversion
Ratio would equal 4.62892 Company shares for each Hayes share. There can be no
assurance that the Merger will be consummated.
The Conversion Ratio is equal to the percentage ownership immediately
following the closing of the Merger of the issued and outstanding shares of
Common Stock and Series A Preferred Stock (together, the "Securities") that the
holders of all classes of Hayes stock, in the aggregate, are entitled to receive
in the Merger (which the Company and Hayes have agreed is 79%), multiplied by a
ratio, the numerator of which is the number of shares of the Securities issued
and outstanding on a fully diluted basis (excluding stock options) prior to the
Effective Date, and the denominator of which is .21, all divided by the number
of shares of Hayes common and preferred stock issued and outstanding on a fully
diluted basis (excluding all outstanding options and warrants) prior to the
Effective Date.
The exact number of shares of Common Stock and Series A Preferred Stock
to be issued in the Merger cannot be determined as of the date hereof due to the
fact that any shares of Hayes capital stock issued and outstanding immediately
prior to the Merger, which are held by Hayes shareholders who comply with all of
the relevant provisions of the Georgia Business Corporation Code (the "GBCC")
for perfecting shareholders' rights of appraisal will not be
4
<PAGE> 6
converted into or be exchangeable for the right to receive the corresponding
Securities, unless and until such shareholders fail to perfect or effectively
withdraw or lose their rights to appraisal under such statute.
Pursuant to a shareholders agreement by and among Hayes and the holders
of Hayes capital stock dated April 16, 1996, as amended on April 23, 1997, Hayes
and the Hayes shareholders have agreed that a 70% affirmative vote shall be
required for a transaction such as the Merger. In connection with the Merger
Agreement, holders of 69.5% of Hayes capital stock have already agreed to vote
in favor of the Merger. Hayes will hold an annual shareholders' meeting to
consider and vote upon a proposal to approve the Merger and adopt the Merger
Agreement and the transactions contemplated thereby. The proposal will include
the conversion of all outstanding shares of (a) Hayes Common Stock into a right
to receive such number of shares of Company Common Stock as is equal to the
Conversion Ratio, (b) Hayes Series A Preferred Stock into the right to receive
such number of shares of Company Common Stock as is equal to the Conversion
Ratio multiplied by the number of shares of Hayes Common Stock into which such
shares of Hayes Series A preferred Stock is then convertible and (c) Hayes
Series B Preferred Stock into the right to receive such number of shares of
Series A Preferred Stock as is equal to the Conversion Ratio multiplied by the
number of shares of Hayes Common Stock into which such shares of Hayes Series B
Preferred Stock is then convertible.
The mailing address of the Company's principal executive offices is
currently 1300 Quince Orchard Boulevard, Gaithersburg, Maryland 20878, and the
phone number is (301) 921-8600
ACQUISITION OF SHARES BY SELLING SHAREHOLDER
On May 2, 1997, the Company and the Selling Shareholder entered into
the 2290 Remote Access Gateway ("Hawk") Technology Transfer Agreement (the
"Technology Agreement") pursuant to which the Selling Shareholder (i)
transferred to the Company technology relating to certain open remote dial
access cards (in the form of a comprehensive set of specifications, technical
information, hardware and software) (the "Hawk Technology"), (ii) sold to the
Company certain inventory tools and equipment used in the application of the
Hawk Technology to develop and manufacture products ("Hawk Products") which
include the Hawk Technology, (iii) licensed to the Company certain intellectual
property in connection with the Hawk Technology , and (iv) agreed to provide the
Company with technical, engineering, manufacturing and marketing support, for an
aggregate purchase price of 503,704 shares of the Company's common stock, par
value $.01 per share (the "Shares"), and $425,000 in cash. The Company and the
Selling Shareholder also entered into a Stock Purchase Agreement, dated as of
May 2, 1997, as amended in September 1997 (the "Purchase Agreement"), pursuant
to which the Company sold and issued the Shares to the Selling Shareholder. In
accordance with the terms of the Purchase Agreement, the Company is registering
the resale of the Shares in a Registration Statement on Form S-1 of which this
Prospectus is a part.
THE OFFERING
Selling Shareholder............. Paradyne Corporation, a Delaware corporation.
Shares of Common Stock Offered.. 503,704
Use of Proceeds................. The Company will not receive any proceeds from
the sale of the Shares.
Nasdaq National Market Symbol... ACCB
Risk Factors.................... The Shares offered hereby are highly
speculative and involve a high degree of
risk. In addition to the other information in
this Prospectus, prospective purchasers of
the Shares should consider carefully such
risks. See "Risk Factors" beginning on page 9.
5
<PAGE> 7
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The table below sets forth selected consolidated historical financial
data of the Company. The selected financial data for the Company for the year
ended July 31, 1997 has been obtained from audited financial statements of the
Company. The selected financial data for the Company for the fiscal years ended
July 31, 1996, 1995, 1994, and 1993 have been derived from the audited
consolidated financial statements of Penril, the former parent company of Access
Beyond. All of the data derived from the audited financial statements should be
read in conjunction with Access Beyond's "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto included elsewhere herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues(1) ................................. $ 44,108 $ 61,838 $ 52,611 $ 39,435 $ 18,000
Net income (loss)
Continuing operations(2) ..................... 1,027 2,345 (4,614) (20,668) (13,890)
Discontinued operations ...................... (896) (828) (1,661) 404 --
Loss on disposal of discontinued operations -- -- (1,400) (604) (3,735)
Earnings (loss) per share
Continuing operations ........................ 0.15 0.30 (0.61) (2.14) (1.16)
Discontinued operations ...................... (0.13) (0.11) (0.22) 0.04 --
Loss on disposal ............................. -- -- (0.19) (0.07) (0.31)
Cash dividends per share ........................ -- 0.02 -- -- --
BALANCE SHEET DATA:
Total assets(3) ................................. $ 49,178 $ 51,061 $ 44,388 $ 33,780 $ 13,906
Working capital ................................. 11,727 13,502 12,158 16,798 3,631
Long-term debt .................................. 10,217 8,890 5,681 905 743
Stockholders' equity ............................ 27,501 28,580 21,723 18,215 7,311
Book value per common share ..................... 3.96 3.66 2.87 1.89 0.61
</TABLE>
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(1) Included in net revenues are the following net revenues relating to
Penril's modem business which was acquired by Bay Networks, Inc.
("Bay") immediately prior to the Penril/Bay Merger, including $4.5
million paid in the fourth quarter of fiscal 1996 to Penril for a
license agreement with Bay:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
--------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues ....... $21,768 $22,828 $18,974 $19,519 $4,228
</TABLE>
(2) Net income from continuing operations for fiscal 1996 included a charge
of $9.7 million for restructuring costs and $500,000 for costs incurred
through July 31, 1996 related to the Penril/Bay Merger.
(3) Included in total assets are the following net assets related to two
discontinued operations (Technipower, Inc., a subsidiary the assets of
which were sold by Penril on October 11, 1996, and Electro-Metrics,
Inc. ("EMI"), a subsidiary the assets of which were sold on June 30,
1997):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
--------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net assets $ 7,299 $ 6,830 $ 5,145 $ 7,337 $ 0
</TABLE>
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SELECTED HISTORICAL FINANCIAL DATA OF HAYES
The following selected consolidated historical financial data of Hayes
has been derived from its audited consolidated historical financial statements
except for the six months ended June 30, 1996 and 1997 and should be read in
conjunction therewith and the notes thereto included herein. All of the data
derived from the audited financial statements should be read in conjunction with
Hayes' "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere herein and the consolidated financial
statements and the notes thereto included herein. The unaudited amounts have
been derived from the financial records, include only normal recurring
adjustments and are not indicative of a full year.
<TABLE>
<CAPTION>
THREE SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MONTHS JUNE 30, (UNAUDITED)
--------------------------------------- ENDED YEAR ENDED --------------------
DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995(1) 1995(2) 1996(1)(3) 1996 1997
---- ---- ---- ------- ------- --------- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ..................... $171,453 $206,191 $246,277 $269,155 $70,111 $257,452 $145,585 $ 94,897
Net income (loss)(3) ............. 3,883 887 (28,066) (14,383) (4,637) (13,154) 5,227 (7,835)
Earnings (loss) per share ........ $ .68 $ .16 $ (4.98) $ (2.56) $ (.82) $ (2.52) $ .70 $ (1.57)
BALANCE SHEET DATA:
Total assets ..................... $ 93,409 $103,939 $124,964 $100,964 $91,696 $ 69,215 $ 88,284 $100,921
Working capital .................. 29,687 30,314 15,840 25,994 25,270 3,654 26,372 (5,771)
Long-term debt ................... 9,108 10,307 28,685 -- 11,134 20,854 23,116 42,447
Shareholders' equity ............. 43,039 44,125 15,897 1,683 (3,012) 5,741 26,814 (2,420)
</TABLE>
- --------------
(1) On November 15, 1994, Hayes filed petition for relief under Chapter 11
of the United States Bankruptcy Code. On March 8, 1996, Hayes' Chapter
11 Plan was confirmed by the U.S. Bankruptcy Court and became effective
on April 16, 1996.
(2) Effective October 1, 1995, Hayes changed its year end from September 30
to December 31.
(3) Included in net income (loss) are the following reorganization costs
related to the Chapter 11 filing:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, ENDED DECEMBER DECEMBER 31, JUNE 30,
1995 31, 1995 1996 1996 (UNAUDITED)
---- -------- ---- ----------------
<S> <C> <C> <C> <C>
$5,026 $4,301 $5,378 $5,378
</TABLE>
The net loss for the year ended December 31, 1996 and six months ended
June 30, 1996 also includes a gain on the sale of land of $8.2 million. The net
loss for the year ended December 31, 1996 also includes a plant closure and
inventory write-down costs associated with such plant closure of $6.0 million.
Quarterly Financial Data
A summary of the Company's consolidated results of continuing
operations for each of the fiscal quarters for the years ended July 31, 1997 and
1996 is shown in the table below. This data includes the revenue, gross profit,
and net loss of Penril for the period August 1, 1995 through November 18, 1996.
The net loss from continuing operations for the fourth quarter of fiscal 1996
includes a charge of $9.7 million for restructuring charges, which are more
fully described in Note 2 of the Consolidated Financial Statements and $500,000
for costs incurred related to the Penril/Bay Merger Agreement with Bay. In the
first quarter of fiscal 1997 the Company recorded a one time gain on the
settlement of its lawsuit with SMC of $3.5 million. In the first and second
quarters of fiscal 1997, the Company paid one time merger related expenses
totaling $4.0 million.
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<TABLE>
<CAPTION>
Fiscal 1997 Quarters Ended: October 31,1996 January 31, 1997 April 30, 1997 July 31, 1997
- -------------------------- --------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 6,915 $ 4,593 $ 3,673 $ 2,819
Gross profit 2,323 1,279 1,768 631
Net loss (1,040) (6,232) (1,997) (4,621)
Net loss per share (.12) (.52) (.17) (.35)
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996 Quarters Ended: October 31,1995 January 31, 1996 April 30, 1996 July 31, 1996
- -------------------------- --------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 9,656 $ 7,691 $ 8,973 $ 13,115
Gross profit 4,757 2,691 3,304 6,274
Net loss (1,597) (3,999) (3,168) (11,904)
Net loss per share (0.19) (0.43) (0.31) (1.11)
</TABLE>
SELECTED PRO FORMA FINANCIAL DATA
The unaudited pro forma condensed combined financial statements of the
Company have been derived from the historical consolidated financial statements
of the Company and Hayes and give effect to (i) the Merger as a reverse
acquisition and a purchase for accounting purposes, and (ii) costs associated
with the consummation of the Merger. The unaudited pro forma condensed combined
statement of operations data gives effect to the Merger as if it had occurred at
the beginning of the earliest period presented. The unaudited pro forma
condensed combined balance sheet data gives effect to the Merger as if it had
occurred on June 30, 1997 using the Company's year ended July 31, 1997 financial
statements. The pro forma adjustments are based on preliminary estimates,
available information and certain assumptions that management deems appropriate.
The pro forma financial data does not purport to represent what the combined
Company's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates or to project the
combined Company's financial position or results of operations for any future
period.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .............. 278,682 101,389
Net income (loss) ......... (41,956) (16,544)
Earnings (loss) per share . ( .72) ( .28)
BALANCE SHEET DATA:
Total assets .............. 123,813
Working capital ........... (2,391)
Long-term debt ............ 42,903
Shareholders' equity ...... 12,877
</TABLE>
See "Unaudited Pro Forma Condensed Combined Financial Statements"
8
<PAGE> 10
RISK FACTORS
Investors should be aware that ownership of the Common Stock of the
Company involves certain risks, including those described below, which could
adversely affect the value of their holdings of Common Stock. The Company does
not make, nor has it authorized any other person to make, any representation
about the future market value of the Company's Common Stock. In addition to the
other information contained in this Prospectus, the following factors should be
considered carefully in evaluating an investment in the Shares offered hereby.
ABSENCE OF PROFITABLE OPERATIONS; LIQUIDITY
The Company, and the Remote Access Business as conducted by Penril,
have not been profitable in the past three fiscal years. Penril posted a net
loss from continuing operations of $4.6 million for fiscal 1995, and $20.7
million for fiscal 1996 and the Company posted a net loss of $13.9 million for
fiscal 1997. Such losses have been due, in part, to decreased revenues caused by
a declining market for certain Penril products that began in fiscal 1995,
non-recurring restructuring costs in connection with operations that were
discontinued due to decline in market demand, costs related to the Penril/Bay
Merger, which occurred during fiscal 1996, costs associated with development of
the Remote Access Business and the spinning off of the Company from Penril
during the year ended July 31, 1997. In addition, during fiscal 1997, the
Company's revenues including, in particular, its revenues from the "Access
Beyond" product family, have been insufficient for the Company to be profitable.
The Company has executed a term sheet for a $10.0 million private placement in
the Company and, upon the closing of the Merger, an additional $30.0 million
investment. There can be no assurance that the Company will achieve
profitability, or that the Company will be able to increase sales of its
products to an amount which will generate adequate cash for operational and
capital needs, or that any or all of such proposed private placements will be
consummated.
Hayes has not been profitable for the past three fiscal years. On
November 15, 1994, Hayes filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code due to its inability to pay its debts on a current
basis. Although Hayes consummated a court approved Reorganization Plan on April
16, 1996, it has accumulated losses of approximately $26.5 million since such
date.
The Company and Hayes have financed their loss from operations in the
past three years (or shorter period with respect to the Company) primarily
though private sales of equity securities, borrowings under credit facilities
and sale of assets, including assets from discontinued operations. On a combined
basis the Company and Hayes had a working capital deficit of approximately $38
million at June 30, 1997.
At the Effective Time, only a limited amount of cash will be available
for working capital from credit facilities of the combined companies. Both the
Company and Hayes are relying on anticipated cash from private placements
totaling $40.0 million prior to the Effective Time to provide working capital
following the Merger. In July 1997, Hayes entered into a letter of intent with a
prospective investor (the "Investor Letter of Intent") to purchase 1,350,743 of
Series C Preferred Stock from Hayes for a purchase price of $30.0 million. If
such purchase is consummated, these shares will be converted into 6,252,454
shares of Common Stock upon the Effective Time and the Hayes shareholders,
including such investor, will own 80.997%, instead of 79%, of the issued and
outstanding securities of the Company. The prospective investor subsequently
proposed to purchase additional shares of Hayes Common Stock from certain Hayes
shareholders for an aggregate purchase price of $10.0 million. Negotiations with
this prospective investor are continuing, and Hayes is also pursuing discussion
with other potential sources of capital funding. In the event that neither the
Company's proposed $10.0 million private placement, nor Hayes' proposed $30.0
million private placement is consummated, cash provided by future operations and
available borrowings under the Company's and Hayes' credit facilities or lines
of credit will be insufficient to meet the Company's working capital
requirements. There can be no assurance that any of such private placements will
be consummated prior to or subsequent to the Effective Time.
LIMITED TRADING HISTORY OF THE COMMON STOCK
The Common Stock has a limited history as a publicly traded security.
The price for the Common Stock is determined in the market place and may be
influenced by many factors, including the operating performance of the Company,
the depth and liquidity of the market for the Common Stock, investor perception
of the Company and general
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<PAGE> 11
economic and market conditions. There can be no assurance that an orderly market
for the Common Stock will be sustained, and the prices at which the Common Stock
is traded may fluctuate significantly.
LIMITED OPERATING HISTORY
The Company began operations on November 18, 1996 for the purpose of
receiving certain lines of business which were to be spun off from Penril. The
Company, as a separate entity, has a limited operating history. The Remote
Access Business, as conducted by Penril prior to the distribution of the Common
Stock to Penril shareholders in November 1996, had an operating history
consisting of the development and sale of local area network ("LAN") and host
access products (the "LAN and Host Access Products") and the development of a
new product family called "Access Beyond." See " - Relationship with Penril" and
"BUSINESS OF THE COMPANY - Principal Products."
DEPENDENCE ON KEY MANAGEMENT
If the Company is to be successful, its success will be due in large
part to the performance of Messrs. Dennis Hayes, Ronald Howard and P.K. Chan,
and, to a lesser extent, other key management personnel. Although the Company
will have employment agreements with Messrs. Hayes, Howard and Chan which
provide for their continued employment, no assurance can be given that the
Company will be able to retain their services or the services of any other key
management personnel. The loss of the services of one or more of the Company's
senior management following the Merger could have a material adverse effect upon
the Company's business, operating results and financial condition. See
"MANAGEMENT OF HAYES - Executive Compensation" and "MANAGEMENT OF HAYES -
Employment Agreements."
RISKS RELATING TO THE MERGER AND INTEGRATION OF THE BUSINESSES
There can be no assurance that the Merger with Hayes will be
consummated. If the Merger with Hayes is consummated, there can be no assurance
that the economies which the Company and Hayes expect to realize as a result of
the combination of the businesses will be achieved, or that the personnel from
the two companies will be successfully integrated.
TECHNOLOGICAL CHANGES
The market for networking and modem products is subject to rapid
technological change, evolving industry standards and frequent new product
introductions and, therefore, requires a high level of expenditures for research
and development. The Company may be required to incur significant expenditures
to develop new integrated product offerings. There can be no assurance that
customer demand for products integrating network connectivity and remote access
technologies will grow at the rate expected by the Company, that the Company
will be successful in developing, manufacturing and marketing new products or
product enhancements that respond to these customer demands or to evolving
industry standards and technological change, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction, manufacture and marketing of these products (especially in light
of the increasing design and manufacturing complexities associated with the
integration of technologies), or that its new products and product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. The Company's business, operating results and financial condition
may be materially and adversely affected if the Company encounters delays in
developing or introducing new products or product enhancements or if such
product enhancements do not gain market acceptance. In order to maintain a
competitive position, the Company must also continue to enhance its existing
products and there is no assurance that it will be able to do so. The Company
will be required to continue to make significant investment in research and
development to refine Hayes' products and its products and to continue to
develop additional products. A major portion of future revenues is expected to
come from new products and services. The Company cannot determine the ultimate
effect that new products will have on its revenues or earnings.
10
<PAGE> 12
POSSIBLE LOSS OF TECHNOLOGY
The Company acquired technology and intellectual property rights
relating to certain open remote dial access cards used in its Hawk products
principally in consideration of the issuance of the Shares. If the Company fails
to use its best efforts to maintain the effectiveness of the Registration
Statement of which this Prospectus is a part then such technology and rights
could be lost which loss could have a material adverse effect on the Company.
COMPETITION
The networking industry is highly competitive and competition is
expected to intensify. There are numerous companies competing in various
segments of the network management and remote access markets. Competitors
include Ascend Communications, Shiva Corporation, Cisco Systems, Inc., 3 Com
Corporation ("3Com"), Microcom, Inc. ("Microcom") and Bay Networks, Inc., among
others. Many of the Company's competitors have greater name recognition, more
extensive engineering, manufacturing and marketing capabilities and greater
financial, technological and personnel resources than those available to the
Company. In addition, certain companies in the networking industry have expanded
their product lines or technologies in recent years as a result of acquisitions.
There can be no assurance that the Company will be able to compete successfully
in the future with existing or new competitors.
Hayes' business products compete with the business products of 3Com,
AT&T, Microcom, Multitech, Telebit and others. 3Com is one of Hayes' most
significant competitors in the retail modem market. Other competitors of Hayes
in the retail modem market include GVC, Boca Research, Inc. ("Boca"), Zoom
Telephonics, Inc., Diamond Multimedia Systems, Inc. and others.
There are many other companies engaged in the research, development and
commercialization of products similar to the Hayes modem, network and broadband
products. Some of the Company's competitors and potential competitors possess
significantly greater capital, marketing, technical and other competitive
resources than Hayes or the Company following the Merger. As a result, they may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, to devote greater resources to the promotion and sale of
their products, or to devote greater resources to the development of new
products than can the Company.
Hayes' products are subject to significant price competition, and
management expects that it will face increasing pricing pressures from
competitors. Accordingly, there can be no assurance that following the Merger
the Company will be able to provide products that compare favorably with the
products of the Company's competitors or that competitive pressures will not
require the Company to reduce its prices. Any material reduction in the price of
the Company's products would negatively affect net margins as a percentage of
net revenues and would require the Company to increase sales to maintain or
increase net income.
IMPORTANT CONSIDERATIONS RELATED TO FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward looking statement within the
meaning of Section 27A of the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that all
forward looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to implement its strategy and identify
new market and product opportunities, product development costs, future return
rates of the Company's products, the dependence of the Company on certain
customers and manufacturers, as well as general market conditions, competition
and pricing. Although the Company believes that the assumptions underlying the
forward looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the forward
looking statements included herein, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
OPTION PLANS - SHARES ELIGIBLE FOR FUTURE SALE AND DILUTION
11
<PAGE> 13
In March 1997, the stockholders of the Company, at an Annual Meeting,
approved and ratified two stock option plans of the Company - the Incentive Plan
and the Amended and Restated 1996 Non-employee Directors' Stock Option Plan (the
"Directors' Plan"). The Company is authorized to issue options to purchase up to
an aggregate of 2,000,000 shares of Common Stock under the Incentive Plan and
options to purchase an aggregate of 250,000 shares of Common Stock under the
Directors' Plan. As of October 23, 1997, the Company had outstanding options to
purchase an aggregate of 965,900 shares under the Incentive Plan and options to
purchase an aggregate of 120,000 shares under the Directors' Plan. As a result
of the Merger, all outstanding options will become fully vested. Holders of
Common Stock could experience dilution in possible future earnings per share in
the event that a large number of options are exercised. Furthermore, the Company
expects to register the resale of the shares of Common Stock issuable upon the
exercise of options granted under the Incentive Plan and the Directors' Plan,
which registration would allow such shares to be freely tradeable in the public
market immediately following exercise of such options, subject to certain volume
limitations for options exercised by directors and executive officers of the
Company.
In addition, at the Effective Time, each outstanding option to purchase
Hayes Common Stock (the "Hayes Options") granted under the Hayes Stock Option
Plan, adopted on June 4, 1996, as amended effective October 22, 1996 (the "Hayes
Option Plan"), and each warrant to purchase Hayes capital stock (collectively
the "Hayes Warrants") will be assumed by the Company in accordance with the
terms of such option or warrant, and converted into rights to purchase shares of
the Company's Securities. Hayes Options and Hayes Warrants for 5,690,074 shares
and 1,851,560 shares of Common Stock, respectively, will be assumed by the
Company. At the Effective Time, Hayes Options to purchase 1,597,664 shares of
Company Common Stock and Hayes Warrants to purchase 1,851,560 shares of Company
Common Stock will be exercisable. Holders of Common Stock could experience
dilution in possible future earnings per share in the event that a large number
of Hayes Options or Hayes Warrants of options are exercised. The Company expects
to register the resale of the shares of Common Stock issuable upon the exercise
of the Hayes Options and the Hayes Warrants, which registration would allow such
shares to be freely tradeable in the public market immediately following
exercise of such Hayes Options and Hayes Warrants, subject to certain volume and
other limitations for Hayes Options and Hayes Warrants, by directors and
executive officers of the Company following the Merger.
OTHER ISSUANCES - SHARES ELIGIBLE FOR FUTURE SALE AND DILUTION
The Company may use shares of its Common Stock to acquire assets,
technology, license rights and/or other companies to develop and expand its
product lines. Future issuances of Common Stock in connection with such
acquisitions could, individually or in the aggregate, adversely affect the
market price of the Common Stock.
PRODUCT PROTECTION AND INTELLECTUAL PROPERTY
The Company, like many other companies in the network access industry,
anticipates that it will rely upon rights granted through licenses from third
parties for a substantial amount of proprietary information used to develop its
products; however, some companies may decide not to grant such licenses and may
seek to protect their proprietary rights in such technological information.
Accordingly, there can be no assurance that the Company will be able to continue
obtaining additional rights to utilize proprietary technological information
necessary to develop its products. Because of the existence of a large number of
patents in the networking field and the rapid rate of issuance of new patents,
it is not economically practical to determine in advance whether a product or
any of its components infringe patent rights of others. In the event of any
infringement, the Company believes that, based upon industry practice, necessary
licenses or rights under such patents may be obtained on terms that should not
have a material adverse effect on the Company's consolidated financial position
or results of operations. However, there can be no assurance in this regard.
Hayes relies on a combination of patent, trade secret, copyright and
trademark laws, nondisclosure and other contractual provisions and technical
measures to protect its proprietary and intellectual property rights in its
products. Hayes receives from time to time, and may receive in the future,
communications from third parties asserting intellectual property rights
relating to its products and technologies. There can be no assurance that these
protections will be adequate to protect Hayes' proprietary rights or that
following the Merger, the Company's competitors will not independently develop
products that are substantially equivalent or superior to the Company's
products. There can be no assurance that third parties will not assert
infringement claims against the Company following the Merger. The loss
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<PAGE> 14
of proprietary technology or a successful claim against the Company could have a
material adverse effect on the Company's financial condition or results of
operations.
CERTAIN ANTITAKEOVER EFFECTS
The Company's Certificate of Incorporation includes certain provisions
that are intended to prevent or delay the acquisition of the Company by means of
a tender offer, proxy contest or otherwise. Specifically, the Certificate of
Incorporation provides for a classified board of directors, classified into
three classes with terms of three years each. In addition, the Certificate of
Incorporation authorizes the Company Board to issue preferred stock without
further stockholder approval, which could have dividend, redemption,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of Common Stock. Finally, the
Company is subject to Section 203 of the Delaware General Corporation Law (the
"DGCL") which limits transactions between a publicly held company and
"interested stockholders" (generally those stockholders who, together with their
affiliates and associates, own 15% or more of a company's outstanding capital
stock). Any one of, or a combination of, the above anti-takeover provisions
could discourage a third party from attempting to acquire control of the
Company. See "DESCRIPTION OF CAPITAL STOCK OF THE COMPANY." The Incentive Plan
and the Directors' Plan provide for acceleration of stock options upon a change
in control of the Company, which may have the effect of making an acquisition of
control of the Company more expensive. See "MANAGEMENT OF THE COMPANY -- The
Amended and Restated 1996 Incentive Option Plan" and "-- The Amended and
Restated 1996 Non-employee Directors Stock Option Plan." These plans may also
inhibit a change in control of the Company. In addition, certain Company
officers have severance compensation agreements with the Company that provide
for substantial cash payments and acceleration of other benefits in the event of
specified corporate changes related to the Company, including a change in
control of the Company. See "MANAGEMENT OF THE COMPANY -- Employment and
Consulting Agreements."
DIVIDENDS
The Company does not anticipate paying dividends on either its Common
Stock or Series A Preferred Stock in the foreseeable future. Holders of Series A
Preferred Stock are entitled to receive, as and when declared by the Company
Board, cumulative compounding dividends at the rate of 10% per annum of the
original issue price per share of the Series A Preferred Stock. No dividends may
be paid on the Common Stock unless all accrued and unpaid dividends on the
Series A Preferred Stock are paid.
Pursuant to a loan and security agreement dated October 2, 1997, the
Company may not declare or pay any dividends, except dividends payable solely in
shares of capital stock, or make any other payments on its capital stock,
without the consent of the lender.
RELATIONSHIP WITH PENRIL
The Company has a limited operating history as an independent public
company. The operations of the Company historically have relied on Penril for
certain necessary administrative services. As of November 18, 1996, Penril and
the Company entered into several agreements for purposes of governing certain of
the ongoing relationships between the two companies following the Penril/Bay
Merger, including indemnification obligations. Pursuant to the Indemnification
Agreement entered into between Penril and the Company (the "Indemnification
Agreement") in connection with Penril's transfer (the "Transfer") to the Company
of substantially all of its assets and liabilities, other than those assets and
liabilities related to Penril's modem business (the "Modem Business"), the
Company agreed to indemnify Penril against all expenses and liabilities
resulting from (i) the operation of the Company from and after the Penril/Bay
Merger, (ii) Penril's operations prior to the Transfer other than those based
upon, arising out of or in connection with (a) the Modem Business, (b) the
Penril/Bay Merger and transactions relating to the Penril/Bay Merger or (c) the
tax consequences of the Distribution, (iii) the termination of employment of
employees (other than those employees identified as remaining with Penril after
the Transfer) by Penril or (iv) information furnished by Penril or the Company
relating to the Company contained in the registration statement filed by Bay in
connection with the Penril/Bay Merger Prospectus. Included within the potential
liabilities against which the Company will indemnify Penril are those referred
to in "BUSINESS OF THE COMPANY - Legal Proceedings." Although the Company is not
aware of any pending or threatened material liability for which the Company may
become obligated to make payments in connection
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<PAGE> 15
with its obligation to indemnify Penril, there can be no assurance that such
indemnification obligations could not arise or that such indemnification
obligations would not be material to the Company. These agreements were
negotiated while the Company was owned by Penril and, consequently, are not the
result of arm's-length negotiations between independent parties. Nevertheless,
the Company believes that the agreements are fair to the parties and contain
terms which are generally comparable to those which would result from
arm's-length negotiations, although there can be no assurance thereof.
INTERNATIONAL SALES
In fiscal 1996, international sales of Hayes' products accounted for
approximately 25% of net sales. These sales were primarily to customers in
Europe and the Asia Pacific region. The Company anticipates that, following the
Merger, international sales will continue to account for a significant portion
of the Company's net sales in the foreseeable future. As a result, the Company's
operating results will be subject to risks inherent in international sales,
including tariffs or other barriers, difficulties in staffing and managing
international operations, fluctuations in foreign currency exchange rates,
compliance with international regulations, approval and market requirements, and
volatility of international economic conditions. One or more of these factors
may have a material adverse effect on the Company's future international sales
and, consequently, on the Company's operating results.
PRODUCT RETURNS, PRICE PROTECTION AND WARRANTY CLAIMS
Like other manufacturers of computer products, Hayes and the Company
are exposed to the risk of product returns from wholesale distributors,
resellers and retailers, either through contractual stock rotation privileges or
as a result of Hayes' and the Company's interest in assisting customers in
balancing inventories. Although Hayes and the Company attempt to monitor and
manage the volume of sales to wholesale distributors and retailers, large
shipments in anticipation of sales by wholesale distributors and retailers could
lead to substantial overstocking by their wholesale distributors and lead to
higher than normal returns. Moreover, the risk of product returns may increase
if demand for Hayes' or the Company's products declines. When Hayes and the
Company reduce their prices, Hayes and the Company credit their respective
wholesale distributors and retailers for the difference between the purchase
price of products remaining in their inventory and the reduced price for such
products on terms negotiated with Hayes and the Company, respectively, which
could have a material adverse effect on the operating results of Hayes and the
Company, respectively.
Hayes' standard two-year warranty permits customers to return any
product for repair or replacement if the product does not perform as warranted.
In the U.S. and Canada only, Hayes also offers its customers the option of an
additional three-year warranty upon completion of a registration card within 90
days of purchase. Some of the Practical Peripheral modems previously sold have a
lifetime warranty. Hayes to date has not encountered material warranty claims or
liabilities. Hayes has established and the Company following the Merger will
establish reserves for product returns, price protection and warranty claims
which management believes are adequate. There can be no assurance that product
returns, price protection and warranty claims will not have a material adverse
effect on future operating results of the Company.
DEPENDENCE ON SUPPLIERS
Material and components for the Company's products are purchased from
outside suppliers. While most components are available from several suppliers, a
few are provided from sole-source vendors. The Company believes that in most
cases alternative sources of supply could be obtained within a reasonable time
period; however, an interruption in the supply of such components could have a
temporary adverse effect on the Company's operations. The major components of
Hayes' products include silicon chips, printed circuit boards, microprocessors,
chipsets and other integrated circuits. Most of the components used in Hayes'
modem products are available from multiple sources. However, certain components
used in Hayes' products are custom manufactured and currently obtained from
single sources. In addition, although readily interchangeable items are
available from several suppliers, many of the components that are incorporated
in Hayes' products, such as integrated circuits and discrete components, are in
limited supply and are allocated throughout the industry. Like others in the
computer industry, Hayes has, from time to time, experienced difficulty in
obtaining certain components. While Hayes has entered into supply arrangements
with certain suppliers, including Lucent Technologies, Inc. and Rockwell
International Corporation ("Rockwell") regarding a supply
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<PAGE> 16
of chips and chipsets, there can be no assurance following the Merger that these
suppliers will continue to meet the Company's requirements. There can be no
assurance that severe shortages of components will not occur in the future which
could increase the cost or delay the shipment of products and have a material
adverse effect on the Company's operating results.
SALES CHANNEL RISKS
The Company's distribution channel is composed of value-added
resellers, original equipment manufacturers and distributors in more than 40
countries. Sales to end-user customers account for less than 10% of the
Company's revenues. Many of the Company's value-added resellers and other
distributors carry products which are complimentary to those of the Company, and
may choose to give higher priority to products of other suppliers or competitors
of the Company.
Hayes sells its products primarily through national, regional and
international wholesale distributors, national corporate resellers, computer
superstores and mail order. Sales to wholesale distributors accounted for a
significant share of Hayes net sales in fiscal 1996. The personal computer
distribution industry has been characterized by rapid change, including
consolidations and financial difficulties of wholesale distributors and the
emergence of alternative distribution channels. Hayes is dependent upon the
continued viability and financial stability of its wholesale distributors. The
loss or ineffectiveness of any of Hayes' largest wholesale distributors or a
number of its smaller wholesale distributors could have a material adverse
effect on the Company's operating results following the Merger. In addition, an
increasing number of vendors are competing for access to wholesale distributors
which could adversely affect the Company's ability to maintain Hayes' existing
relationships with its wholesale distributors or could negatively impact sales
to such distributors.
Hayes is dependent on the continued viability and financial stability
of its national resellers. The loss or ineffectiveness of any of Hayes' largest
national resellers or a number of its smaller national resellers could have a
material adverse effect on the Company's operating results following the Merger.
Due to increased competition for limited shelf space, retailers are
increasingly in a better position to negotiate favorable terms of sale,
including price discounts and product return policies. There can be no assurance
that Hayes will be able to sustain or increase its sales to retailers, which
could have a material adverse effect on the Company's operating results
following the Merger.
The OEM modem market has grown to approximately 50% of the overall
modem market. Hayes has not participated substantially in the OEM modem market
for the last two years and Hayes can give no assurance that it will be able to
successfully penetrate this market.
CONDITIONS TO THE MERGER
The obligations of the Company and Hayes to effect the Merger are
subject to a number of conditions including the receipt by each party of all
consents, assignments, waivers, authorizations or other certificates of third
parties for the continuation in full force and effect of any and all material
contracts and leases. Hayes has not received a consent from its lender CIT
Group/Credit Finance, Inc. ("CIT") for the continuation in full force and effect
of Hayes' credit facility with CIT following the Merger. If CIT does not consent
to the continuation of its credit facility following the Merger, each of Hayes
and the Company may determine to not effect the Merger. If the Merger is
consummated without CIT's consent to continue its credit facility with the
Company, it will be necessary for the Company to pursue additional equity or
debt financing to meet its cash requirements. See "HAYES' MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources."
IMPLEMENTATION OF NEW INFORMATION SYSTEM
Hayes is currently involved in the replacement of its information
systems with software from Oracle Corporation which will be completed after the
Effective Time of the Merger. The implementation of a new information system
could cause disruption to work efficiency. There can be no assurance that the
project will be completed within the budgeted
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<PAGE> 17
time schedule or costs. To the extent that the project is not completed timely
or within the budgeted costs, the Company's business and financial condition
could be adversely affected.
ELECTION OF DIRECTORS AND OTHER STOCKHOLDER MATTERS
As a result of the Shareholder's Agreement among each of the Hayes
Shareholders and Mr. Howard, certain shareholders who will own substantially
more than 50% of the Common Stock will control the election of a majority of the
directors, such agreement to remain effective for so long as certain
shareholders own at least ten (10%) percent of the outstanding shares of the
Company. Such persons will also be able to control the taking of action which
requires approval by stockholders, since they will own more than a majority of
the outstanding shares of the Company.
USE OF PROCEEDS
The Company will not realize any proceeds from the sale of the Shares.
The Company is obligated under the Purchase Agreement to pay all the expenses
associated with the registration of the Shares, including, without limitation,
all registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and expenses of any special audits incident to or required by the registration.
The Selling Shareholder will pay the expenses associated with the sale of the
Shares, which expenses may include selling commissions, underwriting fees, stock
transfer taxes applicable to the Shares, and all fees and disbursements of
counsel for the Selling Shareholder.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not
anticipate paying any such dividends on its Common Stock in the foreseeable
future. Holders of Series A Preferred Stock will be entitled to receive, as and
when declared by the Company Board, cumulative compounding dividends at the rate
of ten percent (10%) per annum of the original issue price per share of the
Series A Preferred Stock. Such dividends are to be paid in cash upon redemption,
or in additional shares of Common Stock upon conversion of the Series A
Preferred Stock. No dividends may be paid on the Common Stock unless all accrued
and unpaid dividends on the Series A Stock are paid.
Pursuant to a loan and security agreement dated October 2, 1997, the
Company may not declare or pay any dividends, except dividends payable solely in
shares of capital stock, or make any other payments on its capital stock,
without the consent of the lender.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
THE COMPANY
The Common Stock is traded on NASDAQ/NMS under the symbol "ACCB." The
stock prices listed below represent the high and low closing sale prices of the
Common Stock, as reported by NASDAQ/NMS, for each fiscal quarter since the
Common Stock began trading on NASDAQ/NMS on November 18, 1996. There is no
public market for the Series A Preferred Stock.
Fiscal Year 1997
- ----------------
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Second quarter ended January 31, 1997
(from November 18, 1996) $8 7/8 $6
Third quarter ended April 30, 1997 $7 1/8 $3
Fourth quarter ended July 31, 1997 $6 1/8 $3 1/4
First quarter (through October 24, 1997) $8 3/16 $4 5/8
</TABLE>
16
<PAGE> 18
On October 24, 1997, the last reported sale price of the Common Stock
on NASDAQ/NMS was $5.5625 per share and there were approximately 803 holders of
record of Common Stock, who management believes hold such shares of Common Stock
for more than 1,800 beneficial owners.
HAYES
Hayes is a privately-held company and its securities are not listed for
quotation on NASDAQ/NMS or a stock exchange. On November 15, 1994, Hayes filed a
petition for relief under Chapter 11 of the U.S. Bankruptcy Code due to its
inability to pay its debts on a current basis. From November 15, 1994 to April
16, 1996, there were no sales of Hayes securities other than the redemption of
529,141.81 shares (after a 3.07835 for one reverse split) of Hayes Common Stock
owned by Melita E. Hayes pursuant to the court approved Plan and the redemption
of stock under the Hayes Profit Sharing, Savings and Stock Plan. In addition,
and in connection with the Plan, on April 16, 1996, Hayes issued 4,900,000
shares of Hayes Series A Preferred Stock for $35.0 million or $7.14 per share to
fund the Plan. On April 11, 1997, Hayes issued 263,113 shares of Hayes Series B
Preferred Stock to Vulcan Ventures for $5.5 million or $20.90 per share without
giving effect to the Conversion Ratio. The following is a summary of prices paid
in private transactions involving Hayes' capital stock during the past two years
without giving effect to the Conversion Ratio:
<TABLE>
<CAPTION>
Price
Transaction Date Description of Security Transaction Value Per Share
- ---------------- ----------------------- ----------------- ---------
<S> <C> <C> <C>
April 16, 1996 Common Stock $11,000,000 $20.79
April 16, 1996 Series A Preferred Stock $35,000,000 $7.14
September 12, 1996 Common Stock $1,741,805 $22.90
December 6, 1996 Common Stock $737,383 $22.90
April 11, 1997 Series B Preferred Stock $5,500,000 $20.90
</TABLE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the
Company at July 31, 1997 and (ii) the pro forma capitalization of the Company at
July 30, 1997 adjusted to give effect to the Merger Agreement as a reverse
acquisition and a purchase for accounting purposes, and costs associated with
the consummation of the Merger. The actual capitalization of the Company is
based on the audited financial statements of the Company as of July 31, 1997.
<TABLE>
<CAPTION>
As of July 31, 1997
- ------------------------------------------------------------------------------------------------------
Actual Pro Forma
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Long-term debt:
CIT line of credit(1) 18,767
CIT term of loans due April 1, 2002(1) 7,079
Convertible notes from Investors(1) 10,000
Capital leases and other(1) 743 1,889
-------- -------
Total long-term debt 743 37,735
Stockholders' equity:
Common stock, $0.01 par value; 30,000,000 shares
authorized; 12,495,291 issued and outstanding
(58,283,453 issued and outstanding pro forma)(2) 125 583
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
As of July 31, 1997
- ------------------------------------------------------------------------------------------------------
Actual Pro Forma
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Series A Preferred Stock, no par value; 1,217,930
shares authorized and outstanding pro forma(3) -- 1,218
Paid-in capital(4) 46,431 94,944
Accumulated deficit(4) (39,206) (84,545)
Other adjustments(4) (39) 677
-------- -------
Total stockholders' equity 7,311 12,877
-------- -------
- ------------------------------------------------------------------------------------------------------
Total capitalization 8,054 50,612
-------- -------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the unaudited financial statements of Hayes as of June 30, 1997.
(2) Based on the issuance of 45,788,162 shares of common stock to be issued
pursuant to the Merger Agreement.
(3) Based on the issuance of 1,217,930 shares of Series A Preferred Stock to be
issued pursuant to the Merger Agreement.
(4) Includes the effect of the exchange of Hayes common and preferred stock for
common and preferred stock of the Company.
SELLING SHAREHOLDER
The Selling Shareholder is offering 503,704 shares of Common Stock of
the Company (the "Shares") under the registration statement of which this
Prospectus is a part. The Shares were acquired by the Selling Shareholder from
the Company in the sale of Hawk Technology and Hawk Products to the Company in
May 1997. Prior to such May 1997 transaction, the Selling Shareholder owned no
shares of the Company's Common Stock. Previously, the Selling Shareholder (or
its predecessor entities) had entered into agreements with Penril involving
certain technologies related to the Access Beyond Business of Penril. In April
1995, Penril and the Selling Shareholder (then known as AT&T Paradyne
Corporation, and was at the time a wholly-owned subsidiary of AT&T) entered into
a Joint Development Agreement ("Development Agreement") relating to the
development of software for bridge routers and remote access servers.
Simultaneously with the Development Agreement, Penril and the Selling
Shareholder entered into two other agreements: (1) a Patent License Agreement
("License Agreement") and (2) an Original Equipment Manufacturer Agreement ("OEM
Agreement"). The License Agreement and the OEM Agreement were to assist the
parties in carrying out the Development Agreement. Under the License Agreement,
Penril received the license to use certain AT&T patents in developing the
software for bridge routers and remote access servers. Under the OEM Agreement,
Penril was to provide the Selling Shareholder with various equipment to be used
in connection with the software developed by Penril under the Development
Agreement. The OEM Agreement was canceled by the Selling Shareholder prior to
any shipments by Penril. The money paid by the Selling Shareholder under the OEM
Agreement was applied to its funding obligations under the Development
Agreement.
18
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of the
Company have been derived from the historical consolidated financial statements
of the Company and Hayes and give effect to (i) the Merger as a reverse
acquisition and a purchase for accounting purposes, and (ii) costs associated
with the consummation of the Merger. The unaudited pro forma condensed combined
balance sheet gives effect to the combination as if it had occurred on June 30,
1997 using the Company's year ended July 31, 1997 financial statements. The
unaudited pro forma condensed combined statements of operations give effect to
the combination as if it had occurred at the beginning of the earliest period
presented. The pro forma adjustments are based on preliminary estimates,
available information and certain assumptions that management deems appropriate.
The pro forma financial data does not purport to represent what the combined
Company's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates or to project the
combined Company's financial position or results of operations for any future
period. The unaudited pro forma condensed combined financial statements should
be read in conjunction with the Company's and Hayes' consolidated financial
statements and the notes thereto included elsewhere herein.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
HAYES THE COMPANY ACQUISITION
JUNE 30, 1997 JULY 31, 1997 ADJUSTMENTS PRO FORMA
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.......................... $ 3,301 $ 578 $3,879
Accounts receivable................................ 38,371 3,050 41,421
Receivables from related parties................... 3,883 3,883
Inventories........................................ 34,891 5,678 749(1) 41,318
Prepaids and other(6).............................. 4,601 167 4,768
Total Current Assets......................... 85,047 9,473 749 95,269
Property and equipment............................. 9,185 3,484 12,669
Intangibles and other.............................. 6,689 949 7,638
Acquired technology................................ 4,010(2) 4,010
Acquired in process research and development....... 46,398(3) (46,398)(3)
Excess of cost over identifiable assets acquired... 4,227(8) 4,227
Total Assets................................. 100,921 13,906 55,384 (46,398) 123,813
LIABILITIES:
Current debt....................................... 31,501 31,501
Accounts payable and accrued liabilities........... 50,126 5,842 1,000(7) 56,968
Amounts due related parties........................ 8,265 8,265
Income taxes....................................... 926 926
Total current liabilities.................... 90,818 5,842 1,000 97,660
Long-term debt, less current....................... 5,491 456 5,947
Other long-term liabilities........................ 1,577 297 1,874
Total Liabilities............................ 97,886 6,595 1,000 105,481
5,455
Redeemable preferred stock, series B............... 5,455
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock....................................... 50 125 (50)(4) 458(4) 583
Preferred stock, series A.......................... 35,000 (35,000)(4) 1,218(4) 1,218
Additional paid in capital......................... 46,431 (46,431)(5) 94,944(4) 94,944
Accumulated deficit................................ (38,147) (39,206) 39,206(5) (46,398)(3) (84,545)
Other adjustments.................................. 677 (39) 39(5) 677
Total stockholders' equity (deficit)......... (2,420) 7,311 (42,336) 50,222 12,877
Total liabilities and stockholders' equity... 100,921 13,906 (41,236) 50,222 123,813
</TABLE>
- --------------------------
(1) Adjustment to reflect fair value of the Company's inventory less estimated
selling costs.
19
<PAGE> 21
(2) Adjustment to capitalize the acquired product line technology using the
income forecast method.
(3) Adjustment to capitalize and expense the acquired in process research and
development based on an appraisal of the product line technology that has
not yet reached technological feasibility using the income forecast
method.
(4) Adjustment to reflect the exchange of Hayes common and preferred stock for
common and preferred stock of the Company.
(5) Adjustment to reflect the elimination of additional paid in capital, and
accumulated deficit and other equity adjustments accounts balances of the
Company.
(6) Consistent with the Company's historical financial statements, the
purchase allocation includes the $980,000 note receivable from
Technipower, Inc. and the $1,950,000 note receivable from Electro-Metrics,
Inc. which have been fully reserved. Repayment of these notes cannot be
assured beyond a reasonable doubt.
(7) Adjustment to record the Company's estimate of costs associated with the
consummation of the Merger.
(8) The fair value of stock issued was based on the outstanding shares at the
average market price of $4.94 five days before and after the announcement
date of July 29, 1997. The unaudited and estimated fair value of assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Fair value of stock issue ................................ $61,695
Other acquisition costs .................................. 1,000
Fair value of liabilities assumed ........................ 6,595
Fair value of tangible and identifiable assets acquired .. (14,655)
Acquired product technology line ......................... (4,010)
Acquired in process research and development ............. (46,398)
---------
Excess of cost over identifiable assets acquired $ 4,227
=========
</TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
THE COMPANY
HAYES SIX MONTHS
SIX MONTHS ENDED ENDED PRO FORMA
JUNE 30, 1997 JULY 31, 1997 ADJUSTMENTS PRO FORMA
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues from continuing operations...... $ 94,897 $ 6,492 $ 101,389
Cost of Revenues............................. 70,965 4,093 75,058
Gross profit................................. 23,932 2,399 26,331
Selling, general and administrative.......... 26,374 5,566 31,940
Research and development..................... 5,981 2,671 8,652
Amortization................................. 775 (1) 775
Restructuring charges........................ 238 238
Write-down of assets......................... 864 864
Operating loss from continuing
operations................................ (8,423) (6,940) (775) (16,138)
Interest (expense) income, net............... (2,375) 108 (2,267)
Other income................................. 1,710 213 1,923
Loss before tax expense ..................... (9,088) (6,619) (775) (16,482)
Income tax expense........................... (62) (62)
Loss before unusual items,
reorganization expenses, discontinued
operations, and non-recurring gains........ (9,150) (6,619) (775) (16,544)
Loss per common share........................ (0.28)
Shares used in per share calculation......... 58,283,453
</TABLE>
- --------------------
(1) Adjustments to recognize amortization of acquired product technology
over its estimated life of three to thirty-six months and to recognize
amortization of excess of cost over identifiable assets acquired over
seven years.
20
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
THE COMPANY
HAYES TWELVE MONTH
YEAR PERIOD
ENDED ENDED JANUARY PENRIL THE COMPANY PRO FORMA
DECEMBER 31, 1996 31, 1997 ADJUSTMENTS AS ADJUSTED ADJUSTMENTS PRO FORMA
----------------- -------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from continuing
operations........................... $ 257,452 $ 33,596 $ (12,366)(1) $ 21,230 $ 278,682
Cost of Revenues........................ 195,918 20,416 (8,683)(1) 11,733 207,651
Gross profit............................ 61,534 13,180 (3,683) 9,497 71,031
Selling, general and administrative..... 61,727 17,239 (2,147)(2) 15,092 76,819
Research and development................ 9,640 7,358 (1,400)(3) 5,958 15,598
Amortization............................ 367 367 2,882(4) 3,249
Restructuring charges................... 3,600 9,718 9,718 13,318
Merger related expenses................. 4,576 4,576 4,576
Operating loss from continuing
operations.............................. (13,433) (26,078) (136) (26,214) (2,882) (42,529)
Interest expense, net................... (5,056) (150) (150) (5,206)
Other income ........................... 2,279 3,885 3,885 6,164
Loss before tax expense ................ (16,210) (22,343) (136) (22,479) (2,882) (41,571)
Income tax expense...................... (385) (385)
Loss before unusual items,
reorganization expenses, discontinued
operations, and non-recurring gains... (16,595) (22,343) (136) (22,479) (2,882) (41,956)
Loss per common share................... (0.72)
Shares used in per share calculation.... 58,283,453
</TABLE>
- -------------------
(1) Adjustments to exclude the modem business revenues and associated costs of
sales; the adjustments to Penril are only for those items that can be
directly attributed to the modem business sold to Bay.
(2) Adjustment to eliminate rent expense related to the modem business product
development and engineering, to exclude marketing and advertising expenses
related to the modem business and related depreciation, amortization and
other operating expense.
(3) Adjustment to eliminate modem business related engineering labor.
(4) Adjustment to recognize amortization of acquired product technology over
its estimated life of three to thirty-six months and to recognize
amortization of excess of cost over identifiable assets acquired over
seven years.
21
<PAGE> 23
ACCESS BEYOND'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
In the fourth quarter of fiscal 1996, Penril took actions to
strategically restructure the business to focus on the remote access
connectivity products, to reduce costs and improve competitiveness for the
long-term. This restructuring plan included the elimination of the VCP and BRX
product lines and the introduction of the new remote access product line. As
described more fully in Note 2 to the Company's Consolidated Financial
Statements, Penril recorded a restructuring charge in the fourth quarter of
fiscal 1996 of $9.7 million. As of July 31, 1997, the Company had completed all
phases of the restructuring plan and does not anticipate any additional cost
associated with this plan.
In the first quarter of fiscal 1997, prior to the spin-off of the
Company, Penril received approximately $6.1 million from the exercise of
employee and director stock options. The cash generated from these exercises was
used for the expenditures related to the merger and spin-off of the Company.
These expenditures included legal and accounting fees of approximately $700,000,
investment banker fees of $1.6 million, and change of control payments to
certain officers of Penril of $1.8 million. Also in the first quarter of fiscal
1997, prior to the spin-off of the Company, Penril received the following; $3.5
million in cash from Standard Micro Systems Corp. for settlement of the law suit
with Penril, and $1.6 million in cash and $2.8 million in notes from the sale of
its Technipower, Inc. subsidiary. As of July 31, 1997, a balance of $980,000 on
the TPI note was past due. The Company reserved the unpaid balance of this note
with a charge in the fourth quarter of fiscal 1997 of $980,000 to loss on
disposal of discontinued operations.
On November 18, 1996, as a result of the merger between Penril and Bay,
certain assets and liabilities related to the modem business were transferred to
Bay. The assets included $2.5 million in accounts receivables, $2.7 million in
inventory, $1.7 million in deferred tax assets, and $761,000 in other assets.
The liabilities included a $4 million line of credit, $1.5 million in accounts
payables, and $887,000 in other liabilities. All cash and rights to future cash
from the sale of TPI were spun-off to the Company pursuant to the merger
agreement with Bay. In addition, the Company received $1.5 million in cash from
Bay pursuant to the Transitional Services Agreement between Penril and the
Company.
In March 1997, the Company entered into an agreement with Hibbing
Electronics, Inc. ("Hibbing") in which Hibbing will manufacture and sell printed
circuit card products to the Company. Under the agreement, Hibbing has the right
to use the lower level of the Company's Gaithersburg, Maryland, facility as well
as certain equipment needed for the manufacturing process. Hibbing will pay the
Company 50% of the monthly rent and utilities associated with that facility, and
will pay the current installment amounts on the equipment that the Company
leases. This agreement expires August 31, 1998 at which time Hibbing shall have
the option to purchase all of the equipment covered under the agreement and the
Company will assign all right, title and interest in the covered leases and
equipment to Hibbing in exchange for Hibbing's agreement to pay and perform the
Company's obligations under those leases.
In May 1997, the Company and the Selling Shareholder entered into the
Technology Transfer Agreement pursuant to which the Selling Shareholder (i)
transferred the Hawk Technology to the Company, (ii) sold to the Company the
Hawk Products (iii) licensed to the Company certain intellectual property in
connection with the Hawk Technology, and (iv) agreed to provide the Company with
technical, engineering, manufacturing and marketing support, for an aggregate
purchase price of 503,704 shares of Common Stock, and $425,000 in cash. The
Company and Paradyne also entered into the Purchase Agreement, pursuant to which
the Company sold and issued the Shares to Paradyne. Pursuant to the Purchase
Agreement, the Company is required to register the Shares for resale by the
Selling Shareholder under the Securities Act.
On June 30, 1997, the Company sold the assets of its Electro-Metrics,
Inc. ("EMI") subsidiary to a company principally owned by the former president
of EMI and received $2.0 million in cash, $1.5 million in subordinated term
notes, and $500,000 in warrants (repayment terms of the notes and warrants are
more fully described in Note 3 to the
22
<PAGE> 24
Company's Consolidated Financial Statements). In accordance with the Securities
and Exchange Commissions' Staff Accounting Bulletin No. 81, "Gain Recognition on
the Sale of a Business or Operating Assets to a Highly Leveraged Entity", a
provision was charged to Loss from Disposal of Discontinued Operations for the
outstanding balance of the subordinated term notes and warrants at July 31, 1997
of 2.0 million. The Company fully expects to collect these notes and warrants,
however the repayments will be recorded as income when received due to the
highly leveraged structure of the buyer. The purchase price was determined by
arms-length negotiation.
The cash received from the sources described above was used to fund the
Company's loss from continuing operations for fiscal 1997 of $13.9 million.
Contributing to the Company's cash flow in fiscal 1997 was the reduction of
accounts receivable of $1.4 million (after adjusting for the transfer of
accounts receivable to Bay). This reduction was the result of lower sales
volumes in fiscal 1997 compared to fiscal 1996.
The Company's inventories and accounts payables declined by $600,000
and $1.1 million respectively (after adjusting for the transfer of inventory and
accounts payable to Bay), as a result of the lower level of business and the
outsourcing of its board level manufacturing to Hibbing.
In August 1997, the Company completed a reduction in force of 19
employees which, in combination with reductions in other expenses, is expected
to result in an annual savings of approximately $2.0 million.
In September 1997, the Company obtained a commitment for a secured
working capital facility of $3.0 million with borrowings based on qualified
accounts receivable and inventory.
The ability of the Company to generate adequate cash for operational
and capital needs is dependent on the success of the Company to increase sales
of its new Access Beyond products including the AB2400/4400 and the "Hawk,"
coupled with the collection of cash from notes received in the sale of its TPI
and EMI subsidiaries. In addition it may seek to raise cash from other sources
including sales of securities or other assets of the Company.
RESULTS OF OPERATIONS
The Company was incorporated on July 23, 1996, and filed a Form S-1
Registration Statement with the Securities and Exchange Commission which became
effective October 17, 1996. On November 18, 1996 Penril distributed a dividend
to its stockholders of record of one share of common stock of Access Beyond for
each share of Penril common stock held. Penril transferred all of the assets and
liabilities of Penril's remote access business to Access Beyond before becoming
a wholly owned subsidiary of Bay on November 18, 1996. As the successor company
to Penril, the Company retains the historical financial information of Penril
through November 18, 1996, when Penril was merged into Bay. For accounting
purposes, the disposition of the modem business, as a result of the merger
agreement with Bay, has been accounted for as a reduction of paid in capital.
For purposes of this discussion, revenue and expenses that could be specifically
identified with the modem business ("Modem Products") are shown separately from
the Company's Access Beyond and LAN/Host Access Products (the "Company's
Products"). Certain expenses that could not be specifically identified with the
modem business were included with the Company's business, consequently the
expenses reported for the Company's business in fiscal 1996 and 1995 are in
excess of those that would have been incurred had the Company been a stand alone
entity at that time. The results of operations from the discontinued operations
of the EMI and TPI subsidiaries are not included in this discussion. Dollar
amounts are reported in thousands.
FISCAL 1997 COMPARED TO FISCAL 1996
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- ---------- ------
<S> <C> <C> <C>
Revenues:
The Company's Products............ $ 13,772 $ 19,916 $ (6,144)
Modem Products.................... 4,228 19,519 (15,291)
-------- -------- --------
$ 18,000 $ 39,435 $(21,435)
======== ======== ========
</TABLE>
23
<PAGE> 25
Revenues from the Company's Products declined in fiscal 1997 as a
result of the delay in launching the new Access Beyond products including the
AB2400/4400 models. These models were released in the fourth quarter of fiscal
1997. In addition, there was a continued decline in the market demand for the
Company's CSX terminal servers and VCX multiplexers which represent older
technology. The Company believes that the new Access Beyond products are
competitively priced and will generate revenues over the next fiscal year to
offset the decline in revenues from the older LAN and Host Access products.
Revenues from Modem Products declined because of the sale of the modem product
business to Bay in November 1996.
Exports represented 21% of the Company's total revenues in fiscal 1997
and 32% of the Company's revenues in fiscal 1996. Revenues from the Company's
foreign subsidiary, which is primarily a sales and marketing operation in
England, represented 20% of the Company's total revenues in fiscal 1997 and 19%
of the Company's total revenues in fiscal 1996. The Company does not believe it
has any significant exposure to exchange rate risk.
In the three years ended July 31, 1997, 1996, and 1995, foreign
operations have generated net losses after eliminations of $164,000, $401,000,
and $49,000 respectively, while domestic operations generated net losses of
$13.7 million, $20.3 million and $5.1 million respectively. The Company's
foreign operation consists of a sales and distribution facility. The net losses
from the Company's foreign operation is due to greater price competitiveness,
which has caused a decline in gross profit margins. The net losses from the
Company's domestic operations in fiscal 1996 included a restructuring charge of
$9.7 million and merger related expenses of $500,000. The net losses from the
Company's domestic operations in fiscal 1997 and 1996 were due to lower sales
volumes and higher absorption of manufacturing variances and other fixed charges
related to the Company's domestic manufacturing operation. The Company's
domestic manufacturing operation performs all manufacturing for the Company and
consequently must absorb all of the unfavorable manufacturing variances
resulting from the lower sales volumes.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Gross Profit Margin:
The Company's Products................ 36% 37% (1)%
Modem Products........................ 23% 49% (26)%
</TABLE>
Gross profit margins for the Company's Products declined slightly in
fiscal 1997 because of manufacturing inefficiencies due to lower sales volumes
and because of delays in launching the new Access Beyond product line. Gross
profit margins for Modem Products declined sharply as a result of the sale of
the modem business to Bay and the efforts prior to the closing to reduce
inventory of Modem Products with discounted pricing.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Selling, general and administrative expenses:
The Company's Products.................... $ 12,253 $ 16,417 $ (4,164)
Modem Products............................ 634 2,694 (2,060)
-------- -------- --------
$ 12,887 $ 19,111 $ (6,224)
======== ======== ========
</TABLE>
Selling, general and administrative expenses for the Company's Products
declined as a result of the restructuring plan implemented in fiscal 1997.
Expenses related to the Modem Products declined as a result of the sale of the
modem business to Bay.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Product development expenses:
The Company's Products............... $ 5,644 $ 5,624 $ 20
Modem Products....................... 520 1,765 (1,245)
------- -------- --------
$ 6,164 $ 7,389 $ (1,225)
======= ======== ========
</TABLE>
24
<PAGE> 26
Product development expenses increased slightly in fiscal 1997 due to
the continued development of the new Access Beyond product line including the
AB2400/4400 and the "Hawk" products which were launched in the fourth quarter of
fiscal 1997. Modem Product development expenses declined due to the sale of the
modem business to Bay in November 1996.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Other Operating expenses:
Merger related expenses................ $ 4,077 $ - $ 4,077
Write-down of assets................... 864 - 864
Provision for restructuring............ 238 9,718 (9,480)
Other Income(expenses):
Interest income........................ 380 - 380
Interest expense....................... 200 698 (498)
Other: Settlement of Lawsuit............... 3,547 - 3,547
</TABLE>
Pursuant to the merger of Penril and Bay in the first quarter of fiscal
1997, Penril incurred merger related expenses of $4.2 million. In the fourth
quarter of fiscal 1997, the Company determined that as a result of the
introduction of its new AB2400/4400 products, an additional reserve for
inventory obsolescence of $864,000 needed to be recorded. Also in the fourth
quarter, the Company recorded a charge to restructuring of $238,000 for
additional inventory that was disposed of as part of the original restructuring
plan. Interest income was generated from the short-term investments that the
Company made in fiscal 1997 with its excess cash. Interest expense resulted from
the Company's capital equipment leases. The decline in interest expense resulted
from the elimination of the line of credit as part of the merger and spin-off
transaction with Bay in fiscal 1997.
In 1993 the Company had initiated a lawsuit against Standard
Microsystems Corp. ("SMC") for breach of contract including failure to transfer
technology, unfair competition and false representations. In September 1996, the
Company and SMC agreed to drop the charges of false representation and settle
the contractual dispute. In October 1996, the Company received from SMC, in
settlement of the litigation, $3.5 million cash, net of legal payments.
FISCAL 1996 COMPARED TO FISCAL 1995
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Revenues:
The Company's Products........ $ 19,916 $ 33,637 $ (13,721)
Modem Products................ 19,519 18,974 545
--------- -------- ---------
$ 39,435 $ 52,611 $ (13,176)
========= ======== =========
</TABLE>
The decrease in revenues for the Company's Products was primarily
attributable to the continued decline in market demand for terminal servers and
multiplexers which resulted in lower volumes and more competitive pricing.
In the fourth quarter of fiscal 1996, Penril and Bay entered into a
License Agreement whereby Bay acquired a license to certain intellectual
property rights related to Penril's modem technology, and Penril was paid $4.5
million. Revenues for Modem Products without this license agreement would have
been $15.0 million in fiscal 1996 compared with $19.0 million in fiscal 1995.
The decrease in revenue from the sale of Modem Products was due to slower than
expected sales of Penril's V.34 modems, and a decline in sales of older Modem
Products.
25
<PAGE> 27
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Gross Profit Margin:
The Company's Products......... 37% 46% (9)%
Modem Products................. 49% 41% 8 %
</TABLE>
The decrease in the gross profit margins for the Company's Products was
due to reductions in product pricing in order to remain competitive in the
market place, and increases in manufacturing inefficiencies due to lower sales
volumes. As noted above, Penril entered into a License Agreement with Bay in the
fourth quarter of fiscal 1996 for $4.5 million. Gross profit margins without
this License Agreement would have been 34% in fiscal 1996 compared to 41% in
fiscal 1995. The decrease in gross profit margins for Modem Products was due to
higher costs of materials in the V.34 modem product line as well as pricing
competition and lower manufacturing efficiencies related to the lower sales
volume.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Selling, general and administrative expenses:
The Company's Products.................... $ 16,417 $ 16,479 $ (62)
Modem Products............................ 2,694 2,286 408
-------- -------- -------
$ 19,111 $ 18,765 $ 346
======== ======== =======
</TABLE>
Selling, general and administrative expenses decreased for the
Company's Products primarily from lower commissions paid due to lower sales
volume. There was also a reduction in personnel costs as a result of eliminating
several administrative positions in Penril's Gaithersburg, Maryland facilities
during fiscal 1995. This reduction was partially offset by a charge of $500,000
during the fourth quarter of fiscal 1996, for costs incurred related to the
Penril/Bay Merger. All expenses which could not be specifically identified with
the modem products were included with the Company's Products. Consequently the
expenses for the Company's Products are in excess of those that would have been
incurred had the Company been a stand alone company.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Product development expenses:
The Company's Products........... $ 5,624 $ 5,520 $ 104
Modem Products................... 1,765 1,918 (153)
------- ------- -------
$ 7,389 $ 7,438 $ (49)
======= ======= =======
</TABLE>
Product development expenses for the Company's Products increased
because of an increase in personnel costs related to development of the new
Access Beyond product line. Modem Product development expenses decreased because
of reductions in personnel costs as a result of Penril's cost reduction efforts
in fiscal 1995. All expenses which could not be specifically identified with the
Modem Products were included with the Company's Products. Consequently the
expenses for the Company's Products are in excess of those that would have been
incurred had the Company been a stand alone company.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Interest expense.............. $698 $1,228 $(530)
</TABLE>
During fiscal 1996, Penril sold Penril Stock in private placements
which generated approximately $14.7 million in cash. A portion of the proceeds
was used to repay all of Penril's term debt during fiscal 1996, which resulted
in decreased interest expense.
26
<PAGE> 28
BUSINESS OF THE COMPANY
GENERAL DEVELOPMENTS
The Company is in the business of developing and marketing products
which enable local, remote or mobile users to access network resources (the
"Remote Access Business"). The Company was incorporated on July 23, 1996 and, as
described more fully in Note 1 to the Company's Consolidated Financial
Statements, was spun-off from Penril on November 18, 1996 pursuant to the
distribution (the "Distribution") to the Penril stockholders on such date of
shares of the Company's Common Stock. The Company retains the historical
financial information of Penril through November 18, 1996 when Penril was merged
into Bay Networks, Inc. For accounting purposes, the disposition of Penril's
modem business, as a result of the merger agreement with Bay Networks, Inc. has
been accounted for as a reduction of paid in capital. The Company's product
lines consists of the product line called Access Beyond, serving the remote
access market, and products which serve the LAN and Host Access Products.
Restructuring: In the fourth quarter of fiscal 1996, Penril took
actions to strategically restructure its business to reduce costs and improve
competitiveness for the long term. As a result of this plan, Penril recorded a
charge of approximately $9.7 million in the fourth quarter of fiscal 1996. The
restructuring included a plan to focus the Company's business operations on the
remote access server and remote connectivity markets and away from the data
transmission markets. See Note 2 to the Consolidated Financial Statements.
Reduction in Work Force: In August 1997, the Company completed a
reduction in work force and other cost-saving measures which will result in an
annual savings of approximately $2.0 million and is expected to improve the
Company's competitiveness. The cost of such reduction in work force was
immaterial.
Acquisitions: On May 2, 1997, the Company and the Selling Shareholder
entered into the Technology Transfer Agreement pursuant to which the Selling
Shareholder (i) transferred to the Company the Hawk Technology, (ii) sold to the
Company the Hawk Products, (iii) licensed to the Company certain intellectual
property in connection with the Hawk Technology, and (iv) agreed to provide the
Company with technical, engineering, manufacturing and marketing support, for an
aggregate purchase price of 503,704 shares of Common Stock and $425,000 in cash.
The Company and the Selling Shareholder also entered into the Purchase
Agreement, pursuant to which the Company sold and issued the Shares to the
Selling Shareholder. The Company is required to register the Shares for the
Selling Shareholder under the Securities Act and use its best efforts to
maintain the effectiveness of the Registration Statement. See Note 7 to the
Company's Consolidated Financial Statements.
PRINCIPAL PRODUCTS
Access Beyond Product Line
The Company's Access Beyond product family is targeted at the remote
access market, providing a scalable modular platform combining advanced modem,
ISDN BRI/PRI, remote access, internet working and terminal connectivity
capabilities within a single family of products. The Access Beyond products
currently use three chassis configurations supporting from one to eight
interface modules for end users to choose from, based on current needs and
anticipated future growth. Interface modules are then selected based upon WAN
and LAN technology and port density requirements. The result is a fully
integrated solution that effectively solves the end user's specific remote
access needs.
The Access Beyond advanced remote access software delivers complete IP,
IPX and Appletalk routing, remote node and remote control capabilities including
NACS/NASI, all combined with full support for PPP, SLIP, CSLIP, LAT, Telnet, and
a wealth of security and management capabilities. In addition to full support
for SNMP, it provides an advanced, easy to use Windows(R) based management and
configuration utility.
The Company recently introduced a new class of remote access solutions
that integrates both T1 and PRI-ISDN directly within Microsoft Windows NT(R)
servers. This new technology, dubbed "Hawk", supports either digital or
27
<PAGE> 29
analog (modem or ISDN) remote access transmission and can be easily plugged into
any Microsoft Windows NT(R) or Novell Netware Connect(R) and Border Manager
configured server. Servers can be configured to simultaneously support existing
network applications as well as remote access, with the Dynamic Access Switching
available in the Hawk solution. This substantially reduces network traffic by
connecting users directly into the server hosting the network applications.
LAN and Host Access Products
The LAN and Host Access Products currently sold by the Company include
statistical multiplexers and host access servers (VCX), and Ethernet terminal
servers (CSX). Each of the LAN and Host Access Products provides the Company
with an existing revenue stream as well as an installed base.
The VCX product line of multiplexers ranges from 4-port remote site
multiplexers to enterprise solutions providing up to 304 ports or 36 trunk lines
and multipurpose communication servers that combine both WAN and LAN
capabilities. These products can function as a data PBX, X.25 PAD, statistical
multiplexer, terminal server or any combination of these. Although the market
for these products is in decline, the Company continues to serve the installed
base and fulfill customer applications.
The CSX Ethernet communications server family provides local and dialup
access to Ethernet LANs. Available as either 8-port or 16-port stand alone units
or as a modular chassis based solution, the CSX server provides terminal and
dialup access for TCP/IP networks.
DISCONTINUED OPERATIONS
In fiscal 1995, the board of directors of Penril decided to sell
Technipower, Inc. ("TPI"), a subsidiary manufacturing uninterruptible power
supplies and power regulating equipment. In October 1996, the Company completed
the sale of TPI business for $1.6 million in cash and a $2.8 million note. As of
July 31, 1997, a balance of $980,000 remained unpaid on the note which was due
July 31, 1997. The Company reserved the unpaid balance of this note with a
charge of $980,000 to loss on disposal of discontinued operations.
In fiscal 1996, the board of directors of Penril decided to sell EMI, a
subsidiary manufacturing test equipment and systems for analysis of
electromagnetic interference and communications security including applications
in satellite communications. In June 1997, the Company completed the sale of the
EMI business to EMI Holding Corp. (the "Borrower"), for $2.0 million in cash,
$1.5 million in subordinated term notes, and $500,000 in warrants. The
subordinated term notes include a $1.0 million note with payments of principal
and interest to be made in seven (7) quarterly installments of $50,000 each,
beginning on June 30, 1997, and one final installment together with accrued
interest being due on June 30, 1999. Interest on the $1.0 million note is at 3%
above the highest interest rate being charged to the Borrower by the Borrower's
principal bank lender ("Bank Rate"). The remaining subordinated term note of
$500,000 accrues interest at 2% above the Bank Rate, accruing from June 30, 1997
and payable in monthly installments beginning on July 1, 1999. The principal
shall be paid in one (1) installment on June 30, 2002. The warrants are
exercisable on June 30, 2002, wherein the Borrower issues to the Company shares
of preferred stock of the Borrower equal to 19.678% of the shares of the
Borrower outstanding immediately after the exercise of these warrants. In
accordance with the Securities and Exchange Commissions Staff Accounting
Bulletin No. 81, "Gain Recognition on the Sale of a Business or Operating Assets
to a Highly Leveraged Entity," a provision was charged to Loss from Disposal of
Discontinued Operations for the outstanding balance of the subordinated term
notes and warrants at July 31, 1997 of $1,950,000. The Company fully expects to
collect these notes and warrants, however the repayments will be recorded as
income when received due to the highly leveraged structure of the Borrower.
28
<PAGE> 30
SUPPLIERS
Material and components for the Company's products are purchased from
outside suppliers. While most components are available from several suppliers, a
few are provided from sole-source vendors. The Company believes that in most
cases alternative sources of supply could be obtained within a reasonable time
period; however, an interruption in the supply of such components could have a
temporary adverse effect on the Company's operations. In March 1997, the Company
entered into an agreement (the "Hibbing Agreement") with Hibbing Electronics
Corporation ("Hibbing") pursuant to which Hibbing manufactures and sells printed
circuit card products to the Company. The Hibbing Agreement expires August 31,
1998 at which time Hibbing shall have the option to purchase for nominal
consideration all of the equipment covered under the agreement and the Company
will assign all right, title, and interest in the covered leases and equipment
to Hibbing in exchange for Hibbing's agreement to pay and perform the Company's
obligations under those leases.
PATENTS, COPYRIGHTS AND LICENSES
The Company owns, or is licensed or otherwise possesses legally
enforceable rights to use, several patents, patent applications, trademarks,
trade names, service marks, copyrights, schematics, technology, know-how,
computer software programs or applications, and tangible or intangible
proprietary information or material essential and necessary to the business of
the Company. The Company may desire in the future to obtain additional licenses
related to its products and believes, based on industry practice, that any
necessary licenses could be obtained. The costs of such licenses may vary
significantly depending on the nature of the technology involved.
The United States trademarks, trade names and service marks owned by
Access Beyond include ACCESS BEYOND.
The Company may license much of its technology including integrated
access software; CSU/DSU technology; frame relay assembler disassembler
technology; PC/TCP SNMP technology; terminal emulation software; remote access
software; router card technology and software; network management software; and
basic frame relay software for LAN interconnect products.
On June 16, 1996, Penril and Bay entered into a Development and License
Agreement on behalf of Access Beyond whereby Bay licensed to Penril on behalf of
Access Beyond certain intellectual property, software, and technical know-how
related to certain 24-port Digital Modem Cards. The agreement contemplates that
Bay will develop a 24-port Digital Modem Card for Access Beyond, train Access
Beyond's personnel in the underlying technology, and provide technical
assistance where necessary to permit Access Beyond to market this digital
technology.
BACKLOG
A significant portion of data communications revenues are based on
customer purchase orders with immediate shipment requirements. Backlog, which
tends not to be significant in data communications products, is a result of the
occasional customer order with future scheduled shipment requirements or
misalignment of demand and production of a particular product. Because data
communications revenues constitute such a significant portion of the revenues of
the Company, it is the opinion of the Company's management that the dollar
amount of backlog at any given time is not indicative of the actual level of
revenues which will ultimately be realized during future periods. Consequently,
the Company's management believes that the amount of backlog is not a material
consideration in understanding the Company's business operations.
COMPETITION
The Company encounters substantial competition in the marketing of its
products and many of its competitors have greater financial, marketing and
technical resources. Important competitive factors in the markets for the
Company's products are established customer base, product performance and
features, service and support as well as
29
<PAGE> 31
price. The Company believes that it competes favorably with respect to these
factors. There can be no assurance that the Company's products will compete
successfully with competitive products that may be offered in the future or that
aggressive pricing will not negatively impact the profitability of the Company.
RESEARCH AND DEVELOPMENT
Under its own sponsorship, the Company is continuously engaged in the
development of new products as well as the development and enhancement of its
existing products. The Company expensed approximately $6.2 million (34% of
consolidated revenues) for product development and engineering during fiscal
1997 compared to $7.4 million (19% of consolidated revenues) in fiscal 1996 and
$7.4 million (14% of consolidated revenues) in fiscal 1995.
ENVIRONMENTAL MATTERS
The Company's compliance with federal, state and local environmental
laws had no material effect upon the Company's capital expenditures, earnings or
competitive position.
SALES AND MARKETING
The Company's distribution channel is composed of value-added resellers
("VARs"), original equipment manufacturers ("OEMs") and distributors in more
than 40 countries. Sales to end-user customers account for less than 10% of the
Company's revenues. This multi-channel strategy allows the Company to meet
specific customer needs while giving coverage to the worldwide markets.
Value Added Resellers. VARs integrate the Company's products with
products of other vendors, into networking systems that are sold directly to
end-users. VARs also sell the Company's products as stand-alone units. Sales to
VARs are made at discounts based on purchase volumes and other incentive
programs.
Original Equipment Manufacturers. The Company also customizes its
product for sale through OEMs. This customization may range from simple private
labeling of existing products to complete customization of software and/or
hardware to fit the product lines of the OEM.
Distributors. The Company also sells its products to distributors who
generally resell to VARs and other dealers. Distributors generally provide a
minimal level of systems integration. The Company offers sales and marketing
programs to assist distributors in promoting, selling and supporting the
Company's products.
Many of the Company's VARs and distributors carry products which are
complementary to, or compete with, those of the Company, and may choose to give
higher priority to products of other suppliers or competitors of the Company.
CUSTOMER SUPPORT, SERVICE AND WARRANTY
The Company services, repairs and provides technical support for its
products. A large portion of these support activities, provided through a 24
hour United States support center, are related to software and hardware
configuration. The Company sells products with end-user warranty periods of up
to sixty months. Following the expiration of the warranty period, if any, the
Company offers services on a time and materials basis, or under maintenance
contracts.
INTERNATIONAL OPERATIONS
The Company has a subsidiary (Access Beyond, Ltd.) located in the
United Kingdom. Financial information about foreign and domestic operations and
export sales is more fully described in Note 10 of the Company's Consolidated
Financial Statements.
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<PAGE> 32
PROPERTIES
The Company's executive offices are located in Gaithersburg, Maryland
in facilities which had previously been leased to Penril. The lease between the
Company and Real Estate Income Partners III was assigned to the Company by
Penril as part of the spin-off, is for 54,874 square feet and expires on
September 30, 1999. The Company has an option to extend the term of the lease
for a period of 119 months and may exercise the option by giving written notice
to the landlord prior to the end of the initial term of the lease. Approximately
50% of the premises is subleased to Hibbing, which pays the Company an amount
equal to 50% of the rent and other charges payable by the Company.
The Company leases a research and development facility in Carlstadt,
New Jersey. The lease is for approximately 44,403 square feet and expires in
September 2001. As more fully described in Note 5 to the Company's Consolidated
Financial Statements, the Company has sublet to other parties a substantial
portion of such premises.
In addition to the facilities mentioned above, the Company and its
subsidiaries lease manufacturing, warehouse and office facilities in
Basingstoke, England. The lease is for approximately 6,800 square feet and
expires in December 2001.
The Company believes its properties are adequate for its needs for the
foreseeable future.
EMPLOYEES
The Company employed approximately 120 full time employees as of July
31, 1997. The Company believes that its future success will depend largely on
its ability to retain certain key personnel and to recruit and retain additional
highly skilled employees who are in great demand. The Company has an employment
contract with Ronald A. Howard, President and CEO, but does not have employment
contracts with its other employees. The Company has employee retention
arrangements with two employees. The Company has experienced no work stoppages
and believes that its employee relations are satisfactory. See "MANAGEMENT OF
THE COMPANY -- Employment and Consulting Agreements."
LEGAL PROCEEDINGS
The Company initiated a lawsuit in December 1994 against Network
Systems Corporation ("NSC") for breach of contract, fraudulent inducement and
defamation. The suit is seeking specific performance, compensatory damages of
$2.0 million and punitive damages of $5.0 million. The litigation arises out of
a contract in which the Company agreed to develop certain computer hardware and
software to NSC's specifications. NSC subsequently brought a counterclaim
alleging negligent misrepresentation, fraud and breach of contract by the
Company. NSC is seeking recision of the contract, restitution of monies paid by
NSC to the Company, compensatory damages of $5.0 million and punitive damages in
an unspecified amount. As of September 23, 1997, the Company was in settlement
discussions with NSC.
The Company is involved in other routine litigation. Management
believes none of the litigation will have a material adverse effect on the
Company's financial position or results of operations.
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Certificate of Incorporation and the By-laws, the
Company Board is divided into three classes with each director serving a three
year term (after the initial term). The following table sets forth certain
information as to persons who currently serve as directors and executive
officers of the Company.
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<PAGE> 33
DIRECTORS
Name, Age and Positions with the
Company other than Director Principal Occupation Information
- --------------------------- --------------------------------
Class I - Term Expiring at 1997 Annual Meeting
Barbara Perrier Dreyer, 42 ... Ms. Perrier Dreyer has served as a Vice
President and Chief Financial Officer of
Communication Systems Technology, Inc., a
developer of software and hardware
communications and control equipment, since
March 1996, and became a Senior Vice President
in October 1997. In July 1997, Ms. Perrier
Dreyer was appointed a member of the Board of
Directors of the International
Teleconferencing Association. Ms. Perrier
Dreyer was President and founder of
VideoGrafects, Inc., a multimedia
communications company specializing in the
production of video and computer based
material, from its founding in August 1992
until the Company was sold to French Bray in
March 1996. Prior to founding VideoGrafects,
Inc., Ms. Perrier Dreyer was a special
(investing) partner with New Enterprise
Associates, a venture capital firm.
Paul Schaller, 49 ............ Mr. Schaller has served as President of
Schaller Associates, a management consulting
firm, since March, 1996. From September 1995
to March 1996, Mr. Schaller was Vice President
of Business Development with the LAN Switching
Division of FORE Systems, Inc., a provider of
ATM switching solutions. From August 1993 to
August 1995, Mr. Schaller was the Vice
President of Marketing at Alantec, Inc., a
provider of routing switches for the internet
working market. Mr. Schaller was Vice
President of Sales and Marketing at Harmonic
Lightwaves, Inc., a fiber optic equipment
provider from 1992 to 1993. From 1982 to 1991
Mr. Schaller was Vice President of Sales and
Marketing and General Manager of the Digital
Division of Vitalink Corporation, a provider
of remote internet working equipment.
Class II -- Term Expiring at 1998 Annual Meeting
John Howard, 44 .............. Mr. Howard has served as Senior Managing
Director of Bear, Stearns & Co., Inc. since
March 1997. Mr. Howard was the Chief Executive
Officer of Gryphon Capital Partners
Corporation, an investment firm, from July
1996 to March 1997. He served as Co-Chief
Executive Officer of Vestar Capital Partners,
a leveraged buyout firm, from 1990 to 1996.
Mr. Howard is also a director of Celestial
Seasonings, Inc., a manufacturer of herbal
teas. Mr. Howard is the brother of Ronald A.
Howard, the Chairman of the Board, President
and Chief Executive Officer of the Company.
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<PAGE> 34
Name, Age and Positions with the
Company other than Director Principal Occupation Information
- --------------------------- --------------------------------
Arthur Samberg, 56 ................. Mr. Samberg has served as President of
Dawson-Samberg Capital Management, Inc.,
a registered investment advisor, since
1985. Mr. Samberg is a General Partner
and senior portfolio manager of Pequot
Partners Fund, L.P., Pequot International
Fund Inc. and Pequot Endowment Fund, L.P.
Class III-Term Expiring at 1999 Annual Meeting
Ronald Howard, 41 .................. Mr. Howard has served as Chairman of the
Chairman of the Board, President and Board, President and Chief Executive
Chief Executive Officer Officer of the Company since November
1996. Mr. Howard served as President of
the Datability Networks Division of
Penril from November 1994 to November
1996, and as Co-President of that
division from May 1993 until November
1994. He had held the position of
Executive Vice President of Penril from
May 1993 until November 1996. Mr. Howard
was President of Datability Inc. from its
founding in 1977 until it was acquired by
Penril in May 1993. Mr. Howard is the
brother of John Howard, a director of the
Company.
EXECUTIVE OFFICERS (OTHER THAN
DIRECTORS)
James Gallagher, 52 ................ Mr. Gallagher has served as Vice
Vice President -- Sales President of Sales of the Company since
November 1996. He was Vice President --
Sales of the Datability Networks Division
of Penril from November 1994 until
November 1996. From May 1993, when Penril
acquired Datability, Inc, until November
1994, Mr. Gallagher was Vice President,
North and South American Sales of the
Datability Networks Division. At
Datability, Inc, he was Vice President of
Sales from April 1990 until May 1993.
MANAGEMENT POST MERGER
As of the Closing of the Merger, the size of the Company Board will be
increased to seven, all of the directors of the Company, other than Mr. Howard,
will resign, Mr. Howard will fill the vacancies thereby created in Classes II
and III and the stockholders will elect two persons to Class I, the term of
which expires at the 1997 Annual Meeting. All of such persons will take office
effective as of the Closing Date, except that Messrs. Hayes and Chiang Lam will
take office effective as of the day after the Closing Date. The following table
sets forth certain information as to persons who will serve as directors and
executive officers of the Company after the Merger. The directors of Class I
will hold office until the Annual Meeting of stockholders in 2000, the directors
of Class II will hold office until the Annual Meeting of stockholders in 1998
and the directors of Class III will hold office until the Annual Meeting of
stockholders in 1999. Thereafter, stockholders will elect the directors of each
Class at the appropriate succeeding Annual Meeting of stockholders.
NAME AND AGE PRINCIPAL OCCUPATION INFORMATION
- ------------ --------------------------------
Class I - Term Expiring at 2000 Annual Meeting
Chiang Lam, 43 ..................... Mr. Lam has served as a director of Hayes
since April 1996. Mr. Lam is a financial
investment advisor serving various
venture capital interests. Mr. Lam served
on the Board of Directors of Paradigm
Technology from June 1994 to August 1996.
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<PAGE> 35
NAME AND AGE PRINCIPAL OCCUPATION INFORMATION
- ------------ --------------------------------
P. K. Chan, 56 ..................... Mr. Chan has served as President and
President and Chief Operating Chief Operating Officer of Hayes since
Officer October 1997 and served as Vice President
of Operations from October 1994 to
October 1997. Prior to joining Hayes in
October 1994, Mr. Chan served as Managing
Director of Achiever Group, a subsidiary
of Achiever Industrial Limited from 1991
to 1994. Prior to joining Achiever
Industrial Limited, he held various
positions with Ampex and Meadville Group,
most recently serving as Managing
Director of Manufacturing.
__________, __________
Class II - Term Expiring at 1998 Annual Meeting
______________, ______
______________, ______
Class III- Term Expiring at 1999 Annual Meeting
Dennis Hayes, 47 ................... Mr. Hayes founded Hayes in 1977 at the
Chairman age of 27 and has served as Chairman and
a director of Hayes since its inception.
Mr. Hayes worked on the first four-bit
microprocessor technology while employed
at Financial Data Services. After
concluding his studies at Georgia Tech,
Mr. Hayes worked for National Data
Corporation where he developed
microcomputer based systems to
interconnect networks and maintain
communications systems on large mainframe
computers. Mr. Hayes is active in both
community and industry associations
including the Public Policy Committee of
the Computing Technology Industry
Association, the Association of On Line
Professionals, Georgia High Tech
Alliance, Governor's Advisory Council on
Science and Technology and Georgia Center
for Advanced Telecommunications
Technology. Mr. Hayes is also the Georgia
Representative to the Federal Lab
Consortium and is one of the four initial
inductees into the Technology Hall of
Fame of Georgia.
Ronald Howard, 41 .................. Mr. Howard has served as Chairman of the
Vice Chairman and Executive Vice Board, President and Chief Executive
President of Business Development Officer of the Company since November
1996. Mr. Howard served as President of
the Datability Networks Division of
Penril from November 1994 to November
1996, and as Co-President of that
division from May 1993 until November
1994. He had held the position of
Executive Vice President of Penril from
May 1993 until November, 1996. Mr. Howard
was President of Datability Inc. from its
founding in 1977 until it was acquired by
Penril in May 1993.
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<PAGE> 36
NAME AND AGE PRINCIPAL OCCUPATION INFORMATION
- ------------ --------------------------------
Barbara Perrier Dreyer, 42 ... Ms. Perrier Dreyer has served as Vice
Director President and Chief Financial Officer of
Communication Systems Technology, Inc., a
developer of software and hardware
communications and control equipment, since
March 1996 and became a Senior Vice President
in October 1997. In July 1997, Ms. Perrier
Dreyer was appointed a member of the Board of
Directors of the International
Teleconferencing Association. Ms. Perrier
Dreyer was President and founder of
VideoGrafects, Inc., a multimedia
communications company specializing in the
production of video and computer based
material, from its founding in August 1992
until the Company was sold to French Bray in
March 1996. Prior to founding VideoGrafects,
Inc., Ms. Perrier Dreyer was a special
(investing) partner with New Enterprise
Associates, a venture capital firm.
EXECUTIVE OFFICERS (OTHER THAN
DIRECTORS)
Alan Clark, 44 ............... Dr. Clark joined Hayes in March 1993 and has
Vice President and Chief served as Vice President and Chief Technical
Technical Officer Officer since March 1996. Prior to joining
Hayes, Dr. Clark served as Director, Research
and Strategy for Dowty Communications in the
United Kingdom. Prior to this position, Dr.
Clark held a Marketing Director position and
an Engineering Director position for the Dowty
Advanced Development Centre from 1989 to 1993.
Prior to joining Dowty, Dr. Clark served
British Telecom in various positions.
James Jones, 40 .............. Mr. Jones joined Hayes in January 1996 as Vice
Vice President and Chief President and Chief Financial Officer and
Financial Officer Treasurer. He previously served in various
positions with Genicom Corporation for nine
years, most recently as Vice President -
Finance. Prior to Genicom, Mr. Jones served as
a manager with Coopers and Lybrand L.L.P.
C. Bruce Meyer, 48 ........... Mr. Meyer has served as Vice President of
Vice President of Human Human Resources since August 1997. He joined
Resources Hayes in August 1996 as Director of Human
Resources. Prior to joining Hayes, Mr. Meyer
served at Genicom Corporation since 1983, most
recently as Vice President of Human Resources
and Corporate Communications.
Keith Mintzer, 43 ............ Mr. Mintzer joined Hayes in January 1997 as
Vice President of Vice President of Worldwide Sales. Prior to
Worldwide Sales joining Hayes, Mr. Mintzer served in a
number of senior executive positions with GBC
Technologies for 10 years. Prior to joining
GBC Technologies, Mr. Mintzer held various
sales and channel management positions at the
Sperry Corporation and Reynolds & Reynolds.
Marshall Toplansky, 46 ....... Mr. Toplansky joined Hayes in August 1996 as
Vice President of Marketing Vice President of Marketing. Prior to joining
Hayes, Mr. Toplansky was Chief Executive
Officer of Core Strategies, a high technology
consulting firm. Prior to Core Strategies, Mr.
Toplansky served as Vice President of
Marketing for U.S. Robotics, Inc.
35
<PAGE> 37
NAME AND AGE PRINCIPAL OCCUPATION INFORMATION
- ------------ --------------------------------
Charles Riehm, 58 ............ Mr. Riehm joined Hayes in October 1996 as
Vice President of Engineering Director of Development. In April 1997, he
was promoted to Vice President of Engineering.
Mr. Riehm served as Vice President of
Operations of SPE Microsystems, Inc. from 1994
to 1996. Prior to SPE Microsystems, Inc., he
served as Director of Communications Products
of Silicom Systems, Inc.
COMMITTEES OF THE COMPANY'S BOARD
The Company Board has established an Audit Committee (the "Audit
Committee") and a Compensation Committee (the "Compensation Committee").
The general functions of the Audit Committee include selecting the
independent auditors (or recommending such action to the Company Board),
evaluating the performance of the independent auditors and their fees for
services, reviewing the scope of the annual audit with the independent auditors
and the results of the audit with management and the independent auditors,
consulting with management, internal auditors and the independent auditors as to
the systems of internal accounting controls, and reviewing the nonaudit services
performed by the independent auditors and considering the effect, if any, on
their independence. The members of the Audit Committee are to be outside
directors and are selected by the full Company Board. The current members of the
Audit Committee are Barbara Perrier Dreyer and John Howard.
The Compensation Committee is authorized and directed to (i) review and
approve the compensation and benefits of the Company's executive officers, (ii)
review and approve the annual salary plans, (iii) review management organization
and development, (iv) review and advise management regarding the benefits,
including bonuses, and other terms and conditions of employment of other
employees, (v) administer the Incentive Plan and the granting of options under
that plan, the Directors' Plan and any other plans that may be established, (vi)
review and recommend for the approval of the Company Board the compensation of
directors, and (vii) determine the compensation and benefits of the Chief
Executive Officer and review and approve, or modify if appropriate, the
recommendations of the Chief Executive Officer with respect to compensation and
benefits of other executive officers. The members of the Compensation Committee
are to be outside directors and are selected by the full Company Board. The
current members of the Compensation Committee are Paul Schaller and Arthur
Samberg.
COMPENSATION OF DIRECTORS
Members of the Company Board who are also employees of the Company do
not receive any additional compensation for service on the Company Board or any
committees of the Company Board. Members of the Company Board who are not
employees receive an annual retainer of $5,000 plus a stipend of $1,000 for each
Company Board meeting attended. Non-employee directors receive additional
stipends for service on committees of the Company Board of $1,000 per committee
meeting not held on the same day as a Company Board meeting.
EXECUTIVE COMPENSATION
The following table provides information with respect to the annual
compensation for services in all capacities to Penril or the Company for fiscal
years ended July 31, 1997, 1996 and 1995 of (i) the Company's chief executive
officer and (ii) the other three most highly compensated executive officers of
the Company (the "Named Executive Officers") who were employed by the Company at
the end of fiscal 1997:
36
<PAGE> 38
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
------------ -------------------
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY STOCK OPTIONS COMPENSATION(2)
------------------ ---- ------ ------------- ------------
<S> <C> <C> <C> <C>
Ronald Howard.................. 1997 $218,982 300,000(3) $ 568,269
Chairman of the Board, 1996 $221,877 250,000(4) $ 784
President and Chief......... 1995 $200,000 30,000(4) $ 5,458
Executive Officer
James Gallagher................ 1997 $236,204 75,000(3) $ 200
Vice President -- Sales...... 1996 $188,293 20,000(4) $ 300
........................... 1995 $167,786 10,000(4) $ 250
Mark Silverman (5)............. 1997 $155,993 60,000(3) $ 200
Vice President -- Research... 1996 $109,577 15,000(4) $ 300
and Development.............. 1995 $105,674 5,000(4) $ 250
John Clary (6)................. 1997 $155,993 225,000(3) $ --
Senior Vice President and Chief 1996 -- -- --
Operating Officer............ 1995 -- -- --
</TABLE>
- -----------------
(1) In accordance with the rules of the Securities and Exchange Commission,
the compensation set forth in the table does not include medical, group
life insurance or other benefits which are available to all salaried
employees of the Company, and certain perquisites and other benefits,
securities or property which do not exceed the lesser of $50,000 or 10%
of the Named Executive Officer's salary and bonus shown in the table.
(2) Includes for fiscal 1997, $562,500 paid to Mr. Howard upon the closing
of the Penril/Bay Merger in a change of control payment and $5,569 paid
for one-half of the life insurance premium purchased on behalf of Mr.
Howard, pursuant to the Mr. Howard's employment agreement with the
Company. Includes for fiscal 1997 and 1996, $200 and $300 respectively
paid for benefits to Mr. Howard, Mr. Gallagher and Mr. Silverman
pursuant to the 401(k) plan. Includes for fiscal 1996 $274 for Mr.
Howard, under the Penril Split Dollar Life Insurance Program and $210
for Mr. Howard paid to the Exec-u-Care Medical Insurance Trust.
(3) Represents options granted under Access Beyond's 1996 Long-Term
Incentive Stock Option Plan. The options are exercisable at the price
of $6.625 per share, the fair market value on the date of grant, except
for 100,000 options granted to Mr. Clary which are exercisable at $4.00
per share, the exercise price on the date of grant.
(4) Represents options granted under Penril's 1980 Long-Term Incentive
Stock Option Plan. The options were exercisable at prices varying from
$2.31 to $8.00 per share, the fair market value on the date of grant.
All options were exercised prior to the spin-off of the Company in
November 1996.
(5) Mr. Silverman's employment with the Company terminated after the end of
fiscal 1997.
(6) Mr. Clary joined Penril on August 5, 1996 as Vice President of
Strategic Planning at an annual salary of $150,000. Mr. Clary's
employment with the Company terminated after the end of fiscal 1997.
37
<PAGE> 39
EMPLOYMENT AND CONSULTING AGREEMENTS
The Employment Agreement dated November 18, 1996 between Ronald Howard
and the Company provides for Mr. Howard serving as Chairman of the Board,
President and Chief Executive Officer. Such employment agreement further
provides for, among other things, a two year term of employment, an annual
salary of $175,000, an opportunity for bonus compensation in an amount at least
equal to his annual salary pursuant to a plan to be established by the Company
Board, and benefits consistent with those normally provided by the Company to
its executive employees as well as a $5.0 million term life insurance policy.
Pursuant to such employment agreement, Mr. Howard was granted options to
purchase 300,000 shares of Common Stock and is entitled to receive, upon a
change of control of the Company, which includes transactions such as the
Merger, a payment equal to two and one-half times his annual compensation. Upon
the Effective Time, the November 18, 1996 Employment Agreement will terminate.
Henry Epstein is a consultant to the Company under the terms of a
November 18, 1996 consulting agreement (the "Epstein Agreement") between the
Company and Ideonics, a financial and technology consulting firm owned by Mr.
Epstein. The Epstein Agreement provides, among other things, for a four year
consulting term with an annual consulting fee of $137,500. In addition, pursuant
to the Epstein Agreement, the Company provides Ideonics with office space,
secretarial assistance and health care benefits for Mr. Epstein. Mr. Epstein was
the Chairman of the Board of both Penril and the Company until the Penril/Bay
Merger and the Distribution, respectively.
As of the Effective Time, the Company will enter into employment
agreements with Messrs. Hayes and Howard. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
RETIREMENT AND SAVINGS PLAN
Access Beyond's Retirement and Savings Plan ("401(k) Plan") is a
defined contribution plan that includes a "cash or deferred" option for
participants, as described in Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"). Employees of Access Beyond who have completed 90
days of eligibility service ("Participants") are eligible to participate in the
401(k) Plan. The 401(k) Plan permits, but does not require Access Beyond to make
matching contributions. In addition, Access Beyond may make discretionary
contributions to the 401(k) Plan which will be allocated to each Participant
based on the ratio of such Participant's eligible compensation to the total of
all Participants' eligible compensation. Amounts contributed by Access Beyond
vest as to 30% after 1 year of eligible service, 60% after 2 years of eligible
service and 100% after 3 years of eligible service. Participants may elect to
direct the investment of their contributions in accordance with the provisions
of the 401(k) Plan. As a part of the Transfer, a retirement and savings plan of
Penril ("Penril Plan") was transferred to the Company and active participation
in the Penril Plan is limited to eligible employees of the Company.
The following table sets forth certain information with respect to
options granted during the year ended July 31, 1997 to the Named Executive
Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------ Potential Realizable Value
Percent of At Assumed Annual Rates
Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Exercise Terms ($)
Options Employees in Price Expiration ---------------------------
Name Granted (#) Fiscal Year ($/share) Date 5 % 10%
---- ----------- ------------- --------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Ronald A Howard 300,000 20.4% 6.625 12/5/06 $1,249,928 $3,167,563
James Gallagher 75,000 5.1% 6.625 12/5/06 312,482 791,891
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------ Potential Realizable Value
Percent of At Assumed Annual Rates
Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Exercise Terms ($)
Options Employees in Price Expiration ---------------------------
Name Granted (#) Fiscal Year ($/share) Date 5 % 10%
---- ----------- ------------- --------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Mark Silverman 60,000 4.1% 6.625 12/5/06 249,986 633,513
John Clary 125,000 8.5% 6.625 12/5/06 520,803 1,319,818
100,000 6.8% 4.00 6/4/07 251,558 637,497
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning each
exercise of stock options, during the fiscal year ended July 31, 1997 by the
Named Executive Officers and unexercised stock options held by the Named
Executive Officers as of the end of such fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Per Share Unexercised In-
Unexercised Exercise Price the-Money
Options/SARs at of Unexercised Options/SARs at
Shares Fiscal Year-End Options at Fiscal Year-End
Acquired on Exercisable/ Fiscal Year- Exercisable/
Exercise (1) Value Realized (2) Unexercisable(3) End Unexercisable (4)
Name (#) ($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ronald Howard 370,000 1,697,125 --/300,000 6.625 --/--
James Gallagher 75,000 611,695 --/ 75,000 6.625 --/--
Mark Silverman 40,000 286,481 --/ 60,000 6.625 --/--
John Clary none none --/225,000 4.00-6.625 --/125,000
</TABLE>
(1) Reflects shares of Penril's Common Stock acquired prior to the Spin-off
transaction pursuant to the exercise of options under Penril's 1986
Long-Term Incentive Stock Option Plan.
(2) Reflects the difference between the exercise price of the options
exercised under Penril's 1986 Long-Term Incentive Stock Option Plan and
the market price of Penril's Common Stock on the date of exercise.
(3) Reflects only stock options granted under the Company's 1996 Long-Term
Incentive Plan. The Company does not grant SARs.
(4) Based on the fiscal year-end per share closing price of $5.25 (as
reported on the NASDAQ/NMS on July 31, 1997). 100,000 options held by
Mr. Clary were in-the-money.
THE AMENDED AND RESTATED 1996 INCENTIVE OPTION PLAN
The Company Board unanimously adopted and approved the 1996 Incentive
Long-Term Option Plan on November 18, 1996, and unanimously adopted the plan, as
amended and restated, on February 4, 1997 (the "Incentive Plan"). The Incentive
Plan was approved by the stockholders of the Company at Special Meeting on March
6, 1997. On December 5, 1996, the Compensation Committee of the Company Board
(the "Committee") granted 1,080,000
39
<PAGE> 41
options to officers and key employees of the Company at an exercise price of
$6.625, on February 4, 1997, an additional 75,000 options were granted at an
exercise price of $6.75 and on June 4, 1997, an additional 314,000 options were
granted at an exercise price of $4.00, which was the fair market value of shares
of Common Stock on each such day, determined in accordance with the provisions
of the Incentive Plan. All of such options vest at the rate of 30% after one (1)
year, 60% after two (2) years and 100% after three (3) years, subject to
acceleration in certain circumstances, including the occurrence of a transaction
such as the Merger. The grant of these options was conditioned upon the approval
of the Incentive Plan by the stockholders of the Company, which was obtained at
the Special Meeting of stockholders on March 6, 1997.
The purpose of the Incentive Plan is to encourage ownership of Common
Stock of the Company by officers, key employees, consultants, advisors and other
service providers ("Eligible Persons"), to encourage their continued employment
with the Company and providing of services to the Company and to provide them
with additional incentives to promote the success of the Company.
The Incentive Plan authorizes the grant to Eligible Persons of options
("Options") consisting of "incentive stock options," as that term is defined
under the provisions of Section 422 of the Code and non-qualified stock options.
There are 2,000,000 shares of Common Stock available for granting of Options
under the Incentive Plan. The Committee administers the Incentive Plan and has
sole discretion to determine those Eligible Persons to whom Options will be
granted, the number of Options granted, the provisions applicable to each Option
and the time periods during which Options may be exercisable; provided, however,
that no person may receive Options to acquire more then 500,000 shares of Common
Stock during any given year. The Committee has complete authority to interpret
all provisions of the Incentive Plan, to prescribe, amend, and rescind rules and
regulations for its administration, and to make all other determinations
necessary or advisable for the administration of the Incentive Plan.
Options may be granted to such Eligible Persons as the Committee, in
its discretion, shall determine. In determining the Eligible Persons to whom
Options shall be granted and the number of shares of Common Stock to be issued
or subject to purchase or issuance under such Options, the Committee shall take
into account the recommendations of the Company's management as to the duties of
the Eligible Persons, their present and potential contributions to the success
of the Company and its subsidiaries, and such other factors as the Committee
shall deem relevant in connection with accomplishing the purposes of the
Incentive Plan. No Option shall be granted to any member of the Committee so
long as his or her membership on the Committee continues or to any member of the
Company Board who is not also an officer, employee or consultant of the Company
or any subsidiary.
As a condition to the grant of an Option under the Incentive Plan, an
optionee must enter into two agreements with the Company: (1) an Assignment of
Inventions and Non-Disclosure Agreement ("Confidentiality Agreement") and (2) a
Non-interference Agreement ("Non-Interference Agreement").
2,000,000 shares of Common Stock have been reserved for issuance by the
Company under the Incentive Plan. Options may be granted to any Eligible Person
for up to an aggregate of 500,000 shares of Common Stock during any calendar
year, subject to adjustment in the event of certain changes in the Company's
capitalization.
The Committee may grant incentive stock options, non-qualified stock
options, or a combination of the two. The exercise price of each incentive stock
option may not be less than the fair market value of the Common Stock on the
date of grant. Under the Incentive Plan, fair market value is generally the
closing price of the Common Stock on NASDAQ/NMS on the last business day prior
to the date on which the value is to be determined. Unless the Committee
determines otherwise, the option price per share of any non-qualified stock
option will be the fair market value of the shares of Common Stock on the last
business day immediately preceding the date on which the option is granted. The
exercise price of each incentive stock option granted to any stockholder
possessing more than 10% of the combined voting power of all classes of capital
stock of the Company, or, if applicable, a parent or subsidiary of the Company,
on the date of grant must not be less then 110% of the fair market value on that
date. In addition, no Eligible Person may be granted an incentive stock option
to the extent the aggregate fair market value, as of the date of grant, of the
stock with
40
<PAGE> 42
respect to which incentive stock options are first exercisable by such Eligible
Person during any calendar year exceeds $100,000.
No option shall be exercisable more than ten (10) years from the date
it was granted. Options granted as incentive stock options shall not be
exercisable more than five (5) years from the date of grant. Options shall be
subject to earlier termination as provided for in the Incentive Plan.
Unless the committee determines otherwise, Options may be exercised as
to 30% of the shares subject to an Option at any time after the first
anniversary of the date of grant, as to 60% of the shares subject to an Option
at any time after the second anniversary of the date of grant and as to all
shares subject to an Option at any time after the third anniversary of the date
of grant.
Options granted under the Incentive Plan are non-transferable except
(a) by will or the laws of descent and distribution or (b) pursuant to a
qualified domestic relations order as defined in the Code or in the Employee
Retirement Income Security Act of 1974, as amended.
Pursuant to the Incentive Plan, Options are terminated upon the
termination of the Eligible Person's employment or other relationship with the
Company, for (i) cause, (ii) voluntarily without the written consent of the
Company or (iii) upon a breach or threatened breach of the Confidentiality
Agreement or Non-Interference Agreement (entered into by the Eligible Persons
upon the grant of the Option). Upon any other termination of the employment or
such other relationship with the optionee (other than in (i) - (iii) above), the
vested portion of the Option is exercisable within three months after the date
of such termination (but not beyond the term of the Option). If an optionee dies
while in the employ of the Company or while providing consulting or other
services to the Company or dies within three months after the termination of
employment or such other relationship with the Company (other than a termination
in (i) - (iii) above), then the vested portion of the Option may be exercised by
a legatee or legatees or by his or her personal representative, at any time
within one year after his or her death (but not beyond the term of the Option).
If the employment or other relationship of an optionee terminates upon
disability (as defined in Section 221(e)(3) of the Code) such person may
exercise the vested portion of the Option for one year after the date of
termination of employment (but not beyond the term of the Option).
An optionee entitled to exercise an Option shall do so by delivery of a
written notice to that effect specifying the number of shares of Common Stock
with respect to which the Option is being exercised. The notice shall be
accompanied by payment in full of the purchase price of any shares of Common
Stock to be purchased, which payment may be made in cash or, upon authorization
by the Committee, in shares of Common Stock of the Company.
Options granted under the Incentive Plan are subject to adjustment upon
a recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend or other similar event affecting the Common
Stock.
In the case of a "change in control" of the Company, which includes
transactions such as the Merger, each Option granted under the Incentive Plan
will terminate 90 days after the occurrence of such "change in control" and an
officer, employee or consultant will generally have the right, commencing at
least five days prior to the "change in control" and subject to any other
limitation on the exercise of the Option (but without regard to any vesting
limitations) in effect on the date of exercise, to immediately exercise any
Option in full to the extent not previously exercised. Under the Company's stock
option plans, the transactions contemplated by the Merger Agreement will
constitute a change in control resulting in acceleration of unvested options and
termination of all options on the 90th day after the effective time of the
Merger. The Merger Agreement provides that as to any employee who continues in
the employ of the Company after the effective time and whose option is
terminated without exercise as a result of the Merger, replacement options will
be issued for the same number of shares giving credit to the time attained under
the terminated options, at an exercise price equal to the "fair market value"
(as defined in the stock option plans) on the date of grant.
The Incentive Plan will terminate ten (10) years after adoption and
Options will not be granted under the Incentive Plan after that date although
the terms of any Option may be amended in accordance with the Incentive Plan
41
<PAGE> 43
at any date prior to the end of the term of such Option. Any Options outstanding
at the time of termination of the Incentive Plan will continue in full force and
effect according to the terms and conditions of the Option and the Incentive
Plan.
The Incentive Plan may be amended by the Company Board, provided that
stockholder approval will be necessary to the extent required under Section 422
of the Code or Rule 16b-3 of the General Rules and Regulations of the Exchange
Act, and provided further that no amendment may impair any rights of any holder
of an Option previously granted under the Incentive Plan without the holder's
consent.
Some of the Options granted under the Incentive Plan are intended to
qualify as incentive stock options for federal income tax purposes as described
in Section 422 of the Code. Generally, an optionee recognizes no taxable income
upon either the grant or exercise of an incentive stock option, although the
difference between the exercise price and the fair market value of the stock on
the date of exercise is an item of tax preference in computing the optionee's
alternative minimum tax liability, if any. If certain holding period
requirements are met, gain or loss on a subsequent sale of the stock by the
optionee is taxed at capital gain rates. Generally, long-term capital gains
rates will apply to the optionee's full gain at the time of the sale of the
stock, provided that: (i) no disposition of the stock is made within two (2)
years from the date of grant of the option nor within one (1) year after the
acquisition of such stock, and (ii) the option is exercised within three months
of the optionee's termination of employment (one year in the event of
disability).
A sale, exchange, gift or other transfer of legal title of stock
acquired pursuant to an incentive stock option within two (2) years from the
date of grant or within one (1) year after acquisition of the stock pursuant to
exercise of the option constitutes a disqualifying disposition. A disqualifying
disposition involving a sale or exchange produces taxable income to the
optionee, and an income tax deduction to the Company, in an amount equal to the
lesser of (i) the fair market value of the stock on the date of exercise minus
the option price or (ii) the amount realized on disposition minus the option
price. Otherwise, generally, neither issuance nor exercise of an incentive stock
option nor the disposition of the underlying stock produces a deduction for the
Company. A disqualifying disposition as a result of a gift produces taxable
income to the optionee in an amount equal to the difference between the option
price and the fair market value of the stock on the date of exercise.
Some of the Options granted under the Incentive Plan may also be
considered to be so-called non-qualified stock options for federal income tax
purposes. An optionee recognizes no taxable income upon the grant of such stock
options. Generally, Section 83 of the Code requires that, upon exercise of an
option, the optionee recognizes ordinary income in an amount equal to the
difference between the option exercise price and the fair market value of the
shares on the date of exercise; and such amount, subject to certain limitations,
is deductible as an expense by the Company for federal income tax purposes. The
ordinary income resulting from the exercise of such options is subject to
applicable withholding taxes. Generally, any profit or loss on the subsequent
disposition of such shares is short-term or long-term capital gain or loss,
depending upon the holding period for the shares.
THE AMENDED AND RESTATED 1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The Company Board unanimously adopted and approved the Directors' Plan
on November 18, 1996, and unanimously adopted the plan, as amended and restated,
on February 4, 1997 (the "Directors' Plan"). The Directors' Plan was approved by
the stockholders of the Company at an Annual Meeting on March 6, 1997. In
accordance with the provisions of the Directors' Plan, each non-employee
director, or his or her designee(s), was granted 25,000 options under the
Directors' Plan on November 18, 1996, at the exercise price of $7.7375, which
was the fair market value of shares of Common Stock on such day, based on the
average of the closing price of the Common Stock for the 10 day period of
November 19, 1996 to December 3, 1996, in accordance with the provisions of the
Directors' Plan. All of such options vest at the rate of 30% after one (1) year,
60% after two (2) years and 100% after three (3) years, subject to acceleration
in certain circumstances. The grant of these options was conditioned upon the
approval of the Directors' Plan by the stockholders of the Company, which was
obtained at the Annual Meeting of stockholders on March 6, 1997.
42
<PAGE> 44
The Directors' Plan is intended to encourage non-employee directors of
the Company ("Eligible Directors") to acquire or increase their ownership of
Common Stock on reasonable terms, and to foster a strong incentive to put forth
maximum effort for the continued success and growth of the Company. The
Directors' Plan provides for the granting of non-qualified stock options to
purchase 250,000 shares of Common Stock to current and future Eligible
Directors.
The Directors' Plan is administered by the Committee. The principal
terms of the option grants are fixed in the Directors' Plan. Therefore, the
Committee will have no discretion to select which Eligible Directors receive
options, the number of shares of Common Stock included in any grant, or the
exercise price of options.
Immediately prior to the Distribution, each of the then identified
Eligible Directors, or his or her designee(s), was granted an option to purchase
25,000 shares of Common Stock. Each Eligible Director who subsequently joins the
Company Board will be granted on the first business day following the first day
of his or her term, an option to purchase 25,000 shares of Common Stock. On the
fifth business day after the Company's Annual Report on Form 10-K is filed with
the Commission for each fiscal year that the Directors' Plan is in effect, each
person who is an Eligible Director on such date will receive an additional
option to purchase 5,000 shares of Common Stock. If the number of shares
available for grant under the Directors' Plan on a scheduled date of grant is
insufficient to make all the grants, then Each Eligible Director will receive an
option to purchase a pro rata number of the available shares.
250,000 shares of Common Stock (subject to adjustment) have been
reserved for issuance by the Company under the Directors' Plan. Any shares of
Common Stock subject to an option which, for any reason, terminates unexercised
or expires, shall be available again for issuance under the Directors' Plan.
The option price per share is the fair market value of the shares of
Common Stock on the date of grant. Under the Directors' Plan, fair market value
is generally the closing price of the Common Stock on NASDAQ/NMS on the last
business day prior to the date on which the value is to be determined; provided,
however, that with respect to the options granted immediately prior to the
Distribution, fair market value means the average of the daily closing price of
the Common Stock for the first ten (10) consecutive trading days that Common
Stock is traded on NASDAQ/NMS other than on an "as issued" or "when issued"
basis, calculated to the nearest cent, as determined by the Company.
Options granted under the Directors' Plan are exercisable for a term of
ten (10) years from the date of grant, subject to earlier termination, and may
be exercised as follows: (a) any option granted as of the effective date of the
Director's Plan or as the first day of an Eligible Director's initial term on
the Company Board may be exercised as to 30% of the shares subject to such
option at any time after the first anniversary of the date of grant, as to 60%
of the shares subject to such option at any time after the second anniversary of
the date of grant, and as to all shares subject to such option at any time after
the third anniversary of the date of grant and (b) any other options may be
exercised at any time after the third anniversary of the date of grant.
Options granted under the Directors' Plan are non-transferable other
than by will or pursuant to the laws of descent and distribution or pursuant to
a qualified domestic relations order.
In the event that an Eligible Director ceases to be a member of the
Company Board (other than by reason of death or disability), an option may be
exercised by the director (to the extent the director was entitled to do so at
the time he ceased to be a member of the Company Board) at any time within seven
months after he ceases to be a member of the Company Board, but not beyond the
term of the option. If the Eligible Director dies or becomes disabled while he
is a member of the Company Board or within seven months thereafter, an option
may be exercised (to the extent the director was entitled to do so as of the
date of his death or the termination of his directorship by reason of his
disability) by a legatee of the director under his will, or by him or his
personal representative or distributees, as the case may be, at any time within
12 months after his death or disability, but not beyond the term of the option.
An Eligible Director entitled to exercise an Option shall do so by
delivery of a written notice to that effect specifying the number of shares of
Common Stock with respect to which the Option is being exercised. The notice
shall be accompanied by payment in full of the purchase price of any shares of
Common Stock to be purchased, which
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payment may be made in cash or, upon authorization by the Committee, in shares
of Common Stock of the Company that such Eligible Director has held for more
than six (6) months.
In accordance with Rule 16b-3(d)(3) promulgated under the Exchange Act,
Eligible Directors are not permitted to dispose of the shares of Common Stock
underlying an option granted pursuant to the Directors' Plan during the six
month period commencing from the date of the acquisition of such option.
Options granted under the Directors' Plan are subject to adjustment
upon a recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend or other similar event affecting the Common
Stock.
Upon a "change of control" of the Company, which includes transactions
such as the Merger, each option granted under the Directors' Plan will terminate
on the later of (i) 90 days after the occurrence of such "change of control" and
(ii) seven months following the date of grant of each option, and an option
holder will have the right, commencing at least five days prior to the "change
of control" and subject to any other limitation on the exercise of the option
(except without regard to any vesting limitations) in effect on the date of
exercise, to immediately exercise any options in full, to the extent they have
not previously been exercised.
The Directors' Plan will terminate on the tenth anniversary of the
Distribution and options may not be granted under the Directors' Plan after that
date, although the terms of any option may be amended in accordance with the
Directors' Plan at any date prior to the end of the term of such option. Any
options outstanding at the time of termination of the Directors' Plan will
continue in full force and effect according to the terms and conditions of the
option and the Directors' Plan.
The Directors' Plan may be amended by the Company Board, provided that
stockholder approval will be necessary to the extent required under Rule 16b-3
of the General Rules and Regulations of the Exchange Act, and no amendment may
impair any of the rights of any holder of an option previously granted under the
Directors' Plan without the holder's consent.
The tax treatment of options granted under the Directors' Plan will be
the same as the tax treatment for non-qualified options discussed under the
Incentive Plan above.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the DGCL, a corporation may indemnify any director, officer,
employee or agent against expense (including attorneys' fees), judgments, fines
and amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation to procure a judgment in
its favor - a "derivative action") if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe that his or her conduct was unlawful.
The Company's Certificate of Incorporation provides, among other
things, that the Company shall indemnify any person who is or was a director or
officer of the Company who is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Company), by reason of the fact that he (i) is or was a
director or officer of the Company, or (ii) is or was serving at the request of
the Company as director, officer, employee, agent of another corporation,
partnership, joint venture, trust, or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself create a presumption that the person did not
act in good faith
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and in a manner which he reasonably believed to be in or not opposed to the best
interests of the Company or, with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of Common Stock
as of October 16, 1997, by each director and Named Executive Officer of the
Company and all directors and executive officers of the Company as a group, as
well as by any person known by the Company to own beneficially more than 5% of
the Common Stock of the Company, based upon such person's reported ownership of
Common Stock in filings made with the Commission pursuant to Sections 13(d) and
13(g) of the Exchange Act as of October 16, 1997. The information in this table
was based in part on information supplied by the named individuals.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENTAGE PERCENTAGE
BENEFICIALLY OWNERSHIP AS OF OWNERSHIP AS OF
OWNED AS OF OCTOBER 16, THE EFFECTIVE
NAME AND ADDRESS OF BENEFICIAL OWNER OCTOBER 16, 1997 1997 (1) TIME (11)
- ------------------------------------ ------------------- --------------- ---------------
<S> <C> <C> <C>
Ronald Howard 1,225,603 (2) 9.4% 2.1%
John Howard 25,000 (3) * *
Barbara Perrier Dreyer 45,000 (3)(4) * *
1,950,000(3)(5)(6) 15.0%
Arthur Samberg 3.3%
Paul Schaller 25,000 (3) * *
James Gallagher 75,000 (7) * *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP
(6 PERSONS) 3,345,603 (8) 25.9% 5.6%
Richard Chilton, Jr.
399 Park Avenue
New York, New York 10022 672,800 (9) 5.2% 1.1%
Pequot Partners Fund, L.P.
and Pequot International Fund, Inc.
354 Pequot Avenue
Southport, Connecticut 06490 1,510,600 (5) 11.6% 2.5%
Cramer Partners, L.P.
100 Wall Street, 8th Floor
New York, New York 10004 2,960,000 (10) 22.7% 5.0%
</TABLE>
- -----------------
(*) Less than 1%
(1) Includes, in certain instances, shares held in the name of an executive
officer's or director's spouse or minor children, the reporting of
which is required by applicable rules of the Commission, but as to
which shares the executive officer or director may have disclaimed
beneficial ownership. Beneficial ownership includes 475,000 shares
issuable upon exercise of options granted under the Incentive or
Director's Plan, within 60 days from the date hereof, assuming that the
Merger is consummated.
(2) Includes 300,000 shares of Common Stock issuable upon the exercise of
an option within 60 days from the date hereof, assuming that the Merger
is consummated.
(3) Includes 25,000 shares of Common Stock issuable upon the exercise of an
option within 60 days from the date hereof, assuming that the Merger is
consummated.
(4) Mrs. Perrier Dreyer and her husband, John Dreyer, have shared voting
and dispositive power with respect to these shares.
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<PAGE> 47
(5) Includes 787,100 shares of Common Stock owned by Pequot Partners Fund,
L.P., a Delaware limited partnership whose general partner and
investment manager is Pequot General Partners, LLC, a Connecticut
limited liability company ("General Partners") and 698,500 shares of
Common Stock owned by Pequot International Fund, Inc., a British Virgin
Islands corporation, whose investment manager is DS International
Partners, L.P., a Delaware limited partnership ("International
Partners"). (Pequot Partners Fund, L.P. and Pequot International Fund,
Inc. are together referred to as the "Funds"). Mr. Samberg is a General
Partner and senior portfolio manager of each of the Funds. General
Partners and International Partners (together, the "Partners") are the
beneficial owners, as such term is used in Rule 13d-3 of the Exchange
Act of the shares of Common Stock owned by the Fund for which they act
as investment manager, respectively. The Partners may be deemed to
constitute a group as such term is used in Section 13(d)(3) of the
Exchange Act. Each of the Partners disclaims beneficial ownership of
the Common Stock beneficially owned by the other Partners.
(6) Includes 86,500 shares of Common Stock owned by Dawson-Samberg Capital
Management, Inc., of which Mr. Samberg is President, and 352,900 shares
of Common Stock owned by Pequot Endowment Fund, L.P., a Delaware
limited partnership ("Endowment Fund") whose general partner and
investment manager is Pequot Endowment Partners, L.P., a Delaware
limited partnership. Mr. Samberg is a General Partner and senior
portfolio manager of Endowment Fund.
(7) Includes 75,000 shares of Common Stock issuable upon the exercise of an
option within 60 days from the date hereof, assuming that the Merger is
consummated.
(8) Includes 475,000 shares of Common Stock issuable upon the exercise of
options within 60 days from the date hereof, assuming that the Merger
is consummated.
(9) According to the Amendment No. 1 to the Schedule 13D, dated March 21,
1997, includes shares of Common Stock held by Chilton Investment
Partners, L.P. ("Chilton Partners"), a Delaware limited partnership,
Chilton Opportunity Trust, L.P. ("Chilton Trust"), a Delaware limited
partnership, or managed accounts over which Mr. Chilton has investment
discretion. Mr. Chilton is the general partner of Chilton Investments,
L.P. ("Chilton Investments"), a Delaware limited partnership, and
Olympic Equity Partners, L.P., a Delaware limited partnership
("Olympic"). Chilton Investments is the general partner of Chilton
Partners. Olympic is the general partner of Chilton Trust, serves as
the investment advisor to Chilton International (BVI) Ltd., a British
Virgin Islands corporation, and advises several managed accounts.
(10) James J. Cramer, President of J.J. Cramer & Co., and Karen Cramer, Vice
President of J.J. Cramer & Co., have shared voting and dispositive
power with respect to these shares.
(11) Assumes consummation of the Merger and the issuance of additional
shares of Common Stock based upon the Conversion Ratio and no change in
beneficial ownership from September 19, 1997. Does not include
additional shares of Common Stock issuable to Mr. Ronald Howard in lieu
of a $437,500 cash bonus payable upon a change in control.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BONUS COMPENSATION; OPTIONS.
Upon Closing of the Merger Messrs. Hayes and Lam, each of whom is a
director of Hayes, will be entitled to receive cash bonuses of $450,000 and
$275,000, respectively. Upon closing of the Merger, pursuant to the terms of the
present Employment Agreement between Mr. Howard and the Company, Mr. Howard will
be entitled to receive a cash payment equal to $437,500. Mr. Howard has advised
the Company that in lieu of receiving such cash payment he will accept shares of
Common Stock having a value equal to such amount. In addition, Mr. Howard owns
options to purchase 300,000 shares of Common Stock under the Incentive Plan,
which options will be repriced to market as of the Effective Time if they expire
unexercised. See "MANAGEMENT OF THE COMPANY - Employment and Consulting
Agreements."
EMPLOYMENT AGREEMENTS.
As of the Effective Time, the Company will enter into the following
employment agreements:
Dennis Hayes - Pursuant to the terms of the Hayes Employment Agreement,
Mr. Hayes will be the Chairman of the Company. His annual base salary will be
$400,000 per year, with annual increases on each anniversary date of the
Effective Time directly proportional to any increase (but not decrease) in the
cost of living as reflected by the Consumer Price Index for Urban Wage Earners
and Clerical Workers-All Items ("CPI") published by the Bureau of Labor
Statistics. Mr. Hayes will also be eligible for a personal incentive cash bonus
up to $500,000 per year based on
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<PAGE> 48
attaining personal goals approved by the Company Board in respect of his duties
on behalf of the Company and a corporate incentive bonus in the maximum amount
of $300,000 per year upon the Company attaining goals established by the Company
Board. In addition, Mr. Hayes will receive on January 1 of each year during the
term of the Hayes Employment Agreement ten-year stock options to purchase
200,000 shares of Common Stock with an exercise price of fair market value on
the date of award, less a 15% discount. Twenty-five percent (25%) of the options
will vest on the date of award, and an additional 25% will vest on December 31
of such year and each ensuing year. If Mr. Hayes voluntarily resigns his
employment (except in the case of a breach of the Hayes Employment Agreement by
the Company, or in the event of a "change in control" as such term is defined in
the Hayes Employment Agreement) or is discharged for "cause" as such term is
defined in the Hayes Employment Agreement, then no further vesting will occur
and all unvested options will terminate immediately upon termination of
employment. Mr. Hayes must exercise any vested options after such termination of
employment within the earlier to occur of five years after the date of
termination or the expiration of the 10-year term of the options. Mr. Hayes will
also receive certain short-term and long-term disability benefits under the
Company's respective disability plans and a car and driver on a full-time basis.
The Company will also pay the premiums on the life insurance policy of Mr.
Hayes. Mr. Hayes will receive a severance payment in an amount equal to
three-twelfths (3/12) of his base salary in the event of Mr. Hayes' death during
the term of the Hayes Employment Agreement. Mr. Hayes has agreed not to compete
with the Company and not to solicit the Company's employees during the term of
his employment and for 18 months thereafter.
Ronald Howard - Pursuant to the terms of the Howard Employment
Agreement, Mr. Howard will be the Vice Chairman of the Company and Executive
Vice President - Business Development. His annual base salary will be $330,000
per year, with annual increases to be reviewed by the Company Board. Mr. Howard
will also be eligible for a cash bonus in an amount calculated by dividing his
base salary by 70% and subtracting his base salary from the resulting amount
(the "Bonus Amount"). Such Bonus Amount shall consist of two parts: (a) a
personal incentive bonus in the maximum amount of 30% of the Bonus Amount, based
on attaining personal goals established by the Compensation Committee in respect
of Mr. Howard's duties on behalf of the Company and (b) a corporate incentive
bonus in the maximum amount of 70% of the Bonus Amount, based on the Company's
attaining such goals, objectives and benchmarks as shall be set by the Company
Board. In addition, Mr. Howard will receive on January 1 of each year during the
term, ten-year stock options to purchase 150,000 shares of Common Stock with an
exercise price of fair market value on the date of award, less a 15% discount.
Twenty-five percent (25%) of the options will vest on the date of award, and an
additional 25% will vest on December 31 of such year and each ensuing year. If
Mr. Howard voluntarily resigns his employment (except in the case of a breach of
the Howard Employment Agreement by the Company, or in the event of a "change in
control" as such term is defined in the Howard Employment Agreement) or is
discharged for "cause" as such term is defined in the Howard Employment
Agreement, then no further vesting will occur and all unvested options will
terminate immediately upon termination of employment. Mr. Howard must exercise
any vested options after such termination of employment within the earlier to
occur of five years after the date of termination or the expiration of the
10-year term of the options. The Company will also continue to pay the premiums
on the life insurance policy that has been maintained by the Company on Mr.
Howard's life prior to the Effective Time. Mr. Howard has agreed not to compete
with the Company, and not to solicit the Company's customers and employees
during the term of his employment and for 18 months thereafter.
SHAREHOLDERS AGREEMENT.
Each of the Hayes Shareholders and Mr. Howard have entered into a
Shareholders' Agreement, effective as of the Effective Time, in respect of the
voting of their respective shares of the Company's Securities for the election
of directors. Such Shareholders' Agreement provides that the shares owned by
such persons will be voted to elect Messrs. Hayes and Howard and five persons
designated by certain of the Hayes Shareholders.
BUSINESS OF HAYES
GENERAL
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<PAGE> 49
Hayes was incorporated in January 1978 as a Georgia corporation. Hayes
engages in the design, manufacturing, marketing and support of computer
communication products for business, government, small office, professional and
individual consumers worldwide through the sale of modem, network and broadband
products.
While historically Hayes' business has focused on its core modem
business, Hayes has recently broadened its products to include integrated
network communication products (access systems). In addition, Hayes has pursued
penetrating the broadband market by offering products for the asymmetric digital
subscriber line ("ADSL") and the cable market.
For nearly two decades, Hayes has been the leader in providing
value-based modems. The Hayes standard AT command set has become the de facto
industry standard for personal computer modems and, along with the patented
escape sequence, created the market requirement for "Hayes compatibility."
Hayes was founded by Mr. Hayes in 1977 to develop and market modems
designed for the microcomputer marketplace. Hayes' first product was released in
April 1977 which was a modem for the early S-100 type computers. Hayes developed
the Micromodem II for the Apple II before Apple had a disk drive. Hayes
introduced the Smartmodem in June 1981. In August 1981, IBM introduced the first
IBM PC that legitimized the personal computer industry. Personal computer ("PC")
sales began to skyrocket and Hayes was the leading manufacturer of modems to
serve this market. Fueled by the growth in the PC market and the introductions
of 1200 and 2400 bits per second modems, Hayes' sales grew from $4.8 million in
1981 to $120.1 million in 1985. Hayes was included twice in Inc. Magazine's list
of Fastest Growing Privately Owned Companies.
In the 1987 to 1988 time frame, the "low price" modem competition began
to consolidate into recognizable brands from the multitude of market players. By
1989, Hayes realized the significance of the emergence of what was internally
referred to as clone modems (claiming Hayes compatibility) as had been observed
with clone PCs (IBM compatible) slightly earlier. Practical Peripherals, Inc.
had established itself as a true brand in the clone modem segment. In August
1989 Hayes purchased Practical Peripherals, Inc. to establish a presence in the
clone modem segment.
In the early 1990s, the consumer, small office/home office ("SOHO")
market segment experienced rapid expansion. In response, Hayes introduced the
ACCURA product line in 1993. This product line provided a different feature set
and a lower price point than Hayes Ultra and Optima product lines. Competitors
in this market segment pursued an extremely aggressive price strategy to gain
market share by initiating rapid price erosion for this market.
Due to market price pressures Hayes reduced its ACCURA pricing in March
1994 to competitive levels. As a result, the ACCURA volumes increased
dramatically. In responding to the ACCURA volume increase, Hayes experienced a
number of operational and manufacturing problems. Due to excess inventory of old
designs, Hayes could not benefit from new lower cost product designs.
Additionally, there was an inadequate internal infrastructure and process in
place to support subcontractor start-up necessary to support increased demand
and significant air freight expense was required due to resultant delays in
subcontractor production. Inventory increased and margins compression occurred.
The resulting strain on Hayes' cash position and operating losses combined with
insufficient capitalization precipitated Hayes' filing a petition for relief
under Chapter 11 of the U.S. Bankruptcy Code on November 15, 1994.
On April 16, 1996, Hayes consummated a court approved Reorganization
Plan. Under the terms of the Plan, all prepetition creditors were paid in full
plus interest, except where other agreements were made. Funding of the Plan was
provided through three major sources. First, pursuant to the Agreement and Plan
of Merger dated April 12, 1996 entered into by and between ACMA, Kaifa
Technology (H.K.) Limited, Rolling Profit Holdings, Ltd., Lao Hotel (H.K.),
Limited, Saliendra Pte Ltd., and S.P. Quek Investments Pte. Ltd. (collectively,
the "Investors"), certain subsidiaries were created by the investors which
collectively contributed $35.0 million to fund the Plan and merge with Hayes.
The Investors received preferred stock representing a 49% voting interest in
Hayes. Second, Hayes entered into an agreement with CIT to borrow up to an
aggregate of $64.5 million through three separate debt instruments
collateralized by Hayes' intellectual property, certain equipment, and accounts
receivable and inventory balances. Third, pursuant to the Plan, Hayes sold
certain parcels of real property.
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<PAGE> 50
During 1996, Mr. Hayes assembled a new management team comprised of
individuals from the communications industry including a new chief financial
officer, vice president of sales, marketing, development and human resources.
On April 24, 1997, Hayes acquired Cardinal which Hayes management
believes added a highly visible brand to Hayes' brand portfolio and strengthened
Hayes' position in the North American retail market. Cardinal's 1996 revenues
were approximately $64.0 million. In connection with the Cardinal acquisition,
in April 1997 Hayes received a $5.5 million investment from Vulcan Ventures,
Inc., one of the Paul Allen Group of Companies. The investment involved the
issuance of 263,113 shares of Series B Preferred Stock of Hayes, which will be
convertible into 1,217,930 shares of Series A Preferred Stock at the Effective
Time.
In July 1997, Hayes entered into the Investor Letter of Intent whereby
a prospective investor proposed to purchase 1,350,743 shares of Series C
Preferred Stock from Hayes (which, if such purchase is consummated, would be
convertible into 6,252,454 shares of Common Stock at the Effective Time) for a
purchase price of $30.0 million. The prospective investor subsequently proposed
to purchase additional shares of Hayes Common Stock from certain Hayes
Shareholders for an aggregate purchase price of $10.0 million. Negotiations with
this prospective investor are continuing, and Hayes is also pursuing discussions
with other potential sources of capital funding. There can be no assurance that
any of such possible investments will be consummated.
PRINCIPAL PRODUCTS
Hayes has invested in technologies that expand its products to meet
changing market demands. Hayes' business is structured around three core product
categories; modems, broadband products and access systems.
Modems
Analog and ISDN modems represent the core of Hayes' business, and
accounted for approximately 96% of all revenues of Hayes for the first six
months of 1997. Hayes is widely recognized as being the company that
commercialized the PC modem in the early 1980's. The Hayes Standard AT Command
Set has become the de facto industry standard for PC modems and along with the
patented escape sequence created the market requirement for "Hayes
compatibility."
Hayes markets its modem products under the Hayes ACCURA(TM), Hayes
OPTIMA(TM), Practical Peripherals(TM), and Cardinal(TM) brands. The modem
products are sold through the distribution, value added reseller and mass
merchant channels.
Due to demand for increased speed in delivery of information, modem
speeds have historically changed every 12 to 24 months. In 1997, Hayes
introduced a series of new products that transmit information at 56Kbs. Hayes
anticipates that the market will transition over the next 12 months to the 56Kbs
speed from the current 33.6Kbs standard. At present, the industry has not
adopted a 56Kbs standard, although such a standard is expected to be established
in 1998. Hayes currently sells products utilizing the two primary 56Kbs
technologies offered in the market.
Broadband Products
Recognizing the market's need for more information at faster speeds,
Hayes has launched significant activities to deliver its customers products at
speeds of multiples of those offered by current analog and ISDN products. Hayes'
efforts are focused on the ADSL and cable markets.
ADSL
On June 6, 1997 Hayes announced that it had been selected by Alcatel
Telecom ("Alcatel") to jointly develop, manufacture and market products and
equipment implementing ADSL technology. These end-to-end ADSL solutions
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<PAGE> 51
will enable consumers, telecommuters and small business users to achieve
affordable, convenient, bandwidth-efficient, high-speed access to the Internet
and other interactive services, such as corporate intranets.
ADSL technology, which utilizes the existing telephone copper-wiring
infrastructure serving virtually all homes and businesses, allows customers to
interact with data networks, the Internet and associated services at speeds more
than 100 times faster than current 56Kbps modems. In recent months, Alcatel has
signed contracts with Ameritech, Bell South, Pacific Bell, Southwestern Bell,
Singapore Telecom, Telia (Sweden) and others to provide its 1000 ADSL system.
Hayes is pursuing other opportunities utilizing ADSL technologies to
develop a strong market position in the emerging ADSL market.
Cable
Management believes that the consumer's demand for higher speed
communications will result in significant demand for Cable modems. In 1996 Hayes
launched a development and marketing effort with an Israeli cable modem company.
In the fourth quarter of 1996 Hayes introduced its cable modem products to the
industry and began a number of successful cable modem trials. Hayes' products
have been well received and Hayes received its first major cable modem order in
April 1997 with an estimated value of $2.0 million. Hayes began shipping cable
modems in the second half of 1997 under its ULTRA(TM) brand.
On September 18, 1997, Hayes and Cisco Systems, Inc. ("Cisco") signed a
Collaboration Agreement whereby Hayes and Cisco agreed to promote Multimedia
Cable Network System ("MCNS") compliant cable modems and head end systems. The
Collaboration Agreement contemplates joint development and marketing of such
products.
On September 18, 1997 Cisco announced that Samsung Electronics Corp.,
Ltd. and Thomson Consumer Electronics had joined Cisco and Hayes in promoting
MCNS compliant cable modems.
Access Systems
The communications industry has seen tremendous growth in the area of
network connectivity. As the number of telecommuters, traveling employees and
branch offices grow, the demand for fast, low cost connectivity has grown.
Connectivity is enabled through client modems, modem pools and integrated remote
access devices. Hayes is seeking to leverage its experience and technology
strengths in communications to provide a portfolio of products that meet the
market's needs.
In the fourth quarter of 1996, Hayes entered into a comprehensive
technology collaboration agreement with the Company through which Hayes
introduced a family of remote access servers including its Century 2000 series,
Century 9200 series and Century 9400 series products. These products support the
connectivity needs of the small business or branch office. They are
fully-integrated remote access servers providing advanced management software
which enables easy configuration and network monitoring. These products use a
modular design for flexibility and ease of upgrade.
In April 1997 Hayes announces a technology agreement with Microcom.
Hayes and Microcom agreed to develop end-to-end communication solutions drawing
from the technology in Microcom's ISP Porte Chassis and Hayes' client and server
remote access products. According to terms of the agreement, the two companies
will explore product development, product branding and co-marketing
opportunities worldwide. The agreement is expected to enable Hayes to quickly
broaden its product offerings for modem pools.
SUPPLIERS
Hayes depends upon certain suppliers for its sole source for certain
components, including Rockwell and Lucent Technologies, Inc. for certain modem
chips used in most of Hayes' product. In addition, Hayes acquires a significant
portion of its network products from two domestic suppliers.
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PATENTS, COPYRIGHTS AND LICENSES
Hayes' patent estate strategy is based upon three fundamental goals:
(i) to protect Hayes' technology to enhance its commercial deployment (ii) to
obtain cross licenses of the technology of others to optimize a royalty-free
access to new technology, and (iii) to generate income. This strategy has
resulted in a significant patent estate consisting of more than 115 patents
owned and licensed, including internationally recognized patents, in the area of
data communications.
Hayes is committed to a licensing program which defends the value of
its intellectual property and offers licenses to responsible third parties. As a
result of Hayes' aggressive patent estate development program, many of Hayes'
competitors formed the Modem Patent Defense Group. This group attempted to
refute the validity of the Hayes' patents, specifically the Heatherington `302
patent, U.S. patent # 4549302 ("Heatherington Patent"), and to avoid payment of
royalty fees by filing suits against Hayes. To date, Hayes has successfully
defended its patent estate, resulting in additional manufacturers signing
license agreements to use Hayes' patents.
The Heatherington Patent has been Hayes' most valuable patent to date.
This patent enables the modem to be switched between data transmission mode and
command mode for configuring the modem. The patent was issued in 1985 and is
valid until February 14, 2001. The Heatherington Patent is licensed to virtually
every major modem manufacturer in the United States and is recognized around the
world as an industry standard for computer communications. The validity of the
patent was upheld by the U.S. Federal Court and since the fall of 1994 has been
fully protected in the European Community.
Another significant patent is the AutoSync patent, U.S. patent
#4700358. This patent is a sophisticated asynchronous to synchronous converter
which allows serial communication through the asynchronous serial port. Industry
interest has been expressed in implementing and licensing this technology.
Currently there are approximately 12 companies licensing this patent from Hayes.
Hayes has other valuable license rights that were obtained through
cross-license agreements with key industry players, including AT&T, 3Com, Intel,
Compaq, IBM, Racal Datacom and Microcom.
Hayes has current and pending patents with potential commercial value
in the area of data compression, multi-channel communication and various other
technologies related to data communications.
BACKLOG
Hayes forecasts demand and builds products in order to fill expected
demand. Customers generally expect delivery within one to two weeks and Hayes'
backlog of firm orders generally represents orders expected to be filled not
later than two months following the date of the order. Management believes that
current backlog may not necessarily be indicative of future revenues.
COMPETITION
The data communications industry is very competitive. Product life
cycles are short with rapid improvements required in terms of product
performance, features and cost. Hayes competes in a number of different markets
within the overall data communications market.
Modem Business Market
Hayes faces competition primarily from established players such as
3Com, AT&T, Microcom, Multitech, Racal Datacom, Motorola and Telebit. The
primary basis of competition is brand recognition, performance, features,
quality, reliability, price, service and support.
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<PAGE> 53
Modem Consumer Markets
The retail modem market is expected to continue its consolidation. The
primary basis of competition is brand recognition and price. 3Com is the most
significant competitor in this market with several smaller competitors competing
at the very low price points. A sample of these smaller competitors include
Golden Video Corporation ("GVC"), Boca Research, Inc., Zoom, and Diamond
Multimedia, Inc. The battle for retail shelf space is and will continue to be
fierce and brand recognition is and will continue be a major benefit to Hayes
and to the Company.
Modem OEM Market
Hayes intends to make significant efforts to reenter the OEM modem
market. The key competitors in this market are CIS Technology, Inc., GVC, 3Com
and others.
Access Systems
The access systems market is characterized by a large number of
participants, none of which have a dominant market position. The market is
experiencing high growth and high margins in comparison to modems. Companies
such as 3Com, Shiva, Asend, and General Datacom compete in this market.
Management believes that in addition to leveraging its strong brand
name, its products can be priced competitively which will enable Hayes to grow
its share of this market.
Broadband
ADSL is an emerging market with no competitor having dominant market
position. Many of the network product and modem companies are likely to
introduce products into this market. In addition, major telecommunications
companies such as Alcatel are expected to have significant presence in the ADSL
market as it matures.
The cable market is also an emerging market. Cable equipment companies
such as Scientific Atlanta and General Instruments are expected to capture a
share of this market. In addition, management believes that modem companies such
as 3Com will offer products in this market. Management expects competition to
intensify as cable modem products gain acceptance.
International
Hayes' products are sold internationally in more than 45 countries.
Some of the U.S. based competitors are present in Hayes' international market
but competition is also present from smaller local modem suppliers.
SALES
Americas Region
North America
Hayes sells its products directly to high-volume computer superstores,
mail order resellers, and mass merchants as well as through the two-tiered PC
distribution channel that includes distributors, large national corporate
resellers and aggregators through its own sales force. In the two-tiered
distribution model, the distributors and national corporate resellers provide an
inventory, logistics, and credit function to smaller resellers such as computer
chains, company-owned locations and value-added resellers.
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<PAGE> 54
The sales strategy for Hayes branded products is to retain a channel
"push" sales organization (reseller, marketing and telephone) ensuring channel
support and appropriate field inventory levels. The sales organization is
structured to focus both on the Hayes, Practical Peripherals and Cardinal brands
and each respective product categories and product lines.
Hayes' sales force consists of the Field Sales Group and the National
Account Group. The Field Sales Group maintains relationships with the corporate
headquarters of Hayes' channel partners as well as the individual reseller
locations that sell to end users. The Field Sales Group ensures that resellers
maintain adequate inventory of Hayes' products and that Hayes maximizes the mind
set of the resellers sales personnel to sell Hayes products.
The National Account Group calls on a large corporate customers and
directly markets Hayes' products to these large sophisticated end users. This
group is responsible for creating and maintaining demand in Fortune 1000
companies for Hayes' technologies. Hayes also maintains a sales office in
Washington D.C. to market to the Federal Government and maintains dedicated
resources within its National Account Group to stimulate sales to state and
local governments.
Latin America
Hayes has recently launched an initiative in Brazil to serve Brazil and
the Latin American region. Business is presently conducted directly with large
end users and through distributors for other customers.
Asia Pacific Region
Hayes' sales strategy in the Asia Pacific region is similar to its
sales strategy in North America. Hayes operates sales, marketing and service
subsidiaries in China, Hong Kong and Australia. Relationships are developed with
key distributors in each of the major Asia Pacific region countries.
Europe Region
Hayes' European sales, marketing and service efforts are headquartered
in the United Kingdom at its Fleet offices. Offices are also maintained in
France and Denmark. Strategic partners are identified in major markets to
distribute Hayes' products.
MARKETING
Hayes' marketing activities focus on developing brand recognition in
key market segments and geographic markets, as the underlying basis for cost
effective promotion of its products.
Public Relations
Hayes has focused its public relations activities on establishing
strong relationships with trade publications, reviewers and columnists. Hayes'
products have been consistently recognized for performance, quality, service and
support (i.e. Government Computer News, Computer Shopper, PCC Week, Mobile
Office, PC Magazine, Computerworld). Hayes has pursued a proactive posture in
public affairs, taking a prominent role in standard setting committees (ITU,
ANSI) and public policy organizations (AOP, GHTA and CompTIA).
Advertising, Packaging and Documentation
Over the years, Hayes has developed an in-house expertise to create
advertising that has consistently scored well in advertising readership studies
(i.e. Starch & Harvey Studies in PC Week, PC Magazine, Info World). Hayes has
been recognized by winning coveted awards from the Society for Technical
Communication Publications competition for the quality of its documentation and
packaging, which is also developed by Hayes in-house.
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<PAGE> 55
Channel and Infrastructure Activities
Hayes has established an effective channel marketing program which
allows the sales force to consistently execute on tactical promotions through
the entire channel spectrum. Hayes was most recently successful in developing
new mail order and mass merchant distribution channels. Hayes also has had
success through its infrastructure program in seeding its new products with
influential user groups of early adopters. In addition, customers can purchase
Hayes products over the worldwide web via ordering and fulfillment programs
recently implemented by Hayes.
CUSTOMER SUPPORT, SERVICE AND WARRANTY
Hayes strives to provide users of its products with the highest quality
technical support and customer service, dedicating more than 90 professionals
processing more than 60,000 incoming calls a month. Hayes constantly surveys its
user base with regard to customer satisfaction and it believes it consistently
outperforms its competitors in the area of support and service.
Hayes offers a standard two-year warranty which permits customers to
return any product for repair or replacement if the product does not perform as
warranted. In the U.S. and Canada only, Hayes also offers its customers the
option of an additional three-year warranty upon completion of a registration
card within 90 days of purchase. Some of the Practical Peripheral modems
previously sold have a lifetime warranty. Hayes to date has not encountered
material warranty claims or liabilities.
RESEARCH AND DEVELOPMENT
Hayes focuses its research and development ("R&D") efforts on hardware
and firmware system design, integration and testing for standalone and board
level data, fax, and voice modems, modem pools, remote access servers and
broadband technologies for high speed communications. Additional R&D activities
include access systems and software products, object oriented programming, and
digital signal processing technologies. Specialized knowledge and skills in the
areas of electromagnetic compatibility ("EMC"), agency approvals, communications
standards and product integration are applied to ensure timely product delivery.
The Company utilizes computer aided design systems for three dimensional
mechanical design and is upgrading its computer aided engineering tools to
improve the engineering process and strengthen applications specific integrated
circuit design capabilities.
Product development cycles typically range from three to 12 months.
Project duration of fifteen to eighteen months are common for new networking
products and new access systems and new technology platforms. Engineering
strategies employed to reduce product costs and time to market include focused
application of resources, simulation, standardization, on-going product and
process value engineering, simplification, automation and reduction of the
number of development cycles. Hayes expensed approximately $4.5 million and $6.0
million for product development and engineering for the six months ending June
30, 1996 and 1997, respectively, $16.2 million, $10.7 million and $9.6 million
for the twelve months ending September 30, 1994 and 1995, respectively, and
December 31, 1996, respectively.
ENVIRONMENTAL MATTERS
Hayes' compliance with federal, state and local environmental laws has
had no material effect upon Hayes' capital expenditures, earnings or competitive
position.
PROPERTIES
Hayes' executive offices are located in Norcross, Georgia in leased
facilities. Hayes' also has manufacturing and distribution facilities at the
same location. The manufacturing facility has five surface mount lines and
occupies approximately 50,000 square feet. The leases between Hayes and Essex
Capital are for 172,342 square feet and cover both the executive offices and
Hayes' manufacturing and distribution facilities. The leases expire between
December
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<PAGE> 56
31, 1999 and September 30, 2000.
In addition to the above lease, Hayes leases sales and marketing
facilities in China, Hong Kong, Australia, United Kingdom, France and Denmark.
Hayes believes its properties are adequate for its needs for the
foreseeable future.
EMPLOYEES
Hayes employed approximately 634 employees and 125 temporary employees
as of October 1, 1997. Hayes' management believes that its future success will
depend largely on its ability to retain certain key personnel and to recruit and
retain additional highly skilled employees. Hayes has experienced no work
stoppages and believes that its employee relations are satisfactory. The Company
will have a new employment agreement with Dennis Hayes as of the Effective Time
(see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS") and employment agreements
with other executives will be assumed by the Company (see MANAGEMENT OF HAYES -
Employment Agreements").
LEGAL PROCEEDINGS
Although Hayes is involved in several legal proceedings, Hayes believes
that it has meritorious defenses and will vigorously defend these cases, and
believes no such proceeding would have a materially adverse effect on Hayes'
properties, business or prospects. Accordingly, Hayes believes that there are no
material legal proceedings to which Hayes is a party or of which any of its
properties are subject; nor are there material legal proceedings known to Hayes
to be contemplated by any governmental authority; nor are there material legal
proceedings known to Hayes, pending or contemplated, in which any director,
officer or affiliate or any principal security holder of Hayes, or any associate
of any of the foregoing, is a party or has any interest adverse to Hayes.
MANAGEMENT OF HAYES
DIRECTORS AND EXECUTIVE OFFICERS
Following the Merger Messrs. Hayes, Lam and Chan will become directors
of the Company. The executive officers of Hayes immediately prior to the Merger
will become the executive officers of the Company. Joseph Formichelli resigned
as President and Chief Executive Officer of Hayes effective October 1, 1997. Mr.
Chan became President and Chief Operating Officer effective October 1, 1997. See
"MANAGEMENT OF THE COMPANY -- Management Post-Merger."
EXECUTIVE COMPENSATION
The following tables provide information with respect to the annual
compensation for services in all capacities to Hayes for fiscal years ended
December 31, 1996 of (i) Hayes' chief executive officer and (ii) the other four
most highly compensated executive officers of Hayes who were employed by Hayes
at the end of fiscal 1996 and who will be executive officers of the Company
following the Merger (the "Hayes Named Executive Officers").
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<PAGE> 57
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation (1) Compensation
Awards of
Securities
Name and Underlying Options All other
Principal Position Year Salary ($) Bonus ($) (#)(2) Compensation ($)
------------------ ---- ---------- --------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Dennis Hayes, Chairman 1996 1,000,000 250,000 - 202,094 (3)
Joseph Formichelli, 1996 206,667 92,500 180,000 100,113 (5)
President and Chief
Executive Officer (4)
James Jones, Vice President 1996 161,064 29,016 150,000 37,396 (6)
and Chief Financial Officer
P. K. Chan, Vice President 1996 198,024 13,792 150,000 1,275 (7)
of Operations
Alan Clark, Vice President 1996 157,996 66,636 150,000 425 (7)
and Chief Technical Officer
</TABLE>
- --------------------------
(1) In accordance with the rules of the Securities and Exchange
Commission, the compensation set forth in the table does not
include medical, group life insurance or other benefits which
are available to all salaried employees of Hayes, and certain
perquisites and other benefits, securities or property which
do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
(2) Does not give effect to the Conversion Ratio.
(3) Includes $192,307 for payout of accrued vacation and $6,690,
$1,754 and $1,200 for payment of life insurance premiums,
automobile use and club dues, respectively.
(4) Effective October 1, 1997, Mr. Formichelli resigned as
President and Chief Executive Officer of Hayes.
(5) Payments for relocation expenses of $99,345 and life insurance
premium of $768.
(6) Includes payments for relocation expenses of $37,143 and life
insurance premiums of $253.
(7) Represents life insurance premiums.
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<PAGE> 58
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to the
option grants in fiscal 1996 for the Hayes Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF STOCK
SECURITIES UNDERLYING OPTIONS GRANTED PRICE APPRECIATION FOR
NUMBER OF TO EMPLOYEES EXERCISE EXPIRATION OPTION TERM
NAME OPTIONS GRANTED (1) IN FISCAL YEAR $ PER SHARE DATE 5% 10%
---- ------------------- ----------------- ------------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Dennis Hayes - - - - - -
Joseph Formichelli 80,000 6.7% $.714 6/4/06 $ 35,922 $ 91,034
100,000 8.4% 1.00 10/23/06 62,889 159,374
James Jones 50,000 4.2% .714 6/4/06 22,451 56,897
100,000 8.4% 1.00 10/23/06 62,889 159,374
P. K. Chan 50,000 4.2% .714 6/4/06 22,451 56,897
100,000 8.4% 1.00 10/23/06 62,889 159,374
Alan Clark 50,000 4.2% .714 6/4/06 22,451 56,897
100,000 8.4% 1.00 10/23/06 62,889 159,374
- -----------------------
</TABLE>
(1) Does not give effect to the Conversion Ratio.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR END OPTION VALUES
The following table provides information with respect to the
aggregated option exercises in the fiscal 1996 and option year end values for
the Hayes Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR END
YEAR END EXERCISABLE/
EXERCISABLE/ UNEXERCISABLE
NAME UNEXERCISABLE (2)
<S> <C> <C>
Dennis Hayes -/- -/-
Joseph Formichelli (1) / 150,000 (1) / $40,880
James Jones (1) / 150,000 (1) / $29,300
P. K. Chan (1) / 150,000 (1) / $29,300
Alan Clark (1) / 150,000 (1) / $29,300
- -----------------
</TABLE>
(1) All options were unexercisable at December 31, 1996.
(2) Does not give effect to the Conversion Ratio.
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<PAGE> 59
EMPLOYMENT AGREEMENTS
Mr. Chan is employed pursuant to an Executive Employment Agreement
dated October 7, 1996 and amended on October ___, 1997. The term of the
agreement is two (2) years from the date of the Agreement as amended. Mr. Chan's
annual base salary is $198,000 and he is entitled to receive additional
incentive compensation of up to $69,300 based upon criteria to be determined by
Hayes. He is generally eligible for participation in the employee benefits
programs, including stock option plans. In the event of a termination for
"Cause" (as defined in the Agreement), a voluntary termination by Mr. Chan, or
the expiration of the term, Mr. Chan will receive no right to compensation or
other benefits. If Mr. Chan's employment is terminated by the Board of Directors
for any reason other than "Cause" within the term of the Agreement, Mr. Chan is
entitled to receive a severance in the form of salary continuation for twelve
(12) months following the effective date of the termination. In the event of a
termination or qualifying resignation relating to a "Change of Control" (as
defined in the Agreement), then Mr. Chan is entitled to receive a severance in
the form of salary continuation for twelve (12) months following the effective
date of the termination. Finally, the Agreement includes an invention assignment
and protective covenants of two (2) years in duration.
Mr. Jones is employed pursuant to an Executive Employment Agreement
dated October ____, 1997. The term of the agreement is two (2) years from the
date of the Agreement. Mr. Jones's annual base salary is $181,000 and he is
entitled to receive additional incentive compensation of up to $54,300 upon
criteria to be determined by Hayes. He is generally eligible for participation
in the employee benefits programs, including stock option plans. In the event of
a termination for "Cause" (as defined in the agreement), a voluntary termination
by Mr. Jones, or the expiration of the term, Mr. Jones will receive no right to
compensation or other benefits. If Mr. Jones's employment is terminated by the
Board of Directors for any reason other than "Cause" within the term of the
Agreement, Mr. Jones is entitled to receive a severance in the form of salary
continuation until the later in time of the remainder of the term of the
Agreement or twelve (12) months following the effective date of the termination.
Finally, the Agreement includes an invention assignment and protective covenants
of two (2) years in duration.
Mr. Clark is employed pursuant to an Executive Employment Agreement
dated October ____, 1997 and a letter agreement dated February 5, 1996, Mr.
Clark's base salary is $160,000. He is entitled to an executive incentive of up
to $40,000 based on Hayes' performance relative to its business plan. Mr. Clark
is generally eligible for participation in the employment benefit programs
including stock option plans. If Mr. Clark's employment with Hayes is terminated
without "Cause," he is entitled to six (6) months of his base salary as in
effect on the date of termination and shall be payable monthly in the same
manner as salary prior to the date of termination for a six (6) month period,
provided that Hayes' obligation to pay such severance will be reduced on a
dollar-for-dollar basis by the amount of any compensation received by Mr. Clark
from employment by any other party during the six (6) months severance period.
Pursuant to the Hayes Option Plan, and after giving effect to the
Conversion Ratio, 8,332,020 shares of authorized, unissued Hayes Common Stock
are currently reserved for issuance upon exercise of stock options granted and
to be granted pursuant to the Hayes Option Plan. These options are classified as
"executive," "management" and "performance" under the Hayes Option Plan. There
are 1,573,826 shares reserved for executive options, 2,129,294 shares reserved
for management options and 4,628,900 shares reserved for performance options.
There have been 1,296,092 executive options issued, 1,269,475 management options
issued and 3,124,507 performance options issued. No further options will be
issued pursuant to the Hayes Option Plan following the Merger.
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<PAGE> 60
SECURITY OWNERSHIP OF HAYES
The following table sets forth the beneficial ownership of capital
stock in Hayes as of September 30, 1997 and as of the Effective Time, by each
Director and Hayes Named Executive Officer, by all executive officers and
directors as a group, as well as by any person known to own beneficially more
than 5% of the capital stock of Hayes.
<TABLE>
<CAPTION>
OF HAYES OF THE COMPANY
-------- --------------
AS OF SEPTEMBER 30, 1997 AS OF THE EFFECTIVE TIME (10)
----------------------------------- --------------------------------
NUMBER OF NUMBER OF SHARES OF
SHARES OF STOCK PERCENTAGE COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED OF BENEFICIALLY PERCENTAGE
OF BENEFICIAL OWNER (1) OWNERSHIP OWNED OWNERSHIP
<S> <C> <C> <C> <C>
Dennis Hayes 4,991,750 (2) 49.1% 23,106,312 38.8%
Mina Hayes 200,000 (3) 1.9% 925,780 1.6%
Chiang Lam 200,000 (4) 1.9% 925,780 1.6%
Rinzai Limited
17 Jurong Port Road
Singapore 619092 3,062,500 (5) 30.2% 14,176,006 23.8%
S.P. Quek 3,062,500 (6) 30.2% 14,176,006 23.8%
K.S. Cham -- -- -- --
Kaifa Technology (H.K.) Limited
2201 Hong Kong Worsted Mills Industrial
Building
31-39 Wo Tong Jsui Street
Kwai Chury, New Territories
Hong Kong 816,667 (7) 8.0% 3,780,270 6.4%
M.C. Tam 816,667 (8) 8.0% 3,780,270 6.4%
Joseph Formichelli 20,000 (9) * 92,578 *
James Jones 50,000 (9) * 231,445 *
Alan Clark 50,000 (9) * 231,445 *
P. K. Chan 50,000 (9) * 231,445 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A 9,530,317 88.1% 44,114,884 70.1%
GROUP (14 PERSONS)
- ------------------
</TABLE>
* Less than 1%.
(1) On a fully-diluted basis including options exercisable within 60 days
and without giving effect to the Conversion Ratio.
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<PAGE> 61
(2) Consists of Hayes Common Stock. Includes 4,400,000 shares owned by
Chestnut Capital, LP of which Mr. Hayes is the General Partner.
Includes 48,529 shares held by a Hayes employee benefit plan of which
Mr. Hayes serves as trustee. Mr. Hayes disclaims beneficial ownership
of warrants held by Ms. Hayes.
(3) Consists of warrants to purchase Hayes Common Stock. Ms. Hayes
disclaims beneficial ownership of shares held by Mr. Hayes and
Chestnut Capital, LP.
(4) Consists of warrants to purchase Hayes Common Stock.
(5) Consists of Hayes Series A Preferred Stock which has voting rights
equivalent to those of Hayes Common Stock. Includes Series A Preferred
Stock held by S.P. Quek Investments Pte. Ltd.,which is an affiliate of
Mr. S.P. Quek, Chairman of Rinzai Limited.
(6) Consists of Hayes Series A Preferred Stock held by Rinzai Limited of
which Mr. Quek serves as Chairman and Hayes Series A Preferred Stock
held by S.P. Quek Investments Pte. Ltd.
(7) Consists of Hayes Series A Preferred Stock which has voting rights
equivalent to those of the Hayes Common Stock.
(8) Consists of Hayes Series A Preferred Stock, held by Kaifa Technology
(H.K.) Limited, of which Mr. Tam serves as President.
(9) Consists of options to purchase Hayes Common Stock.
(10) After giving effect to the Conversion Ratio.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Vulcan Ventures is a shareholder of Hayes, currently owning 263,113
shares of Hayes Series B Preferred Stock (without giving effect to the
Conversion Ratio). Vulcan Ventures was the majority shareholder of Cardinal, a
company that Hayes acquired in April, 1997. With respect to certain obligations
of Cardinal, Vulcan Ventures had certain guarantee obligations. As a part of the
transaction to acquire Cardinal, Hayes entered into a guarantee agreement in
favor of Vulcan Ventures relating to Vulcan Venture's guarantee of Cardinal
obligations. Vulcan Ventures and Hayes have also entered into a Strategic
Relationship Agreement pursuant to which Hayes and Vulcan Ventures have agreed
to develop mutually beneficial business opportunities.
Dennis Hayes has an employment agreement with Hayes. Hayes has loaned
funds to Dennis Hayes of approximately $244,214 at September 30, 1997. Dennis
Hayes sits on the Boards of Directors of three companies in which Hayes has an
ownership interest: Scaleable Software Solutions, Inc., BVRP Software S.A., and
Xylon Semiconductors, Inc.
Kaifa Technology (H.K.), Limited ("Kaifa") is a shareholder of Hayes,
currently owning 816,667 shares of Hayes Series A Preferred Stock (without
giving effect to the Conversion Ratio). Kaifa and Hayes have entered into a
Subcontract Manufacturing Agreement, pursuant to which Kaifa performs certain
manufacturing work for Hayes in its factory in Hong Kong.
Rolling Profit Holdings Limited is a shareholder of Hayes, currently
owning 408,333 shares of Hayes Series A Preferred Stock (without giving effect
to the Conversion Ratio). Wong's Electronics Limited ("Wong's") is an affiliate
of Rolling Profit Holdings Limited. Wong's and Hayes have entered into a
Subcontract Manufacturing Agreement, pursuant to which Wong's performs certain
manufacturing work for Hayes in its factory in China.
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<PAGE> 62
HAYES' MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL BUSINESS DEVELOPMENTS
Hayes is comprised of three business units: the Modem Products
business, the Network Products business and the recently formed Broadband
Products business. The Modem Products business designs, manufactures and markets
analog and ISDN modem products. The Modem Products business distributes its
products under the Optima, Accura, Practical Peripherals, and Cardinal brands.
The Network Products business designs and markets modem pool and remote access
server products. These products are distributed under the Century brand. The
Broadband Products business designs and markets ADSL and cable modem products
and was formed in June 1997. The Broadband Products business markets its
products under the Ultra brand.
On October 1, 1995, Hayes changed its year end from September 30 to
December 31. In the following discussion, fiscal 1996 is the calendar year and
is compared to Hayes' fiscal year ending September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
General. Hayes' primary capital requirements are for working capital,
acquisitions and other capital expenditures. Hayes has historically met its
capital requirements through a combination of equity transactions, cash flow
from operations, bank lines of credit and credit terms from suppliers.
Cash Flows. Cash and cash equivalents decreased by approximately $2.9
million to $2.8 million at June 30, 1997 as compared to $5.7 million at December
31, 1996. Cash and cash equivalent increased by $500,000 at December 31, 1996
from $5.2 million at September 30, 1995. Cash and cash equivalents decreased by
$3.1 million at September 30, 1995, as compared to September 30, 1994. The
increase in cash in fiscal 1996 resulted from implementation of the Plan and
reduction in restricted cash. The decrease in fiscal 1995 resulted primarily
from the increase in restricted cash as a result of Hayes' debtor-in-possession
financing with General Electric Capital Corporation ("GECC"). The increase in
cash and cash equivalents in fiscal 1994 resulted from extending vendor payments
prior to Hayes' Chapter 11 filing.
Cash used in operations was $16.6 million and $50.8 million in the
first six months of 1997 and the first six months of 1996, respectively. Cash
used in operations was $41.0 million in fiscal 1996 due to the implementation of
the Plan, which included payments of approximately $44.6 million to pre-petition
claimants, and a net loss of $13.2 million. Cash generated by operations was
approximately $1.5 million in fiscal 1995 and resulted from a net loss of
approximately $14.4 million which was more than offset by non-cash depreciation
and amortization and reduced working capital investment. Cash used in operations
was $7.7 million in 1994 due to a net loss of approximately $28.1 million
reduced by non cash depreciation and amortization and reduced working capital
investment.
Cash from investment activities was approximately $250,000 in the first
six months of 1997 due to sale of stock in a French software company partially
offset by the net impact of capital expenditures and changes in other long term
assets and $15.9 million in the first six months of 1996 due to the sale of
certain parcels of real estate. Cash from investment activities in fiscal 1996
was due to the sale of real estate, investments and equipment and a reduction in
restricted cash partially offset by capital expenditures. Cash used in
investment activities was $1.5 million and $8.1 million in fiscal 1995 and 1994,
respectively. The primary uses of these funds were capital investments and an
increase in restricted cash.
Cash provided from financing activities was approximately $13.8 million
and $34.4 million in the first six months of 1997 and in the first six months of
fiscal 1996, respectively. In March 1997, Hayes exercised its right to request
additional loans from certain shareholders to meet short-term capital needs.
Hayes issued short-term promissory notes totaling $4.0 million. Such notes are
convertible into Hayes Series A Preferred Stock. On April 23, 1997, Hayes
completed an agreement with Vulcan Ventures, Inc. to issue 263,113 shares of
Hayes Series B Preferred Stock (without giving effect to the Conversion Ratio)
for $5.5 million.
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<PAGE> 63
The cash provided in fiscal 1996 was due to the issuance of $35.0
million of Hayes Series A Preferred Stock partially offset by the repurchase of
$13.5 million of common stock less borrowings under Hayes' credit facilities.
Cash used in financing activities was $3.0 million in fiscal 1995 due to
payments exceeding borrowings under the GECC credit facility. Cash provided by
financing activities was $18.1 million in fiscal 1994 due to borrowings under
Hayes' credit facility with NationsBank of Georgia N.A.
At June 30, 1997, Hayes' principal sources of liquidity included cash
and cash equivalents and its credit facilities with CIT (the "CIT Facility").
The CIT Facility, which expires on April 16, 2000, consists of two term loans
and a revolving loan which provide for maximum borrowings of $64.5 million. The
revolving loan provides for financing based upon eligible receivables and
inventory. The term loans are based upon appraised values of equipment and
intangibles. The CIT Facility bears interest at prime plus 2.125 percent. At
June 30, 1997, Hayes had borrowed to the full extent of availability under the
CIT Facility.
Management believed that such sources were insufficient to enable it to
expand its business and sought additional funding through the issuance of Hayes'
equity. In July 1997, Hayes entered into the Investor Letter of Intent whereby a
prospective investor proposed to purchase 1,350,743 shares of Hayes Series C
Preferred Stock (without giving effect to the Conversion Ratio) for $30.0
million. If such purchase is consummated, these shares will be converted into
6,252,454 shares of Common Stock upon the Effective Time. Management believes
the proceeds from the sale of the Hayes Series C Preferred stock, if such sale
is consummated, in addition to cash and cash equivalents and its CIT credit
facilities, will be sufficient to satisfy operating cash and capital expenditure
requirements through at least the next twelve months. Negotiations with this
prospective investor are continuing, and Hayes is also pursuing discussions with
other potential sources of capital funding. There can be no assurance that the
proposed investment described in the Investor Letter of Intent will be
consummated.
Inflation
Hayes believes that inflation has not had a material impact on its
operating results and does not expect inflation to have a material impact on its
operating results in the foreseeable future.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30,
1996
<TABLE>
<CAPTION>
June 30, June 30,
1996 1997 Change
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Net Revenues:
Modem Products ................. $ 139,873 $ 91,439 $ (48,434)
Access Systems ................. 5,712 3,458 (2,254)
--------- --------- ---------
$ 145,585 $ 94,897 $ (50,688)
========= ========= =========
</TABLE>
Net revenues in the six months ended June 30, 1997 decreased by $50.7
million, or 34.8%, from the same period in 1996 primarily due to lower revenues
in both the Modem Products and Access Systems businesses. The decrease in net
revenues was largely attributable to Hayes' introduction of modems with 56Kbs
speeds. In the third quarter of fiscal 1996, Rockwell and 3 Com announced the
introduction of modem technology that would permit data to be transmitted on
analog phone lines at 56Kbs. These announcements were followed by announcements
by most modem providers, including Hayes, indicating product availability in the
first and second quarters of 1997. As a result of these announcements and
commentary from various industry analysts, management believes that its channel
partners assumed that modem customers would move quickly to 56Kbs modems and
away from the then industry standard 33.6Kbs modems. Consequently, Hayes'
channel partners significantly reduced orders for 33.6Kbs products and
substantially reduced channel inventories of such products in the first quarter.
Instead of placing orders for 33.6Kbs products, Hayes' channel partners began
placing orders for Hayes' 56Kbs products. Due to the lack of availability of
56Kbs modem chips
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from its suppliers, Hayes was unable to fill many of these orders and backlog
rose to $10.5 million at March 31, 1997 from $4.6 million at December 31, 1996.
In the second quarter of 1997, Hayes began to fill its channel partners
demand for 56Kbs product. Management believes that during this period its
channel partners realized that customer demand was weighted heavily toward
33.6Kbs products and the market had not yet accepted 56Kbs products. As a
result, Hayes' channel partners began to place significant orders for 33.6Kbs
products. Hayes had converted much of its manufacturing schedule to 56Kbs
products and was therefore unable to meet much of its channel partners' demand
for 33.6Kbs product during the second quarter. Although second quarter 1997
revenues increased 42.2% from the first quarter of 1997 to $55.7 million at June
30, 1997, backlog grew to $20.9 million at June 30, 1997.
Gross profit, as a percentage of net revenues, declined to 25.2% in the
first six months of 1997 from 28.0% in the first six months of 1996 due to
unfavorable manufacturing variances caused by disruption to manufacturing
schedules and lower average selling prices for 33.6Kbs products resulting from
the introduction of 56Kbs products.
Selling, general and administrative expenses decreased by $4.9 million
in the first six months of 1997 from the comparable period in 1996. Such
expenses represented 27.8% of revenue in the first six months of 1997 compared
to 21.5% in the first six months of 1996. Hayes reduced operating expenditures
in anticipation of lower revenues in the first six months of 1997, but expenses
as a percent of revenue were higher due to such lower revenues.
Research and development expense increased to $6.0 million from $4.5
million in the first six months of fiscal 1997 compared to the same period in
fiscal 1996 as a result of increased development expenses related to new
products for the network and broadband markets.
In the first six months of 1997 Hayes recognized a gain of $1.3 million
from the sale of stock in a French software company. Hayes also recognized a
gain in the first six months of 1996 of $8.2 million from the sale of certain
parcels of real estate.
Interest expense was $0.6 million lower in the first six months of 1997
compared to the same period in 1996. The interest expense in the first six
months of 1996 included interest at 12%, which was payable on most of the
pre-petition claims. These claims were paid in full in April of 1996.
Hayes reported a net loss of $7.8 million for the six months ended June
30, 1997 and net income of $5.2 million the six months ended June 30, 1996. On a
per share basis, net loss was $(1.57) and net income was $.70 in the six months
ended June 30, 1997 and June 30, 1996, respectively.
Fiscal 1996 Compared to Fiscal 1995
<TABLE>
<CAPTION>
September 30, December 31,
1995 1996 Change
------------- ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Net Revenues:
Modem Products ............... $ 260,303 $ 245,438 $ (14,865)
Access Systems ............... 8,852 12,014 3,162
--------- --------- ---------
$ 269,155 $ 257,452 $ (11,703)
========= ========= =========
</TABLE>
In fiscal 1996, Hayes reported net sales of approximately $257.5
million, a decrease of 4.4% from fiscal 1995. Modem Products business net
revenues decreased 5.7% to $245.4 million in fiscal 1996. This decrease resulted
from price erosion in the Company's 14.4 Kbs and 28.8 Kbs modem products. Access
Systems business net revenues increased 35.7% in fiscal 1996 to $12.0 million
due to growth in Century product sales.
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Gross profit, as a percentage of net sales, remained constant at 23.9%
in 1996 and 1995. Although average sales prices declined in fiscal 1996 versus
fiscal year 1995, improved product designs and lower manufacturing and material
costs enabled Hayes to maintain its gross profit margins.
Selling, general and administrative expenses, excluding restructuring
charges and amortization and write-off of intangibles, increased by
approximately $6.1 million in fiscal 1996 and rose as a percentage of revenue to
24.0% versus 20.7% in fiscal 1995. The primary factors in the increase were
higher marketing expenses resulting from Hayes' sponsorship of a NASCAR racing
team at a cost of $3.8 million, higher marketing expenses and recruiting and
relocation expenses due to the employment of a new management team as Hayes
emerged from Chapter 11, partially offset by lower administrative expenses.
Research and development expense declined $1.1 million in 1996 compared
to 1995 due to management's curtailment of expenditures in the first half of
1996 as a result of the Chapter 11 filing.
Interest expense decreased 23.5% or approximately $1.5 million in
fiscal 1996 as compared to fiscal 1995 as a result of the $35.0 million capital
investment made in Hayes, the sale of certain parcels of real estate, and a new
borrowing arrangement, all of which were part of the Chapter 11 Reorganization
Plan. The implementation of the Plan enabled Hayes to pay pre-petition claims
which generally accrued interest at 12%.
In fiscal 1996, Hayes recognized a gain of approximately $700,000 on
the sale of stock of a public company which it had previously received as
settlement of an intellectual property dispute. Hayes also recognized a gain of
approximately $8.2 million on the sale of certain parcels of real estate it had
previously acquired for development as a corporate campus.
Other income consists primarily of insert fees from third parties for
the inclusion of their software and related promotional materials in Hayes'
products and intellectual property license fees. Other income declined by
approximately $1.9 million or 45.2% in fiscal 1996 from approximately $4.2
million in fiscal 1995. The decline resulted from a reduction in license fees
from Rockwell. In July 1995, Hayes and Rockwell entered into an agreement in
which, among other things, Rockwell agreed to supply Hayes modem chips and Hayes
agreed to waive license fees from the date of the agreement through December 31,
1996 (the "Rockwell Agreement").
The Hayes effective tax rate was 3.0% in 1996 compared to 6.1% in
fiscal 1995. The Hayes' effective tax rates have been significantly impacted by
its losses, nondeductible Chapter 11 expenses and the recognition of valuation
allowances on its deferred tax assets.
Hayes reported a net loss of $13.2 million for fiscal 1996 and a net
loss of $14.4 million for fiscal 1995. On a per share basis, net loss was
$(2.52) for fiscal 1996 and $ (2.56) for fiscal 1995, respectively.
Fiscal 1995 Compared to Fiscal 1994
<TABLE>
<CAPTION>
September 30, September 30,
1994 1995 Change
------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Net Revenues:
Modem Products ............... $243,315 $260,303 $ 16,988
Access Systems ............... 2,962 8,852 5,890
-------- -------- --------
$246,277 $269,155 $ 22,878
======== ======== ========
</TABLE>
Net revenues were 9.3% higher in fiscal 1994 than in fiscal 1995. Modem
Products business sales increased 7.0% to approximately $260.3 million in fiscal
1995. Hayes experienced strong growth in modem sales in its Asia
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<PAGE> 66
Pacific operations and modest growth in its North American operations. Access
Systems business sales increased 198.9% in fiscal 1995 due to the introduction
of the Century product line.
Fiscal 1995 gross profit as a percentage of net sales increased to
23.9% from 20.7% in fiscal 1994. In March 1994 Hayes lowered prices which
resulted in a significant increase in unit volumes. Hayes experienced a number
of operational and manufacturing problems which led to unfavorable manufacturing
variances and inventory charges. In October 1994, Hayes employed a new vice
president of operations. Under his leadership, Hayes made significant
improvements in its operations, which resulted in improved margins in fiscal
year 1995. In addition, Hayes continued to introduce improved product designs
with lower material and manufacturing costs.
Selling, general and administrative expenses, excluding amortization
and write-off of intangibles, decreased by approximately $9.6 million in fiscal
1995 to $55.6 million compared to $65.2 million in fiscal 1994. These expenses
also decreased as a percentage of revenue to 20.7% in fiscal 1995 from 26.5% in
fiscal 1994. As a result of Hayes' November 15, 1994 Chapter 11 filing,
management significantly curtailed operating expenses in the areas of sales and
marketing.
Research and development expense declined $5.4 million in 1995 compared
to 1994. As a result of the Chapter 11 filing, management curtailed spending.
Interest increased 242.6% or by approximately $4.7 million to $6.6
million in fiscal 1995 compared to $1.9 million in fiscal 1994 as a result of
Hayes' Chapter 11 filing. Hayes was required to recognize interest on its
pre-petition claims at 12% unless the claimant otherwise agreed.
Other income declined $0.7 million in fiscal 1995 as compared to fiscal
1994 due to the decline in licensing fees to Hayes resulting from the Rockwell
Agreement.
Hayes' effective tax rate was 6.1% and 5.7% for fiscal 1995 and 1994,
respectively. Hayes' tax rates have been significantly impacted by its losses,
nondeductible Chapter 11 expenses and the recognition of valuation allowances on
its deferred tax assets.
Hayes reported a net loss of $14.4 million for fiscal 1995 and a net
loss of $28.1 million for fiscal 1994. On a per share basis net loss was $(2.56)
and $(4.98) in fiscal 1995 and fiscal 1994, respectively.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000
shares of Common Stock and 3,000,000 shares of Preferred Stock. As of September
19, 1997 the Company had 12,495,291 shares of Common Stock issued and
outstanding and no shares of Preferred Stock issued and outstanding . At the
Effective Time, the Company will amend its certificate of incorporation to
increase the authorized capital stock of the Company to 100,000,000 shares,
consisting of _____ shares of Common Stock and _____ shares of Preferred Stock
of which 1,217,930 shares will be designated as Series A Preferred Stock.
The Common Stock is listed for trading on NASDAQ/NMS under the symbol
"ACCB". The transfer agent and registrar for the Common Stock is Continental
Stock Transfer and Trust Company.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to the vote of stockholders, including
the election of directors. The holders of Common Stock do not have cumulative
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<PAGE> 67
voting rights. Subject to any preferential rights held by holders of the
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends as may be declared from time to time by the Company Board out of
funds legally available therefor. In the event of the liquidation, dissolution
or winding up of the Company, holders of Common Stock will be entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of outstanding Preferred Stock, if any. Holders of Common Stock do
not have preemptive, conversion or redemption rights. All the issued and
outstanding shares of Common Stock are duly authorized, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company Board, without further approval or action by the
stockholders, is authorized to issue shares of Preferred Stock in one or more
series and to fix as to any such series the dividend rate, redemption prices,
preferences on liquidation or dissolution, sinking fund terms, if any,
conversion rights, voting rights and any other preference or special rights and
qualifications. Issuances of Preferred Stock may adversely affect the rights of
holders of Common Stock. Holders of Preferred Stock might, for example, be
entitled to preference in distributions to be made to stockholders upon the
liquidation, dissolution or winding up of the Company. In addition, holders of
Preferred Stock might enjoy voting rights that limit, qualify or adversely
affect the voting rights of holders of Common Stock. Such rights of the holders
of one or more series of Preferred Stock might include the right to vote as a
class with respect to the election of directors, major corporate transactions or
otherwise, or the right to vote together with the holders of Common Stock with
respect to any such matter. The holders of Preferred Stock might be entitled to
cast multiple votes per share. The issuance of Preferred Stock could have the
effect of delaying, deferring, or preventing a change in control of the Company
without further action by the stockholders. The Company has no present plans to
issue any shares of Preferred Stock, other than the Series A Preferred Stock.
SERIES A PREFERRED STOCK
Voting Rights. The Series A Preferred Stock will be nonvoting, except
with respect to (i) a change in the rights, preferences or privileges of the
Series A Preferred Stock, (ii) a change in the number of authorized shares of
Series A Preferred Stock, (iii) the issuance of securities senior to or on
parity with the Series A Preferred Stock, (iv) the redemption of or payment of
dividends with respect to the Common Stock, (v) the incurrence or guarantee of
indebtedness by the Company or (vi) the approval of creation of a mortgage,
pledge or security interest in all or substantially all of the Company's assets.
The foregoing matters require the approval of a majority of the holders of
Series A Preferred Stock.
Conversion Rights. Each share of Series A Preferred Stock will be
convertible, at the option of the holder of such share, into one share of Common
Stock, subject to anti-dilution adjustment. The Series A Preferred Stock will
also be subject to automatic conversion into Common Stock upon the affirmative
vote of at least a majority of the Series A Preferred Stock.
Redemption. Upon 90 days prior written notice from the holders of more
than 50% of the Series A Preferred Stock delivered to the Company not earlier
than November 1, 1999, the Company will be required to redeem the Series A
Preferred Stock for a cash payment of $4.5159 per share plus accrued but unpaid
dividends (the "Redemption Price"). The Company will have the right, at its sole
option and discretion and upon 30 days prior written notice, to redeem all of
the Series A Preferred Stock for the Redemption Price on April __, 2000. Less
than all of the Series A Preferred Stock may be redeemed on a pro rata basis
with the consent of a majority of the holders of the Series A Preferred Stock.
Dividends. Holders of Series A Preferred Stock will be entitled to
receive, as and when declared by the Company's Board, cumulative compounding
dividends at the dividend rate of 10% per year of the original issue price per
share of the Series A Preferred Stock. Dividends accumulated on the Series A
Preferred Stock are to be declared by the Company Board and paid in cash upon
the redemption of the Series A Preferred Stock or in shares of Common Stock upon
the conversion of the Series A Preferred Stock.
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ANTITAKEOVER PROVISIONS
The Certificate of Incorporation and the By-laws of the Company (i)
provide for three classes of directors on the Company Board from which directors
may only be removed by Stockholders for cause; (ii) generally provide that only
a majority of the Company Board shall have the authority to fill vacancies on
the Company Board; (iii) restrict the right to amend certain provisions of the
Certificate of Incorporation and By-laws; (iv) restrict the right of
stockholders to call annual meetings; (v) establish an advance notice procedure
regarding the nomination of directors by stockholders and stockholder proposals
to be brought before an annual meeting; and (vi) authorize the Company Board to
issue preferred stock without further stockholder approval. These provisions are
designed to encourage any person who desires to take control of and/or acquire
the Company to enter into negotiations with the Company Board, thereby making
more difficult the acquisition of the Company by means of a tender offer, a
proxy contest or other non-negotiated means. In addition to encouraging any
person intending to attempt a takeover of the Company to negotiate with the
Company Board, these provisions also curtail such person's use of a dominant
equity interest to control any negotiations with the Company Board. Under such
circumstances, the Company Board may be better able to make and implement
reasoned business decisions and protect the interests of all of the Company's
stockholders.
Classified Board. The Certificate of Incorporation provides for the
Company Board to be divided into three classes serving staggered terms so that
directors' initial terms will expire at the 1997, 1998 or 1999 annual meeting of
stockholders, and that starting with the 1997 annual meeting of the Company's
stockholders, one class of directors will be elected each year for a three-year
term. See "MANAGEMENT OF THE COMPANY -- Directors and Executive Officers." The
classes will be as nearly equal in number as possible. The classification of
directors makes it more difficult for a significant stockholder to change the
composition of the Company Board in a relatively short period of time and,
accordingly, provides the Company Board and stockholders time to review any
nomination that a significant stockholder may make and to pursue alternative
courses of action which it believes are fair to all the stockholders of the
Company.
Removal of and Filling Vacancies on the Company Board. The Certificate
of Incorporation provides that, subject to any rights of the holders of any
class or series of the capital stock of the Company entitled to vote generally
in the election of directors, only a majority vote of the members of the Company
Board then in office, although less than a quorum, shall have the authority to
fill any vacancies on the Company Board, including vacancies created by an
increase in the authorized number of directors. Moreover, because the
Certificate of Incorporation provides for a classified board, Delaware law
provides that the stockholders may remove a member of the Company Board only for
cause and the Certificate of Incorporation requires the affirmative vote of the
holders of at least 80% of the voting power of all the then-outstanding shares
of the voting stock of the Company, voting together as a single class, to remove
a member of the Company Board. These provisions relating to removal and filling
of vacancies on the Company Board of the Company preclude stockholders from
enlarging the Company Board or removing incumbent directors and filling
vacancies with their own nominees.
Amendment of the Certificate of Incorporation and Company By-laws. The
Certificate of Incorporation contains provisions requiring the affirmative vote
of the holders of at least 80% of the voting power of the Common Stock entitled
to vote generally in the election of directors to amend certain provisions of
the Certificate of Incorporation and Company By-laws (including certain of the
provisions discussed above). These provisions make it more difficult for
stockholders to make changes in the Certificate of Incorporation or Company
By-laws, including changes designed to facilitate the exercise of control over
the Company.
Annual Meetings. The Company By-laws provide that annual meetings of
stockholders can be called only by the Chairman of the Board, the Vice Chairman
of the Board, the President or any Vice President, the Secretary or by the
Company Board. Stockholders are not permitted to call an annual meeting but may,
upon a written request by stockholders owning a majority in amount of the entire
capital stock of the Company issued and outstanding and entitled to vote,
require that any of the foregoing call an annual meeting of stockholders. These
provisions prohibit a significant
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stockholder from authorizing stockholder action without a meeting at which all
stockholders would be entitled to participate.
Nominations of Directors and Stockholder Proposals. The Company By-laws
establish an advance notice procedure with regard to the nomination other than
by, or at the direction of, the Company Board of candidates for election as
directors (the "Nomination Procedure") and with regard to stockholder proposals
to be brought before an annual meeting of stockholders (the "Business
Procedure"). The Nomination Procedure provides that only persons who are
nominated by, or at the direction of, the Company Board, or by a stockholder of
the Company entitled to vote for the election of directors who has given timely
written notice to the Secretary of the Company prior to the meeting at which
directors are to be elected, are eligible for election as directors of the
Company. The Business Procedure provides that to be properly brought before an
annual meeting, business must be specified in the notice of the annual meeting
given by or at the direction of the Company Board or brought before the meeting
by, or at the direction of, the Company Board or by a stockholder who has given
timely written notice to the Secretary of the Company of such stockholder's
intention to bring such business before such meeting. To be timely, notice for
nominations or stockholder proposals must be received by the Company not less
than 60 days prior to the annual meeting; provided, however, that in the event
that less than 70 days notice or prior public disclosure of the date of the
annual meeting is given or made to stockholders, notice by a stockholder, to be
timely, must be received no later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made, whichever first occurs. In addition
to the foregoing requirements, the proxy rules under the Exchange Act set forth
certain requirements, including stockholder eligibility, timing and attendance
requirements, which must be satisfied in order for a stockholder proposal to be
included in the Company's proxy statement and form of proxy. These requirements
under the Exchange Act may differ from those set forth under the Nomination
Procedure or the Business Procedure.
Under the Nomination Procedure, notice to the Company from a
stockholder who proposes to nominate a person at an annual meeting for election
as a director must contain certain information about that person so nominated,
including age, business and residence addresses, principal occupation, the class
and number of shares of Common Stock beneficially owned, and such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee, and certain information about
the stockholder proposing to nominate that person. Under the Business Procedure,
notice relating to a stockholder proposal must contain certain information about
such proposal and about the stockholder who proposes to bring the proposal
before the meeting, including the class and number of shares of Common Stock
beneficially owned by such stockholder. If the officer of the Company presiding
at the meeting determines that a person was not nominated in accordance with the
Nomination Procedure, or that other business was not brought before the meeting
in accordance with the Business Procedure, such person is not eligible for
election as a director, or such business is not to be conducted as such meeting,
as the case may be.
The purpose of the Nomination Procedure is, by requiring advance notice
of nomination by stockholders, to afford the Company Board a meaningful
opportunity to consider the qualifications of the proposed nominees and, to the
extent deemed necessary or desirable by the Company Board, to inform
stockholders about such qualifications. The purpose of the Business Procedure
is, by requiring advance notice of stockholder proposals, to provide a more
orderly procedure for conducting annual meetings of stockholders and, to the
extent deemed necessary or desirable by the Company Board, to provide the
Company Board with a meaningful opportunity to inform stockholders, prior to
such meetings, of any proposal to be introduced at such meetings, together with
any recommendation as to the Company Board's position or belief as to action to
be taken with respect to such proposal, so as to enable stockholders better to
determine whether they desire to attend such meeting or grant a proxy to the
Company Board as to the disposition of any such proposal. Although the Company
By-laws do not give the Company Board any power to approve or disapprove
stockholder nominations for the election of directors or any other proposal
submitted by stockholders, the Company By-laws may have the effect of precluding
a nomination for the election of directors or precluding the conducting of
business at a particular stockholder meeting if the proper procedures are not
followed, and may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of the Company, even if the conduct of such
solicitation or such attempt might be beneficial to the Company and its
stockholders.
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Issuance of Preferred Stock. The Certificate of Incorporation
authorizes the Company Board to issue preferred stock, without further
stockholder approval, which could have dividend, redemption, liquidation,
conversion, voting or other rights that could adversely affect the voting power
and other rights of holders of Common Stock. The ability of the Company Board to
issue preferred stock could have the effect of delaying, deferring, or
preventing a change in control of the Company without further action by the
stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
In March 1997, the stockholders of the Company, at an Annual Meeting,
approved and ratified two stock option plans of the Company - the Incentive Plan
and the Amended and Restated 1996 Non-employee Directors' Stock Option Plan (the
"Directors' Plan"). The Company is authorized to issue options to purchase up to
an aggregate of 2,000,000 shares of Common Stock under the Incentive Plan and
options to purchase an aggregate of 250,000 shares of Common Stock under the
Directors' Plan. As of October 20, 1997, the Company had outstanding options to
purchase an aggregate of 965,900 shares under the Incentive Plan and options to
purchase an aggregate of 120,000 shares under the Directors' Plan. As a result
of the Merger, all outstanding options will become fully vested. Holders of
Common Stock could experience dilution in earnings per share in the event that a
large number of options are exercised. Furthermore, the Company expects to
register the resale of the shares of Common Stock issuable upon the exercise of
options granted under the Incentive Plan and the Directors' Plan, which
registration would allow such shares to be freely tradeable in the public market
immediately following exercise of such options, subject to certain volume
limitations for options exercised by directors and executive officers of the
Company.
In addition, at the Effective Time, each outstanding option to purchase
Hayes Common Stock (the "Hayes Options") granted under the Hayes Stock Option
Plan, adopted on June 4, 1996, as amended effective October 22, 1996 (the "Hayes
Option Plan"), and each warrant to purchase Hayes capital stock (collectively
the "Hayes Warrants") will be assumed by the Company in accordance with the
terms of such option or warrant, and converted into rights to purchase shares of
the Company's Securities. Hayes Options and Hayes Warrants for 5,690,074 shares
and 1,851,560 shares of Common Stock, respectively, will be assumed by the
Company. At the Effective Time, Hayes Options to purchase 1,597,664 shares of
Company Common Stock and Hayes Warrants to purchase 1,851,560 shares of Company
Common Stock will be exercisable. Holders of Common Stock could experience
dilution in earnings per share in the event that a large number of Hayes Options
or Hayes Warrants of options are exercised. The Company expects to register the
resale of the shares of Common Stock issuable upon the exercise of the Hayes
Options and the Hayes Warrants, which registration would allow such shares to be
freely tradeable in the public market immediately following exercise of such
Hayes Options and Hayes Warrants, subject to certain volume and other
limitations for Hayes Options and Hayes Warrants, by directors and executive
officers of the Company following the Merger. See "THE MERGER - Interests of
Certain Persons in the Merger."
The Company may use shares of its Common Stock to acquire assets,
technology, license rights and/or other companies to develop and expand its
product lines. Future issuances of Common Stock in connection with such
acquisitions could, individually or in the aggregate, adversely affect the
market price of the Common Stock.
PLAN OF DISTRIBUTION
After the effectiveness of the registration statement of which this
Prospectus is a part, the Selling Shareholder will sell the Shares through
brokerage firms yet to be selected. The sales of the Shares will be made in
accordance with the terms of the Purchase Agreement. The Purchase Agreement
provides that the Selling Shareholder can sell up to 251,852 shares of Common
Stock (50% of the Shares) on or prior to May 15, 1998 and any of the Shares,
including the remaining 251,852 shares (50% of the Shares), after May 15, 1998.
The Selling Shareholder intends to sell the Shares as soon as practicable during
the periods permitted under the Purchase Agreement, provided there is a
favorable market price of the Common Stock of the Company at the time of each
contemplated sale.
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LEGAL MATTERS
The law firm of Morrison Cohen Singer & Weinstein, LLP, New York, New
York, has acted as counsel to the Company in connection with this offering and
will render an opinion as to the legality of the securities being offered
hereby.
EXPERTS
The consolidated financial statements of the Company and its
subsidiaries for the year ended July 31, 1997 and 1996, and for each of the
three years in the period ended July 31, 1996 included in this Prospectus and
the related Financial Statement Schedule have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Hayes and its subsidiaries as
of December 31, 1995 and 1996 and for the years ended September 30, 1994 and
1995, the three months ended December 31, 1995 and the year ended December 31,
1996 included in this Prospectus have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as stated in their report appearing herein and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ACCESS BEYOND, INC. AND SUBSIDIARIES AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report.................................................. F-2
Consolidated Statements of Operations for each of the years ended
July 31, 1997, 1996 and 1995........................................... F-3
Consolidated Balance Sheets as of July 31, 1997 and 1996................... F-4
Consolidated Statements of Cash Flows for each of the three years
ended July 31, 1997, 1996 and 1995....................................... F-5
Consolidated Statements of Stockholders' Equity for each of the
three years ended July 31, 1997, 1996 and 1995........................... F-6
Notes to Consolidated Financial Statements for the years ended
July 31, 1997, 1996 and 1995............................................. F-7-18
HAYES
Consolidated Financial Statements of Hayes:
Independent Accountant's Report............................................ F-19
Consolidated Balance Sheets as of December 31, 1995 and 1996
and June 30, 1997 (unaudited)............................................ F-20
Consolidated Statements of Operations for the years ended
September 30, 1994 and 1995, the three months ended December 31, 1995,
the year ended December 31, 1996, and the six months ended June 30, 1996
and 1997 (unaudited)..................................................... F-21
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended September 30, 1994 and 1995, the three months ended December 31,
1995, the year ended December 31, 1996 and the six months ended
June 30, 1997 (unaudited)................................................ F-22
Consolidated Statements of Cash Flows for the years ended
September 30, 1994 and 1995, the three months ended December 31, 1995,
the year ended December 31, 1996, and the six months ended June 30, 1996
and 1997 (unaudited)..................................................... F-23
Notes to Consolidated Financial Statements................................. F-24-37
</TABLE>
F-1
<PAGE> 73
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Access Beyond, Inc.
Gaithersburg, Maryland
We have audited the accompanying consolidated balance sheets of Access
Beyond, Inc. and subsidiaries (the successor company to Penril DataComm
Networks, Inc.) as of July 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended July 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Access Beyond, Inc. and
subsidiaries as of July 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Washington, D.C.
August 29, 1997 (September 15, 1997 as to Note 11)
F-2
<PAGE> 74
ACCESS BEYOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES FROM CONTINUING OPERATIONS $ 18,000 $ 39,435 $ 52,611
COSTS AND EXPENSES
Cost of revenues 11,999 22,409 29,394
Selling, general and administrative 12,887 18,611 18,765
Product development and engineering 6,164 7,389 7,438
Merger related expenses 4,077 500 --
Write-down of assets 864 -- --
Provision for restructuring costs 238 9,718 --
Amortization of cost over net assets acquired -- 734 834
-------- -------- --------
36,229 59,361 56,431
OPERATING LOSS FROM CONTINUING
OPERATIONS (18,229) (19,926) (3,820)
OTHER INCOME (EXPENSE)
Interest income 380 -- --
Interest expense (200) (698) (1,228)
Other: settlement of lawsuit 3,547 -- --
Other income (expenses), net 612 (44) (144)
-------- -------- --------
4,339 (742) (1,372)
LOSS FROM CONTINUING OPERATIONS
Before Income Taxes (13,890) (20,668) (5,192)
Benefit For Income Taxes -- -- 578
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (13,890) (20,668) (4,614)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes -- 404 (1,661)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
net of income taxes (3,735) (640) (1,400)
-------- -------- --------
NET LOSS $(17,625) $(20,904) $ (7,675)
======== ======== ========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Continuing operations $ (1.16) $ (2.14) $ (0.61)
Discontinued operations -- 0.04 (0.22)
Loss on disposal of discontinued operations (0.31) (0.07) (0.19)
-------- -------- --------
$ (1.47) $ (2.17) $ (1.02)
======== ======== ========
Shares used in per share calculation 11,956 9,650 7,559
======== ======== ========
</TABLE>
THE CONSOLIDATED FINANCIAL STATEMENTS OF ACCESS BEYOND, INC. INCLUDE THE
FINANCIAL INFORMATION OF PENRIL DATACOMM NETWORKS, INC. FOR THE PERIODS PRIOR TO
NOVEMBER 18, 1996 WHEN ACCESS BEYOND, INC. WAS SPUN-OFF FROM PENRIL DATACOMM
NETWORKS, INC. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 75
ACCESS BEYOND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 578 $ 4,237
Accounts receivable, less allowance for doubtful
accounts of $215 in 1997 and $554 in 1996 3,050 7,044
Inventories 5,678 9,684
Deferred income taxes -- 1,700
Net assets of discontinued operations -- 7,337
Other current assets 167 249
-------- --------
TOTAL CURRENT ASSETS 9,473 30,251
Property and equipment, net 3,484 2,457
Other assets 949 1,072
-------- --------
TOTAL ASSETS $ 13,906 $ 33,780
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ -- $ 4,000
Current portion of capital lease obligations 287 272
Accounts payable 3,458 6,076
Accrued compensation and commissions 630 1,347
Other accrued expenses 1,467 1,758
-------- --------
TOTAL CURRENT LIABILITIES 5,842 13,453
Long-Term portion of capital lease obligations 456 633
Other Noncurrent Liabilities 297 1,479
-------- --------
TOTAL LIABILITIES 6,595 15,565
-------- --------
Commitments and Contingencies (See Note 7) -- --
SHAREHOLDERS' EQUITY
Serial preferred stock, $.01 par value; authorized,
100,000 shares; issued, none -- --
Common stock, $.01 par value; authorized, 30,000,000
shares; issued and outstanding, 12,495,291 shares in 1997
and 10,849,647 shares in 1996 125 109
Additional paid-in capital 46,431 39,837
Accumulated deficit (39,206) (21,581)
Accumulated foreign currency translation adjustment (39) (150)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 7,311 18,215
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,906 $ 33,780
======== ========
</TABLE>
THE CONSOLIDATED FINANCIAL STATEMENTS OF ACCESS BEYOND, INC. INCLUDE THE
FINANCIAL INFORMATION OF PENRIL DATACOMM NETWORKS, INC. FOR THE PERIODS PRIOR TO
NOVEMBER 18, 1996 WHEN ACCESS BEYOND, INC. WAS SPUN-OFF FROM PENRIL DATACOMM
NETWORKS, INC. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 76
ACCESS BEYOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
loss from operations $(13,890) $(20,668) $ (4,614)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,269 3,452 4,418
Benefit from deferred taxes -- -- (578)
Provision for restructuring costs 238 9,718 --
Other 20 (93) 25
(Increase) decrease in assets:
Accounts receivable 1,406 6,477 2,508
Inventories 559 (472) 1,122
Other current assets 19 529 (287)
Increase (decrease) in liabilities:
Accounts payable (1,093) (2,080) 1,792
Other liabilities (793) (731) (291)
-------- -------- --------
Net cash provided by (used in) continuing operating activities (12,265) (3,868) 4,095
CASH FLOWS FROM DISCONTINUED OPERATIONS
Proceeds from the sale of discontinued operations 5,411 -- --
Loss from discontinued operations (3,735) (236) (3,061)
Non-cash charges and changes in working capital (1,809) (2,832) 285
Provision for loss on disposal of discontinued operations 3,735 640 1,400
-------- -------- --------
Net cash provided by (used in) discontinued operations 3,602 (2,428) (1,376)
Net cash used in provided by (used in) operations (8,663) (6,296) 2,719
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for purchased technology (352) (800) (1,049)
Expenditures for property, equipment and other (714) (747) (417)
-------- -------- --------
Net cash used in investing activities (1,066) (1,547) (1,466)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit -- (1,095) 1,870
Payments on long-term debt (282) (5,210) (3,300)
Issuance of common stock 6,241 17,486 74
Other 111 (93) 94
-------- -------- --------
Net cash provided by (used in) financing activities 6,070 11,088 (1,262)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 4,237 992 1,001
-------- -------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 578 $ 4,237 $ 992
======== ======== ========
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ -- $ 20 $ 113
======== ======== ========
Cash payments for interest $ 200 $ 783 $ 1,103
======== ======== ========
</TABLE>
THE CONSOLIDATED FINANCIAL STATEMENTS OF ACCESS BEYOND, INC. INCLUDE THE
FINANCIAL INFORMATION OF PENRIL DATACOMM NETWORKS, INC. FOR THE PERIODS PRIOR TO
NOVEMBER 18, 1996 WHEN ACCESS BEYOND, INC. WAS SPUN-OFF FROM PENRIL DATACOMM
NETWORKS, INC. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 77
ACCESS BEYOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------------ PAID-IN UNEARNED EARNINGS CURRENCY
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) ADJUSTMENT
--------- ----------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AUGUST 1, 1994 7,442,368 $ 74 $ 21,720 $ (16) $ 6,998 $ (196)
Net loss (7,675)
Issuance of common stock-
Upon exercise of stock options 33,067 1 73
Upon exercise of warrants 80,000 1 194
For acquisition of patent rights 50,000 1 118
Shares retired in connection with
options, warrants, and awards (62,620) (1) (194) 16
Deferred tax benefit from exercise of options -- 473
Foreign currency translation adjustment -- 136
---------- -------- ----------- ----------- --------- ----------
BALANCE JULY 31, 1995 7,542,815 76 22,384 -- (677) (60)
Net loss (20,904)
Issuance of common stock-
Upon sale in private placements 2,607,267 26 14,718
Upon exercise of stock options 687,284 7 2,735
Upon exercise of warrants 25,000 -- --
Shares retired in connection
with options, warrants and awards (12,719) -- --
Foreign currency translation adjustment -- (90)
---------- -------- ----------- ----------- --------- ----------
BALANCE JULY 31, 1996 10,849,647 109 39,837 -- (21,581) (150)
Net loss -- (17,625)
Issuance of common stock-
Upon exercise of stock options 1,124,951 11 6,124
Upon sale of stock 16,989 -- 115
For purchase of technology from Paradyne 503,704 5 1,695
For the effect of the merger of Penril and Bay
Networks, and the spin-off of Access Beyond -- -- (1,340)
Foreign currency translation adjustment 111
---------- -------- ----------- ----------- --------- ----------
BALANCE JULY 31, 1997 12,495,291 $ 125 $ 46,431 $ -- $ (39,206) $ (39)
========== ======== =========== ========= ========= ==========
</TABLE>
THE CONSOLIDATED FINANCIAL STATEMENTS OF ACCESS BEYOND, INC. INCLUDE THE
FINANCIAL INFORMATION OF PENRIL DATACOMM NETWORKS, INC. FOR THE PERIODS PRIOR TO
NOVEMBER 18, 1996 WHEN ACCESS BEYOND, INC. WAS SPUN-OFF FROM PENRIL DATACOMM
NETWORKS, INC. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 78
ACCESS BEYOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EFFECTS OF THE SPIN-OFF AND MERGER TRANSACTIONS: Access Beyond, Inc.
("Access Beyond" or "the Company") was incorporated on July 23, 1996, and filed
a Form S-1 Registration Statement with the Securities and Exchange Commission
which became effective October 17, 1996. On November 18, 1996 Penril DataComm
Networks, Inc. ("Penril") distributed a dividend to its stockholders of record,
one share of common stock of Access Beyond for each share of Penril common stock
held. Penril transferred all of the assets and liabilities of Penril's remote
access business to Access Beyond before becoming a wholly owned subsidiary of
Bay Networks, Inc.("Bay") on November 18, 1996. As the successor company to
Penril, Access Beyond retains the historical financial information of Penril
through November 18, 1996, when Penril was merged into Bay. For accounting
purposes, the disposition of the modem business, as a result of the merger
agreement with Bay, has been accounted for as a reduction of paid in capital.
On November 18, 1996 Penril transferred all of its remote access
business assets and liabilities to Access Beyond as part of its spin-off of
Access Beyond. Assets and liabilities related to the modem business remained
with Penril and Penril became a wholly-owned subsidiary of Bay as part of the
Merger Agreement with Bay. Revenues from the modems prior to the sale of the
modem business to Bay were $4.2 million in fiscal 1997. Under the terms of the
Merger Agreement with Bay, assets and liabilities related to the modem business
that were acquired by Bay included the following at the date of the closing.
<TABLE>
<CAPTION>
=========================================================================================
(In thousands of dollars) November 18, 1996
=========================================================================================
Assets:
<S> <C>
Accounts receivable, net $ 2,542
Inventory, net 2,740
Deferred tax asset 1,700
Other assets 761
- -------------------------------------------------------------- --------------------------
Total Assets 7,743
- -------------------------------------------------------------- --------------------------
Liabilities:
Line of credit $ 4,000
Accounts payable 1,525
Other liabilities 887
- -------------------------------------------------------------- --------------------------
Total Liabilities 6,412
- -------------------------------------------------------------- --------------------------
Net assets related to the modem business $ 1,331
============================================================== ==========================
</TABLE>
As a result of the merger with Bay, the Company paid performance and
severance payments to certain employees. In addition, the Company incurred
investment banking, legal and consulting fees. The total merger related expenses
were approximately $4.1 million.
BUSINESS: The company is in the business of developing and marketing
products which enable local remote or mobile users to access network resources
(remote access business).
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly owned. All significant intercompany accounts and transactions have been
eliminated.
F-7
<PAGE> 79
CASH AND CASH EQUIVALENTS: The Company considers cash on hand, deposits
in banks, and highly liquid investments with an original maturity of three
months or less as cash and cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value due to the short maturities of such instruments. Capital lease obligations
are carried at amounts approximating fair values based on current rates offered
to the Company for debt with similar collateral and guarantees, if any, and
maturities.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market. The inventories include the cost of material and,
when applicable, labor and manufacturing overhead. During the fourth quarter of
fiscal 1997 as a result of the introduction of the new AB2400/4400 product line,
the Company reviewed its reserve for obsolescence of VCS and CSX product
inventory. Based on this review, the Company recorded a charge of $864,000. The
following table shows the detail in the inventory account for the years ending
July 31, 1997 and 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------------------------------------------------
(in thousands of dollars) 1997 1996
--------------------------------------------------------------------
Raw Materials and
component parts $ 3,433 $ 5,823
Work in process 42 541
Finished goods 2,203 3,320
====================================================================
Total inventories $ 5,678 $ 9,684
====================================================================
</TABLE>
PROPERTY, EQUIPMENT, AND DEPRECIATION: Additions to property and
equipment are recorded at cost. The Company provides depreciation for financial
reporting purposes using primarily the straight-line method over the estimated
useful lives of the assets which range from 3 to 10 years. Leasehold
improvements are amortized over the term of the related lease or their estimated
useful lives, whichever is shorter. The following table shows the detail in
property, equipment and depreciation for the years ending July 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(in thousands of dollars) Useful lives 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Machinery, and equipment 3-5 years $ 7,385 $10,875
Purchased software and technology 3 years 6,544 5,486
Leasehold improvements 3-5 years 949 879
- --------------------------------------------------------------------------------------
Total property and equipment, at cost 14,878 17,240
Less accumulated depreciation and
amortization (11,394) (14,783)
======================================================================================
Total property and equipment, net $ 3,484 $ 2,457
======================================================================================
</TABLE>
REVENUE RECOGNITION: Revenues are recognized at the time of shipment of
the product or performance of product-related services. Revenues from the
license of product technology is recorded upon delivery of the technology
specification and the fulfilment of the other material obligations.
ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS: During fiscal 1996, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of", which requires the Company to review
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets for impairment whenever events or changes in
F-8
<PAGE> 80
circumstances indicate that the carrying amount of an asset may not be
recoverable. As a result of events occurring in the fourth quarter of fiscal
1996, the Company decided to restructure and refocus its remaining business. Due
to these events, the Company determined that the Excess of Costs over Net Assets
Acquired would not be recoverable, and a charge of $4,952,000 was taken in the
fourth quarter of fiscal 1996 against the carrying value of this asset.
INCOME TAXES: Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future.
A valuation allowance is established to reduce deferred tax assets to the amount
expected to be realized.
EARNINGS PER SHARE: Earnings per share for the three years ended July
31, 1997 are calculated based on the weighted average common shares outstanding.
SOFTWARE DEVELOPMENT COSTS: Certain acquired software development costs
are being amortized over their estimated economic life, principally five years,
commencing when each product is available for general release. Internal software
development are expensed as incurred, except those costs applicable to third
party contracts.
STOCK-BASED COMPENSATION: Effective August 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, pro forma net income
and earnings per share information has been presented in Note 7 as required
under SFAS 123.
RELATED PARTY TRANSACTIONS: As described in Note 5, the Company entered
into a consulting agreement with Henry Epstein, the former CEO of Penril.
In November 1996, John Howard was appointed as a member of the Board of
Directors of the Company. Mr. Howard is the brother of Ronald A. Howard,
President and CEO of the Company.
CONCENTRATION OF RISK: Material and components for the Company's
products are purchased from outside suppliers. While most components are
available from several suppliers, a few are provided from sole-source vendors.
The Company believes that in most cases alternative sources could be obtained
within a reasonable time period; however, an interruption in the supply of such
components could have a temporary adverse effect on the Company's operations.
NEW ACCOUNTING PRONOUNCEMENTS: During fiscal 1997, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 128, 129, 130, and 131. These statements establish standards for computing
and presenting earnings per share, disclosing information about an entity's
capital structure, reporting and displaying comprehensive income and its
components in financial statements, and reporting information about operating
segments in annual financial statements, respectively. Each of these statements
are effective for financial statements for periods beginning after December 15,
1997. The effect of adopting these statements in fiscal 1998 is not deemed to be
material.
RECLASSIFICATIONS: Certain reclassifications have been made to prior
period consolidated financial statements to conform to the July 31, 1995
presentation.
2. RESTRUCTURING
In the fourth quarter of fiscal 1996, Penril took actions to
strategically restructure its business to improve Penril's financial
performance. The restructuring included a plan to focus Penril's business
operations on the remote access server and remote connectivity markets ("Remote
Access") and away from the data transmission markets. As
F-9
<PAGE> 81
a result of this plan Penril recorded a charge of $9,718,000 in the fourth
quarter of fiscal 1996 and the Company recorded a charge of $238,000 in the
fourth quarter of fiscal 1997. These charges were for the following costs.
a. The excess of costs over the fair value of net assets acquired
through the Datability, Inc. acquisition in fiscal 1993, was
related to data transmission techniques and, due to the
restructuring plan, has no net realizable value. Accordingly
the remaining book value of $4,952,000 was written off in
fiscal 1996.
b. A charge of $2,339,000 was taken for the write-off of
inventory and fixed assets related to the data transmission
business. In fiscal 1997 an additional charge of $238,000 was
taken for the write-off of inventory related to the data
transmission business, and substantially all inventory related
to the data transmission business was disposed of.
c. A charge of $1,012,000 was taken for contractual obligations
and settlement costs incurred for leased facilities in
Carlstadt, New Jersey, Hong Kong and Malaysia. Under the
restructuring plan the Hong Kong and Malaysia facilities were
vacated at the end of fiscal 1996, and substantially all of
the leased space in the Carlstadt, New Jersey facility was
vacated. As of July 31, 1997 a provision of $300,000 remained
for the future contractual obligations and settlement costs
associated with the Carlstadt, New Jersey facility.
d. A charge of $979,000 was taken for computer software related
to the data transmission business that was capitalized in
accordance with FAS86, which had no realizable value under the
restructuring plan. In fiscal 1997 the remaining book value of
this computer software was written off.
e. A charge of $436,000 was taken for severance costs associated
with employees terminated in connection with the restructuring
plan. All costs associated with these terminations were paid
in fiscal 1997.
3. DISCONTINUED OPERATIONS
In fiscal 1995, the Board of Directors decided to sell Technipower,
Inc. ("TPI"), a subsidiary manufacturing uninterruptible power supplies and
power regulating equipment. In October 1996, the Company completed the sale of
TPI business for $1,591,000 in cash and a $2,750,000 note. As of July 31, 1997,
a balance of $980,000 remained unpaid on the note which was due July 31, 1997.
The Company reserved the unpaid balance of this note with a charge of $980,000
to loss on disposal of discontinued operations.
In fiscal 1996, the Board of Directors decided to sell Electro-Metrics,
Inc. ("EMI"), a subsidiary manufacturing test equipment and systems for analysis
of electromagnetic interference and communications security including
applications in satellite communications. In June 1997, the Company completed
the sale of the EMI business to EMI Holding Corp. (the "Borrower"), for
$2,000,000 in cash, $1,500,000 in subordinated term notes, and $500,000 in
warrants. The subordinated term notes include a $1,000,000 note with payments of
principal and interest to be made in seven (7) quarterly installments of $50,000
each, beginning on June 30, 1997, and one final installment together with
accrued interest being due on June 30, 1999. Interest on the $1,000,000 note is
at 3% above the highest interest rate being charged to the Borrower by the
Borrower's principal bank lender ("Bank Rate"). The remaining subordinated term
note of $500,000 accrues interest at 2% above the Bank Rate, accruing from June
30, 1997 and payable in monthly installments beginning on July 1, 1999. The
principal shall be paid in one (1) installment on June 30, 2002. The warrants
are exercisable on June 30, 2002, wherein the Borrower issues to the Company
shares of preferred stock of the Borrower equal to 19.678% of the shares of the
Borrower outstanding immediately after the exercise of these warrants.
F-10
<PAGE> 82
In accordance with the Securities and Exchange Commissions Staff
Accounting Bulletin No. 81, "Gain Recognition on the Sale of a Business or
Operating Assets to a Highly Leveraged Entity", a provision was charged to Loss
from Disposal of Discontinued Operations for the outstanding balance of the
subordinated term notes and warrants at July 31, 1997 of $1,950,000. The Company
fully expects to collect these notes and warrants, however the repayments will
be recorded as income when received due to the highly leveraged structure of the
Borrower. As a result, the Company recorded a loss on the disposition of the EMI
business of approximately $2.8 million.
The following table sets forth the selected financial data of both
discontinued operations for the three years ended July 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands of dollars) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 4,743 $10,469 $8,960
================================================================================
Income (loss) from operations,
net of income taxes -- 404 (1,661)
- --------------------------------------------------------------------------------
Loss on disposal, net of income taxes (3,735) (640) (1,400)
- --------------------------------------------------------------------------------
Total loss from discontinued
operations $(3,735) $ (236) $ (3,061)
================================================================================
Depreciation and amortization $ 153 $ 431 $ 415
================================================================================
Capital expenditures $ 114 $ 275 $ 245
================================================================================
</TABLE>
The Company disposed of both TPI and EMI operations through the sale of
the subsidiary companies net assets. Therefore at July 31, 1997 there were no
identifiable assets or income tax benefits for either discontinued operation.
4. FINANCING
BANK FINANCING: On November 18, 1996, pursuant to the Spin-off and
Merger transactions, Bay assumed the $4,000,000 outstanding line of credit which
the Company had prior to the transaction. As of July 31, 1997, the Company had
no line of credit with its principal bank.
5. LONG-TERM OBLIGATIONS
The accompanying Consolidated Statements of Operations include net
rental expense for the fiscal years 1997, 1996, and 1995 of $1,103,000,
$1,673,000 and $1,941,000 respectively. At July 31, 1997, the aggregate future
minimum rental commitments under all noncancelable operating lease agreements
are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Gross Rental Net
For the Years Ending July 31, Rental from Rental
(in thousands of dollars) Commitments Subleases Commitments
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $1,841 $1,011 $ 830
1999 1,678 87 1,591
2000 855 -- 855
2001 671 -- 671
2002 106 -- 106
=========================================================================================
$5,151 $1,098 $4,053
=========================================================================================
</TABLE>
As described more fully in Note 7, the Company entered into an
agreement with Hibbing Electronics Corporation ("Hibbing") in March 1997 which
allows Hibbing to use certain of the Company's leased manufacturing equipment.
Capital lease obligations at July 31, 1997 and 1996 consisted of:
F-11
<PAGE> 83
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(in thousands of dollars) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Capital leases $ 743 $ 905
less current portion (287) (272)
============================================================================
Long-term capital lease obligations $ 456 $ 633
============================================================================
</TABLE>
On November 18, 1996, the Company entered into a noncancelable four (4)
year consulting agreement with Henry Epstein/d.b.a. Ideonics, former CEO and
chairman of the board of Penril, which has a minimum commitment of $137,500 per
year.
6. INCOME TAXES
In November 1996, as a result of the merger of Penril DataComm Networks,
Inc. with Bay Networks, Inc., all federal net operating losses and general
business and other tax credits of Penril DataComm Networks, Inc., of
approximately $15.2 million and $1.2 respectively remained with Penril after the
Spin-off of the Company.
The following table sets forth the differences between the tax provision
(benefit) from continuing operations calculated at the statutory federal income
tax rate and the actual tax benefit for the fiscal years ended July 31, 1996 and
1995 for Penril:
<TABLE>
<CAPTION>
AS OF JULY 31,
------------------------------------------------------------------------------
(amounts in thousands of dollars) 1996 1995
------------------------------------------------------------------------------
<S> <C> <C>
Tax provision at federal statutory rate $(7,027) $(1,724)
Amortization of non-deductible intangibles 1,931 283
State & foreign taxes, net of federal benefit (1,137) (218)
Change in valuation allowance 6,093 1,134
Other 140 (53)
------------------------------
Income tax benefit $ -- $ (578)
------------------------------------------------------------------------------
</TABLE>
The primary components of the temporary differences which give rise to
Penril's net deferred tax asset at July 31, 1996 are shown below:
<TABLE>
<CAPTION>
AS OF JULY 31,
----------------------------------------------------------------------
1996
------------------------------------------------------------------------
<S> <C>
Deferred tax assets:
Reserves and other contingencies $1,500
Depreciation and amortization 65
Restructuring Reserve 1,859
Net operating loss 6,780
General Business and other tax credits 1,248
Loss on discontinued operations 546
Valuation reserve (9,837)
----------------------------------------------------------------------
Total deferred tax assets 2,161
Deferred tax liabilities
Amortization of technologies (461)
----------------------------------------------------------------------
Net deferred tax assets $1,700
----------------------------------------------------------------------
</TABLE>
Access Beyond, Inc., will file its first tax return for the period from
November 18, 1996 until the end of the fiscal year ended July 31, 1997. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying value of assets and liabilities for financial reporting purposes and
the amounts reported for income tax purposes. Significant components of the
Company's deferred income tax liabilities and assets are shown in the following
table.
F-12
<PAGE> 84
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(in thousands of dollars) July 31, 1997
- -------------------------------------------------------------------------
<S> <C>
Deferred Tax Assets:
Reserves and other contingencies $ 721
Note receivable reserves 1,137
Net operating losses 5,247
Excess tax depreciation over book 65
- -------------------------------------------------------------------------
Net deferred tax assets 7,170
Valuation Allowance (7,170)
=========================================================================
Net Deferred Tax Assets Reported $ -
=========================================================================
</TABLE>
No income tax provision or benefit was recorded in fiscal 1997.
The reconciliation of the effective income tax rates to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
July 31, 1997
-------------
<S> <C>
Statutory federal rate -34.0%
State income taxes,
net of federal income
tax benefit -1.6%
Transaction Merger -13.7%
Miscellaneous 2.5%
Change in valuation
allowance 46.8%
-------------
Effective tax rates 0.0%
=============
</TABLE>
At July 31, 1997 the Company had a net operating loss carryforward
(including EMI and TPI) of approximately $13.8 million which expires in 2012.
The Company has made no income tax payments for the year ended July 31, 1997.
7. COMMITMENTS AND CONTINGENCIES
PENDING TRANSACTION: On July 29, 1997, the Company entered into an
Agreement and Plan of Reorganization (the "Merger Agreement") with Hayes
Microcomputer Products, Inc. Under the terms of the Merger Agreement with Hayes
Microcomputer Products (the "Hayes Merger"), Hayes will become a wholly owned
subsidiary of the Company and the shareholders of Hayes at the time the Merger
becomes effective will own approximately 79% of the outstanding equity
securities of the Company. The Company will amend its certificate of
incorporation to (i) change its name to Hayes Communications Inc., (ii) increase
the number of authorized shares of capital stock, and (iii) create Series A
Preferred Stock and the Board of Directors of the Company will be increased to
seven members, five of whom will be designated by the Hayes shareholders. The
transaction is subject to regulatory and the Company's stockholders' approval
and certain conditions to closing as set forth in the Hayes Agreement. At the
time of the consummation of the merger, the Company is responsible for payment
of the investment banking fees of approximately $ 1.0 million and for change of
a control payment of $437,500 to Ronald Howard (president of the Company).
Possible loss of Hawk Technology: On May 2, 1997, the Company and
Paradyne Corporation, A Delaware corporation ("Paradyne"), entered into the 2290
Remote Access Gateway ("Hawk") Technology Transfer Agreement (the "Technology
Agreement") pursuant to which Paradyne (i) transferred to the Company technology
relating to certain open remote dial access cards (in the form of a
comprehensive set of specifications, technical information, hardware and
software)(the "Hawk Technology"), (ii) sold to the Company certain inventory,
tools and equipment used in the application of the Hawk Technology to develop
and manufacture products, ("Hawk Products") which include the Hawk Technology,
(iii) licensed to the Company certain intellectual property in connection with
the Hawk Technology, and (iv) agreed to provide the Company with technical,
engineering, manufacturing and marketing
F-13
<PAGE> 85
support, for an aggregate purchase price of 503,704 shares of the Common Stock
(the "Paradyne Shares"), and $425,000 in cash. The shares of Common Stock were
valued at the fair value at date of issuance, approximately $1.7 million. The
Company and Paradyne also entered into a Stock Purchase Agreement, dated as of
May 2, 1997 (the "Purchase Agreement"), pursuant to which the Company sold and
issued the Paradyne Shares to Paradyne. Pursuant to the Purchase Agreement, the
Company is required to register the Paradyne Shares for Paradyne under the
Securities Act within one hundred twenty (120) days after the closing, with the
right to extend such date by 60 days, under certain circumstances.
Paradyne's transfer of Hawk Technology, license of Intellectual
Property and, to a certain extent, the inventory of Hawk Product are subject to
an "Unwind" provision in the Technology Agreement. Paradyne may elect to rescind
the Technology Agreement if the Company (a) fails to timely register the
Paradyne Shares or (b) fails to use its best efforts to maintain the
effectiveness of the registration statement, and does not cure such failure
within 30 days after Paradyne gives written notice. Such election would result
in the termination of the license of the Intellectual Property, the transfer of
the Hawk Technology and unsold Hawk Products to Paradyne, and the return to the
Company of the value of the consideration paid, subject to certain adjustments.
HIBBING AGREEMENT: In March 1997, the Company entered into an agreement
with Hibbing Electronics Corporation in which Hibbing manufactures and sells
printed circuit card products to the Company. Under the Agreement, Hibbing has
the right to use the lower level of the Company's Gaithersburg, Maryland
facility as well as certain equipment needed for the manufacturing process.
Hibbing pays the Company 50% of the monthly rent and utilities associated with
the facility and pays the current installment amounts on the manufacturing
equipment that Hibbing uses and that the Company leases. This agreement expires
August 31, 1998 at which time Hibbing shall have the option to purchase all of
the equipment covered under the agreement and the Company will assign all right,
title, and interest in the covered leases and equipment to Hibbing in exchange
for Hibbing's agreement to pay and perform the Company's obligations under those
leases.
LEGAL PROCEEDINGS: The Company initiated a lawsuit in December 1994
against Network Systems Corporation ("NSC") for breach of contract, fraudulent
inducement and defamation. The suit is seeking specific performance,
compensatory damages of $2,000,000 and punitive damages of $5,000,000. The
litigation arises out of a contract in which the Company agreed to develop
certain computer hardware and software to NSC's specifications. NSC subsequently
brought a counterclaim alleging negligent misrepresentation, fraud and breach of
contract by the Company. NSC is seeking recision of the contract, restitution of
monies paid by NSC to the Company, compensatory damages of $5,000,000 and
punitive damages in an unspecified amount. As of July 31, 1997, the Company was
in discussions with NSC.
In 1993 the Company initiated a lawsuit against Standard Microsystems
Corp. ("SMC") for breach of contract including failure to transfer technology,
unfair competition and false representations. In September 1996, the Company and
SMC agreed to drop the charges of false representation and settle the
contractual dispute. In October 1996, the Company received from SMC, in
settlement of the litigation, $3,500,000 cash, net of legal payments.
Digital Equipment Corporation ("DEC") has claimed, through a series of
written communications, that the Company has violated DEC patents related to DEC
LAT technology. In August 1997, the Company and DEC entered into an license
agreement including a specific release whereby the Company acquired a
non-exclusive license to develop, manufacture, and market specified products
which are compatible with Digital's LAT technology.
The Company is involved in other routine litigation.
Management believes none of the litigation will have a material adverse
effect on the Company's financial position or results of operations.
F-14
<PAGE> 86
8. SHAREHOLDERS' EQUITY
COMMON STOCK: In the first quarter of fiscal 1997, as part of the
Spin-off and Merger with Bay described in Note 1, Penril issued 1,124,951 shares
of its common stock in connection with the accelerated vesting of Penril's
outstanding employee stock options and non-employee stock options. Penril
received approximately $6,135,000 from the exercise of those options. Also prior
to the Spin-off and Merger with Bay, Penril issued 16,989 shares of its common
stock to Ronald Howard for $115,000. Subsequently, Penril issued 11,991,587
shares of the Company's common stock in a stock dividend which is described more
fully in Note 1, and completed the Spin-off and Merger with Bay. The Company's
common stock began trading on the NASDAQ on November 18, 1996. A summary of
stock option transactions for Penril during the three years ended July 31, 1997
is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- ------------------------ -----------------------
1986 Incentive Plan Directors' Plan 1995 Incentive Plan
------------------- --------------- -------------------
Number Average Number Average Number Average
of Price of Price of Price
Shares Per Share Shares Per Share Shares Per Share
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding August 1, 1994 1,037,419 $4.15 204,000 $3.64 -- $
--
Granted 348,000 $3.12 18,000 $3.25 -- --
Exercised (33,067) $2.23 -- -- -- --
Canceled (233,617) $4.15 -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Outstanding July 31, 1995 1,118,735 $3.89 222,000 $3.61 -- --
- ------------------------------------------------------------------------------------------------------------
Granted 494,000 $7.34 18,000 $5.69 70,000 $6.77
Exercised (539,284) $4.02 (148,000) $3.87 -- --
Canceled (110,500) $4.32 -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Outstanding July 31, 1996 962,951 $5.54 92,000 $3.59 70,000 $6.77
- ------------------------------------------------------------------------------------------------------------
Exercised (962,951) $5.54 (92,000) $3.59 (70,000) $6.77
============================================================================================================
Outstanding July 31, 1997 -- -- -- -- -- --
============================================================================================================
</TABLE>
EMPLOYEE STOCK OPTIONS AND STOCK AWARDS: On November 18, 1996, the
Company adopted the 1996 Long Term Incentive Plan (the "1996 Plan"). Under the
1996 Plan, which will terminate on November 18, 2006, awards may be granted to
key employees of the Company and its subsidiaries in one or more of the
following forms: (i) Incentive Stock Options; (ii) Non-qualified Stock Options;
and (iii) a combination of the foregoing. The option price per share of any
option granted under the 1996 Plan is the fair market value of a share of Common
Stock on the date the option is granted. No option will be exercisable more than
ten years from the date of grant and vest over three years. An aggregate of
2,000,000 shares of the Company's common stock were reserved for issuance at
July 31, 1997
NON-EMPLOYEE DIRECTOR STOCK OPTIONS: On November 18, 1996, the Company
adopted the 1996 Non-Employee Directors' Stock Option Plan ("Directors Plan").
Under the Directors Plan an option to purchase 25,000 shares is automatically
granted to each non-employee director on the first day of his initial term. In
addition, options to purchase 5,000 shares are automatically granted to each
non-employee director on the fifth business day after the Annual Report on Form
10-K is filed with the Securities and Exchange Commission. The option price per
share of any option granted under the Directors Plan is the fair market value of
a share of Common Stock on the date the option is granted. No option will be
exercisable more than ten years from the date of grant and vest over three
years. An aggregate of 250,000 shares were reserved for issuance under the
Directors Plan at July 31, 1997.
A summary of the stock option transactions for the Company for the year
ended July 31, 1997 is as follows (amounts in thousands):
F-15
<PAGE> 87
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1996 Long Term Incentive Directors' Plan
Plan
Number Average Number Average
of Price of Price
Shares Per Share Shares Per Share
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Granted 1,469,000 $6.08 100,000 $7.74
Canceled (100,000) $6.63 -- --
=========================================================================================
Outstanding at July 31, 1997 1,369,000 $6.04 100,000 $7.74
=========================================================================================
</TABLE>
CHANGE OF CONTROL PROVISION: In the case of a "change in control" of
the Company, an option holder will generally have the right, commencing at least
five days prior to the "change in control" and subject to any other limitation
on the exercise of the option in effect on the date of exercise, to immediately
exercise any options in full to the extent not previously exercised, without
regard to any vesting limitations.
SFAS NO. 123: For the purposes of following pro forma disclosures
required by SFAS No. 123, the estimated fair value of the options is expensed in
the year that the options are granted using the Black-Scholes option valuation
model. The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restriction and are fully
transferable. In addition, option valuation models, such as Black-Scholes model,
require the input of highly subjective assumptions including the expected stock
price volatility which are subject to change from time to time. For this reason,
and because SFAS No. 123 fair value-based method of accounting has not been
applied to options granted prior to August 1, 1995, the resulting pro forma
compensation costs are not necessarily indicative of costs to be expected in
future years.
In preparing the pro forma information, the following assumptions were
made: risk-free weighted average interest rate was 5.5%; volatility factors of
the expected market price of the Company's common stock of 61.12% in fiscal 1997
and 86.2% for Penril's common stock in fiscal 1996, and option lives of less
than 12 months for both years. The following pro forma information has been
prepared as if the Company had accounted for its employee stock options using
the fair value-based method of accounting established by SFAS No. 123.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the year ended July 31,
(Dollars in thousands, except per share) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Net loss from continuing operations:
As reported ($13,890) ($20,668)
Pro forma ($16,138) ($21,954)
Loss per share from continuing operations:
As reported ($1.16) ($2.14)
Pro forma ($1.35) ($2.28)
============================================================================
</TABLE>
SERIAL PREFERRED STOCK: The Company's Serial Preferred Stock may be
issued in one or more series. The shares of any series may be convertible into
Common Stock, may have priority over Common Stock in the payment of dividends
and in the distribution of assets in the event of liquidation or dissolution of
the Company, and may have preferential or other voting rights, all as determined
by the Board of Directors at the time it approves the series.
WARRANTS: In March, 1987, Henry D. Epstein joined Penril as President
and Chief Executive Officer and was issued Class A warrants to purchase 400,000
shares of Penril's Common Stock at $2.23 per share and Class B warrants to
purchase 80,000 shares of Penril's Common Stock at $2.34 per share. Mr. Epstein
exercised 220,000 Class A warrants in January 1993, 80,000 Class A warrants in
January 1994 and 100,000 Class A warrants in February 1994. In February 1995,
Mr. Epstein exercised all 80,000 Class B warrants. All exercises were
accomplished by delivery of shares previously held.
F-16
<PAGE> 88
In October 1992, Penril issued a warrant to purchase 166,000 shares of
common stock at $4.50 per share, the fair market value on the date of issuance,
to Coast Federal Savings Bank ("Coast") in settlement of a law suit brought
against the Company. In addition, Penril issued Class E warrants to purchase 25,
000 shares of common stock at $3.625 per share, the fair market value on the
date of issuance, to Mr. Henry Epstein in consideration for Mr. Epstein, in his
capacity as a stockholder of Penril, assisting Penril in settling the litigation
with Coast. The Coast warrant expired June 7, 1995. The Class E warrants were
exercised subsequent to July 31, 1995.
9. RETIREMENT AND SAVINGS PLAN
On November 18, 1996, the Company adopted the Penril Retirement and
Savings Plan as part of the Spin-off and Merger transaction with Bay described
in Note 1. The Company's Retirement and Savings Plan ("401(k) Plan") is a
defined contribution plan including provisions of section 401(k) of the Internal
Revenue Code. Employees of the Company who have completed 90 days of service
("Participants") are eligible to participate in the 401(k) Plan. The 401(k) Plan
permits, but does not require, the Company to match employee contributions. In
addition, the Company may make discretionary contributions to the 401(k) Plan
which will be allocated to each Participant based on the ratio of such
Participant's eligible compensation to the total of all Participants' eligible
compensation. Amounts contributed by the Company vest as to 30% after 1 year of
eligible service, 60% after 2 years of eligible service and 100% after 3 years
of eligible service. Participants may elect to direct the investment of their
contributions in accordance with the provisions of the 401(k) Plan. The Company
made matching contributions of $46,000 in fiscal 1997 and Penril made matching
contributions of $61,000 and $45,000 during fiscal 1996 and 1995, respectively.
There were no additional Company contributions in any year. The Company provides
no post-employment or post-retirement benefits.
F-17
<PAGE> 89
10. GEOGRAPHIC AREA INFORMATION
The Company's foreign operations for fiscal 1997 consisted principally
of sales and marketing activities through its Access Beyond, Ltd subsidiary
located in the United Kingdom. Certain information, including the effect of
intercompany transactions, relating to the Company's operations on a geographic
basis for the year ending July 31, 1997, and Penril's operations on a
geographical basis for the years ending July 31, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(in thousands of dollars) 1997 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
U.S. Revenue
Domestic $ 10,724 $ 19,350 $ 26,190
--------------------------------------------------------------------------------------------
Exports:
Europe 1,993 8,808 9,326
Pacific Rim 1,465 3,868 6,402
Central and South America 973 2,393 3,487
Other International 1,191 2,235 4,403
--------------------------------------------------------------------------------------------
Total Exports 5,622 17,304 23,618
--------------------------------------------------------------------------------------------
Total U.S. Revenue 16,346 36,654 49,808
--------------------------------------------------------------------------------------------
Revenue from foreign subsidiaries 3,537 7,392 6,839
Adjustments and eliminations (1,883) (4,611) (4,036)
============================================================================================
Total Revenues $ 18,000 $ 39,435 $ 52,611
============================================================================================
Income (loss) from continuing operations before taxes
U.S. $(13,726) $(20,267) $(5,143)
Foreign (457) (531) 688
Eliminations 293 130 (737)
============================================================================================
Total loss from continuing operations $(13,890) $(20,668) $(5,192)
============================================================================================
Identifiable Assets
U.S. $12,785 $ 31,325 $ 40,946
Foreign subsidiaries 1,121 2,455 3,441
============================================================================================
Total Identifiable Assets $13,906 $ 33,780 $ 44,387
============================================================================================
</TABLE>
11. SUBSEQUENT EVENTS
On September 15, 1997, the Company received a commitment from a third
party lending institution approving a working capital facility of $3,000,000
with borrowing based on qualified accounts receivable. Interest will be one half
percentage point (1/2%) above the Reference Rate publicly announced by Norwest
Bank. A fee of 1% of the total line and term loan commitment will be due and
payable at closing and at each annual anniversary date thereafter. The facility
will be for a two year period. In the event of the Hayes Merger, the Company may
prepay the line of credit by providing the lender with sixty days written
notice, and payment of the service charge (a monthly charge equal to the greater
of $2,000 or 1/3% of the average daily outstanding balance on all loans) times
the remaining months of the two year term. In all other cases the prepayment
penalty will be equal to 3% of the total line commitment in the first year and
2% of the line commitment in all subsequent years thereafter.
F-18
<PAGE> 90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hayes Microcomputer Products, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Hayes
Microcomputer Products, Inc. and subsidiaries as of December 31, 1995 and 1996
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended September 30, 1994 and 1995, the
three months ended December 31, 1995, and the year ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hayes
Microcomputer Products, Inc. and subsidiaries as of December 31, 1995 and 1996
and the results of their operations and their cash flows for the years ended
September 30, 1994 and 1995, the three months ended December 31, 1995, and the
year ended December 31, 1996 in conformity with generally accepted accounting
principles.
Atlanta, Georgia
April 30, 1997, except for
Note 18, as to which the date
is July 29, 1997.
F-19
<PAGE> 91
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 2,435 $ 5,687 $ 2,782
Restricted cash............................................ 3,501 594 519
Accounts receivable, less allowance for doubtful accounts
and product returns of $5,424 in 1995, $8,115 in 1996
and $5,916 in 1997...................................... 27,489 16,060 38,371
Receivables from related parties........................... 6,828 3,883
Inventories................................................ 38,304 25,422 34,891
Refundable income taxes.................................... 1,344 16
Prepaid expenses and other current assets.................. 2,187 4,437 4,601
------- ------- --------
Total current assets............................... 75,260 59,044 85,047
Property and equipment, net.................................. 6,207 7,387 9,185
Computer software costs, net................................. 813 307
Land held for sale........................................... 6,139 328
Intangibles and other long-term assets....................... 3,277 2,149 6,689
------- ------- --------
Total assets....................................... $91,696 $69,215 $100,921
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current debt............................................... $11,134 $13,973 $ 31,501
Accounts payable........................................... 4,307 10,414 28,043
Amounts due to related parties............................. 6,918 8,265
Accrued liabilities........................................ 34,549 23,221 22,083
Income taxes payable....................................... 864 926
------- ------- --------
Total current liabilities.......................... 49,990 55,390 90,818
Long-term debt, less current................................. 6,881 5,491
Liabilities subject to compromise............................ 44,581
Other long-term liabilities.................................. 137 1,203 1,577
------- ------- --------
Total liabilities.................................. 94,708 63,474 97,886
Commitments and contingencies
Redeemable preferred stock, Series B, no par value,
authorized 263,113 shares; issued and outstanding 263,113
at June 30, 1997........................................... 5,455
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized 100,000,000
shares; issued and outstanding 17,328,479 shares at
December 31, 1995 and 4,991,750 shares at December 31,
1996 and June 30, 1997.................................. 173 50 50
Preferred stock, Series A, no par value, authorized
10,000,000 shares; issued and outstanding 4,900,000
shares at December 31, 1996 and June 30, 1997........... 35,000 35,000
Paid-in capital............................................ 496
Accumulated deficit........................................ (4,299) (30,312) (38,147)
Foreign currency translation adjustment.................... 308 1,003 677
Unrealized gain on marketable securities................... 310
------- ------- --------
Total stockholders' equity (deficit).................... (3,012) 5,741 (2,420)
------- ------- --------
Total liabilities and stockholders' equity......... $91,696 $69,215 $100,921
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 92
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1995 1996 1996 1997
------------- ------------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Sales......................... $ 246,277 $ 269,155 $ 70,111 $257,452 $ 145,585 $ 94,897
Cost of sales..................... 195,188 204,787 51,765 195,918 104,809 70,965
-------- -------- -------- -------- -------- --------
Gross profit................. 51,089 64,368 18,346 61,534 40,776 23,932
-------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing............. 41,278 33,364 8,867 42,757 21,317 17,444
General and administrative...... 23,908 22,223 5,100 18,970 9,983 8,930
Research and development........ 16,153 10,713 2,281 9,640 4,549 5,981
Amortization and write-off of
intangibles.................. 6,463 5,907
Restructuring charges........... 3,600
-------- -------- -------- -------- -------- --------
Total operating expenses..... 87,802 72,207 16,248 74,967 35,849 32,355
-------- -------- -------- -------- -------- --------
Operating (loss) income........... (36,713) (7,839) 2,098 (13,433) 4,927 (8,423)
Interest expense, net............. (1,928) (6,605) (1,807) (5,056) (2,994) (2,375)
Gain on sale of investment........ 666 1,315
Gain on sale of land.............. 8,153 8,153
Other income (expense), net....... 4,893 4,155 (24) 2,279 1,406 1,710
-------- -------- -------- -------- -------- --------
(Loss) income before unusual
gain and income tax expense
(benefit).................. (33,748) (10,289) 267 (7,391) 11,492 (7,773)
Unusual gain, patent infringement
settlement...................... 3,993
Reorganization expense............ 5,026 4,301 5,378 5,378
-------- -------- -------- -------- -------- --------
(Loss) income before income
tax expense (benefit)...... (29,755) (15,315) (4,034) (12,769) 6,114 (7,773)
Income tax expense (benefit)...... (1,689) (932) 603 385 887 62
-------- -------- -------- -------- -------- --------
Net (loss) income............ $ (28,066) $ (14,383) $ (4,637) $(13,154) $ 5,227 $ (7,835)
-------- -------- -------- -------- -------- --------
Net (loss) income per share....... $ (4.98) $ (2.56) $ (0.82) $ (2.52) $ 0.70 $ (1.57)
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE> 93
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN UNREALIZED TOTAL
COMMON STOCK PREFERRED STOCK ACCUMULATED CURRENCY GAIN ON STOCKHOLDERS'
----------------- ---------------- PAID-IN EARNINGS TRANSLATION MARKETABLE EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT SECURITIES (DEFICIT)
------- -------- ------- ------- -------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance September 30,
1993.................. 17,418 $ 174 $ 998 $ 42,787 $ 166 $ 44,125
Stock repurchased from
profit sharing...... (90) (1) (502) (503)
Net loss.............. (28,066) (28,066)
Foreign currency
translation......... 340 340
------- ---- ----- --------- -----
Balance September 30,
1994.................. 17,328 $ 173 496 14,721 506 15,896
Net loss.............. (14,383) (14,383)
Foreign currency
translation......... (96) (96)
Unrealized gain on
securities held for
sale................ $ 266 266
------- ---- ----- --------- ----- --------
Balance September 30,
1995.................. 17,328 173 496 338 410 266 1,683
Net loss.............. (4,637) (4,637)
Foreign currency
translation......... (102) (102)
Unrealized gain on
securities held for
sale................ 44 44
------- ---- ----- --------- ----- --------
Balance December 30,
1995.................. 17,328 173 496 (4,299) 308 310 (3,012)
Net loss.............. (13,154) (13,154)
Stock repurchased and
retired............. (1,737) (17) (602) (12,859) (13,478)
Preferred stock
issued.............. 4,900 $35,000 35,000
Reverse split of
common stock........ (10,599) (106) 106
Foreign currency
translation......... 695 695
Unrealized gain on
securities held for
sale................ (310) (310)
------- ---- ----- -------- ----- --------- ----- --------
Balance December 31,
1996.................. 4,992 50 4,900 35,000 (30,312) 1,003 5,741
Net loss
(unaudited)......... (7,835) (7,835)
Foreign currency
translation
(unaudited)......... (326) (326)
------- ---- ----- -------- ----- --------- ----- --------
Balance June 30, 1997
(unaudited)........... 4,992 $ 50 4,900 $35,000 $ $ (38,147) $ 677 $ $ (2,420)
======= ==== ===== ======== ===== ========= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 94
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------- ------------- ------------ ------------ SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income..................... $ (28,066) $ (14,383) $ (4,637) $(13,154) $ 5,227 $ (7,835)
-------- -------- -------- -------- -------- --------
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization....... 5,795 5,989 1,301 4,799 1,769 3,198
Amortization and write-off of
intangibles....................... 6,463 5,543
Provision for doubtful accounts
receivable........................ (140) 2,390 (20) 345 173 (24)
Provision for inventory
write-downs....................... 3,832 12,727 575 5,440 2,217 2,002
Deferred income taxes............... 3,034
Gain on sale of investment.......... (666) (1,315)
Gain on sale of land................ (8,153) (8,153)
Changes in assets and liabilities,
net of effects of acquisition:
Accounts receivable............... (2,114) (11,513) 6,079 4,256 (2,164) (19,342)
Inventories....................... (18,448) 3,541 (161) 7,442 (4,593) (11,471)
Refundable income taxes........... (3,741) 3,011 1,328 1,328 16
Prepaid expenses and other current
assets.......................... (415) 1,043 (14) (1,338) (1,377) (105)
Accounts payable.................. 25,448 (47,850) 1,057 6,107 6,211 17,629
Amounts due to related parties.... 6,496 2,596 1,347
Accrued liabilities............... 1,373 8,441 7,605 (10,464) (10,875) (1,138)
Income taxes payable.............. 62
Liabilities subject to
compromise...................... 33,275 3,147 (44,581) (44,581)
Other long-term liabilities....... (753) (701) 3 1,066 1,429 374
-------- -------- -------- -------- -------- --------
Total adjustments............... 20,334 15,896 19,572 (27,923) (56,020) (8,767)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities.......... (7,732) 1,513 14,935 (41,077) (50,793) (16,602)
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures.................. (4,915) (1,805) (453) (5,028) (1,113) (1,916)
Proceeds from sale of land............ 14,317 14,317
Payment for acquisition of Cardinal,
net of cash acquired of $3,057...... (38)
Proceeds from sale of investment...... 798 1,431
Proceeds from sale of property and
equipment........................... 759 73 782 85
Changes in other long-term assets..... (3,167) 2,636 189 333 561 699
Changes in escrowed and restricted
funds............................... (3,036) (465) 2,907 2,078 75
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities.......... (8,082) (1,446) (656) 14,109 15,928 251
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Issuance of preferred stock........... 35,000 35,000 5,455
Payments on debt...................... (7,624) (28,685) (16,318) (17,915) (15,655) (60,271)
Proceeds from debt.................... 26,256 26,266 22,057 21,637 65,263
Issuance of convertible notes......... 6,000 6,000 4,000
Repurchase of stock................... (504) (13,478) (10,999)
Payment of debt issuance costs........ (618) (625) (2,139) (1,614) (675)
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities.......... 18,128 (3,037) (16,943) 29,525 34,369 13,772
-------- -------- -------- -------- -------- --------
Effect of exchange rate changes on
cash.................................. 340 (96) (102) 695 349 (326)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................... 2,654 (3,066) (2,766) 3,252 (147) (2,905)
Cash and cash equivalents at beginning
of period............................. 5,613 8,267 5,201 2,435 2,435 5,687
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of
period................................ $ 8,267 $ 5,201 $ 2,435 $ 5,687 $ 2,288 $ 2,782
-------- -------- -------- -------- -------- --------
Supplemental information:
Interest paid......................... $ 896 $ 3,221 $ 1,203 $ 11,811 $ 8,084 $ 1,286
Income taxes paid..................... 3 15 7 658 233 62
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 95
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
(IN THOUSANDS)
1. NATURE OF BUSINESS AND PLAN OF REORGANIZATION
Hayes Microcomputer Products, Inc. ("Hayes") along with its wholly owned
subsidiaries (collectively, the "Company"), is engaged in the development,
production and marketing of telecommunications equipment and software and sells
primarily to personal computer and peripheral distributors and resellers.
Reorganization
On November 15, 1994, Hayes filed a petition for relief under Chapter 11 of
the United States Bankruptcy Code due to its inability to pay its debts on a
current basis. Under Chapter 11, certain claims against the debtor in existence
prior to the filing of the petition for relief under the federal bankruptcy laws
were stayed while the Debtor continued business as a debtor-in-possession
("DIP"). These claims were reflected in the consolidated December 31, 1995
balance sheet as liabilities subject to compromise.
Hayes filed amended and restated plans of reorganization, the most recent
dated February 9, 1996 (the "Plan"). The Plan was confirmed by the U.S.
Bankruptcy Court on March 8, 1996 and became effective on April 16, 1996. From
November 1994 through April 1996, the Company operated as the DIP. The Plan
provided for the payment in full of all prepetition creditors on the effective
date, plus interest on such creditors' claims, except where such creditors have
agreed to accept payments over a period of time. Funding of the plan was
provided through three major sources. First, pursuant to an agreement and plan
of merger dated April 12, 1996 (the "Agreement") and entered into by and between
Rinzai Limited ("ACMA"), Kaifa Technology (H.K.) Limited, Rolling Profit
Holdings, Ltd., Lao Hotel (H.K.), Limited, Saliendra Pte Ltd., and S.P. Quek
Investments Pte. Ltd. (collectively, the "Investors"), certain subsidiaries were
created by the investors which collectively contributed $35.0 million and merged
with Hayes. The Investors received preferred stock representing a 49 percent
voting interest in the Company. Second, the Company entered into an agreement
with The CIT Group/Credit Finance, Inc. ("CIT") to borrow up to a total of $64.5
million through three separate debt instruments collateralized by the Company's
intellectual property, certain equipment, and accounts receivable and inventory
balances. Third, pursuant to the Plan, the Company sold certain parcels of real
property classified as land held for sale on the accompanying consolidated
balance sheets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Hayes
Microcomputer Products Inc. and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
The Company's investments in 20 to 50 percent owned companies in which it has
the ability to exercise significant influence over operating and financial
policies are accounted for on the equity method. Accordingly, the Company's
share of the earnings of these companies and any realized gains and losses are
included in the consolidated statements of operations. Investments in other
companies are carried at cost. The cost of securities sold is based on the
specific identification method.
Effective October 1, 1995, the Company changed its year end from September
30 to December 31. Certain reclassifications have been made to prior period
financial statements in order to conform to the 1996 presentation.
Interim Financial Statements
The interim financial data as of and for the six months ended June 30, 1996
and 1997 is unaudited; however, in the opinion of the Company's management, the
interim data includes all adjustments, consisting
F-24
<PAGE> 96
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
only of normal recurring adjustments necessary for a fair statement of results
for the interim period. The interim period results of operations are not
necessarily indicative of results for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these
estimates.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Restricted cash at December 31, 1996 and at June 30, 1997 is based on a
Bankruptcy Court mandate to escrow funds. Restricted cash at December 31, 1995
is based on the Company's previous debt facility requirements.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and include labor and related manufacturing overhead. Market with respect to raw
materials is replacement cost and for work in process and finished goods is net
realizable value. Inventories are presented net of the reserve for obsolescence.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated for financial reporting purposes using
the straight-line method based on the estimated useful life of the assets (three
to five years). Leasehold improvements are depreciated over the shorter of the
lease term or useful life.
Maintenance and repairs are charged to expense as incurred. Upon sale,
retirement or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in the consolidated statements of
operations
Computer Software Costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," the Company capitalizes costs incurred for the development of
computer software to be sold. Costs are capitalized upon the establishment of
technical feasibility of the product. Capitalized costs are being amortized
based on current and future projected revenues for each product with an annual
minimum equal to the straight-line amortization over the five year estimated
economic useful life of the product.
Intangibles and Other Long-Term Assets
The Company evaluates the recoverability of all long-lived assets including
related intangible assets and goodwill based upon a comparison of discounted
estimated future cash flows from the related operations with the then
corresponding carrying values of those assets. Realizability of non-related
goodwill is evaluated based on non-discounted future cash flow and operating
income.
Intangible assets consist principally of purchased software and goodwill
which is being amortized using the straight-line method over five years and ten
years, respectively. Accumulated amortization was $11.7 million, $12.2 million
and $12.4 million at December 31, 1995 and 1996 and at June 30, 1997,
respectively.
F-25
<PAGE> 97
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company's policy is to record revenue upon shipment of related goods to
customers. Sales to certain distributors are under terms which allow for those
distributors to receive price protection based on future price reductions. Some
sales made to distributors allow limited rights of return. The Company provides
an allowance for returns and price reductions based on historical experience.
Income Taxes
Income taxes have been provided using the asset and liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Under SFAS 109, deferred tax liabilities and assets are
determined based on temporary differences between the bases of certain assets
and liabilities for income tax and financial reporting purposes. The differences
are primarily attributable to reserves on inventory and accounts receivable.
Future tax benefits, such as net operating loss carryforwards, are recognized to
the extent that realization of such benefits is more likely than not. The effect
of a change in the valuation allowance that results from a change in
circumstances that causes a change in judgment about the realizability of the
related deferred tax asset in future years would be included in income in that
period.
Advertising
All advertising costs are expensed when incurred. Advertising expenses were
approximately $11.1 million, $9.9 million, $3.4 million and $18.0 million for
the years ended September 30, 1994 and 1995, the three months ended December 31,
1995, and the year ended December 31, 1996, respectively.
Foreign Currency Translation
The financial statements of subsidiaries of the Company outside the United
States are measured using the local currency as the functional currency.
Translation adjustments result from the process of translating those
subsidiaries' financial statements from functional currency into U.S. dollars.
Translation adjustments are reported separately and accumulated in a separate
component of equity. Assets and liabilities of these subsidiaries are translated
at the rates of exchange at the balance sheet dates. Income and expense items
are translated at monthly weighted average rates.
Future Adoption of Recently Issued Accounting Standards
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), No. 130, "Reporting Comprehensive Income"
("SFAS 130"), No. 129, "Disclosure of Information About Capital Structure"
("SFAS 129"), and No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 131 specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS 129 provides increased disclosure about an entity's
capital structure, and SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share. These standards are effective
for periods ending after December 15, 1997.
The Company believes that the impact of these standards, when adopted, will
not have a material impact on the Company's consolidated financial statements.
F-26
<PAGE> 98
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash Equivalents
The Company estimates that the fair value of cash equivalents approximates
carrying value due to the relatively short maturity of these instruments.
Notes Payable
The Company estimates that the fair value of notes payable approximates
carrying value based upon its effective current borrowing rate for issuance of
debt with similar terms and remaining maturities.
Liabilities Subject to Compromise
The Company estimates that the fair value of prepetition liabilities
approximates carrying value based upon its effective borrowing rate for issuance
of debt with similar terms and remaining maturities.
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(IN THOUSANDS)(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................................... $18,781 $ 9,199 $12,304
Work in process..................................... 3,728 4,728 3,106
Finished goods...................................... 15,795 11,495 19,481
------- ------- -------
$38,304 $25,422 $34,891
======= ======= =======
</TABLE>
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(IN THOUSANDS)(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............................. $17,939 $19,735 $18,731
Data processing equipment........................... 14,164 15,069 15,509
Furniture and fixtures.............................. 6,585 6,662 6,447
Leasehold improvements.............................. 4,427 4,738 3,813
Construction in progress............................ 42 448 691
------- ------- -------
43,157 46,652 45,191
Less accumulated depreciation and amortization...... (36,950) (39,265) (36,006)
------- ------- -------
$ 6,207 $ 7,387 $ 9,185
======= ======= =======
</TABLE>
F-27
<PAGE> 99
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(IN THOUSANDS)(UNAUDITED)
<S> <C> <C> <C>
Accounts payable.................................... $ 7,394 $ 8,444 $ 2,470
Payroll and benefits................................ 4,827 2,643 2,027
Vendor obligations.................................. 777 2,348 2,348
Restructuring....................................... 2,058 10,881
Professional fees................................... 7,571 333 537
Interest............................................ 6,383
Promotional and marketing........................... 2,901 1,497 891
Other............................................... 4,696 5,898 2,929
------- ------- -------
$34,549 $23,221 $22,083
======= ======= =======
</TABLE>
5. WRITE-OFF OF INTANGIBLES
In accordance with the Company's policy, management assessed the value of
the goodwill that was recorded as a result of the July 1989 acquisition of
Practical Peripherals, Inc., a computer products manufacturer with operations in
Thousand Oaks, California. As a result of changes in events and circumstances
related to the business, management determined that the goodwill should be
reduced significantly given the expected value that would be derived from these
intangible assets in the future. The Company recorded a charge to write-off
goodwill totaling $5.5 million in the year ended September 30, 1995.
6. RESTRUCTURING
In September 1996, the Company announced the closure of its Thousand Oaks,
California operations. During the year ended December 31, 1996, the Company
recorded a restructuring charge of $3.6 million related to exiting these
operations. The restructuring charge consists of the following items:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Lease obligation............................................... $1,700
Employee severance............................................. 965
Equipment disposals............................................ 705
Other.......................................................... 230
------
$3,600
======
</TABLE>
At December 31, 1996, the remaining restructuring reserve totaled $3.3
million of which $2.1 million is included in accrued liabilities and $1.2
million is included in other long-term liabilities. In addition, cost of sales
for the year ended December 31, 1996 includes $2.4 million of additional
inventory obsolescence charges associated with the termination of products
produced at the Thousand Oaks facility and the resulting disposal of excess
inventory. At June 30, 1997, the remaining restructuring reserve totaled $1.9
million of which $500,000 is included in accrued liabilities and $1.4 million is
included in other long-term liabilities.
F-28
<PAGE> 100
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
GECC DIP financing................................ $ 11,134
CIT line of credit................................ $ 6,035 $ 18,767
CIT term loan "A," due April 1, 2002.............. 1,802 1,333
CIT term loan "B," due April 1, 2002.............. 6,667 5,746
Convertible notes from Investors.................. 6,000 10,000
Other............................................. 350 1,146
--------- --------- ---------
11,134 20,854 36,992
Less current maturities........................... (11,134) (13,973) (31,501)
--------- --------- ---------
Total long-term debt.............................. $ $ 6,881 $ 5,491
========= ========= =========
</TABLE>
Prior to April 16, 1996, the Company completed a $45.0 million court
approved DIP financing with General Electric Capital Corporation ("GECC") under
which amounts owed to NationsBank of Georgia, N.A. were paid in full. In
accordance with the Plan, this financing agreement was paid in full and replaced
by the CIT agreements.
On April 16, 1996, the Company entered into two term loans and a revolving
loan facility (the "Line of Credit") with CIT which provide for maximum
borrowings of $64.5 million. The Line of Credit provides for financing based on
eligible accounts receivable and inventory, as defined in the agreement, and
expires April 16, 2000 unless otherwise renewed. The term loans are based on
eligible equipment and intangibles. Based on the applicable calculations, the
total available borrowings under the term loans and the Line of Credit are
approximately $17.2 million as of December 31, 1996. The term loans and the Line
of Credit bear interest at prime plus 1.625 percent (9.875 percent at December
31, 1996). The Line of Credit has covenants requiring minimum levels of tangible
net worth and net income, as defined. If these minimum levels are not met, CIT
may raise the interest rate to prime plus 2.125 percent and can accelerate the
existing loan amortization on the term facilities. The Company did not meet the
minimum levels at December 31, 1996 and at June 30, 1997. The interest rate was
raised effective January 1, 1997 and the loan amortization on the term
facilities was accelerated effective July 1, 1997.
In April 1996, the Company entered into convertible subordinated promissory
notes (the "Convertible Notes") totaling $6.0 million with certain investors.
The Convertible Notes bear interest at prime plus 1.625 percent and are due on
October 15, 1997. The Convertible Notes have conversion features whereby they
may be converted into shares of the Company's Series A preferred stock if not
paid in full by the maturity date. The Company has reserved authorized shares of
Series A Preferred stock for the Convertible Notes totaling 840,000 shares.
The Company's weighted average interest rate on short-term borrowings was
approximately 9.3%, 9.9%, and 10.5% at December 31, 1995 and 1996 and at June
30, 1997, respectively.
During March 1997, the Company issued additional Convertible Notes totaling
$4.0 million with certain investors. These Convertible Notes bear interest at
prime plus 1.625 percent and are due on October 15, 1997. The Convertible Notes
have conversion features whereby they may be converted into shares of the
Company's Series A preferred stock if not paid in full by the maturity date. The
Company has reserved 560,000 authorized shares of such stock.
F-29
<PAGE> 101
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of debt for the next five years are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year:
1997............................................ $ 13,973
1998............................................ 1,588
1999............................................ 1,588
2000............................................ 1,588
2001............................................ 1,588
Thereafter...................................... 529
-------
$ 20,854
=======
</TABLE>
8. INCOME TAXES
The differences between the federal statutory income tax rate and the
Company's effective tax rate were as follows for the years ended September 30,
1994 and 1995, the three months ended December 31, 1995, and the year ended
December 31, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Federal statutory rate........... (34.00)% (34.00)% (34.00)% (34.00)%
State income taxes, net of
federal benefit................ (4.00) (4.00) (4.00) (4.00)
Amortization and write-off of
intangibles.................... 13.74
Taxes on foreign income.......... (0.20) 3.20 14.95 3.00
Provision for valuation
allowance...................... 34.53 29.20 63.74 35.86
Equity in foreign subsidiaries
and foreign sales
corporation.................... 5.00 (0.41) (19.61) (3.43)
Other, net....................... (7.01) (13.82) (6.13) 5.59
---- ----- ----- -----
Total....................... (5.68)% (6.09)% 14.95% 3.02%
==== ===== ===== =====
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
(in thousands)
Current:
Federal........................ $(4,723) $(1,359)
Foreign........................ 427 $603 $385
State..........................
------- ------- ---- ----
(4,723) (932) 603 385
Deferred:
Federal........................ 2,967
Foreign........................ 67
State..........................
------- ------- ---- ----
3,034
------- ------- ---- ----
$(1,689) $ (932) $603 $385
======= ======= ==== ====
</TABLE>
F-30
<PAGE> 102
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of deferred income taxes as of December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards.............................. $ 781 $ 12,183
Inventory obsolescence reserves............................... 6,358 2,915
Accrued employee benefits..................................... 828 519
Allowance for doubtful accounts and product returns........... 2,059 3,170
Reserves for warranty claims.................................. 854 856
Accrued advertising........................................... 468 568
Accrued reorganization expenses............................... 3,320 96
Other......................................................... 2,827 1,623
Valuation allowance........................................... (17,312) (21,892)
-------- --------
Total deferred tax assets.................................. 183 38
-------- --------
Deferred income tax liabilities:
Computer software costs....................................... (183) (38)
-------- --------
Total deferred tax liabilities............................. (183) (38)
-------- --------
Net deferred tax asset.......................................... $ $
======== ========
</TABLE>
Due to the Company's filing of a voluntary petition for bankruptcy in 1994,
subsequent emergence from bankruptcy proceedings in April 1996, and the results
of operations for the year ended December 31, 1996, the Company has recorded a
valuation allowance equal to the amount of its net deferred tax assets. The loss
carryforwards as of December 31, 1995 and 1996, are subject to annual
limitations and will expire in 2010 and 2011, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases office, plant, and warehouse facilities and certain
vehicles and equipment under noncancelable operating leases. As of December 31,
1996, the approximate future minimum lease payments for noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year:
1997........................................... $ 3,399
1998........................................... 3,055
1999........................................... 2,241
2000........................................... 461
2001........................................... 461
Thereafter..................................... 1,318
-------
$ 10,935
=======
</TABLE>
The above payments for noncancelable operating leases includes $1.7 million
associated with the Thousand Oaks facility which has been accrued as part of the
restructuring.
Rental expense was approximately $4.5 million, $3.7 million, $1.0 million,
and $3.9 million for the twelve months ended September 30, 1994 and 1995, the
three months ended December 31, 1995, and the twelve months ended December 31,
1996, respectively.
F-31
<PAGE> 103
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There are various litigation proceedings and claims arising in the ordinary
course of business. The Company believes it has meritorious defenses and is
vigorously defending these matters. The Company believes that the resolution of
such contingencies will not have a material adverse effect on the consolidated
financial position, results of operations, or cash flows of the Company.
During 1994, resultant of patent infringement suits, the Company completed
the negotiation of patent license agreements with certain customers and
suppliers. These agreements provide for royalties to be paid by the customers
and suppliers to the Company on both past and future sales. In settlement of
past sales, the Company recorded approximately $4.0 million as an unusual gain
in 1994.
The Company has employment agreements with a stockholder and certain
management personnel with terms from six months to five years.
The Company has an agreement with a supplier of modem chips, under which
the Company committed, under certain circumstances, to purchase a minimum number
of modem chips during 1996. The Company did not purchase the required number of
modem chips and has accrued a potential estimated penalty due the supplier. The
Company and supplier are in negotiations to resolve the matter.
10. PROFIT SHARING AND 401(k) PLANS
Prior to October 1, 1994, the Company maintained a separate defined
contribution profit-sharing plan (the "Profit-Sharing Plan") covering
substantially all of the Company's full-time employees.
On June 22, 1995, the Company authorized an amendment of the Profit Sharing
Plan to allow the Profit-Sharing Plan to be split into separate 401(k) and
profit-sharing components, whereby the profit-sharing component was frozen
retroactive to October 1, 1994 and all balances immediately vested. The 401(k)
component began functioning as a separate plan as of July 1, 1995, and provides
for eligibility for substantially all employees after six months of service and
vesting of matching contributions ratably over a five-year period. The Company
contributed $0.2 million, $0.1 million and $0.3 million for the year ended
September 30, 1995, the three months ended December 31, 1995 and the year ended
December 31, 1996, respectively.
The Company contributions to the Profit-Sharing Plan were determined at the
discretion of the board of directors. The Company made no contributions to the
Profit-Sharing Plan for the periods presented.
Terminated employees are required to sell their stock to the Profit-Sharing
Plan at the appraised value of the stock. Under the terms of the Profit-Sharing
Plan, the Company had the right to repurchase any shares acquired by the
Profit-Sharing Plan at their appraised value. The Company repurchased and
retired 76,053 shares for $1.7 million in 1996. There were no shares repurchased
in 1995.
As part of the Plan, the Profit-Sharing Plan was amended to provide for a
one-time election whereby all active participants could convert all or part of
their Hayes Microcomputer Products, Inc. stock to cash. In 1996, the Company
paid approximately $0.7 million to the Profit-Sharing plan to repurchase and
retire 32,197 shares of its common stock.
11. CAPITAL STRUCTURE
(a) Common and Preferred Stock
The Company's Restated Articles of Incorporation authorize the issuance of
up to 100,000,000 shares of one cent ($.01) par value common stock. In
accordance with the Plan, the Company effected a 3.078-to-one reverse stock
split which reduced the number of outstanding shares by 10,599,595 shares.
In fiscal 1996, the Company authorized a new class of no par value Series A
Preferred Stock consisting of 10,000,000 shares. The Board of Directors is
authorized to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges, and restrictions of such stock, including
dividend rights, preferences
F-32
<PAGE> 104
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the number of shares constituting any series or the designation of such
series, without further vote or action by the shareholders. During 1997, the
Company authorized a new class of no par value Series B Preferred Stock
consisting of 263,113 shares.
As of December 31, 1996, the Company had issued and outstanding 4,900,000
shares of Series A Preferred Stock. These preferred shares have no dividend
rights but do have preference and priority payment of any dividends on Common
Stock if declared by the Board of Directors. Any such dividends are
noncumulative. The preferred shares also have voting rights and are convertible
by a stated formula at the option of the shareholder and are automatically
converted upon an Initial Public Offering.
(b) Stock Redemption Agreements
In 1988, the Company entered into an agreement with a stockholder whereby
the Company could be required to purchase 1,628,884 shares of common stock at
the option of the stockholder at any time after January 1, 1999 through June
2008. In April 1996, in accordance with the Plan, the Company repurchased all of
the common shares held by a stockholder for $11.0 million and subsequently
retired these shares. In conjunction with this payment, the shareholder
agreement was terminated.
12. REDEEMABLE PREFERRED STOCKS
During April 1997, the Company completed an agreement with Vulcan Ventures,
Inc. to issue 263,113 shares of Series B Preferred Stock for $5.5 million which
includes $45,000 of issuance costs. The stockholders are entitled to receive
cumulative compounding dividends at the rate of 10% per annum of the original
issue price per share of Series B Preferred Stock. Series B dividends have
preference and priority payment over Series A Preferred Stock and Common Stock.
These preferred shares have no voting rights except as required under applicable
law or as expressly stated in the agreement relating to the Series B Preferred
Stock. The Company could be required to redeem these preferred shares by a
stated formula at the option of the more than 50% of the stockholders at any
time after November 1, 1999. The Series B Preferred Stock also is convertible
into shares of common stock by a stated formula if the Company's share are
publicly traded at a stated value per share or in the aggregate or if the Series
B stockholders obtain an affirmative majority vote.
13. STOCK-BASED COMPENSATION
In connection with the Plan, the Company authorized 600,000 warrants to
purchase shares for the fair value at the date of grant. The Company issued
400,000 warrants during April 1996 at an exercise price of $0.714 per share. The
warrants will become exercisable and fully vested on the date the Company files
a registration statement for an Initial Public Offering with the Securities and
Exchange Commission or closes a significant transaction, as defined in the
warrant agreement. The warrants expire five years after the date on which they
become exercisable. The warrants were issued to Directors and are valued and
presented as options in the information below.
In addition, one of the holders of the preferred stock received an
anti-dilution warrant enabling the holder to purchase sufficient quantity to
maintain a 20.2 percent ownership interest of the Company at a price of $14.28
per share.
The Hayes Microcomputer Products, Inc. Stock Option Plan (the "Stock Option
Plan") was adopted by the Company's stockholders in June 1996. No options were
granted prior to that date. Options granted under the Stock Option Plan may be
either (i) options intended to qualify as incentive stock options ("ISO's")
under Section 422 of the Internal Revenue Code or (ii) non-qualified stock
options. None of the options granted in 1996 were intended to qualify as ISO's.
The Stock Option Plan allows for three types of grants: Executive, Management,
and Performance Grants. The Stock Option Plan, as amended in October 1996,
F-33
<PAGE> 105
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allows for a total of 800,000 shares to be granted for Executive and Management
Grants and 1,000,000 shares to be granted for Performance Grants.
An explanation of each type of grant and a description of the options
awarded under each type of grant are as follows:
Executive Grant
During 1996, the Company granted 310,000 options to purchase shares as
Executive Grants at an exercise price of $0.714 per share. The options will
become exercisable on the first to occur of (i) the date on which the company
files a registration statement for an Initial Public Offering with the
Securities and Exchange Commission, or (ii) the date of a significant corporate
transaction, as defined, such as a merger, consolidation or sale. The options
expire five years after the date on which they become exercisable.
Management Grant
During 1996, the Company granted 282,500 options to purchase shares as
Management Grants at exercise prices ranging from $0.714 to $1 per share. The
options will become exercisable on the first to occur of (i) the date on which
the Company files a registration statement for an Initial Public Offering with
the Securities and Exchange Commission, or (ii) the date of a significant
corporate transaction, as defined, such as a merger, consolidation or sale. The
options expire ten years after the date of grant. Upon the date the options
first become exercisable, the amount vested at that time will be determined
based on a five-year ratable vesting schedule beginning at the date of grant.
Performance Grant
During 1996, the Company granted 600,000 options to purchase shares as
Performance Grants at an exercise price of $1 per share. The options begin
vesting on the date the Company completes an Initial Public Offering with the
Securities and Exchange Commission. Vesting will be determined based on the
attainment of specified average share prices as defined in the Stock Option
Plan. The average share prices range from $24.19 to $60.47. The number of
shares, if any, that may be vested will be based solely upon events occurring in
the first five years after the date of grant. The options expire ten years after
the date of grant.
Options historically have been granted based on an amount greater than or
equal to the fair value of the shares at the date of grant. Since no quoted
market price was available, the best estimate of the fair value of the stock was
determined by the Board of Directors.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1996: dividend yield of 0%, expected volatility of 0%, risk-free
interest rate of 6.38%, and an expected term of 5.3 years.
The Company did not grant stock options prior to April 1996 and as of
December 31, 1996 no options are exercisable. A summary of the Company's stock
option plan activity and related information for the year ended December 31,
1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options granted................................... 1,592,500 $0.835
Options canceled.................................. (71,500) $0.714
---------
Options outstanding at December 31, 1996.......... 1,521,000 $0.841
=========
Weighted average fair value of options granted
during the year at the share's fair value....... $ 0.23
</TABLE>
F-34
<PAGE> 106
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF OPTIONS AVERAGE
OUTSTANDING AT REMAINING
DECEMBER 31, CONTRACTUAL
EXERCISE PRICES 1996 LIFE
----------------------------------------------- -------------- -----------
<S> <C> <C>
$0.714......................................... 844,500 7.5 years
$1.000......................................... 676,500 6.7 years
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. For the fiscal year ended December 31, 1996, no
compensation expense was recognized for its stock option plans, since certain
events have not occurred. Had compensation expense for the Company's stock-based
compensation plans been determined under the provisions consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss for the year ended December 31, 1996,
would have been the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
NET LOSS LOSS PER SHARE
-------- --------------
<S> <C> <C>
As reported...................................... $(13,154) $(2.52)
Pro forma........................................ $(13,246) $(2.54)
</TABLE>
14. GEOGRAPHIC SEGMENTS
The Company operates in several geographic areas worldwide. Revenues can be
grouped into three primary geographic segments: North America, Europe and Asia.
Selected financial data by primary geographic area for the periods ended
September 30, 1994 and 1995 and December 31, 1995 and 1996 follow:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 1994
--------------------------------------------------------------
(IN THOUSANDS)
ADJUSTMENTS
NORTH AND
AMERICA EUROPE ASIA ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers..................... $219,962 $19,591 $12,464 $ (5,740) $246,277
Operating profit (loss)......... (35,822) (1,674) 650 133 (36,713)
Identifiable assets............. 128,617 10,678 2,393 (16,724) 124,964
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 1995
--------------------------------------------------------------
(IN THOUSANDS)
ADJUSTMENTS
NORTH AND
AMERICA EUROPE ASIA ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers..................... $228,983 $22,893 $18,315 $ (1,036) $269,155
Operating profit (loss)......... (7,098) (1,492) 751 (7,839)
Identifiable assets............. 99,919 8,656 7,687 (15,298) 100,964
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1995
--------------------------------------------------------------
(IN THOUSANDS)
ADJUSTMENTS
NORTH AND
AMERICA EUROPE ASIA ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers..................... $ 54,409 $ 8,102 $ 7,600 $ 70,111
Operating profit (loss)......... (445) 852 1,691 2,098
Identifiable assets............. 82,944 10,675 6,309 $ (8,232) 91,696
</TABLE>
F-35
<PAGE> 107
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------------------------
(IN THOUSANDS)
ADJUSTMENTS
NORTH AND
AMERICA EUROPE ASIA ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers..................... $202,001 $24,516 $38,800 $ (7,865) $257,452
Operating profit (loss)......... (10,118) (2,536) (856) 77 (13,433)
Identifiable assets............. 69,943 8,824 7,966 (17,518) 69,215
</TABLE>
Operating profit (loss) is calculated as total revenue less total operating
expenses. In calculating operating profit, none of the following items have been
added or deducted: net interest expense, net miscellaneous income,
reorganization items, or income taxes. Identifiable assets are those assets of
the Company that are identified with the operations in each geographic area,
including goodwill.
The Company generates significant sales outside the United States and is
subject to risks generally associated with international operations. The foreign
operations of the Company accounted for approximately 13%, 15%, 22% and 25% of
the Company's net sales for the years ended September 30, 1994 and 1995, the
three months ended December 31, 1995, and the year ended December 31, 1996,
respectively. Accordingly, the Company's financial results from international
operations may be affected by the economic, political, and regulatory climates
prevailing in the respective foreign countries and by fluctuations in currency
exchange rates.
15. ACQUISITION OF CARDINAL TECHNOLOGIES, INC.
During April 1997, the Company acquired 100% of the outstanding common
stock of Cardinal Technologies, Inc. ("Cardinal"), a private manufacturer of
modems and ISDN adapters, for $2.5 million. The acquisition has been accounted
for utilizing the purchase method of accounting. The estimated fair values
assigned to the assets and liabilities acquired were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Total consideration paid (including acquisition costs of
$595)........................................................ $ 3,095
Fair value of tangible and identifiable assets acquired........ (15,350)
Fair value of liabilities assumed.............................. 17,055
--------
Estimated goodwill........................................ $ 4,800
========
</TABLE>
The results of operations of Cardinal from the beginning of the period
through the acquisition date are not significant to the Company's consolidated
results of operations.
16. SIGNIFICANT RISKS AND UNCERTAINTIES
The communications industry is highly competitive and competition is
expected to intensify. There are numerous companies competing in various
segments of the market in which the Company does business. Competitors include
organizations significantly larger and with more development, marketing and
financial resources than the Company. The Company's success is dependent on its
ability to develop and market products that are innovative, cost-competitive and
meet customer expectations.
The markets for the Company's products are characterized by rapid
technological developments resulting in short product life cycles. The market
for modems is primarily dependent upon the market for personal computers. From
diminished product demand, production overcapacity, and resultant accelerated
erosion of average selling prices, the Company's business could be materially
and adversely affected by industry-wide
F-36
<PAGE> 108
HAYES MICROCOMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fluctuations in the personal computer marketplace in the future. The Company's
ten largest customers account for approximately 62%, 57%, 56% and 73% of net
sales for the years ended September 30, 1994 and 1995, the three months ended
December 31, 1995, and the year ended December 31, 1996, respectively.
The Company's accounts receivable are concentrated with a limited number of
customers. The amounts owed by the largest ten customers represented
approximately 48% and 55% of the total accounts receivable balances as of
December 31, 1995 and 1996, respectively.
17. RELATED PARTY TRANSACTIONS
As of December 31, 1996, the Company has the following related party
transactions:
The Company has a split-dollar life insurance policy on a shareholder of
the Company with the Company as the beneficiary. The split-dollar agreement is
included in other long-term assets in the amount of $1.1 million and $0.6
million as of December 31, 1995 and 1996, respectively. The cash surrender
value, included in prepaids and other current assets, is $0.3 million as of
December 31, 1995 and 1996, respectively.
A shareholder of the Company has a revolving credit arrangement with the
Company stating a maximum draw of $0.3 million. The balance outstanding,
included in prepaids and other current assets, is $0.2 million as of December
31, 1995 and 1996, respectively.
The Company has manufacturing subcontractor agreements with two of its
stockholders. During 1996, and as of June 30, 1997 the Company purchased $44.8
million, and $21.7 million, respectively, of finished goods from such
manufacturers.
18. SUBSEQUENT EVENTS (UNAUDITED)
On July 29, 1997, the Company signed a definitive merger agreement with
Access Beyond, Inc., a provider of remote access connectivity products. Under
the terms of the agreement, the merged company will be renamed Hayes
Communications Inc. Access Beyond will issue approximately 45.0 million shares
of common stock for 100% of the outstanding stock of Hayes. Subsequent to the
merger, Access Beyond shareholders will own approximately 21% of the combined
company. The combination will be accounted for using the purchase method and is
subject to the completion of due diligence and regulatory approvals.
In addition, the Company has signed a letter of commitment with a potential
investor, whereby the Company would receive approximately $30.0 million in
exchange for 1,350,743 shares of Hayes Series C Preferred Stock which is
convertible under certain circumstances to common stock. The investment is
subject to the completion of due diligence and regulatory approvals.
F-37
<PAGE> 109
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page No.
Available Information.......................................................... 2
Summary........................................................................ 3
Risk Factors................................................................... 9
Use of Proceeds................................................................ 16
Dividend Policy................................................................ 16
Market for Common Equity and
Related Stockholder Matters................................................ 16
Capitalization................................................................. 17
Selling Shareholder............................................................ 18
Unaudited Pro Forma Condensed
Combined Financial Statements.............................................. 19
Access Beyond's Management's
Discussion and Analysis of
Financial Condition and
Results of Operations...................................................... 22
Business of the Company........................................................ 27
Management of the Company...................................................... 31
Security Ownership............................................................. 45
Certain Relationships and Related
Transactions............................................................... 46
Business of Hayes.............................................................. 47
Management of Hayes............................................................ 55
Security Ownership of Hayes.................................................... 59
Certain Relationships and Related
Transactions............................................................... 60
Hayes Management's Discussion
and Analysis of Financial
Condition and Results
of Operation............................................................... 61
Description of Capital Stock
of the Company............................................................. 65
Shares Eligible for Future Sale................................................ 69
Plan of Distribution........................................................... 69
Legal Matters.................................................................. 70
Experts ...................................................................... 70
Index to Consolidated Financial
Statements................................................................. F-1
</TABLE>
ACCESS BEYOND, INC.
503,704 SHARES
OF COMMON STOCK
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
OCTOBER __, 1997
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred by the
Registrant in connection with the sale by the Selling Shareholder of the
securities being registered hereby. All amounts are estimated, except the
Securities and Exchange Commission registration fee and the NASDAQ/NMS
additional listing fee.
SEC registration fee........................................$849.05
NASDAQ listing fee.......................................$10,074.08
Accounting fees and expenses..........................$
------------
Legal fees and expenses...............................$
------------
Printing and engraving expenses.......................$
------------
Miscellaneous.........................................$
------------
Total.................................................$
=============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL permits the indemnification of the directors
and officers of the Company. The By-laws of the Company do not contain any
provisions on indemnification.
The Certificate of Incorporation provides for the indemnification of
directors and officers and employees of the Company, and persons who serve or
served at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred with respect to any action, suit
or proceeding, if such person acted in good faith and in a manner he reasonably
believed to being or not opposed to the best interests of the Company and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The indemnification provisions set forth in the
Certificate of Incorporation do not preclude the indemnification of, and
advancement of expenses to, any other person to whom the Company has the power
or obligation to indemnify under the provisions of the DGCL, or otherwise. The
right to indemnification conferred in the Certificate of Incorporation is a
contract right and shall include the right to have paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition. The Company maintains insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Company against any such
expense, liability or loss, whether or not the Company would have the power or
the obligation to indemnify such person against such expense, liability or loss
under state law or under the terms of the Certificate of Incorporation. Each
director of the Company entered into a Director Indemnification Agreement with
the Company. The Director Indemnification Agreements provide that, subject to
certain exclusions, the Company will indemnify each director against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with any
threatened, pending or completed action, suit or proceeding to which such
director is or is threatened to be made a party by reason of his or her position
as an officer or director of the Company or who serves or served at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, to the extent of the
highest and most advantageous of the indemnification provisions set forth in the
Certificate of Incorporation, the Company's By-laws, the DGCL, the laws of the
jurisdiction under which the Company exists, the terms of any liability
insurance or any other benefits available to such director.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES.
Since November 18, 1996, the Registrant has sold and issued the
following securities that were not registered under the Securities Act:
II-1
<PAGE> 111
(1) On May 2, 1997, the Company issued 503,704 shares of Common Stock
to Paradyne in consideration of the transfer of the Hawk Technology and the Hawk
Products to the Company, the license to the company of certain technology in
connection with the Hawk Technology and certain technical engineering,
manufacturing and marketing support to be provided to the Company by Paradyne.
(2) The Registrant has granted options to purchase an aggregate of
1,589,000 shares of Common Stock, 1,469,000 of which options were granted
pursuant to the Incentive Plan (of which 965,900 remain outstanding) and
120,000 of which were granted pursuant to the Directors' Plan.
The sale and issuance of securities in the transaction described above
in paragraph (1) were deemed to be exempt from registration under the Securities
Act by virtue of Section 4(2) thereof and Regulation D thereunder as
transactions not involving any public offering. The purchaser of all of the
shares described in paragraph (1) represented its intention to acquire the
shares for investment only and not with a view to the distribution thereof and
appropriate legends were affixed to the certificates representing securities
issued in such transactions. The purchaser had adequate access to information
about the Registrant.
No registration was required with respect to the grant of the options
described above in paragraph (2) by virtue of Section 4(2) of the Securities Act
as a transaction not involving a public offering due to each optionee being
either an officer, director or employee of the Registrant who had adequate
access to information about the registrant, as well as the fact that none of
such options are transferable or currently vested or exercisable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
Exhibit No. Description
2.1 Form of Distribution Agreement between Access Beyond,
Inc. (the "Company") and Penril DataComm Networks,
Inc. ("Penril") (filed as Exhibit 2.1 to the
Company's registration statement on Form S-1, as
amended (Commission File Number 333-10741).
2.2 Plan and Agreement of Merger dated as of June 16,
1996, as amended August 5, 1996, among Penril, Bay
Networks, Inc. ("Bay") and Beta Acquisition Corp.
(filed as Exhibit 2.2 to the Company's registration
statement on Form S-1, as amended (Commission File
Number 333-10741).
2.3 Agreement and Plan of Reorganization between Access
Beyond, Inc. (the "Company") and Hayes Microcomputer
Products, Inc. ("Hayes") dated July 29, 1997 (filed
as Exhibit 10.1 to the Company's Form 8-K filed
August 7, 1997).
2.4 Form of draft of Certificate of Merger (filed as
Exhibit 2.4 to the Company's registration statement
on Form S-4 (Commission File Number 333-37993)).
3.1 Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1 to the Company's registration
statement on Form S-1, as amended (Commission File
Number 333-1074)).
3.2 Form of Draft of Amended and Restated Certificate of
Incorporation of the Company (filed as Exhibit 3.2 to
the Company's registration statement on Form S-4
(Commission File Number 333-37993)).
3.3 By-Laws of the Company (filed as Exhibit 3.2 to the
Company's registration statement on Form S-1, as
amended (Commission File Number 333-10741)).
4.1.1 Voting Agreement dated July 29, 1997 between the
Company and Chestnut Capital Limited Partnership
(filed as Exhibit 4.1.1 to the Company's registration
statement on Form S-4 (Commission File Number
333-37993)).
II-2
<PAGE> 112
Exhibit No. Description
4.1.2 Voting Agreement dated July 29, 1997 between the
Company and Rinzai Limited (filed as Exhibit 4.1.2 to
the Company's registration statement on Form S-4
(Commission File Number 333-37993)).
4.1.3 Voting Agreement dated July 29, 1997 between the
Company and Vulcan Ventures Incorporated (filed as
Exhibit 4.1.3 to the Company's registration statement
on Form S-4 (Commission File Number 333-37993)).
4.2.1 Affiliate Agreement dated July 29, 1997 between the
Company and Kaifa Technology (H.K.) Limited (filed as
Exhibit 4.2.1 to the Company's registration statement
on Form S-4 (Commission File Number 333-37993)).
4.2.2 Affiliate Agreement dated July 29, 1997 between the
Company and Rinzai Limited (filed as Exhibit 4.2.2 to
the Company's registration statement on Form S-4
(Commission File Number 333-37993)).
4.2.3 Affiliate Agreement dated July 29, 1997 between the
Company and Chestnut Limited Partnership (filed as
Exhibit 4.2.3 to the Company's registration statement
on Form S-4 (Commission File Number 333-37993)).
*4.2.4 Affiliate Agreement dated July 29, 1997 between the
Company and S.P. Quek Investments Pte Ltd. (to be
filed as Exhibit 4.2.4 to the Company's registration
statement on Form S-4, as amended (Commission File
Number 333-37993)).
4.2.5 Affiliate Agreement dated July 29, 1997 between the
Company and Dennis Hayes (filed as Exhibit 4.2.5 to
the Company's registration statement on Form S-4
(Commission File Number 333-37993)).
4.3.1 Market Standoff Agreement dated July 29, 1997 between
the Company and Kaifa Technology (H.K.) Limited
(filed as Exhibit 4.3.1 to the Company's registration
statement on Form S-4 (Commission File Number
333-37993)). 4.3.2 Market Standoff Agreement dated
July 29, 1997 between the Company and Rinzai Limited
(filed as Exhibit 4.3.2 to the Company's registration
statement on Form S-4 (Commission File Number
333-37993)).
4.3.3 Market Standoff Agreement dated July 29, 1997 between
the Company and S.P. Quek Investments Pte Ltd. (filed
as Exhibit 4.3.3 to the Company's registration
statement on Form S-4 (Commission File Number
333-37993)).
4.3.4 Market Standoff Agreement dated July 29, 1997 between
the Company and Rollig Profit Holdings Limited (filed
as Exhibit 4.3.4 to the Company's registration
statement on Form S-4 (Commission File Number
333-37993)).
4.3.5 Market Standoff Agreement dated July 29, 1997 between
the Company and Saliendra Pte Ltd. (filed as Exhibit
4.3.5 to the Company's registration statement on Form
S-4 (Commission File Number 333-37993)).
4.3.6 Market Standoff Agreement dated July 29, 1997 between
the Company and Lao Hotel (H.K.) Limited (filed as
Exhibit 4.3.6 to the Company's registration statement
on Form S-4 (Commission File Number 333-37993)).
4.3.7 Market Standoff Agreement dated July 29, 1997 between
the Company and Denis Hayes (filed as Exhibit 4.3.7
to the Company's registration statement on Form S-4
(Commission File Number 333-37993)).
*5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP.
10.1 Technology License Agreement, dated as of November
16, 1996 between Penril and the Company (filed as
Exhibit 10.1 to the Company's registration statement
on Form S-1, as amended (Commission File Number
333-10741)).
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<PAGE> 113
Exhibit No. Description
10.2 Development and License Agreement dated as of June
16, 1996 between Bay and Penril, on behalf of the
Company (filed as Exhibit 10.2 to the Company's
registration statement on Form S-1, as amended
(Commission File Number 333-10741)).
10.3 Indemnification Agreement dated as of November 16,
1996 between Penril and the Company (filed as Exhibit
10.3 to the Company's registration statement on Form
S-1, as amended (Commission File Number 333-10741)).
10.4 Transitional Services Agreement dated as of November
16, 1996 between the Company and Penril (filed as
Exhibit 10.7 to the Company's registration statement
on Form S-1, as amended (Commission File Number
333-10741)).
10.5.1 Lease Agreement between Penril and Real Estate Income
Partners dated as of March 31, 1989, as amended on
May 14, 1990 and November 15, 1996 (filed as Exhibit
10-8.1 to the Company's Form 10-K filed October 16,
1997).
10.5.2 Assignment and Assumption of Lease between Penril and
the Company dated as of November 18, 1996 (filed as
Exhibit 10.8.2 to the Company's Form 10-K filed
October 16, 1997).
** 10.6 The Company's Amended and Restated 1996 Long-Term
Incentive Plan (filed as Exhibit 10.9 to the
Company's Form 10-K filed October 16, 1997).
** 10.7 Form of Option Agreement for the grant of
non-qualified options under the Amended and Restated
1996 Long-Term Incentive Plan (filed as Exhibit 10.10
to the Company's Form 10- K filed October 16, 1997).
** 10.8 The Company's Amended and Restated 1996 Non-Employee
Directors' Stock Option Plan. (filed as Exhibit 10.11
to the Company's Form 10-K filed October 16, 1997).
** 10.9 Form of Option Agreement for the grant of
options under the Amended and Restated 1996
Non-Employee Directors' Stock Option Plan (filed as
Exhibit 10.12 to the Company's Form 10-K filed
October 16, 1997).
10.10 2290 Remote Access Gateway ("Hawk") Technology
Transfer Agreement dated as of May 2, 1997 between
the Company and Paradyne Corporation (filed as
Exhibit 10.13 to the Company's Form 10-K filed
October 16, 1997).
10.11 Stock Purchase Agreement dated as of May 2, 1997
between the Company and Paradyne Corporation, and
First Amendment thereto dated September 1997 (filed
as Exhibit 10.14 to the Company's Form 10-K filed
October 16, 1997).
**10.12 Employment Agreement dated as of November 18, 1996
between the Company and Ronald A. Howard (filed as
Exhibit 10.15 to the Company's Form 10-K filed
October 16, 1997).
10.13 Manufacturing Agreement dated as of March 1, 1997
between the Company and Hibbing Electronics
Corporation (filed as Exhibit 10.16 to the Company's
Form 10-K filed October 16, 1997).
* ** 10.14 Form of Employment Agreement between the Company and
Ronald Howard (to be filed as Exhibit 10.14 to the
Company's registration statement on Form S-4, as
amended (Commission File Number 333-37993)).
* ** 10.15 Form of Employment Agreement between the Company and
Dennis Hayes (to be filed as Exhibit 10.15 to the
Company's registration statement on Form S-4, as
amended (Commission File Number 333-37993)).
10.16 Agreement between the Company and EMI Holding Corp.,
dated November 13, 1996, relating to the sale of
Electro-Metrics, Inc., as amended on January 6, 1997,
February 26, 1997 and April 17, 1997 (filed as
Exhibit 10.17 to the Company's Form 10-K filed
October 16, 1997).
**10.17 Hayes Stock Option Plan (to be filed as Exhibit 10.17
to the Company's registration statement on Form S-4,
as amended (Commission File Number 333-37993)).
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<PAGE> 114
**10.18 First Amendment to Hayes Stock Option Plan (to be
filed as Exhibit 10.18 to the Company's registration
statement on Form S-4, as amended (Commission File
Number 333-37993)).
**10.19 Forms of Hayes Stock Option Agreements, as amended
(to be filed as Exhibit 10.19 to the Company's
registration statement on Form S-4, as amended
(Commission File Number 333- 37993)).
21. List of Subsidiaries of the Company (filed as Exhibit
21 to the Company's Form 10-K filed October 16,
1997).
23.1 Consent of Deloitte & Touche LLP (included in Part II
of this Registration Statement).
23.2 Consent of Coopers & Lybrand LLP (included in Part II
of this Registration Statement).
* 23.4 Consent of Morrison Cohen Singer & Weinstein,
LLP (contained in its opinion filed as Exhibit 5.1
hereto).
24. Powers of Attorney for the Company (included on the
signature page hereto).
27. Financial Data Schedule (filed as Exhibit 27 to the
Company's registration statement on Form S-4, as
amended (Commission File Number 333-37993)) .
- --------------------
* To be filed by amendment.
** Management contract, compensation plan or arrangement
(b) Financial Statement Schedules
Independent Auditor's Report on Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules specified under Regulation S-X for the Company have
been omitted because they are either not applicable, not required or
because the information required is included in the consolidated
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers of sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
and of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
II-5
<PAGE> 115
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrants
have been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matter has been settled by the controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration when it became effective.
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<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of
Gaithersburg, State of Maryland, on October 29, 1997.
ACCESS BEYOND, INC.
By: s/ Ronald Howard
----------------------------------------
Ronald Howard
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Ronald Howard and Mark Fields,
or either of them, each with the power of substitution, his or her
attorney-in-fact, to sign any amendments to this Registration Statement and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his or her substitute, may
do or choose to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
s/ Ronald Howard
- --------------------------------- President and Chief Executive Officer October 29, 1997
Ronald Howard (Principal Executive Officer) and
Chairman of the Board of Directors
s/ Mark Fields
- --------------------------------- Controller and Acting Chief Financial October 29, 1997
Mark Fields Financial Officer, (Principal Financial
and Accounting Officer)
s/ Barbara Perrier Dreyer
- --------------------------------- Director October 29, 1997
Barbara Perrier Dreyer
s/ John Howard
- --------------------------------- Director October 29, 1997
John Howard
s/ Arthur Samberg
- --------------------------------- Director October 29, 1997
Arthur Samberg
s/ Paul Schaller
- --------------------------------- Director October 29, 1997
Paul Schaller
</TABLE>
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<PAGE> 117
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
of our report dated April 30, 1997, except for Note 18 as to which the date is
July 29, 1997 on our audits of the consolidated financial statements of Hayes
Microcomputer Products, Inc. We also consent to the references to our firm under
the caption "Experts."
Coopers & Lybrand L.L.P.
Atlanta, Georgia
October 29, 1997
II-8
<PAGE> 118
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Access Beyond,
Inc. on Form S-1 of our report dated August 29, 1997 (September 15, 1997 as to
Note 11), appearing in the Prospectus, which is part of this Registration
Statement, and of our report dated August 29, 1997 (September 15, 1997 as to
Note 11) relating to the financial statement schedule appearing elsewhere in
this Registration Statement.
We also consent to the reference to us under the heading "Expert" in
such Prospectus.
/s/ Deloitte & Touche LLP
Washington, D.C.
October 27, 1997
II-9
<PAGE> 119
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Access Beyond, Inc.
Gaithersburg, Maryland
We have audited the consolidated financial statements of Access Beyond, Inc. and
subsidiaries (the successor company to Penril DataComm Networks, Inc.) as of
July 31, 1997 and 1996, and for each of the three years in the period ended July
31, 1997, and have issued our report thereon dated August 29, 1997 (September
15, 1997 as to Note 11), included herein. Our audits also included the financial
statement schedule of Access Beyond, Inc. listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in reaction to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Deloitte & Touche LLP
Washington, D.C.
August 29, 1997 (September 15, 1997 as to Note 11)
S-1
<PAGE> 120
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(in thousands of dollars) Column B Column C Column D Column E
Charges to Recovery Write-off
Allowance for Doubtful Accounts Balance at S, G & A of bad of bad debts, Balance at
Applicable to Accounts August 1, expenses debts(a) other(b) July 31,
Receivable
<S> <C> <C> <C> <C> <C>
Fiscal 1997 $ 554 $462 $91 $ (893) $215
Fiscal 1996 $ 1,067 $502 $20 $(1,035) $554
</TABLE>
(a) Included in the fiscal 1997 recovery of bad debts was and exchange rate
adjustment of $8,000 and a transfer of bad debt reserves of $66,000 related to
the Spin-off and Merger transaction with Bay Networks, Inc.
(b) Included in the fiscal 1997 write-off of bad debts was $250,000 of reserves
transferred to Bay Networks, Inc. related to the Spin-off and Merger transaction
with Bay Networks, Inc.
S-2
