<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report: October 24, 2000
(Date of Earliest Event Reported)
CLARENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 000-26441 77-0433687
(State of jurisdiction) (Commission File No.) (IRS Employer
Identification No.)
700 Chesapeake Drive
Redwood City, California 94063
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 306-7511
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
On August 10, 2000, Clarent Corporation filed a Form 8-K to report its
acquisition of Act Networks, Inc., which was completed on August 10, 2000.
Pursuant to Item 7 of Form 8-K, Clarent indicated that it would file certain
financial information as soon as practicable. This Amendment is filed to provide
the required financial information.
a. Financial Statements of Business Acquired
<PAGE>
ACT Networks, Inc.
Consolidated Financial Statements
Years ended June 30, 2000, 1999 and 1998
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................. 1
Consolidated Financial Statements
Consolidated Balance Sheets.................................... 2
Consolidated Statements of Operations.......................... 3
Consolidated Statements of Stockholders' Equity................ 4
Consolidated Statements of Cash Flows.......................... 5
Notes to Consolidated Financial Statements..................... 6
</TABLE>
<PAGE>
1.
Report of Independent Auditors
Board of Directors
Clarent Corporation and ACT Networks, Inc.
We have audited the accompanying consolidated balance sheets of ACT Networks,
Inc. as of June 30, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 2000. 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 auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ACT Networks, Inc.
at June 30, 2000 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 2000, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Woodland Hills, California
July 27, 2000, except for Note 13,
as to which the date is August 10, 2000
<PAGE>
2.
ACT Networks, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
June 30
2000 1999
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 46,510 $ 33,850
Marketable securities 4,085 17,613
Accounts receivable, less allowances of $3,137
in 2000 and $2,440 in 1999 12,008 18,309
Inventory 6,864 9,613
Prepaids and other current assets 774 582
----------------------------
Total current assets 70,241 79,967
Plant, equipment and other improvements:
Machinery and equipment 8,826 7,696
Furniture and fixtures 970 1,318
Computer software 2,139 2,145
Leasehold improvements 249 787
----------------------------
12,184 11,946
Accumulated depreciation and amortization 8,134 8,310
----------------------------
4,050 3,636
Goodwill and other intangibles 1,106 1,769
Other assets 167 269
----------------------------
Total assets $ 75,564 $ 85,641
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,456 $ 6,898
Accrued payroll and related benefits 923 1,192
Other accrued liabilities 1,445 567
Income taxes payable 619 -
Deferred income taxes 65 65
----------------------------
Total current liabilities 5,508 8,722
Commitments and contingencies
Stockholders' equity:
Common stock and additional paid-in capital;
$.001 par value:
Authorized - 40,000
Issued and outstanding - 10,537 at June 30,
2000 and 10,183 at June 30, 1999 108,781 106,278
Accumulated deficit (38,366) (29,059)
Accumulated other comprehensive loss (359) (300)
----------------------------
Total stockholders' equity 70,056 76,919
----------------------------
Total liabilities and stockholders' equity $ 75,564 $ 85,641
============================
See accompanying notes.
<PAGE>
3.
ACT Networks, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended June 30
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Net sales $48,836 $54,322 $ 54,964
Cost of goods sold 24,749 24,412 29,900
----------------------------------------------
Gross profit 24,087 29,910 25,064
Operating expenses:
Research and development 10,644 12,887 16,349
Sales and marketing 15,742 13,961 15,984
General and administrative 7,535 7,925 8,935
In-process research and development - - 6,750
Impairment and restructuring - 607 3,393
---------------------------------------------
Total operating expenses 33,921 35,380 51,411
---------------------------------------------
Loss from operations (9,834) (5,470) (26,347)
Other:
Write-down on note receivable (1,000) - -
Gain on sale of investment - 120 4,704
Interest and other income, net 2,611 2,260 2,426
Interest expense (5) - (7)
---------------------------------------------
1,606 2,380 7,123
---------------------------------------------
Loss before income taxes and extraordinary item (8,228) (3,090) (19,224)
Provision for income taxes 215 36 157
---------------------------------------------
Loss before extraordinary item (8,443) (3,126) (19,381)
Extraordinary item, ACT merger costs (864) - -
---------------------------------------------
Net loss $(9,307) $(3,126) $(19,381)
=============================================
Basic and diluted loss per common share:
Loss before extraordinary item $ (0.82) $ (0.32) $ (2.11)
Extraordinary item (0.08) - -
---------------------------------------------
Basic and diluted loss $ (0.90) $ (0.32) $ (2.11)
=============================================
Shares used in computation of loss per
common share:
Basic and diluted 10,283 9,644 9,170
=============================================
</TABLE>
See accompanying notes.
<PAGE>
4.
ACT Networks, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Paid-in Accumulated
Capital in Other
Common Stock Excess of Accumulated Comprehensive
Shares Amount Par Value Deficit Loss Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 9,271 $ 9 $ 100,079 $ (6,552) $ 2 $ 93,538
Comprehensive loss:
Net loss - - - (19,381) - (19,381)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - - (312) (312)
Unrealized gains on marketable securities 95 95
--------
Total other comprehensive loss - - - - - (217)
--------
Total comprehensive loss - - - - - (19,598)
Exercise of options to purchase common stock and
employee stock purchases 108 - 613 - - 613
Exercise of warrants 23 - 235 - - 235
Stock option compensation - - 131 - - 131
Common stock purchased and retired (214) - (2,402) - - (2,402)
------------------------------------------------------------------
Balance at June 30, 1998 9,188 9 98,656 (25,933) (215) 72,517
Comprehensive loss:
Net loss - - - (3,126) - (3,126)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - - 10 10
Unrealized gains on marketable securities - - - - (95) (95)
--------
Total other comprehensive loss - - - - - (85)
--------
Total comprehensive loss - - - - - (3,211)
Exercise of options to purchase common stock
and employee stock purchases 995 1 7,612 - - 7,613
------------------------------------------------------------------
Balance at June 30, 1999 10,183 10 106,268 (29,059) (300) 76,919
Comprehensive loss:
Net loss - - - (9,307) - (9,307)
Other comprehensive loss:
Foreign currency translation adjustment - - - - (59) (59)
--------
Total other comprehensive loss (59)
--------
Total comprehensive loss - - - - - (9,366)
Exercise of options to purchase common
stock and employee stock purchases 354 1 2,502 - - 2,503
------------------------------------------------------------------
Balance at June 30, 2000 10,537 $ 11 $ 108,770 $(38,366) $(359) $ 70,056
==================================================================
</TABLE>
See accompanying notes.
<PAGE>
5.
ACT Networks, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years ended June 30
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (9,307) $ (3,126) $(19,381)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,830 2,299 2,436
Amortization of intangible assets 663 700 1,210
Non-cash charges for warrants and stock options - - 366
Gain on sale of investment - (120) (4,704)
Loss on sale of fixed assets 29 - -
Write-down of note receivable 1,000 - -
Provision for bad debt 901 1,406 1,712
Provision for deferred taxes - - (22)
Impairment and restructuring charges - - 3,393
Write-off of in-process research and development - - 6,750
Changes in operating assets and liabilities:
Accounts receivable 5,400 (2,489) (4,146)
Inventory 2,749 (784) 3,734
Prepaids and other current assets (192) 1,204 (1,241)
Accounts payable, accrued expenses, other current
liabilities and income taxes payable (3,214) 401 989
---------------------------------------------
Net cash used in operations (141) (509) (8,904)
Investing activities
Purchase of marketable securities (161,995) (23,537) (18,727)
Sales at maturity of marketable securities 175,523 17,436 17,807
Sale of long-term investment - 120 6,699
Note receivable (1,000) - -
Purchase of plant, equipment and other fixed assets (2,344) (2,081) (2,434)
Acquisition of certain assets of SourceCom - - (8,390)
Decrease (increase) in other assets 102 (220) (142)
Proceeds from sale of assets 71 - -
---------------------------------------------
Net cash provided by (used in) investing activities 10,357 (8,282) (5,187)
Financing activities
Exercise of stock warrants and options $ 2,503 $ 7,613 $ 613
Repurchase of common stock - - (2,402)
---------------------------------------------
Net cash provided by (used in) financing activities 2,503 7,613 (1,789)
Net impact of foreign exchange rate changes on cash (59) 10 (50)
---------------------------------------------
Net (decrease) increase in cash 12,660 (1,168) (15,930)
Cash and cash equivalents at beginning of year 33,850 35,018 50,948
---------------------------------------------
Cash and cash equivalents at end of year $ 46,510 $ 33,850 $ 35,018
=============================================
Supplemental cash flow information:
Interest and income taxes paid during the year:
Interest $ 5 $ - $ 7
=============================================
Income taxes $ 167 $ 36 $ 2,103
=============================================
Non-cash investing and financing activities:
Acquisition of certain assets of SourceCom:
Fair market value of assets (including goodwill) acquired $ - $ - $ 1,640
Estimated value of in-process research & development - - 6,750
---------------------------------------------
$ - $ - $ 8,390
=============================================
</TABLE>
See accompanying notes.
<PAGE>
6.
ACT Networks, Inc
Notes to Consolidated financial Statements
June 30, 2000
1. Significant Accounting Policies
Organization and Operations
ACT Networks, Inc. (the Company) was incorporated in California on May 15, 1987,
and reincorporated in Delaware in March 1995. The Company develops, manufactures
and markets integrated wide-area network (WAN) access products which support a
broad range of integrated voice and data network applications. The Company's
products utilize advanced voice and data compression algorithms, enhanced
switching and traffic management capabilities, and proprietary integration
technologies to build cost-effective, bandwidth efficient WANs (see Note 13
regarding the sale of the Company).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. Results of operations include
operations of subsidiaries from the date of acquisition.
Cash Equivalents
The Company considers cash equivalents to be only those investments which are
highly liquid, readily convertible to cash and which mature within three months
from date of purchase. Cash equivalents are carried at cost which approximates
fair market value and are considered available-for-sale as defined in Statement
of Financial Accounting Standards (SFAS) No. 115.
Marketable Securities
The Company classifies its investments in marketable securities as available-
for-sale and, accordingly, records them at fair value which approximated their
cost at June 30, 2000 and 1999. These investments consist primarily of corporate
investment-grade bonds and commercial paper. The contractual maturities of all
the Company's marketable securities are less than one year at June 30, 2000 and
1999. The cost of securities sold is based on the specific identification
method. There were no significant unrealized gains and losses at June 30, 2000
and 1999, on marketable securities.
Concentration of Credit Risks
Accounts receivable consist primarily of amounts due from various original
equipment manufacturers, end users and distributors. Although the Company does
not require collateral, it performs periodic credit evaluations and analysis of
amounts due from its customers (see also Note 4). Credit losses have been within
management's expectations.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Plant, Equipment and Other Improvements
Plant, equipment and other improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets or, if shorter for leasehold improvements, the
remaining lease term, which vary from three to seven years.
<PAGE>
7.
ACT Networks, Inc
Notes to Consolidated financial Statements (continued)
1. Significant Accounting Policies (continued)
Goodwill and Other Intangibles
Goodwill and other intangibles of $1,106,000 and $1,769,000 at June 30, 2000 and
1999, are net of accumulated amortization of $4,114,000 and $3,451,000,
respectively, and consist primarily of goodwill and developed technology
acquired in the Company's acquisitions. Goodwill represents the excess of the
purchase price over the estimated fair market value of net assets acquired in
business combinations and is being amortized over 7 years. Acquisition
intangibles represent the fair market valuation of intangibles acquired in
business combinations and are being amortized over 5 to 7 years. Other
intangible assets include software licensing agreements which are being
amortized over 3 to 5 years. Intangible assets were significantly written down
in 1998 as a part of the Company's restructuring (see Note 12).
Long-Lived Assets
Long-lived assets, such as plant, equipment and intangibles, are reviewed for
impairment whenever events or changes in circumstances indicate that the net
book value of these assets may not be recoverable (see Note 12).
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Revenue Recognition
Revenue is generally recognized upon shipment. The Company's products are
generally under warranty against defects and are sold with provisions for
certain levels of continuing customer support. The amounts of any potential
warranty costs or other customer support costs are estimated and provided for in
the period of sale.
Foreign Research and Development Credits
The Company receives foreign tax credits from Canada and the Province of Quebec
related to research and development expenditures made by its Canadian
subsidiary. These amounts are reflected as a reduction of research and
development expense in the Company's statement of operations. Amounts receivable
as of June 30, 2000 and 1999, of such credits and grants amounted to $147,000
and $163,000, respectively. For the years ended June 30, 2000, 1999 and 1998,
$118,000, $184,000 and $159,000, respectively, of these credits and grants were
reflected as a reduction of research and development expense in the accompanying
consolidated statements of operations.
Effect of Foreign Currency
The Company translates the assets and liabilities of its foreign subsidiaries at
the rate of exchange in effect at the period end. Revenues and expenses are
translated using an average of exchange rates in effect during the period.
Translation adjustments are recorded as a component of accumulated other
comprehensive loss within stockholders' equity. There have been no significant
transaction-related foreign exchange gains/losses during the years ended June
30, 2000, 1999 and 1998.
<PAGE>
8.
ACT Networks, Inc
Notes to Consolidated financial Statements (continued)
1. Significant Accounting Policies (continued)
Loss Per Share
"Basic loss per share" is based upon the weighted average number of common
shares outstanding. "Diluted loss per share" is based upon the weighted average
number of common shares and dilutive potential common shares outstanding.
Potential common shares consist of shares issuable upon the exercise of
outstanding stock options (computed using the treasury stock method) under the
Company's stock option plans.
Options to purchase 2,646,000, 2,880,000 and 2,661,000 shares outstanding during
the years ended June 30, 2000, 1999 and 1998, respectively, were excluded from
the respective computations of diluted loss per share because their effect would
be anti-dilutive.
Stock Option and Purchase Plans
The Company applies the provisions of APB Opinion No. 25 to account for stock
options granted and provides pro forma net loss and pro forma loss per share
disclosures for employee stock option as grants if the fair-value-based method
had been applied.
Segment Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers, as presented
in Notes 4 and 10. Based on the provisions of SFAS 131 and the manner in which
management analyzes the business, the Company has determined that it does not
have separately reportable operating segments.
Comprehensive Loss
As of July 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains and
losses on the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive loss.
Recent Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative financial instruments and hedging activities related to
those instruments, as well as other hedging activities. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the Company expects the adoption of SFAS No. 133 not to have a
material impact on its financial position, results of operations or cash flows.
In July 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS
No. 138, "Accounting For Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133," were issued. The Company will be
required to adopt these statements in the first quarter of fiscal 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company is required to adopt SAB 101 in
the fourth quarter of fiscal 2001. Management does not expect the adoption of
SAB 101 to have a material effect on the Company's operations or financial
position.
<PAGE>
9.
ACT Networks, Inc
Notes to Consolidated financial Statements (continued)
1. Significant Accounting Policies (continued)
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 amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates. Significant estimates made in
preparing the consolidated financial statements include the allowance for
doubtful accounts and inventory valuation to determine whether conditions of
impairment are present.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Business and Asset Acquisitions
On August 10, 1997, the Company acquired, out of bankruptcy court, certain
assets of SourceCom, a Massachusetts corporation (SourceCom). SourceCom is a
developer of high performance broadband access devices. The cash purchase price
paid by the Company was approximately $8,000,000. The Company also recorded
transaction costs of approximately $390,000. The acquired assets were recorded
at their estimated fair market values at the date of acquisition. Of the total
purchase price for the assets acquired, $6,750,000 represented the value of in-
process research and development that had not yet reached technological
feasibility and was charged to the Company's operations and $1,090,000
represented other intangibles being amortized over 5 years (see Note 12). The
fair market value of the in-process research and development and other
intangibles was determined by an independent appraiser.
3. Other, Net
In March 1999, the Company sold its interest in a joint venture investment,
previously written off, for proceeds and a gain of $120,000. In March 1998, the
Company sold its investment in common stock of NetSpeak with a cost basis of
$1,995,000 for gross proceeds of $6,699,000, realizing a gain of $4,704,000.
There were no other material realized gains or losses relating to marketable
securities during the years ended June 30, 2000 and 1999.
In June 2000, the Company fully reserved a $1,000,000 promissory note
receivable.
4. Accounts Receivable and Sales to Major Customers
Included in accounts receivable at June 30, 2000 and 1999, are $10,806,800 and
$11,827,000, respectively, of amounts due from foreign customers.
The three largest accounts receivable from individual customers represented
16.7%, 14.1% and 7.2% at June 30, 2000, and 22.3%, 8.0% and 8.0% at June 30,
1999, of total accounts receivable, respectively.
Sales to two customers represented 18.3% and 12.3% of total sales for 2000,
12.9% and 10.0% of total sales for 1999, and sales to one customer represented
12.3% of total sales for 1998.
<PAGE>
10.
ACT Networks, Inc.
Consolidated Statements of Stockholders' Equity (continued)
5. Inventory
Inventory consisted of the following components (in thousands):
June 30
2000 1999
-------------------
Purchased parts $ 1,373 $ 2,076
Sub-assemblies and finished goods 5,491 7,537
-------------------
$ 6,864 $ 9,613
===================
6. Income Taxes
The provision for income taxes consists of the following (in thousands):
Years ended June 30
2000 1999 1998
----------------------------------------
Current:
Federal $ - $ - $ -
State - - 10
Foreign 215 36 169
----------------------------------------
215 36 179
Deferred:
Federal - - -
State - - -
Foreign - - (22)
----------------------------------------
- - (22)
----------------------------------------
$ 215 $ 36 $ 157
========================================
The Company's foreign and domestic operations had income (loss) before income
taxes and eliminations of $(1,036,000) and $(6,388,000), respectively, for the
year ended June 30, 2000, $(316,000) and $(2,570,000), respectively, for the
year ended June 30, 1999, and $491,000 and $(19,623,000), respectively, for the
year ended June 30, 1998.
A reconciliation of the statutory federal income tax rate to the effective tax
rate, as a percentage of income before tax, is as follows:
Years ended June 30
2000 1999 1998
--------------------------------
Statutory federal income tax benefit
rate (34)% (34)% (34)%
Amortization of goodwill and other
permanent items 3 5 1
Change in valuation allowance 31 29 33
Foreign income taxes 3 1 1
--------------------------------
3% 1% 1%
================================
<PAGE>
11.
ACT Networks, Inc.
Consolidated Statements of Stockholders' Equity (continued)
6. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
June 30
2000 1999
--------------------
Deferred tax assets:
Allowance for losses on receivables $ 1,118 $ 781
Vacation accruals 129 104
Depreciation 796 904
Inventory 1,645 720
Intangibles 3,778 4,210
Net operating loss carryforwards 8,099 7,032
Research and development credit carryforwards 1,956 2,888
Other accruals 456 294
--------------------
Total deferred tax assets 17,977 16,933
Deferred tax liabilities:
Software development costs (27) (27)
License fee (8) (39)
Prepaid insurance (80) (24)
Federal benefit from state (705) (739)
--------------------
Total deferred tax liabilities (820) (829)
--------------------
Net deferred tax assets 17,157 16,104
Valuation allowance (17,157) (16,104)
Foreign deferred tax liabilities (65) (65)
--------------------
$ (65) $ (65)
====================
The net change in the valuation allowance for net deferred tax assets during the
year ended June 30, 2000, was $1,053,000.
At June 30, 2000, the Company has net operating loss carryforwards for federal
and state tax purposes of approximately $22,937,000 and $6,805,000,
respectively, which begin expiring in 2011 for federal and 2002 for state.
Utilization of the net operating loss carryforwards is subject to limitations as
a result of ownership changes as defined in the Internal Revenue Code. The
Company has research and development credit carryforwards of $943,000 and
$619,000 for federal and state tax purposes, respectively, that begin expiring
in 2004 for federal; the state credit has no expiration provisions.
Included in the valuation allowance balance at June 30, 2000, is $5,342,000
related to the exercise of stock options which are not reflected as an expense
for financial reporting purposes. Accordingly, any future reduction in the
valuation allowance relating to this amount will be credited directly to equity
and not reflected as an income tax benefit in the statement of operations.
The Company intends to reinvest the foreign subsidiary's net earnings in the
subsidiary's local operations. Accordingly, U.S. taxes have not been provided
for such earnings.
<PAGE>
12.
ACT Networks, Inc.
Consolidated Statements of Stockholders' Equity (continued)
7. Commitments and Contingencies
The Company leases its offices, manufacturing facility and certain equipment
under noncancelable operating lease agreements. The office and manufacturing
facility leases are subject to annual increases based on the Consumer Price
Index. Future minimum lease payments are as follows (in thousands):
Fiscal Years ended June 30
--------------------------
2001 $1,336
2002 1,201
2003 1,149
2004 1,102
2005 1,135
------
$5,923
======
Rental expense under operating leases was $1,657,000, $1,966,000 and $1,429,000
for the years ended June 30, 2000, 1999 and 1998, respectively.
The Company is involved in certain claims and legal proceedings which arise in
the normal course of business. Management does not believe that the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
8. Stockholders' Equity
The Company's stock option plans provide for option grants designated as either
nonqualified or incentive stock options. Options granted under all stock option
plans generally carry an exercise price of not less than the fair market value
of the underlying shares as of the date of the option grant and expire after ten
years. The Company executes individual option agreements under the stock option
plans and the shares underlying the options generally become vested at 24% of
the total grant after the completion of the first 12 full months of employment
and 2% per month thereafter. Certain terms of options held by the Company's
then-Chairman of the Board and Chief Executive Officer were modified giving rise
to a non-cash compensation charge of $131,000 for the year ended June 30, 1998.
At June 30, 2000, the Company has authorized a total of 2,779,000 shares of
common stock for issuance under the 1995 stock option/stock issuance plan (the
1995 Plan), 950,000 shares under the 1997 Non-Executive Officer Stock
Option/Stock Issuance Plan (the 1997 Plan), 860,000 shares under the 1997 Stock
Incentive Plan (the 1997 Incentive Plan). In addition, the Company has granted
options to purchase 440,000 shares outside of the stock option plans above.
Under the plans, 307,000 shares are available for future grants. In addition,
2,646,000 shares are reserved for issuance upon exercise of outstanding options.
The Company has an employee stock purchase plan whereby, in accordance with
Section 423 of the Internal Revenue Code, eligible employees may authorize
payroll deductions of up to 10% of their salary to purchase shares of the
Company's common stock at the lower of 85% of the fair market value of common
stock on the first or last day of the offering period. 47,000 shares were issued
under this plan for the year ended June 30, 2000. There are 88,000 shares
authorized and available for future issuance under this plan.
On August 3, 1998, the Company implemented an option cancellation/regrant
program for directors, executive officers and other employees holding stock
options with an exercise price per share in excess of the market price of the
Company's Common Stock at the time the cancellation/regrant occurred. Stock
options of 1,724,798 with an exercise price in excess of $6.75 per share were
canceled and new options for the same aggregate number of shares were granted
with an exercise price of $6.75 per share.
<PAGE>
13.
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
The following is a summary of all stock option activity for the three years
ended June 30, 2000:
<TABLE>
<CAPTION>
Weighted
Exercise Average
Number of Price Per Exercise
Shares Share Price
----------------------------------------------------
<S> <C> <C> <C>
Outstanding at June 30, 1997 2,121,000 $.70-$35.00 $13.33
Granted 1,256,000 7.06-14.56 10.31
Canceled (665,000) 1.75-35.00 15.91
Exercised (51,000) .70-12.13 2.43
----------------------------------------------------
Outstanding at June 30, 1998 2,661,000 .70-27.50 11.47
Granted 3,756,000 5.38-23.88 8.72
Canceled (2,621,000) .70-25.50 11.41
Exercised (916,000) .70-16.63 7.57
----------------------------------------------------
Outstanding at June 30, 1999 2,880,000 .70-27.50 9.17
Granted 1,021,000 5.63-18.25 8.89
Canceled (948,000) 5.38-21.00 10.55
Exercised (307,000) .70-13.06 6.96
----------------------------------------------------
Outstanding at June 30, 2000 2,646,000 $.70-$27.50 $ 8.83
====================================================
</TABLE>
At June 30, 2000, 1999 and 1998, stock options to purchase 1,591,000, 1,246,000,
and 1,510,000 shares were exercisable at a weighted average price of $8.27,
$7.73, and $10.94, respectively. Information regarding stock options outstanding
as of June 30, 2000, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Exercise Contractual Exercise
Price Range Shares Price Life Shares Price
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $10.00 2,120,000 $ 7.25 8.3 1,397,000 $ 7.22
Over $10.00 526,000 15.23 8.5 194,000 15.80
</TABLE>
Fair Value Disclosures
Stock option grants are set at the closing price of the Company's common stock
on the date of grant and the related number of shares granted are fixed at that
point in time. Therefore, under the principles of APB Opinion No. 25, the
Company does not recognize compensation expense associated with the grant of
stock options. SFAS No. 123, "Accounting for Stock-Based Compensation," requires
the use of option valuation models to provide supplemental information regarding
options granted after fiscal 1996. Pro forma information regarding net income
(loss) and earnings (loss) per share shown below was determined as if the
Company had accounted for its employee stock options and shares sold under its
stock purchase plan under the fair value method.
<PAGE>
14.
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
The fair value of the options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of
6.24%, 6.0% and 6.22%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 144% for 2000, 85% for 1999 and
65% for 1998, and expected life of the options of 3.06, 4.17 and 4.16 years,
respectively. These assumptions resulted in weighted-average fair values of
$7.73, $5.76 and $5.73 per share for stock options granted in 2000, 1999 and
1998, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The pro forma effect on the
Company's loss for 1999, 1998 and 1997 is not representative of the pro forma
effect on net loss in future years because it does not take into consideration
pro forma compensation expense related to grants made prior to 1997. Pro forma
information in future years will reflect the amortization of a larger number of
stock options granted in several succeeding years. The Company's pro forma
information is as follows (in thousands, except per share amounts):
Years ended June 30
2000 1999 1998
Pro forma net loss $(14,012) $(9,747) $(24,184)
Pro forma loss per share:
Basic and diluted $ (1.36) $ (1.01) $ (2.64)
Other Comprehensive Loss
Information regarding the components of accumulated other comprehensive loss are
as follows (in thousands):
<TABLE>
<CAPTION>
Unrealized Accumulated
Gains Foreign Other
(Losses) on Currency Comprehensive
Securities Translation Loss
-----------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1998 $ 95 $(310) $(215)
Other comprehensive loss, for
the year ended June 30, 1999 (95) 10 (85)
-----------------------------------------
Balance at June 30, 1999 - (300) (300)
Other comprehensive loss, for
the year ended June 30, 2000 - (59) (59)
-----------------------------------------
Balance at June 30, 2000 $ - $(359) $(359)
=========================================
</TABLE>
9. Employees' Retirement Plan
In 1994, the Company established a 401(k) Plan (the Plan) covering substantially
all of its full-time employees. Employees may make voluntary contributions to
the Plan. The Company may voluntarily contribute a percentage of the employee's
contribution, at its discretion, subject to certain limitations. The Company
contributed $84,000, $75,000 and $66,000 to the Plan during the years ended
2000, 1999 and 1998, respectively.
<PAGE>
15.
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
10. Geographic Information
The Company's sales by geographic area of the customer are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended June 30
2000 1999 1998
-----------------------------------------
<S> <C> <C> <C>
North America (primarily United States) $ 19,889 $ 26,408 $ 19,913
Latin America 9,777 9,476 14,194
Europe 7,808 8,342 6,203
Asia Pacific 11,362 10,096 14,654
-----------------------------------------
$ 48,836 $ 54,322 $ 54,964
=========================================
</TABLE>
Information about the Company's long-lived assets in each geographic area is as
follows (in thousands):
<TABLE>
<CAPTION>
As of June 30
2000 1999
--------------------------
<S> <C> <C>
Long-lived assets:
United States $ 3,123 $ 2,968
Canada 815 634
Asia Pacific 112 34
--------------------------
Total long-lived assets $ 4,050 $ 3,636
==========================
</TABLE>
Long-lived assets are those assets of the Company that are identified with the
operations in each geographic area.
<PAGE>
16.
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
11. Quarterly Operating Data (Unaudited)
The following is a summary of unaudited quarterly results of operations (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter
--------------------------------------------------------------
First Second(1) Third Fourth(2)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 30, 2000:
Net sales $ 12,398 $ 9,767 $ 12,644 $ 14,027
Gross profit $ 6,491 $ 3,643 $ 6,761 $ 7,191
Loss before extraordinary item $ (2,536) $ (3,858) $ (465) $ (1,584)
Extraordinary item, net of tax-ACT merger
costs - - - (864)
Net loss $ (2,536) $ (3,858) $ (465) $ (2,448)
Basic and diluted loss per common share before
extraordinary item $ (0.25) $ (0.38) $ (0.04) $ (0.15)
Extraordinary item - - - (0.08)
Loss per common share basic and diluted $ (0.25) $ (0.38) $ (0.04) $ (0.23)
<CAPTION>
Quarter
-------------------------------------------------------------
First(3) Second Third Fourth
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999:
Net sales $ 13,936 $ 12,074 $ 15,103 $ 13,209
Gross profit 7,931 7,204 8,809 5,966
Net (loss) income (966) 225 612 (2,997)
(Loss) earnings per common share
basic and diluted $ (0.10) $ 0.02 $ 0.06 $ (0.30)
</TABLE>
(1) Included in the Company's net loss for the second quarter of 2000, is a
charge of $1,184,000 as a write-down of inventory primarily due to a
decrease in sales of products being discontinued.
(2) Included in the Company's net loss for the fourth quarter of 2000, is an
extraordinary item of $864,000 for incurred acquisition costs related to
the Clarent acquisition of ACT Networks. Additionally, the Company fully
reserved a $1,000,000 promissory note receivable.
(3) The first quarter of 1999 includes a restructuring charge of $607,000.
<PAGE>
17.
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
12. Impairment and Restructuring Charges
In July 1998, the Company announced a major restructuring program designed to
streamline operations and focus on key markets. As part of the restructuring
program, the Company concentrated its resources on the Netperformer and
ServiceXchange product lines. Additionally, the Company significantly reduced
its workforce, eliminated its business unit matrix structure in favor of a
functional organization, consolidated its facilities, and de-emphasized
engineering, sales and marketing efforts for non-strategic products.
As a result of the restructuring plan, in fiscal 1999 the Company incurred
approximately $607,000 of charges related primarily to employee terminations. At
June 30, 1998, the Company accrued approximately $750,000 for certain non-
cancelable purchase orders for non-strategic inventory that became impaired.
In connection with the restructuring, in 1998 the Company evaluated its long-
lived assets, principally the tangible and intangible assets established in the
DeltaComm, Dynastar, and SourceCom acquisitions, for impairment under SFAS No.
121. The carrying amount of these assets exceeded the projected undiscounted
future cash flows and, accordingly, the carrying amount was written-down to fair
value. Fair value was determined based on an analysis of the projected future
discounted cash flows of the underlying operation, including cash generated from
the disposal of underlying assets. In addition, in 1998, the Company recorded
charges to cost of goods sold of $3,651,000 to write-down the carrying value of
inventory due to the restructuring and related de-emphasis or discontinuation of
certain product lines and other factors.
The impairment write-downs, excluding inventory write-downs, reflected in the
1998 statement of operations consisted of the following non-cash charges (in
thousands):
Amount
----------
Asset impaired:
Property, plant and equipment $ 682
Developed technology and other acquisition intangibles 2,444
Other intangible assets 267
----------
$ 3,393
==========
During 1999, the Company sold certain assets, and the buyer assumed certain
liabilities, originally acquired in the DeltaComm acquisition. The Company
recognized a loss of $120,000 on the sale of those assets, which loss is
included in interest and other income in the statement of operations.
13. Subsequent Events
On August 10, 2000, the Company was acquired by Clarent Corp., a worldwide
leader in providing carrier-grade, phone-to-phone Internet Protocol (IP)
telephony solutions. Clarent enables interconnection among communications
service providers' disparate networks and fosters the creation of global
footprints for more than 260 telecom service providers worldwide, including
AT&T, NTT and China Telecom. At the effective time of the merger, each share of
the Company's common stock was automatically converted into 0.4198 shares of
Clarent common stock. The Exchange Ratio was based on the minimum per share
price of $14.00 for the Company's common stock divided by the average closing
market price of $33.3500 for the Clarent common stock for the five trading days
immediately before the day the merger became effective.
The Company recorded extraordinary costs, net of taxes, of $864,000, or $0.08
per share, in the fourth quarter 2000 related to the merger with Clarent Corp.
The tax component of the extraordinary loss was zero due to the valuation
allowance.
<PAGE>
18.
Financial Statements, Pro forma Financial Information and Exhibits
(continued)
b. Pro Forma Financial Information
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial information
for Clarent consists of the Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1999, and for the six months ended
June 30, 2000 and the Unaudited Pro Forma Combined Condensed Balance Sheet as of
June 30, 2000. These pro forma financial statements give effect to Clarent's
acquisition of ACT through a merger and exchange of shares, at an exchange ratio
of 0.4198. The Unaudited Pro Forma Combined Condensed Statements of Operations
for the year ended December 31, 1999 and the six months ended June 30, 2000
reflects this transaction as if it had taken place on January 1, 1999. The
Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to this
transaction as if it had taken place on June 30, 2000.
The Unaudited Pro Forma Combined Condensed Statements of Operations combine
Clarent's historical results of operations for the year ended December 31, 1999
and the six months ended June 30, 2000 with ACT's historical results for the
year ended December 31, 1999 and the six months ended June 30, 2000.
The pro forma financial statements are not necessarily indicative of what
the actual financial results would have been had the transaction taken place on
January 1, 1999 or June 30, 2000 and do not purport to indicate the results of
future operations.
The merger has been accounted for using the purchase method of accounting.
The pro forma financial statements have been prepared on the basis of
assumptions described in the notes thereto.
In connection with the acquisition of ACT, Clarent expects to incur write-
offs related to in-process research and development, currently estimated at
$31.5 million. The Unaudited Pro Forma Combined Condensed Balance Sheet includes
the effect of the write-off related to in-process research and development;
however, the Unaudited Pro Forma Combined Condensed Statements of Operations do
not reflect this charge. The charge related to in-process research and
development will be reflected in Clarent's consolidated financial statements
when the merger is consummated. The pro forma financial statements do not
include the costs of integration estimated at $1.9 million, as these costs will
affect future operations and do not qualify as liabilities in connection with a
purchase business combination under EITF 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination."
The pro forma financial statements should be read in conjunction with the
related notes included in this document and the audited financial statements and
notes of Clarent and ACT, included or incorporated by reference elsewhere in
this Amendment to Form 8-K.
<PAGE>
19.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Actual Actual Pro Forma
Clarent ACT Adjustments Total
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue:
Product and software.................................. $ 44,182 $ 50,477 $ -- $ 94,659
Services.............................................. 3,641 -- -- 3,641
-------- -------- ----------- ----------
Total revenue....................................... 47,823 50,477 -- 98,300
Cost of revenue:
Product and software.................................. 16,746 25,568 -- 42,314
Services.............................................. 3,559 -- -- 3,559
Amortization of developed
technology........................................... -- -- 2,772 (7) 2,772
-------- -------- ----------- ----------
Total cost of revenue............................... 20,305 25,568 2,772 48,645
-------- -------- ----------- ----------
Gross profit........................................ 27,518 24,909 (2,772) 49,655
Operating expenses:
Research and development.............................. 9,172 12,007 -- 21,179
Sales and marketing................................... 25,111 15,718 -- 40,829
General and administrative............................ 6,877 8,483 -- 15,360
Amortization of compensation.......................... 19,371 -- 5,852 (8) 25,223
Amortization of goodwill and
other purchased intangibles.......................... 150 -- 14,570 (6) 14,720
-------- -------- ----------- ----------
Total operating expenses............................ 60,681 36,208 20,422 117,311
-------- -------- ----------- ----------
Loss from operations................................... (33,163) (11,299) (23,194) (67,656)
Interest and other income, net......................... 2,512 2,448 -- 4,960
-------- -------- ----------- ----------
Loss before provision for income
taxes................................................... (30,651) (8,851) (23,194) (62,696)
(Provision for) benefit from
income taxes.......................................... (132) 72 -- (60)
-------- -------- ----------- ----------
Net loss............................................... $(30,783) $ (8,779) $ (23,194) $ (62,756)
======== ======== =========== ==========
Basic and diluted net loss per
share................................................. $ (1.87) $ (0.87) $(3.03)
Shares used to compute basic and
diluted net loss per share............................ 16,457 10,084 20,690
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
<PAGE>
20.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Actual Actual Pro Forma
Clarent ACT Adjustments Total
-------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue:
Product and software.................................... $ 47,333 $ 26,671 $ -- $ 74,004
Services................................................ 5,563 -- -- 5,563
-------- -------- ----------- --------
Total revenue......................................... 52,896 26,671 -- 79,567
Cost of revenue:
Product and software.................................... 17,331 12,718 -- 30,049
Services................................................ 3,718 -- -- 3,718
Amortization of developed
technology............................................. -- -- 1,386 (7) 1,386
-------- -------- ----------- --------
Total cost of revenue................................. 21,049 12,718 1,386 35,153
-------- -------- ----------- --------
Gross profit............................................ 31,847 13,953 (1,386) 44,414
Operating expenses:
Research and development................................ 9,906 4,958 -- 14,864
Sales and marketing..................................... 22,874 7,695 -- 30,569
General and administrative.............................. 5,024 3,566 -- 8,590
Amortization of compensation............................ 2,310 -- 2,926 (8) 5,236
Amortization of goodwill and other
purchased intangibles.................................. 451 -- 7,284 (6) 7,735
-------- -------- ----------- --------
Total operating expenses.............................. 40,565 16,219 10,210 66,994
-------- -------- ----------- --------
Loss from operations..................................... (8,718) (2,266) (11,596) (22,580)
Interest and other income, net........................... 8,514 362 -- 8,876
-------- -------- ----------- --------
Loss before provision for income
taxes................................................... (204) (1,904) (11,596) (13,704)
Provision for income taxes............................... (284) (145) -- (429)
-------- -------- ----------- --------
Net loss................................................. $ (488) $ (2,049) $ (11,596) $(14,133)
======== ======== =========== ========
Basic and diluted net loss per
share................................................... $ (0.02) $ (0.20) $ (0.39)
Shares used to compute basic and
diluted net loss per share.............................. 32,174 10,333 36,512
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
<PAGE>
21.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Actual Actual Pro Forma
Clarent ACT Adjustments Total
-------- ------- --------------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $199,157 $46,510 $ -- $245,667
Short-term investments............... 77,017 4,085 -- 81,102
Accounts receivable, net............. 29,102 12,008 -- 41,110
Inventories.......................... 14,604 6,864 (2,637)(2) 18,831
Prepaid expenses and other current
assets.............................. 2,888 774 -- 3,662
-------- ------- ----------- --------
Total current assets............... 322,768 70,241 (2,637) 390,372
Property, plant & equipment, net...... 17,591 4,050 (933)(2) 20,708
Intangible assets.................... -- -- 39,778 (1) 39,778
Goodwill............................. 2,107 1,106 (1,106)(5) 44,613
42,506 (1)
Other assets......................... 7,260 167 -- 7,427
-------- ------- ----------- --------
Total assets....................... $349,726 $75,564 $ 77,608 $502,898
======== ======= =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 15,402 $ 2,456 $ -- $ 17,858
Compensation related accruals........ 4,323 923 -- 5,246
Deferred revenue..................... 11,032 -- -- 11,032
Other accrued liabilities............ 5,483 2,129 12,323 (2) 19,935
-------- ------- ----------- --------
Total current liabilities.......... 36,240 5,508 12,323 54,071
Stockholders' equity:
Common stock......................... 356,766 108,781 68,008 (3) 533,555
Deferred compensation................ (3,680) -- (9,952)(1) (13,632)
Accumulated other comprehensive
loss................................ (162) (359) 359 (5) (162)
Accumulated deficit.................. (39,438) (38,366) 6,870 (4) (70,934)
-------- ------ ----------- --------
Total stockholders' equity......... 313,486 70,056 65,285 448,827
-------- ------- ----------- --------
Total liabilities and
stockholders' equity.............. $349,726 $75,564 $ 77,608 $502,898
======== ======= =========== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
<PAGE>
22.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
For purposes of the pro forma operating data, Clarent's consolidated financial
statements as of June 30, 2000 and for the year ended December 31, 1999 and the
six months ended June 30, 2000 have been combined with the ACT financial
statements as of June 30, 2000 and for the calendar year ended December 31, 1999
and for the six months ended June 30, 2000.
The companies have had no significant inter-company activity which would
require elimination in preparing the combined condensed financial statements. In
addition, the companies have no significantly different accounting policies and
procedures which would have required conforming adjustments.
The accompanying pro forma information should be read in conjunction with
the historical financial statements and related notes for both Clarent and ACT.
The pro forma financial statements give effect to Clarent's acquisition of
ACT through a merger and exchange of shares. The Unaudited Pro Forma Combined
Condensed Statements of Operations for the year ended December 31, 1999 and the
six months ended June 30, 2000 reflect this transaction as if it had taken place
on January 1, 1999. The Unaudited Pro Forma Combined Condensed Balance Sheet
gives effect to this transaction as if it had taken place on June 30, 2000.
The merger was accounted for using the purchase method of accounting. The
pro forma financial statements have been prepared on the basis of assumptions
described in the following notes and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of ACT based
on actual fair value. In the opinion of Clarent's management, all adjustments
necessary to present fairly such pro forma financial statements have been made
based on the terms and structure of the ACT merger.
In connection with the merger, Clarent expects to incur write-offs related
to in-process research and development, of approximately $31.5 million. The
Unaudited Pro Forma Combined Condensed Balance Sheet includes the effect of the
write-off related to in-process research and development; however, the Unaudited
Pro Forma Combined Condensed Statements of Operations do not reflect this
charge. The charge related to in-process research and development will be
reflected in Clarent's consolidated financial statements upon the effective time
of the merger. The pro forma financial statements do not include the costs of
integration estimated at $1.9 million as they will affect future operations.
The pro forma financial statements are not necessarily indicative of what
the actual financial results would have been had the transaction taken place on
January 1, 1999 or June 30, 2000 and do not purport to indicate the results of
future operations.
The pro forma financial statements give effect to the following pro forma
adjustments:
(1) In accordance with the merger agreement, ACT will become a wholly owned
subsidiary of Clarent, and all outstanding shares of its common stock
will be converted into shares of Clarent common stock.
The ACT merger was accounted for using the purchase method of accounting.
The purchase price of $33.72 per share was based on the average closing price of
Clarent's stock on August 10, 2000 (the date of consummation of the merger) and
the three days prior to the merger date.
<PAGE>
23.
The purchase price was determined as follows:
Clarent Fair Value
ACT Shares Shares (in thousands)
---------- --------- ------------
Shares........................... 10,588,040 4,444,832 $ 149,880
Stock options assumed............ 2,653,347 1,106,288 26,909
---------- --------- ------------
Totals........................... 13,241,387 5,551,120 $ 176,789
========== ========= ============
The ACT shares were converted to Clarent equivalent shares by taking the
number of ACT shares divided by the exchange ratio of 0.4198 per share, and
adjusted for rounding.
With respect to stock options assumed as part of the merger, all ACT
options were exchanged for Clarent options and were included as part of the
purchase price based on their fair value. Any unvested Clarent options issued in
exchange for unvested ACT options are also included as part of the purchase
price based on their fair value, however, pursuant to Financial Accounting
Standards Board Interpretation No. 44, the portion of the intrinsic value of
unvested options that will be deemed to be earned over the remaining vesting
period of those options has been deducted from the fair value of the unvested
options and will be amortized as deferred compensation over that remaining
vesting period. The fair value of the options assumed is based on the Black-
Scholes model using the following assumptions:
. Fair market value of the underlying shares is based on the average
closing price of Clarent's common stock on August 10, 2000 and the three
days prior to such date.
. Expected life of 4 years
. Expected volatility of .80
. Risk free interest rate of 6.0%
. Expected dividend rate of 0%
Below is a table of the estimated acquisition cost, allocation of excess
purchase cost over the fair value of net assets acquired to goodwill and other
intangible assets acquired and annual amortization of the goodwill and
intangible assets acquired (in thousands, except for asset life):
<TABLE>
<CAPTION>
Estimated Annual
Acquisition Amortization
Cost Asset Life of Intangibles
----------- ---------- --------------
(in years)
<S> <C> <C> <C>
Value of common stock and stock
options issued......................... $176,789
Transaction costs....................... 7,008
Merger related restructuring costs...... 8,885
--------
Total estimated acquisition cost........ 192,682
Less net tangible assets acquired....... 68,950
--------
Excess purchase cost over the fair
value net tangible assets acquired..... $123,732
========
Excess purchase cost was allocated
to the following:
Assembled workforce.... 6,642 3 $2,214
Customer base.......... 19,276 5 3,855
Developed technology... 13,860 5 2,772
In-process technology.. 31,496
Goodwill............... 42,506 5 8,501
Deferred compensation.. 9,952 4 5,852(a)
------
Total................................ $123,732
========
</TABLE>
(a) Under the graded method, approximately 59%, 25%, 12% and 4%, respectively,
of each option's compensation expense is recognized in each of the four years
following the date of purchase.
<PAGE>
24.
Tangible assets of ACT acquired in the merger principally include cash,
short-term investments, accounts receivables, inventories and fixed assets.
Liabilities of ACT assumed in the merger principally include accounts payable,
accrued payroll and other current liabilities.
To determine the value of the developed technology the expected future cash
flow attributable to all existing technology was discounted, taking into account
risks related to the characteristics and applications of the technology,
existing and future markets, and assessments of the life cycle stage of the
technology. The analysis resulted in a valuation of approximately $13.9 million
for developed technology which has reached technological feasibility and
therefore was capitalizable. The developed technology is being amortized on a
straight line basis over a five year period.
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting and hiring costs and
training costs for each category of employee. The analysis determined a
valuation of approximately $6.6 million for the assembled workforce, and is
being amortized on a straight line basis over a three year period.
The value of the customer base of approximately $19.3 million was derived
by considering, among other factors, the historical costs to develop customer
relationships, the expected income, and the associated risks. Associated risks
included the inherent difficulties and uncertainties in transitioning business
relationships. The value of the customer base is being amortized over a five
year period.
The value of deferred compensation of approximately $10.0 million was
derived using the guidance of Financial Accounting Standards Board
Interpretation No. 44, the unvested options' intrinsic value, and a vesting
ratio of 74% for the remaining vesting period of unvested options. The deferred
compensation is being amortized using a graded method over a four year period.
The projects identified as in-process technology at ACT are those that were
underway at the time of the ACT merger and required additional effort to
establish technological feasibility after consummation of the ACT merger. These
projects have identifiable technological risk factors which indicate that even
though successful completion is expected, it is not assured. If an identified
project is not successfully completed, there is no alternative future use for
the project and the expected future income will not be realized.
The in-process technology acquired from ACT in the transaction consists
primarily of technology related to replacement and enhancement of ACT's core
technology, principally NetPerformer and ServiceXchange.
(2) The pro forma adjustment to "Inventories", "Property, plant and equipment"
and "Other Accrued Liabilities" reflects the write-off of $2.6 million of
inventories of ACT that are for products that are either being discontinued
or are redundant with those of Clarent, the write-off of $933,000 for
plant, equipment and information systems that will not be used after the
execution of the integration plan, an accrual of $1.3 million for
liabilities related to involuntary employee termination benefits of ACT
employees, $4.0 million for costs to exit operating leases of ACT, and
$7.0 million in transaction costs.
(3) The pro forma adjustment to "Common Stock" reflects elimination of ACT's
common stock ($108.8 million) and the impact of the issuance of Clarent
common stock and assumption of options to purchase common stock ($176.8
million) in connection with the merger.
(4) The pro forma adjustment to "Accumulated Deficit" reflects the elimination
of ACT's accumulated deficit ($38.4 million) and the in-process technology
charge ($31.5 million).
(5) The pro forma adjustment to "Goodwill" and "Accumulated Other
Comprehensive Loss" reflects the elimination of ACT's goodwill related to
historical acquisitions, and elimination of accumulated other comprehensive
loss.
(6) The pro forma adjustment is for the amortization of goodwill, assembled
workforce and customer base.
(7) The pro forma adjustment is for the amortization of developed technology.
(8) The pro forma adjustment is for the amortization of deferred compensation.
<PAGE>
25.
Financial Statements, ProForma Financial Information and Exhibits
(continued).
c. Exhibits
2.1 Agreement and Plan of Merger and Reorganization, dated as of May
1, 2000, among Clarent Corporation, Copper Acquisition Sub, Inc.
and ACT Networks, Inc., as amended (incorporated by reference to
Exhibits 2.1 and 2.2 to Clarent Corporation's Registration
Statement on Form S-4 (No. 333-38216) filed May 31, 2000, as
amended on July 7, 2000).
99.1 Press Release titled "Clarent Corporation Completes Acquisition
of ACT Networks" dated August 10, 2000, (incorporated by
reference to Exhibit 99.1 to Clarent Corporation's Form 8-K
filed August 10, 2000.)
<PAGE>
26.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CLARENT CORPORATION
Dated: October 24, 2000 By: /s/ Richard J. Heaps
--------------------
Richard J. Heaps
Chief Operating Officer and
Chief Financial Officer
<PAGE>
27.
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger and Reorganization, dated as of May 1,
2000, among Clarent Corporation, Copper Acquisition Sub, Inc. and
ACT Networks, Inc. (incorporated by reference to Exhibits 2.1 and
2.2 to Clarent Corporation's Registration Statement on Form S-4 (No.
333-38216) filed May 31, 2000, as amended on July 7, 2000).
99.1 Press Release titled "Clarent Corporation Completes Acquisition of
ACT Networks" dated August 10, 2000, (incorporated by reference to
Exhibit 99.1 to Clarent Corporation's Form 8-K filed August 10,
2000.)
