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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1995 Commission File Number: 0-14805
MICROCOM, INC.
Exact name of registrant as specified in charter
MASSACHUSETTS 04-2710644
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
500 RIVER RIDGE DRIVE 02062-5028
NORWOOD, MASSACHUSETTS (Zip code)
(Address of principal executive office)
(617) 551-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or anyamendment to
this Form 10-K [X]
Aggregate market value of common stock held by non-affiliates of the
Registrant as of May 15, 1995: $98,639,947
Number of shares outstanding of the Registrant's only class of common stock
as of May 15, 1995: 11,115,593
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DOCUMENTS INCORPORATED BY REFERENCE:
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PART OF FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
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- Portions of Registrant's Annual Report to Parts I & III
Stockholders for the fiscal year ended
March 31, 1995.
- Portions of Registrant's Proxy Statement relating Part III
to Registrant's Annual Meeting of Stockholders
scheduled to be held on July 20, 1995
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PART I
ITEM 1. BUSINESS.
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Microcom, Inc. ("Microcom" or the "Company") is a leading provider of
remote network access solutions. The Company's products enable users to access
and communicate with on-line computer networks, such as the Internet, America
Online, CompuServe and Prodigy, and corporate networks from remote locations.
The Company was founded in 1980 as a developer of data communications
software, high performance modems and related technologies. Beginning in the
early 1990s, the Company responded to changes in the data communications
industry by undertaking a series of strategic initiatives designed to
reposition the Company to address the needs of the remote network access
market. By leveraging its technology and expertise, the Company has developed a
broad line of remote network access products.
Microcom's products serve both central site network managers and
individual remote users. Products designed for the central site include the
High Density Management System (HDMS) -- a dial-up access management system;
and LANexpress -- remote local area network (LAN) access systems which include
expressWATCH, a comprehensive remote network access management solution.
Products designed for the individual remote user include high performance V.34
(28.8 Kbps) PCMCIA, desktop and other modems; Carbon Copy remote
control/remote PC access software; LANexpress Remote client software, a remote
node and remote control LAN access product; and ISDN terminal adapters.
The Company's customers include (i) Internet and on-line service
network access providers, such as Sprint, (ii) Corporate 2000 companies, such
as American Airlines, Inc., Blockbuster Entertainment Corporation, NYNEX
Corporation and State Farm Insurance Company, (iii) large international
corporations, (iv) governmental agencies and universities and (v) individual
remote users seeking to access the Internet, on-line services and corporate
networks. The Company distributes its products through direct sales and
multiple indirect channels, including VARs, distributors and OEMs in the
United States and international markets.
Microcom is committed to being a leader in the development and
implementation of standards for remote network access products. For example,
in 1983 the Company introduced the Microcom Networking Protocol (MNP), a
communications standard incorporated into the majority of modems sold today.
The latest version, MNP 10EC, enhances the operation of modem communications
over the cellular network. Most recently, Microsoft incorporated the Company's
Advanced Parallel Technology (APT) into its Windows 95 operating system
enabling high performance remote network access connections.
Industry Background
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Significant changes in computer-based information systems have occurred
over the last decade. Historically, information stored in computer databases
could only be accessed by terminals or PCs emulating terminals directly
connected to a central or host computer. Remote users wishing to access
information over the public switched telephone network used a modem to dial
from their terminal or computer into another modem which was usually connected
directly to the central or host computer.
Beginning in the late 1980s, the following factors changed the nature
of, and increased the demand for, remote network access:
Growth of the Internet and On-line Services. The number of users of
the Internet and on-line services such as America Online, CompuServe and
Prodigy has grown rapidly in recent years. It is estimated that the number of
users linked to the Internet has grown from less than 2 million in 1992 to
approximately 30 million today. This growth
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is due to increased use of electronic mail ("e-mail") and the proliferation of
databases and other information services such as the World Wide Web.
Development of Distributed, Client/Server Computing. With the
development of LANs, it became possible for information to be stored on a
number of computers which were connected to each other and located within a
building or campus. Simultaneously, the advent of new communications products
such as hubs, bridges and routers, allowed multiple LANs to be integrated into
distributed, enterprise-wide computing networks. To take advantage of these
distributed computer networks, products utilizing client/server architecture,
including relational databases, e-mail and file and printer sharing were
introduced to collect, retrieve and distribute information. Distributed
computing and client/server based software are now being used on a corporate
enterprise-wide and departmental basis to run mission critical processes and
to provide the primary means for corporate communication.
Growth in Mobile, Remote and Home Offices. Corporations, governmental
agencies, universities and other organizations are increasingly looking to
control costs while providing their employees with access to essential
information and resources to perform their jobs efficiently and effectively
from any location. The proliferation of notebooks and home computers is
allowing a newly created remote workforce to work from home or on the road. To
remain productive, these users must be able to access their corporate
distributed networks from remote locations.
Technological Advances. Advances in modem technology (such as the V.34
standard) and switched digital service technology (such as ISDN) are helping
to increase the speed of network communication, which is a key user requirement
for remote network access. In addition, the introduction of sophisticated
network management software technology enables the diagnosis, management and
reconfiguration of the numerous network access points and unattended remote
locations from a central site on a cost-effective basis.
Markets
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These factors have created an enormous growth in the number of remote
users seeking to connect to the Internet and on-line services through network
access providers and to information on corporate networks. As a result, the
need for hardware and software products to support, expand and enhance remote
network access has created a number of rapidly growing markets.
Network access providers are responsible for linking millions of remote
users to the Internet and on-line services each day and require substantial
amounts of equipment including modems, ISDN interfaces, management software,
routers, switches and access servers. Since many of the access points for these
networks are in unattended locations, reliable equipment that is easily
diagnosed, managed and reconfigured via software from a central site is
essential. In addition, since network access providers charge for their
services based on the duration of the connection, they require systems that
permit remote users with many different brands of modems to establish and
maintain connections with the network.
Enterprise computing networks are large scale, diverse, distributed
computing and client/server networks. To support the extensive remote network
access demands, these corporate networks require multiprotocol, multifunction
access servers and a large number of modems and ISDN interfaces to support
numerous users on diverse hardware and software platforms. Due to the size and
complexity of the enterprise network, management software to diagnose,
configure and troubleshoot the remote access aspects of the network is
critical. Enterprise network managers also require reliability, connectability
and ease of use and installation of all products. Finally, with increased
occurrences of unauthorized computer access and theft of services and
information, security has become a key requirement for developing and
operating remote network access capabilities for the enterprise network.
Departmental computing networks are typically characterized by a
limited number of remote users requiring access to a smaller, less complicated
corporate network. As a result, only 2 to 16 dial-up connection points (ports)
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and support for only the most popular networking protocols is typically
required. Since departmental networks generally are managed by a smaller
management information systems staff, remote access equipment for this market
must be easy to install and use. Although access security and network
management are important, these features are generally less extensive
than in the enterprise network environment.
In addition to the hardware and software necessary to serve the needs
of central site network managers, remote users need reliable, high performance
communications hardware and easy to use software to access the information
residing on the various types of networks.
The Microcom Solution
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In an effort to address the diverse needs of these rapidly growing
markets, the Company has developed and offers a broad range of remote network
access products. The following are the key attributes of the Microcom solution:
Broad Product Range. The Company's broad remote network access product
line serves both central site network managers and remote users in each of the
remote network access markets. HDMS serves on-line network and Internet access
providers and enterprise network managers. LANexpress serves both enterprise
and departmental network managers. Remote users can utilize the Company's
modems and ISDN terminal adapters, LANexpress Remote client software and
Carbon Copy software to access on-line services, the Internet and corporate
networks, on both the enterprise and departmental level.
Remote Access Management. The Company's central site dial access
products provide comprehensive management capabilities in order to control
effectively both operations and costs. The key management capabilities include
configuration, diagnostics, cost management and capacity planning.
Remote Access Security. Microcom pioneered the use of security at the
dial connection level rather than relying solely on the security measures of
the host computer. The Company has developed a wide variety of security
mechanisms, including user authentication, call-back schemes (fixed and
roving), encrypted user information and embedded modem security keys designed
to keep potential "hackers" from completing the dial connection into the
network or host computer. Without the connection in place, potential hackers
cannot attempt unauthorized access to the underlying network or host computer.
Comprehensive Connectivity. Through the use of proprietary firmware,
the Company's central site products are designed to connect to a broad range
of popular modem brands and stay connected regardless of prevailing line
conditions.
High Quality, Reliable Products. The Company's products go through
extensive development and quality assurance testing before shipment to
customers. The Company has quality assurance personnel on-site on a full-time
basis at the manufacturing facilities of the Company's off-shore manufacturers.
This has resulted in the Company's products attaining a reputation with
customers for quality and reliability.
Ease of Installation and Use. The Company's LANexpress, Carbon Copy
and modem products are utilized by departmental network managers and
individual remote users. Since these users typically lack significant
technological resources, products targeted at these customers need to be easy
to install and use. The Company has specifically designed its LANexpress,
Carbon Copy and modem products to be readily installed without technical
support. In addition, LANexpress Remote and Carbon Copy software incorporate
user-friendly, graphical user interfaces.
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Recent Repositioning and Strategy
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In the early 1990s, the Company responded to changes in the data
communications industry by undertaking a series of strategic initiatives and
restructurings designed to reposition the Company to address the needs of the
emerging remote network access market. First, in response to customers' demands
for certain central site remote network access products and emerging market
trends, the Company redirected its strategic focus to the HDMS products by
increasing research and development expenditures and accelerating introduction
of enhancements to these products. Second, beginning in 1991, the Company
reviewed each of its product lines. This process led to the disposition of
certain non-core products including (i) Virex, a virus detection and correction
program, (ii) Relay, a PC mainframe terminal emulation package, and (iii)
LANlord, a desktop management software package. Third, in July 1993, the
Company restructured its sales force, increased the number of application
engineers and implemented new sales and marketing strategies focused
specifically on the sale of remote network access products to Corporate 2000
customers and large international corporations. Fourth, the Company appointed
Roland Pampel as President, Chief Executive Officer and a Director of the
Company. Finally, the Company recently completed two acquisitions of ISDN
technology to broaden the Company's remote network access product offerings.
The Company's objective is to continue to be a leading provider of
remote network access solutions. The Company's strategy to achieve this
objective is comprised of the following elements:
Continue Focus on Remote Network Access Market. The Company will
continue to focus on the remote network access market and to develop new
products and enhancements to meet or exceed the evolving requirements of both
the central site network manager and the remote user.
Maintain Technology Leadership. The Company intends to continue to
invest in research and development of products to meet its customers' needs.
The Company believes that the expertise it has developed in creating its
existing products will permit it to enhance these products, develop new
products and respond to emerging technologies in a cost-effective and timely
manner.
Leverage Existing Customer Base. The Company believes that many of its
existing customers will continue to purchase remote network access products.
Through its multiple sales channels, the Company intends to aggressively
market new products and enhancements to its existing customers. The Company
also believes that its installed base represents an important source of
references for new customers, particularly telecommunications companies.
Develop and Expand Strategic Relationships. The Company plans to
continue to develop strategic relationships with telecommunications network
service providers, equipment providers, OEMs and software vendors in order to
enhance Microcom's product development activities and leverage shared
technologies and joint marketing efforts.
Expand Worldwide Distribution. The Company plans to continue to
develop demand for its remote network access products both domestically and
internationally. The Company intends to expand its channels of distribution and
strengthen its sales and marketing support for existing VARs and distributors.
Products
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As discussed below, the Company offers a broad range of remote network
access products for central site network managers and individual remote users.
HDMS - High Density Management System. This product is a central site
remote access management system for dial-up networks. HDMS provides network
access managers with robust remote access security and management
capabilities, including real-time monitoring and control, alarm threshold
processing, operational
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statistics, modem control and the ability to reconfigure the system from a
central management location. HDMS is designed to be highly reliable, operate
with a wide range of modems and provide a high rate of connection. The product
is capable of handling modem data rates up to 28.8 thousand bits per second
(Kbps) and throughput rates up to 115.2 Kbps. HDMS includes a chassis for
installing up to 16 dual modem cards (32 modems), an Intelligent Network
Controller (INC) to manage the modems as one integrated unit and an optional T1
interface to bring high speed digital T1 and fractional T1 circuits to the
chassis. The HDMS INC can manage up to 8 chassis containing up to 254 modems.
LANexpress. This product is a fully integrated remote LAN access
solution. LANexpress combines server hardware and software, client software
and management applications software, providing remote users with easy to use,
reliable, secure access, via dial or cellular links, to information residing on
enterprise LANs. The LANexpress server provides the network connection for
dial-up access into Ethernet or token ring networks. The product's
multiprotocol networking capabilities can support virtually all network
environments, including IP, Novell IPX, NetBIOS, Banyan Vines, DECNet and
other legacy protocols. Containing V.34 modems, the LANexpress server supports
high performance, sustained transfer speeds over 100 Kbps simultaneously on 2
to 16 ports. Remote PC users can connect to the network with LANexpress Remote
client software, an easy to use, graphical user interface. The diverse
requirements of remote applications are addressed by integrating both remote
node (best for interactive applications) and remote control (ideal for data
intensive applications) into a single client software solution.
The Company's expressWATCH management software allows comprehensive,
real-time management of the LANexpress system from any PC running Windows on
the network. Network managers with expressWATCH can configure, control and
monitor all components of the system (including the server, server modems and
remote client) using the standard Simple Network Management Protocol (SNMP).
expressWATCH can also be employed at a remote location to manage the system
over a dial-up connection.
Modems. The Company has been developing high speed, error correcting
modems since 1982. In 1983, the Company introduced the Microcom Networking
Protocol (MNP), a communications standard incorporated into the vast majority
of modems sold today. The most recent version, MNP 10EC, optimizes the
operation of modem connections over the cellular network. The Company's latest
28.8 Kbps modems, such as the DeskPorte FAST and TravelPorte FAST, are based
on the industry standard V.34 technology. These products are available in
desktop, portable, PCMCIA, internal and rackmountable models.
The Company's Advanced Parallel Technology (APT), which is incorporated
into its modems, allows transmission of data through the parallel port of a PC
instead of the serial port, achieving throughput rates of up to 300 Kbps as
compared to up to 115.2 Kbps for other modems using the serial port. The
Company's modem products are designed to meet the needs of remote users of
enterprise and departmental networks by providing sophisticated security
capabilities, advanced features such as remote upgrade capability, and a high
degree of reliability and performance.
Carbon Copy. Carbon Copy is a remote control/remote PC access software
package which enables remote users to communicate with PCs running either
Windows or DOS. Mobile professionals, staff at branch offices and employees
working at home use Carbon Copy to access data and applications located on
remote PCs, bulletin board services or LANs. Carbon Copy enables internal help
desks to support PC users on corporate LANs, and allows technical support
groups and VARs to provide application support and training to external users.
Carbon Copy's features include a terminal emulator, comprehensive file transfer
(including file synchronization and crash recovery capabilities), a software
communications gateway (enabling users to dial in to a common PC and allowing
LAN-based PC users to dial out), NetBIOS and Novell IPX support, and NetWare
LAN support.
ISDN Terminal Adapters. The Company's Solis-L ISDN cards and
associated software provide a Basic Rate Interface (BRI) while the Solis-F
ISDN card provides the same functionality as the Solis-L plus analog dial and
fax
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connectivity. Both cards use on-board processing to provide higher performance
through embedded protocol support and data compression. In addition to
supporting a range of third party software applications, these cards are sold
with access applications software, allowing users to build systems for LAN to
LAN and remote user to LAN connectivity for Novell networks.
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Customers
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The Company markets its products to a broad range of domestic and
foreign organizations and individuals. The target customers for the Company's
central site remote network access products are Internet and on-line service
access providers (including major telecommunications companies), the Corporate
2000, large international corporations, universities and governmental
agencies. The Company's remote site PC software and modems are sold to both
businesses and individuals. The following selected customers have purchased
from the Company or its resellers at least $50,000 of the Company's products
since the beginning of fiscal 1995. The Company believes that these customers
are representative of the Company's customers generally.
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HDMS LANexpress
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Bell-Northern Research Ltd. American Cyanamid Company
NYNEX Corporation Broken Hill Petroleum
Sprint Corporation Cargill Incorporated
Storage Technology Corporation South Africa Power Association
Tele-Communications, Inc. U.S. Air Force Academy
University of Tennessee U.S. Department of Labor
CARBON COPY MODEMS
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Automatic Data Processing, Inc. American Airlines, Inc.
Eli Lilly and Company BellSouth Corporation
Simplex Time Recorder Co. Blockbuster Entertainment Corporation
United States Golf Association SafeCo Insurance Company
Whitmire Ltd. State Farm Insurance Company
</TABLE>
Sprint accounted for 24% and 13% of the Company's net sales in fiscal
1995 and 1994, respectively. No single customer accounted for more than 10% of
the Company's net sales in fiscal 1993. Sprint is not obligated to make any
minimum level of future purchases from the Company or to provide the Company
with binding forecasts of product purchases for any future period. While the
Company expects that Sprint will continue to be a significant customer, the
Company anticipates that overall net sales to Sprint in fiscal 1996 will be
significantly less than in fiscal 1995. Although the Company has recently
established a relationship with another major telecommunications carrier,
there can be no assurance that the Company will make any significant sales to
such carrier or that sales to it and other telecommunications carriers will
offset any decline in sales to Sprint. The failure to achieve and maintain
significant sales to telecommunications carriers or to offset any decline in
sales to Sprint would have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's agreements with VARs, distributors and OEMs are typically
non-exclusive and in many cases may be terminated by either party without
cause, and many of the Company's VARs, distributors and OEMs carry competing
product lines. Therefore, there can be no assurance that any VAR, distributor
or OEM will continue to represent the Company's products and the loss of
important VARs, distributors or OEMs could adversely affect the Company's
business, results of operations and financial condition.
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Customer Service and Support
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The Company is committed to providing strong customer service and
support. The Company's customer service organization assists both resellers
and end users with product configuration, installations and interoperability
issues. Service and support are provided by telephone and remote dial-up access
to customer installations. The Company also provides on-site, faxback and
on-line bulletin board services. The Company provides service and support to
its international end users through its independent distributors.
The Company's products have warranties of up to five years. In
addition, the Company provides a variety of fee based services, including
extended warranties, priority exchange of defective products and premium
toll-free support. The Company also offers various training courses for its
resellers and end user customers.
Sales and Marketing
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The Company sells its products through direct sales and multiple
indirect distribution channels, including VARs, distributors and OEMs. In
fiscal 1995, sales through indirect distribution channels accounted for
approximately 69% of the Company's net sales.
In North America, the Company has relationships with approximately 40
VARs through which the Company sells its HDMS, LANexpress and modem products.
These VARs concentrate on large sales opportunities, providing integrated
solutions to network access providers, Corporate 2000, universities and
governmental agencies. In addition, the Company sells Carbon Copy, LANexpress
and certain of modem products through a two-tiered distribution channel in
which the Company sells to distributors who in turn sell to resellers such as
computer retail chains, mail order houses and independent VARs. These
resellers generally sell directly to corporate and individual end users.
Outside of North America, the Company's products are sold by
independent distributors whose principal markets are Australia, The Czech
Republic, Denmark, France, Germany, Hong Kong, Israel, Italy, Japan, the
Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom.
The Company supports its domestic and international VARs and
distributors by providing product training, evaluation products, regular
mailings of product, promotional and technical materials, and reseller and
end-user telephone technical support, and by participating in cooperatively
funded marketing programs including trade shows and seminars. The Company also
works closely with its VARs in selling and servicing major accounts and
believes that such collaboration is necessary for the successful
implementation of the Company's remote network access solutions. The Company
promotes corporate and product awareness and generates sales leads through a
variety of means, including advertisements in major industry trade
publications, participation in industry trade shows, seminars and direct mail.
The Company has sales and support offices in California, Colorado,
Georgia, Illinois, Massachusetts, New Jersey, New York, Texas, Virginia as
well as in Australia, England, France, Germany and Singapore. As of May 1,
1995, the Company's sales and marketing organization consisted of 73 employees.
No single VAR, distributor or OEM individually accounted for more than 10% of
the Company's net sales in fiscal 1993, 1994 or 1995.
Research and Development
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The market for Microcom's products is characterized by rapidly changing
technology, evolving industry standards and frequent introductions of new
products and enhancements. Microcom's future success will depend in part on
its ability to enhance its existing products and to introduce new products and
enhancements on a timely basis to meet and adapt to changing customer
requirements, evolving industry standards and emerging technologies.
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The Company is also committed to ongoing support of and participation in
industry standards activities which affect the remote network access
market.
The Company emphasizes modular software and hardware design, using core
components of its key technologies across its various product lines. The
Company believes that this not only accelerates time to market, but also
provides greater reliability by using proven designs in multiple product
applications. A variety of design and development processes and tools are
employed to ensure timely product introductions and that potential problems are
detected early in the design and development cycle.
To be competitive in the international marketplace, the Company obtains
country specific certification for its modem and ISDN products. To date, the
Company has successfully certified its products for use in numerous countries,
with ongoing programs to obtain certification in additional countries and to
certify new products as they are introduced. The modular design of the
Company's software products facilitates foreign language translations.
There can be no assurance that Microcom will be successful in
developing, manufacturing and marketing new products or product enhancements
that respond to technological changes or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products or that
its new products will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technological or other
reasons, to develop new products or enhancements of existing products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, results of operations and financial
condition would be materially and adversely affected. In addition, there can
be no assurance that services, products or technologies developed by others
will not render Microcom's products or technologies uncompetitive or obsolete.
The introduction of new or enhanced products also requires the Company to
manage the transition from older products in order to minimize disruption in
customer ordering patterns, avoid excessive levels of older product inventories
and ensure that adequate supplies of new products can be delivered to meet
customer demand. There can be no assurance that the Company will successfully
manage the transition to new products. The failure to manage any such
transition successfully could have a material adverse effect on the Company's
business, results of operations and financial condition.
Competition
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The market for remote network access products is highly competitive. In
the central site remote network access market, the Company competes with
remote LAN access server vendors such as Shiva Corporation, Digital
Communications Associates, Inc., Novell, Inc. and 3Com Corporation and vendors
of dial-up access management systems such as U.S. Robotics Corporation,
Primary Access Corporation (recently acquired by 3Com Corporation) and
Motorola, Inc. The Company also faces increasing competition from OS and NOS
vendors such as Microsoft Corporation, Novell, Inc. and International Business
Machines Corporation who are including remote access capabilities in their
products. In the remote site PC communications software market, the Company
competes with a number of providers of remote control, file transfer and
remote LAN access software, including Symantec Corporation, Stac Electronics,
Inc. and Shiva Corporation. The Company's remote site modems compete with those
of U.S. Robotics Corporation, Hayes Microcomputer Products, Inc. and Practical
Peripherals, Inc. Increased competition could result in price reductions and
loss of market share which would materially and adversely affect Microcom's
business, results of operations and financial condition. The Company believes
that its ability to compete successfully depends on a number of factors,
including price, product features, product quality, performance and
reliability, name recognition, international certification, experienced sales,
marketing and service organizations, development of new products and
enhancements, evolving industry standards, and announcements by competitors.
Many of Microcom's current and potential competitors have significantly greater
financial, marketing, technical and other resources than Microcom. As a
result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company. The Company also expects competition to increase as a result of
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industry consolidations. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to address the remote network access needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. There can be no assurance that Microcom will be able to continue to
compete successfully with existing or new competitors or that competitive
pressures faced by the Company would not materially and adversely affect its
business, results of operations or financial condition.
Manufacturing
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The Company uses subcontractors to manufacture all of its products.
These manufacturers provide Microcom with fully tested, finished products
built to the Company's specifications. The Company's HDMS, LANexpress and
modem products are manufactured primarily by subcontractors in China, Malaysia,
Singapore and Hong Kong. A subcontractor in Massachusetts produces the
Company's software products and also provides warehousing and distribution
services to the Company. Microcom's internal manufacturing operations consist
of materials planning and procurement, product modifications to meet foreign
country requirements, final assembly, factory testing and quality control. In
addition, Microcom quality assurance personnel are on-site full-time at the
manufacturing facilities of the Company's subcontractors performing various
tests and quality assurance procedures. To date, the Company has not
experienced significant manufacturing defects or customer returns of products.
As of March 31, 1995, the Company employed 28 persons in the areas of
manufacturing and quality assurance. Reliance on foreign manufacturers
involves a number of risks, including unexpected changes in regulatory
requirements and tariffs, difficulties enforcing agreements, exchange rate
fluctuations, difficulties enforcing intellectual property rights, difficulties
obtaining export licenses, the imposition of withholding or other taxes,
embargoes or exchange controls or the adoption of other restrictions on
foreign trade.
Certain components used in the Company's products are available from a
single source, and others are available only from limited sources. In certain
circumstances, despite the availability of multiple sources, the Company may
select a single source in order to maintain quality control and develop a
strategic relationship with the supplier. In addition, certain components used
in the Company's products are only available from a single supplier or a
limited number of suppliers. Components for the Company's products which are
only available from a single supplier include certain semiconductor components
used in the Company's modems sourced from Rockwell and the power supply
component obtained from TDK for the Company's PCMCIA modem. It was recently
reported that Rockwell would be required to allocate among its customers,
including Microcom, the supply of a certain component incorporated into V.34
modems. This component is included in the Company's HDMS, LANexpress and modem
products. If Rockwell is unable to supply sufficient quantities of this
component to the Company on a timely basis, it would cause a delay in
Microcom's product shipments and such delay would have a material adverse
effect on the Company's business, results of operations and financial
condition. The Company believes, however, that it will be able to obtain from
Rockwell sufficient quantities of the component to satisfy its anticipated
requirements. The Company generally purchases single or limited source
components pursuant to purchase orders and has no guaranteed supply
arrangements with its suppliers. Further, the availability of many of these
components is dependent in part on the Company's ability to provide its
suppliers with accurate forecasts of its future requirements. A reduction or
interruption in supply of these components could result in delays or reductions
in product shipments which would materially and adversely affect the Company's
business, results of operations and financial condition and could damage
customer relationships. The Company may also be subject to increases in
component costs, which could also have a material adverse effect on the
Company's business, results of operations or financial condition.
Proprietary Rights
- ------------------
The Company's success and ability to compete is dependent in part upon
its ability to protect its proprietary technology. The Company relies on a
combination of patent, copyright and trade secret laws and non-disclosure
10
<PAGE> 11
agreements to protect its proprietary technology. The Company currently holds
fourteen United States patents, three of them involving ISDN technology, and
has five United States patent applications and two foreign patent applications
pending in a number of jurisdictions. There can be no assurance that patents
will be issued with respect to pending or future patent applications or that
the Company's patents will be upheld as valid or will prevent the development
of competitive products. The Company's United States patents expire between
2004 and 2011. The Company has not sought foreign patents for some of its
technologies, including technologies which have been patented in the United
States, which may adversely effect the Company's ability to protect its
technologies and products in foreign countries. The Company generally enters
into confidentiality or license agreements with its employees, distributors,
customers and potential customers and limits access to and distribution of its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by the Company to protect its proprietary
rights will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States. The Company is
also subject to the risk of adverse claims and litigation alleging
infringement of the proprietary rights of others. From time to time the Company
has received claims of infringement of other parties' proprietary rights. In
addition, the Company periodically reviews recent patents that have been
issued to third parties. As a result of such reviews, the Company has from time
to time identified and investigated the validity and scope of issued patents
for technologies similar to, or related to, the Company's technologies.
Although the Company believes that it does not infringe the valid patents of
others, there can be no assurance that third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not require the Company to enter
into license arrangements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can
be obtained on commercially reasonable terms. The failure to obtain such
royalty or licensing agreements on a timely basis would have a material
adverse effect upon the Company's business, results of operations and financial
conditions.
Employees
- ---------
As of March 31, 1995, the Company employed 309 persons, including 73 in
sales and marketing, 47 in customer service, 112 in research, development and
related engineering activities, 28 in manufacturing and 49 in executive and
administrative activities. None of the Company's employees is represented by a
labor union and the Company has not experienced any work stoppages. Management
believes that the Company's relations with its employees are good. Microcom
believes that its future success will depend in large part upon its ability to
attract and retain highly skilled engineering, managerial, sales, marketing
and product development personnel. Except with respect to the President and
Chief Executive Officer, the Company does not have employment contracts with
its key personnel and does not maintain any key person life insurance
policies. Competition for such personnel is intense, especially in the areas
of engineering and sales and marketing. The loss of key management or technical
personnel could materially and adversely affect the Company's business,
results of operations and financial condition, and there can be no assurance
that Microcom will be successful in attracting and retaining the personnel
required to engineer, manage, market or develop its products and conduct its
operations successfully.
11
<PAGE> 12
ITEM 2. PROPERTIES.
- --------------------
The Company's executive offices and its principal engineering and
marketing operations are located in a 101,000 square foot leased facility in
Norwood, Massachusetts. The lease for this facility expires in fiscal 2002,
subject to the Company's option to extend the term for up to an additional five
years. The Company also leases sales offices in California, Colorado,
Georgia, Illinois, Massachusetts, New Jersey, New York, Texas, Virginia, as
well as Australia, England, France, Germany and Singapore. The Company
believes that these facilities will be adequate to meet its requirements for
the foreseeable future and that suitable additional or substitute space will be
available as needed.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------
None
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------
The information contained under the headings "Stock Listing", "Number of
Stockholders" and "Dividend Policy" in the "Corporate Information" section on
the inside back cover of the Annual Report and under the heading "Selected
Quarterly Data" section on Page 27 of the Annual Report is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The information contained under the heading "Five-Year Summary of Operations"
on page 12 of the Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 13
through 15 of the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The information contained in the Consolidated Financial Statements (pages 17
through 19), Notes to Consolidated Financial Statements (pages 20 through 26),
Report of Independent Public Accountants (page 28) and under the heading
"Selected Quarterly Data" (page 27) in the Annual Report is incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
None
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
The information set forth under the caption "Election of Directors" appearing
in the Company's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on July 20, 1995 is incorporated herein by reference.
<TABLE>
The executive officers of the Company are as follows:
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Roland D. Pampel.............. 60 President, Chief Executive Officer and Director
Richard A. Barbari............ 55 Executive Vice President, Marketing and Latin America and Africa Sales
Lewis A. Bergins.............. 56 Executive Vice President, International Sales and Corporate Strategy
and Development
Peter J. Minihane............. 46 Executive Vice President, Chief Financial Officer and Treasurer
Gregory Pearson............... 49 Senior Vice President, Technology Management
William Andrews............... 40 Vice President, North American Sales
Eugene Y. G. Chang............ 41 Vice President, ISDN Technology
Jerry L. Falk................. 46 Vice President, Hardware Development
Mark J. Freitas............... 38 Vice President, Systems Management and Customer Support
Joseph P. King, Jr............ 45 Vice President, Operations
Elizabeth H. Rock............. 36 Vice President, Corporate Communications
Mr. Pampel has served as President, Chief Executive Officer and a
Director since March 1994. He is currently serving as a Class I Director for a
term expiring at the 1995 Annual Meeting of Stockholders. From September 1991
to February 1994, Mr. Pampel was Chief Executive Officer, President and a
Director of Nicolet Instrument Corporation, a manufacturer of biomedical and
analytical instruments. From July 1989 to August 1991, he was Chief Executive
Officer, President and a Director of Bull HN Information Systems, Inc., a
computer manufacturer. Since August 1993, Mr. Pampel has served on the board
of directors of Best Power Technology, Inc., a manufacturer of power technology
and backup recovery products.
Mr. Barbari has served as Executive Vice President, Marketing and Latin
America and Africa Sales since May 1994. From 1992 to April of 1994, Mr.
Barbari was Director of Operations of Nicolet Instrument Corporation, a
manufacturer of biomedical and analytical instruments. From 1989 to 1992, he
was Chief Executive Officer and Chairman of the Board of Ultimap Corporation, a
geographic information systems software company which filed for and emerged
from reorganization proceedings under Chapter 11 of the Bankruptcy Code during
this period.
Mr. Bergins joined the Company in 1982 and has served as Executive Vice
President, International Sales and Corporate Strategy and Development since
January 1989.
Mr. Minihane joined the Company in 1985 and has served as Executive Vice
President, Chief Financial Officer and Treasurer since January 1989. He has
been a director since May 1993 of Datawatch Corporation, a software company.
Mr. Pearson joined the Company in 1986 and has served as Senior Vice
President, Technology Management since April 1990.
</TABLE>
14
<PAGE> 15
Mr. Andrews has served as Vice President, North American Sales of the
Company since February 1992. From January 1987 to January 1992, Mr. Andrews was
remployed by Bitstream, Inc., a digital type and software company, as Vice
President, Sales and Marketing.
Mr. Chang rejoined the Company in 1995 as Vice President, ISDN
Technology. From November 1990 to January 1995, Mr. Chang was President and a
Director of Extension Technology Corp., which was acquired by the Company in
January 1995. From 1984 to 1990 Mr. Chang was employed by the Company as a
product manager for ISDN products.
Mr. Falk joined the Company in 1984 and has served as Vice President,
Hardware Development since April 1991.
Mr. Freitas joined the Company in 1986 and has served as Vice President,
Systems Management and Customer Support since May 1994.
Mr. King has served as Vice President, Operations since June 1992. From
1986 to June 1992, he was Vice President of Operations and Engineering at Alloy
Computer Products, Inc., a computer manufacturer.
Ms. Rock joined the Company in January 1991 and has served as Vice
President, Corporate Communications since June 1994. From August 1988 to June
1990, Ms. Rock was with Microamerica, Inc., a microcomputer distributor, as
Director, Marketing Communications.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
The information contained under the headings "Directors Compensation",
"Executive Compensation" and "Employment Agreements" on pages 5 through 8 of
the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The information contained under the heading "Stock Ownership of Directors,
Executive Officers and Principal Stockholders" on pages 2 and 3 of the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information contained under the heading "Certain Transactions" on pages 16
and 17 of the Proxy Statement is incorporated herein by reference.
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
<TABLE>
1. Financial Statements:
<CAPTION>
Page*
-----
<S> <C>
Five-Year Summary of Operations for the Five Year Period
Ended March 31, 1995 12
Consolidated Statements of Operations for the Three Years
Ended March 31, 1995 16
Consolidated Balance Sheets as of March 31, 1995 and 1994 17
Consolidated Statements of Stockholders' Equity for the
Three Years Ended March 31, 1995 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Selected Quarterly Data for the Two Years Ended March 31, 1995 27
Report of Independent Public Accountants 28
<FN>
*Page references are to the Company's 1995 Annual Report to Stockholders.
Such Annual Report is not to be deemed a part of this Report except for
those parts thereof specifically incorporated by reference into this
Report.
</TABLE>
<TABLE>
<CAPTION>
2. Financial Statement Schedule: Page
----
<S> <C>
Schedule II - Valuation and Qualifying Accounts 24
The Financial Statement Schedule listed above should be read in conjunction with
the Company's financial statements and the notes thereto (collectively, the
"Financial Statements") in the Company's 1995 Annual Report to Stockholders.
All other schedules have been omitted as they are not applicable, not required,
or the information is included in the Financial Statements. See "Report of
Independent Public Accountants on Schedules" on page 23 of this report.
</TABLE>
3. Exhibits: See Index to Exhibits and Financial Statement Schedules
appearing in (c) below.
16
<PAGE> 17
(b) REPORTS ON FORM 8-K:
A Form 8-K was filed by the Registrant on January 20, 1995 reporting the
acquisition of Extension Technology Corp. by the Registrant. A Form 8-K/A,
amending such Form 8-K, was filed by the Registrant on March 20, 1995 for the
purpose of filing the following financial statements:
(A) Financial Statements of Extension Technology Corp.:
(1) Report of Independent Public Accountants
(2) Balance Sheets as of September 30, 1994 and 1993
(3) Statements of Operations for the three years ended
September 30, 1994 and for the period from inception
(November 9, 1990) to September 30, 1994.
(4) Statements of Stockholders' Deficit for the years ended
September 30, 1994 and for the period from
inception (November 9, 1990) to September 30, 1994.
(5) Statement of Cash Flows for the years ended September 30, 1994
and for the period from inception (November 9, 1990) to
September 30, 1994.
(6) Notes to Financial Statements.
(B) Pro forma combined condensed financial information of Microcom, Inc.
and Extension Technology Corp.:
(1) Pro forma Condensed Balance Sheet as of September 30, 1994
and notes thereto.
(2) Pro forma Condensed Statement of Operations for the six months
ended September 30, 1994 and notes thereto.
(3) Pro forma Condensed Statement of Operations for the year ended
March 31, 1994 and notes thereto.
(c) EXHIBITS
INDEX TO EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Certain of the following exhibits are filed herewith (denoted by *). Certain
other of the following exhibits have heretofore been filed with the
Commission and are incorporated herein by reference.
<TABLE>
Exhibit No. Exhibit
- ----------- --------
<S> <C>
####2.1 - Merger Agreement and Plan of Reorganization, dated as
of December 21, 1994, by and among the Registrant, Extension
Acquisition Corp. and Extension Technology Corp. (Exhibit to
Report on Form 8-K filed January 20, 1995).
17
</TABLE>
<PAGE> 18
<TABLE>
Exhibit No. Exhibit
- ----------- --------
<S> <C>
####2.2 - Asset Purchase Agreement dated as of September 30, 1992 among
Registrant, Microcom Systems, Inc. and Datawatch Corporation.
(Exhibit to Report on Form 10-Q filed for the quarter ended
December 31, 1992.)
####2.3 - Asset Purchase Agreement dated December 22, 1992 among
Registrant, Microcom Systems, Inc. and VM Systems Group, Inc.
(Exhibit to Report on Form 10-Q filed for the quarter ended
December 31, 1992.)
####2.4 - Asset Purchase Agreement dated as of December 31, 1993 among
Registrant, Microcom Systems, Inc. and Central Point Software,
Inc. (Exhibit to Report on Form 10-K filed for the year ended
March 31, 1994.)
###3.1 - Restated Articles of Organization of Registrant.
#3.2 - By-Laws of Registrant, as amended.
###4.1 - Article 6 of Restated Articles of Organization of Registrant.
#4.2 - Articles III and VIII of By-Laws of Registrant, as amended.
###10.1 - Purchase Agreement Dated June 30, 1993 between the Registrant
and Sprint Communications Corporation L.P.
###10.2 - Registration Rights Agreement dated December 20, 1994 between
the Registrant and Extension Technology Corp.
###10.3 - Amendment dated March 30, 1989 to Lease between the Registrant
and First Stone Ridge Limited Partnership.
###10.4 - Second Amendment dated January 31, 1995 to Lease between the
Registrant and First Stone Ridge Nominee Trust I.
###10.5 - Amended and Restated Credit Agreement dated March 22, 1995
among the Registrant, Silicon Valley Bank and BayBank.
###10.6 - Amended and Restated Promissory Note in the principal amount
of $8,000,000 dated March 22, 1995 made by the Registrant to
the order of Silicon Valley Bank.
###10.7 - Promissory Note in the principal amount of $8,000,000 dated
March 22, 1995 made by the Registrant to the order of BayBank.
###10.8 - Amended and Restated Security Agreement dated March 22, 1995
among the Registrant, Silicon Valley Bank and BayBank.
</TABLE>
18
<PAGE> 19
<TABLE>
Exhibit No. Exhibit
- ----------- --------
<S> <C>
###10.9 - Guaranty dated March 22, 1995 by Microcom Systems, Inc. in
favor of Silicon Valley Bank and BayBank.
###10.10 - Guarantor Security Agreement dated March 22, 1995 among
Microcom Systems, Inc., Silicon Valley Bank and BayBank.
###10.11 - Collateral Assignment of Patents and Trademarks dated March 22,
1995 among Microcom Systems, Inc., Silicon Valley Bank
and BayBank.
###10.12 - Letter Agreement dated February 15, 1994 among Roland D.
Pampel, James M. Dow as Chairman of the Board of Directors of
the Registrant and Michael I. Schneider as Chairman of the
Compensation Committee of the Board of Directors of the
Registrant.
###10.13 - Letter Agreement dated March 3, 1994 among the Registrant,
James M. Dow and Michael I. Schneider as Chairman of the
Compensation Committee of the Board of Directors of
the Registrant.
###10.14 - Secured Promissory Notes made by certain senior officers and
directors to the order of the Registrant in connection
with stock loans.
###10.15 - 1993 Non-Employee Director Stock Option Plan. (As Amended and
Restated as of March 17, 1995.)
####10.16 - 1982 Stock Option and Stock Purchase Plan (as Amended and
Restated Effective as of June 8, 1994) (Exhibit to Registration
Statement #33-84572 filed on Form S-8 on September 30, 1994).
####10.17 - 1987 Employee Stock Purchase Plan. (As Amended and Restated
Effective as of April 24, 1995) (Exhibit to Registration
Statement #33-59939 filed on Form S-8 on June 5, 1995.)
####10.18 - Long Term Performance Plan of Registrant. (Exhibit to
Registration Statement #33-84572 filed on Form S-8 on
September 30, 1994.)
##10.19 - Agreement dated May 13, 1986 between Registrant and Rockwell
International Corp.
##10.20 - Agreement dated January 30, 1987 between Registrant and
Rockwell International Corp.
##10.21 - Lease dated August 11, 1987 between Registrant and First Stone
Ridge Limited Partnership. (Exhibit to Report on Form 10-K
filed for the year ended March 31, 1988.)
</TABLE>
19
<PAGE> 20
<TABLE>
Exhibit No. Exhibit
- ----------- --------
<S> <C>
####10.22 - Manufacturing Agreement dated as of December 18, 1987 between
Registrant and Video Technology Engineering, Ltd. (Exhibit to
Report on Form 10-K filed for the year ended March 31, 1988.)
####10.23 - Letter of intent dated as of January 26, 1993 between
Registrant and Flextronics International. (Exhibit to Report
on Form 10-K filed for the year ended March 31, 1994.)
#10.24 - Master Conditional Sale and Security Agreement between
Registrant and NYNEX Credit Company dated as of
September 23, 1988.
#10.25 - Financing Agreement for Centrex Service between Registrant and
NYNEX Credit Company dated as of September 23, 1988
#10.26 - Agreement dated July 1, 1988 between Registrant and Rockwell
International Corp.
####10.27 - Agreement Dated December 12, 1989 between Registrant and
Rockwell International Corp. (Exhibit to Report on Form 10-K
filed for the year ended March 31, 1990.)
####10.28 - Agreement dated December 23, 1991 between Registrant and
Rockwell International Corp. (Exhibit to Report on Form 10-K
filed for the year ended March 31, 1992.)
####10.29 - Agreement dated October 4, 1993 between Registrant and
Rockwell International Corp. (Exhibit to Report on Form 10-K
filed for the year ended March 31, 1994.)
####10.30 - Spectrum-Microcom Global Settlement by and between the Company
and Spectrum Information Technologies, Inc. dated November 16,
1993. (Exhibit to Report on Form 10-Q filed for the quarterly
period ended December 31, 1993.)
*11.0 - Statement Regarding Computation of Per Share Earnings.
*13.0 - Annual Report to Stockholders for the fiscal year ended
March 31, 1994, which is deemed not to be filed except to the
extent that portions thereof are expressly incorporated
by reference herein.
*21.0 - Subsidiaries of Registrant.
*23.0 - Consent of Independent Public Accountants
<FN>
- ---------------------------
# Filed with the Company's Registration Statement on Form S-1,
Registration Statement No. 33-28399.
</TABLE>
20
<PAGE> 21
## Filed with the Company's Registration Statement on Form S-1,
Registration Statement No. 33-13455.
### Filed with the Company's Registration Statement on Form S-3,
Registration Statement No. 33-59471.
#### Filed with the report or registration statement indicated.
(d) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MICROCOM, INC.
June 29, 1995 By: /s/ Roland D. Pampel
----------------------------------
Roland D. Pampel
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Roland D. Pampel President, Chief Executive Officer June 29, 1995
- ------------------------ and Director
Roland D. Pampel (Principal Executive Officer)
/s/ Peter J. Minihane Executive Vice President, Chief June 29, 1995
- ------------------------ Financial Officer and Treasurer
Peter J. Minihane (Principal Financial Officer and
Principal Accounting Officer)
/s/ James D. Dow Chairman of the Board June 22, 1995
- ------------------------
James D. Dow
/s/ Donald G. Kennedy Director June 29, 1995
- ------------------------
Donald G. Kennedy
- ------------------------ Director June __, 1995
Fred L. Luconi
/s/ John C. Rutherford Director June 29, 1995
- ------------------------
John C. Rutherford
/s/ Michael I. Schneider Director June 29, 1995
- ----------------------
Michael I. Schneider
22
<PAGE> 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
----------------------------------------------------
To Microcom, Inc:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Microcom, Inc.'s
1995 Annual Report to Stockholders incorporated by reference in this Form 10-K,
and have issued our report thereon dated April 11, 1995. Our audits were made
for the purpose of forming an opinion on those statements taken as a whole.
The schedule listed in the index is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
June 22, 1995
23
<PAGE> 24
Schedule II
<TABLE>
<CAPTION>
MICROCOM, INC.
Valuation and Qualifying Accounts
(In thousands)
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Description Period Expenses Accounts Deductions End of Period
- ------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Fiscal Year Ended March 31,:
Reserve for doubtful
Accounts:
1991 605 180 ---- 403 382
1992 382 360 ---- 396 346
1993 346 271 ---- 224 393
1994 393 ---- ---- 147 246
1995 246 134 ---- 130 250
Accumulated amortization of
purchased technology:
1991 2,603 1,719 ---- 4,322 ----
1992 ---- ---- ---- ---- ----
1993 ---- ---- ---- ---- ----
1994 ---- ---- ---- ---- ----
1995 ---- 75 ---- ---- 75
Accumulated amortization of
goodwill:
1991 1,382 1,111 ---- 1,002 1,491
1992 1,491 530 ---- ---- 2,021
1993 2,021 531 ---- ---- 2,552
1994 2,552 530 ---- ---- 3,082
1995 3,082 531 ---- ---- 3,613
Accumulated amortization of
nondisclosure and
noncompete agreements:
1991 738 238 ---- 976 ----
1992 ---- ---- ---- ---- ----
1993 ---- ---- ---- ---- ----
1994 ---- ---- ---- ---- ----
1995 ---- ---- ---- ---- ----
</TABLE>
24
<PAGE> 1
Exhibit 11.0
<TABLE>
MICROCOM, INC.
CALCULATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
Year Ended March 31,
----------------------------------------------------
1995 1994 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ................................................... $ 5,761 $(10,913) $(10,694) $ 3,431
Reconciliation of weighted average number of shares outstanding
to amount used in net income (loss) per share computation:
Weighted average number of shares outstanding................ 10,792 10,041 9,644 9,211
Assumed exercise of stock options computed
using the treasury stock method.............................. 1,013 -- -- 791
Weighted average number of shares outstanding,
as adjusted.................................................. 11,805 10,041 9,644 10,002
Net income (loss) per share.......................................... $ .49 $ (1.09) $ (1.11) $ .34
</TABLE>
<PAGE> 1
Exhibit 13.0
[FRONT COVER]
EXTENDING THE HEART OF THE NETWORK
PHOTO COLLAGE
MICROCOM
ANNUAL REPORT 1995
<PAGE> 2
CORPORATE FOCUS
Microcom's strategy is to continue to be a leading provider of remote network
access solutions and to capitalize on the emerging trends in this market. The
key components of this strategy include a continued focus on the remote network
access market, maintaining technology leadership, leveraging our existing
customer base, developing and expanding our strategic relationships, and
expanding our worldwide distribution. With more and more people needing to
access information on the Internet, on-line services and corporate networks, the
demand for fast, reliable and secure solutions is on the rise. While most
companies only provide one end of the remote network access solution, Microcom
provides both ends -- from the central site to the remote site. Microcom's broad
product line addresses the needs of the central site network manager and the
remote user accessing central site information, hence extending the heart of the
network.
<PAGE> 3
QUARTERLY FINANCIAL SUMMARY
[BAR CHART]
REVENUE
(in millions of dollars)
6/93 - 3/95
[BAR CHART]
GROSS PROFIT
(in millions of dollars)
6/93 - 3/95
[BAR CHART]
EARNINGS PER SHARE
(in dollars)
6/94 - 3/95
[BAR CHART]
INCOME FROM OPERATIONS
(in millions of dollars)
6/94 - 3/95
[BAR CHART]
NET INCOME
(in millions of dollars)
6/94 - 3/95
1
<PAGE> 4
TO OUR SHAREHOLDERS:
Fiscal year 1995 was an outstanding year for Microcom. The Company
achieved record revenues of $93.1 million, a 65 percent increase over the prior
year, and sustained eight consecutive quarters of increased revenue and gross
profit expansion. This performance, along with the continued delivery of
award-winning products, new technologies, distribution partnerships, strong
international growth, and expanded market opportunities resulted in a doubling
of the market value of Microcom stock from $5.75 to $11.34 per share over the
course of the fiscal year.
[PHOTO] Roland D. Pampel, President and Chief Executive Officer (Left), with
James M. Dow, Chairman of the Board
The theme of this annual report, "Extending the Heart of the Network,"
was certainly true of Microcom in fiscal year 1995 -- in fact, in many respects,
it was the key to our success. We expended significant corporate resources on
improving the quality of our products and support to meet or exceed our
customers, resellers, and distributors expectations. We aggressively pursued and
concluded technology acquisitions to complement our internal development
capabilities while providing immediate access to emerging technologies important
to future growth. New distribution partnerships in a number of countries
contributed substantially to the 115 percent growth of our international
business, which accounted for 28 percent of our total revenue in fiscal year
1995 versus 22 percent in the prior year.
Microcom has continually led the industry in developing innovative
products in response to customer requirements. Our goal is to continue to be a
worldwide leader in providing remote network access solutions that help
customers extend the heart of their networks to the exploding number of mobile
users and telecommuters dialing into corporate networks and accessing on-line
services and the Internet.
Microcom has installed more than 12,000 chassis and approximately
250,000 ports of our HDMS(TM) (High Density Management System(TM)), a remote
dial-up access management system for central site mainframe access, remote LAN
(local area network) access, and on-line service and Internet access. In
addition to offering the lowest price-per-port solution, HDMS's comprehensive
network management, robust security, superior reliability, and unparalleled
reporting capabilities uniquely position the product to capitalize on the boom
in on-line services. In fiscal year 1995, HDMS sales comprised approximately 40
percent Roland D. Pampel, President and Chief Executive Officer (Left), with
James M. Dow, Chairman of the Board of Microcom's product revenue. Major sales
included two of the leading telecommunications providers in the United States
and the PTTs in the Netherlands and in Israel. We added T1 and V.34
communications standards to the product and will continue to enhance and market
HDMS in the future.
Our LANexpress(TM) product, a fully integrated remote LAN access
solution that began shipping in early 1994, continues to be recognized by
industry experts as a leadership product in terms of performance, ease-of-use,
and manageability. LAN Times noted that "for an all-in-one remote node, remote
control package, Microcom's LANexpress server is hard to beat." At the Invex
Computer Fair in the Czech Republic, LANexpress was awarded the "Crystal Disk"
for outstanding technology.
2
<PAGE> 5
Less than a year after initial market introduction, we expanded
LANexpress into a family of products providing a range of flexible solutions for
workgroups, departments, and the enterprise. At the same time, we signed
distribution agreements with three of the leading U.S. national distributors:
Tech Data Corp., Merisel Inc., and Ingram Micro Inc. In addition, we obtained
certification for sale of the product line in more than 20 countries on six
continents.
International Data Corporation (IDC) has predicted that the market for
remote LAN access servers will grow from $400 million in 1994 to more than $1
billion by 1998. We are continuing to invest in the technical superiority and
global distribution of LANexpress in order to take advantage of this market
opportunity.
While our strategy focuses on central site products such as HDMS and
LANexpress, Microcom continues to deliver a comprehensive set of remote products
and technologies that allow customers to build end-to-end remote network access
solutions. Microcom's remote products and technologies include Carbon Copy(TM)
remote control PC access software, a family of high-speed 28.8 Kbps modem
products and transmission protocols, and ISDN (Integrated Services Digital
Network) products and technology.
With more than one million unit shipments, Microcom's Carbon Copy
remains one of the best selling remote control PC access software packages
worldwide. In the past fiscal year, we made Carbon Copy available to even more
international users by delivering localized versions in Japan, Germany, France,
Spain, Portugal, and the Czech Republic. In the United States, we established an
OEM (original equipment manufacturer) partnership with Artisoft who is selling
Carbon Copy as part of their LANtastic Utility Pack for the burgeoning small
office/home office market.
Just recently, we launched the new Carbon Copy for Windows, Version
3.0, which added numerous new features, including unsurpassed remote control and
file transfer speeds, outstanding ease of installation, Windows 95 support and
multi-level security. The new features will expand the opportunities for Carbon
Copy into growing markets such as document transmission, remote diagnostics and
equipment control, collaboration, automated data collection, remote professional
services, and remote training.
Microcom's high-speed modems continue to set the standard for technical
excellence and price/performance leadership. In June 1994, the Company
introduced the TravelCard(TM) FAST, the industry's first 28.8 Kbps PCMCIA
credit-card sized modem. This modem incorporates Microcom's Advanced Parallel
Technology(TM) (APT(TM)) which takes advantage of the PC's parallel port
capability to overcome the serial port bottleneck that occurs in high-speed
communications in Windows environments. We also worked extensively with Rockwell
International, the manufacturer of the modem's data pump, to ensure the highest
quality, connectability, and interoperability with other modem brands. The
TravelCard FAST, along with the DeskPorte(TM) FAST desktop version, received
numerous industry awards, including recognition from PC Computing, Computer
Life, PC LapTop, and Windows Sources.
[PHOTO 1]
MICROCOM HDMS PLUS
[PHOTO 2]
LAN EXPRESS 4000
[PHOTO 3]
MICROCOM CARBON COPY BOX
3
<PAGE> 6
At the end of 1994, we began converting our 28.8 Kbps V.FC modems to
the newly established V.34 international standard. By the end of March, 1995, we
had converted virtually the entire product line to the standard in the U.S. as
well as internationally.
Over the years, Microcom has developed several innovative technologies
that the Company has licensed to other data communications suppliers. In late
1994, we teamed with Rockwell to announce MNP(R) (Microcom Networking
Protocol(TM)) 10EC, an enhanced version of MNP 10, the de facto industry
standard for transmitting data over adverse lines and cellular networks. We have
also licensed our Advanced Parallel Technology to Microsoft Corporation for
inclusion in Windows 95.
ISDN technology allows the integration of voice and data transmission
over a single digital line at speeds up to 128 Kbps. Widely available in
international markets for several years, ISDN service is now becoming more
available in the U.S., particularly for use in remote network access
applications. Given Microcom's objective to continue to be a leader in remote
network access technology, we believe that ISDN is a key technology for future
revenue growth. Within the past six months, we acquired two ISDN companies which
has given us immediate access to this technology.
The acquisition of Extension Technology Corporation (ETC) brings to
Microcom key ISDN intellectual property, patents, and expertise that are
adaptable to our LANexpress and HDMS products. The second acquisition was for
the SoLIS ISDN product line of a German subsidiary of Electronic Data Systems
(EDS). SoLIS is highly regarded as a leading edge technology with a significant
installed base in larger corporations throughout Europe.
In conjunction with the acquisition of SoLIS, Microcom formed a new
subsidiary in Germany, Microcom GmbH, which now has worldwide development and
product support responsibilities for Microcom's ISDN products. We believe that
centralizing development functions on the continent will expedite the delivery
of quality products to the marketplace.
In fiscal 1995, Microcom also invested heavily in expanding
international channels of distribution. In Scandinavia, we established a joint
venture between our Swedish, Norwegian, and Danish distributors. In Eastern
Europe, we entered into distribution agreements in the emerging markets of the
Czech Republic and Poland. In the United Kingdom, we experienced very strong
demand for LANexpress due to the technological expertise and excellent
relationships that Tricom, our distribution partner, has with large U.K.-based
organizations.
In the Pacific Rim, we signed a major distribution agreement with
Sydney, Australia-based Banksia, a leading modem manufacturer, who will market
Microcom's entire modem line and HDMS in that country. We expanded distribution
in Japan by providing localized versions of Carbon Copy for Windows and
LANexpress; while HDMS and modem sales to Internet access providers were also
strong. Our partnership with Datacraft Asia Ltd., based in Singapore, expanded
our sales in Hong Kong and Singapore.
[PHOTO 4]
TRAVEL CARD FAST 28.8
[PHOTO 5]
COMPUTER BOARD
4
<PAGE> 7
Finally, we expanded our presence in the Middle East, South Africa, and
in South America through a series of new distribution agreements.
Before beginning fiscal year 1996 we established a set of corporate
goals to leverage our success in the past year, to improve our ability to
compete in a highly competitive marketplace, and to sustain quarterly revenue
and earnings growth. We will continue to focus on quality improvements and in
exceeding our customers' and partners' expectations. Product innovation,
price/performance leadership, further OEM and strategic partnerships, and
expanded technology licensing will help us meet our financial and market
objectives. In the U.S., we will focus sales on the Corporate 2000 while
expanding our value-added reseller channel. In other countries, we will strive
to increase the productivity of our existing distribution while adding new
partners to key stategic markets.
On May 19, 1995, the Company announced a secondary public stock
offering of 3,200,00 shares of its common stock, the proceeds of which will be
used for repayment of indebtedness, working capital and other general corporate
purposes. We're extremely excited about the offering, the opportunity to
disseminate Microcom's success story and the resulting working capital that will
be necessary to continue our growth.
Microcom made tremendous progress in fiscal year 1995 thanks to the
dedication and hard work of our talented employees and to the support of our
customers, distribution partners, vendors, and stockholders. We believe that the
strategic course set one year ago is the right direction for Microcom and we are
focused on improving our execution of the strategy. Our performance in fiscal
year 1995 makes us confident that the new fiscal year will demonstrate continued
growth in revenue and earnings.
Sincerely,
/s/ Roland D. Pampel /s/James M. Dow
- ------------------------------------- ---------------------
Roland D. Pampel James M. Dow
President and Chief Executive Officer Chairman of the Board
5
<PAGE> 8
MICROCOM. EXTENDING THE HEART OF THE NETWORK.
Information superhighway, cyberspace, worldwide web, electronic shopping malls,
net surfing, virtual offices. Hardly a day goes by without hearing one of these
terms. For computer enthusiasts, it's easy to get caught up in the technobabble,
but for others, it is baffling, even daunting, and seems to bear little
relevance to daily life.
The world is rapidly changing, however. More and more people are
getting connected at work, at home, and on the road. This past year has
witnessed an explosion in the number of people subscribing to on-line services
such as America Online, Prodigy, and CompuServe and connecting to the Internet.
Organizations of all sizes are racing to connect remote users to central site
corporate information resources. Information is power and timely access to
information is a competitive advantage.
According to International Data Corporation, there is a paradigm shift
occurring with profound implications for business and society. While in the past
ten years, the use of computers focused on improving individual and internal
productivity, in the coming information highway era, computers will be used to
look outward, building mass market connections between businesses and consumers,
governments and their citizens.
REMOTE SITE
Microcom is an industry leader in delivering powerful and easy-to-use
products for remote users connecting to the Internet, on-line services, and
departmental and enterprise networks.
Microcom is a company delivering the enabling technology for this new
era. Over the years Microcom has developed highly innovative products that
provide superior end-to-end remote network access solutions. Central site
products, including HDMS (High Density Management System) and LANexpress, offer
outstanding reliability, unparalleled performance, robust security, and
comprehensive management capabilities. As you will see in the following pages,
customers such as Sprint Corporation, the United States Department of Labor, and
Bezeq (Israeli PTT) depend on these Microcom products to provide vital services
to the public and private sectors.
Microcom's extensive line of 28.8 Kbps modems has received numerous
industry awards in recognition of their technological excellence. Carbon Copy
for Windows remote control PC access software features an easy-to-use graphical
user interface, remote control, and top file transfer speed. Millions of
customers use these products to remotely access and share information globally.
As remote network access technology becomes more widespread, the
quality of vendor support assumes greater importance. Microcom is focused on
achieving the highest levels of customer satisfaction. In each of the following
application profiles, Microcom received and responded to considerable feedback
from the customer. Extending the heart of the network is a considerable
undertaking. With leading-edge products and a dedicated support organization,
Microcom is ready to help customers enter the information highway era.
7
<PAGE> 9
SPRINT CORPORATION (HDMS)
[LOGO]
Sprint Corporation, one of the largest U.S.-based telecommunications
service providers, has utilized Microcom's High Density Management System (HDMS)
and dial-up access systems for nearly a decade to enable connectivity to
Sprint's X.25 public data network (PDN). Spanning almost 500 U.S. cities, the
Sprint PDN supports business applications for customers ranging from financial
services firms and large retail operations to manufacturing companies and
on-line service providers -- in short, any organization that has a local branch
office or remote user who wants to dial into a database via a public data
network.
The explosive growth of the on-line services industry is driving rapid
expansion of the Sprint public network. "In 1994, we expanded the network port
counts by a factor of three, and we expect the number to increase substantially
in 1995," Jim Greenberg, director of Sprint Data Services Engineering in Reston,
Virginia.
Designing and maintaining such a vast and rapidly growing network is a
constant yet exciting challenge. Sprint's customers require reliable and fast
access at competitive prices. Complicating the situation is the fact that Sprint
must support interoperability among the dozens of different modem types now
available in the marketplace.
To help meet these challenges, Sprint currently relies on a large
number of Microcom HDMS (High Density Management System) dial-up access
management systems equipped with 28.8 Kbps modem modules. Says Greenberg, "The
beauty of our network is that throughput is very fast. We are unique in that we
have designed the network and tuned our modems to handle the gamut of on-line
service applications from simple chat sessions to large graphic downloads."
In addition to the delivery of high-speed products, Greenberg
appreciates Microcom's efforts in ensuring interoperability with a wide variety
of other manufacturers' modems. He also values HDMS' network management
capabilities. Microcom developed an alarm feed into the customized network
management system that Sprint uses to manage its public data network.
In the end, Greenberg is proud that Sprint is on the forefront of
helping customers access the information superhighway. Microcom is pleased to be
working with Sprint to provide high-quality communications services.
[PHOTO 6]
SPRINT BUILDING
8
<PAGE> 10
UNITED STATES DEPARTMENT OF LABOR (LANEXPRESS)
[DEPARTMENT OF LABOR SEAL]
The U.S. Department of Labor (DOL) is reinventing government through
the use of remote network access technology. In the summer of 1994, the DOL
began a nationwide rollout of Microcom's LANexpress remote LAN access system to
improve communications and efficiency of more than 12 regional offices and 200
field offices responsible for enforcing Wage Hour and Federal Contract
Compliance standards that ensure the economic well-being of American workers.
According to Steve Cohen, nationwide network manager for the DOL's
Employment Standards Administration (ESA) networks and telecommunications, prior
to installing LANexpress, DOL field investigators expended considerable time,
effort, and expense sending multiple documents via fax or mail between field and
regional offices. LANexpress has improved efficiency and reduced costs by
providing immediate access to electronic mail, procedural information, and
legislative acts, needed by wage and contracts inspectors who enforce
departmental policies while on the road. DOL/ESA is also currently working on
establishing an Internet gateway connection that will provide external users
access to relevant public documents and will serve as an electronic mail gateway
for the general public.
The DOL has worked closely with Microcom to customize LANexpress in
order to address the computing needs of its remote employees. A standard
platform and user interface were developed in order to minimize training and
support requirements and to ensure ease of installation and use.
The DOL's investment in remote LAN access technology recently helped
the Office of Workers' Compensation Programs (OWCP) provide assistance to the
victims of the Oklahoma City bombing. Within one day of the disaster, four DOL
volunteers from a regional office in Dallas established a virtual office in
Oklahoma City utilizing notebook PCs equipped with LANexpress software. The
volunteers were able to open case files quickly and access information remotely
to expedite insurance claims.
Based on its initial success with LANexpress, the Department of Labor
is planning to expand deployment to other DOL divisions.
[PHOTO 7]
DEPARTMENT OF LABOR BUILDING
9
<PAGE> 11
BEZEQ (HDMS AND MODEMS]
Public telephone companies throughout the world, commonly known as
PTTs, rely on Microcom remote network access products to provide a variety of
services to the public and private sectors in their respective countries. Bezeq,
the Israeli PTT, began utilizing Microcom's HDMS dial-up access management
systems and 28.8 Kbps modems in mid-1994 in support of two major network
products.
ISRANET is a large packet switching network spanning thirty sites in
Israel. The network provides three types of services to its customers: dial-up
access to an X.25/X.32 network, access to commercial on-line services, and
customer-to-customer connectivity. According to David Rehana, head of the packet
switching system in Bezeq's data communications section, "ISRANET is growing
rapidly in response to increasing customer demand for network access services.
It will probably double in size over the next year. In particular, we are
experiencing increased demand for our Frame Relay service which provides
customers cost-effective switched network access."
The second project, SIFRANET, provides leased line network access via
28.8 Kbps analog modems. To date, the two projects combined have widely deployed
HDMS chassis with more than 1,500 28.8 Kbps integrated modem modules.
Rehana says that Bezeq selected Microcom products based on their
superior price/performance and management capabilities. "As a government agency,
our mandate is to deliver high-quality services at the best possible prices.
After evaluating a number of products, we concluded that Microcom products could
help us fulfill our mission. One year later, we are pleased with our selection."
In 1996 Bezeq plans to offer dial-in service for Frame Relay access.
Microcom's HDMS will be an important component of the service, enabling
throughput rates up to 115.2 Kbps with compression. "We need to be on the
cutting edge of technology to be responsive to our customers," says Rehana. "We
therefore rely on suppliers, such as Microcom, to keep pace with our business
and technical requirements."
10
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FIVE-YEAR SUMMARY OF OPERATIONS 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
CONSOLIDATED STATEMENTS OF OPERATIONS 16
CONSOLIDATED BALANCE SHEETS 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 18
CONSOLIDATED STATEMENTS OF CASH FLOWS 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20
SELECTED QUARTERLY DATA 27
REPORT OF MANAGEMENT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 28
CORPORATE INFORMATION INSIDE BACK COVER
</TABLE>
11
<PAGE> 13
FIVE YEAR SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended March 31,
Consolidated Statement of Operations Data 1995 1994 1993 1992 1991
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $93,106 $56,464 $69,435 $73,906 $55,401
Gross margin.......................................... 41,784 27,392 36,303 41,804 27,445
Income (loss) from operations......................... 7,517 (10,416) (6,902) 4,205 (33,434)
Net income (loss)..................................... 5,761 (10,913) (10,694) 3,431 (28,744)
Net income (loss) per share........................... .49 (1.09) (1.11) .34 (3.16)
Weighted average number of shares outstanding......... 11,805 10,041 9,644 10,002 9,083
</TABLE>
No cash dividends have been declared or paid by the Company in any of the
periods presented. Fiscal 1994 and 1993 results have been effected by the
disposition of certain product lines and restructuring costs. For further
discussion of dispositions and restructuring costs, see "Notes to the
Consolidated Financial Statements" on pages 20-26.
<TABLE>
<CAPTION>
As of March 31,
1995 1994 1993 1992 1991
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital...................................... $17,732 $13,957 $20,829 $29,221 $25,221
Total assets......................................... 57,788 38,453 45,853 52,957 52,281
Long-term portion of capitalized leases.............. 122 450 762 649 815
Total stockholders' equity........................... 35,282 26,231 36,520 46,042 40,141
</TABLE>
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES
In fiscal 1995, net sales increased by $36,642,000, or 65%, from fiscal 1994.
The increase was primarily attributable to increased sales of central site
remote network access products, particularly HDMS. A significant portion of HDMS
sales were made to Sprint, which accounted for 24% and 13% of net sales in
fiscal 1995 and 1994, respectively. The increase in net sales was also
attributable to increased sales of 28.8 Kbps modems which were not available
until the third quarter of fiscal 1994. The LANexpress product line also
contributed to the increase in net sales. These increases were offset in part by
a decrease in sales of the Company's bridge/router products, with respect to
which the Company discontinued development and marketing efforts in fiscal 1994,
and a decline in Carbon Copy software sales, which resulted from the success of
competitive products. International sales were $26,549,000 in fiscal 1995,
representing 28% of net sales, as compared to $12,358,000 in fiscal 1994, or 22%
of net sales. The increase in fiscal 1995 international sales was primarily due
to increased HDMS and modem sales.
GROSS MARGIN
Gross margin as a percentage of net sales was 45% for fiscal 1995 as compared to
49% for fiscal 1994. The decrease was primarily due to a decrease in the selling
price of the Company's modems due to competitive pressures and a decrease in
sales of its higher margin Carbon Copy software.
RESEARCH AND DEVELOPMENT
Research and development costs in fiscal 1995 were $10,250,000 as compared to
$8,959,000 in fiscal 1994. As a percentage of net sales, research and
development expenses decreased to 11% in 1995 from 16% in the prior fiscal year.
Although research and development expenses decreased as a percentage of net
sales, the total dollar amount increased by $1,291,000, principally as a result
of increased consulting and contract professional fees relating to continued
product development.
SALES AND MARKETING
In fiscal 1995, sales and marketing expenses increased by $3,662,000, or 23%,
over fiscal 1994 due to increased variable selling expenses resulting from
increased net sales. As a percentage of net sales, sales and marketing expenses
decreased to 21% in fiscal 1995 from 28% in the prior fiscal year as net sales
increased at a higher rate than sales and marketing expenses.
GENERAL AND ADMINISTRATIVE
In fiscal 1995, general and administrative expenses were $4,747,000 or 5% of net
sales, as compared to $5,366,000, or 9% of net sales, in the prior fiscal year.
The decrease in such expenses as a percentage of net sales was the result of the
Company's reduction in general and administrative personnel together with the
increase in net sales for the year.
INTEREST INCOME AND EXPENSE
Interest income increased in fiscal 1995 by $25,000 to $67,000 and interest and
other expense increased by $429,000 to $807,000. The increase in interest income
was due to interest earned on certain loans to officers of the Company. The
increase in interest and other expense was primarily a result of interest paid
on increased borrowings under the Company's revolving credit facility.
INCOME TAXES
The Company's effective tax rate was 15% for fiscal 1995. The difference between
the statutory rate and the effective tax rate reflects the utilization of a
portion of the Company's net operating loss carry forwards. At March 31, 1995,
the Company had available $21,509,000 in net operating loss carry forwards,
which may be used to offset future taxable income, and $3,959,000 in research
and development credit carry forwards, which may be used to offset future taxes
payable. These carry forwards expire through 2009 and are subject to review and
possible adjustment by the Internal Revenue Service.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
For the reasons stated above, net income for fiscal 1995 was $5,761,000 as
compared to a net loss of $10,913,000 for fiscal 1994, and net income per share
for fiscal 1995 was $.49 as compared to a net loss per share of $1.09 for fiscal
1994.
FISCAL 1994 COMPARED TO FISCAL 1993
NET SALES
In fiscal 1994, net sales decreased by $12,971,000, or 19%, from fiscal 1993.
The decrease in net sales was a result of the decline in demand for the
Company's modem and bridge/router products in the first and second quarters of
fiscal 1994 combined with reduced software revenues resulting from the
disposition of the Company's Relay and Virex software product lines during
fiscal 1993. The decline in demand for the Company's modems was due to increased
competition in the modem market. International sales were $12,358,000 in fiscal
1994, representing 22% of net sales, as compared to $14,696,000 in fiscal 1993,
or 21% of net sales. The decrease in fiscal 1994 international sales was
primarily due to lower modem sales in Europe and the disposition of the software
product lines in fiscal 1993.
GROSS MARGIN
Gross margin as a percentage of net sales was 49% for fiscal 1994 as compared to
52% for fiscal 1993. The decrease was primarily due to a decrease in the selling
price of the Company's modems and an overall decrease of higher margin software
sales as a result of the software product line dispositions in fiscal 1993.
13
<PAGE> 15
RESEARCH AND DEVELOPMENT
Research and development costs in fiscal 1994 were $8,959,000 as compared to
$12,483,000 in fiscal 1993. As a percentage of net sales, research and
development expenses decreased to 16% in fiscal 1994 from 18% in the prior
fiscal year. The decrease resulted from decreased research and development
activity and a corresponding reduction in personnel.
SALES AND MARKETING
In fiscal 1994, sales and marketing expenses decreased $5,307,000, or 25%, from
fiscal 1993. As a percentage of net sales, sales and marketing expenses
decreased to 28% in fiscal 1994 as compared to 30% in the prior fiscal year. The
decrease was primarily due to the Company's restructuring of its domestic sales
force at the beginning of the second quarter of fiscal 1994. This restructuring
resulted in a reduction of headcount and related personnel expenses, and a
decrease in marketing program spending.
GENERAL AND ADMINISTRATIVE
In fiscal 1994, general and administrative expenses were $5,366,000, or 10% of
net sales, as compared to $5,539,000, or 8% of net sales, in the prior fiscal
year. The increase, as a percentage of net sales, was the result of a decline in
the Company's net sales in fiscal 1994.
RESTRUCTURING AND OTHER COSTS
During fiscal 1994, the Company incurred $7,875,000 in restructuring and other
costs. Of such amount, $6,500,000 was incurred in the first quarter of fiscal
1994 and related primarily to (i) a 12% workforce reduction, mostly in the areas
of sales and marketing, and general and administrative, resulting in a charge of
$870,000, (ii) the direct costs effecting the realizability of certain assets
associated with the implementation of a new sales, marketing and distribution
plan in the amount of $3,275,000 and (iii) the disposition of Company's Client
Server Technologies Group, which developed and marketed the LANlord product
line, which resulted in a charge of $1,850,000. Restructuring and other costs
accrued in the first quarter of fiscal 1994 were realized as follows:
$3,400,000, $1,900,000 and $1,200,000 in the second, third and fourth quarters,
respectively. The balance of the restructuring charges, $1,375,000, was incurred
in the fourth quarter of fiscal 1994 and related primarily to the closing of the
Company's manufacturing facility in Puerto Rico, certain executive severance
costs, and the direct costs associated with the consolidation of the Company's
shipping locations. Restructuring charges accrued in the fourth quarter of
fiscal 1994 were realized as follows: $448,000, $581,000, $242,000 and $104,000
in the first, second, third and fourth quarters of fiscal 1995, respectively.
During fiscal 1993, the Company incurred a $4,268,000 restructuring charge, a
substantial portion of which related to the write-off of certain assets and
estimated costs in connection with the disposition of the Company's Relay
software product line. Additionally, the 1993 restructuring charge reflected the
costs associated with the Company's reduction of its worldwide workforce by
approximately 15%, primarily in the areas of research and development and
general and administrative, and the elimination of certain assets and excess
facilities.
INTEREST INCOME AND EXPENSE
Interest income decreased in fiscal 1994 by $46,000 to $42,000 and interest and
other expense increased by $193,000 to $378,000. The decrease in interest income
was due to lower average cash balances and a decline in prevailing interest
rates. The increase in interest and other expense was primarily a result of
foreign exchange hedging costs associated with the foreign exchange contracts on
foreign currency receivables ($108,000), and the loss recognized on the sale of
certain fixed assets no longer utilized by the Company ($30,000).
INCOME TAXES
The Company did not record a benefit for income taxes in fiscal 1994 due to the
uncertainty in being able to utilize its net operating loss carry forwards. The
Company did record a provision of $161,000 for income taxes relating to its
subsidiary located in Hong Kong.
NET LOSS AND NET LOSS PER SHARE
For the reasons stated above, net loss for fiscal 1994 was $10,913,000 as
compared to a net loss of $10,694,000 for fiscal 1993 and net loss per share for
fiscal 1994 was $1.09 compared to a net loss per share of $1.11 for fiscal 1993.
RECENT ACQUISITIONS AND DISPOSITION OF PRODUCT LINES
On March 31, 1995, the Company acquired certain assets of mbp
Softwareentwicklungsgesellschaft mbH ("mbp") for an aggregate purchase price of
2,350,000 Deutschemarks (approximately $1,716,000). In addition, the Company
will pay mbp royalties for the five year period ending March 31, 2000 based on
the net sales and earnings attributable to the assets purchased from mbp. The
acquisition has been accounted for as a purchase. The assets purchased by the
Company from mbp were utilized in the business of developing, procuring,
marketing, distributing, selling and supporting ISDN products. The Company has
formed a wholly owned subsidiary, Microcom GmbH, and with the acquired assets
will operate the business in Germany.
On January 5, 1995, the Company acquired Extension Technology Corp. ("ETC") in a
merger pursuant to which ETC became a wholly owned subsidiary of the Company. In
connection with the merger, the shareholders of ETC received an aggregate of
114,980 shares of the Company's Common Stock. The merger has been accounted for
as a purchase with a total purchase price of approximately $2,104,000. ETC was
engaged in product development and market research in the area of remote
connectivity to LANs utilizing ISDN technology.
On December 31, 1993, the Company sold substantially all of the assets relating
to its Client Server Technologies Group which developed, marketed and
distributed the LANlord product. The consideration received consisted of
approximately $1,380,000 in cash and the assumption by the purchaser of certain
liabilities of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and equivalents decreased by $4,479,000 during fiscal 1995 to
$863,000. Net cash used in operating activities was $8,449,000 in fiscal 1995,
as compared to $1,848,000 used in operating activities in fiscal 1994. The
decrease in cash and equivalents was primarily due to the Company's substantial
net sales growth in fiscal 1995 which required an additional investment in
inventory and resulted in a corresponding increase in accounts receivable.
Accounts receivable increased from $13,282,000 at March 31, 1994 to $22,183,000
at March 31, 1995. Cash flows from investing activities in fiscal 1995 included
continued investments in software development costs of $4,922,000, costs
associated with purchases of property and equipment in the amount of $2,567,000
and the purchase of assets from mbp in the amount of $1,716,000.
14
<PAGE> 16
The Company's cash and equivalents decreased by $3,766,000 during fiscal 1994 to
$5,342,000. Net cash used in operating activities was $1,848,000 in fiscal 1994,
as compared to $6,427,000 provid ed by operating activities in fiscal 1993. The
decrease in cash and equivalents was primarily due to the Company's loss from
operations in fiscal 1994. Cash flows from investing activities in fiscal 1994
included proceeds of $1,000,000 from the disposition of the Company's Client
Server Technologies Group which was offset by capitalized software and
development costs of $3,352,000 and costs associated with purchases of property
and equipment in the amount of $1,003,000.
The Company's cash and equivalents increased by $3,499,000 during fiscal 1993 to
$9,108,000. The $6,427,000 in net cash provided by operating activities was
offset by $3,890,000 in net cash used in investing activities. Cash flows from
investing activities included proceeds of $3,052,000 from the disposition of the
Utilities and Relay product lines which was offset by $3,776,000 in capitalized
software and development costs, $1,851,000 in costs associated with the
acquisition of certain assets in connection with the disposition of the
Company's Utilities product line and additional costs related to the acquisition
of the Client Server Technologies Group and $1,315,000 in costs associated with
purchases of property and equipment.
At March 31, 1995, the Company had a bank revolving credit facility which
allowed the Company to borrow up to an amount (the "Maximum Borrowing Amount")
equal to the lesser of (i) $16,000,000 or (ii) an amount based on the Company's
eligible accounts receivable and inventory. The Maximum Borrowing Amount is
reduced by amounts which may be drawn on outstanding letters of credit and
bankers' acceptances and by a percentage of the Company's exposure under foreign
currency exchange contracts. Interest on borrowings is at the banks' prime rate
(9% at March 31, 1995) plus 2%. At March 31, 1995, the Company had letters of
credit of $2,619,000, bankers' acceptances of $195,000 and borrowings under the
credit facility of $12,020,000. The portion of foreign exchange contracts which
reduce the availability of the borrowings under the credit facility at March 31,
1995 was $78,000. The remaining amount available to borrow under the credit
facility at March 31, 1995 was $1,088,000. Under the terms of the credit
facility, which expires in March 1996 and is secured by substantially all of the
Company's assets, the Company is required to comply with certain covenants,
including maintaining minimum levels of profitability, tangible net worth and
liquidity and not exceeding specified debt to net worth ratios. The terms of the
credit facility also prohibit the Company from paying cash dividends. At March
31, 1995, the Company was in compliance with all covenants.
Since its inception, the Company has met its liquidity requirements through cash
provided by operations, public and private stock offerings, short-term
borrowings from banks, lease arrangements for facilities and equipment and
dispositions of product lines. The Company believes that the proceeds the
Company receives from a secondary public offering announced on May 19, 1995,
together with its cash and equivalents, credit facility availability and cash
provided by operations, will be adequate to fund the Company's operations
through fiscal 1997.
FOREIGN CURRENCY HEDGING
To date, all of the Company's transactions (including customer sales and
purchases from vendors) have been denominated in U.S. dollars, except for an
immaterial amount of customer sales denominated in U.K. pounds sterling. The
Company has hedged the currency risk associated with these foreign sales by
entering into forward contracts. The gains or losses on such contracts are
deferred until the contracts are settled and are then recognized as other income
or expense. The Company had $153,000 and $407,000 in foreign currency contracts
at March 31, 1995 and 1994, respectively. The Company had no material unrealized
gains or losses on these contracts.
15
<PAGE> 17
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994 1993
------------------------------
<S> <C> <C> <C>
Net sales (Notes 1, 12 and 13)................................ $93,106 $ 56,464 $ 69,435
Cost of sales................................................. 51,322 29,072 33,132
------- -------- --------
Gross margin.................................................. 41,784 27,392 36,303
------- -------- --------
Operating expenses:
Research and development (Notes 1 and 8)................... 10,250 8,959 12,483
Sales and marketing........................................ 19,270 15,608 20,915
General and administrative................................. 4,747 5,366 5,539
Restructuring and other costs (Note 2)..................... -- 7,875 4,268
------- -------- --------
Total operating expenses................................. 34,267 37,808 43,205
------- -------- --------
Income (loss) from operations................................. 7,517 (10,416) (6,902)
Settlement costs.............................................. -- -- (3,200)
Interest income............................................... 67 42 88
Interest and other expense, net............................... (807) (378) (185)
------- -------- --------
Income (loss) before income taxes............................. 6,777 (10,752) (10,199)
Provision for income taxes (Note 14).......................... 1,016 161 495
------- -------- --------
Net income (loss)............................................. $ 5,761 $(10,913) $(10,694)
========= ======== ========
Net income (loss) per share (Note 1).......................... $.49 $ (1.09) $ (1.11)
========= ======== ========
Weighted average number of shares outstanding................. 11,805 10,041 9,644
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 18
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
<TABLE>
<CAPTION>
March 31,
ASSETS 1995 1994
----------------------
<S> <C> <C>
Current assets:
Cash and equivalents (Note 1)...................................................................... $ 863 $ 5,342
Accounts receivable, less reserves for doubtful accounts
of $250 and $246 at March 31, 1995 and 1994, respectively ......................................... 22,183 13,282
Inventories (Notes 1 and 6) ........................................................................ 16,248 5,975
Prepaid expenses and other current assets .......................................................... 822 1,130
-------- --------
Total current assets ........................................................................... 40,116 25,729
Property and equipment, net (Notes 1 and 6) ........................................................... 5,683 5,357
Other assets, net (Notes 1, 6 and 8) ................................................................. 11,989 7,367
-------- --------
$ 57,788 $ 38,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized leases and short-term debt (Notes 9 and 10) ......................... $ 12,543 $ 853
Accounts payable ................................................................................... 6,923 7,999
Accrued restructuring costs (Note 2) ............................................................... -- 1,492
Accrued expenses (Note 6) .......................................................................... 2,428 1,353
Income taxes payable (Note 14) ..................................................................... 490 75
-------- --------
Total current liabilities ...................................................................... 22,384 11,772
-------- --------
Long-term portion of capitalized leases (Note 9) ...................................................... 122 450
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity (Note 11):
Common stock, $.01 par value, authorized - 30,000 shares, issued - 12,088
and 11,442 shares at March 31, 1995 and 1994, respectively ........................................ 121 114
Capital in excess of par value ..................................................................... 61,223 58,504
Stock loans - related parties ...................................................................... (1,942) (1,612)
Unrealized loss on marketable securities ........................................................... (33) (534)
Accumulated deficit ................................................................................ (21,589) (27,350)
Treasury stock, 981 shares at cost ................................................................. (2,613) (2,613)
Cumulative translation adjustment .................................................................. 115 (278)
-------- --------
Total stockholders' equity ..................................................................... 35,282 26,231
-------- --------
$ 57,788 $ 38,453
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994 1993
---------------------------------------
<S> <C> <C> <C>
Common stock:
Balance, beginning of year ....................................... $ 114 $ 107 $ 104
Acquisition ...................................................... 1 -- --
Exercise of stock options and employee stock purchase plan ....... 6 7 3
------- ------- -------
Balance, end of year ............................................. 121 114 107
------- ------- -------
Capital in excess of par value:
Balance, beginning of year ....................................... 58,504 55,903 54,571
Acquisition ...................................................... 1,350 -- --
Exercise of stock options and employee stock purchase plan ....... 1,369 2,601 1,332
------- ------- -------
Balance, end of year ............................................. 61,223 58,504 55,903
------- ------- -------
Stock loans - related parties:
Balance, beginning of year ....................................... (1,612) (116) (116)
Stock loans ...................................................... (330) (1,496) --
------- ------- -------
Balance, end of year ............................................. (1,942) (1,612) (116)
------- ------- -------
Unrealized loss on marketable securities:
Balance, beginning of year ....................................... (534) -- --
Adjustment to value of marketable securities ..................... 501 (534) --
------- ------- -------
Balance, end of year ............................................. (33) (534) --
------- ------- -------
Accumulated deficit:
Balance, beginning of year ....................................... (27,350) (16,437) (5,743)
Net income (loss) ................................................ 5,761 (10,913) (10,694)
------- ------- -------
Balance, end of year ............................................. (21,589) (27,350) (16,437)
------- ------- -------
Treasury stock ...................................................... (2,613) (2,613) (2,613)
------- ------- -------
Cumulative translation adjustment:
Balance, beginning of year ....................................... (278) (324) (161)
Net translation adjustment ....................................... 393 46 (163)
------- ------- -------
Balance, end of year ............................................. 115 (278) (324)
------- ------- -------
Total stockholders' equity .......................................... $ 35,282 $ 26,231 $ 36,520
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................................... $ 5,761 $(10,913) $(10,694)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................ 6,096 6,205 6,908
Gain on disposition of product lines ..................................... -- -- (282)
Changes in assets and liabilities, net of effects from sale of product
lines and acquisition of businesses:
Accounts receivable, net ............................................... (8,496) 73 1,671
Inventories ............................................................ (9,853) (315) 5,256
Prepaid expenses and other current assets .............................. 308 125 595
Accounts payable and accrued expenses .................................. (1,434) 1,136 340
Income taxes payable ................................................... 415 -- --
Accrued settlement costs ............................................... -- -- 2,400
Accrued restructuring .................................................. (1,246) 1,841 233
--------- ------- --------
Net cash provided by (used in) operating activities .................. (8,449) (1,848) 6,427
--------- ------- --------
Cash flows from investing activities:
Proceeds from disposition of product lines ................................. -- 1,000 3,052
Capitalized software development costs and purchased technology ............ (4,922) (3,352) (3,776)
Other assets ............................................................... 379 18 (1,851)
Acquisition of a business .................................................. (1,716) -- --
Purchases of property and equipment ........................................ (2,567) (1,003) (1,315)
--------- ------- --------
Net cash used in investing activities ................................ (8,826) (3,337) (3,890)
--------- ------- --------
Cash flows from financing activities:
Borrowings under the revolving credit line, net ............................ 12,020 -- --
Exercise of stock options and employee stock purchase plan ................. 1,434 1,112 1,335
Payment on capitalized leases .............................................. (312) (280) (210)
Banker acceptance on inventory purchases ................................... (346) 541 --
--------- ------- --------
Net cash provided by financing activities ............................ 12,796 1,373 1,125
--------- ------- --------
Effect of exchange rates on cash .............................................. -- 46 (163)
--------- ------- --------
Net increase (decrease) in cash and equivalents ............................... (4,479) (3,766) 3,499
Cash and equivalents at beginning of year ..................................... 5,342 9,108 5,609
--------- ------- --------
Cash and equivalents at end of year ........................................... $ 863 $ 5,342 $ 9,108
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 21
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Microcom, Inc. (the Company) designs, manufactures, and markets products
for the remote network access markets. The Company's products are utilized
within one industry segment.
The consolidated financial statements reflect the application of certain
accounting policies described here and elsewhere in the notes to the
consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions have been eliminated.
Cash and Equivalents
The Company considers all highly liquid investments with remaining maturities of
three months or less at the time of acquisition to be cash equivalents. Cash and
equivalents, which include time deposits and certificates of deposit, are stated
at cost plus accrued interest, which approximates market.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization for property and equipment are
computed using the straight-line method over the assets' estimated useful life.
Useful lives used in computing depreciation are as follows: computer equipment -
2 to 3 years; machinery and equipment - 3 to 7 years; furniture and fixtures - 8
years. Leasehold improvements are amortized over the shorter of the lease period
or their estimated useful life.
Marketable Securities
Marketable securities are stated at market at the balance sheet date and are
included in other assets. In accordance with Statement of Financial Accounting
Standards (SFAS) 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company classifies its marketable securities as available for
sale and, therefore, records unrealized gains and losses on marketable
securities as a separate component of stockholders' equity. The cost basis of
the Company's marketable securities at both March 31, 1995 and 1994 was
$1,351,000.
Translation of Foreign Currencies
Assets and liabilities of the Company's foreign operations are translated in
accordance with SFAS 52 "Foreign Currency Translation" into United States
dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates prevailing during the
year. Translation adjustments and transaction gains or losses are recognized as
other income or expense in the period incurred. Transaction gains or losses have
been immaterial for all periods presented.
Foreign Currency Hedging
To date, all of the Company's transactions (including customer sales and
purchases from vendors) have been denominated in U.S. dollars, except for an
immaterial amount of customer sales denominated in U.K. pounds sterling. The
Company has hedged the currency risk associated with these foreign sales by
entering into forward contracts at the beginning of each quarter. The gains or
losses on these foreign currency contracts are deferred until the contracts are
settled and then recognized as other income or expense. The Company had $153,000
and $407,000 in foreign currency contracts at March 31, 1995 and 1994,
respectively. The Company had no material unrealized gains or losses on these
contracts.
Research and Development and Software Development Costs
Research and development costs, other than certain software development costs,
are expensed as incurred. The Company capitalizes certain computer software
development costs incurred after establishing technological feasibility and
before general release of a software product. Capitalized software development
costs are amortized using the straight-line method over the estimated economic
lives of the products, generally 18 months. Amortization commences on the date
of the initial product shipment.
Revenue Recognition and Warranty Costs
Revenue is recognized upon shipment, provided that no significant vendor and
postcontract support obligations remain outstanding and collection of the
resulting receivable is deemed probable. Postcontract customer support bundled
in the sale of initial license fees is deferred and amortized over the
maintenance period. The Company recognizes revenue associated with separately
billed maintenance and customer support ratably over the life of the contract.
These contracts generally have terms of one year or less. Postcontract customer
support revenues represent less than 1% of total revenues for all periods
presented. Estimated warranty costs, which are not material to operations, are
accrued for at time of shipment.
Net Income (Loss) per Share
Net income per share in fiscal 1995 was based on the weighted average number of
shares of common stock and common stock equivalents (stock options) outstanding
during the fiscal year. Net loss per share in fiscal 1994 and 1993 did not
consider common stock equivalents, as the effect would have been antidilutive.
20
<PAGE> 22
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - RESTRUCTURING AND OTHER COSTS
During fiscal 1994, the Company incurred $7,875,000 in restructuring and other
costs. Of such amount, $6,500,000 was incurred in the first quarter of the
fiscal year and related primarily to (i) a 12% workforce reduction, mostly in
the areas of sales and marketing, and general and administrative, resulting in a
charge of $870,000, (ii) the direct costs effecting the realizability of certain
assets associated with the implementation of a new sales, marketing and
distribution plan in the amount of $3,275,000 and (iii) the disposition of
Company's Client Server Technologies Group, which developed and marketed the
LANlord product line, in the amount of $1,850,000. Restructuring and other costs
accrued in the first quarter of fiscal 1994 were realized as follows:
$3,400,000, $1,900,000 and $1,200,000 in the second, third and fourth quarters,
respectively. The balance of the restructuring charges, $1,375,000 was incurred
in the fourth quarter of fiscal 1994 and related primarily to the closing of the
Company's manufacturing facility in Puerto Rico, certain executive severance
costs, and the direct costs associated with the consolidation of the Company's
shipping locations. Restructuring charges accrued in the fourth quarter of
fiscal 1994 were realized as follows: $448,000, $581,000, $242,000 and $104,000
in the first, second, third and fourth quarters of fiscal 1995, respectively.
During fiscal 1993, the Company incurred a $4,268,000 restructuring charge. A
substantial portion of the charge was for the write-off of certain assets and
estimated costs in connection with the disposition of the Company's Relay
product line. Additionally, the restructuring charge reflects the costs
associated with the Company's reduction of its worldwide workforce by
approximately 15%, primarily in the areas of research and development and
general and administrative, and the elimination of certain assets and excess
facilities.
NOTE 3 - ACQUISITIONS
On January 5, 1995, the Company acquired Extension Technology Corp. (ETC) in a
merger pursuant to which ETC became a wholly owned subsidiary of the Company and
the shareholders of ETC received an aggregate of 114,980 shares of the Company's
common stock. The purchase price was allocated to the fair value of the assets
acquired, including purchased technology of $2,104,000, which is being amortized
using the straight-line method over its estimated useful life of seven years.
This acquisition was accounted for under the purchase method of accounting, and
accordingly, the results of operations of ETC are included in the accompanying
consolidated financial statements from the date of acquisition. The following
unaudited pro forma condensed consolidated results of operations for fiscal 1995
and 1994 have been prepared as if the operations of the Company and ETC had been
combined since the beginning of fiscal 1994:
Pro Forma Consolidated Results of Operations
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994
----------------------
<S> <C> <C>
Net sales....................................... $93,169 $56,753
Net income (loss)............................... 4,231 (12,935)
Net income (loss) per share..................... .36 (1.27)
</TABLE>
The pro forma combined results do not purport to be indicative of the results
that would actually have been obtained had the acquisition occurred at the
beginning of fiscal 1994.
On March 31, 1995, the Company acquired certain assets of mbp
Softwareentwicklungsgesellschaft mbH (mbp) for an aggregate purchase price of
2,350,000 Deutschemarks (approximately $1,716,000). In addition, the Company
will pay mbp royalties for a five-year period ending March 31, 2000 based on the
net sales and income from operations attributable to the assets purchased from
mbp. The acquisition has been accounted for as a purchase. The cost of the
purchased technology acquired is being amortized using the straight-line method
over its estimated useful life of seven years. Pro forma information for this
acquisition has not been presented because its results of operations prior to
the acquisition date were not material.
NOTE 4 - DISPOSITIONS
During fiscal 1994, the Company sold certain assets of its Client Server
Technologies Group for cash and a note receivable. In fiscal 1993, the Company
sold certain assets of its Utilities and Relay product lines for cash, future
royalties, marketable securities, and the purchasers' assumption of certain
liabilities of the Company. Pro forma information has not been presented as the
product lines disposed of were not material to the Company's financial position
or results of operations.
NOTE 5 - LEASES
The Company conducts its operations in leased facilities under operating leases
which expire at various dates through fiscal 2002. In addition, the Company
leases certain equipment under operating and capital leases which expire at
various dates through fiscal 1997. The value of equipment recorded under capital
leases was $1,710,000 at both March 31, 1995 and 1994. Accumulated amortization
was $1,433,000 and $1,160,000 at March 31, 1995 and 1994, respectively.
Aggregate rental expense under operating leases was $1,760,000, $1,910,000 and
$2,453,000 for the years ended March 31, 1995, 1994, and 1993, respectively.
21
<PAGE> 23
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
Future minimum lease payments under capital and operating lease commitments at
March 31, 1995 were as follows:
<TABLE>
<CAPTION>
(In thousands)
Fiscal Year Capital Operating
----------- --------------------
<S> <C> <C>
1996.............................................. $359 $1,382
1997.............................................. 122 1,247
1998.............................................. -- 1,140
1999.............................................. -- 1,095
2000.............................................. -- 1,017
Thereafter........................................ -- 2,020
---- ------
481 $7,901
Less interest..................................... 36 ======
----
Net present value................................. $445
====
</TABLE>
NOTE 6 - CONSOLIDATED BALANCE SHEET DETAILS
(In thousands)
<TABLE>
<CAPTION> March 31,
1995 1994
Details of selected consolidated balance sheet accounts were as follows: ----------------------
<S> <C> <C>
Inventories:
Raw materials.................................................................... $ 4,557 $ 2,391
Finished goods................................................................... 11,691 3,584
-------- -------
16,248 5,975
======== =======
Property and equipment:
Computer equipment............................................................... 9,503 8,391
Machinery and equipment.......................................................... 2,937 2,882
Furniture and fixtures........................................................... 1,458 1,475
Leasehold improvements........................................................... 1,830 1,802
-------- -------
15,728 14,550
Accumulated depreciation and amortization........................................ (10,045) (9,193)
-------- -------
5,683 5,357
======== =======
Other assets:
Computer software development costs.............................................. 12,954 8,032
Cost in excess of value of assets acquired....................................... 9,198 5,551
Investment in common stock and license agreement ................................ 1,217 667
Note receivable relating to the Client Server Technologies disposition .......... -- 500
Other............................................................................ 136 181
-------- -------
23,505 14,931
Accumulated amortization......................................................... (11,516) (7,564)
-------- -------
11,989 7,367
======== =======
Accrued expenses:
Employee compensation and benefits............................................... 791 554
Other............................................................................ 1,637 799
-------- -------
$ 2,428 $ 1,353
======== =======
</TABLE>
22
<PAGE> 24
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION MARCH 31,
(In thousands) 1995 1994 1993
---------------------------
<S> <C> <C> <C>
Income taxes paid........................................................ $ 101 $ 174 $ 145
Interest paid............................................................ 673 125 138
Items not affecting cash:
Common stock issued pursuant to a merger agreement..................... 1,351 -- --
Reserve for unrealized loss on marketable securities................... 501 (534) --
Stock loans issued..................................................... (330) (1,496) --
Client Server Technologies note receivable............................. -- 500 --
Investment in common stock............................................. -- -- 1,351
Capital leases on equipment purchases.................................. -- -- 420
</TABLE>
NOTE 8 - COMPUTER SOFTWARE DEVELOPMENT COSTS
The Company capitalized $4,922,000, $3,352,000, and $3,776,000 of certain
software development costs in fiscal 1995, 1994, and 1993, respectively. The
Company is amortizing the capitalized costs using the straight-line method over
the estimated economic lives of the products or a period generally not exceeding
18 months. In fiscal 1995, 1994, and 1993, the Company recorded amortization
expense of $3,332,000, $2,914,000, and $3,069,000, respectively.
NOTE 9 - FINANCING ARRANGEMENTS
(In thousands)
<TABLE>
<CAPTION>
March 31,
Capital leases were as follows: 1995 1994
---------------
<S> <C> <C>
Capital lease with interest at 10.5%..................... $ 450 $ 762
Less - current portion................................... (328) (312)
----- -----
$ 122 $ 450
===== =====
The minimum repayment is as follows:
1996..................................................... $ 328
1997..................................................... 122
-----
$ 450
=====
</TABLE>
NOTE 10 - REVOLVING CREDIT FACILITY
At March 31, 1995, the Company had a bank revolving credit facility which
allowed the Company to borrow up to an amount (the Maximum Borrowing Amount)
equal to the lesser of (i) $16,000,000 or (ii) an amount based on the Company's
eligible accounts receivable and inventory. The Maximum Borrowing Amount is
reduced by amounts which may be drawn on outstanding letters of credit, bankers'
acceptance outstanding, and by a percentage of the Company's exposure under any
foreign currency exchange contracts. Interest on borrowings was at the banks'
prime rate (9% at March 31, 1995) plus 2%. At March 31, 1995, the Company had
letters of credit of $2,619,000, bankers' acceptances of $195,000, and
borrowings under the line of credit of $12,020,000. The portion of foreign
exchange contracts which reduce the availability of borrowings under the line of
credit at March 31, 1995 was $78,000. The remaining amount available to borrow
under the line of credit at March 31, 1995 was $1,088,000. Under the terms of
the line of credit, which expires in March 1996 and is secured by substantially
all of the Company's assets, the Company is required to maintain certain
covenants, including maintaining minimum levels of profitability, tangible net
worth and liquidity and not exceeding specified debt to net worth ratios. The
terms of the credit facility also prohibit the Company from paying cash
dividends. As of March 31, 1995 the Company was in compliance with all
covenants.
NOTE 11 - STOCKHOLDERS' EQUITY
Stock Option and Stock Purchase Plan
The Company maintains a stock option and stock purchase plan (the Option Plan)
which provides for the grant of incentive stock options, non-qualified stock
options and purchase authorizations to key employees, directors and consultants
of the Company and its subsidiaries. At March 31, 1995, there were 4,828,000
shares reserved for issuance under the Option Plan. Substantially all out-
23
<PAGE> 25
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
standing options and purchase authorizations are immediately exercisable in
full. Shares of common stock made subject to options and purchase authorizations
vest periodically from the date of grant in accordance with schedules
established by the compensation committee of the Board of Directors. Shares
subject to incentive stock options generally vest over a four-year period. Any
shares with respect to which an option or purchase authorization has been
exercised that are not vested upon the participant's termination of service are
subject to the Company's right of repurchase at the participant's option price
for such shares. At March 31, 1995, 413,394 shares of common stock were
available under the Option Plan for additional grants of options and purchase
authorizations.
A summary of the Option Plan activity for fiscal March 31, 1993, 1994, and 1995
follows:
<TABLE>
<CAPTION>
(In thousands) Number of Option Price
Options Per Share
----------------------------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1992............................ 1,694 $2.00 - $14.63
Granted................................................ 1,410 3.00 - 8.50
Exercised.............................................. (100) 3.00 - 12.38
Forfeited.............................................. (1,227) 3.00 - 5.25
------ --------------------
Outstanding at March 31, 1993............................ 1,777 3.00 - 14.63
Granted................................................ 1,232 1.75 - 4.88
Exercised.............................................. (547) 1.75 - 5.63
Forfeited.............................................. (629) 2.06 - 8.63
------ --------------------
OUTSTANDING AT MARCH 31, 1994............................ 1,833 2.00 - 14.63
GRANTED................................................ 352 5.00 - 10.25
EXERCISED.............................................. (318) 2.00 - 5.63
FORFEITED.............................................. (41) 2.88 - 14.63
------ --------------------
OUTSTANDING AT MARCH 31, 1995............................ 1,826 $2.00 - $10.25
======
OPTIONS VESTED AT MARCH 31, 1995......................... 971 $2.00 - $ 7.50
======
</TABLE>
Non-Employee Director Stock Option Plan
The Company maintains a Non-Employee Director Stock Option Plan (the Director
Plan) which provides for the grant of non-qualified stock options to
non-employee directors of the Company. Under the Director Plan, any person who
served as a non-employee director on March 17, 1995, or who first becomes a
non-employee director after March 17, 1995 is entitled to receive an option to
purchase 16,000 shares of the Company's common stock (collectively the Initial
Options). In addition, each person serving as a non-employee director on April
15 of each year, commencing in 1996, is entitled to receive an option to
purchase 4,000 shares of common stock (the Annual Options). The exercise price
of all options granted under the Director Plan is equal to the fair market value
of the Company's common stock on the date of grant. All options are immediately
exercisable, but unvested shares are subject to repurchase by the Company upon
the optionee ceasing to be a director of the Company. The Initial Options vest
in three annual installments of 32%, 33%, 35% each on the first, second and
third anniversaries of the date of grant. The Annual Options vest in full on the
first anniversary of the date of grant. No option granted under the Director
Plan may be exercised after the earlier of: (i) the third anniversary of the
date on which an optionee ceases to be a director, or (ii) the tenth anniversary
of the date of grant. There are 100,000 shares of common stock reserved for
issuance under the Director Plan. At March 31, 1995, there were no shares of
common stock available for additional option grants under the Director Plan.
A summary of the Director Plan activity for the year ended March 31, 1994 and
1995 follows:
<TABLE>
<CAPTION>
(In thousands) Number of Option Price
Options Per Share
----------------------------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1993........................... --
Granted............................................... 30 $ 5.75 - $ 5.75
Exercised............................................. (20) 5.75 - 5.75
Forfeited............................................. -- -- --
--- ---------------------
OUTSTANDING AT MARCH 31, 1994........................... 10 5.75 - 5.75
GRANTED............................................... 80 11.88 - 11.88
EXERCISED............................................. (10) 5.75 - 5.75
FORFEITED............................................. -- -- --
--- ---------------------
OUTSTANDING AT MARCH 31, 1995........................... 80 $11.88 - $11.88
=== =====================
</TABLE>
There were no options vested as of March 31, 1995.
24
<PAGE> 26
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
Long-Term Performance Plan
The Company maintains a Long-Term Performance Plan (the Performance Plan) which
permits the grant of stock options, stock appreciation rights (SARs), stock and
cash rewards to officers and key employees of the Company. The maximum number of
shares of common stock issuable under the Performance Plan is 300,000. No
participant in the Performance Plan may be granted, in any fiscal year, options
or SARs with respect to more than 100,000 shares. No option or SAR may be
granted under the Performance Plan in which the exercise price is less than the
fair market value of the common stock on the date of grant. Stock options
granted under the Performance Plan may be in the form of incentive stock options
or non-qualified stock options. Incentive stock options may not be exercisable
more than ten years after the date of grant. Shares of common stock subject to
options vest periodically from the date of grant in accordance with schedules
established by the compensation committee of the Board of Directors of the
Company. At March 31, 1995, 111,000 shares of common stock remained available
for additional option grants under the Performance Plan.
A summary of the Performance Plan activity for the year ended March 31, 1995
follows:
<TABLE>
<CAPTION>
(In thousands) Number of Option Price
Options Per Share
----------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING AT MARCH 31, 1994
GRANTED............................................. 189 $5.38 - $10.00
EXERCISED........................................... -- -- - --
FORFEITED........................................... -- -- - --
--- --------------------
OUTSTANDING AT MARCH 31, 1995......................... 189 $5.38 - $10.00
===
</TABLE>
There were no options vested as of March 31, 1995.
Stock Loans to Related Parties
The Company has made loans to certain officers and directors to enable them to
exercise options to purchase common stock of the Company. These loans are
evidenced by promissory notes and accrue interest at the Adjusted Federal Rate
and are due at various dates through 2003.
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan (the Purchase Plan) which
authorizes the issuance of up to 1,045,000 shares of common stock. Substantially
all the employees of the Company are eligible to participate in the Purchase
Plan. Participants in the Purchase Plan are entitled to purchase common stock
during specified offering periods (typically six months) at a price equal to the
lower of 85% of the market value of the common stock at the beginning or end of
the offering period, through the accumulation of payroll deductions or a
lump-sum payment. Approximately 204,000, 195,000, and 144,000 shares of common
stock for a total of $894,000, $747,000, and $945,000, were purchased during
fiscal 1995, 1994 and 1993, respectively, under the Purchase Plan.
Post Retirement and Post Employment Benefits
The Company has no obligation for post retirement and post employment benefits.
Employee Benefit Plan
The Company maintains an Employee Deferred Compensation Savings Plan that covers
all employees over 18 years of age who have completed at least two months of
service with the Company. Contributions by the Company are discretionary and are
determined by the Company's Board of Directors. There were no Company
contributions in fiscal 1995, 1994 or 1993.
NOTE 12 - NET SALES BY GEOGRAPHIC AREA
($ in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994 1993
-----------------------------
<S> <C> <C> <C>
Net sales by geographic area were as follows:
North America........................................... $66,557 $44,106 $54,739
International:
Europe................................................ 18,969 8,932 9,096
All other............................................. 7,580 3,426 5,600
------- ------- -------
.................................................... $93,106 $56,464 $69,435
======= ======= =======
Percent:
North America........................................... 72% 78% 79%
International:
Europe................................................ 20 16 13
All other............................................. 8 6 8
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
25
<PAGE> 27
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
NOTE 13 - SIGNIFICANT CUSTOMER
In fiscal 1995 and 1994, one customer accounted for 24% and 13%, respectively,
of net sales. No customer accounted for greater than 10% of net sales in fiscal
1993.
NOTE 14 - INCOME TAXES
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994 1993
------------------------
<S> <C> <C> <C>
The provision for income taxes is as follows:
Current:
Federal.................................................. $ 101 $ -- $ --
State.................................................... 306 10 20
International............................................ 609 151 150
------ ---- ----
1,016 161 170
------ ---- ----
Deferred:
Federal.................................................. -- -- --
State.................................................... -- -- 325
------ ---- ----
-- -- 325
------ ---- ----
$1,016 $161 $495
====== ==== ====
</TABLE>
Deferred income taxes result primarily from timing differences in the
recognition of expenses for tax and financial reporting purposes. The sources of
these timing differences are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
(In thousands) 1995 1994
----------------------
<S> <C> <C>
Net operating loss carry forwards................................ $ 7,313 $ 8,863
Tax credit carry forwards........................................ 3,959 3,959
Computer software development costs.............................. 68 (127)
Puerto Rico adjustment........................................... -- (337)
Purchased technology............................................. 326 380
Other............................................................ 169 198
Valuation allowance.............................................. (11,835) (12,936)
-------- --------
$ -- $ --
======== ========
</TABLE>
A reconciliation of the United States Federal statutory tax rate to the
Company's effective tax rate for fiscal 1995 is as follows:
<TABLE>
<S> <C>
U.S. Federal statutory tax rate................................ 34.0%
State income taxes, net of Federal benefit...................... 3.0
Net operating loss carry forwards............................... (22.0)
Effective tax rate.............................................. 15.0%
</TABLE>
The Company does not provide for U.S. income taxes on the undistributed earnings
of its foreign sudsidiaries as the Company does not have any current intention
of repatriating such earnings.
At March 31, 1995, the Company had available $21,509,000 of net operating loss
carry forwards, which may be used to offset future taxable income, and
$3,959,000 of research and development credit carry forwards which may be used
to offset future taxes payable. These carry forwards expire through 2009 and are
subject to review and possible adjustment by the Internal Revenue Service.
The Company accounts for income taxes under the liability method in accordance
with SFAS 109 "Accounting for Income Taxes."
The Company has recorded a full valuation allowance against the deferred tax
asset related to its net operating loss and tax credit carry forwards due to
uncertainty relating to the realization of this asset.
26
<PAGE> 28
SELECTED QUARTERLY DATA
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal
First Second Third Fourth Year
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1995:
Net sales.................................... $ 21,315 $22,770 $23,134 $25,887 $ 93,106
Gross margin................................. 9,588 10,157 10,364 11,675 41,784
Income from operations....................... 1,457 1,747 2,055 2,258 7,517
Net income................................... 1,176 1,385 1,529 1,671 5,761
Net income per share......................... .11 .12 .13 .14 .49
FISCAL 1994:
Net sales.................................... $ 12,056 $12,471 $14,849 $17,088 $ 56,464
Gross margin................................. 5,515 6,326 7,465 8,086 27,392
Income from operations....................... (10,186) 79 448 (757) (10,416)
Net income (loss)............................ (10,300) 66 265 (944) (10,913)
Net income (loss) per share.................. (1.06) .01 .03 (.09) (1.09)
</TABLE>
Fiscal 1994 results have been effected by the disposition of a product line and
restructuring costs. For further discussion of dispositions and restructuring
costs, see "Notes to the Consolidated Financial Statements" on pages 20-26.
The quarterly price range for the Company's Common Stock traded over-the-counter
and quoted on Nasdaq:
<TABLE>
<CAPTION>
Fiscal 1995 Fiscal 1994
-----------------------------------
High Low High Low
-----------------------------------
<S> <C> <C> <C> <C>
First Quarter............................... $ 6.50 $4.50 $5.13 $3.13
Second Quarter.............................. 8.25 5.88 3.63 1.50
Third Quarter............................... 12.38 6.63 5.63 2.50
Fourth Quarter.............................. 12.63 9.00 7.75 4.75
</TABLE>
The last sale price of the Company's common stock as reported by Nasdaq on June
12, 1995 was $12.88 per share.
27
<PAGE> 29
REPORT OF MANAGEMENT
The Company's management is responsible for the preparation of financial
statements and the integrity and objectivity of all financial information
presented in this Annual Report. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles. Management
makes informed judgments and estimates of expected effects of events and
transactions and believes that the financial data fairly represents Company
operations.
Management's objectives are to maintain the highest level of ethical standards
in the conduct of Company business and to safeguard the assets through a system
of sound internal controls. These objectives are supported by policies and
procedures which are continuously reviewed and updated by management.
The Board of Directors, through its Audit Committee, consisting solely of
non-employee Directors, serves in an overview role. The Committee meets
regularly with management and the Company's independent public accountants to
review financial information, internal controls, and related matters. The
Committee reports its findings directly to the Board of Directors. The
independent public accountants are engaged by the Board of Directors and have
full and free access to the Audit Committee and the Company's outside counsel.
/s/ James M. Dow /s/ Roland D. Pampel /s/ Peter J. Minihane
James M. Dow Roland D. Pampel Peter J. Minihane
Chairman of the Board President and Executive Vice President,
Chief Executive Officer Chief Financial Officer
and Treasurer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Microcom, Inc.:
We have audited the accompanying consolidated balance sheets of Microcom, Inc.
(a Massachusetts corporation) and subsidiaries as of March 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended March 31, 1995. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Microcom, Inc. and subsidiaries
as of March 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 1995 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 11, 1995
28
<PAGE> 30
MICROCOM,INC.
CORPORATEINFORMATION
CORPORATE HEADQUARTERS
Microcom, Inc.
500 River Ridge Drive
Norwood, MA 02062-5028
(617) 551-1000
LEGAL COUNSEL
Choate, Hall & Stewart
Boston, MA
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
Boston, MA
BANKS
Silicon Valley Bank
Wellesley, MA
BayBank
Burlington, MA
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
Boston, MA
STOCK LISTING
Nasdaq Stock Market
TRADING SYMBOL
MNPI
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m., Thursday, July
20, 1995, at:
The First National Bank of Boston
100 Federal Street
Boston, MA 02110
NUMBER OF STOCKHOLDERS
At May 31, 1995, there were approximately 425 stockholders of record.
DIVIDEND POLICY
No cash dividends have been declared or paid by the Company since its inception.
It is the policy of the Company to retain any cash flow for future business
expansion. The Company anticipates no change in this policy in the foreseeable
future.
AVAILABLE PUBLICATIONS
The Company's Annual Report and Interim Reports are distributed regularly to
stockholders. In addition, other publications are available upon request
including:
- - Annual Report on Form 10-K and Quarterly Reports on Form 10-Q as filed
with the Securities and Exchange Commission; and
- - Brochures on specified Company products.
Such other publications are available upon written request directed to:
Vice President of Corporate Communications
Microcom, Inc.
500 River Ridge Drive
Norwood, MA 02062-5028
SHAREHOLDER SERVICES
Our Transfer Agent is responsible for all shareholder records and for the
issuance of stock certificates. For faster response, shareholders should refer
all questions on these matters directly to our Transfer Agent at the following
address:
The First National Bank of Boston
Investor Relations
P.O. Box 644
Boston, MA 02101-0644
OFFICERS AND DIRECTORS
Roland D. Pampel - President, Chief Executive Officer and Director
Richard A. Barbari - Executive Vice President, Marketing and Latin America and
Africa Sales
Lewis A. Bergins - Executive Vice President, International Sales and Corporate
Strategy and Development
Peter J. Minihane - Executive Vice President,
Chief Financial Officer and Treasurer
Gregory Pearson - Senior Vice President,
Technology Management
William Andrews - Vice President, North America Sales
Eugene Y.G. Chang- Vice President, ISDN Technology
Jerry L. Falk - Vice President, Hardware Development
Mark J. Freitas - Vice President, Systems Management and
Customer Support
Joseph P. King, Jr. - Vice President, Operations
Elizabeth H. Rock - Vice President, Corporate Communications
James M. Dow - Chairman of the Board
Fred L. Luconi - Vice Chairman of the Board1
Private Investor
Donald G. Kennedy - Director(1,2)
(independent management consulting)
John C. Rutherford - Director(3)
Managing Director of Parthenon Group
(management consulting )
Michael I. Schneider - Director(2)
Vice President of Data General Corporation
(computer manufacturing)
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
<PAGE> 1
Exhibit 21.0
<TABLE>
MICROCOM, INC. SUBSIDIARIES
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
<S> <C>
Microcom (UK) Limited England
Microcom Caribe, Inc. Delaware, USA
Connectivity, Ltd. U.S. Virgin Islands
MNP Sales B.V. Netherlands
MNP Hong Kong Limited Hong Kong
Microcom Systems, Inc. Delaware, USA
MNP France S.A.R.L. France
Extension Technology Corp. Delaware, USA
Vermogensverwaltungsgesellschaft mbH Germany
Each subsidiary listed above is a wholly-owned subsidiary of Microcom, Inc.
except for MNP Hong Kong which is a wholly-owned subsidiary of MNP Sales
B.V., which in turn is a wholly-owned subsidiary of Microcom, Inc.
</TABLE>
<PAGE> 1
Exhibit 23.0
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report dated April 11, 1995, included in this Form 10-K, into Microcom, Inc.'s
previously filed Registration Statements on Form S-8 (File Nos. 33-16833,
33-18426, 33-29279, 33-29771, 33-37284, 33-40893, 33-63454, 33-71588, 33-84572
and 33-59939).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 28, 1995
