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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-20238
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First Pacific Networks, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 77-0174188
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
871 Fox Lane, San Jose, CA 95131
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(Address of principal executive offices) (Zip Code)
(408) 943-7600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year if changed since last
report)
Indicate by check 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
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Indicate number of shares outstanding of each of the issuer's classes of
common stock, at the latest practicable date:
Class Outstanding as of: August 13, 1996
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Common Stock, $.001 par value 37,645,644
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This report on Form 10-Q, including all exhibits, contains 18 pages. The
exhibit index is located on page [15] of this report.
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1996 and June 30, 1996 1
Condensed Consolidated Statements of Operations -
Three months ended June 30, 1995 and 1996 2
Condensed Consolidated Statements of Cash Flows -
Three months ended June 30, 1995 and 1996 3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15-17
ii
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS MARCH 31, JUNE 30,
1996 1996
---- ----
Current assets:
Cash and cash equivalents $ 2,708 $ 3,324
Accounts receivable, net 594 231
Inventories 3,535 3,551
Prepaid expenses and other current assets 739 547
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Total current assets 7,576 7,653
Property and equipment, net 3,714 3,498
Deposits and other assets 334 363
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Total assets $ 11,624 $ 11,514
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LIABILITIES
Current liabilities:
Accounts payable $ 1,300 $ 1,285
Accrued expenses 2,656 2,726
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Total current liabilities 3,956 4,011
Capitalized leases, less current portion 184 118
Payable to related party 5,857 5,966
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Total liabilities 9,997 10,095
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Commitments and contingencies (Notes 4 and 7)
STOCKHOLDERS' EQUITY (See Note 8)
Preferred stock, $.001 par value
Authorized: 6,060 shares
Issued and outstanding: 4 at March 31, 1996
and 5 shares at June 30, 1996 - -
(Aggregate Liquidation Preference $5,000)
Common stock, $.001 par value
Authorized: 55,000 shares
Issued and outstanding: 33,831 shares at
March 31, 1996 and 35,771 shares at
June 30, 1996 34 36
Additional paid-in capital 127,854 132,806
Notes receivable from sale of common stock (13) (13)
Accumulated deficit (126,245) (131,408)
Currency translation adjustment (3) (2)
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Total stockholders' equity 1,627 1,419
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Total liabilities and stockholders' equity $ 11,624 $ 11,514
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The accompanying notes are an integral part of these financial statements
1
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
1995 1996
---- ----
Revenues:
Products $ 691 $ 165
Product development and field trial 1,217 96
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Total revenues 1,908 261
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Costs and expenses:
Products 397 541
Product development and field trial 201 90
Research and development 2,485 1,964
Sales and marketing 2,104 1,864
General and administrative 819 868
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Total costs and expenses 6,006 5,327
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Loss from operations (4,098) (5,066)
Interest expense, net (95) (97)
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Net loss $ (4,193) $ (5,163)
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Shares used in computing per share amount 21,848 34,741
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Net loss per share $ (0.19) $ (0.15)
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The accompanying notes are an integral part of these financial statements
2
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
1995 1996
---- ----
Cash used in operating activities:
Net loss $(4,193) $(5,163)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 496 361
Interest accrued but not paid 120 109
Changes in assets and liabilities;
Accounts receivable 716 363
Inventories (1,441) 10
Prepaid expenses and other current assets 228 68
Deposits and other assets 47 (29)
Accounts payable (1,056) (15)
Accrued expenses (593) 195
Customer advances and deferred revenue 482 -
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Net cash used in operating activities (5,194) (4,101)
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Cash used in investing activities:
Acquisition of property and equipment (135) (148)
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Net cash used in investing activities (135) (148)
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Net cash from financing activities:
Proceeds from issuance of preferred stock, net - 4,889
Proceeds from issuance of common stock, net 715 64
Payments on capitalized leases (37) (89)
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Net cash provided by financing activities 678 4,864
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(4,651) 615
Currency translation adjustment 19 1
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Net increase (decrease) in cash (4,632) 616
Cash and cash equivalents at beginning of the period 6,179 2,708
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Cash and cash equivalents at end of the period $ 1,547 $ 3,324
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Supplemental disclosures:
Cash paid during the period for interest $ 21 $ 21
Equipment purchased through leases $ 67 $ 24
Conversion of Series D Preferred Stock to Common Stock $ 3,900
The accompanying notes are an integral part of these financial statements
3
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the Company's management, the unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the consolidated
financial position as of June 30, 1996, and the condensed consolidated results
of operations for the three month period ended June 30, 1995 and 1996, and cash
flows for the three month period ended June 30, 1995 and 1996. The results of
operations for the three month period ended June 30, 1996 are not necessarily
indicative of the results for the full year.
The March 31, 1996 consolidated balance sheet data was derived from audited
financial statements. The balance sheet data does not include all disclosures
required by generally accepted accounting principles. These statements should
be read in conjunction with the March 31, 1996 audited consolidated financial
statements and notes thereto.
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany balances
and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company has sustained recurring losses related primarily to the development and
marketing of its products. Management is actively pursuing additional equity
and debt financing from both institutional and corporate investors. In
addition, the Company is pursuing funding opportunities with strategic corporate
partners. During fiscal 1996, the Company raised $15.9 million from private
placements of 400,000 shares of Common Stock, 7,000 shares of Series C Preferred
Stock, 3,900 shares of Series D Preferred Stock and 9% Convertible Debentures.
In May 1996, the Company raised net proceeds of $4.9 million from the sale of
Series E Preferred Stock (see Note 8). Management has implemented certain cost
reductions and cost containment measures including reductions in its full-time
employee base. However, the Company's management has developed a fiscal 1997
operations plan in which the Company has placed significant reliance on
obtaining outside financing. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
COMPUTATION OF NET LOSS PER SHARE:
Net loss per share is based upon the weighted average number of shares of
common stock outstanding during the period.
4
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. BALANCE SHEET DETAIL: (UNAUDITED)
Accounts receivable, net, comprise:
MARCH 31, 1996 JUNE 30, 1996
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Accounts receivable $ 852,000 $ 789,000
Other 150,000 -
Less allowance for doubtful accounts (408,000) (558,000)
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Accounts receivable, net $ 594,000 $ 231,000
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Inventories comprise:
Raw materials $ 2,571,000 $ 2,642,000
Work in process 117,000 164,000
Finished goods 847,000 745,000
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$ 3,535,000 $ 3,551,000
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Property and equipment, net, comprise:
Equipment $ 8,141,000 $ 8,275,000
Furniture and fixtures 1,813,000 1,823,000
Leasehold improvements 497,000 499,000
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10,451,000 10,597,000
Less accumulated depreciation and
amortization (6,737,000) (7,099,000)
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$ 3,714,000 $ 3,498,000
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Accrued expenses comprise:
Accrued payroll and employee related
expenses $ 578,000 $ 777,000
Accrued contract costs 381,000 381,000
Notes and current portion of
capitalized leases payable 455,000 331,000
Accrued rent 222,000 209,000
Accrued legal costs 769,000 785,000
Other accrued expenses 251,000 243,000
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$ 2,656,000 $ 2,726,000
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5
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. PAYABLE TO RELATED PARTY:
Payable to related party comprise:
March 31, June 30,
1996 1996
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Noninterest-bearing obligation, due
in March 1998 and 1999 $7,000,000 $7,000,000
Discount based on imputed interest
rate of 7.4% (1,143,000) (1,034,000)
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$5,857,000 $5,966,000
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Represents obligation arising from an amendment to a product license
agreement with Entergy Enterprises, Inc. ("Entergy") a stockholder of the
Company.
4. LITIGATION:
On March 17, 1994, the Company entered into a Settlement Agreement and
Release (the Settlement Agreement) relating to an action in the United States
District Court for the Northern District of California (the District Court),
entitled Arthur C. Bass v. First Pacific Networks, Inc., et al. with the estate
of Mr. Bass (the Estate). The Bass lawsuit arose out of the Company's
possession of stock certificates registered in the name of Mr. Bass in the
aggregate amount of 425,307 shares, which Mr. Bass claimed were wrongfully
withheld by the Company. Subsequent to the death of Mr. Bass, in December 1993
the District Court ordered the Company to transfer 367,930 of these shares to
the Probate Court of Shelby County, Tennessee. The order to transfer the Bass
shares was stayed upon the posting of an appeal bond in December 1993 in the
amount of $3.7 million (the Appeal Bond), which bond was posted at the Company's
request by one of its insurers, subject to a reservation of rights. The
remaining 57,377 shares were held by the creditors of the estate of Mr. Bass.
Pursuant to the terms of the Settlement Agreement, the Company was required
to place 367,930 of the previously issued shares with an investment banking firm
to sell the shares. To the extent the net proceeds from the sale of these
shares were less than $15 per share ($5,518,950), the Company was obligated to
pay the difference, up to a maximum of $1.8 million, to the Estate. The Company
was advised that the shares were sold at a price of $8.25 per share and,
accordingly, the Company remitted $1.8 million to the Estate in July 1994. The
Company received insurance proceeds of $550 thousand in July against the
settlement payment. Further, the Company was required to issue to the Estate
(for those shares held by creditors to the Estate) previously unissued shares of
the Company's common stock with an aggregate market value at the time of
approximately $387 thousand (or approximately 53,700 shares). In July 1994,
53,730 shares were issued to the Estate in fulfillment of that provision of the
settlement agreement.
The Estate moved to compel the insurance carrier to pay approximately $686
thousand (plus interest and attorneys' fees) pursuant to the Appeal Bond. The
court issued an order granting the Estate's motion. The insurance carrier and
the Company jointly filed an appeal from the court's order which appeal was
denied in April 1996 and became final in July 1996. The Estate's motion for
an award of attorneys' fees and costs claimed amount to approximately
$152,000 remains pending.
6
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. LITIGATION: (CONTINUED)
In the opinion of management the ultimate outcome of such matters is not
expected to have a material adverse effect on the Company's results of
operations or financial position.
5. RELATED PARTY TRANSACTIONS:
In May 1995, the Company and Entergy Enterprises, Inc. (a subsidiary of
Entergy Corporation and a 4.8% stockholder of the Company) agreed to further
amend a Product License Agreement which had been entered into in July 1991 and
subsequently amended in December 1991 and March 1994. The Amendment provided
for, among other things, elimination of Entergy's obligation to pay $1,000,000
of additional development funding and the Company's obligation to repay $988,000
in customer advances. In connection with the Amendment the Company recognized
approximately $988,000 of development revenue (included in deferred revenue at
March 31, 1995) in the three months ended June 30, 1995.
For the three months ended June 30, 1995 $1,033,000, of the Company's
revenue, representing 54%, of total revenue, was earned under field trial and
development arrangements. There was no revenue from activities with Entergy in
the three months ended June 30, 1996.
In February 1996, the Company entered into a one year consulting agreement
with the Company's Chairman of the Board, who was a former officer of the
Company. During the three months ended June 30, 1996 the Company incurred
consulting expenses under the agreement of $61,000.
6. SIGNIFICANT CUSTOMERS:
Three customers represented 54%, 17% and 17%, respectively, of total revenue
for the three months ended June 30, 1995 and two customers represented 53% and
30%, respectively, of total revenue for the three months ended June 30, 1996.
7. COMMITMENTS:
LETTERS OF CREDIT
Outstanding letters of credit aggregated $235,000 at June 30, 1996. The
letter of credit relates to collateral for leasehold improvements.
As of June 30, 1996, "deposits and other assets" includes $235,000 of
restricted cash for letter of credit arrangements.
PURCHASE COMMITMENTS
At June 30, 1996, the Company has outstanding a non cancelable commitment to
purchase approximately $2,400,000 of inventory from its contract manufacturer.
The Company currently anticipates that it will acquire the inventory throughout
fiscal 1997.
7
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. STOCKHOLDERS EQUITY:
On May 31, 1996 the Company completed a private placement of 5,000 shares of
Series E Preferred Stock (Series E Stock), par value $.001 per share having a
purchase price of $5,000,000, in reliance on Regulation S promulgated under the
Securities Act of 1933, as amended. The Series E Stock is convertible into the
Company's common stock, at a conversion rate of the lower of $3.25 or 80% of
the market value of the Company's common stock at the time of conversion. The
Series E Stock is convertible at the option of the holder at any time after 60
days past its issuance date and is subject to mandatory conversion in May 1998.
The Company has the right to redeem outstanding shares of Series E preferred
stock under certain circumstances. Holders of Series E Stock are entitled to
receive dividends only when and if dividends are declared on the Company's
common stock, and will be determined based on the number of shares of common
stock the Series E Stock could be converted into at the time of the declaration
of dividends on the Company's common stock. The holders of the Series E Stock
do not have voting rights.
In the event of any liquidation, dissolution or wind-up of the Company, the
holder's of the Series E Stock are entitled to receive, prior and in preference
to holder's of the Company's common stock, the amount of $1,000 per share for
each share of Series E Stock held by them plus an amount equal to all declared
and unpaid dividends on the Series E Stock, if any. At June 30, 1996 5,000
shares of the Series E Preferred Stock remain outstanding.
In April and May 1996 all 3,900 shares of the Company's Series D Preferred
Stock were converted into 1,895,000 shares of the Company's common stock.
On June 20, 1996, the Company's Board of Directors adopted a resolution,
which is subject to stockholder approval, to increase the authorized shares of
the Company's Common Stock to 90,000,000 shares.
SUBSEQUENT EVENT
On August 13, 1996, 1,500 shares of Series E Preferred Stock were
converted into 1,875,000 of the Company's Common Stock.
8
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
The following information should be read in conjunction with the condensed
consolidated interim financial statements and the notes thereto included in Item
1 of this Quarterly Report and with the Company's Annual Report for the fiscal
year ended March 31, 1996.
BACKGROUND
The Company's historical revenues have been derived principally from the
following sources: license fees from one licensee, development and field trial
revenue and product sales. There was no license fee revenue in the three month
periods ended June 30, 1995 and 1996. Development and field trial revenue
represented 64%, and 36%, and product sales represented 37% and 63%, of total
revenues during the three month period ended June 30, 1995 and 1996,
respectively. To date, the Company has not gained rapid market penetration of
its technology and there can be no assurance that it will be able to do so.
The Company is often required to enter into arrangements with potential
customers to conduct field and/or pilot tests of its products and, in order to
achieve market penetration and visibility and allow customer evaluation of the
Company's products, may ship products under terms which result in no profit
being realized or a loss to the Company. In addition, the Company may
experience significant fluctuations in periodic results in the event license
fees and development fees are derived by the Company. The Company is unable to
predict whether or when any licenses will be entered into or license fees
generated, partially because of the lengthy period of time involved in
negotiating and obtaining a licensing arrangement. Additionally, variability in
periodic operating results may arise from budgeting and purchasing patterns of
customers, the timing of field trials and development arrangements as well as
general economic trends.
The Company has experienced significant operating losses to date and
expects to incur continuing operating losses for the foreseeable future. This
factor has resulted in significant depletion of the Company's cash resources
which has required and will require the Company to obtain additional financing
in order to continue in existence. During fiscal 1996 and through the first
quarter of fiscal 1997 outstanding shares of the Company's Common Stock has
risen to 36 million as a result of funding through equity transactions. The
Company is seeking approval from its stockholders to increase its level of
authorized shares for potential future issuance of Common Stock through
financing transactions at its Annual Meeting in September of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Operations during the three month period ended June 30, 1996 utilized cash
of $4.1 million as compared to $5.2 million for the three month period ended
June 30, 1995. Cash used in operations was primarily attributable to cash
utilized to fund the operating loss partially offset by a reduction in accounts
receivable. The decrease in cash utilized to fund operations in the first
quarter of fiscal 1997 as compared to the same quarter in fiscal 1996 is due
principally to reduced inventory acquisitions and reductions to accounts payable
and accrued expenses that took place in fiscal 1996. The fiscal 1997 operating
loss reflects continued investments in product and market development activities
while not attaining sufficient revenue levels or margins to compensate for the
expenditures. Accounts receivable decreased due primarily to reduced revenue in
the comparable quarterly periods, a result of decreased development and field
trial revenue activity. Inventory levels at June 30, 1996 are primarily
attributed to purchases for anticipated sales for field trials and early
deployments of the Company's FPN1000-TM- system which have not yet materialized.
In addition, the Company has noncancelable commitments to purchase approximately
$2.4 million of inventory related to its subscriber units. The inventory is
currently scheduled to be received throughout fiscal 1997. These inventory
levels are currently in excess of anticipated short-term needs and therefore if
not utilized could become subject to obsolescence or decline in the market value
causing inventory write-offs against operating results. The Company expects to
utilize its cash resources to continue to finance operations, product
development, sales and marketing activities, and inventory purchases.
9
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company had no material capital asset commitments at June 30, 1996.
Property and equipment purchases for the first quarter of fiscal 1997
represented the Company's principal investing activity totaling $148 thousand.
The purchases relate primarily to purchase of equipment for in-house test
facilities and engineering test equipment for hardware and software development
purposes which are required to continue the development of the Company's
products. The Company anticipates additional equipment purchases in fiscal 1997
at levels similar to that in fiscal 1996 should current operating levels
continue. The Company has obtained and will continue to seek lease financing
for certain of these equipment additions.
The Company has an office lease expiring in 2001 with total future minimum
lease payments of $3.7 million. At June 30, 1996 the Company had outstanding
letters of credit of $235 thousand associated with leasehold improvements.
In March 1994, in connection with entering into an Amended License
Agreement with Entergy Enterprises, the Company became obligated, subject to
certain conditions, to pay $7 million to Entergy Enterprises in March 1998. In
connection with a May 1995 amendment to the Product License Agreement Entergy
Enterprises agreed to change the payment date of the obligation such that $3.5
million is now due in March 1998 and $3.5 in March 1999. At June 30, 1996, the
Company is obligated to pay an aggregate in minimum lease payments of
$383thousand under capitalized lease obligations for primarily equipment
acquisitions.
At March 31, 1996, the Company had available net operating loss
carryforwards of approximately $98 million to offset future taxable income for
federal tax purposes. The utilization of the loss carryforwards to reduce
future income taxes will depend on the Company's ability to generate sufficient
taxable income prior to the expiration of the net operating loss carryforwards.
The carryforwards begin to expire in the year 2003. However, the Tax Reform Act
of 1986 limits the maximum annual use of net operating loss and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a corporation. As a result of the Company's initial public offering and
other stock issuance's, a change of ownership occurred which will restrict the
Company's use of net operating loss carryforwards for federal tax purposes. The
limitation applies to those net operating loss carryforwards that were incurred
prior to such ownership change. The Company's annual limitation of such net
operating loss carryforwards is currently estimated to be $4-5 million per
year. Further, anticipated future financing transactions could result in
further restrictions to operating and tax credit carryforwards.
Cash provided by financing activities consisted of $5.0 million ($4.9
million net of expenses) from the 5,000 shares of Series E Preferred Stock, in a
private placement on May 31, 1996. The Company's Series D Preferred Stock which
was outstanding at March 31, 1996 was converted into 1,895,000 shares of Common
Stock during the first quarter of fiscal 1997. The Series E Preferred Stock
becomes eligible for conversion in July 1996 and on August 13, 1996 1,500
shares of Series E Preferred Stock were converted into 1,875,000 shares of
Common Stock.
10
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company's principal sources of liquidity are cash and cash equivalents
and receivables. At June 30, 1996, the Company had cash and cash equivalent
balances of $3.3 million and accounts receivable of $231 thousand. The
Company's future capital requirements and the adequacy of available funds will
depend on a variety of factors including availability of authorized shares of
Common Stock, market acceptance of HFC networks, the Company's ability to
successfully penetrate its markets, as demonstrated by securing orders, progress
of the Company's product development, the cost, timing and extent of future
field trials, competing technological and market developments and establish and
maintain strategic alliance and licensing arrangements. The Company believes
based on its current operating levels that is has sufficient cash resources at
June 30, 1996 for operating activities through August 1996. The Company is
pursuing financing alternatives from both institutional, corporate and other
investors to meet the Company's current cash needs and to satisfy additional
cash requirements for continuation of its operations. There can be no
assurance, however, that the Company will obtain additional financing and
that if available will be on terms favorable to the Company or that the
stockholders will approve an increase in authorized shares. To the extent
that the Company raises additional capital by issuing equity securities
ownership dilution to shareholders will result. In the event that management
is unable to raise additional funds, in the near term, operating activities
would be significantly curtailed and the Company may not be able to continue
in existence (See Note 1 of Notes to Condensed Consolidated Financial
Statements). The Company's discussion of the period of time through which its
financial resources will be adequate to support operations contains
forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
RESULTS OF OPERATIONS:
Product revenues decreased 76% to $165 thousand for the three months ended
June 30, 1996, compared to $691 thousand and for the three months ended June 30,
1995. Product development and field trial revenues decreased 92% to $96
thousand for the three months ended June 30, 1996, as compared to $1.2 million
for the three months ended June 30, 1995. The decrease in product revenues
reflects a lower level of shipments for pilot test and field trials to
international (principally Asia) and domestic customers. The decreased product
development and field trial revenue reflects $988 thousand of product
development revenue associated with the aforementioned amendment to the Product
License agreement with Entergy in the three months ended June 30, 1995. The
revenue related to reimbursement of product development costs incurred by the
Company and included in operations in periods prior to fiscal 1996. The Company
recognized the development revenue in the three months ended June 30, 1995
following a May, 1995 amendment to its Product License Agreement with Entergy.
Exclusive of the product development revenue related to Entergy, product
development and field trial revenue associated principally with the Company's
energy management product PowerView decreased due principally to reduced
activities. A portion of the field trial revenue recognized in fiscal 1996 was
attributable to expenses reimbursed by Entergy in connection with a field trial
in Arkansas, which was completed in the fall of 1995.
Product costs increased 36% to $541 thousand for the three months ended
June 30, 1996, as compared to $397 thousand for the three months ended June 30,
1995. The increase in product costs is due primarily to a provision for product
costs on a field trial. Manufacturing operations costs allocated to research
and development, to reflect support activities conducted by manufacturing
personnel, amounted to $332 thousand and $318 thousand for the three months
ended June 30, 1995 and 1996, respectively.
Product development and field trial costs decreased 55% to $90 thousand for
the three months ended June 30, 1996, as compared to $201 thousand for the three
months ended June 30, 1995. The decrease primarily reflects decreased field
trial activity in the quarter associated with the Company's energy management
products.
11
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FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS (Continued)
Research and development expense decreased 21% to $2.0 million for the
three months ended June 30, 1996, as compared to $2.5 million for the three
months ended June 30, 1995. The decreased expenses primarily reflect the
decrease to 47 research and development personnel at June 30, 1996 from 55 at
June 30, 1995 and reduced depreciation expense. The decrease in personnel
levels is the result of the completion of certain phases of development and cost
containment efforts.
Sales and marketing expenses decreased 11% to $1.9 million for the three
months ended June 30, 1996, as compared to $2.1 million for the three months
ended June 30, 1995. The decrease in expense is due primarily to reduced
personnel and related costs and travel as a result of cost containment efforts.
Full-time personnel engaged in marketing, sales and customer service activities
at June 30, 1996 totalled 38 as compared to 45 at June 30, 1995.
General and administrative expense increased 6% to $868 thousand for the
three months ended June 30, 1996 as compared to $819 thousand for the three
months ended June 30, 1995. The increase primarily reflects increased
recruiting and consulting costs offset in part by a reduction in personnel
related costs due to cost containment efforts. At June 30, 1996 full-time
personnel engaged in general and administrative activities approximated 22 as
compared to 26 at June 30, 1995.
The Company reflected interest expense, net of interest income, of $97
thousand for the three months ended June 30, 1996 as compared to $95 thousand
for the three months ended June 30, 1995. The increase to net interest expense
reflects the lower levels of cash and cash equivalents available for short term
investment in the comparable periods.
Historically, inflation has not had significant impact on the operations of
the Company. However, there can be no assurance that inflation will not have a
material impact on the Company's business in the future.
12
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
On March 17, 1994, the Company entered into a Settlement Agreement and
Release (the Settlement Agreement) relating to an action in the United States
District Court for the Northern District of California (the District Court),
entitled Arthur C. Bass v. First Pacific Networks, Inc., et al. with the estate
of Mr. Bass (the Estate). The Bass lawsuit arose out of the Company's
possession of stock certificates registered in the name of Mr. Bass in the
aggregate amount of 425,307 shares, which Mr. Bass claimed were wrongfully
withheld by the Company. Subsequent to the death of Mr. Bass, in December 1993
the District Court ordered the Company to transfer 367,930 of these shares to
the Probate Court of Shelby County, Tennessee. The order to transfer the Bass
shares was stayed upon the posting of an appeal bond in December 1993 in the
approximate amount of $3.7 million (the Appeal Bond), which bond was posted at
the Company's request by one of its insurers, subject to a reservation of
rights. The remaining 57,377 shares were held by the creditors of the estate of
Mr. Bass.
Pursuant to the terms of the Settlement Agreement, the Company was required
to place 367,930 of the previously issued shares with an investment banking firm
to sell the shares. To the extent the net proceeds from the sale of these
shares were less than $15 per share ($5,518,950), the Company was obligated to
pay the difference, up to a maximum of $1.8 million, to the Estate. The Company
was advised that the shares were sold at a price of $8.25 per share and,
accordingly, the Company remitted $1.8 million to the Estate in July 1994. The
Company received insurance proceeds of $550 thousand in July against the
settlement payment. Further, the Company was required to issue to the Estate
(for those shares held by creditors to the Estate) previously unissued shares of
the Company's common stock with an aggregate market value at the time of
approximately $387 thousand (or approximately 53,700 shares). In July 1994,
53,730 shares were issued to the Estate in fulfillment of that provision of the
settlement agreement.
The Estate moved to compel the insurance carrier to pay approximately $686
thousand (plus interest and attorneys' fees) pursuant to the Appeal Bond. The
court issued an order granting the Estate's motion. The insurance carrier and
the Company jointly filed an appeal from the court's order which appeal was
denied in April 1996 and became final in July 1996. The Estate's motion for an
award of attorneys' fees and costs claimed to amount to approximately $152,000
remains pending.
In the opinion of management the ultimate outcome of such matters is not
expected to have a material adverse effect on the Company's results of
operations or financial position.
ITEM 5. OTHER INFORMATION
On May 31, 1996 the Company closed a private placement made in reliance on
Regulation S under the Securities Act of 1933, in which it received net proceeds
of $4.9 million from the sale of Series E Preferred Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS:
See index to Exhibits on page 15.
(b) REPORTS ON FORM 8-K:
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST PACIFIC NETWORKS, INC.
August 13, 1996 /s/ M. Peter Thomas
- -------------------------- ------------------------------
Date M. Peter Thomas
Chief Executive Officer and
President
August 13, 1996 /s/ Kenneth W. Schneider
- -------------------------- ------------------------------
Date Kenneth W. Schneider,
Executive Vice President
and Chief Financial Officer
14
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3. Exhibits.
3.1 Restated Certificate of Incorporation (1)
3.2 Certificate of Retirement and Prohibition of Reissuance of
Shares (5)
3.3 Certificate of Designation For Series B Preferred Stock (15)
3.4 Fourth Amended and Restated By-Laws of the Company (8)
3.5 Corrected Certificate of Designation for Series C Preferred
Stock (16)
3.6 Certificate of Designation For Series D Preferred Stock (17)
3.7 Certificate of Designation For Series E Preferred Stock (9)
4.1 Form of Rights Agreement between the Company and Continental
Stock Transfer & Trust Company, as Rights Agent (including
as Exhibit A the form of Certificate of Designation,
Preferences and Rights of the Terms of the Series B
Preferred Stock, as Exhibit B the form of Right Certificate,
and as Exhibit C the Summary of Terms of Rights
Agreement)(10)
4.3 Form of 9% Convertible Debenture issued July 13, 1995 (14)
4.4 Form of Series C Preferred Stock Offshore Securities
Subcription Agreement (16)
4.5 Form of Series D Offshore Securities Subscription Agreement
(17)
4.6 Form of Series E Offshore Securities Subscription Agreement
(9)
10.1 Product License Agreement dated as of July 31, 1991 between
the Company and Electec, Inc.(1)
10.4 Investor Rights Agreement dated July 31, 1991 among the
Company, Electec, Inc. and certain shareholders(1)
10.4(a) Revised Form of Amendment No. 1 to Investor Rights
Agreement(1)
10.5 Common Stock Purchase Agreement dated as of July 31, 1991
between the Company and Electec, Inc.(1)
10.7 1991 Stock Option Plan with Form of Stock Option Grant(1)
10.7(a) 1991 Stock Option Plan, as amended(4)
10.8 1990 Stock Option Plan with Form of Stock Option Grant(1)
10.10 Employment Agreement dated as of July 31, 1991 between the
Company and Donald G. Marquart(1)
10.11 Employment Agreement dated as of July 31, 1991 between the
Company and Robert P. McNamara, Ph.D.(1)
10.12 Form of Employee Proprietary Information and Invention
Assignment Agreement(1)
10.13 Form of Indemnification Agreement(1)
10.14 Registration Rights Agreement dated as of February 23, 1989
among the Company and certain shareholders(1)
10.16(a) Common Stock Warrant dated May 31, 1991 issued by the
Company to Samuel R. Dunlap, Jr. (1)
15
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
3. Exhibits. (Continued)
EXHIBIT NO. DESCRIPTION
10.17 Letter Agreement dated April 13, 1992 among the Company,
Holland Pacific B.V., New Special Assets Limited and First
Pacific Company Limited(1)
10.18 Irrevocable Proxy to James K. Gibby/Robert P. McNamara from
Holland Pacific B.V. and New Special Assets Limited(1)
10.18(a) Amendment to Exhibit 10.18(2)
10.19 License Agreement dated October 15, 1989 between the Company
and Wavelengths Lasers, Inc. and Amendment No. 1 thereto(1)
10.22 Debenture Agreement dated September 1, 1989 between the
Company and Kimoto-Seika, Inc. and Waiver thereto dated
March 25, 1992(1)
10.25 Common Stock Purchase Warrant dated April 6, 1992 issued by
the Company to Dan Purjes(1)
10.26 Form of Common Stock Purchase Warrant dated January 10, 1992
issued by the Company to Josephthal Lyon & Ross
Incorporated(1)
10.31 Warrant Agreement between the Company and Josephthal Lyon &
Ross Incorporated(2)
10.38 Common Stock Purchase Warrant issued by the Company to Rajiv
Jaluria dated May 24, 1993(2)
10.40 Consulting Agreement effective February 1, 1996 between the
Company and Craig J. Brunet(9)
10.41 Employment Agreement dated May 6, 1996 between the Company
and James D. Bletas(9)
10.42 Lease dated December 12, 1993 between the Company and
Sobrato Interests II(5)
10.43 Settlement Agreement and Release dated as of March 17, 1994
by and among the Company, the Estate of Arthur C. Bass (the
"Estate"), Paula C. Bass and Gary Singer as co-executor of
the Estate(6)
10.44 Amendment to Product License Agreement dated March 31, 1994
between the Company and Entergy Enterprises, Inc.(6)
10.47 Employment Agreement dated as of February 18, 1996 between
the Company and Kenneth W. Schneider(9)
10.48 Employment Agreement effective June 26, 1995 between the
Company and M. Peter Thomas(13)
10.49 Second Amendment to Product License Agreement dated May 24,
1995 between the Company and Entergy Enterprises, Inc.(13)
10.50 1994 Stock Option Plan with Form of Stock Option Grant(11)
10.51 1994 Employee Stock Purchase Plan with Form of Stock
Purchase(12)
10.52 Form of Confidential Reciprocal Non-Disclosure Agreement(13)
11.1 Statement re: computation of per share loss(18)
21.1 List of Subsidiaries (9)
23.1 Consent of Independent Accountants(9)
- ---------------
(1) Filed with and incorporated by reference to the corresponding Exhibit
number of the Company's Registration Statement on Form S-1 filed on May 20,
1992 (File No. 33-47821).
(2) Filed with and incorporated by reference to the corresponding Exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1993.
16
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
3. Exhibits. (Continued)
(3) Filed with and incorporated by reference to the corresponding Exhibit
number of the Company's Current Report on Form 8-K filed September 21,
1993.
(4) Filed with and incorporated by reference to the corresponding Exhibit
number of the Company's Registration Statement on Form S-3 filed on
July 27, 1993 (File No. 33-47821).
(5) Filed with and incorporated by reference to the corresponding Exhibit,
which has been renumbered herewith, of the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1994.
(6) Filed with and incorporated by reference to the corresponding Exhibit,
which has been renumbered herewith, to the Company's Current Report on
Form 8-K filed on April 28, 1994.
(7) Filed with and incorporated by reference to the corresponding Exhibit
number to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.
(8) Filed with and incorporated by reference to the corresponding Exhibit,
which has been renumbered herewith, to the Company's Current Report on
Form 8-K/A filed on May 12, 1995.
(9) Filed and incorporated by reference to the corresponding Exhibit
number to the Company's Annual Report on Form 10-K for the fiscal year
ended Mrach 31, 1996.
(10) Filed with and incorporated by reference to the corresponding Exhibit,
which has been renumbered herewith, to the Company's Current Report on
Form 8-K filed on February 2, 1995.
(11) Filed with and incorporated by reference to the corresponding Exhibit,
which has been renumbered herewith, to the Company's Report on Form S-8
filed on November 14, 1994.
(12) Filed with and incorporated by reference to the corresponding Exhibit,
which has been renumbered herewith, to the Company's Report on Form S-8
filed on November 15, 1994.
(13) Filed with and incorporated by reference to the corresponding Exhibit
number to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995.
(14) Filed with and incorporated by reference to the corresponding Exhibit
number to the Company's Quarterly Report on Form 10Q for the three
months ended June 30, 1995.
(15) Filed with and incorporated by reference, to the Exhibit A, to the
corresponding Exhibit, which has been renumbered herewith, to the
Company's Current Report on Form 8-K filed on February 2, 1995.
(16) Filed with and incorporated by reference to the corresponding Exhibit
number to the Company's Quarterly Report on Form 10Q for the quarterly
period ended September 30, 1995.
(17) Filed with and incorporated by reference, to the Exhibit A, to the
corresponding Exhibit, which has been renumbered herewith, to the
Company's Current Report on 8-K filed on March 23, 1996.
(18) Filed herewith.
17
<PAGE>
EXHIBIT 11.1
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
June 30,
--------
1995 1996
---- ----
Weighted average common shares outstanding
for the period 21,848 34,741
-------- --------
Shares used in loss per share calculation 21,848 34,741
-------- --------
-------- --------
Net loss $ (4,193) $ (5,163)
-------- --------
-------- --------
Loss per share applicable to common shareholders $ ( 0.19) $ (0.15)
-------- --------
-------- --------
Dilutive common stock warrants and stock options have not been included
in the calculation of common and common equivalent shares used to calculate
net loss per share, as their inclusion would be antidilutive.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,324
<SECURITIES> 0
<RECEIVABLES> 789
<ALLOWANCES> 558
<INVENTORY> 3,551
<CURRENT-ASSETS> 7,653
<PP&E> 10,597
<DEPRECIATION> 7,099
<TOTAL-ASSETS> 11,514
<CURRENT-LIABILITIES> 4,011
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 1,383
<TOTAL-LIABILITY-AND-EQUITY> 11,514
<SALES> 165
<TOTAL-REVENUES> 261
<CGS> 541
<TOTAL-COSTS> 5,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> (5,163)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,163)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0
</TABLE>
