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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
March 31,1996 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 No.)
871 Fox Lane, San Jose, CA 95131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (408) 943-7600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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
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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 any amendment to this
Form 10-K. [ ]
As of June 25, 1996 the registrant had 35,741,198 shares of Common Stock
outstanding and the aggregate market value of the Common Stock held by
nonaffiliates of the registrant based on the closing price of the registrant's
Common Stock reported on Nasdaq was approximately $74,699,000.
Exhibit Index located at page 58.
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DOCUMENTS INCORPORATED BY REFERENCE:
Part III
Item 10. Directors and
Executive Officers
of the Registrant
Item 11. Executive Compensation To be included in the
Proxy Statement to be
filed pursuant to
Regulation 14A not
Item 12. Security Ownership later than 120 days
of Certain Beneficial after the end of the
Owners and Management Registrant's fiscal
year.
Item 13. Certain Relationships
and Related Transactions
Part IV
Item 14. Exhibits, Financial See Exhibit Index on page 58 and
Statement Schedules, Financial Statement Schedule Index
and Reports on Form 8-K on page 30.
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PART I
Item 1. BUSINESS
First Pacific Networks, Inc. (the "Company") has developed a patented
telecommunications technology that enables telephone, data and video
communications to be transmitted simultaneously over a single wiring system to a
large number of users on a cost-effective basis. The Company's strategy is to
use a combination of strategic alliances with network system integrators,
network infrastructure builders, major communications service and equipment
providers, distributors and licenses as well as direct product sales to
telephone service and cable television operators and utilities worldwide to gain
market penetration of its products.
The Company believes that worldwide market and regulatory developments
and technological advancements are contributing to the increased demand by both
the telephone and cable television industries for telecommunications systems
capable of providing multiple and integrated communications services to their
subscribers at a cost below or competitive with that necessary to build
conventional communication systems. In addition, electric utility companies and
municipalities are seeking to develop systems capable of implementing energy
management programs as well as providing other communication services such as
voice and data. The implementation of these systems requires upgrading of the
broadband networks of the cable television industry and replacement and/or
re-engineering of the switched voice and low-speed data networks operated by the
telephone companies and/or, in certain instances, the deployment of new
distribution networks. The Company believes that its technology can provide a
cost-effective means of implementing such re-engineering. The Company's
technology enables multiple communications services to be provided over upgraded
network distribution systems or new hybrid fiber/coaxial cable (HFC) networks on
an incremental user basis. To implement the Company's strategy, the Company is
adapting and incorporating its core technology and family of products into
systems designed to address specific market applications. The Company's current
marketing activities are targeted primarily to cable telephony systems
internationally and to selected domestic telephone markets, and domestic energy
management applications to utilities.
The Company is conducting ongoing product development and testing to
adapt its technology and products for specific market requirement applications
and evaluate products under operating conditions and to reduce product costs.
To date, no system wide first or commercial deployments of the Company's
technology have been implemented, although field trials and pilot systems that
include Company products are currently ongoing. See "- Sales and Marketing."
Revenues have not been material and the Company has incurred substantial
operating losses. See "- Management's Discussion and Analysis of Financial
Condition and Results of Operation".
In July 1992, the Company completed its initial public offering. The
Company was incorporated under the laws of the State of Delaware in 1987. In
August 1988, the Company changed its name to First Pacific Networks, Inc. All
references herein to the Company include, unless otherwise indicated, the
operations of the Company, First Pacific Federal Systems, Inc., its currently
inactive, wholly-owned subsidiary, its wholly owned-subsidiary First Pacific
Networks International B.V. organized in the Netherlands and its subsidiary FPN
U.K. Limited, organized in the United Kingdom. The Company's executive offices
are located at 871 Fox Lane, San Jose, California 95131.
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COMPANY TECHNOLOGY AND PRODUCTS
The Company's technology and systems consist of hardware and software
that combine multiple signals to permit an individual signal, either voice, data
or a compressed digital video signal, to be routed on a single wire to its
designated destination independently of other signals on the network. The
Company's systems are currently being designed to share a common Radio Frequency
(RF) Digital Transport Platform (DTP). The DTP is currently intended to support
the cable-telephone and energy management applications, as well as future
applications. The Company's technology has been designed to operate over a
coaxial cable wiring system or a combination of optical fiber and coaxial cable
(hybrid fiber-coax or "HFC") wiring system.
The Company's technology organizes the use and function of the wiring
system "bandwidth," which is the capacity of the wiring to carry information.
The wiring system bandwidth varies depending on the physical characteristics of
the particular wire and is viewed as passive since it carries, but does not
change or process, the communications information. The wiring system bandwidth
is divided into two blocks, one for transmitting information and one for
receiving information. The overall organization of bandwidth on a system will
be functionally dependent upon the specific market application in which the
Company's technology is deployed. The wiring system extends to every end-user's
location and provides each end-user access to a range of system bandwidth from
350 MHz to over 1 GHz, depending on the characteristics of the wiring system and
market application. The Company's technology can be deployed so that available
system bandwidth exceeds current users requirements, with the balance available
for other uses or future expansion. In addition, as the number of users or
services grows, the wiring system can be divided to accommodate growth without
installing expensive additional wiring systems.
The Company's technology is incorporated into intelligent interface
units which can accommodate different types of communications services. For
example, users can plug telephones, answering machines, fax machines, personal
computers and televisions into connection outlets on the Company's interface
units in a manner similar to the way in which they connect electrical devices
into electrical distribution outlets. Each system is expected to include an
adaptation of at least three basic products: the interface unit, the
intelligent network gateway interface unit and the network management system,
together with related software. The customer's interface unit is the
communications link between the end-user and the wiring system and uses a
digital transport platform to carry communications, depending on the
configuration and programming required by the particular telecommunications
application. The Company's technology incorporates what is known as an "open
architecture" design, which supports the development or attachment of new types
of equipment to its interface units as new equipment is introduced. The
interface units can be connected to a wide range of distribution wiring systems,
including fiber-optic, broadband and baseband coaxial cable, or any combination
of the above. The intelligent network gateway interface unit acts as the
interface to the public switched telephone network. The characteristics of
the wiring system may determine the nature of the services that can be provided
using Company technology.
The Company's technology is the architectural base for its products and
systems, which are comprised of radio frequency, networking protocols,
microprocessor and software components. Based upon this architecture, the
Company has organized the applications of its technology into three product
families: the FPN1000 system, to provide cable telephony for residential and
small business applications, the FPN2000 or PowerView-Registered Trademark-
system, to provide energy management and other utility applications and the
FPN3000 product family which permits the users, including cable television and
utilities, to transmit high speed data on a broadband cable network. Within
each product family, product applications have been developed, and are expected
to be developed and enhanced, in response to specific market or regulatory
requirements.
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The Company's telephone system application, the FPN1000 product family
currently consists of two principal systems; the FPN1000 system and the FPN1000i
system. The FPN1000 is targeted at domestic markets (and other markets with
similar telephone environments and requirements) and the FPN1000i is designed to
serve multiple segments of the international marketplace. Both systems
currently consist of three components: the Voice Interface Unit (VIU-Registered
Trademark-), which is an intelligent interface unit located at or near the
subscriber premises, the Trunk Interface Unit (TIU-Registered Trademark-) which
serves as the digital gateway into the Public Switched Telephone Network (PSTN),
and the NMS 1000, the network management system which administers and maintains
the devices and services to subscribers on the distribution network. The FPN1000
and FPN1000i systems are now being deployed in field trial and/or pilot testing
and limited deployments. For example, the FPN1000 system is currently operating
in an installation of approximately 136 subscribers in California providing
telephony over cable and in a 60 subscriber pilot test in the Netherlands. See
"- Markets and Market Applications - Cable Telephony." The initial version of
the FPN1000 system provided an analog connection to the PSTN and has been
utilized primarily for small deployments, such as field trials and pilot tests.
The Company has currently under development a Digital Transport Unit
(DTU), an addition to the FPN1000i system. The DTU designed initially for the
international market will provide a transport interface between a digital
central office switch and remote access multiplexers over a HFC network. The
DTU, which can be integrated into the same network with the Company's
single-line VIU, may be deployed in 30-, 60- and 120-line access multiplexers.
The DTU may serve as an alternative to the VIU for densely populated urban areas
that contain multiple dwelling units and high telephone penetration rates. The
Company is also beginning to focus its development efforts on multiple-line
versions of its VIU products.
The Company's energy management system applications the FPN2000 product
family consists initially of the PowerView-Registered Trademark- system a system
under development for a Customer Controlled Load Management/Automatic Feedback
System (CCLM/AFS) energy management application. It includes an intelligent
utility unit (IUU) installed at or near a customer(s) residence, a network
gateway, installed at the utility distribution substation and a system manager
consisting of hardware and software components located at the utility's host
computer facility. A field trial version of the product is deployed at CSW
Communications, Inc. (CSW) a subsidiary of Central and South West Corporation in
Texas. As of May 31, 1996, approximately 390 IUU's have been installed. The
Company has also shipped its latest version of PowerView-Registered Trademark-
system to Southern Development and Investment Group (Southern Development), a
subsidiary of The Southern Company. The system will serve a 303-unit apartment
community in Georgia. A modification of the PowerView-Registered Trademark-
product that will permit a single IUU to serve multiple homes is also being
tested in these field trials. See " - Markets and Market Applications - Energy
Management" and " - Agreements with Entergy Enterprises."
The Company is continuing to develop enhanced adaptations or
modifications of certain of these products and systems to improve performance,
achieve cost reductions and to meet different market requirements using its core
technology as the foundation. Such adaptations or modifications extend the
performance characteristics of the system to enable new applications and its
ability to conform with interface and operational standards in both the domestic
and international markets.
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MARKETS AND MARKET APPLICATIONS
COMPANY STRATEGY. The Company's strategy is to leverage its core
technology and products for specific market applications and to use a
combination of strategic alliances, joint ventures, system integrators,
distributors, OEM's, value added resellers and licensing to gain adoption of its
products. In addition, the Company has licensed and, in certain marketplaces,
may continue to license its technology, manufacturing and products as part of
its strategy. As a result of market, regulatory and competitive factors, the
Company's marketing activities are currently focused primarily towards
international cable telephony and domestic energy management applications of its
technology. The principal target markets include cable telephony applications
for primarily foreign cable television operators and telephone service companies
and domestic electric power utilities.
In most instances, potential Company customers require field trials or
pilot installations of Company products for evaluation. The Company believes
that the product installations through these evaluations can demonstrate the
viability of the Company's technology and products in addressing specific market
and customer applications. The Company has tested its technology for viability
in all principal market applications targeted by the Company, although products
continue to be tested, evaluated and modified for specific market applications.
In many cases, initial trial sales of product for such purposes are not
profitable to the Company and may result in losses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
However, the Company has sold and will continue to sell field trial pilot
systems for evaluation with certain key customers because of their high
visibility or to provide these customers with an opportunity to evaluate and
test the Company's technology for potential commercial deployment. The Company
is collaborating with and will continue to pursue collaborations with system
integrators, infrastructure builders and system operators to pursue
opportunities involving new or upgraded distribution systems. In addition, the
Company has entered into sales, marketing and distribution agreements with
equipment suppliers, distributors and system integrators to market or jointly
market and sell the Company's systems. See " - Sales and Marketing."
To date, the Company has licensed its technology for use in certain new
products for energy management and other utility applications to Entergy
Enterprises and has sold a small number of pilot systems or products for field
deployment in providing telephony on cable in domestic and international
markets. The Company has shipped its PowerView-Registered Trademark- system to
CSW for a field trial in Laredo, Texas, and to Southern Development for an
installation in an apartment complex in Georgia. During fiscal 1996 the Company
was selected to provide the first commercial cable telephony system in the
Netherlands through its relationship with Bosch Telecom. Shipments of a system
to initially support 100 subscribers in this pilot project were made in fiscal
1996. During fiscal 1995 the Company had entered into distribution and/or
signed joint sales and marketing agreements with, among others, the Dutch
Broadband Networks Division of Bosch Telecom, Ericsson Business Networks AB, a
subsidiary of L.M. Ericsson and Pan Asian Systems Ltd. a wholly owned subsidiary
of A.S. Watson a member of the Huthinson Whampoa Group. In April, 1995, the
Company has also entered into a joint venture relationship with Tomen
Corporation to form FPN Japan to pursue the recently deregulated
telecommunications market in Japan. To date, there have been no significant
purchases made pursuant to these agreements.
CABLE TELEPHONY
The Company's technology is designed to enable network operators to
deliver telephone and data services to subscribers over cable networks which are
either all coaxial cable or HFC infrastructures. This provides the Company the
opportunity to market its products to cable television operators, the telephone
service industry and new multiple communications service providers, particularly
in the international marketplace.
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CABLE TELEVISION OPERATORS. The Company's technology enables a cable
television distribution network that has been designed for or upgraded to
provide for two-way capability, to be utilized in two distinct applications; to
provide additional services, such as telephone and data transmission services,
including alternate access, in which long distance telephone carriers could use
the cable television distribution systems to bypass the local telephone
companies' distributions systems for originating and terminating long distance
telephone traffic. The Company's technology is embodied for these applications
in the FPN1000 system, which is designed to enable cable television distribution
systems to support telephone and data services without disrupting any other
services on the existing cable network infrastructure. Company products can
also be deployed in the same manner as set-top converters and, installed in
users' homes on an as needed basis.
For the application of providing telephone services over cable systems,
the Company's current marketing efforts are focused primarily on cable system
operators in international markets, such as the United Kingdom and Japan where
cable operators are permitted to provide telephone services in their territory,
or in countries in which there is planned deregulation such as the Netherlands
and newly industrializing countries where telephone penetration or quality of
service is low. See " - International."
Until passage of the Telecommunications Act of 1996 ("the 1996 Act") in
February 1996 cable system operators in the United States were prohibited in
most geographic regions from directly providing local telephone service in their
service areas. See - "Government Regulation." Under the 1996 Act, cable system
operators may now provide such services. However, the Company believes there
still remains uncertainty as to the timing of deployments, if any, as well as to
the ultimate strategies of the Multiple System Operators (MSO's) and the effects
of local regulatory hurdles and is therefore evaluating its strategy in pursuing
this segment of the marketplace. The Company is continuing to focus, in the
near term, on small to medium size cable operators as well as other potential
service providers such as utility companies and competitive access providers
(CAP's). In these markets, the operator utilizing the FPN1000 system could for
an example enable the operator to be an alternative provider in delivering
"long-distance" telephone service to and from the subscriber as an alternative
to the local service provider. The Company has deployed pilot systems to
provide local telephone service to a small number of customers in three
metropolitan cable networks in the United States.
TELEPHONE SERVICE COMPANIES. Virtually none of the conventional local
telephone company wiring to the home is currently capable of supporting
traditional cable television service cost-effectively and, accordingly,
upgrading or rebuilding of those wiring systems is required to enable the
current system to accommodate cable television services. Although the Company's
technology is not the only means by which a telephone company could transmit
cable television programming over upgraded coaxial cable or HFC wiring systems,
the Company believes that its technology provides a means by which a telephone
company could provide digital switched voice and cable television services over
the same wiring system using only a single wiring distribution system.
This worldwide industry includes domestic local exchange carriers
("LECs"), dominated by the seven regional bell operating companies (RBOCs) and
GTE, numerous independent telephone companies (Intelcos) and long distance
carriers (LDCs) such as MCI Communications Ltd. and Sprint International and
government owned or sponsored international telephone companies (PTTs). Certain
of these carriers have recently announced an interest in rebuilding their
networks within an HFC distribution system and provide multiple communication
services. Although not currently viewed as a near-term revenue opportunity, the
Company believes that such changes in telephone service company infrastructures
create a potential long-term market opportunity for the Company's products.
However, there can be no assurance that these networks will be rebuilt or
rebuilt utilizing HFC networks.
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Intelcos consisting of over 1,000 small, independent telephone
companies are not subject to the cross ownership provisions and limitations of
the Cable Communications Policy Act of 1984 and, accordingly, are not prohibited
from providing cable television service to their customers. See " - Government
Regulation." In this market sector, the Company is targeting small telephone
companies that either currently possess or desire to deploy cable television
service. Marketing efforts in this sector have not been significant during
fiscal 1996. The Company has sold one pilot system in this market sector.
Prior to the 1996 Act the large domestic local telephone carriers, such
as GTE and the RBOC's had been prohibited from providing cable television
service in their regulated service areas. The 1996 Act allows local telephone
companies to own and operate cable and video distribution systems in their
service areas, subject to certain safeguards. See - "Government Regulation."
This legislation may accelerate the investment by local telephone companies in
fiber-optic and other advanced technologies to upgrade their networks, enabling
them to provide television services, electronic publishing and other information
services. The Company believes that the large local telephone companies in the
domestic marketplace do not currently represent a significant near-term
opportunity to market the Company's products due to the current status of
telephone companies utilization of HFC wiring systems.
INTERNATIONAL. The international market may include any combination of
the other principal applications of the Company's technology and systems,
depending upon the requirements and regulatory environment of the particular
country. Potential international customers include cable television operators,
some of which are directly or indirectly owned or partially owned by domestic
cable television operators and/or LEC's, as well as emerging multiple
communication service providers. The international market includes both
advanced and newly industrialized countries which are distinguished by the
existing communications infrastructure and degree of telephone or cable
penetration, capital resources available to establish, upgrade to and maintain
and operate a modern infrastructure and regulatory and economic considerations.
The Company believes that the ability of its technology to deliver telephone,
data and video services over a single new or upgraded distribution system can
provide a cost-effective solution to the total communications needs of many
foreign countries. The Company has developed and will continue to develop
systems with modifications or acquire sub-systems, including international
interfaces, required to conform to international standards and for use in the
implementation of new and integrated telecommunications infrastructure.
The Company has completed development of its first international
interface which is dedicated to the United Kingdom television market. In order
to achieve broad penetration internationally the Company will need to complete
additional interfaces or, if available, acquire sub-systems that provide such
interface capabilities. An international interface accommodates the differences
in the speed and clocking of signals and specific requirements of a particular
country for connection to its public telephone network.
During 1995, the Company entered into supply or joint sales and
marketing/distribution agreements with equipment suppliers, system integrators
and value added resellers on a worldwide as well as country specific basis. See
"Market and Market Applications - Company Strategy". The Company continues to
increase its efforts in pursuing opportunities and is engaged in discussions
with multi-national vendors of communications systems relating to potential
licenses of the Company's technology, product development or distribution
agreements for countries in Europe, and Asia. See " - Sales and Marketing."
During 1994, the Company commenced marketing activities relating to its FPN1000i
system, with the required international interface, to the United Kingdom as well
as certain other European cable markets. The Company opened an office in the
United Kingdom in 1994 to address European opportunities and support customers.
The Company operates in the United Kingdom through its subsidiary, FPN U.K.
Limited.
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During the fiscal year ended March 31, 1996, foreign sales accounted
for approximately 7% of the Company's total revenues. As of March 31, 1996, the
Company had products installed in 10 foreign countries. On May 31, 1996, the
Company had six personnel involved in international sales.
ENERGY MANAGEMENT.
The electric utility industry is under increasing pressure to reduce
peak power demand requirements and achieve more uniform energy consumption,
thereby potentially reducing the need for, the costs of, and environmental
concerns associated with the construction of additional generation, transmission
and distribution capacity and ongoing operations and maintenance. One of the
principal initiatives being pursued by electric utilities is energy management,
which focuses primarily on shifting, leveling or reducing peak-load demand.
Energy management applications of the Company's technology include demand-side
management, as well as other utility applications which can reduce ongoing
operational costs to the utility of providing power to its customers, such as
remote meter reading, remote billing and remote interdiction (activation and
deactivation of service). The Company is currently incorporating its technology
into a customer controlled load management/automated feedback system. The
Company's products for this application are currently being marketed as
"PowerView-Registered Trademark-". Deployments of Company technology in this
market will be subject to approval by applicable regulatory authorities.
See " - Government Regulation."
The Company's energy management solution will consist of four parts:
(i) a home network, supplied by existing vendors of in-home products; (ii) an
intelligent utility unit, which is functionally similar to the Company's voice
interface unit and is expected to be installed at or near the residence and
provide the communications link between the residence and the communications
network operated by the utility; (iii) the PowerView Gateway, which is
functionally similar to the Company's Trunk Interface Unit and is expected to
be installed at a utility distribution substation and connect the Intelligent
Utility Units to the utility's host computers through a digital backbone
network; and (iv) the PowerView-Registered Trademark- Management System, which
is a software program designed to operate and interface to a utility's host
computer.
The PowerView-Registered Trademark- system is expected to provide, over
time a number of energy management and other utility application functions.
These include enabling: (i) the customer to monitor energy usage and cost on a
real-time basis; (ii) the customer to program appliances to respond to utility
time-of-use rates; (iii) the utility to read meters remotely and provide time
of day billing; and (iv) the utility to turn power on or off to residences
remotely, eliminating the need for a service visit. The approach underlying
CCLM/AFS is that "real-time" load management driven by time-of-day pricing will
be effective in shifting power consumption to less expensive off-peak hours,
thereby reducing peak power consumption and deferring the need to build new
power plants or upgrade transmission and distribution systems.
The Company's PowerView-Registered Trademark- system is integrated with
hardware and software components that comprise the in-home network. The Company
has completed integration of its current version of PowerView-Registered
Trademark- in cooperation with two hardware suppliers. The Company is currently
dependent upon these suppliers for its continued involvement in certain field
trials of PowerView-Registered Trademark-. Should these suppliers be unable to
supply or discontinue production of the in-home network hardware, the Company
could experience significant delays and costs as a result of identifying and
integrating the PowerView-Registered Trademark- product with a replacement
supplier. The Company is evaluating additional sources for the in-home network
and electric meters as well as the possibility of obtaining certain rights with
respect to the in-home network. The Company has also shipped its latest version
of the PowerView-Registered Trademark- System to C&SW for purposes of a field
trial in Laredo, Texas and to Southern Development for a deployment in an
apartment complex in Georgia. Although the current version of the
PowerView-Registered Trademark- System is now being deployed for field trials
the Company's product development for energy management applications related to
the CCLM/AFS is ongoing and will focus on system improvements, operability,
interface to a utility's host
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computers and cost reductions. See " - Agreements with Entergy Enterprises" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DATA APPLICATIONS
In April 1995 the Company formally introduced its FPN3000 Ethernet
Modem, a data product designed to provide full 10 Mbps clear channel capability.
The FPN3000 Ethernet Modem was designed to operate in most commercial and
midsplit cable environments and to act as an Ethernet MAU. FPN's Ethernet Modem
will interconnect with PCs, Ethernet repeaters or 10 base T hubs and provides
full 10 Mbps clear channel capability on the coaxial network and is capable of
supporting up to three concurrent Ethernets on the same HFC network.
To date the Company has had limited sales and marketing efforts
associated with the product line as it is currently assessing licensing
strategies to achieve market penetration.
SALES AND MARKETING
The Company's marketing activities are currently focused primarily on
cable telephony and energy management applications. The Company has entered
into various agreements that provide for joint sales and marketing or that grant
both exclusive and non-exclusive distribution rights domestically and outside
the United States as a means of marketing its product in key market segments.
The Company is also exploring licensing arrangements in order to penetrate
certain markets. The Company markets and sells directly into the European
marketplace both through its subsidiary, FPN U.K. Limited and through companies
with which is has sales and marketing agreements such as Bosch Telecom.
As of May 31, 1996, sales and marketing activities were conducted by 23
individuals in addition to the executive officers of the Company. The Company
also contracts, from time to time, with independent consultants to support its
marketing and sales efforts.
The Company currently has only one licensee (Entergy Enterprises) and
there can be no assurance that the Company will enter into additional license
agreements in the future. Since inception, with the exception of license,
field trial and development fees from Entergy Enterprises substantially all of
the Companys' revenues have been derived from product sales for business
network applications and for field trials of products in cable telephony
internationally and energy management applications with CSW and Southern
Development. Evaluation of Company technology and products by potential
licensees can be expected to include a review of written and graphic
descriptions of the product, laboratory evaluations and technical trials and
field or pilot trials. During field or pilot trials, the products are used
under actual operating conditions to provide service to subscribers.
Subsequent to field or pilot trials are first deployments, which usually
involve a larger number of locations in the system and ultimately commercial
deployment. To date, the Company's products have been or are currently being
pilot tested for certain applications, but none of the Company's products have
been the subject of first deployments or commercial deployments. The Company
is unable to predict when its products may be commercially deployed, as the
decision to implement a commercial deployment will depend not only on the
results of pilot testing by the customer but also on a number of factors
outside the Company's control, such as strategic and financial considerations
of, and regulatory constraints affecting, the customer. The evaluations of new
technology and software, the field or pilot testing program and negotiation and
approval of a commercial deployment can extend over a substantial time period
and, accordingly, the Company is unable to predict whether or when any pilot
systems will ultimately result in a first or commercial deployment.
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The Company also participates in trade conferences for cable
television, telephony and energy management applications. Company training of
personnel, customers and distributors includes use of technical documentation
covering the Company's product line, video tapes and on-site training courses.
The Company's sales personnel work closely with the Company's support personnel,
who provide assistance in training customers in the operation of Company
products. See " - Service and Support."
During the fiscal year ended March 31, 1996, three customers accounted
for 44%, 22%, and 20% of the Company's revenues. The four largest customers
accounted for 92% of the Company's revenues. The Company cannot predict whether
it will continue to be materially dependent on a small number of customers for
the foreseeable future. However, the impact or lack of license fees and certain
field trials on operating results could be pronounced in any period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RESEARCH AND DEVELOPMENT
Since its inception, the Company has devoted substantial resources to
research and product development, primarily relating to development of its core
technology and a family of products incorporating this core technology which can
be adapted to address requirements of different market applications. The
Company intends to continue to make substantial investments in product
development and product line extensions, building on its core technology base,
and to the development of systems incorporating its core technology, to address
specific market applications. For example, during the fiscal year ended March
31, 1996, the Company has been developing the DTU product for the Company's
cable telephone application and an interface for the domestic market products.
Product adaptations and enhancements are also ongoing for energy management
applications and to enhance performance and efficiency in system architecture.
As part of its ongoing development process, the company is also modifying its
products to achieve additional cost reductions using technologies permitting
higher levels of integration. The Company believes that attaining cost
reductions will be a necessity for both economic and competitive positioning of
the Company in the marketplace.
For product adaptations that do not have general applicability, the
Company generally intends to enter into strategic alliances under which the
partner may provide funding toward the development of the specific product or
adaptation required.
At May 31, 1996, the company had 46 employees and one consultant
involved in research and development activities (12 of which were engaged
exclusively in energy management/utility applications), and has used and will
continue to utilize certain manufacturing resources to support product
development efforts. The Company also utilizes part-time or temporary
consultants on an as-needed basis for specific research and development
projects. In order, to reduce fixed overhead and respond on a timely basis to
unique requirements, companies engaged in software development and consultants
have been and may continue to be utilized by the Company for specialized and
non-recurring development activities for which the Company does not have
internal expertise. For example the Company will utilize consultative resources
and development tools of a Company in developing a certain host computer
software interface in its energy management application. The Company will be
required to pay royalties based upon shipments of product as well as incur
expenditures for upfront development costs. Although such consultants generally
do not conduct research in areas relating to the Company's core technology, the
Company obtains from each consultant an agreement assigning inventions similar
to that signed by each Company employee and a Confidential Disclosure Agreement.
During the fiscal years ended March 31, 1994, 1995, and 1996 research and
development expenses were approximately $10.8 million, $13.2 million, and $8.5
million respectively.
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PATENTS AND OTHER PROPRIETARY RIGHTS
The Company has 12 issued United States Patents, 6 issued foreign
patents and 2 additional United States patent applications pending, all
generally covering the company's core technology. In addition, more than 20
corresponding patent applications are pending in various foreign countries.
With the exception of several software programs that are
non-exclusively licensed to the Company and incorporated into its FPN1000 and
FPN2000 (PowerView-Registered Trademark-) product families, the Company claims
copyright ownership on its significant software products. The Company has
licensed and intends to license certain software incorporated and to be
incorporated into PowerView-Registered Trademark-. The Company has also
registered trademarks or service marks in the United States for First Pacific
Networks (and design), First Pacific Federal Systems, Personal Xchange and the
PX logo, TIU, VoiceMAN, PowerView, VIU, Bandwidth Xtender, The Communications
Utility, Powervu Software and has applied for registration in the United States
of several marks including FPN and Personal Xchange Networks.
The Company also relies on trade secrets that it seeks to protect, in
part, through confidentiality agreements with employees and other parties. As
the Company intends to enforce its patents and protect its trade secrets, it may
be involved from time to time in litigation to determine the enforceability,
scope and validity of proprietary rights. Any such litigation could result in
substantial cost to the Company and diversion of effort by the Company's
management and technical personnel.
SERVICE AND SUPPORT
Service and technical support offered by the company include system
planning and support by the Company during the sale, project management
coordination of product information from the field, evaluation of existing
on-site equipment and network specifications, site preparation, installation and
user training.
Company products are designed so that the failure of any individual
component or unit will not cause the system on a network-wide basis to fail to
operate. The modularity of the system enables customers to return to the
Company only the specific unit requiring repair. In addition, the Company's
products are designed to be remotely accessible, allowing service staff to
remotely call up, diagnose and otherwise support systems in the field from the
Company's California headquarters. At May 31, 1996, the Company had a service
and support organization of 18 individuals. The Company maintains an in-house
laboratory with Company products in operation to enable Company personnel to
reproduce customer problems while maintaining telephone contact with the
customer. The customer can be instructed on how to correct the problem or, if a
defect in Company products is detected, to ship the defective part or unit to
the Company. Licensees of the company will be expected to provide primary
service to their customers once they have been trained by the Company's service
and support personnel.
The Company generally offers a 12 month warranty on its products.
Additional warranty provisions are made available under certain conditions.
Through March 31, 1996, warranty expense had not been significant. The Company
intends to offer service contracts providing for maintenance and software
upgrades after the expiration of the warranty period. The Company also intends
to expand its technical and operations support capabilities, including
development of training courses for licensees and distributors and establishment
of specific in-country support capability for international customers.
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MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations activities include material
planning, final assembly test and quality control, operations engineering and
support to engineering and at May 31, 1996, manufacturing operations includes 22
full-time employees and utilizes temporary employees as necessary. The company
uses a number of subcontractors for board level assembly. At the Company's
headquarters, Company personnel sort and arrange components for delivery to
manufacturers and perform sub-assembly and testing, systems integration and
final testing. The Company maintains an operations engineering team that
participates in the design and manufacture of Company products, including the
inspection of components, subassemblies and final tests. The Company's strategy
includes seeking subcontracts with high volume manufacturers in order to provide
the capacity necessary to support projected demands for the Company's products
without incurring the capital expenditures required in connection with
establishing an internal manufacturing capability. The Company may also seek to
cross-license the manufacture of certain elements of its systems to strategic
alliances when such activity could result in enhancements or cost reductions to
its products being funded by the licensee.
In January 1994, the Company entered into a three-year agreement with
Sanyo Electric Co. Ltd. ("Sanyo") providing for Sanyo to manufacture the
customer interface unit of the FPN1000 system. Sanyo commenced initial
manufacturing of the customer interface unit during the fourth quarter of fiscal
1995. The Company has outstanding non cancelable commitments with Sanyo to
purchase approximately $2.4 million of customer interface units. The Company is
currently working with Sanyo regarding shipment of such inventory and associated
payment terms. The Company believes that it will purchase this inventory which
is comprised of both finished goods and components through the remainder of
1996. The Company will continue to provide the capability for low volume
manufacturing of this product and, in addition, will continue to manufacture the
equipment that provides access between the cable network and the public switched
telephone network.
The Company is involved in discussions with a potential manufacturer to
produce the IUU portion of the PowerView-Registered Trademark- product. The
Company will continue to manufacture the equipment which provides for
communication between the subscriber and the Utility's host computer.
It is the Company's intent to have multiple sources of supply for
components and services required to fulfill its' product requirements, and most
of the components used by the Company in its manufacturing processes are
available from multiple sources. Where necessary to fulfill unique
requirements, the Company's management will approve sole source and single
source items for use based upon risk assessment and satisfactory supply
arrangements. A "SOLE SOURCE ITEM" has only one known available manufacturer of
the item (although it may be available from multiple channels of distribution).
Sole source items can and do include: custom integrated circuits, such as
ASIC's; third-party proprietary IC's (such as semi custom micro-processors and
hybrids) and custom designed assemblies or subsystems (such as unique power
supplies). A "SINGLE SOURCE ITEM" could be made available from a number of
sources, but is an item for which the Company has selected only one manufacturer
or provider. Single source items can and do include: commercially available
items where time and/or cost have not yet allowed the qualification of other
sources but such sources readily exist (e.g. IC's or other electrical components
with unique package types or non-characterized performance) as well as Company
proprietary items where economies of scale for start-up, tooling, testing
capabilities, etc., have not yet or will not justify the qualification of
additional sources (e.g. components, assemblies, custom enclosures, contract
manufacturing, etc.) although such additional sources readily exist.
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The Company's sourcing practices minimize single and sole sources and
generally include multiple channels of availability through distribution and
factory-direct relationships. The Company monitors worldwide availability,
lead-times, and prices as practicable. The Company provides forecasts of its
demand to its supply base as available. Any interruption of supply of material
from these sources could delay shipments and adversely affect the Company's
business. The Company believes it maintains a sufficient inventory of these
sole and single source items to meet current orders.
Many of the components incorporated into the Company's products are
manufactured overseas. To date, the Company has not experienced difficulty in
obtaining timely deliveries of needed components.
The Company has developed test equipment and tooling required to meet
current production requirements. The Company believes that changes for
additional market applications or for subsequent generations of product
applications will require additional test equipment and retooling.
COMPETITION
Many areas of the telecommunications industry are characterized by
intense competition, with a large number of companies offering or seeking to
develop technology or system capabilities similar to those of the Company's
technology or products. The Company believes that the principal competitive
factors in the telecommunications markets are price (i.e., the relative cost to
install the system and thereafter maintain, expand and upgrade the system) and
performance, as well as reliability, customer technical support, compatibility
with existing communications standards and the ability to respond to changes in
telecommunications standards.
The Company faces competition from a number of entities, many of whom
have substantially greater financial, marketing and/or other resources than the
Company, are significantly more established in the telecommunications industry
and have invested substantial amounts in their technology. Potential
competitors include companies in various segments of the telecommunications
field, including AT&T, L.M. Ericsson, General Instrument Corporation, Motorola,
Inc., Tellabs, Inc., ADC Telecommunications, DSC Communications Corporation,
Philips Broadband Network, Inc., Northern Telecom Limited, Broadband
Technologies, Inc. and Scientific-Atlanta, Inc., or alliances formed by these or
other companies with other companies in the telecommunications field.
The Company's competitors also include manufacturers and vendors of
technology and products which address specific customer or market needs for each
discrete area of the telecommunications industry. For example, in the market
for energy management and other utility applications, the PowerView-Registered
Trademark- system will compete with other technologies and programs providing
demand-side management. In certain markets, the Company may indirectly compete
with companies who are also potential customers of its technology and products
for example, cable television operators and telephone companies are both
acquiring technologies to enable them to provide combinations of telephone, data
and video services into homes and offices.
The Company also competes directly with many companies who are
developing innovative communications technologies. Deregulation of the domestic
telephone and cable television industries, as well as the emergence of new
telecommunications technologies, can be expected to result in increased
competition. For example, the competition between regional telephone companies
and large Multiple System Operators for cable television systems has produced a
need for products that can create telephone services using the cable television
infrastructure. Competition can be expected from the traditional equipment
suppliers for both of these markets. The Company believes that competitors will
attempt to utilize varied technologies to produce competing products to fulfill
customer needs.
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AGREEMENTS WITH ENTERGY ENTERPRISES
In July 1991, the Company entered into a series of agreements with
Entergy Enterprises, certain of which were amended in December 1991, March 1994
and May 1995.
The agreements as amended through March 1994 included, among other
things, the following: (i) a Product license Agreement granting Entergy
Enterprises (a) an exclusive worldwide license (with the Company retaining joint
marketing rights) to make, use and sell the Company's core technology in the
CCLM/AFS product, (b) and exclusive worldwide license to sublicense to electric,
gas or water utilities (other than affiliates of Entergy Enterprises), the right
to use the CCLM/AFS product, and to sell, lease or otherwise provide the
CCLM/AFS product to customers or end users within their respective service
territories, and (c) together with affiliates of Entergy Enterprises, an
exclusive license to use the CCLM/AFS product, and to lease, sell or otherwise
provide the CCLM/AFS product for use by customers and end users within the
Entergy Corporation electric system; (ii) a common Stock Purchase Agreement
relating to the sale to Entergy Enterprises of an equity interest in the Company
for $3.5 million; and (iii) an Investor Rights Agreement.
The original Product License Agreement between the Company and Entergy
provided for funding by Entergy of development costs not to exceed $1 million;
favored pricing to Entergy based upon the lowest prices then offered other
purchasers; and an initial term of 30 years. In addition, the Product License
Agreement provided for royalties of 5% on hardware sales and revenue sharing at
50% on all other revenues to specified customer categories. The March 1994
amendment to the Product License Agreement (the "Amended License Agreement")
also provided for, among other things, the payment by Entergy Enterprises to the
Company of up to an additional $1 million in development costs relating to the
CCLM/AFS product. The $1 million additional development costs was recorded as
deferred revenue at March 31, 1995.
In consideration for the March 1994 Amended License Agreement, the
Company agreed to pay Entergy Enterprises an aggregate of $9 million (the
"Company Obligation"), of which $2 million was paid upon execution of the
Amended License Agreement and $7 million is payable in the form of a
non-interest bearing, unsecured contractual obligation that will be payable
after March 1998. The Company incurred a charge to operating results of
approximately $7 million in its fourth fiscal quarter ended March 31, 1994,
reflecting the current value of the Company Obligation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 10 of Notes to Consolidated Financial Statements.
In May 1995, the Amended License Agreement was further amended to
provide for, among other things: (i) royalties payable to Entergy being reduced
to 2% of net receipts received by the Company from sales of specified products
to be defined customer groups with further reductions in the royalty when
specified events occur; (ii) license fee revenue sharing decreased to 10% with
only licenses with certain qualifying utilities applicable; (iii) royalties in
(i) and (ii) above continuing for a 10 year period following the repayment of
the $7 million obligation; (iv) rescheduling the repayment of the $7 million
obligation such that $3.5 million is due in March 1998 and $3.5 million is due
in March 1999; (v) royalty or license payments received by Entergy prior to
repayment of the $7 million obligation are to reduce the obligation amount; (vi)
elimination of Entergy's obligation to pay $1 million of additional development
funding and the Company's obligation to repay $988 thousand in customer advances
(included in current liabilities at March 31, 1995); and (vii) a reduction in
Entergy's license rights under certain conditions (the "Second Amendment").
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The Second Amendment restructured the license rights granted to
Entergy under the Amended License Agreement. From the date of the Second
Amendment, Entergy is not allowed to take action to license or sublicense under
its license grants unless and until the earlier of: (i) the Company or its
assignees, successors, partners, licensees, etc., fail for a period of one year
to actively market CCLM products; or (ii) the Company or any successor becomes
subject to the jurisdiction of a U.S. Bankruptcy Court or avails itself of some
judicial or quasijudicial proceedings which provides relief to debtors which is
not dismissed within ninety (90) days thereafter ("Bankruptcy Events").
Entergy's license rights shall expire fourteen (14) months following the timely
payment of the "Company Obligation". After said fourteen (14) month period,
Entergy shall have an exclusive nontransferable perpetual license: (i) to
sublicense to entities, other than its Affiliates within its service territory,
whose principal business is the electric, gas or water utility business
("Qualifying Utilities"), the right to manufacture (or have manufactured) and
use, and to sell, lease and otherwise provide to customers or end users, the
CCLM/AFS for use exclusively within its service territories; and (ii) to lease
or sell or otherwise provide to Qualifying Utilities the CCLM/AFS for use within
its service territories. Ten percent (10%) of any license or sublicense shall
be paid to the Company (without any Right to Use fees). Both parties agreed
that each party has fully discharged all contractual, financial and performance
obligations to the other; and each party releases any and all claims that either
party may have against the other as of the date of the Second Amendment.
The Common Stock Purchase Agreement provided for the purchase by
Entergy Enterprises of 1,007,115 shares of Common Stock, representing 9.95% of
the then outstanding equity in the Company, for the $3.5 million.
The Investor Rights Agreement grants demand and piggy-back registration
rights to Entergy Enterprises under certain conditions and provides for the
Company to indemnify Entergy Enterprises and its affiliates under certain
circumstances with respect to any registration statement including the Common
Stock of Entergy Enterprises pursuant to such registration rights. The Company
is also required to redeem a corresponding portion of Entergy Enterprises'
shares in the event the Company redeems or otherwise acquires any shares of its
Common Stock in order to maintain Entergy Enterprises' level of equity interest
below the level (currently 10%) (the "Ownership Limit") which would cause the
Company to become subject to regulation as a subsidiary of a registered holding
company under the 1935 Act. Entergy Enterprises has agreed that neither it nor
any of its affiliates will acquire beneficial ownership of any voting stock of
the Company without the Company's prior written consent if the effect of such
acquisition would increase its beneficial ownership of voting stock to more than
the Ownership Limit. Pursuant to an ownership right that expired at the time of
the Company's initial public offering in 1992 Entergy acquired an aggregate of
768,120 additional shares of the Company's Common Stock at an aggregate price of
$6.1 million during fiscal 1993. At March 31, 1996, Entergy Enterprises held
1,715,235 shares of the Company's Common Stock.
Because Entergy Corporation is a registered holding company under the
1935 Act, these and other transactions relating to the involvement of Entergy
Enterprises with the Company in licensing the CCLM/AFS product were required to
be approved under the 1935 Act by the Securities and Exchange Commission
("SEC"). Entergy Enterprises has advised the Company that it received authority
under the 1935 Act to license the CCLM/AFS product to enable it to provide and
sublicense energy management and other utility applications and to purchase the
Company's securities.
Unless otherwise authorized by the SEC, Entergy Enterprises will divest
its equity interest in the Company upon the earlier of the deployment of
PowerView in 20% of the electric service customer locations in the Entergy
Corporation system or January 1, 2002.
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The Company has recorded $566 thousand, $626 thousand and $1.1 million
for the years ended March 31, 1994, 1995 and 1996, respectively, for revenue
under joint development, field trial and product sale arrangements with Entergy.
Included in accounts receivable as of March 31, 1995 were $1.5 million ($499
thousand, respectively, net of deferred revenue), respectively, due from
Entergy. No amounts were outstanding at March 31, 1996. In addition, during
fiscal 1995 Entergy advanced the Company $1 million against future purchases
with the balance of $988 thousand included in customer advances at March 31,
1995. During the first quarter of fiscal 1996 the Company's $1 million
obligation was offset in satisfaction of the amounts due from Entergy related to
additional development costs.
GOVERNMENT REGULATION
The telecommunications industry in the United States, particularly the
telephone and cable television industries, has been subject to varying degrees
of regulation. Although the Company's activities are not generally subject to
direct government regulation (other than the requirement to obtain registration
of Company products connecting to the public telephone network with the Federal
Communications Commission, which registration has been obtained for existing
products), the Company's business has been significantly affected by regulatory
and rate barriers applicable to the telephone and cable television and electric
utility industries, as well as any changes to such rules and regulations.
In the United States telephone and cable television markets, until
February of 1996 with the passage of the 1996 Act, regulatory and statutory
barriers had restricted the ability of certain of the major regional telephone
companies to provide local cable television services and certain states have
regulatory barriers that restrict the ability of large multiple cable television
system operators to provide local telephone services. Additionally, the Public
Utility Holding Act of 1935 had restricted the 10 registered electric utility
holding companies and their operating subsidiaries from making investments
outside the utility business. Accordingly, the incentive of companies in there
industry to invest in technologies for integrated services was limited. These
restrictions may have been an important factor in decisions by electric utility
companies, domestic telephone companies or cable operators to purchase Company
products or license Company technology. The 1996 Act eliminated these
restrictions on domestic telephone companies, cable operators and electric
utility holding companies.
Alternate access service providers are subject to regulation by the FCC
and state public service commissions.
The 1996 Act has impacted state public service commission restrictions
on the ability of many service providers to increase customer rates, thereby
potentially reducing the incentive to invest in new technologies. The ultimate
effect of the 1996 Act on the authority of state commissions is currently
expected to be determined by the Federal Communication Commission by no later
than June 1997. Moreover, for energy management and other utility applications,
a decision by a utility to deploy the CCLM/AFS product will depend in part on
the evaluation of public utility commissions and may require determination that
the utility can recover the cost of the CCLM/AFS product in its customer rate
base.
INDUSTRY STANDARDS COMPLIANCE
Industry standards bodies have created committees to address the matter
of standards within the telecommunications industry. The purpose of such
standards is to facilitate the interoperability of products from various vendors
and, through standardization, create a competitive environment which is
anticipated to result in lower products costs. During the past few years, many
new standards have been adopted and more are pending. The International
Standards Organization ("ISO"), one of the primary standard setting bodies in
the communications industry, has developed a framework for network standard
called the Open System Interconnection Reference Model (the "OSI Model"). The
OSI Model represents a standard approach by which information can be
communicated throughout a network, so that a variety
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of independently developed computer and communications devices can interoperate.
The design of the Company's products conforms to the OSI Model and accommodates
most existing and pending standards, including applicable Bell system
specifications, CCITT specifications, RS-232 standards and RS-449 standards.
The Company's existing products have been certified, or are being modified to be
certified, by Underwriters Laboratories (UL) to the extent required to meet
industry standards.
EMPLOYEES
As of May 31, 1996, the Company employed 136 persons full time, of
which 47 were in research and development, 22 were in sales and marketing, 18
were in service and support, 23 were in manufacturing and quality control and 26
in management, administration and support functions. The Company also utilizes
part-time or temporary consultants on an as-needed basis. The Company's
business is dependent in part upon its ability to recruit and retain qualified
personnel. None of its employees are represented by a labor union and the
Company believes its employee relations are satisfactory.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
- - ---- --- --------
M. Peter Thomas 54 President and Chief Executive Officer and
Director
Robert P. McNamara, Ph.D. 46 Executive Vice President, Chief Technical
Officer and Director
Kenneth W. Schneider 48 Executive Vice President - Finance and Chief
Financial Officer
James D. Bletas 51 Vice President International
M. PETER THOMAS was elected President and Chief Executive Officer in
June 1995 and has served as a Director of the Company since September 1994.
From July 1991 to September 1994, Mr. Thomas was a consultant and co-founder of
the Stanbridge Group, a consulting firm. Additionally, Mr. Thomas served, from
February 1990 to July 1991, as President and Chief Executive Officer of
Data-Design Laboratories, Inc., an electronics assembly manufacturing company.
He was also President and Chief Executive Officer of Ericsson North America, a
subsidiary of Sweden's L. M. Ericsson from January 1986 to June 1989. Prior to
Ericsson, Mr. Thomas was President of Telenova, Inc. from 1984 to 1986, where he
worked to develop and conclude strategic partnerships that encompassed equity
investments, joint product development and OEM supply.
ROBERT P. MCNAMARA, PH.D. has served as Executive Vice President, Chief
Technical Officer and a Director since February 1988, when the Company acquired
the assets and technology of Tsunami, which Dr. McNamara, along with Donald G.
Marquart, founded in 1983. Dr. McNamara has served as Vice President
Engineering from June 1995 through June of 1996. Dr. McNamara is the principal
inventor of the Company's technology. From August 1983 to February 1988, Dr.
McNamara was the Vice President and Chief Scientist at Tsunami. From 1981 until
founding Tsunami, Dr. McNamara was with Sytek Incorporated (now Hughes LAN
Systems), a local area network manufacturer, serving first as Program Manager
for MetroNet Development, a large city-wide data communication, local area
networking and videotext development program, and then as Manager of Network
Architecture. From 1980 to 1981, Dr. McNamara served as Manager of
Business/Residence Planning at GTE Service Corporation. Dr. McNamara was a
member of the Technical Staff of Bell Laboratories from 1978 to
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1980, where he participated in the design of telecommunications systems such as
the Local Area Digital Transport system. Dr. McNamara holds a Ph.D. in applied
physics from the California Institute of Technology and is published in several
fields, including combustion engineering, solid state semiconductor physics and
communications theory.
KENNETH W. SCHNEIDER has served as Vice President - Finance and Chief
Financial Officer since January 1993 and Executive Vice President since August
1993. Prior to joining the Company, Mr. Schneider was a partner of Coopers &
Lybrand L.L.P., the Company's auditors, since October 1983, which he joined in
December 1974.
JAMES D. BLETAS has served as Vice President International since May
1996. Prior to joining the Company, Mr. Bletas served as Executive Vice
President of California Microwave Inc.'s, Microwave Network Systems division
from November 1995 to April 1996. From November 1993 to October 1995 he was
President of California Microwave Inc.'s, Telecom's Transmission Systems
division in Fremont, California. Prior to that he served as Vice President
International for Harris Corporation's Farinon division in San Carlos,
California, from July 1985 to October 1993. From October 1975 to June 1985, Mr.
Bletas worked in Harris Corporation's Farinon division's Canadian facility in
Dorval Quebec, Canada, in various capacities with the latest as Director of
International Sales for Europe, Africa and the Middle East. Both California
Microwave and the Farinon division of Harris Corporation were suppliers of
Wireless communiation systems worldwide. Prior to that Mr. Bletas spent
approximately ten years with Bell Canada in various technical and administrative
capacities.
Item 2. PROPERTIES
The Company currently occupies an aggregate of approximately 103,000
square feet of office and manufacturing space in San Jose, California pursuant
to a lease expiring in January 2001. The lease provides for current annualized
rent of approximately $799,500, subject to specified annual increases.
Item 3. 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
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.
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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 have jointly filed an appeal from the court's order which appeal
was denied in April 1996. The insurance carrier and the Company are currently
evaluating their further remedies available with respect to the appeal. The
Estate's motion for an award of attorneys' fees and costs claimed amount to
$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.
The Company had filed a lawsuit against one of its previous insurance
carriers alleging, among other things, recovery of part of the settlement in the
Bass litigation, defense costs incurred with respect to that litigation, and
punitive damages. In December 1995, the company and the former carrier entered
into a settlement arrangement pursuant to which the Company has recorded a net
gain of $1.7 million (net of directly related settlement costs of $275
thousand). The Company received the cash proceeds from the settlement in
January 1996.
During the year ended March 31, 1996 the Company entered into
settlement arrangements related to other litigation or claims outstanding in
which it was either a plaintiff or defendant. As a result of these settlements,
the Company has recognized a net gain of $38 thousand (net of $213 thousand of
settlement charges).
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq SmallCap Market
since August 25, 1996, under the symbol FPNX. From July 22, 1992 through August
24, 1995 the Company's Common Stock traded on the Nasdaq National Market. The
following table sets forth the quarterly high and low bid information of the
Common Stock for the periods indicated as reported by Nasdaq. These prices do
not include retail mark-ups, mark-downs or commissions. The closing sales price
of the Company's Common Stock on June 25, 1996 was $2.09.
High Low
------ -----
Fiscal Year Ended March 31, 1995
April 1 - June 30, 1994 $11.00 $6.50
July 1 - September 30, 1994 8.00 5.88
October 1 - December 31, 1994 7.63 3.25
January 1 - March 31, 1995 5.41 3.50
Fiscal Year Ended March 31, 1996
April 1 - June 30, 1995 $ 4.63 $1.00
July 1 - September 30, 1995 4.00 1.69
October 1 - December 31, 1995 2.25 0.84
January 1 - March 31, 1996 2.56 1.00
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of June 25, 1996, there were approximately 691 stockholders' of
record of the Company's Common Stock, including nominees and brokers holding
street accounts.
(c) DIVIDENDS
The Company has never paid a cash dividend on its Common Stock and
intends to continue to retain earnings, if any, to finance future growth.
Accordingly, the Company does not anticipate the payment of cash dividends to
holders of Common Stock in the foreseeable future.
21
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Report. The consolidated statement of operations
data for the years ended March 31, 1994, 1995 and 1996, and the consolidated
balance sheet data as of March 31, 1995 and March 31, 1996 are derived from, and
are qualified by reference to, the audited Consolidated Financial Statements
included elsewhere in this Report and should be read in conjunction with those
financial statements and notes thereto. The consolidated statement of
operations data for the fiscal year ended March 31, 1992 and 1993 and the
consolidated balance sheet data as of March 31, 1992, 1993 and 1994 are derived
from audited financial statements not included herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Licensing fees $ 7,650 - - - -
Products 1,344 $ 543 $ 651 $ 1,048 $ 3,345
Product development and field trial 479 1,059 1,038 1,632 1,654
--------- -------- -------- -------- --------
Total Revenues 9,473 1,602 1,689 2,680 4,999
Costs and expenses:
Products 2,304 3,692 3,900 2,914 3,661
Product development and field trial 764 1,089 694 1,320 634
Research and development 2,242 4,330 10,839 13,238 8,454
Sales and marketing 2,240 3,987 6,280 8,590 7,254
General and administrative 2,387 5,263 7,544 3,929 3,400
Non-recurring charge - license agreement - - 7,000 - -
--------- -------- -------- -------- --------
Loss from operations (463) (16,759) (34,568) (27,311) (18,404)
Litigation settlements, net - - - - 1,763
Interest income (expense), net (2,472) 754 989 262 (407)
--------- -------- -------- -------- --------
Loss before extraordinary item (2,935) (16,005) (33,579) (27,049) (17,048)
Net income (loss) 12,273(1) (16,055) (33,579) (27,049) (17,048)
Dividends declared on Series A Preferred
Stock 52 290 - - -
Income (loss) per share:
Before extraordinary item $ (0.26) $ (1.03) $ (1.76) $ (1.31) $ (0.67)
Extraordinary item 1.33 - - - -
Net income (loss) per share $ 1.06 $ (1.03) $ (1.76) $ (1.31) $ (0.67)
Shares used in computing per share amounts (2) 11,477 15,882 19,050 20,644 25,408
Consolidated Balance Sheet Data:
Working capital $ 6,674 $ 31,471 $ 21,220 $ 2,603 $ 3,620
Total assets 14,229 38,573 35,873 19,651 11,624
Long-term obligations 311 33 5,000 5,812 6,041
Accumulated deficit (32,274) (48,569) (82,148) (109,197) (126,245)
Stockholders' equity 7,180 33,779 19,755 2,463 1,627
</TABLE>
(1) Net income resulted from an extraordinary gain consisting of
approximately $15.2 million relating to the extinguishment of
indebtedness, net of income taxes of $300 thousand. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(2) See Note 2 of Notes to Consolidated Financial Statements.
22
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. In the fiscal year ended March 31, 1992,
license fees represented 81% of total revenue. There was no license fee revenue
in the fiscal years ended March 31, 1993 through 1996. Development and field
trial revenue represented 61%, 61%, and 33%, and product sales, a substantial
portion of which are utilized in field trials, represented 39%, 39% and 67%, of
total revenues during the fiscal years ended March 31, 1994, 1995 and 1996,
respectively. To date, the Company has not gained market penetration of its
technology and there can be no assurance that it will be able to do so. During
the fiscal year ended March 31, 1993, 83% of revenues were derived from product
development and field trial revenue from and product sales to Entergy
Enterprises and during the fiscal years ended March 31, 1994, 1995, and 1996,
34%, 23% and 23%, respectively, of revenues were derived from development and
field trial revenues from Entergy Enterprises. See "Business."
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 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 May 31, 1996
outstanding shares of the Company's Common Stock has risen to 36 million as a
result of funding through equity transactions. The company anticipates that it
will seek approval from its stockholders to increase its level of authorized
shares for potential future issuance of Common Stock through financing
transactions. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" - "Liquidity and Capital Resources").
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, the Company financed its
operations principally through public offerings and private placements of debt
and equity securities and a license fee aggregating $131.0 million. These
financings included convertible debt and equity private placements with
aggregate net proceeds of $15.9 million in fiscal 1996, a private placement with
net proceeds of $9.3 million in fiscal 1995, and public offerings in July 1992
and October 1993 resulting in net proceeds of $39.9 million and $17.5 million,
respectively. At March 31, 1996 the Company had working capital of $3.6
million, including $2.7 million in cash. To date, the Company's cash resources
have been used, and are expected to continue to be used, to finance product
development, sales and marketing, operations, inventory purchases and capital
expenditures.
23
<PAGE>
Operations during the year ended March 31, 1996 utilized cash of $18.6
million as compared to $29.2 million for the year ended March 31, 1995. Cash
used in operations, in fiscal 1996, was primarily attributable to cash utilized
to fund the operating loss and reductions to accounts payable and accrued
expenses. The decrease in cash utilized to fund operations in fiscal 1996 as
compared to fiscal 1995 is due principally to the reduced operating loss and
reduced inventory acquisitions offset in part by the reductions to accounts
payable and accrued expenses. The fiscal 1996 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 a reduction in amounts due from
Entergy Enterprises which were outstanding at March 31, 1995 and reduced revenue
in the comparable fourth quarter periods, a result of decreased development and
field trial revenue activity. Accounts receivable at March 31, 1995 included
$499 thousand ($1.5 million before offset of $1.0 million of deferred revenue)
of amounts due from Entergy Enterprises. Entergy Enterprises had agreed,
pursuant to a March 1994 Amendment to a product license agreement, to pay $1
million of additional development costs incurred prior to fiscal 1995 pending
completion of product specifications and evaluation of the Company's CCLM/AFS
product. In May 1995, the Company and Entergy Enterprises entered into an
amendment to the terms of a Product License Agreement. Pursuant to that
amendment Entergy's obligation to pay the $1 million was eliminated along with
the Company's obligation to repay certain advances of $988 thousand received
from Entergy. This resulted in a reduction of customer advances and recognition
of $988 thousand of deferred revenue as revenue in the first quarter of fiscal
1996. Inventory levels at March 31, 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 1996. 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 decline in inventory level at March 31,
1996 as compared to March 31, 1995 is attributable to an increase in the fourth
quarter of fiscal 1995 for a field trial of the PowerView-Registered Trademark-
system and anticipated FPN1000 system sales. Accounts payable decreased due
primarily to reduced inventory purchases in the period as compared to the fourth
quarter of fiscal 1995 and reduced operating expenses. Accrued expenses
decreased due primarily to a reduction in accrued contract costs as the result
of modification of a customer contract in which the Company had recorded an
estimated loss. The Company expects to utilize its cash resources to continue
to finance operations, product development, sales and marketing activities, and
inventory purchases.
The Company had no material capital asset commitments at March 31,
1996. Property and equipment purchases for the fiscal 1996 and fiscal 1995
represented the Company's principal investing activity totaling $594 thousand
and $2.6 million, respectively. The purchases relate primarily to purchase of
equipment for in-house constructed system test facilities and engineering test
equipment and software 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 $4.1 million. At March 31, 1996 the Company had
outstanding letters of credit of $235 thousand associated with leasehold
improvements. See Note 7 of Notes to Consolidated Financial Statements.
24
<PAGE>
In March 1994, in connection with entering into an Amended License
Agreement with Entergy Enterprises, the Company made a cash payment of $2
million to Entergy Enterprises and became obligated, subject to certain
conditions, to pay an additional $7 million to Entergy Enterprises in March
1998. In connection with the 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 March 31, 1996, the Company is obligated to pay an aggregate in
minimum lease payments of $542 thousand under capitalized lease obligations for
primarily equipment acquisitions. See "Business-Agreements with Entergy
Enterprises," "-Results of Operations" and Note 10 of Notes to Consolidated
Financial Statements.
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. (See Note 8 of Notes to Consolidated Financial Statements). 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 issuance of 9% Convertible Debentures, in a
private placement in July 1995, $7 million ($6.8 million net of expenses) from
the sale of 7,000 shares of Series C Preferred Stock, in a private placement in
October 1995, $3.9 million ($3.6 million net of expenses) from the sale of 3,900
shares of Series D Preferred Stock, in a private placement in March 1996, $740
thousand arising from the issuance of 400 thousand shares of common stock in a
private placement pursuant to which the Company received proceeds of $600
thousand and shares issued under the Company's stock purchase plan, partially
offset by payments under capitalized lease obligations and short-term notes
payable. Further, the Company raised $5.0 million from the sale of 5,000 shares
of Series E Preferred Stock, in a private placement on May 31, 1996. The 9%
Convertible Debentures were converted into 3,090,000 shares of the Company's
Common Stock in September 1995 and the Series C Preferred Stock was converted
into 8,470,000 shares of the Company's Common Stock during the fiscal year 1996.
Subsequent to March 31, 1996 the Series D Preferred Stock was converted into
1,895,000 shares of Common Stock. The Series E Preferred Stock becomes eligible
for conversion in July 1996. (See Note 15 of Notes to Consolidated Financial
Statements.)
The Company's principal sources of liquidity are cash and cash
equivalents and receivables. At March 31, 1996, the Company had cash and cash
equivalent balances of $2.7 million and accounts receivable of $594 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 of 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 March 31, 1996 together with the $5 million private placement
in May 1996, for operating activities through August 1996. However, 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. In addition, the Company
is presently engaged in discussions with potential strategic partners that could
involve funding
25
<PAGE>
of various operational activities. The Company has also reduced its operational
expenses during fiscal 1996. The Company's level of full-time personnel, at
March 31, 1996, has declined to 131 from 174 at March 31, 1995. There can be no
assurance, however, that the stockholders will approve an increase in authorized
shares, that the Company will obtain additional financing, or enter into an
arrangement with a strategic partner or that if available will be obtainable on
terms favorable to the Company or its stockholders. To the extent that 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 2
of Notes to 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
FISCAL YEARS ENDED MARCH 31, 1996 AND 1995
Total revenues increased 87% to $5.0 million for the fiscal year ended
March 31, 1996 from $2.7 million for the fiscal year ended March 31, 1995.
Product revenues increased 219% to $3.3 million, for the fiscal year ended March
31, 1996, as compared to $1.0 million for the fiscal year ended March 31, 1995.
Product development and field trial revenues increased 1% to $1.7 million for
the fiscal year ended March 31, 1996, as compared to $1.6 million for the fiscal
year ended March 31, 1995.
The increase in product revenues for the fiscal year ended March 31,
1996, as compared to 1995, is due primarily to product revenue recognized in
fiscal 1996 associated with a field trial of the Company's energy management
products. The increase in product development and field trial revenues in the
fiscal year ended March 31, 1996, as compared to the same period in 1995,
reflects $988 thousand of product development revenue associated with a Product
License Agreement with Entergy. This revenue relates to reimbursement of
product development costs incurred by the Company and included in operations in
prior periods (and reflected in deferred revenue at March 31, 1995). The
Company recognized the development revenue in the current period following a
May, 1995 amendment to its Product License Agreement with Entergy (see Note 10
of Notes to the Consolidated Financial Statements). 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-Registered Trademark- decreased for the comparable periods due
principally to reduced activities including the completion of a development
contract in December, 1995. A portion of the field trial revenue recognized in
both fiscal 1995 and 1996 are attributable to expenses reimbursed by Entergy in
connection with a field trial in Arkansas which was completed in September 1995.
Product costs increased 26% to $3.7 million for the fiscal year ended
March 31, 1996, as compared to $2.9 million for the fiscal year ended March 31,
1995. The increase in product costs for the fiscal year ended March 31, 1996 is
attributable primarily to the product costs associated with the aforementioned
product revenues recognized in conjunction with a field trial of the Company's
energy management products and inventory reserve provisions. The increase in
product costs for the fiscal year ended March 31, 1996, was offset in part by a
$700 thousand reduction to an estimated loss provision established for a
contractual obligation with TeleWest Communications Group, Ltd. (TeleWest).
This reduction results from a renegotiation of a contract with TeleWest, whereby
the Company agreed to the elimination of minimum purchase commitments in
exchange for elimination of product pricing commitments made by the Company.
The Company had in fiscal 1994 provided a loss for its contractual obligations
under the original purchase commitment. Exclusive of energy management field
trial product costs, inventory reserve provisions and the aforementioned
reduction in accrued contract cost, product costs decreased due primarily to
reduced manufacturing operating costs from cost containment efforts and reduced
activity. Manufacturing operations costs allocated to research and development,
to reflect support
26
<PAGE>
activities conducted by manufacturing personnel, amounted to $1.1 million for
the fiscal year ended March 31, 1996, as compared to $2.4 million for the fiscal
year ended March 31, 1995.
Product development and field trial costs decreased 52% to $634
thousand for the fiscal year ended March 31, 1996, as compared to $1.3 million
for the fiscal year ended March 31, 1995. The decrease primarily reflects
decreased field trial and development contract activity.
Research and Development expense decreased 36% to $8.5 million for the
fiscal year ended March 31, 1996, as compared to $13.2 million for the fiscal
year ended March 31, 1995. The decreased expenses primarily reflect the
decrease to 49 research and development personnel from 70 at March 31, 1995.
The decrease also reflects a decrease of $1.3 million in manufacturing
operations support costs allocated to product development. Such costs
representing primarily program management, test and design activities supporting
product development. The decrease in personnel levels is the result of the
completion of certain phases of development and cost containment efforts.
Sales and marketing expense decreased 16% to $7.3 million for the
fiscal year ended March 31, 1996, as compared to $8.6 million for the fiscal
year ended March 31, 1995. The decrease reflects reduced costs, in the
comparable periods, in full-time personnel and related costs and in marketing
and outside services as a result of cost containment efforts. These decreases
were offset in part by an increased use of consultants. Full-time personnel
engaged in marketing, sales and customer service activities at March 31, 1996
totaled 38 as compared to 44 at March 31, 1995.
General and administrative expense decreased 13% to $3.4 million for
the fiscal year ended March 31, 1996, as compared to $3.9 million for the fiscal
year ended March 31, 1995. The decrease reflects reduced personnel and related
costs due to cost containment efforts, decreased legal costs as a result of
reduced litigation activity, and reduction in the allowances for doubtful
accounts. At March 31, 1996, full-time personnel engaged in general and
administrative activities totaled 21 as compared to 26 at March 31, 1995.
In December 1995, the Company entered into a settlement agreement with
a former insurance carrier in an action in which the Company was a plaintiff.
The Company recorded a gain of $1.7 million (net of $275 thousand of directly
related settlement costs) in the fiscal year ended March 31, 1996.
Interest income decreased to $179 thousand for the fiscal year ended
March 31, 1996 from $758 thousand for the fiscal year ended March 31, 1995,
reflecting decreasing amounts of funds available for short-term investment in
the comparable periods. Interest expense increased to $586 thousand for the
fiscal year ended March 31, 1996 from $496 thousand for the fiscal year ended
March 31, 1995 primarily as the result of interest expense associated with the
Company's 9% Convertible Debentures issued in July 1995 which were subsequently
converted into Common Stock of the Company in September 1995.
FISCAL YEARS ENDED MARCH 31, 1995 AND 1994
Total revenues increased 59% to $2.7 million for the fiscal year ended
March 31, 1995 from $1.7 million for the fiscal year ended March 31, 1994.
Product revenues increased 61% to $1.0 million during the year ended March 31,
1995 from $651 thousand for the year ended March 31, 1994, reflecting increased
sales for pilot tests and field trials to international customers principally in
Asian markets. Product development and field trial revenue increased 57% to
$1.6 million for the fiscal year ended March 31, 1995 from $1.0 million for the
fiscal year ended March 31, 1994, due primarily to increased field trial
activity associated with the Company's energy management product PowerView.
During fiscal 1995 the Company had field trial activity primarily with two
utility companies as compared to primarily one such customer in fiscal 1994. A
portion of field trial revenue recognized during fiscal 1995 and 1994 are
attributable to expenses to be reimbursed by Entergy Enterprises in connection
with a field trial in Arkansas, which is currently expected to be completed in
the fall of 1995.
27
<PAGE>
Cost of product revenues decreased by 25% to $2.9 million in the fiscal
year ended March 31, 1995, from $3.9 million in the fiscal year ended March 31,
1994. The decrease is due primarily to a $1.1 million provision established in
fiscal 1994 associated with an estimated loss on the initial purchase commitment
on the TeleWest contract which was offset only in part in 1995 by provisions for
losses on product to be provided in a field trial and increased inventory
reserve provisions. The decrease is also attributable to the charging of
certain manufacturing operations costs to research and development during all of
fiscal 1995 but were charged to cost of product revenues only in the first-half
of fiscal 1994.
Product development and field trial costs increased by 90% to $1.3
million for the fiscal year ended March 31, 1995 from $694 thousand for the
fiscal year ended March 31, 1994. The increase primarily reflects increased
field trial activity.
Research and development expense increased by 22% to $13.2 million for
the fiscal year ended March 31, 1995 from $10.8 million for the fiscal year
ended March 31, 1994. This increase is primarily attributable to an increase of
$1.4 million of manufacturing operations supports costs allocated to research
and development. Such costs representing primarily test and design activities
supporting product development. The increased expense levels also partially
reflect increased personnel utilized for modifications and enhancements to both
the FPN1000 and FPN2000 systems. Engineering headcount increased throughout the
first three quarters of fiscal 1995 averaging 75 personnel before decreasing to
70 personnel at March 31, 1995 as compared to 66 at March 31, 1994. The reduced
personnel levels at the end of the fiscal year reflect the completion of certain
phases of development as well as cost containment efforts.
Sales and marketing expense increased by 37% to $8.6 million for the
fiscal year ended March 31, 1995 from $6.3 million for the fiscal year ended
March 31, 1994. The increases in product demonstration costs, salaries and
benefits, and the opening of a sales office in the U.K., reflect the Company's
increased efforts in developing and strengthening target markets. These
increases were offset in part by reductions in outside services of $867 thousand
during fiscal 1995 as compared to fiscal 1994 as the Company's use of outside
services decreased. Personnel levels in sales and marketing (including customer
service) were at 44 as of March 31, 1995 and 1994, however, average full-time
personnel in fiscal 1995 approximated 49 personnel. The decrease at fiscal year
end as compared to the average for the year reflects a restructuring which took
place during the fourth quarter realigning the Company's sales and marketing
efforts to support the Company's strategy utilizing its corporate alliances.
General and administrative expense decreased 48% to $3.9 million for
the fiscal year ended March 31, 1995, from $7.5 million for the fiscal year
ended March 31, 1994. The decreases primarily reflect decreased legal and legal
related costs and to a lesser extent reductions related to compensation and
taxes and reduction in allowances for uncollectible accounts. Offsetting these
decreases are increased costs associated with insurance of approximately $250
thousand. At March 31, 1995 full-time personnel engaged in general and
administrative activities approximated 26 as compared to 30 at March 31, 1994.
The Company incurred a non-recurring charge to operations of $7 million
in the fourth quarter of fiscal 1994 for consideration provided in the Amended
License Agreement with Entergy Enterprises. There was no such charge in fiscal
1995.
Interest income decreased to $758 thousand for the fiscal year ended
March 31, 1995 from $995 thousand for the fiscal year ended March 31, 1994,
reflecting decreasing amounts of funds available for short-term investment.
Interest expense increased to $496 thousand for the fiscal year ended March 31,
1995 from $6 thousand for the fiscal year ended March 31, 1994, reflecting
primarily the amortization of the discount on the Payable to Related Party (See
Note 4 of Notes to Consolidated Financial Statements), which generated
approximately $440 thousand of interest expense in fiscal 1995. Similar expense
was not incurred in the same periods of 1994.
28
<PAGE>
EFFECTS OF INFLATION
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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report. See Index to Consolidated Financial Statements on Page 30.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . 31
Consolidated Financial Statements:
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . .34-35
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 36
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .37-54
Report of Independent Accountants on
Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . 55
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . 56
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
First Pacific Networks, Inc. and Subsidiaries
San Jose, California
We have audited the accompanying consolidated balance sheets of First Pacific
Networks, Inc. and Subsidiaries as of March 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Pacific Networks, Inc. and Subsidiaries as of March 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has sustained recurring losses from operations
which raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 17, 1996, except Note 15, as to which the date is June 20, 1996
31
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS March 31,
---------
1995 1996
---- ----
Current assets:
Cash and cash equivalents $ 6,179 $ 2,708
Accounts receivable, net 1,741 594
Inventories 4,865 3,535
Prepaid expenses and other current assets 1,194 739
-------- ---------
Total current assets 13,979 7,576
Property and equipment, net 5,110 3,714
Deposits and other assets 562 334
-------- ---------
Total assets $ 19,651 $ 11,624
-------- ---------
-------- ---------
LIABILITIES
Current liabilities:
Accounts payable $ 5,217 $ 1,300
Accrued expenses 5,118 2,656
Customer advances 1,041 -
-------- ---------
Total current liabilities 11,376 3,956
Payable to related party 5,440 5,857
Capitalized leases, less current portion 372 184
-------- ---------
Total liabilities 17,188 9,997
-------- ---------
Commitments and contingencies (Notes 4, 7, 10 and 12).
STOCKHOLDERS' EQUITY (Note 15)
Preferred stock, $.001 par value:
Authorized: 6,060 shares;
Issued and outstanding: None at March 31,1995 and
4 shares as of March 31, 1996
(Aggregate Liquidation Preference $3,900)
Common stock, $.001 par value:
Authorized: 55,000 shares;
Issued and outstanding: 21,692 shares as of
March 31, 1995 and 33,831 shares as of
March 31, 1996 22 34
Additional paid-in capital 111,683 127,854
Notes receivable from sale of common stock (13) (13)
Accumulated deficit (109,197) (126,245)
Cumulative translation adjustment (32) (3)
-------- ---------
Total stockholders' equity 2,463 1,627
-------- ---------
Total liabilities and stockholders' equity $ 19,651 $ 11,624
-------- ---------
-------- ---------
The accompanying notes are an integral part of these
consolidated financial statements.
32
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Products $ 651 $ 1,048 $ 3,345
Product development and field trial 1,038 1,632 1,654
-------- -------- --------
Total Revenue 1,689 2,680 4,999
-------- -------- --------
Costs and expenses:
Products 3,900 2,914 3,661
Product development and field trial 694 1,320 634
Research and development 10,839 13,238 8,454
Sales and marketing 6,280 8,590 7,254
General and administrative 7,544 3,929 3,400
Non-recurring charge-license agreement 7,000
-------- -------- --------
Total costs and expenses 36,257 29,991 23,403
-------- -------- --------
Loss from operations (34,568) (27,311) (18,404)
Litigation settlements, net 1,763
Interest income 995 758 179
Interest expense (6) (496) (586)
-------- -------- --------
Net loss $(33,579) $(27,049) $(17,048)
-------- -------- --------
-------- -------- --------
Net loss per share $ (1.76) $ (1.31) $ (0.67)
-------- -------- --------
-------- -------- --------
Shares used in computing per share amounts 19,050 20,644 25,408
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
33
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balances March 31, 1993 - - 18,168 $ 18 $ 82,534
Common Stock issued in connection with:
Secondary public offering, net of
issuance costs of $1,844 1,192 1 17,525
Exercise of employee stock options for
cash 424 1 1,239
Conversion of debentures 3 34
Exercise of warrants for cash 95 564
Compensation expense in connection with
issuance of stock options to directors
Cash from notes receivable
Net loss
------ ------ ------- ------ ----------
Balances, March 31, 1994 - - 19,882 20 101,896
Common Stock issued in connection with:
Private Placement, net of issuance costs
of $1,045 1,700 2 9,262
Exercise of employee stock options for
cash 56 86
Litigation settlement 54 387
Compensation expense in connection
with issuance of a warrant to a
director 52
Foreign currency translation adjustment
Net loss
------ ------ ------- ------ ----------
Balances, March 31, 1995 - - 21,692 22 111,683
------ ------ ------- ------ ----------
<CAPTION>
Notes
Receivable
Deferred from Sales of Cumulative
Stock Common Accumulated Translation Stockholders'
Compensation Stock Deficit Adjustment Equity
------------ ----- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Balances March 31, 1993 $ (187) $ (17) $ (48,569) - $ 33,779
Common Stock issued in connection with:
Secondary public offering, net of
issuance costs of $1,844 17,526
Exercise of employee stock options for
cash 1,240
Conversion of debentures 34
Exercise of warrants for cash 564
Compensation expense in connection with
issuance of stock options to directors 187 187
Cash from notes receivable 4 4
Net loss (33,579) (33,579)
--------- ---------- ---------- -------- --------
Balances, March 31, 1994 - (13) (82,148) - 19,755
Common Stock issued in connection with:
Private Placement, net of issuance costs
of $1,045 9,264
Exercise of employee stock options for
cash 86
Litigation settlement 387
Compensation expense in connection
with issuance of a warrant to a
director 52
Foreign currency translation adjustment $(32) (32)
Net loss (27,049) (27,049)
--------- ---------- ---------- -------- --------
Balances, March 31, 1995 - (13) (109,197) (32) 2,463
--------- ---------- ---------- -------- --------
</TABLE>
(continued)
The accompanying notes are an integral part of these
consolidated financial statements.
34
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balances, March 31, 1995 (forward) - - 21,692 22 111,683
Preferred Stock issues in connection
with private placement of:
Series C Preferred Stock and warrants
(see Note 6) for cash net of issuance 7 6,771
costs of $229
Series D Preferred Stock for cash net of
issuance costs of $251 4 3,649
Common stock issued in connection with:
Private placement, net of issuance costs
of $30 400 - 570
Employee stock purchase plan 91 - 181
Exercise of employee stock options for 37
cash 24
Conversion of 9% Convertible
Debentures, net of issuance costs of
$123 3,090 3 4,864
Litigation settlement 64 108
Conversion of Series C preferred stock (7) 8,470 9 (9)
Foreign currency translation adjustment
Net loss
------ ------ ------ ------ --------
Balances, March 31, 1996 4 - 33,831 $ 34 $ 127,854
------ ------ ------ ------ --------
------ ------ ------ ------ --------
<CAPTION>
Notes
Receivable
Deferred from Sales of Cumulative
Stock Common Accumulated Translation Stockholders'
Compensation Stock Deficit Adjustment Equity
------------ ----- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Balances, March 31, 1995 (forward) - (13) (109,197) (32) 2,463
Preferred Stock issues in connection
with private placement of:
Series C Preferred Stock and warrants
(see Note 6) for cash net of issuance 6,771
costs of $229
Series D Preferred Stock for cash net of
issuance costs of $251 3,649
Common stock issued in connection with:
Private placement, net of issuance costs
of $30 570
Employee stock purchase plan 181
Exercise of employee stock options for
cash 37
Conversion of 9% Convertible
Debentures, net of issuance costs of
$123 4,867
Litigation settlement 108
Conversion of Series C preferred stock -
Foreign currency translation adjustment 29 29
Net loss (17,048) (17,048)
--------- ---------- ---------- -------- -----------
Balances, March 31, 1996 - $ (13) $ (126,245) $ (3) $ 1,627
--------- ---------- ---------- -------- -----------
--------- ---------- ---------- -------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
35
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash used-in operating activities:
Net loss $(33,579) $(27,049) $(17,048)
Adjustment to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts 503 123 144
Provision for inventory obsolescence and write-down 427 797 634
Depreciation and amortization 1,212 1,541 1,817
Loss on disposal of property and equipment 72
Compensation charge related to issuance of stock options and warrants 187 52 -
Amortization of discount on long-term obligation 440 417
Non-recurring charge 5,000
Changes in assets and liabilities:
Accounts receivable (667) (1,101) (38)
Inventories (162) (4,915) 697
Prepaid expenses and other current assets (527) (439) 829
Deposits and other assets (139) (353) 228
Note receivable from officer 251 - -
Accounts payable 1,886 1,398 (3,917)
Accrued expenses 3,455 (679) (2,416)
Customer advances 16 1,018 -
------- ------- -------
Net cash used in operating activities (22,137) (29,167) (18,581)
------- ------- -------
Cash from (used-in) investing activities:
Acquisition of property and equipment (2,517) (2,595) (594)
Proceeds from sale of property and equipment - - 190
Sales of short-term investments 2,982 - -
------- ------- -------
Net cash provided by (used in) investing activities 465 (2,595) (404)
------- ------- -------
Net cash from financial activities:
Proceeds from issuance of preferred stock, net 10,420
Proceeds from issuance of common stock, net 19,330 9,350 788
Payments on capital lease obligations (137) (266)
Payments on notes payable (13) (325)
Proceeds from issuance of 9% Convertible Debenture 4,867
Proceeds from payment on notes receivable from sale of common stock 4
------- ------- -------
Net cash provided by financing activities 19,334 9,200 15,484
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents - (32) 30
------- ------- -------
Net decrease in cash and cash equivalents (2,338) (22,594) (3,471)
Cash and cash equivalents at beginning of year 31,111 28,773 6,179
------- ------- -------
Cash and cash equivalents at end of year $ 28,773 $ 6,179 $ 2,708
------- ------- -------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 6 $ 56 $ 169
Common stock issued in exchange for debentures plus accrued interest $ 34
Notes payable issued in exchange for prepaid insurance $368 $344 $ 374
Equipment purchased through capitalized leases $730 $ 89
Conversion of 9% Convertible Debenture to common stock $5,000
Conversion of Series C Preferred Stock to common stock $7,000
Common Stock issue in litigation settlement $ 108
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
36
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
1. BUSINESS OF THE COMPANY:
First Pacific Networks, Inc. (the Company), a Delaware corporation,
designs, develops, assembles and markets products for telephone, data and
energy management communications over hybrid fiber/coaxial cable networks,
both domestically and internationally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in the consolidation.
BASIS OF PRESENTATION:
The accompanying 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 $5.0
million from the sale of Series E Preferred Stock (see Note 15).
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.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS AND CONCENTRATION RISK:
Interest-bearing deposits with maturities of three months or less at
the date of investment are considered cash equivalents. As of March
31, 1995, the Company had approximately $3,953,000 of its cash and
cash equivalents on deposit with two U.S. banks and approximately
$2,226,000 of its cash and cash equivalents on deposit with two
individual U.S. brokers. At March 31, 1996, the Company had
approximately $878,000 on deposit with one U.S. bank, and
$1,830,000 with one U.S. broker.
37
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued):
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Inventories
include a provision for obsolescence, which is determined based on
estimated manufacturing needs and forecasted sales by product type.
The Company is currently dependent on sole or limited suppliers for
certain components used in its products, particularly custom
integrated circuits, third party proprietary IC's and custom designed
assemblies and sub-assemblies, which may cause shortages that limit
production capacity. There can be no assurance that such shortages
will not adversely affect future operating results. The Company's
current levels of inventory are in excess of its short term needs at
March 31, 1996. The Company has established provisions for excess
and obsolete inventory, has developed a plan to reduce inventory
levels through product sales and currently believes no loss will be
incurred in its disposition; however, it is reasonably possible that
the plan will not be wholly successful and a material loss could
ultimately result on the disposal of this inventory.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of three to
five years. Leasehold improvements are amortized on a straight-line
basis over their estimated useful lives or the lease term, whichever
is shorter.
Disposals of property and equipment are recorded by removing the
costs and accumulated depreciation from the accounts. Gains or losses
are included in the results of operations.
AMORTIZATION OF DISCOUNTS:
Discounts on notes payable are amortized over the lives of the notes
using the interest method.
REVENUE RECOGNITION:
The Company recognizes revenue from product licenses when the license
agreement has been executed and, if applicable, when the software has
been delivered and all significant obligations have been completed.
Product revenues are generally recorded upon shipment. Development
revenues are generally recognized using the percentage-of-completion
method. The Company does not require collateral of its customers for
amounts receivable.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are charged to expense as
incurred.
FOREIGN CURRENCY ACCOUNTING:
Substantially all of the Company's activities and expenses are
denominated in the local currency, which is the functional currency
for all foreign operations. Foreign exchange gains and losses, which
result from the process of translating foreign currency financial
statements into U.S. dollars are
38
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued):
FOREIGN CURRENCY ACCOUNTING, (continued):
presented as a separate component of stockholders' equity. Gains and
losses from foreign currency transactions have not been material.
INCOME TAXES:
The Company accounts for its income taxes using the liability method.
Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
LOSS PER SHARE:
Loss per share is based upon the weighted average number of shares of
common stock outstanding.
SUPPLEMENTARY LOSS PER SHARE:
As required by Accounting Principles Board Opinion No. 15, "Earnings
Per Share," supplementary loss per share information is presented as
if the Company's 9% Convertible Debentures, Series C Convertible
Preferred Stock and Series D Convertible Preferred Stock had been
converted as of the fiscal 1996 date of issuance.
Year Ended March 31, 1996
Net Loss $(17,048,000)
-------------
-------------
Shares used in computing per share amount 28,550,000
----------
----------
Supplemantary net loss per share $(0.60)
-------
-------
RECENT ACCOUNTING PRONOUNCEMENTS:
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," which requires the
Companny to review for impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. Statement No. 121 will become
effective for the Company's fiscal year 1997. The Company has studied
the implications of the statement, and based on its initial
evaluation, does not expect it to have a material impact on the
Company's financial condition or results of operations.
39
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued):
RECENT ACCOUNTING PRONOUNCEMENTS, (continued):
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation," which establishes a fair value based method of
accounting for stock-based compensation plans. The Company is
currently following the requirements of APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company plans to adopt
SFAS No. 123 during fiscal year 1997 utilizing the disclosure
alternative.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value due to their
short maturities. Based on borrowing rates currently available to
the Company, the fair value of the payable to related party is
approximately $4,500,000 as compared to the balance sheet amount of
$5,857,000 as of March 31, 1996.
RECLASSIFICATION:
Certain reclassifications have been made to prior year balances to
conform to current classifications. These reclassifications did not
change previously reported total assets, liabilities or stockholders'
equity.
40
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
3. BALANCE SHEET DETAIL:
Accounts receivable, net, comprise:
March 31,
---------
1995 1996
---- ----
Accounts receivable $1,506,000 $ 852,000
Due from related party (see Note 10) 1,499,000 -
Other - 150,000
Less allowance for doubtful accounts (264,000) (408,000)
----------- -----------
2,741,000 594,000
Less deferred revenue (1,000,000) -
----------- -----------
$1,741,000 $ 594,000
----------- -----------
----------- -----------
Inventories comprise:
March 31,
---------
1995 1996
---- ----
Raw materials $2,980,000 $2,571,000
Work in progress 1,192,000 117,000
Finished goods 693,000 847,000
----------- -----------
$4,865,000 $3,535,000
----------- -----------
----------- -----------
Property and equipment, net, comprise:
March 31,
---------
1995 1996
---- ----
Equipment $7,953,000 $ 8,141,000
Furniture and fixtures 1,749,000 1,813,000
Leasehold improvements 488,000 497,000
----------- -----------
10,190,000 10,451,000
Less accumulated depreciation and
amortization (5,080,000) (6,737,000)
----------- -----------
$5,110,000 $ 3,714,000
----------- -----------
----------- -----------
Equipment, furniture and fixtures includes $730,000 and $803,000 at
March 31,1995 and 1996, respectively ($663,000 and $578,000, at March 31,
1995 and 1996, respectively, net of accumulated amortization) of
capitalized leases.
Accrued expenses comprise:
March 31,
---------
1995 1996
---- ----
Accrued payroll and employee-related
expenses $1,146,000 $ 578,000
Accrued contract costs 1,554,000 381,000
Notes and current portion of capitalized
leases payable 396,000 455,000
Accrued rent 282,000 222,000
Accrued legal costs 810,000 769,000
Other accrued expenses 930,000 251,000
----------- -----------
$5,118,000 $2,656,000
----------- -----------
----------- -----------
41
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
4. PAYABLE TO RELATED PARTY (SEE NOTE 10):
Payable to related party comprise:
March 31,
---------
1995 1996
---- ----
Noninterest-bearing obligation, due in
March 1998 and 1999 $7,000,000 $7,000,000
Discount based on imputed interest rate of
7.4% (1,560,000) (1,143,000)
----------- -----------
$5,440,000 $5,857,000
----------- -----------
----------- -----------
In May, 1995, the terms were amended whereby the obligation repayment was
changed from $7,000,000 due in March, 1998 to $3,500,000 due in March 1998
and $3,500,000 due in March 1999. However, should the Company be obligated
to pay certain specified royalties under an amended license agreement with
Entergy such royalties will result first in the reduction of this payable
should they arise prior to its due date.
5. LONG-TERM OBLIGATIONS:
CAPITAL LEASE OBLIGATIONS:
The Company has leased equipment under capital lease obligations
maturing at various dates through fiscal 1999.
The following is a schedule of future annual minimum lease payments
due under the capital lease agreements as of March 31, 1996:
Year Ended March 31,
1997 $340,000
1998 196,000
1999 6,000
--------
Total minimum lease payments 542,000
Less amount representing interest 104,000
--------
Present value of minimum lease payments 438,000
Less current portion included in accrued expenses 254,000
--------
Noncurrent portion $184,000
--------
--------
9% CONVERTIBLE DEBENTURES:
In July 1995 the Company completed a private placement of $5,000,000 in
9% Convertible Debentures due September 10, 1998 in reliance on
Regulation S promulgated under the Securities Act of 1933, as amended.
These debentures were converted into 3,090,000 shares of the Company's
Common Stock in September 1995. Accumulated interest on these
debentures through the conversion date was not material.
42
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
6. STOCKHOLDERS' EQUITY:
PREFERRED STOCK: (See Note 15)
GENERAL:
As of March 31, 1995 and 1996, the Company has authorized 6,060,000
shares of preferred stock with a $.001 par value. The following
series of convertible preferred stock have been designated, issued
and outstanding as of March 31, 1995 and 1996:
March 31, 1995 March 31, 1996
-------------- --------------
Issued and Issued and
Designated Outstanding Designated Outstanding
---------- ----------- ---------- -----------
Series A 1,060,000 -- 1,060,000 --
Series B 500,000 -- 500,000 --
Series D -- -- 3,900 3,900
--------- ----------- ---------- -----------
1,560,000 -- 1,563,900 3,900
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
In October 1995 the Company completed a private placement of 7,000
shares of Series C convertible preferred stock, par value $.001 per
share having a purchase price of $7,000,000 ($6,771,000 net of
issuance costs) in reliance on Regulation S promulgated under the
Securities Act of 1933, as amended. Subsequently in December 1995
through February 1996 all of the outstanding Series C preferred stock
was converted into 8,470,000 shares of the Company's common stock.
Upon conversion, the Series C preferred stock was returned to the
authorized but undesignated pool of preferred stock.
Related to the issuance of the Series C preferred stock, the Company
issued fully exercisable warrants to the distributors of the private
placement to purchase 700,000 shares of the Company's common stock at
an exercise price of $3.50 which expire in August 1998.
In March 1996, the Company completed a private placement of
3,900 shares of Series D convertible preferred stock, par value $.001
per share having a purchase price of $3,900,000 ($3,649,000 net of
issuance costs) in reliance on Regulation S promulgated under the
Securities Act of 1933, as amended. The Series D preferred stock is
convertible into the Company's common stock, at the option of the
holder, at a conversion rate of 82% of the market value of the
Company's common stock at the time of conversion. The Series D
preferred stock is convertible at anytime after April 30, 1996 and is
subject to mandatory conversion in April, 1998. Holders of series D
preferred 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 D
preferred stock could be converted into at the time of declaration of
dividends on the company's common stock. The holder's of the Series D
preferred stock do not have voting rights.
In the event of any liquidation, dissolution or wind-up of the
Company, the holders of the Series D preferred 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 D
preferred stock held by them plus an amount equal to all declared
and unpaid dividends on the Series D preferred stock, if any.
43
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
STOCK RIGHTS PLAN AND SERIES B PREFERRED STOCK:
On January 31, 1995, the Company's Board of Directors approved the
adoption of a Preferred Stock Purchase Rights Agreement. Under the
agreement, stockholder's of record on February 14, 1995 and
thereafter will receive one (1) right to purchase one-thousandth
(1/1000) of a share of the Company's Series B preferred stock.
The rights, which will initially be inseparable from the common
stock, become exercisable to purchase one one-thousandth
of a share of the new preferred stock, at $35.00 per right, when
someone acquires 15% or more of the Company's common stock or
announces a tender offer which could result in such person owning
15% or more of the common stock. Each one one-thousandth of a share
of the Series B preferred stock has terms designed to make it
substantially the economic equivalent of one share of common stock.
Prior to someone acquiring 15% of the Company's common stock, the
rights can be redeemed for $.001 each by action of the Board. Under
certain circumstances, if someone acquires 15% or more of the common
stock, the rights permit the holders, other than the acquirer, to
purchase the Company's common stock having a market value of twice
the exercise price of the rights, in lieu of the preferred stock. In
addition, in the event of certain business combinations, the rights
permit purchase of the common stock of an acquirer at a 50%
discount. Rights held by the acquirer will become null and void.
The rights expire on January 30, 2005. The rights will not be
taxable to stockholders and will be payable to stockholders of record
on February 14, 1995. The previous summary is qualified by reference
to the description of the Rights Agreement contained in a
Registration Statement on Form 8-A dated February 2, 1995, as filed
by the Company with the Securities and Exchange Commission.
COMMON STOCK: (See Note 15)
GENERAL:
In November, 1994, the Company completed a private placement made in
reliance on Regulation S promulgated under the Securities Act of
1933, as amended, in which it received net proceeds of $9,264,000
from the sale and issuance of 1,700,000 shares of its common stock.
In May 1995, the Company completed a private placement in reliance on
Regulation S promulgated under the Securities Act of 1933, as
amended, in which it received net proceeds of $570,000 from the sale
and issuance of 400,000 shares of its common stock.
44
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
6. STOCKHOLDERS' EQUITY, continued:
WARRANTS:
The Company has reserved common stock as of March 31, 1996 for
warrants which are exercisable as follows:
Number of Exercise Price Aggregate
Shares per Share Price Exercise Period
--------- -------------- --------- ---------------
3,000 $1.53 5,000 Through July 1998
58,000 $1.53 88,000 Through February 1997
700,000 $3.50 2,450,000 Through August 1998
200,000 $5.00 1,000,000 Through December 1996
16,000 $6.10 100,000 Through May 1998
19,000 $6.10 115,000 Through May 1999
8,000 $9.25 75,000 Through December 1998
75,000 $17.31 1,298,000 Through January 2003
--------- ----------
1,079,000 $5,131,000
--------- ----------
--------- ----------
In addition to the above warrants, the Company, in July 1992, issued
warrants to purchase 490,000 shares of common stock to its former
underwriter that expire in July 1997. The warrant agreement provides
for, among other things, demand, as well as other registration
rights, antidilution adjustments and exercise price reductions,
should certain events occur. As a result of these provisions the
number of shares of common stock that may be acquired pursuant to
these warrants approximates 986,000 at an exercise price of
approximately $.83 per share at March 31, 1996.
STOCK OPTION PLANS:
In September 1994, the Company's stockholders approved the adoption
of the 1994 Stock Option Plan (the Plan). Under the Plan, 1,000,000
shares of the Company's common stock were reserved for possible
issuance. The Plan expires in July 2004.
The Company has reserved 3,426,000 shares for issuance under its
1990, 1991 and 1994 Stock Option Plans. Under the Plans, either
incentive or nonqualified stock options may be granted to employees,
officers, directors, consultants or independent contractors.
Incentive stock options cannot be granted at prices lower than fair
market value at the date of grant as determined by the Board of
Directors or the Compensation Committee. Options granted under the
Plans are exercisable at such times and under such conditions and
terms as determined by the Board of Directors or the Compensation
Committee at the date of each grant and generally expire seven years
from the date of grant. Options generally become exercisable over
various vesting periods ranging from immediate to ratably over 36
months. On May 10, 1994, the Board of Directors authorized employees
the right to cancel certain outstanding stock options and receive new
option grants with an exercise price of $8.00 per share (the fair
market value as of the date of the Board's authorization). Options
to purchase 1,501,000 shares of common stock were exercisable at
March 31, 1996.
45
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
6. STOCKHOLDERS' EQUITY, continued:
STOCK OPTION PLANS:
Activity under the Company's stock options are summarized as follows:
<TABLE>
<CAPTION>
1990, 1991 AND 1994 STOCK OPTION PLANS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Outstanding Options
------------------------------------------------------------------
Shares Number of Price Per Aggregate
Available Shares Share Price
--------- ------ ----- -----
<S> <C> <C> <C> <C>
Balances, March 31, 1993 584 1,346 $1.53-$18.75 $ 9,138
Additional shares reserved 1,000
Granted (1,231) 1,231 $9.81-$20.38 17,361
Exercised (424) $1.53-$10.13 (1,240)
Canceled 33 (33) $1.53-$20.38 (391)
----- ----- --------
Balances, March 31, 1994 386 2,120 $1.53-$20.28 24,868
Additional shares reserved 1,000
Granted (2,005) 2,005 $4.14-$9.25 14,852
Exercised (56) $1.53-$6.10 (86)
Canceled 1,675 (1,675) $3.48-$20.38 (23,146)
----- ----- --------
Balances, March 31, 1995 1,056 2,394 $1.53-$15.00 16,488
Granted (1,664) 1,664 $.88-$4.00 3,864
Exercised (24) $1.53 (37)
Canceled 1,021 (1,021) $2.37-$15.00 (6,937)
----- ----- --------
Balances, March 31, 1996 413 3,013 $.88-$15.00 $ 13,378
----- ----- --------
----- ----- --------
</TABLE>
In addition to the options shown in the table above, in December
1992 the Company granted options to purchase 78,000 shares
of common stock to nonemployee members of the Board of Directors
outside of the 1990 and 1991 Plans. These options were granted at an
exercise price of $4.50 per share, with an aggregate exercise price
of $351,000. Vesting occurs ratably over a 12-month period
commencing in October 1992.
Options to purchase 21,000 of these shares were exercised in fiscal
1994, leaving 41,000 outstanding options at March 31, 1994 and 1995.
There was no activity with respect to these options in fiscal year
1995. During fiscal year 1996 18,000 shares were cancelled leaving
23,000 shares outstanding at March 31, 1996. Compensation expense of
$187,000 was recorded in 1994 relating to this transaction.
EMPLOYEE STOCK PURCHASE PLAN:
In September 1994, the Company's stockholders approved the adoption
of the 1994 Employee Stock Purchase Plan (ESPP). Under the ESPP,
250,000 shares of the Company's common stock have been reserved
for possible issuance. Generally, each offering of common stock
under the ESPP will be for a period of twenty-four months with each
offering period consisting of four six-month purchase periods. Under
the ESPP, eligible employees may authorize payroll deductions up to
5% of their compensation. The purchase price per share will
generally be at the lower of 85% of the fair market value of the
Company's common stock on the date of commencement of the offering
period or on the last day of a purchase period. Should the employee
not elect to purchase in the
46
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
6. STOCKHOLDERS' EQUITY, continued:
EMPLOYEE STOCK PURCHASE PLAN, continued:
purchase period, or elect other rights under the ESPP, the employee
shall automatically be withdrawn from such offering and be eligible
to re-enroll in the offering commencing on the first business day
subsequent to such purchase period. During the fiscal year ended
March 31, 1996 employees purchased 91,000 shares of the Company's
common stock leaving 159,000 shares available for future purchase
under the ESPP.
7. COMMITMENTS:
OPERATING LEASES:
Substantially all of the Company's office space is leased under a
noncancelable operating lease expiring through 2001. The Company's
primary office and operting facility lease provides for, among other
things, step increases in monthly lease payments and Company
responsibility for insurance, taxes and maintenance. The Company
has two options to extend the term of the lease. Each option, if
exercised, would extend the lease term for 60 months at the greater
of the then existing rental rate or 95% of the fair market rental at
the date of renewal.
Future minimum lease payments under the Company's building leases are
as follows:
For the Year Ended March 31,
----------------------------
1997 $847,000
1998 839,000
1999 839,000
2000 839,000
2001 705,000
For the years ended March 31, 1994, 1995 and 1996, rent expense was
approximately $566,000, $983,000, and $925,000, respectively.
EMPLOYMENT AND CONSULTING AGREEMENTS:
As of March 31, 1995, the Company had entered into employment
agreements terminating at various periods through fiscal
year 1999 with six of its officers. As a result of activity during
fiscal 1996 the Company has at March 31, 1996, employment agreements
with three officers that provide for base compensation. The terms of
the employment agreements provide for base compensation aggregating
approximately $344,000 through June 1997, plus expense reimbursements
and severance arrangements. Two employment agreements provide for a
bonus of up to 100% of base salary which may be awarded based upon
the officer's achievement of specific business objectives. Employment
agreements also include participation in management incentive plans
and include change of control provisions.
47
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
7. COMMITMENTS (CONTINUED):
LETTERS OF CREDIT:
Outstanding letters of credit aggregated $791,000 at March 31, 1995
and $235,000 at March 31, 1996. The letters of credit relate to
collateral for leasehold improvements.
As of March 31, 1995 and 1996, "deposits and other assets" includes
$238,000 and $235,000, respectively, of restricted cash for letter
of credit arrangements. As of March 31, 1995 "prepaids and other
current assets" includes $553,000 in restricted cash for letter of
credit arrangements.
PURCHASE COMMITMENTS:
At March 31, 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.
8. INCOME TAXES:
The tax effects of the significant temporary differences which comprise
deferred tax assets at March 31, 1995 and 1996 are as follows (IN
THOUSANDS):
1995 1996
---- ----
Current deferred tax assets:
Inventory valuation and reserves $ 1,600 $ 1,500
Reserves and other temporary differences 2,200 900
Non-current deferred tax assets:
Principally net operating losses 31,500 36,800
Capitalized research and development costs 5,200 10,600
Notes payable to related party 2,200 2,400
Valuation allowance (42,700) (52,200)
-------- --------
Net deferred tax asset - -
-------- --------
-------- --------
Due to the uncertainty surrounding the realization of these future
deductible amounts in future tax returns, the Company has placed a full
valuation allowance against its otherwise recognizable net deferred tax
assets.
At March 31, 1996, the Company has net operating loss carryforwards
available to reduce future taxable income of approximately $98,000,000
for federal income tax purposes, expiring 2003 through 2011 if not
utilized and not limited under ownership change provisions of the Tax
Reform Act of 1986, and approximately $35,000,000 for state income tax
purposes, expiring in 1996 through 2001 if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforward in certain situations where changes occur in the
stock ownership of a corporation. As a result of equity transactions
from 1992 through the present the Company has affected an ownership
change for tax purposes that will limit its ability to fully utilize its
operating loss carryfowards. The annual limitation of usage of such
losses is currently estimated to be $4,000,000 to $5,000,000 per year.
48
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
9. SAVINGS AND RETIREMENT PLAN:
Effective January 1993, the Company established an Employee Savings and
Retirement Plan (the Retirement Plan) in accordance with Section 401(k)
of the Internal Revenue Code. Under the Retirement Plan, at the
discretion of the Board of Directors, the Company may match a portion of
the employees' contributions. For the periods presented, no matching
contributions have been made by the Company.
10. AGREEMENTS WITH ENTERGY ENTERPRISES, INC., A STOCKHOLDER:
In July 1991, the Company entered into a series of agreements with
Entergy Enterprises, certain of which were amended in December 1991,
March 1994 and May 1995.
The agreements as amended through March 1994 included, among other
things, the following: (i) a Product license Agreement granting Entergy
Enterprises (a) an exclusive worldwide license (with the Company
retaining joint marketing rights) to make, use and sell the Company's
core technology in the CCLM/AFS product, (b) and exclusive worldwide
license to sublicense to electric, gas or water utilities (other than
affiliates of Entergy Enterprises), the right to use the CCLM/AFS
product, and to sell, lease or otherwise provide the CCLM/AFS product
to customers or end users within their respective service territories,
and (c) together with affiliates of Entergy Enterprises, an exclusive
license to use the CCLM/AFS product, and to lease, sell or otherwise
provide the CCLM/AFS product for use by customers and end users within
the Entergy Corporation electric system; (ii) a common Stock Purchase
Agreement relating to the sale to Entergy Enterprises of an equity
interest in the Company for $3,500,000; and (iii) an Investor Rights
Agreement.
The original Product License Agreement between the Company and Entergy
provided for funding by Entergy of development costs not to exceed
$1,000,000; favored pricing to Entergy based upon the lowest prices then
offered other purchasers; and an initial term of 30 years. In addition,
the Product License Agreement provided for royalties of 5% on hardware
sales and revenue sharing at 50% on all other revenues to specified
customer categories. The March 1994 amendment to the Product License
Agreement (the "Amended License Agreement") also provided for, among
other things the payment by Entergy Enterprises to the Company of up to
an additional $1,000,000 in development costs relating to the CCLM/AFS
product. The $1,000,000 additional development costs was recorded as
deferred revenue at March 31, 1995.
In consideration for the March 1994 Amended License Agreement, the
Company agreed to pay Entergy Enterprises an aggregate of $9,000,000
(the "Company Obligation"), of which $2 million was paid upon execution
of the Amended License Agreement and $7,000,000 is payable in the form
of a non-interest bearing, unsecured contractual obligation that will be
payable after March 1998. The Company incurred a charge to operating
results of approximately $7,000,000 in its fourth fiscal quarter ended
March 31, 1994, reflecting the current value of the Company Obligation.
In May 1995, the Amended License Agreement was further amended to provide
for, among other things: (i) royalties payable to Entergy being reduced
to 2% of net receipts received by the Company from sales of specified
products to defined customer groups with further reductions in the
royalty when specified events occur; (ii) license fee revenue sharing
decreased to 10% with only licenses with certain qualifying utilities
applicable; (iii) royalties in (i) and (ii) above continuing for a 10
year period following the repayment of the $7,000,000 obligation; (iv)
rescheduling the repayment of the $7,000,000 obligation such that
$3,500,000 is due in March 1998 and $3,500,000 is due in March 1999; (v)
royalty or license payments received by Entergy prior to repayment of the
$7,000,000 obligation are to reduce the obligation amount; (vi)
elimination of Entergy's obligation
49
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
10. AGREEMENTS WITH ENTERGY ENTERPRISES, INC., A STOCKHOLDER:
to pay $1,000,000 of additional development funding and the Company's
obligation to repay $988,000 in customer advances (included in current
liabilities at March 31, 1995); and (vii) a reduction in Entergy's
license rights under certain conditions (the "Second Amendment").
The Second Amendment restructured the license rights granted to Entergy
under the Amended License Agreement. From the date of the Second
Amendment, Entergy is not allowed to take action to license or
sublicense under its license grants unless and until the earlier of:
(i) the Company or its assignees, successors, partners, licensees, etc.,
fail for a period of one year to actively market CCLM products; or
(ii) the Company or any successor becomes subject to the jurisdiction of
a U.S. Bankruptcy Court or avails itself of some judicial or
quasijudicial proceedings which provides relief to debtors which is not
dismissed within ninety (90) days thereafter ("Bankruptcy Events").
Entergy's license rights shall expire fourteen (14) months following the
timely payment of the "Company Obligation". After said fourteen (14)
month period, Entergy shall have an exclusive nontransferable perpetual
license: (i) to sublicense to entities, other than its Affiliates within
its service territory, whose principal business is the electric, gas or
water utility business ("Qualifying Utilities"), the right to manufacture
(or have manufactured) and use, and to sell, lease and otherwise provide
to customers or end users, the CCLM/AFS for use exclusively within its
service territories; and (ii) to lease or sell or otherwise
provide to Qualifying Utilities the CCLM/AFS for use within its service
territories. Ten percent (10%) of any license or sublicense shall be
paid to the Company (without any Right to Use fees). Both parties agreed
that each party has fully discharged all contractual, financial and
performance obligations to the other; and each party releases any and all
claims that either party may have against the other as of the date of
the Second Amendment.
The Common Stock Purchase Agreement provided for the purchase by Entergy
Enterprises of 1,007,115 shares of Common Stock, representing 9.95% of
the then outstanding equity in the Company, for the $3,500,000.
The Investor Rights Agreement grants demand and piggy-back registration
rights to Entergy Enterprises under certain conditions and provides for
the Company to indemnify Entergy Enterprises and its affiliates under
certain circumstances with respect to any registration statement
including the Common Stock of Entergy Enterprises pursuant to such
registration rights. The Company is also required to redeem a
corresponding portion of Entergy Enterprises' shares in the event the
Company redeems or otherwise acquires any shares of its Common Stock in
order to maintain Entergy Enterprises' level of equity interest below
the level (currently 10%) (the "Ownership Limit") which would cause the
Company to become subject to regulation as a subsidiary of a registered
holding company under the 1935 Act. Entergy Enterprises has agreed that
neither it nor any of its affiliates will acquire beneficial ownership
of any voting stock of the Company without the Company's prior written
consent if the effect of such acquisition would increase its beneficial
ownership of voting stock to more than the Ownership Limit. Pursuant to
an ownership right that expired at the time of the Company's initial
public offering in 1992 Entergy acquired an aggregate of 768,120
additional shares of the Company's Common Stock at an aggregate price of
$6,128,282 during fiscal 1993. At March 31, 1996, Entergy Enterprises
held 1,715,235 shares of the Company's Common Stock.
50
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
10. AGREEMENTS WITH ENTERGY ENTERPRISES, INC., A STOCKHOLDER, (continued):
Because Entergy Corporation is a registered holding company under the
1935 Act, these and other transactions relating to the involvement of
Entergy Enterprises with the Company in licensing the CCLM/AFS product
were required to be approved under the 1935 Act by the Securities and
Exchange Commission ("SEC"). Entergy Enterprises has advised the
Company that it received authority under the 1935 Act to license the
CCLM/AFS product to enable it to provide and sublicense energy management
and other utility applications and to purchase the Company's securities.
Unless otherwise authorized by the SEC, Entergy Enterprises will divest
its equity interest in the Company upon the earlier of the deployment of
PowerView in 20% of the electric service customer locations in the
Entergy Corporation system or January 1, 2002.
The Company has recorded $566,000, $626,000 and $1,132,000 for the years
ended March 31, 1994, 1995 and 1996, respectively, for revenue under
joint development, field trial and product sale arrangements with
Entergy. Included in accounts receivable as of March 31, 1995 were
$1,499,000 ($499,000, net of deferred revenue), due from Entergy. No
amounts were outstanding at March 31, 1996. In addition, during fiscal
1995 Entergy advanced the Company $1,000,000 against future purchases
with the balance of $988,000 included in customer advances at March 31,
1995. During the first quarter of fiscal 1996 the Company's $1,000,000
obligation was offset in satisfaction of the amounts due from Entergy
related to additional development costs.
11. SIGNIFICANT CUSTOMERS AND EXPORT SALES:
In addition to sales to Entergy, the Company had sales to three
significant customers representing 20%, 16% and 15%, respectively, of
net revenues in 1995 and in fiscal 1996 the Company had sales to two
significant customers representing 44% and 20%, respectively, of net
revenues.
Export sales were 36% and 7% of total revenues in fiscal year 1995 and
1996, respectively, and were not significant in fiscal year 1994.
12. 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
51
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
12. LITIGATION (continued):
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 have jointly filed an appeal from the
court's order which appeal was denied in April 1996. The insurance
carrier and the Company are currently evaluating their further remedies
available with respect to the appeal. The Estate's motion for an award
of attorneys' fees and costs claimed amount to $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.
The Company had filed a lawsuit against one of its previous insurance
carriers alleging, among other things, recovery of part of the
settlement in the Bass litigation, defense costs incurred with respect
to that litigation, and punitive damages. In December 1995, the company
and the former carrier entered into a settlement arrangement pursuant to
which the Company has recorded a net gain of $1.7 million (net of
directly related settlement costs of $275 thousand). The Company
received the cash proceeds from the settlement in January 1996.
During the year ended March 31, 1996 the Company entered into settlement
related to other litigation or claims outstanding in which it was either
a plaintiff or defendant. As a result of these settlements, the Company
has recognized a net gain of $38 thousand (net of $213 thousand of
settlement charges).
13. RELATED PARTY TRANSACTIONS:
Issuance costs of the Company's secondary public offering included
underwriting discounts of $1,356,000. A portion of each of these costs
was paid to an underwriting firm whose Chairman and Chief Executive
Officer was a stockholder of the Company and at the time of the
offerings was also a director of the Company. In July 1992, the
underwriting firm also received warrants to purchase 490,000 shares of
common stock, initially exercisable at $14.85 per share, in exchange
for the cancellation of 137,000 warrants at an exercise price of $6.10
per share, issued in connection with the Company's private placement of
Series A preferred shares in January through April of 1992. The warrants
contain antidilution provisions that can increase the shares subject to
exercise and reduce the exercise price (See Note 6 of Notes to
Consolidated Financial Statements). The underwriting firm has
transferred 297,627 of its warrants to their Chairman, a former director
of the Company.
The Company had entered into a consulting agreement with a member of its
Board of Directors, which was terminated during fiscal 1994. The Company
incurred consulting expenses relating to this agreement of $122,000, in
fiscal 1994.
52
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
13. RELATED PARTY TRANSACTIONS:
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 fiscal 1996 the Company incurred
consulting expenses under the agreement of $41,000.
In May 1994, the Board of Directors authorized extension of warrants to
a board member for 16,393 shares of common stock originally expiring in
May 1994 for an additional four-year period at an exercise price of
$6.10 per share.
See Note 10 for discussion of related party transactions with Entergy
Enterprises, Inc.
14. QUARTERLY INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
1994 Fiscal Quarter Ended
-------------------------
June 30 September 30 December 31 March 31
------- ------------ ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 193 $ 426 $ 430 $ 640
Costs and expenses 6,551 7,000 7,176 15,530(1)
Loss from operations (6,358) (6,574) (6,746) (14,890)
Net loss (6,125) (6,384) (6,493) (14,577)
Net loss per share $ (0.34) $ (0.35) $ (0.33) $ (0.74)
<CAPTION>
1995 Fiscal Quarter Ended
-------------------------
June 30 September 30 December 31 March 31
------- ------------ ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 756 $ 515 $ 573 $ 836
Costs and expenses 7,524 7,284 7,804 7,379
Loss from operations (6,768) (6,769) (7,231) (6,543)
Net loss (6,632) (6,712) (7,172) (6,533)
Net loss per share $ (0.33 $ (0.34) $ (0.34) $ (0.30)
<CAPTION>
1996 Fiscal Quarter Ended
-------------------------
June 30 September 30 December 31 March 31
------- ------------ ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 1,908 $ 2,313 $ 278 $ 500
Costs and expenses 6,006 7,133 4,895 5,369
Loss from operations (4,098) (4,820) (4,617) (4,869)
Net loss (4,193) (4,984) (2,908)(2) (4,963)
Net loss per share $ (0.19) $ (0.21) $ (0.11) $ (0.16)
</TABLE>
(1) The fiscal quarter ended March 31, 1994 includes a $7,000,000
nonrecurring charge related to a license agreement (see Note 10). In
addition the quarter includes a $1,100,000 charge for an estimated
loss on a contractual obligation to provide products and services,
pursuant to a contract entered into in March 1994.
(2) The fiscal quarter ended December 31, 1995 includes a net gain of
$1,763,000 from litigation settlements.
53
<PAGE>
15. SUBSEQUENT EVENT:
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.
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.
54
<PAGE>
REPORT ON INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders
First Pacific Networks, Inc. and Subsidiaries
San Jose, California
Our report on the financial statements of First Pacific Networks, Inc. and
Subsidiaries is included on page 30 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed on page 30 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information required to be included
therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 17, 1996, except Note 15, as to which the date is June 20, 1996
55
<PAGE>
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. D COL. E
- - ------------------------------------------------------------------------------------------------------------------------------------
Additions
Description Balance at Balance
Beginning of Charged to costs Charged to Deductions - at End
Period and Expenses Other Accounts Describe of Period
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $264,000 $144,000 $408,000
Reserve for excess and obsolete inventory $3,659,000 $634,000 $4,293,000
Year ended March 31, 1995
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $141,000 $123,000 $264,000
Reserve for excess and obsolete inventory $2,562,000 $797,000 $300,000 (2) $3,659,000
Year ended March 31, 1994
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $128,000 $503,000 $490,000 (1) $141,000
Reserve for excess and obsolete inventory $2,135,000 $427,000 $2,562,000
</TABLE>
(1) Consists of $190,000 of uncollectible
accounts written off, net of recoveries
and $300,000 reclassified to deferred
revenue
(2) Reclassified from accrued expenses
56
<PAGE>
PART III
The information called for by Items 10, 11, 12 and 13 of Part III has been
omitted and will be included in the Registrant's proxy statement which will be
filed not later than 120 days after the close of its fiscal year.
57
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
An Index to Financial Statements and Financial
Statement Schedules appears on page 30.
Financial Statement Schedules appear on page 55.
All other financial statement schedules are omitted
because they are not applicable or the required
information is shown in the financial statements or
notes thereto.
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)
58
<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(9)
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.
59
<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 herewith.
(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.
(b) Reports on Form 8-K.
On March 23, 1996, the Company filed a Current Report on Form 8-K
dated March 8, 1996, reporting under Item 5 a private placement
of 3,900 shares of Series D Preferred Stock having a purchase
price of $3,900,000 in reliance on Regulation S under the
Securities Act of 1933, as amended.
(c) Exhibits - The response to this portion of Item 14 is submitted
as a separate section of this report.
(d) Financial Statement Schedules - The response to this portion of
Item 14 is submitted as a separate section and included on page
55 of this report.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: June 28, 1996 By: /s/ M. Peter Thomas
--------------- -----------------------------
M. Peter Thomas
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
/s/ Craig J. Brunet Chairman June 28, 1996
- - ----------------------------
Craig J. Brunet
/s/ M. Peter Thomas President, Chief Executive June 28, 1996
- - ---------------------------- Officer and Director
M. Peter Thomas (Principal Executive Officer)
/s/ Kenneth W. Schneider Executive Vice June 28, 1996
- - ---------------------------- President and Chief
Kenneth W. Schneider Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Robert P. McNamara Executive June 28, 1996
- - ---------------------------- Vice President,
Robert P. McNamara Chief Technical Officer
and Director
/s/ Bill B. May Director June 28, 1996
- - ----------------------------
Bill B. May
/s/ Paul C. O'Brien Director June 28, 1996
- - ----------------------------
Paul C. O'Brien
/s/ Samuel R. Dunlap Jr. Director June 28, 1996
- - ----------------------------
Samuel R. Dunlap
61
<PAGE>
Exhibit 3.7
CERTIFICATE OF DESIGNATION
OF
FIRST PACIFIC NETWORKS, INC.
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
----------------------
SERIES E. PREFERRED STOCK
First Pacific Networks, Inc., a Delaware corporation (the
"Corporation"), hereby certifies that the following resolution has been duly
adopted by the Board of Directors of the Corporation:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation (the "Board") by the
provisions of the Restated Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), there hereby is created, out of the 6,060,000
shares of Preferred Stock, par value $0.001 per share, of the Corporation
authorized in Article III of the Certificate of Incorporation (the "Preferred
Stock"), a series of the Preferred Stock of the Corporation consisting of 5,000
shares, which series shall have the following powers, designations, preferences
and relative, participating, optional and other rights, and the following
qualifications, limitations and restrictions:
1. DESIGNATION. The designation of the series of Preferred Stock
fixed by this resolution shall be "Series E Preferred Stock" (hereinafter
referred to as the "Series E Preferred Stock").
2. CONVERSION RIGHTS.
(a) RIGHT TO CONVERT. The total number of original shares of
Series E Preferred Stock acquired by any holder may be converted, at the option
of the holder thereof, at any time from and after the sixtieth (60th) day
following the date of original issuance thereof, without the payment of any
additional consideration therefor, into that number of fully paid and
nonassessable shares of common stock, $0.001 par value per share, of the
Corporation (the "Common Stock") as is determined by dividing (i) the sum of (a)
$1,000 plus (b) the amount of all declared but unpaid dividends on the shares of
Series E Preferred Stock being so converted by (ii) the Conversion
1
<PAGE>
Price (determined as hereinafter provided) in effect at the time of conversion.
The "Conversion Price" shall be equal to the lower of (i) $3.25 or (ii) eighty
percent (80%) of the average closing bid price of a share of Common Stock as
reported on the NASDAQ Small Cap Market (or, in the event that such security is
not traded on the NASDAQ Small Cap Market, such other national or regional
securities exchange or automated quotations system upon which the Common Stock
is listed and principally traded) over the three consecutive trading days
immediately preceding the date of the Conversion Notice (as defined in Section
2(b) hereof).
(b) MECHANICS OF CONVERSION. No fractional shares of Common
Stock shall be issued upon conversion of Series E Preferred Stock. If upon
conversion of shares of Series E Preferred Stock held by a registered holder
which are being converted, such registered holder would, but for the provisions
of this Section 2(b), receive a fraction of a share of Common Stock thereon,
then in lieu of any such fractional share to which such holder would otherwise
be entitled, the Corporation shall pay cash equal to such fraction multiplied by
the then effective Conversion Price. Before any holder of Series E Preferred
Stock shall be entitled to convert the same into full shares of Common Stock,
such holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for the
Series E Preferred Stock, and shall give written notice (the "Conversion
Notice") to the Corporation at such office that such holder elects to convert
the same and shall state therein such holder's name or the name or names of its
nominees in which such holder wishes the certificate or certificates for shares
of Common Stock to be issued. The Corporation shall, as soon as practicable
thereafter, but in any event within three business days of the date of its
receipt of the original Conversion
2
<PAGE>
Notice and the certificate or certificates representing the shares of Series E
Preferred Stock to be converted, issue and deliver or cause to be issued and
delivered to such holder of Series E Preferred Stock, or to its nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled, together with cash in lieu of any
fraction of a share. Such conversion shall be deemed to have been made on the
date that the Corporation first receives the Conversion Notice, by telecopier or
otherwise, and the person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date. Upon the
conversion of any shares of Series E Preferred Stock, such shares shall be
restored to the status of authorized but unissued shares of Preferred Stock and
may be reissued by the Corporation at any time.
(c) NOTICES OF RECORD DATE. In the event of (i) any declaration
by the Corporation of a record date of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend or other distribution or (ii) any capital reorganization of the
Corporation, any reclassification or recapitalization of the capital stock of
the Corporation, any merger or consolidation of the Corporation, and any
transfer of all or substantially all of the assets of the Corporation to any
other Corporation, or any other entity or person, or any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, the
Corporation shall mail to each holder of Series E Preferred Stock at least
twenty (20) days prior to the record date specified therein, a notice specifying
(A) the date on which any such record is to be declared for the purpose of such
dividend or distribution and a description of such dividend or distribution, (B)
the date on which any such reorganization,
3
<PAGE>
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective and (C) the time, if any, that is to
be fixed, as to when the holders of record of Common Stock (or other securities)
shall be entitled to exchange their shares of Common stock (or other securities)
for securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution or winding up.
(d) STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the
Corporation shall (i) take a record of holders of shares of the Common Stock for
the purpose of determining the holders entitled to receive a dividend payable in
shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock,
(iii) combine the outstanding shares of Common Stock into a smaller number of
shares or (iv) issue, by reclassification of the Common Stock, any other
securities of the Corporation, then, in each such case, the Conversion Price
then in effect shall be adjusted so that upon the conversion of each share of
Series E Preferred Stock then outstanding the number of shares of Common Stock
into which such shares of Series E Preferred Stock are convertible after the
happening of any of the events described in clauses (i) through (iv) above shall
be the number of such shares of Common Stock into which such shares of Series E
Preferred Stock would have been converted if so converted immediately prior to
the happening of such event or any record date with respect thereto.
(e) MANDATORY CONVERSION. If not sooner converted, all
outstanding shares of Series E Preferred Stock shall be subject to mandatory
conversion on the second anniversary of the date of original issuance thereof.
For purposes of clause (b) above, such second anniversary date shall be
4
<PAGE>
deemed to be the date on which the Corporation receives a Conversion Notice with
respect to the then outstanding shares of Series E Preferred Stock.
(f) COMMON STOCK RESERVED. The Corporation shall reserve and
keep available out of its authorized but unissued Common Stock such number of
shares of Common Stock as shall from time to time be sufficient to effect
conversion of all of the then outstanding shares of Series E Preferred Stock.
3. DIVIDEND RIGHTS OF SERIES E PREFERRED STOCK. Subject to the
dividend provisions fixed by the Board for any series of Preferred Stock
designated by the Board in the future, the holders of Series E Preferred Stock
shall be entitled to receive dividends, out of any assets at the time legally
available therefor, when and as declared by the Board. No cash dividends shall
be paid on any Common Stock unless at the same time a dividend is paid with
respect to all outstanding shares of Series E Preferred Stock in an amount for
each such share of Series E Preferred Stock equal to the aggregate amount of
such dividends payable on that number of shares of Common Stock into which each
such share of Series E Preferred Stock could then be converted on the date of
the declaration of the dividend assuming, if it is not otherwise the case, that
the Series E Preferred Stock was convertible at the option of the holders of
Series E Preferred Stock on such date pursuant to the provisions of Section 5(a)
below.
4. VOTING RIGHTS OF SERIES E PREFERRED STOCK. Except as otherwise
required by law, the holders of outstanding shares of Series E Preferred Stock
shall not be entitled to vote on any matters submitted to the stockholders of
the Corporation.
5. PREFERENCE ON LIQUIDATION. Subject to the liquidation
preferences of any series of Preferred Stock other than the Series E Preferred
5
<PAGE>
Stock, including, without limitation, any liquidation preferences that provides
for payments to any series of Preferred Stock or the Common Stock prior to or on
a parity with any payment to holders of the Series E Preferred Stock provided
for below (including any preferences that provide for additional parity or non-
parity payments to the holders of the Series E Preferred Stock), in the event of
any liquidation, dissolution or winding up of the Corporation, distributions to
holders of Series E Preferred Stock, holders of Series D Preferred Stock,
holders of Series C Preferred Stock, holders of Series B Preferred Stock,
holders of Series A Convertible Preferred Stock (the "Series A Preferred Stock")
and holders of Common Stock shall be made in the following manner:
(a) The holders of Series E Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Corporation to the holders of the Common Stock by reason of their ownership of
such stock, the amount of (i) $1,000 per share of each share of Series E
Preferred Stock then held by them, adjusted for any stock split, stock
combination, stock distribution or stock dividend with respect to such shares
and (ii) an amount equal to all declared but unpaid dividends on the Series E
Preferred Stock as provided in Section 2 above. The Series E Preferred Stock
shall rank on a parity with the Series A Preferred Stock with respect to Article
III, Section A.4 of the Certificate of Incorporation (the "Series A Liquidation
Section"), Section 3 of the Certificate of Designation of the Series C Preferred
Stock (the "Series C Liquidation Section") and Section 3 of the Certificate of
Designation of the Series D Preferred Stock (the "Series D Liquidation
Section"), as to the distribution of assets and funds upon dissolution,
liquidation or winding up of the Corporation, with the
6
<PAGE>
effect stated in the Series A Liquidation Section, the Series C Liquidation
Section and the Series D Liquidation Section.
(b) After payment in full to (i) the holders of Series E
Preferred Stock of all amounts exclusively payable on or with respect to said
shares pursuant to Section 3(a) above, (ii) the holders of the Series D
Preferred Stock of all amounts exclusively payable on or with respect to said
shares pursuant to the Series D Liquidation Section, (iii) the holders of the
Series C Preferred Stock of all amounts exclusively payable on or with respect
to said shares pursuant to the Series C Liquidation Section and (iv) the holders
of Series A Preferred Stock of all amounts exclusively payable on or with
respect to said shares pursuant to the Series A Liquidation Section, the holders
of the Common Stock and Series B Preferred Stock shall be entitled to receive
the remaining assets of the Corporation available for distribution to the
stockholders upon the dissolution, liquidation or winding up of the Corporation.
If the assets and funds available for distribution among the holders of the
Common Stock and among the holders of the Series B Preferred Stock or of any
other series of Preferred Stock ranking on a parity with the Common Stock with
respect to this Section 3(b) as to the distribution of assets upon such
dissolution, liquidation or winding up shall be insufficient to permit the
payment to such holders of their full liquidation payments, then the entire
remaining assets and funds of the Corporation legally available for such
distribution shall be distributed ratably among such holders in proportion to
their aggregate preferential amounts.
(c) A consolidation or merger of the Corporation with or into
another corporation or entity in a transaction involving the disposition of more
than fifty percent (50%) of other voting power of the Corporation, or a sale of
all or substantially all of the assets of the Corporation (a "Sale
7
<PAGE>
of the Corporation") shall be regarded as a dissolution, liquidation or winding
up of the Corporation within the meaning of this Section 3. The Corporation
shall not consummate a Sale of the Corporation before the expiration of ten (10)
days after mailing written notice of the proposed Sale of the Corporation to the
holders of record of the Series E Preferred Stock (the "Sale of the Corporation
Notice").
6. REDEMPTION RIGHTS. (a) In the event that the Corporation has
issued 5,000,000 or more shares of Common Stock upon the conversion of shares to
Series E Preferred Stock, the Corporation shall have the right to redeem the
remaining outstanding shares of Series E Preferred Stock, in whole or in part,
at a cash redemption price equal to the sum of (i) $1,000 per share, (ii) the
amount of all accrued but unpaid dividends with respect to the shares being
redeemed and (iii) an amount equal to twenty-five percent (25%) of the aggregate
amount referred to in clauses (i) and (ii) (collectively, the "Cash Redemption
Price"); provided, however, that the Corporation shall not be entitled to redeem
any shares of Series E Preferred Stock unless it has given the holder of such
shares written notice of such redemption (the "Redemption Notice") prior to the
date that the holder submits a Conversion Notice with respect to such shares.
In the event that the Corporation delivers a timely Redemption Notice, the Cash
Redemption Price will be paid to the holder of the shares to be redeemed within
five (5) business days of the date of the Redemption Notice, by certified or
official bank check, upon the surrender of the certificate(s) representing the
shares of Series E Preferred Stock being so redeemed.
(b) If after 60 days from the date of issuance of the Series E
Preferred Stock, the average closing bid price of the Common Stock of the
Corporation is less than $3.25 for a period of 5 consecutive trading days, the
8
<PAGE>
Corporation shall have the right to redeem the outstanding shares of Series E
Preferred Stock, in whole or in part, at the Cash Redemption Price; provided,
however, that the Corporation shall be required to give the holder of such
shares 10 days prior written notice of such redemption (the "Notice Period").
In addition, the holder shall have the right, at any time during the Notice
Period, to elect to convert such holder's shares of Series E Preferred Stock by
submitting a Conversion Notice to the Corporation in accordance with the terms
of Section 2(b) hereof. In the event that the holder does not elect to convert
such shares during the Notice Period, the Cash Redemption Price will be paid to
the holder of the shares to be redeemed within five (5) business days of the
date of the Redemption Notice, by certified or official bank check, upon the
surrender of the certificate(s) representing the shares of Series E Preferred
Stock being so redeemed.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its President, and attested by its Secretary, this
30th day of May, 1996.
FIRST PACIFIC NETWORKS, INC.
By: /s/ M. Peter Thomas
-------------------
M. Peter Thomas
President
Attest:
By: /s/ Kenneth W. Schneider
------------------------
Kenneth W. Schneider
Corporate Secretary
9
<PAGE>
Exhibit 4.6
REGULATION S SECURITIES SUBSCRIPTION AGREEMENT
FIRST PACIFIC NETWORKS INC.
THE SECURITIES WHICH ARE THE SUBJECT OF THIS SUBSCRIPTION AGREEMENT HAVE
NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION IN
RELIANCE ON THE TRANSACTIONAL SAFE HARBOR FROM REGISTRATION AFFORDED BY
REGULATION S PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL.
This Regulation S Securities Subscription Agreement (the "Agreement") is
executed by the undersigned (the "Subscriber") in connection with the offer and
the subscription of the undersigned to purchase an aggregate of 2,500 shares
(the "Shares") of Series E Preferred Stock, par value $0.001 per share, of First
Pacific Networks Inc., a Delaware corporation (the "Company"), at a price of US
$1,000 per share, which Shares are convertible into shares of common stock, par
value $0.001 per share (the "Common Stock" and together with the Shares, the
"Securities"), of the Company. The terms and provisions of the Shares are set
forth in the Certificate of Designation attached hereto as Exhibit A. This
Agreement and the offer and sale of the Securities contemplated hereby are being
made in reliance upon the provisions of Regulation S ("Regulation S") under the
Securities Act of 1933, as amended (the "Act"). The Subscriber, in order to
induce the Company to enter into the transaction contemplated hereby and
acknowledging that the Company will rely thereon represents, warrants and agrees
as follows:
OFFER TO SUBSCRIBE; PURCHASE PRICE. The Subscriber hereby offers to
purchase and subscribes for the Shares for an aggregate price of $__________.
The closing of the transactions contemplated hereby (the "Closing") shall be
deemed to occur when this Agreement has been executed by both Subscriber and
Company. Payment shall be made at the Closing by delivering immediately
available funds in United States dollars by wire transfer for simultaneous
closing by delivery of securities versus payment. The Company agrees to deliver
certificates representing the Shares subscribed for at the Closing. The date on
which the Closing occurs is hereafter referred to as the Closing Date.
1
<PAGE>
SUBSCRIBER REPRESENTATIONS; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION
OFFSHORE TRANSACTION. Subscriber represents and warrants to
the Company that (i) Subscriber is not a "U.S. person" as that term is defined
in Rule 902(o) of Regulation S; (ii) the Subscriber is not, and on the Closing
Date will not be, an affiliate of the Company; (iii) at the execution of this
Subscription Agreement, Subscriber was outside the United States and no offer to
purchase the Securities was made in the United States; (iv) the Subscriber
agrees that all offers and sales of the Securities prior to the expiration of a
period commencing on the Closing and ending forty (40) days thereafter
(the"Restricted Period") shall not be made to U.S. persons or for the account or
benefit of U.S. persons and shall otherwise be made in compliance with the
provisions of Regulation S; (v) Subscriber is not a distributor or dealer;
(vi) the transactions contemplated hereby (a) have not been and will not be pre-
arranged by the Subscriber with a purchaser located in the United States or a
purchaser which is a U.S. Person, and (b) are not and will not be part of a plan
or scheme by the Subscriber to evade the registration provisions of the Act;
(vii) the Subscriber shall take all reasonable steps to ensure its compliance
with Regulation S and shall promptly send to each purchaser (x) who acts as a
distributor, underwriter, dealer or other person participating pursuant to a
contractual arrangement in the distribution of the Securities or receiving a
selling concession, fee or other remuneration in respect of any of the
Securities, or (y) who purchases prior to the expiration of the Restricted
Period, a confirmation or other notice to the purchaser stating that the
purchaser is subject to the same restrictions on offers and sales as the
Subscriber pursuant to Section 903(c)(2)(iv) of Regulation S; and (viii) none of
the Subscriber, its affiliates or persons acting on their behalf have conducted
and shall not conduct any "directed selling efforts" as that term is defined in
Rule 902(b) of Regulation S; nor has the Subscriber, its affiliates or persons
acting on their behalf have conducted any general solicitation relating to the
offer and sale of any of the Securities in the United States or elsewhere.
BENEFICIAL OWNER. Subscriber is purchasing the Shares for
its own account or for the account of beneficiaries for whom Subscriber has full
investment discretion with respect to the Securities and whom Subscriber has
full authority to bind, so that each such beneficiary is bound hereby as if such
beneficiary were a direct Subscriber hereunder and all representations,
warranties and agreements herein were made directly by such beneficiary and not
with a view to or for sale in connection with any distribution of the Shares.
DIRECTED SELLING EFFORTS. Subscriber will not engage in any
activity for the purpose of, or that could reasonably be expected to have the
effect of, conditioning the market in the United States for any of the Shares
sold hereunder. To the best knowledge of the Subscriber, neither the Company
nor any person acting for the Company has conducted any "directed selling
efforts" as that term is defined in Rule 902 of Regulation S.
SHORT POSITION. Neither Subscriber nor any of its
affiliates will directly or indirectly maintain any short position in any
securities of the Company until after the end of the Restricted Period.
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INDEPENDENT INVESTIGATION. Subscriber in electing to
subscribe for the Shares hereunder, has relied solely upon the representations
and warranties of the Company set forth in this Agreement and on independent
investigation made by it and its representatives, if any, and Subscriber has
been given no oral or written representations or assurance from the Company or
any representation of the Company other than as set forth in this Agreement or
in a document executed by a duly authorized representative of the Company making
reference to this Agreement. Subscriber has business or financial experience
sufficient to enable Subscriber to protect its own interests in connection with
the transactions contemplated by this Agreement.
NO GOVERNMENT RECOMMENDATION OR APPROVAL. Subscriber
understands that no United States federal or state agency, or similar agency of
any other country, has passed upon or made any recommendation or endorsement of
the Company, this transaction or the purchase of the Shares.
ADDITIONAL FINANCING. The Subscriber acknowledges that the
Company is experiencing negative cash flow from operations and is actively
exploring financing alternatives in addition to the private placement of the
Shares under Regulation S and that there can be no assurance that such financing
will be available when required or that if available, any such financing will be
on terms satisfactory to the Company.
THE COMPANY REPRESENTS, COVENANTS AND WARRANTS THE FOLLOWING:
REPORTING COMPANY STATUS. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is duly qualified as a foreign corporation in all jurisdictions in
which the failure to so qualify would have a material adverse effect on the
Company and its subsidiaries taken as a whole. The Company is a "Reporting
Issuer" as defined by Rule 902 of Regulation S. The Company has registered its
Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Common Stock is listed and trades on the
NASDAQ Small Cap Market. The Company has filed all material required to be
filed pursuant to all reporting obligations under either Section 13(a) or 15(d)
of the Exchange Act for a period of at least twelve (12) months immediately
preceding the offer or sale of the Securities (or for such shorter period that
the Company has been required to file such material).
CONCERNING THE SECURITIES. The issuance, sale and delivery
of the Shares and the shares of Common Stock issuable upon the conversion
thereof are within the Company's corporate powers and have been duly authorized
by all required corporate action on the part of the Company and its stockholders
and when such securities are issued, sold and delivered in accordance with the
terms hereof and the Shares for the consideration expressed herein and in the
Shares, such securities will be duly and validly issued, fully paid and
nonassessable. There are no preemptive rights of any stockholders of the
Company.
OFFSHORE TRANSACTION. The Company has not offered or sold
the Shares to any person in the United States, or, to the best knowledge of the
Company, any identifiable groups of U.S. citizens abroad, or any U.S. person as
that term is defined in Regulation S. At the time the buy order for
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the Shares was originated the Company and/or its agents reasonably believed
Subscriber was outside the United States and was not a U.S. person.
PREARRANGED SALE. The Company and/or its agents believe
that the transaction contemplated hereby has not been pre-arranged with a buyer
in the United States.
NO DIRECTED SELLING EFFORTS. The Company has not conducted
any "directed selling efforts" as that term is defined in Rule 902 of Regulation
S nor has Company conducted any general solicitation relating to the offer and
sale of the Shares to persons resident within the United States or any other
U.S. person as that term is defined in Rule 902 of Regulation S.
SUBSCRIPTION AGREEMENT. This Agreement has been duly
authorized, validly executed and delivered on behalf of the Company and is a
valid and binding agreement enforceable against the Company in accordance with
its terms, subject to general principles of equity and to bankruptcy or other
laws affecting the enforcement of creditors' rights generally.
NON-CONTRAVENTION. The execution and delivery of this
Agreement and the consummation of the issuance of the Shares and the
transactions contemplated by this Agreement and the Shares do not and will not
conflict with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default under, the certificate of incorporation
or bylaws of the Company, or any indenture, mortgage, deed of trust, or other
material agreement or instrument to which the Company is a party or by which it
or any of its properties or assets are bound, or any existing applicable law,
rule or regulation of the United States of any State thereof or any applicable
decree, judgment or order of any Federal or State court, Federal or State
regulatory body, administrative agency or other United States governmental body
having jurisdiction over the Company or any of its properties or assets.
1 LITIGATION. There is no action, suit or proceeding before
or by any court or governmental agency or body, domestic or foreign, now pending
or, to the knowledge of the Company, threatened, against or affecting the
Company, or any of its properties, which might result in any material adverse
change in the condition (financial or otherwise) or in the earnings, business
affairs or business prospects of the Company, or which might materially and
adversely affect the properties or assets thereof.
2 NO DEFAULT. Except as disclosed in the Company's filings
with the Securities and Exchange Commission, the Company is not in default in
the performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it or its property
may be bound; and neither the execution, nor the delivery by the Company, nor
the performance by the Company of its obligations under this Agreement or the
Shares will conflict with or result in the breach or violation of any of the
terms or provisions of, or constitute a default or result in the creation or
imposition of any lien or charge on any assets or properties of the Company
under, any material indenture, mortgage, deed of trust or other material
agreement or instrument to which the Company is a party or by which it is bound
or any statute or the certificate of
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incorporation or bylaws of the Company, or any decree, judgment, order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Company or its properties.
3 SEC FILINGS. None of the Company's filings with the
Securities and Exchange Commission since January 1, 1995 contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statement therein in light of the
circumstances under which they were made, not misleading at the time such
filings were made. The Company has since January 1, 1995 timely filed all
requisite forms, reports and exhibits thereto with the Securities and Exchange
Commission.
4 FULL DISCLOSURE. There is no fact known to the Company
(other than general economic conditions known to the public generally) that has
not been disclosed in writing to the Subscriber that (i) could reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise) or in the earnings, business affairs, business prospects, properties
or assets of the Company or (ii) could reasonably be expected to materially and
adversely affect the ability of the Company to perform its obligations pursuant
to this Agreement.
2COVENANTS OF THE COMPANY. For so long as any Shares held by the
Subscriber remain outstanding, the Company covenants and agrees with the
Subscriber that:
(a) It will use its best efforts to maintain the listing of its
Securities on the NASDAQ Small Cap Market.
(b) Except as otherwise expressly provided in Section 6 below,
it will not issue stop transfer instructions to its transfer agent with respect
to and will not place a restrictive legend on the certificates representing the
Shares or the shares of Common Stock issuable upon the conversion thereof.
(c) It will permit the Subscriber to exercise its right to
convert the Shares by telecopying an executed and completed Notice of Conversion
to the Company and delivering the original Notice of Conversion and the
certificate representing the Shares to the Company by express courier. Each
date on which a Notice of Conversion is telecopied to the Company in accordance
with the provisions hereof shall be deemed a Conversion Date. The Company will
transmit the certificates representing shares of Common Stock issuable upon
conversion of any Shares (together with the certificates representing the Shares
not so converted) to the Subscriber via express courier, by electronic transfer
or otherwise, within three business days after receipt by the Company of the
original Notice of Conversion and the certificate representing the Shares to be
converted (the "Delivery Date"). If, after three business days after the
Delivery Date, the Company has not delivered such shares of Common Stock in
accordance with the provisions of this Section 4, the Subscriber shall be
entitled to receive a penalty in an amount in cash equal to $30.00 per day for
each $50,000 face amount of Shares being so converted until the earlier of the
date of delivery of such shares of Common Stock or the revocation of the Notice
of Conversion as set forth below. In addition to any other remedies which may
be available to the Subscriber,
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in the event that the Company fails for any reason to effect delivery of such
shares of Common Stock within five business days after the Delivery Date, the
Subscriber will be entitled to revoke the relevant Notice of Conversion by
delivering a notice to such effect to the Company whereupon the Company and
the Subscriber shall each be restored to their respective positions
immediately prior to delivery of such Notice of Conversion.
3RESTRICTIONS ON CONVERSION OF SECURITIES. The Subscriber or any
subsequent holder of the Shares (the "Holder") shall be prohibited from
converting any portion of the Shares which would result in the Subscriber or the
Holder being deemed the beneficial owner, in accordance with the provisions of
Rule 13d-3 of the Securities Exchange Act of 1934, as amended, of five percent
(5%) or more of the then issued and outstanding Common Stock of the Company.
4SECURITIES TO BE ISSUED WITHOUT RESTRICTIVE LEGEND. All Shares issued
pursuant to this Agreement and all shares of Common Stock issuable upon
conversion of the Shares shall be issued without restrictive legend, in the name
of the Subscriber. The Company warrants that no stop transfer instructions,
other than with respect to transfers to U.S. Persons of the certificates
representing such Shares during the Restricted Period, have been given or will
be given and that from and after the expiration of the Restricted Period the
Shares and the shares of Common Stock issuable upon the conversion thereof shall
be freely transferable on the books and records of the Company. Nothing in this
Section 6, however, shall affect in any way the Subscriber's obligations and
agreements to comply with all applicable securities laws upon resale of the
Securities.
5RELIANCE ON REPRESENTATIONS. The Subscriber understands that the offer
and sale of the Shares are not being registered under the Act. The Company and
the Subscriber are relying on the rules governing offers and sales made outside
the United States pursuant to Regulation S.
6RESALES. Subscriber acknowledges and agrees that the Securities may only
be resold (a) in compliance with Regulation S; (b) pursuant to a Registration
Statement under the Act; or (c) pursuant to an exemption from registration under
the Act other than Regulation S.
7CONFIDENTIALITY. Each of the Company and the Subscriber agrees to keep
confidential and not to disclose to or use for the benefit of any third party
any information which at any time is communicated by the other party as being
confidential without the prior written approval of the other party; provided,
however, that this provision shall not apply to information which, at the time
of disclosure, is already part of the public domain (except by breach of this
Agreement) and information which is required to be disclosed by law.
8INDEMNIFICATION. Each of the Company and the Subscriber agrees to
indemnify the other and to hold the other harmless from and against any and all
losses, damages, liabilities, costs and expenses (including reasonable
attorneys' fees) which the other may sustain or incur in connection with the
breach by the indemnifying party of any representation, warranty or covenant
made by it in this Agreement.
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9REGISTRATION. After the expiration of the Restricted Period, if the
Company fails to issue to the Subscriber or the Subscriber's transferees
certificates for shares of Common Stock issuable upon conversion of the Shares
bearing no restrictive legend and free of stop transfer instructions for any
reason other than the Company's reasonable good faith belief that the
representations and warranties made by the Subscriber in this Agreement were
untrue when made, then the Company shall be required, at the request of the
Subscriber and at the Company's expense, to effect the registration of such
shares of Common Stock under the Act, and relevant Blue Sky laws as promptly as
is practicable. The Company and the Subscriber shall cooperate in good faith in
connection with the furnishing of information required for such registration and
the taking of such other actions as may be legally or commercially necessary in
order to effect such registration. The Company shall file a registration
statement within 30 days of Subscriber's written demand therefor and shall use
its best efforts to cause such registration statement to become effective as
soon as practicable thereafter. Such best efforts shall include, but not be
limited to, promptly responding to all comments received from the staff of the
Securities and Exchange Commission, providing Subscriber's counsel with a
contemporaneous copy of all written communications from and to the staff of the
Securities and Exchange Commission with respect to such registration statement
and promptly preparing and filing amendments to such registration statement
which are responsive to the comments received from the staff of the Securities
and Exchange Commission. Once declared effective by the Securities and Exchange
Commission, the Company shall cause such registration statement to remain
effective until the earlier of (i) the sale by the Subscriber of all shares of
Common Stock so registered or (ii) 120 days after the effective date of such
registration statement. In the event that the Company has not effected the
registration of such shares of Common Stock under the Act and relevant Blue Sky
Laws within 90 days after the date of the Subscriber's demand therefor, the
Company shall pay in the aggregate to the Subscriber(s) by wire transfer, as
liquidated damages for such failure and not as a penalty, an amount in cash
equal to $100,000. Such payment shall be made to the Subscriber(s) immediately
upon expiration of the 90-day period referenced in the preceding sentence if the
registration of such shares of Common Stock is not effected by such date;
provided, however, that the payment of such liquidated damages shall not relieve
the Company from its obligations to register such shares of Common Stock
pursuant to this Section 11.
10NOTICES. Any notice to be given or to be served upon any party to this
Agreement in connection with this Agreement must be in writing and will be
deemed to have been given and received upon confirmed receipt, if sent by
facsimile, or two (2) days after it has been submitted for delivery by Federal
Express or an equivalent carrier, charges prepaid and addressed to the following
addresses with a confirmation of delivery:
If to the Company, to:
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If to the Subscriber, to:
Any party may, at any time by giving notice to the other party,
designate any other address in substitution of an address established pursuant
to the foregoing to which such notice will be given.
11MULTIPLE COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which will be deemed to be an original but all of which
will constitute one in the same instrument. However, in enforcing any party's
rights under this Agreement it will be necessary to produce only one copy of
this Agreement signed by the party to be charged.
12CERTAIN AGREEMENTS. The Company covenants and agrees that it will not
(i) enter into any subsequent Regulation S transaction with any third party for
a period of 60 days or (ii) enter into any subsequent Regulation S transaction
with any third party within a period of 30 days following the foregoing 60-day
period without first offering the Subscriber the opportunity (which shall remain
open for a period of ten business days from the date the Subscriber receives
notice thereof) to purchase up to all of such additional Regulation S securities
(in the discretion of the Subscriber) on the terms and provisions on which the
Company proposes to offer such additional Regulation S securities to such third
parties. In the event that the Subscriber declines to participate in any such
investment, the Company shall provide the Subscriber with prompt written notice
of the consummation of any such transaction with a third party, specifying the
material terms thereof.
13GOVERNING LAW. This Agreement will be construed and enforced in
accordance with and governed by the laws of the State of Delaware, except for
matters arising under the Act, without reference to principles of conflicts of
law.
14BROKERS. Other than with respect to PVH Fund Management Limited, the
Company is not subject to any claim for commission or remuneration by any
broker, finder or other person in connection with the transactions contemplated
hereby.
15MANDATORY CONVERSION. The parties hereto acknowledge that the Shares are
subject to mandatory conversion as set forth in the Certificate of Designation.
16LIQUIDATED DAMAGES. In the event that the Company fails for any reason to
effect delivery of the shares of Common Stock issuable upon conversion within
the required time period set forth in Section 4 hereof, the parties agree that
the amount of damages sustained by Subscriber would be substantial but would be
difficult to determine precisely, accordingly, the Subscriber will be entitled
to receive, as liquidated damages for such failure and not as a penalty, an
amount in cash equal to the number of shares of Common Stock to which the
Subscriber would have been entitled on the date of the Conversion
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Notice multiplied by the closing bid price for the Common Stock of the
Company on the third day following such date.
The Subscriber hereby subscribes for ________ Shares and herewith
agrees to tender funds in the amount of _________________________________ United
States Dollars ($___________).
The Subscriber acknowledges that this Agreement shall not be effective
unless and until accepted by the Company as indicated below.
Dated this ____ day of May, 1996.
(Investor)
By: _______________________________
Name:
Title:
THIS SUBSCRIPTION IS ACCEPTED BY THE COMPANY ON THE ____ DAY OF MAY,
1996.
FIRST PACIFIC NETWORKS INC.
By: ________________________________
Name:
Title:
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Exhibit 10.40
CONSULTING AGREEMENT
WITH
CRAIG J. BRUNET
THIS AGREEMENT, effective as of February 1, 1996, is entered into by and
between First Pacific Networks, Inc., a Delaware corporation with a business
address of 871 Fox Lane, San Jose, California, 95131 ("Company"), and Craig J.
Brunet and/or the Lewisberg Group ("Consultant") with a business address of 228
Esquinance Street, Mandeville, Louisiana, 70448.
WHEREAS, Company is in the business of selling and licensing voice, video
and data transmission products and desires to secure Consultant as an
independent contractor to provide consulting services to Company; and
WHEREAS, Consultant desires to provide consulting services for Company on
the terms and conditions as set forth in this Agreement;
NOW, THEREFORE, in condition of the foregoing and of the material promises
and conditions contained in this Agreement, the parties agree as follows:
1. DEFINITIONS.
For the purpose of this Agreement:
a) "Information" shall mean any and all discoveries, ideas, facts,
or any other information relating to the operations of Company's
business, of whatever type and in whatever form, which is
disclosed or otherwise made available to Consultant by Company
in confidence, including, but not limited to, all information
relating to technical, financial, personnel, sales, customers
and scientific matter of Company, and any other discoveries,
ideas, business plans, or facts relating to any of the
foregoing, whether developed by Consultant or others;
b) "Trade Secrets" shall mean any and all information that derives
independent economic value, actual or potential, from not being
generally known to persons who can obtain economic value from
its disclosure or use, and that is the subject of reasonable
efforts by Company to maintain its secrecy;
c) "Inventions" shall mean any and all inventions, improvements,
discoveries and technical developments that Consultant, solely
or jointly with others, conceives, makes or reduces to practice
within the scope of the work under the Agreement, including all
work products which result from the performance of Consultant's
services.
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2. SERVICES.
Consultant agrees to perform for the Company services, including
without limitation, the services listed in the Scope of Service
Section in Exhibit "A". Such services are hereinafter referred to as
"Services". Said services may be modified by the Company.
3. INDEPENDENT CONTRACTOR.
Consultant shall at all times be an independent contractor with the
Company. The Company is interested in the results obtained by
Consultant, who shall have control of the manner and means of
performing Consultant's obligations hereunder. Consultant is not an
employee nor an agent of the Company for any purpose whatsoever.
Consultant shall be responsible for any and all taxes, and/or
penalties assessed by reason of any claims that Consultant is deemed
an employee of the Company. Company and Consultant specifically
agree that Consultant is not an employee of Company and shall not
accrue any benefits that would normally inure with employee status.
Consultant warrants that he/she carries insurance for property
damage and public liability for him/herself in an amount as may be
required by Company and pays any legally required withholding taxes.
Consultant shall not file any worker's compensation claims against
Company. Consultant shall not enter into any agreement or obligation
on behalf of the Company without prior written approval from the
Company. Absent written prior approval, Consultant shall not have
any authority to act for or to bind the Company in any way, to sign
in the name of the Company or to represent that Company is in any way
responsible for the acts of omissions of Consultant.
Consultant's Services need not be performed on consecutive days or
limited to specific calendar days. Consultant shall not have the
right to assign this Agreement nor subcontract the performance of
services.
4. CONSULTANT'S RECORDS.
For the period of this Agreement, Consultant shall submit a monthly
status report to the Company and a monthly billing statement.
5. RATE OF PAYMENT FOR SERVICES.
a) Company agrees to pay Consultant for Services in accordance with
the schedule contained in Exhibit "B", attached hereto.
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b) The payments under this section shall constitute Consultant's
sole compensation for the performance of Consultant's Services
under this Agreement.
c) Company agrees to pay consultant for services no later than
fifteen (15) working days following receipt of monthly billing
statement.
6. TERMS AND TERMINATION.
a) The term of this Agreement shall be for a period commencing
February 1, 1996, and terminating on January 31, 1997 unless
extended to additional periods of time upon mutual agreement by
the parties in writing.
b) Consultant agrees that the obligations of Paragraphs 7 and 8
shall survive any termination or expiration of the Agreement.
7. CONFIDENTIAL INFORMATION; ASSIGNMENT OF INVENTIONS.
a) Consultant acknowledges that all Information and Trade Secrets
which the Company discloses to Consultant pursuant to this
Agreement, or prior thereto as an employee, is confidential and
proprietary to Company or others who have disclosed the
Information to the Company. During the term of this Agreement
and thereafter, Consultant shall not use or exploit the
Information or disclose the Information to any third party,
except insofar as is necessary to perform Consultant's
obligations under the Agreement or where specifically authorized
in writing by Company.
b) Upon termination of this Agreement for any reason whatsoever or
upon Company's request, Consultant shall promptly deliver to
Company all documents, material and property in Consultant's
possession or control (such as drawings, manuals, notebooks,
reports, sketches, records, computer programs, employee lists,
customer lists and the like), whether delivered to Consultant by
Company or made by Consultant in the performance of Services
under this Agreement, relating to the business activities of
Consultant or its customers or suppliers, and containing any
information or data whatsoever, whether or not it is
confidential.
c) Consultant warrants and represents that Consultant is subject to
no contractual obligations or restraints which will interfere
with Consultant's right or ability to perform Consultant's
obligations as described in this Agreement or which could cause
any conflict of interest. Consultant further warrants that the
performance of Services,
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as contemplated by this Agreement does not infringe upon a
patent, copyright, major work or trademark and does not violate
a trade secret or other intellectual property right of a third
party.
d) Consultant agrees that the Company is the sole owner of any and
all property rights in Inventions, including, but not limited
to, the right to use, sell, license or otherwise transfer or
exploit the Inventions, and the right to make such changes in
them and the uses thereof as Company may from time to time
determine. Consultant agrees to disclose promptly in writing
to Company ever Invention. Consultant hereby assigns to
Company, without further consideration, Consultant's entire
right, title , and interest worldwide, free and clear of all
liens and encumbrances, in ad to all Inventions, which shall be
sole property of Company as provided to Section 2860 of the
California Labor Code. Consultant also agrees to cooperate
with Company both during and after the term of this Agreement
in evidencing, maintaining, defending, obtaining and
enforcing patents, copyright, and other protecting of Company's
right to Inventions. In the event that Company is unable for
any reason whatsoever to secure Consultant's signature to any
lawful and necessary document required to apply for or execute
any patent, copyright or other applications with respect to any
Inventions (including improvements, renewals, extensions,
continuations, divisions or continuations in part thereof),
Consultant hereby irrevocably designates and appoints Company
an its duly authorizedd officers an agents as his agents and
attorneys-in-fact to act for an in his behalf and instead of
Consultant, to execute and file such application and to do all
other lawfully permitted acts to further the prosecution and
issuance of patents, copyrights and other rights thereon with
the same legal force and effect as if executed by Consultant.
As provided in Section 2870 of the California Labor Code, this
Section 7(d) does not apply to any Inventions:
i. for which no equipment, supplies, facility, or Trade
Secrets of Company were used; and
ii. which was developed entirely on Consultant's own time;
and
iii. which does not relate at the time of conception or
reduction to practice to Company's current business or
its actual or demonstrably anticipated research or
development, or which does not result from any work
performed by Consultant for Company.
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8. INDEMNIFICATION.
Consultant agrees to indemnify, defend and hold Company harmless from
and against any liability or claim that may be incurred or demanded of
Company arising from any taxing agency or as a result of negligence,
improper conduct or intentional acts or omissions by Consultant or
due to any claims of any kind against Company by any of Consultant's
Agents.
9. ARBITRATION.
Any controversy between Company and Consultant or between any
employee of Company and Consultant, including, but not limited to,
those involving the construction or application of any of the terms,
provisions or conditions of the Agreement or otherwise arising out of
or relating to this Agreement, shall be settled by binding
arbitration in accordance with the then-current commercial
arbitration rules of the American Arbitration Association, and
judgment on the award rendered by the arbitration(s) may be rendered
b any court having jurisdiction hereof. Company and Consultant shall
share the costs of the arbitrator equally but shall each bear their
won costs and legal fees associated with the arbitration. The
location of the arbitration shall be in Santa Clara County,
California.
10. MODIFICATION.
Notwithstanding anything to the contrary, any modification of this
Agreement will be effective only if it is in writing and signed by
the parties to be bound thereby.
11. ENTIRE AGREEMENT.
This Agreement including Exhibits A, B and C, constitutes the entire
agreement save and except for the "Proprietary Rights and
Confidentiality Agreement" executed by Consultant concurrent herewith
between Company and Consultant, pertaining to the subject matter
hereof, and supersedes all prior or contemporaneous written or verbal
agreements and understandings with Consultant in connection with the
subject matter hereof. The parties acknowledge that all employment
agreements, including without limitation, that agreement dated June
26, 1995, is rescinded and of no force and effect.
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12. GOVERNING LAW.
This Agreement and the rights and obligations hereunder shall be
governed by the laws of California, and the parties to the Agreement
specifically consent to the jurisdiction of the courts of California
over any action arising out of or related to this Agreement and
further agree that the proper venue shall be Santa Clara County.
13. SEVERABILITY.
If any provision of this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall, nevertheless, continue in full force and effect
without being impaired or invalidated in any way.
14. WAIVER.
The parties hereto shall not be deemed to have waived any of their
respective rights under this Agreement unless the waiver is in
writing and signed by such waiving party. No delay in exercising
any right shall be a waiver nor shall a waiver on one occasion
operate as a waiver of such right on a future occasion.
15. NOTICES.
All notices provided for herein shall be in writing and shall be
deemed to have given when delivered personally, when deposited in the
United States mail, registered or certified, postage prepaid, sent by
facsimile or when delivered to a telegraph company, addressed as
follows:
To Company: First Pacific Networks, Inc.
Attention: Human Resources
871 Fox Lane
San Jose, CA 95131
Fax: (408) 943-7666
To Consultant: Craig J. Brunet
The Lewisberg Group
228 Esquinance Street
Mandeville, LA 70448
Fax: (504) 674-2005
or at such addresses as either of said parties may from time to time in writing
appoint.
6
<PAGE>
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION
WHICH MAY BE ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized officers or agents.
FIRST PACIFIC NETWORKS, INC. CRAIG J. BRUNET
THE LEWISBERG GROUP
SSN or Tax ID#: ###-##-####
-------------
Signed:/s/ M. Peter Thomas Signed:/s/ Craig J. Brunet
------------------- -------------------
Name: M. Peter Thomas Name: Craig J. Brunet
------------------ -------------------
Title: Chief Executive Officer
--------------------------
Date: Date:
------------------------ --------------------
7
<PAGE>
EXHIBIT A
INITIAL SCOPE OF SERVICES
1. Consultant will serve as an Executive Advisor to the Company's Board of
Directors and Chief Executive Officer.
2. Consultant will seek to identify and introduce Company to private parties
who may be interested in an equity investment in Company. Consultant
agrees, upon request of Company, to supply Company, from time to time, a
written list of "introduced parties" which shall be subject to Company's
approval.
3. Consultant shall have no authority to commit Company on any issue. Nothing
contained in this Agreement shall create any partnership, joint venture or
other form of fiduciary relationship.
4. All plans, along with travel, must be pre-approved. Company will reimburse
Consultant for all reasonable and generally accepted business and travel
expenses incurred in this engagement within five (5) business days from
submittal of an expense report by Consultant.
8
<PAGE>
EXHIBIT B
RATE AND TERMS OF PAYMENT
1. Company agrees to pay Consultant $20,348 per month retainer.
2. Option to purchase up to 50,000 shares of the Company's Common Stock
vesting in equal installments over the thirteen month period of consulting
services, said vesting to cease immediately upon any termination of this
Agreement. The option price will be determined in accordance with existing
Board policy.
Consultant agrees that grant numbers 492, 493, 497, 613 and 733 in the
aggregate amount of 425,000 options as shown on Exhibit "C" attached hereto
and incorporated herein by reference, are terminated and of no force and
effect. Consultant further agrees to execute any and all documents
necessary to effectuate said termination of options.
3. All other Company perquisites and benefits will automatically cease upon
the execution of this Agreement.
4. There are no provisions for commission payments under this Agreement for
any work resulting in an order or sale to an interested party.
9
<PAGE>
Exhibit 10.41
THIS AGREEMENT OF SEVERANCE ("Agreement") is effective as of the 16th day of
May, 1996, by and between James D. Bletas ("Employee") and First Pacific
Networks, Inc. (the "Company").
IT IS AGREED THAT:
A. In the event the Company terminates Employee's employment without
"cause", Employee will be entitled to receive Employee's salary,
benefits and continued vesting of stock options for a six (6) month
period, beginning on the date of termination, in monthly installments.
B. If at the end of such six (6) month period Employee has not secured new
permanent employment or equivalent consultancy, Employee shall be entitled
to receive, in monthly installments, Employee's salary, benefits and
continued vesting of stock options for an additional period of up to six
(6) months. For purposes of this Agreement, securing new permanent
employment has occurred if Employee has accepted a position as an employee
or consultant for an amount of income equal to Employee's present salary
with the Company. For purposes of this Section B, the payments to Employee
shall cease upon securing the herein described employment or consultancy.
C. In the event the Company terminates Employee's employment for "cause", the
Employee shall be entitled to no severance or other benefits.
D. For purposes of Sections A and C above, "cause" shall mean:
1. the conviction of a felony;
2. a willful act by Employee which constitutes gross misconduct and
which is injurious to the Company; or
3. the improper disclosure of the Company's confidential or proprietary
information.
E. Both Employee and the Company acknowledge that Employee's employment is
"at will", as that term is defined under applicable law.
F. Employee agrees to abide by the terms and conditions of the Company's
standard employee Confidential Information and Inventions Agreement which
was executed by Employee upon Employee's employment with the Company.
1
<PAGE>
Exhibit 10.41
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company, by its duly authorized officer, as of the date first
written above.
THE COMPANY: THE EMPLOYEE:
FIRST PACIFIC NETWORKS, INC. James D. Bletas
By: /s/ M. Peter Thomas By: /s/ James D. Bletas
------------------- -------------------
M. Peter Thomas
Its: President and Chief Executive Officer
2
<PAGE>
Exhibit 10.47
THIS AGREEMENT OF SEVERANCE ("Agreement") is effective as of the 18th day of
February, 1996, by and between Kenneth W. Schneider ("Employee") and First
Pacific Networks, Inc. (the "Company").
IT IS AGREED THAT:
A. In the event the Company terminates Employee's employment without "cause",
Employee will be entitled to receive Employee's salary and benefits for a
six (6) month period, beginning on the date of termination, in monthly
installments.
B. If at the end of such six (6) month period Employee has not secured new
permanent employment or equivalent consultancy, Employee shall be entitled
to receive, in monthly installments, Employee's salary and benefits for an
additional period of up to six (6) months. For purposes of this Agreement,
securing new permanent employment has occurred if Employee has accepted a
position as an employee or consultant for an amount of income equal to
Employee's present salary with the Company. For purposes of this
Section B, the payments to Employee shall cease upon securing the herein
employment or consultancy.
C. In the event the Company terminates Employee's employment for "cause", the
Employee shall be entitled to no severance or other benefits.
D. For purposes of Sections A and C above, "cause" shall mean:
1. the conviction of a felony;
2. a willful act by Employee which constitutes gross misconduct and
which is injurious to the Company; or
3. the improper disclosure of the Company's confidential or proprietary
information.
E. Both Employee and the Company acknowledge that Employee's employment is
"at will", as that term is defined under applicable law.
F. Employee agrees to abide by the terms and conditions of the Company's
standard employee Confidential Information and Inventions Agreement which
was executed by Employee upon Employee's employment with the Company.
G. Both Employee and the Company acknowledge that this Agreement supersedes
Employye's employment agreement with the Company dated March 14, 1994 and
said employment agreement is therefore rescinded and of no force and
effect.
1
<PAGE>
Exhibit 10.47
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company, by its duly authorized officer, as of the date first
written above.
THE COMPANY: THE EMPLOYEE:
FIRST PACIFIC NETWORKS, INC. KENNETH W. SCHNEIDER
By: /s/ M. Peter Thomas By: /s/ Kenneth W. Schneider
------------------- ------------------------
M. Peter Thomas
Its: President and Chief Executive Officer
2
<PAGE>
Exhibit 11.1
FIRST PACIFIC NETWORKS, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average common shares outstanding
for the year..................................... 19,050 20,644 25,408
Common equivalent shares puruant to Staff
Accounting Bulletin No. 83....................... -- -- --
Common equivalent shares assuming conversion of
stock options under the treasury stock method.... -- -- --
Common equivalent shares assuming conversion of
stock warrants under the treasury stock method... -- -- --
-------- -------- --------
Shares used in primary loss per share calculation. 19,050 20,644 25,408
Other dilutive shares assuming conversion of stock
options under the treasury stock method.......... -- -- --
Other dilutive shares assuming conversion of stock
warrants under the treasury stock method......... -- -- --
Other dilutive shares assuming conversion of
convertible debt under the treasury stock
method........................................... -- -- --
-------- -------- --------
Shares used in fully diluted loss per share
calculation...................................... 19,050 20,644 25,408
-------- -------- --------
-------- -------- --------
Net loss used in per share calculations........... $(33,579) $(27,049) $(17,048)
-------- -------- --------
-------- -------- --------
Primary loss per share............................ $(1.76) $(1.31) $(0.67)
-------- -------- --------
-------- -------- --------
Fully diluted loss per share...................... $(1.76) $(1.31) $(0.67)
-------- -------- --------
-------- -------- --------
</TABLE>
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.
<PAGE>
Exhibit 21.1
FIRST PACIFIC NETWORKS, INC.
First Pacific Federal Systems, Inc. (United States)
First Pacific Networks International B.V. (Netherlands)
FPN U.K. Limited (United Kingdom)
1
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
First Pacific Networks, Inc. on Form S-8 (File No. 33-98570) of our reports
dated May 17, 1996, except Note 15, as to which the date in June 20, 1996 on our
audits of the financial statements and financial statement schedule of First
Pacific Networks, Inc. as of March 31, 1995 and 1996 and for each of the three
years in the period ended March 31, 1996, which reports are included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
June 28, 1996
1
<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 32 AND 33 OF THE COMPANY'S FORM 10-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 2,708
<SECURITIES> 0
<RECEIVABLES> 1,002
<ALLOWANCES> 408
<INVENTORY> 3,535
<CURRENT-ASSETS> 7,576
<PP&E> 10,451
<DEPRECIATION> 6,737
<TOTAL-ASSETS> 11,624
<CURRENT-LIABILITIES> 3,956
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 1,593<F1>
<TOTAL-LIABILITY-AND-EQUITY> 11,624
<SALES> 3,345
<TOTAL-REVENUES> 4,999
<CGS> 3,661
<TOTAL-COSTS> 23,403
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 144
<INTEREST-EXPENSE> 586
<INCOME-PRETAX> (17,048)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,048)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> 0
<FN>
<F1>On May 31, 1996 the Company completed a private placement of 5,000 shares
of Series E convertible preferred stock having a purchase price of
$ 5.0 million.
</FN>
</TABLE>
