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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
(Mark One)
/x/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarter ended September 30, 1997
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ____ to____
Commission file number:
0-28734
---------------
ADVANCED FIBRE COMMUNICATIONS, INC.
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 68-0277743
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Willow Brook Court
Petaluma, California 94954
(707) 794-7700
(Address, including zip code, of Registrant's principal
executive offices and telephone number, including area code)
_____________________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding as of
Class October 24, 1997
----- ----------------
Common Stock, $0.01 par value 72,264,406
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- - --------------------------------------------------------------------------------
ADVANCED FIBRE COMMUNICATIONS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 1997 and 1996. . . 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,774 $ 24,942
Marketable securities 99,985 83,488
Accounts receivable 59,499 32,779
Inventories, net 42,227 17,349
Other current assets 6,141 3,631
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Total current assets 216,626 162,189
Property and equipment, net 22,613 9,589
Other assets 6,615 3,901
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TOTAL ASSETS $ 245,854 $ 175,679
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------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,155 $ 8,799
Accrued liabilities 17,124 $ 8,052
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Total current liabilities 39,279 16,851
Long-term liabilities 795 805
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000
shares authorized in 1997 and 1996; no
shares issued and outstanding - -
Common stock, $0.01 par value; shares
200,000,000 shares authorized in 1997 and
1996, 72,198,052 and 65,299,214 shares
issued and outstanding in 1997 and 1996,
respectively 722 653
Additional paid-in capital 187,843 163,675
Notes receivable from stockholders (376) (151)
Retained earnings (accumulated deficit) 17,591 (6,154)
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Total stockholders' equity 205,780 158,023
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 245,854 $ 175,679
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See accompanying notes to condensed consolidated financial statements
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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------------
1997 1996 1997 1996
-------- -------- ---------- --------
Revenues $76,790 $35,012 $182,402 $88,784
Cost of revenues 41,472 19,737 99,984 50,795
------- ------- -------- -------
Gross profit 35,318 15,275 82,418 37,989
------- ------- -------- -------
Operating expenses:
Research and development 7,205 4,141 18,495 10,035
Selling, general and
administrative 12,297 5,608 29,925 13,509
DSC litigation costs - - - 18,947
------- ------- -------- -------
Total operating expenses 19,502 9,749 48,420 42,491
------- ------- -------- -------
Operating income (loss) 15,816 5,526 33,998 (4,502)
Other income (expense), net 1,313 (338) 3,694 (439)
------- ------- -------- -------
Income (loss) before income
taxes 17,129 5,188 37,692 (4,941)
Income taxes (benefit) 6,338 1,984 13,946 (6,604)
------- ------- -------- -------
Net income $10,791 $ 3,204 $ 23,746 $ 1,663
------- ------- -------- -------
------- ------- -------- -------
Net income per share $ 0.14 $ 0.31
------- --------
------- --------
Pro forma net income per share $ 0.05 $ 0.03
------- -------
------- -------
Shares used in per share
computations 79,112 61,506 77,437 60,116
------- ------- -------- -------
------- ------- -------- -------
See accompanying notes to condensed consolidated financial statements
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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
1997 1996
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,746 $ 1,663
Adjustments to reconcile net income
to net cash provided from (used in)
operating activities:
Noncash portion of litigation settlement - 12,807
Deferred income taxes (1,324) (6,760)
Depreciation and amortization 1,932 583
Changes in operating assets and liabilities:
Accounts receivable (26,708) (12,132)
Inventories (24,878) (6,435)
Accounts payable 13,356 1,111
Other, including other current assets and
liabilities 22,048 2,455
------------- -----------
NET CASH PROVIDED (USED) IN OPERATING
ACTIVITIES 8,172 (6,708)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of marketable securities (16,497) -
Other long-term investments (3,000) -
Purchase of property and equipment (14,956) (4,555)
Other - (950)
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (34,453) (5,505)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing, net - 7,742
Proceeds from secondary offering of common stock 7,843 -
Proceeds from other stock issuances and exercise
of options and warrants 2,270 90
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,113 7,832
------------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (16,168) (4,381)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,942 11,118
------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,774 $ 6,737
------------- -----------
------------- -----------
NONCASH FINANCING AND INVESTING ACTIVITIES:
Issuance of preferred stock for business
acquisition $ - $ 1,540
------------- -----------
------------- -----------
See accompanying notes to condensed consolidated financial statements
5
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ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules
and regulations of the Securities and Exchange Commission. While these
financial statements reflect all adjustments of a normal and recurring
nature which are, in the opinion of management, necessary to present
fairly the results of the interim period, they do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial
statements and notes should be read in conjunction with the financial
statements and notes thereto, for the period ended December 31, 1996,
contained in the Company's annual report on Form 10-K.
The consolidated financial statements include Advanced Fibre
Communications, Inc., and its subsidiaries (the "Company"). Significant
intercompany transactions and accounts have been eliminated.
The Company operates on 13-week fiscal quarters ending on the last
Saturday of each fiscal period. For presentation purposes only, its
fiscal periods are shown as ending on the last day of the month of the
respective fiscal period. The results for the three and nine months
ended September 30, 1997 are not necessarily indicative of the operating
results for the full year.
NOTE 2 INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or
market and consisted of the following (in thousands):
September 30, December 31,
1997 1996
------------- ------------
Raw materials $ 13,632 $ 7,631
Work-in-progress 78 155
Finished goods 28,517 9,563
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$ 42,227 $ 17,349
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------------- ------------
NOTE 3 COMMITMENTS AND CONTINGENCIES
ITRI
In September 1992, the Company entered into agreements (the "ITRI
Agreements") with the Industrial Technology Research Institute ("ITRI"),
a Taiwanese government-sponsored research and development organization,
that granted to ITRI certain license rights to the European
Telecommunications Standards Institute ("ETSI") version of the Universal
Modular Carrier 1000-TM- ("UMC"). See "Item 2 Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain
Factors that Might Affect Future Operating Results -- Competition." In
1995, a dispute arose among the Company, ITRI, and certain of ITRI's
member companies (the "Member Companies") in which the Company claimed
that ITRI and the Member Companies were, among other things, failing to
pay royalties when due under the ITRI Agreements. In reliance upon
certain provisions of the ITRI Agreements, in April 1996, the Company
ceased delivering to
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the Member Companies certain proprietary application specific integrated
circuits ("ASICs") used in manufacturing the UMC system.
Pursuant to agreements with ITRI reached in 1994, the design
documentation for these ASICs are held in a trust account, with
directions that the designs can be made available to ITRI on the
occurrence of specified conditions. On July 9, 1996, the trustee
custodian of the ASIC designs filed suit against the Company in the
United States District Court, Eastern District of New York, alleging
that the Company had not supplied all required documentation to the
trustee, and wrongfully discontinued the sale of the ASICs to the Member
Companies. Among other things, the complaint seeks unspecified damages
on behalf of the trustee, and a determination that the trustee can
release the ASIC designs to ITRI. On July 31, 1996, the Company filed a
counterclaim against the trustee claiming, among other things, that the
trustee improperly disclosed the design documentation to third parties.
Discovery in the case has been ongoing since October 1996. No trial date
is currently set.
On July 30, 1996, the Company filed suit against ITRI and others in the
United States District Court, Northern District of California, for
breach of the ITRI Agreements, breach of covenants of good faith, trade
secret misappropriation, tortious interference, and related claims. The
complaint alleges that ITRI breached the ITRI Agreements, among other
ways, by failing to collect royalties owed to the Company, by developing
UMC-based products not shared with the Company, by transferring UMC
technology to an unauthorized company, and by misappropriating the
Company's trade secrets and that the ITRI Agreements have been
terminated. The Company seeks recovery for lost profits and unjust
enrichment, punitive damages, and declaratory and injunctive relief.
On September 13, 1996, ITRI filed a demand for arbitration of the
dispute and claimed, among other things, that the Company has breached
the ITRI Agreements and is liable for unspecified royalties and punitive
damages, and claiming proprietary rights in certain UMC technology. On
September 30, 1996, the Company amended the complaint in its suit
against ITRI to add the Member Companies and Taiwan-based Acer Netxus,
Inc., as parties to the suit.
On August 27, 1996, the Member Companies filed suit against the Company
in United States District Court, Northern District of California,
alleging breach of contract and unfair competition based on the
Company's discontinuation of ASIC sales and alleged failure to provide
certain other UMC technology to the Member Companies. The complaint
filed by the Member Companies alleges that the Company lacked
justification to discontinue the sale of ASICs and that its failure to
sell ASICs to the Member Companies constituted unfair competition. The
complaint seeks court-ordered arbitration, unspecified damages, punitive
damages and an injunction requiring further sales of the ASICs to the
Member Companies. On September 6, 1996, the Court granted a temporary
restraining order pursuant to which the Company supplied the Member
Companies with a specified number of ASICs on the terms and conditions
set forth in the ITRI Agreements. The Court's Order was granted as an
interim measure to preserve the status quo pending adjudication on the
merits. On September 16, 1996, the Company filed counterclaims seeking
declaratory and injunctive relief and damages against Member Companies
for, among other things, breach of contract, fraud and misappropriation
of trade secrets. On September 23, 1996, the Member Companies filed a
demand for arbitration of the dispute and claimed, among other things,
actual damages in excess of $60 million, legal fees and expenses and
punitive damages.
The parties conducted discovery with respect to the royalty and ASIC
supply issues during September and October 1996. A hearing on ITRI's
motion for a preliminary injunction to require the Company to continue
supplying ASICs and ITRI's motion to compel arbitration was held on
November 22, 1996. On January 23, 1997, the Court granted the ITRI
parties' motion to compel arbitration, and granted, in part, the Member
Companies' motion for a preliminary injunction. Under the Court's
Order, the case was directed to arbitration under the auspices of the
American Arbitration Association, the litigation was stayed, and the
Company was directed to continue supplying ASICs to the Member Companies
as under the prior temporary restraining order.
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On or about April 8, 1997, ITRI and the Member Companies filed amended
demands for arbitration with the American Arbitration Association. On
April 28, 1997, the Company filed an answer and counterclaim in the
arbitration proceeding against ITRI, the Member Companies, and Acer
Netxus, Inc., a Taiwanese company to which ITRI purportedly assigned
member company rights under the ITRI Agreements without the Company's
consent. Document discovery in the arbitration began in August 1997.
The date for commencement of the evidentiary hearing has not been set.
The Company believes that it has meritorious defenses to the claims
asserted by the trustee, ITRI and the Member Companies and it intends to
defend the litigation vigorously. Moreover, the Company believes that
the damages claims of the trustee, ITRI, and the Member Companies are
without merit. The Company further believes that its claims against the
trustee, ITRI, the Member Companies, and Acer Netxus are meritorious and
the Company intends to vigorously pursue such claims. However, due to
the nature of the claims and because the proceedings are in the
discovery stage, the Company cannot determine the total expense or
possible loss, if any, that may ultimately be incurred either in the
context of a trial, arbitration or as a result of a negotiated
settlement. Regardless of the ultimate outcome of the proceedings, it
could result in significant diversion of time by the Company's
management. After consideration of the nature of the claims and the
facts relating to the proceedings, the Company believes that the
resolution of this matter will not have a material adverse effect on the
Company's business, financial condition and results of operations;
however, the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance to that effect.
DSC
From July 1993 until June 1996 the Company was involved in litigation
with DSC Communications Corporation ("DSC"). DSC alleged, among other
things, that the Company's UMC technology contained or was derived from
trade secrets and other proprietary technology of DSC. The parties
entered into a Settlement Agreement and Mutual Releases dated as of
June 24, 1996 (the "Settlement Agreement") pursuant to which the
litigation was terminated. Under the terms of the Settlement Agreement,
the Company paid DSC $3,000,000 in June 1996 and $7,106,000 in July
1996, and issued 725,787 shares of common stock to DSC. The full
settlement amount was recorded during the second quarter of 1996 as a
charge of $15,807,000. Under the terms of the Settlement Agreement, the
Company maintains all rights to the UMC technology free and clear of any
claim by DSC.
NOTE 4 NET INCOME PER SHARE
Net income per common share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of stock
options and warrants.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
SFAS No. 128 requires the presentation of basic net income per share
and, for companies with complex capital structures, diluted net income
per share. SFAS No. 128 is effective for annual and interim periods
ending after December 15, 1997. The Company expects that basic net
income per share will be higher than fully diluted net income per share
as presented in the accompanying condensed consolidated financial
statements and that diluted net income per share will not differ
materially from fully diluted net income per share as presented in the
accompanying condensed consolidated financial statements.
NOTE 5 COMMON STOCK SPLIT
In September 1997, the stockholders approved an increase in the
Company's authorized shares of Common Stock from 100,000,000 to
200,000,000. On September 22, 1997, the Company effected a two-for-one
stock split to stockholders of record as of August 29, 1997. All share,
per share, and Common Stock amounts herein have been restated to reflect
the effect of this split.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical financial information contained herein, the
following discussion and analysis may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements include declarations regarding the intent, belief or current
expectations of the Company and its management. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties; actual
results could differ materially from those indicated by such forward-looking
statements. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements, as
set forth below under "Certain Factors That Might Affect Future Operating
Results," are: (i) the limited history of operations and profitability of the
Company, (ii) potential fluctuations in future operating results and
seasonality, (iii) dependence on the telecommunications industry and small
line-size market, (iv) risks associated with a concentrated product line, new
products and rapid technological change, (v) dependence on sole-source and
other key suppliers, (vi) dependence on a limited number of third party
manufacturers and support organizations, (vii) risks associated with
competition, (viii) risks associated with pending litigation, (ix) risks
associated with limited protection of proprietary technology and risk of
third-party claims of infringement, (x) risk of failure to manage expanding
operations, (xi) customer concentration, (xii) risks associated with
international markets, (xiii) dependence on key personnel, (xiv) compliance
with regulations and industry standards and (xv) other risks identified from
time to time in the Company's reports and registration statements filed with
the Securities and Exchange Commission.
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto.
GENERAL
AFC designs, develops, manufactures, markets and supports the UMC system, a
cost-effective, multi-feature digital loop carrier system developed to serve
low density markets. The Company's UMC system is designed to enable
telephone companies, cable companies and other service providers to connect
subscribers to the central office switch for narrow band, wide band, and
broad band voice and data communications over copper, fiber, coaxial cable
and analog radio networks. The Company was incorporated in May 1992 and was
in the initial startup and development phase through December 1993. The
Company sells its product worldwide, primarily through its direct sales force
in the domestic market, and through direct sales, distributors and agents in
international markets.
RESULTS OF OPERATIONS
REVENUES. For the three months ended September 30, 1997, revenues were $76.8
million compared with $35.0 million for the same period of 1996, an increase
of $41.8 million or 119.3%. International revenues were $15.0 million for
the third quarter of 1997 compared with $5.2 million for the comparable
period of 1996, an increase of $9.8 million or 188.5%.
For the nine months ended September 30, 1997, revenues were $182.4 million
compared with $88.8 million for the comparable period of 1996, an increase of
$93.6 million or 105.4%. International revenues were $43.3 million for the
nine months ended September 30, 1997 compared with $11.9 million for the same
period of 1996, an increase of $31.4 million or 263.9%. The improvement in
revenues for the three month and nine month periods of 1997 was primarily due
to the increase in international revenues, the introduction of the UMC 1000
Third Generation Digital Loop Carrier and other new features of the UMC
system, and the expansion of the Company's customer base.
For the quarters ended September 30, 1997 and 1996, GTE Communication Systems
Corporation ("GTE") accounted for 27.4% and 10.9% of revenues, respectively.
For the nine months ended September 30, 1997 and 1996, GTE accounted for
20.5% of revenues and ALLTEL Supply, Inc., accounted for 10.9% of revenues in
each respective period. ALLTEL Supply, Inc., is an affiliate of the
independent domestic telephone company, ALLTEL. No other customer
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accounted for 10% or more of revenues in any such period. Although the
Company's largest customers have varied from period to period, the Company
anticipates that its results of operations in any given period will continue
to depend to a significant extent upon sales to a small number of customers.
There can be no assurance that the Company's principal customers will
continue to purchase product from the Company at current levels, if at all.
The loss of one or more major customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
GROSS PROFIT. For the three months ended September 30, 1997, gross profit
was $35.3 million or 46.0% of revenues compared with $15.3 million or 43.6%
of revenues for the same period of 1996, an increase of $20.0 million. Gross
profit is comprised of revenues less the cost of materials, manufacturing and
warranty costs. For the nine months ended September 30, 1997, gross profit
was $82.4 million or 45.2% of revenues compared with $38.0 million or 42.8%
of revenues for the comparable period of 1996, an increase of $44.4 million.
The improvement in gross margins (gross profit as a percent of revenues) from
1996 to 1997 for the three and nine month periods resulted from greater
efficiencies achieved in the purchasing and manufacturing activities as
associated with higher unit volume, from engineering design improvements, and
from lower cost inventory sourced in China. In the future, gross margins may
fluctuate due to a wide variety of factors, including: the mix between
domestic and international sales; the customer mix; the timing and size of
orders which are received and can be shipped in a quarter; the availability
of adequate supplies of key components and assemblies and the adequacy of
manufacturing capacity; the Company's ability to introduce new products and
technologies on a timely basis; the timing of new product introductions or
announcements by the Company or its competitors; price competition; and unit
volume.
RESEARCH AND DEVELOPMENT. For the three months ended September 30, 1997,
research and development expenses were $7.2 million compared with $4.1
million for the same period of 1996, an increase of $3.1 million or 74.0%.
Research and development expenses were 9.4% and 11.8% of revenues for the
third quarter of 1997 and 1996, respectively.
For the first nine months of 1997, research and development expenses were
$18.5 million compared with $10.0 million for the comparable period of 1996,
an increase of $8.5 million or 84.3%. Research and development expenses were
10.1% and 11.3% of revenues for the nine months of 1997 and 1996,
respectively.
The increase in research and development expenses from 1996 to 1997 for the
three month and nine month periods was primarily due to the addition of
personnel hired to develop technology, the use of outside services for
certain development and testing efforts and the higher costs for material and
test equipment used to develop and test new products and features. As of
September 30, 1997 the number of employees in research and development was
170 compared with 117 as of September 30, 1996, an increase of 45.3%. The
Company expects that research and development expenditures generally will
continue to increase in absolute dollars to support the continued development
of new products and features and the product cost reduction efforts. All
research and development costs have been expensed as incurred.
SELLING, GENERAL AND ADMINISTRATIVE. For the three months ended September
30, 1997, selling, general and administrative expenses were $12.3 million
compared with $5.6 million for the same period of 1996, an increase of $6.7
million or 119.3%. Selling, general and administrative expenses were 16.0%
of revenues for each of the respective third quarters of 1997 and 1996.
For the first nine months of 1997, selling, general and administrative
expenses were $29.9 million compared with $13.5 million for the comparable
period of 1996, an increase of $16.4 million or 121.5%. Selling, general and
administrative expenses were 16.4% and 15.2% of revenues for the nine month
periods of 1997 and 1996, respectively.
Additional employees, higher facilities costs and the legal costs associated
with the ITRI litigation predominately accounted for the increase in general
and administrative expenses for the three and nine month periods from 1996 to
1997. The increase in sales and marketing expenses from 1996 to 1997 for the
three and nine month periods was
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attributed primarily to the impact of higher revenue levels on commissions
earned by the Company's sales force and by international distributors,
additional sales and marketing personnel, increased advertising and trade
show participation and increased travel and entertainment expenses. Selling,
general and administrative headcount increased 83.6% to 224 from 122 as of
September 30, 1997 and 1996, respectively.
DSC LITIGATION. From July 1993 until June 1996 the Company was involved in
litigation with DSC Communications Corporation ("DSC"). DSC alleged, among
other things, that the Company's UMC technology contained or was derived from
trade secrets and other proprietary technology of DSC. The parties entered
into a Settlement Agreement and Mutual Releases dated as of June 24, 1996
(the "Settlement Agreement") pursuant to which the litigation was terminated.
Under the terms of the Settlement Agreement, the Company paid DSC $3,000,000
in June 1996 and $7,106,000 in July 1996, and issued 725,787 shares of common
stock to DSC. The full settlement amount was recorded during the second
quarter of 1996 as a charge of $15,807,000. Under the terms of the
Settlement Agreement, the Company maintains all rights to the UMC technology
free and clear of any claim by DSC.
INCOME TAXES (BENEFIT). For the three and nine months ended September 30,
1997, the Company recorded income taxes at an effective rate that
approximated the combined federal and state statutory rates. For the nine
months ended June 30, 1996, an income tax benefit of $8.6 million was
recorded to reflect the benefit of the DSC litigation settlement and the
decrease in the valuation allowance recorded against the Company's deferred
tax assets.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's cash and marketable securities
amounted to $108.8 million compared with $108.4 million at December 31, 1996.
In February 1997, the company completed a secondary offering of 4,000,000
shares of Common Stock, 3,600,000 of which were sold by certain stockholders
and 400,000 of which were sold by the Company, generating approximately $7.8
million of net proceeds to the Company.
Net cash of $8.2 million was generated from operating activities. This was
primarily the result of increased earnings offset by an increase in
receivables due to higher sales volume and an increase in inventory in
anticipation of expected customer demand for the Company's products. Net
cash of $34.5 million was used in investing activities, including the net
purchases of marketable securities, the purchases of property and equipment,
and the long term equity investment in a development stage telecommunications
company. The Company continues to invest in capital equipment to support its
employee and facility growth, its implementation of a new management and
accounting system, and its research and development and manufacturing
activities.
The Company has a $12.0 million bank line with an interest rate of prime plus
0.5%. The line of credit expired on November 15, 1996, but automatically
renews for successive thirty day periods until terminated by written
agreement. The amount available to the Company for borrowing under the line
is based upon the balance of eligible domestic accounts receivable at the
time of borrowing. As part of the bank line, the bank may issue letters of
credit up to $10.0 million and foreign exchange contracts up to $5.0 million.
The bank line requires the Company to comply with certain financial
covenants. As of September 30, 1997, and December 31, 1996 no borrowings
were outstanding under the bank line, and the Company was in compliance with
the covenants contained in the agreement. At September 30, 1997, $140,000
was reserved for letters of credit and $650,000 was reserved for foreign
contracts under the line.
The Company also has lease lines totaling $12.8 million that are used for
equipment and furniture purchases. As of September 30, 1997, $5.6 million
remained available under the lease lines.
The Company believes that its existing cash and short-term investments and
available credit facilities will be adequate to support the Company's
financial resource needs, including working capital requirements, capital
expenditures, operating lease obligations and debt payments for the next
twelve months.
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CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
In addition to the other information in this Quarterly Report on Form 10-Q,
the following are important factors that should be considered in evaluating
the Company and its business.
LIMITED HISTORY OF OPERATIONS AND PROFITABILITY. The Company was
incorporated in May 1992 and was in the initial startup and development phase
through December 1993. The Company began shipping the UMC in January 1994
and, accordingly, has a limited operating history. The Company has incurred
substantial expenditures related to the development, manufacturing startup
and marketing of the UMC system. Although the Company first achieved
profitability in the second quarter of 1995, it recorded a net loss in the
second quarter of 1996 due to charges associated with the settlement of
litigation with DSC, and there can be no assurance that the Company will
sustain or increase its profitability in the future.
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS; SEASONALITY. The
Company's operating results have been, and will continue to be, affected by a
wide variety of factors, some of which are outside of the Company's control,
that could have a material adverse effect on revenues and results of
operations during any particular period. These factors include: the mix
between domestic and international sales; the customer mix; the timing and
size of orders which are received and can be shipped in a quarter; the
availability of adequate supplies of key components and assemblies and the
adequacy of manufacturing capacity; the Company's ability to introduce new
products and technologies on a timely basis; the timing of new product
introductions or announcements by the Company or its competitors; price
competition; and unit volume.
The UMC system is sold primarily to telephone companies that install the UMC
system as part of their access networks. Additions to those networks
represent complex engineering projects which can require from three to twelve
months from project conceptualization to completion. The UMC system
typically represents only a portion of a given project and, therefore, the
timing of product shipment and revenue recognition is often difficult to
forecast. In developing countries, delays and reductions in the planned
project deployment can be caused by additional factors, including reductions
in capital availability due to declines in the local economy, currency
fluctuations, priority changes in the government's budget and delays in
receiving government approval for deployment of the UMC system in the local
loop. The Company's expenditures for research and development, marketing and
sales, and general and administrative functions are based in part on future
revenue projections and in the near term are relatively fixed. The Company
may be unable to adjust spending in a timely manner in response to any
unanticipated declines in revenues. Accordingly, any significant decline in
demand for the UMC system relative to planned levels could have a material
adverse effect on the Company's business, financial condition and results of
operations in that quarter or subsequent quarters. All of the above factors
are difficult to forecast, and these or other factors could materially
adversely affect the Company's business, financial condition and results of
operations. As a result, the Company believes that period-to-period
comparisons are not necessarily meaningful and should not be relied upon as
indications of future performance. Fluctuations in the Company's operating
results may cause volatility in the price of the Company's Common Stock.
Further, it is likely that in some future quarter the Company's revenues or
operating results will be below the expectations of public market analysts or
investors. In such event, the market price of the Company's Common Stock
would likely be materially adversely affected.
The Company's customers normally install a portion of the UMC system in
outdoor locations. Shipments of the UMC system are subject to the effects of
seasonality, with fewer installation projects scheduled for the winter
months. Accordingly, the Company believes that over time this seasonality
will cause its revenues in the quarter ended March 31 to be lower than
revenues in the preceding quarter ended December 31.
DEPENDENCE ON TELECOMMUNICATIONS INDUSTRY AND SMALL LINE-SIZE MARKET. The
Company's customers are concentrated in the public carrier telecommunications
industry. Accordingly, the Company's future success depends upon the capital
spending patterns of such customers and the continued demand by such
customers for the UMC system. The target markets for the UMC system are the
small line-size markets of the United States and developing countries.
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Historically, these markets have had little access to the advanced services
that can be made available through the UMC system and, accordingly, there can
be no assurance that potential customers will consider the near term value of
these advanced services to be sufficient to influence their purchase
decisions. Furthermore, there can be no assurance that the UMC system will
find widespread acceptance among the telephone companies and other potential
customers in small line-size markets or that such customers and potential
customers will not adopt alternative architectures or technologies that are
incompatible with the UMC technology, which would have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that telephone companies,
foreign governments or other customers will pursue infrastructure upgrades
that will necessitate the implementation of advanced products such as the UMC
system. Infrastructure improvements requiring the Company's or similar
technology may be delayed or prevented by a variety of factors, including
cost, regulatory obstacles, the lack of consumer demand for advanced
telecommunications services and alternative approaches to service delivery.
CONCENTRATED PRODUCT LINE, NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE. The
Company currently derives substantially all of its revenues from the UMC
system and expects that this concentration will continue in the foreseeable
future. As a result, any decrease in the overall level of sales of, or the
prices for, the UMC system due to product enhancements, introductions or
announcements by the Company's competitors, a decline in the demand for the
UMC system, product obsolescence or any other reason could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The telecommunications equipment market is characterized by rapidly changing
technology, evolving industry standards, changes in end-user requirements,
and frequent new product introductions and enhancements. The introduction of
products embodying new technologies or the emergence of new industry
standards can render existing products obsolete or unmarketable. The
Company's success will depend upon its ability to enhance the UMC technology
and to develop and introduce, on a timely basis, new products and feature
enhancements that keep pace with technological developments and emerging
industry standards and address changing customer requirements in a
cost-effective manner. There can be no assurance that the Company will be
successful in identifying, developing, manufacturing, and marketing product
enhancements or new products that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing
of these products, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Furthermore, from time to time, the Company may announce new
products or product enhancements, services or technologies that have the
potential to replace or shorten the life cycle of the UMC system and that may
cause customers to defer purchasing the UMC system. There can be no assurance
that future technological advances in the telecommunications industry will
not diminish market acceptance of the UMC system or render the UMC system
obsolete and, thereby, materially adversely affect the Company's business,
financial condition and results of operations.
The Company has experienced delays in completing development and introduction
of new products, product variations and feature enhancements, and there can
be no assurance that such delays will not continue or recur in the future.
Furthermore, the UMC system contains a significant amount of complex hardware
and software that may contain undetected or unresolved errors as products are
introduced or as new versions are released. The Company has in the past
discovered technical difficulties in certain UMC system installations. There
can be no assurance that despite significant testing by the Company, hardware
or software errors will not be found in the UMC system after commencement of
shipments, resulting in delays in, or cancellation of, customer orders or in
the loss of market acceptance, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON SOLE-SOURCE AND OTHER KEY SUPPLIERS. Certain components used
in the Company's products, including the Company's proprietary application
specific integrated circuits ("ASICs"), codecs, certain surface mount
technology components and other components, are only available from a single
source or limited number of suppliers. Some of the Company's sole-source
suppliers are companies which from time to time allocate parts to telephone
equipment manufacturers due to market demand for telecommunications
equipment. Many of the Company's competitors are much
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larger and may be able to obtain priority allocations from these shared
suppliers, thereby limiting or making unreliable the sources of supply for
these components. The Company encountered supply delays for codecs in the
second quarter of 1994 which resulted in delayed shipments of the UMC system,
and there can be no assurance that similar shortages will not occur in the
future or will not result in the Company having to pay a higher price for
components. If the Company is unable to obtain sufficient quantities of
these or any other components, delays or reductions in manufacturing or
product shipments could occur which would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON LIMITED NUMBER OF THIRD PARTY MANUFACTURERS AND SUPPORT
ORGANIZATIONS. The Company relies on a limited number of independent
contractors that manufacture the subassemblies to the Company's
specifications for use in the Company's products. In particular, the Company
relies on: (i) Flextronics International Ltd. and Tanon Manufacturing, Inc.
(a division of Electronic Associates, Inc.), and Shanghai Lucent Technologies
Transmission Equipment Co., Ltd., to manufacture the Company's printed
circuit board assemblies; (ii) Paragon, Inc., to manufacture backplanes and
channel bank assemblies and (iii) Sonoma Metal Products, Inc., and Cowden
Metal San Jose, Inc., to manufacture the outside cabinets. In the event that
the Company's subcontractors were to experience financial, operational,
production, or quality assurance difficulties that resulted in a reduction or
interruption in supply to the Company or otherwise failed to meet the
Company's manufacturing requirements, the Company's business, financial
condition and results of operations would be adversely affected until the
Company established sufficient manufacturing supply from alternative sources.
There can be no assurance that the Company's current or alternative
manufacturers will be able to meet the Company's future requirements or that
such manufacturing services will continue to be available to the Company at
favorable prices, or at all.
The Company also relies on Point-to-Point Communications, Inc.
("Point-to-Point"), a third-party support organization, to provide first line
technical assistance and post-sales support to AFC customers. There can be
no assurance that Point-to-Point will be able to provide the level of
customer support demanded by the Company's existing or potential customers.
COMPETITION. The market for equipment for local telecommunications networks
is extremely competitive. The Company's competitors range from small
companies, both domestic and international, to large multinational
corporations. The Company's competitors include Alcatel Alsthom Compagnie
Generale d'Electricite, DSC, ECI Telecom, Inc., E/O Networks, Fujitsu
America, Inc., Hitron Technology, Inc., Lucent Technologies, Inc., NEC
America, Inc., Northern Telecom Ltd., Opnet Technologies Co. Ltd., RELTEC
Corporation, Seiscor Technologies Inc., Siemens Corporation, Teledata
Communications Ltd., UT Starcom, Inc., and Vidar-SMS Co. Ltd. Many of these
competitors have more extensive financial, marketing and technical resources
than the Company and enjoy superior name recognition in the market. In
addition, the Company has entered into agreements with the Industrial
Technology Research Institute ("ITRI") to jointly develop products based on
the UMC system. ITRI is a Taiwanese government-sponsored research and
development organization in the telecommunications field. Such agreements
grant ITRI and certain of its member companies certain rights to manufacture
and sell the European Telecommunications Standards Institute ("ETSI") version
of the UMC system outside of North America. Such entities currently compete
with the Company in international markets, primarily in China. In addition,
upon termination of the agreements with ITRI in 2002, ITRI will have a
worldwide, non-exclusive, royalty-free, irrevocable license to use the ETSI
version of the UMC technology and, consequently, such member companies will
be able to compete with the Company worldwide at such time. There is an
ongoing dispute subject to litigation between the Company and ITRI and such
member companies as to, among other things, whether ITRI possesses the right
to grant such rights to manufacture and sell the ETSI version of the UMC
system to new member companies and whether AFC has terminated or may
terminate such agreements and the rights, if any, of the member companies
thereunder. Depending on the outcome of this dispute, the Company may face
competition from new member companies for the ETSI version of the UMC system.
Such companies may possess substantially greater financial, marketing and
technical resources than the Company. The Company may also face competition
from new market entrants. There can be no assurance that the Company will be
able to compete successfully in the future.
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RISKS ASSOCIATED WITH PENDING LITIGATION. The Company is a party to certain
legal proceedings including the litigation between the Company and ITRI and
certain of its member companies arising out of a dispute regarding, among
other things, the payment of royalties and the supply of ASICs under the
agreements between the Company and ITRI. The Company is unable to determine
the total expense or possible loss, if any, that may ultimately be incurred
in the resolution of these proceedings. Regardless of the ultimate outcome
of these proceedings, they could result in significant diversion of time by
the Company's management. After consideration of the nature of the claims
and the facts relating to these proceedings, the Company believes that the
resolution of these proceedings will not have a material adverse effect on
the Company's business, financial condition and results of operations;
however, the results of these proceedings, including any potential
settlements, are uncertain and there can be no assurance to that effect. See
"Part II Item 1 Legal Proceedings, ITRI."
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF
INFRINGEMENT. The Company attempts to protect its technology through a
combination of copyrights, trade secret laws and contractual obligations.
The Company does not presently hold any patents for its existing products and
has no patent applications pending. There can be no assurance that the
Company's intellectual property protection measures will be sufficient to
prevent misappropriation of the Company's technology or that the Company's
competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. In
addition, the laws of many foreign countries do not protect the Company's
intellectual property rights to the same extent as the laws of the United
States. The failure of the Company to protect its proprietary information
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The increasing dependence of the telecommunications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. In June 1996, the
Company settled litigation with DSC under which DSC had claimed proprietary
rights to the UMC technology. In the future the Company may be subject to
additional litigation to defend against claimed infringements of the rights
of others or to determine the scope and validity of the proprietary rights of
others. Future litigation also may be necessary to enforce and protect trade
secrets and other intellectual property rights owned by the Company. Any
such litigation could be costly and cause diversion of management's
attention, either of which could have a material adverse effect on the
Company's business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require
the Company to seek licenses from third parties, or prevent the Company from
manufacturing or selling its products, any one of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that any necessary
licenses will be available on reasonable terms.
RISK OF FAILURE TO MANAGE EXPANDING OPERATIONS. The Company has experienced
a period of rapid growth, which has placed and could continue to place, a
significant strain on the Company's management, operational, financial and
other resources. The members of the Company's management team have limited
experience in the management of rapidly growing companies. To effectively
manage the recent growth as well as any future growth, the Company will need
to recruit, train, assimilate, motivate and retain qualified managers and
employees. Management of future growth, if such growth occurs, may require
the Company to implement expanded or new management and accounting systems.
In connection with the Company's recent growth, management evaluated and
purchased a new management and accounting system and is in the process of
implementing the system. There can be no assurance that the Company will
complete such implementation on a timely basis. Information systems
expansion or replacement can be a complex, costly and time-consuming process,
and there can be no assurance that any such activities can be accomplished
without disruption of the Company's business. Any business disruption or
other system transition difficulties could have a material adverse effect on
the Company's business, financial condition and results of operations. The
failure of the Company to effectively manage its domestic and international
operations or any current or future growth could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's results of operations will be adversely affected
if revenues do not increase sufficiently to compensate for the increase in
operating expenses resulting from any expansion.
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CUSTOMER CONCENTRATION. For the nine months ended September 30, 1997,
approximately 20.5% of the Company's revenues was derived from sales to GTE
Communication Systems Corporation. For the nine months ended September 30,
1996, ALLTEL Supply, Inc., accounted for 10.9% of the Company's revenues.
For the nine months ended September 30, 1997 and 1996, the Company's five
largest customers accounted for approximately 41.8% and 32.0% of revenues,
respectively. Although the Company's largest customers have varied from
period to period, the Company anticipates that its results of operations in
any given period will continue to depend to a significant extent upon sales
to a small number of customers. None of the Company's customers has entered
into an agreement requiring it to purchase a minimum amount of product from
the Company. There can be no assurance that the Company's principal
customers will continue to purchase product from the Company at current
levels, if at all. The loss of one or more major customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. International sales constituted
23.7% and 13.4% of the Company's total revenues for the nine months ended
September 30, 1997 and 1996, respectively. International sales have
fluctuated in absolute dollars and as a percentage of revenues, and are
expected to continue to fluctuate in future periods. The Company relies on a
number of third-party distributors and agents to market and sell the UMC
system outside of North America. There can be no assurance that such
distributors or agents will provide the support and effort necessary to
service international markets effectively. The Company intends to expand its
existing international operations and enter new international markets, which
will demand significant management attention and financial commitment. The
Company's management has limited experience in international operations, and
there can be no assurance that the Company will successfully expand its
international operations. In addition, a successful expansion by the Company
of its international operations and sales in certain markets may depend on
the Company's ability to establish and maintain productive strategic
relationships. To date, the Company has formed three joint ventures to
pursue international markets, two of which have been or are in the process of
being terminated or liquidated due to differences with the joint venture
partners. There can be no assurance that the Company will be able to
identify suitable parties for joint ventures or strategic relationships or,
even if such parties are identified, that successful joint ventures or
strategic relationships will result. Moreover, there can be no assurance
that the Company will be able to increase international sales of the UMC
system through strategic relationships or joint ventures. The failure to do
so could significantly limit the Company's ability to expand its
international operations and could adversely affect the Company's business,
financial condition and results of operations.
International telephone companies are in many cases owned or strictly
regulated by local regulatory authorities. Access to such markets is often
difficult due to the established relationships between a government owned or
controlled telephone company and its traditional indigenous suppliers of
telecommunications equipment. In addition, the Company's bids for business
in certain international markets typically will require the Company to post
bid and performance bonds and to incur contract penalties should the Company
fail to meet production and delivery time schedules on large orders. The
failure of the Company to meet these schedules could result in the loss of
collateral posted for the bonds or financial penalties which could adversely
affect the Company's business, financial condition and results of operations.
The Company's international sales currently are primarily U.S.
dollar-denominated. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products less
competitive in international markets. For example, increases in the value of
the U.S. dollar relative to the Mexican peso in late 1994 resulted in a
significant decrease in sales of the UMC system to Telefonos de Mexico for
1995. Furthermore, operating in international markets subjects the Company
to certain additional risks, including unexpected changes in regulatory
requirements, political and economic conditions, tariffs or other barriers,
difficulties in staffing and managing international operations, exchange rate
fluctuations, potential exchange and repatriation controls on foreign
earnings, potentially negative tax consequences, longer sales and payment
cycles and difficulty in accounts receivable collection. In addition, any
inability to obtain local regulatory approval could delay or prevent entrance
into international markets, which could materially impact the Company's
business, financial condition and results of operations. In order to compete
in international markets, the Company will need to comply with various
regulations and standards.
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DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon key technical and management employees. The loss of the services
of any of these key employees of the Company could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company does not have employment agreements with, or key
person life insurance for, any of its employees. Competition for highly
qualified employees is intense and the process of locating key technical and
management personnel with the combination of skills and attributes required
to execute the Company's strategy is often lengthy. There can be no
assurance that the Company will be successful in retaining its existing key
personnel or in attracting and retaining the additional employees it may
require.
COMPLIANCE WITH REGULATIONS AND INDUSTRY STANDARDS. The UMC system is
required to comply with a large number of voice and data regulations and
standards, which vary between domestic and international markets, and may
vary by the specific international market into which the Company sells its
products. Standards setting and compliance verification in the United States
are determined by the Federal Communications Commission ("FCC"), by
Underwriters Laboratories, by independent telephone companies, by Bell
Communications Research ("Bellcore") and by other independent third-party
testing organizations. In international markets, the Company's products must
comply with recommendations issued by the Consultative Committee on
International Telegraph and Telephony and with requirements established by
the individual regional carriers which specify how equipment that is
connected to their local networks must operate. In addition, the Company's
products must comply with standards issued by the European Telecommunications
Standards Institute. These standards are implemented and enforced by the
Telecommunications Regulatory Authority of each European nation. Standards
for new services continue to evolve, and the Company will be required to
modify its products or develop and support new versions of its products to
meet these standards. The failure of the Company's products to comply, or
delays in meeting compliance, with the evolving standards both in its
domestic and international markets could have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition, the Company will need to ensure that its products are easily
integrated with the carriers' network management systems. The Regional Bell
Operating Companies ("RBOCs"), which represent a large segment of the U.S.
telecommunications market, in many cases require that equipment integrated
into their networks be tested by Bellcore, indicating that the products are
interoperable with the operations, administration, maintenance and
provisioning systems used by the RBOCs to manage their networks. Bellcore
testing requires significant investments in resources to achieve compliance.
The UMC system completed a Bellcore technical audit and was found to meet
applicable requirements. The failure to maintain such compliance or to
obtain it on new features released in the future could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In October 1997, Underwriters Laboratories officially registered the Company
to ISO 9001, ANSI/ASQC Q9001 which assures quality in design, development,
production, installation and servicing. The ISO 9001 international standard
consists of all elements which define a quality system aimed primarily at
achieving customer satisfaction by preventing nonconformity at all stages
from design through servicing. There can be no assurance that the Company
will maintain such certification. The failure to maintain such certification
may preclude the Company from selling the UMC system in certain markets and
could materially adversely effect the Company's ability to compete with other
suppliers of telecommunications equipment.
The U.S. Congress recently passed new regulations that affect
telecommunications services, including changes to pricing, access by
competitive suppliers and many other broad changes to the data and
telecommunications networks and services. These changes will have a major
impact on the pricing of existing services, and may affect the deployment of
future services. These changes could cause greater consolidation in the
telecommunications industry, which in turn could disrupt existing customer
relationships and have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance
that any regulatory changes will not have a material adverse effect on the
demand for the UMC system. Uncertainty regarding future policies combined
with emerging new competition may also affect the demand for
telecommunications products such as the UMC system.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITRI
In September 1992, the Company entered into agreements (the "ITRI
Agreements") with the Industrial Technology Research Institute ("ITRI"), a
Taiwanese government-sponsored research and development organization, that
granted to ITRI certain license rights to the European Telecommunications
Standards Institute ("ETSI") version of the Universal Modular Carrier
1000-TM- ("UMC"). See "Part I Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Factors that
Might Affect Future Operating Results -- Competition." In 1995, a dispute
arose among the Company, ITRI, and certain of ITRI's member companies (the
"Member Companies") in which the Company claimed that ITRI and the Member
Companies were, among other things, failing to pay royalties when due under
the ITRI Agreements. In reliance upon certain provisions of the ITRI
Agreements, in April 1996, the Company ceased delivering to the Member
Companies certain proprietary application specific integrated circuits
("ASICs") used in manufacturing the UMC system.
Pursuant to agreements with ITRI reached in 1994, the design documentation
for these ASICs are held in a trust account, with directions that the designs
can be made available to ITRI on the occurrence of specified conditions. On
July 9, 1996, the trustee custodian of the ASIC designs filed suit against
the Company in the United States District Court, Eastern District of New
York, alleging that the Company had not supplied all required documentation
to the trustee, and wrongfully discontinued the sale of the ASICs to the
Member Companies. Among other things, the complaint seeks unspecified
damages on behalf of the trustee, and a determination that the trustee can
release the ASIC designs to ITRI. On July 31, 1996, the Company filed a
counterclaim against the trustee claiming, among other things, that the
trustee improperly disclosed the design documentation to third parties.
Discovery in the case has been ongoing since October 1996. No trial date is
currently set.
On July 30, 1996, the Company filed suit against ITRI and others in the
United States District Court, Northern District of California, for breach of
the ITRI Agreements, breach of covenants of good faith, trade secret
misappropriation, tortious interference, and related claims. The complaint
alleges that ITRI breached the ITRI Agreements, among other ways, by failing
to collect royalties owed to the Company, by developing UMC-based products
not shared with the Company, by transferring UMC technology to an
unauthorized company, and by misappropriating the Company's trade secrets and
that the ITRI Agreements have been terminated. The Company seeks recovery
for lost profits and unjust enrichment, punitive damages, and declaratory and
injunctive relief. On September 13, 1996, ITRI filed a demand for
arbitration of the dispute and claimed, among other things, that the Company
has breached the ITRI Agreements and is liable for unspecified royalties and
punitive damages, and claiming proprietary rights in certain UMC technology.
On September 30, 1996, the Company amended the complaint in its suit against
ITRI to add the Member Companies and Taiwan-based Acer Netxus, Inc., as
parties to the suit.
On August 27, 1996, the Member Companies filed suit against the Company in
United States District Court, Northern District of California, alleging
breach of contract and unfair competition based on the Company's
discontinuation of ASIC sales and alleged failure to provide certain other
UMC technology to the Member Companies. The complaint filed by the Member
Companies alleges that the Company lacked justification to discontinue the
sale of ASICs and that its failure to sell ASICs to the Member Companies
constituted unfair competition. The complaint seeks court-ordered arbitration,
unspecified damages, punitive damages and an injunction requiring further sales
of the ASICs to the Member Companies. On September 6, 1996, the Court granted a
temporary restraining order pursuant to which the Company supplied the Member
Companies with a specified number of ASICs on the terms and conditions set
forth in the ITRI Agreements. The Court's Order was granted as an interim
measure to preserve the status quo pending adjudication on the merits. On
September 16, 1996, the Company filed counterclaims seeking declaratory and
injunctive relief and damages against Member Companies for, among other
things, breach of contract, fraud and misappropriation of trade
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secrets. On September 23, 1996, the Member Companies filed a demand for
arbitration of the dispute and claimed, among other things, actual damages in
excess of $60 million, legal fees and expenses and punitive damages.
The parties conducted discovery with respect to the royalty and ASIC supply
issues during September and October 1996. A hearing on ITRI's motion for a
preliminary injunction to require the Company to continue supplying ASICs and
ITRI's motion to compel arbitration was held on November 22, 1996. On
January 23, 1997, the Court granted the ITRI parties' motion to compel
arbitration, and granted, in part, the Member Companies' motion for a
preliminary injunction. Under the Court's Order, the case was directed to
arbitration under the auspices of the American Arbitration Association, the
litigation was stayed, and the Company was directed to continue supplying
ASICs to the Member Companies as under the prior temporary restraining order.
On or about April 8, 1997, ITRI and the Member Companies filed amended
demands for arbitration with the American Arbitration Association. On April
28, 1997, the Company filed an answer and counterclaim in the arbitration
proceeding against ITRI, the Member Companies, and Acer Netxus, Inc., a
Taiwanese company to which ITRI purportedly assigned member company rights
under the ITRI Agreements without the Company's consent. Document discovery
in the arbitration began in August 1997. The date for commencement of the
evidentiary hearing has not been set.
The Company believes that it has meritorious defenses to the claims asserted
by the trustee, ITRI and the Member Companies and it intends to defend the
litigation vigorously. Moreover, the Company believes that the damages
claims of the trustee, ITRI, and the Member Companies are without merit. The
Company further believes that its claims against the trustee, ITRI, the
Member Companies, and Acer Netxus are meritorious and the Company intends to
vigorously pursue such claims. However, due to the nature of the claims and
because the proceedings are in the discovery stage, the Company cannot
determine the total expense or possible loss, if any, that may ultimately be
incurred either in the context of a trial, arbitration or as a result of a
negotiated settlement. Regardless of the ultimate outcome of the proceedings,
it could result in significant diversion of time by the Company's management.
After consideration of the nature of the claims and the facts relating to
the proceedings, the Company believes that the resolution of this matter will
not have a material adverse effect on the Company's business, financial
condition and results of operations; however, the results of these
proceedings, including any potential settlement, are uncertain and there can
be no assurance to that effect.
19
<PAGE>
ITEM 2. CHANGES IN SECURITIES:
(a) COMMON STOCK SPLIT
In September 1997, the stockholders approved an increase in the Company's
authorized shares of Common Stock from 100,000,000 to 200,000,000. On
September 22, 1997 the Company effected a two-for-one stock split to
stockholders of record as of August 29, 1997.
(b) ISSUANCE OF UNREGISTERED SECURITIES
Between July 1, 1997 and September 30, 1997 the Company issued and sold the
following securities which were not registered under the Securities Act of
1933 ("Securities Act"): the Company issued and sold an aggregate of 257,030
shares of Common Stock upon the net exercise of warrants to 6 persons or
entities for aggregate consideration of 2,034 shares of Common Stock.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in
reliance upon Section 4(2) of the Securities Act, or Regulation D promulgated
thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act,
as transactions by an issuer not involving any public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensations as provided under Rule 701.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a) SPECIAL MEETING
The Company held a special meeting of stockholders on September 22, 1997.
The stockholders voted on and approved the filing of the Company's Fifth
Amended and Restated Certificate of Incorporation which increased the
Company's authorized shares of Common Stock. The result of the vote was
31,102,657 shares in favor, 355,804 shares against, 22,270 shares abstaining
and 0 broker non-votes.
ITEM 5. OTHER INFORMATION: None
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- - ------- --------------------
<S> <C>
3.3.1 Fifth Amended and Restated Certificate of Incorporation of the Registrant.
3.5 Amended and Restated Bylaws of the Registrant.***
4.1 Specimen Certificate of Common Stock.*
4.2 Series E Preferred Stock Purchase Agreement, dated September 29, 1995,
between the Registrant and certain purchasers of the Registrant's Series E
Preferred Stock.*
4.3 Certificate of Incorporation of the Registrant (included in Exhibit 3.3).*
10.1 Form of Warrant Issued In Connection with the Sale of the Registrant's
Series A Preferred Stock on January 6, 1993.*
10.2 Form of Warrant Issued In Connection with the Sale of the Registrant's
Series B Preferred Stock on October 5, 1993.*
10.3 Form of Warrant Issued in Connection with the Sale of the Registrant's
Series C Preferred Stock on March 16, 1994.*
10.4 Form of Performance Warrant Issued in Connection with the Sale of the
Registrant's Series C Preferred Stock on March 16, 1994 and May 4, 1994.*
10.4.1 Form of Amendment to Warrants and Performance Warrants.*
10.5 Warrant Issued in Connection with the Sale of the Registrant's Series E
Preferred Stock on September 29, 1995.*
10.6 Restricted Stock Issuance Agreement, dated May 19, 1995, between the
Registrant, Donald Green and Maureen Green.*
10.7 Compensation Agreement, dated May 19, 1995, between the Registrant and
Donald Green.*
10.8 Promissory Note Secured by Pledge Agreement, dated May 31, 1995, by
Donald Green in favor of the Registrant.*
10.9 Stock Pledge Agreement, dated June 16, 1995, between the Registrant and
Donald Green.*
10.10 Promissory Note issued by Carl Grivner, dated October 5, 1995, in favor
of the Registrant.*
10.11 Shareholder and Joint Venture Agreement, dated December 28, 1995,
between the Registrant and Harris Corporation, acting for the purposes of the
agreement through its Digital Telephone Systems Division.*+
10.13 License, Joint Development, Supply and Authorized Manufacturing Agreement,
dated September 25, 1992, between the Registrant and Industrial Technology
Research Institute of the Republic of China.*+
10.14 Hangzhou Aftek Communication Registrant Ltd. Contract, dated June 18, 1994,
between Advanced Fibre Technology Communication (Hong Kong) Limited and
Hangzhou Communication Equipment Factory of the MPT., HuaTong Branch.*+
10.15 1445 & 1455 McDowell Boulevard North Net Lease, dated February 1, 1993,
between the Registrant and G & W/ Redwood Associates Joint Venture, for the
premises located at 1445 McDowell Boulevard North.*
10.16 Redwood Business Park Net Lease, dated July 9, 1995, between the Registrant
and G & W/Redwood Associates Joint Venture, for the premises located at
1455 McDowell Boulevard North.*
10.17 Redwood Business Park Net Lease, dated July 10, 1995, between the Registrant
and G & W/Redwood Associates Joint Venture, for the premises located at
1440 McDowell Boulevard North.*
10.18 Redwood Business Park Net Lease, dated June 3, 1996, between the Registrant
and G & W/Redwood Associates Joint Venture, for the premises located at
Buildings 1 & 9 of Willow Brook Court.*
10.19 Second Amended and Restated Loan and Security Agreement, dated December 7, 1995,
between the Registrant and Bank of the West.*
10.20 Form of Indemnification Agreement for Executive Officers and Directors of the
Registrant.*
10.21 The Registrant's 1993 Stock Option/Stock Issuance Plan as amended (the "1993 Plan").*
10.22 Form of Stock Option Agreement pertaining to the 1993 Plan.*
10.23 Form of Notice of Grant of Stock Option pertaining to the 1993 Plan.*
10.24 Form of Stock Purchase Agreement pertaining to the 1993 Plan.*
10.25 The Registrant's 1996 Stock Incentive Plan (the "1996 Plan").*
10.26 Form of Stock Option Agreement pertaining to the 1996 Plan.*
10.26.1 Form of Automatic Stock Option Agreement pertaining to the 1996 Plan.*
10.27 Form of Notice of Grant of Stock Option pertaining to the 1996 Plan.*
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.27.1 Form of Notice of Grant of Non-Employee Director Automatic Stock Option
pertaining to the 1996 Plan.*
10.28 Form of Stock Issuance Agreement pertaining to the 1996 Plan.*
10.29 The Registrant's Employee Stock Purchase Plan.*
10.30 Termination Agreement of Joint Venture and Partnership Agreement, dated
December 23, 1996, between the Registrant and Tellabs Operations, Inc.**
10.31 License and Marketing Agreement, dated December 23, 1996, between the
Registrant and Tellabs Operations, Inc.**
10.32 OEM Agreement, dated December 23, 1996, between the Registrant and
Tellabs Operations, Inc.**
10.33 Stock Issuance Agreement, dated June 30, 1997, between the Registrant
and Peter A. Darbee.***
10.34 Note secured by Stock Pledge Agreement, dated June 30, 1997, by Peter A.
Darbee in favor of the Registrant.***
10.35 Stock Pledge Agreement, dated June 30, 1997, between the Registrant and
Peter A. Darbee.***
10.36 Consulting Agreement, dated May 19, 1997, between the Registrant and
Peter A. Darbee.***
11.1 Schedule re: computation of net income (loss) per share.
21.1 Subsidiaries of the Registrant.*
27.1 Financial data schedule.
</TABLE>
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-8921) filed with the Securities and Exchange Commission on
July 26, 1996, as amended, and declared effective September 30, 1996.
** Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-20369) filed with the Securities and Exchange Commission on
January 24, 1997, as amended, and declared effective February 12, 1997.
*** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, filed with the Securities and Exchange
Commission on August 8, 1997.
+ Portions of this Exhibit have been granted Confidential Treatment.
(b) REPORTS ON FORM 8-K: NONE
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED FIBRE COMMUNICATIONS, INC.
(Registrant)
Dated: November 7, 1997 By:
/s/ Peter A. Darbee
-------------------------------------
Name: Peter A. Darbee
Title: Vice President, Chief
Financial Officer and Secretary
23
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
EXHIBIT INDEX
Exhibit
Number Document Description
------- --------------------
3.3.1 Fifth Amended and Restated Certificate of Incorporation of
the Registrant.
11.1 Schedule re: computation of net income per share.
27.1 Financial data schedule.
24
<PAGE>
EXHIBIT 3.3.1
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ADVANCED FIBRE COMMUNICATIONS, INC.
A Delaware corporation
(Pursuant to Sections 242 and 245
of the Delaware General Corporation Law)
Advanced Fibre Communications, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, hereby certifies as follows:
FIRST: That the name of the corporation is Advanced Fibre
Communications, Inc. and that the corporation was originally incorporated on
September 28, 1995, pursuant to the General Corporation Law.
SECOND: The Amended and Restated Certificate of Incorporation of
this corporation shall be restated to read in full as is set forth on Exhibit
A attached hereto.
THIRD: That said amendment and restatement was duly adopted in
accordance with the provisions of Section 242 and Section 245 of the General
Corporation Law by obtaining a majority vote of the Common Stock in favor of
said amendment and restatement in the manner set forth in Section 222 of the
General Corporation Law.
IN WITNESS WHEREOF, Advanced Fibre Communications, Inc. has caused
its corporate seal to be hereunto affixed and this Fifth Amended and Restated
Certificate of Incorporation to be signed by its President and attested to by
its Secretary this 22nd day of September, 1997.
ADVANCED FIBRE
COMMUNICATIONS, INC.
---------------------------------------------
Carl Grivner,
President, Chief Executive Officer and Chief
Operating Officer
ATTEST
- - ----------------------
Peter A. Darbee, Secretary
1.
<PAGE>
EXHIBIT A
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ADVANCED FIBRE COMMUNICATIONS, INC.
FIRST. The name of the corporation is Advanced Fibre Communications,
Inc. (the "Corporation").
SECOND. The address of its registered office in the State of Delaware
is 1013 Centre Road, in the City of Wilmington, County of New Castle. The
name of its registered agent at such address is The Prentice-Hall Corporation
System.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH. (a) The Corporation is authorized to issue 205,000,000 shares
of capital stock, $0.01 par value. The shares shall be divided into two
classes, designated as follows:
Designation of Class Number of Shares Par Value
-------------------- ---------------- ---------
Common Stock 200,000,000 $0.01
Preferred Stock 5,000,000 $0.01
-----------
TOTAL: 205,000,000
-----------
(b) The Preferred Stock may be issued from time to time in
one or more series. The Board of Directors is expressly authorized, in the
resolution or resolutions providing for the issuance of any wholly unissued
series of Preferred Stock, to fix, state and express the powers, rights,
designations, preferences, qualifications, limitations and restrictions
thereof, including without limitation: the rate of dividends upon which and
the times at which dividends on shares of such series shall be payable and
the preference, if any, which such dividends shall have relative to dividends
on shares of any other class or classes or any other series of stock of the
Corporation; whether such dividends shall be cumulative or noncumulative, and
if cumulative, the date or dates from which dividends on shares of such
series shall be cumulative; the voting rights, if any, to be provided for
shares of such series; the rights, if any, which the holders of shares of
such series shall have in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation; the
rights, if any, which the holders of shares of such series shall have to
convert such shares into or exchange such shares for shares of stock of the
Corporation, and the terms and conditions, including price and rate of
exchange of such conversion or exchange; the redemption rights (including
sinking fund provisions), if any, for shares of such series; and such other
powers, rights, designations, preferences, qualifications, limitations and
restrictions as the Board of Directors may desire to so fix. The Board of
Directors is also expressly authorized to fix the number of shares
1.
<PAGE>
constituting such series and to increase or decrease the number of shares of
any series prior to the issuance of shares of that series and to increase or
decrease the number of shares of any series subsequent to the issuance of
shares of that series, but not to decrease such number below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
FIFTH. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is authorized to make, alter or repeal any or
all of the Bylaws of the Corporation; provided, however, that any Bylaw
amendment adopted by the Board of Directors increasing or reducing the
authorized number of Directors shall require the affirmative vote of a
majority of the total number of Directors which the Corporation would have if
there were no vacancies. In addition, new Bylaws may be adopted or the
Bylaws may be amended or repealed by the affirmative vote of at least 66-2/3%
of the combined voting power of all shares of the Corporation entitled to
vote generally in the election of directors, voting together as a single
class. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at
least 66-2/3% of the combined voting power of all shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to alter, change, amend, repeal or adopt any
provision inconsistent with, this Article FIFTH.
SIXTH. (a) Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special
meeting of stockholders of the Corporation and may not be effected by any
consent in writing of such stockholders.
(b) Special meetings of stockholders of the Corporation may
be called only (i) by the Chairman of the Board of Directors, or (ii) by the
Chairman or the Secretary at the written request of a majority of the total
number of Directors which the Corporation would have if there were no
vacancies upon not fewer than 10 nor more than 60 days' written notice. Any
request for a special meeting of stockholders shall be sent to the Chairman
and the Secretary and shall state the purposes of the proposed meeting.
Special meetings of holders of the outstanding Preferred Stock may be called
in the manner and for the purposes provided in the resolutions of the Board
of Directors providing for the issue of such stock. Business transacted at
special meetings shall be confined to the purpose or purposes stated in the
notice of meeting.
(c) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at
least 66-2/3% of the combined voting power of all shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to alter, change, amend, repeal or adopt any
provision inconsistent with, this Article SIXTH.
2.
<PAGE>
SEVENTH. (a) The number of Directors which shall constitute the whole
Board of Directors of this corporation shall be as specified in the Bylaws of
this corporation, subject to this Article SEVENTH.
(b) The Directors shall be classified with respect to the
time for which they severally hold office into three classes designated Class
I, Class II and Class III, as nearly equal in number as possible, as shall be
provided in the manner specified in the Bylaws of the Corporation. Each
Director shall serve for a term ending on the date of the third annual
meeting of stockholders following the annual meeting at which the Director
was elected; provided, however, that each initial Director in Class I shall
hold office until the annual meeting of stockholders in 1997, each initial
Director in Class II shall hold office until the annual meeting of
stockholders in 1998 and each initial Director in Class III shall hold office
until the annual meeting of stockholders in 1999. Notwithstanding the
foregoing provisions of this Article SEVENTH, each Director shall serve until
his successor is duly elected and qualified or until his death, resignation
or removal.
(c) In the event of any increase or decrease in the
authorized number of Directors, (i) each Director then serving as such shall
nevertheless continue as a Director of the class of which he is a member
until the expiration of his current term, or his early resignation, removal
from office or death and (ii) the newly created or eliminated directorship
resulting from such increase or decrease shall be apportioned by the Board of
Directors among the three classes of Directors so as to maintain such classes
as nearly equally as possible.
(d) Any Director or the entire Board of Directors may be
removed by the affirmative vote of the holders of at least 66-2/3% of the
combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
(e) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at
least 66-2/3% of the combined voting power of all shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to alter, change, amend, repeal or adopt any
provision inconsistent with, this Article SEVENTH.
EIGHTH. (a) 1. In addition to any affirmative vote required by law,
any Business Combination (as hereinafter defined) shall require the
affirmative vote of at least 66-2/3% of the combined voting power of all
shares of the Corporation entitled to vote generally in the election of
directors, voting together as a single class (for purposes of this Article
EIGHTH, the "Voting Shares"). Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that some lesser
percentage may be specified by law or in any agreement with any national
securities exchange or otherwise.
3.
<PAGE>
2. The term "Business Combination" as used in this
Article EIGHTH shall mean any transaction which is referred to in any one or
more of the following clauses (A) through (E):
(A) any merger or consolidation of the Corporation
or any Subsidiary (as hereinafter defined) with or into (i) any Interested
Stockholder (as hereinafter defined) or (ii) any other corporation (whether
or not itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate (as hereinafter defined) or Associate
(as hereinafter defined) of an Interested Stockholder; or
(B) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of related
transactions) to or with, or proposed by or on behalf of, any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder, of
any assets of the Corporation or any Subsidiary constituting not less than
five percent of the total assets of the Corporation, as reported in the
consolidated balance sheet of the Corporation as of the end of the most
recent quarter with respect to which such balance sheet has been prepared; or
(C) the issuance or transfer by the Corporation or
any Subsidiary (in one transaction or a series of related transactions) of
any securities of the Corporation or any Subsidiary to, or proposed by or on
behalf of, any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder in exchange for cash, securities or other property (or
a combination thereof) constituting not less than five percent of the total
assets of the Corporation, as reported in the consolidated balance sheet of
the Corporation as of the end of the most recent quarter with respect to
which such balance sheet has been prepared; or
(D) the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation, or any spin-off or split-up of
any kind of the Corporation or any Subsidiary, proposed by or on behalf of an
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder; or
(E) any reclassification of securities (including
any reverse stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its Subsidiaries or
any similar transaction (whether or not with or into or otherwise involving
an Interested Stockholder) which has the effect, directly or indirectly, of
increasing the percentage of the outstanding shares of (i) any class of
equity securities of the Corporation or any Subsidiary or (ii) any class of
securities of the Corporation or any Subsidiary convertible into equity
securities of the Corporation or any Subsidiary, represented by securities of
such class which are directly or indirectly owned by any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder.
4.
<PAGE>
(b) The provisions of section (a) of this Article EIGHTH
shall not be applicable to any particular Business Combination, and such
Business Combination shall require only such affirmative vote as is required
by law and any other provision of this Certificate of Incorporation, if such
Business Combination has been approved by two-thirds of the whole Board of
Directors.
(c) For the purposes of this Article EIGHTH:
1. A "person" shall mean any individual, firm,
corporation or other entity.
2. "Interested Stockholder" shall mean, in respect of
any Business Combination, any person (other than the Corporation or any
Subsidiary) who or which, as of the record date for the determination of
stockholders entitled to notice of and to vote on such Business Combination,
or immediately prior to the consummation of any such transaction
(A) is or was, at any time within two years prior
thereto, the beneficial owner, directly or indirectly, of 15% or more of the
then outstanding Voting Shares, or
(B) is an Affiliate or Associate of the Corporation
and at any time within two years prior thereto was the beneficial owner,
directly or indirectly, of 15% or more of the then outstanding Voting Shares,
or
(C) is an assignee of or has otherwise succeeded to
any shares of capital stock of the Corporation which were at any time within
two years prior thereto beneficially owned by any Interested Stockholder, if
such assignment or succession shall have occurred in the course of a
transaction, or series of transactions, not involving a public offering
within the meaning of the Securities Act of 1933, as amended.
3. A "person" shall be the "beneficial owner" of any
Voting Shares
(A) which such person or any of its Affiliates and
Associates (as hereinafter defined) beneficially own, directly or indirectly,
or
(B) which such person or any of its Affiliates or
Associates has (i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights,
exchange rights, warrants or options, or otherwise, or (ii) the right to vote
pursuant to any agreement, arrangement or understanding, or
5.
<PAGE>
(C) which are beneficially owned, directly or
indirectly, by any other person with which such first mentioned person or any
of its Affiliates or Associates has any agreement, arrangement or
understanding for the purposes of acquiring, holding, voting or disposing of
any shares of capital stock of the Corporation.
4. The outstanding Voting Shares shall include shares
deemed owned through application of paragraph 3 above but shall not include
any other Voting Shares which may be issuable pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise.
5. "Affiliate" and "Associate" shall have the
respective meanings given those terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on the
date of adoption of this Certificate of Incorporation (the "Exchange Act").
6. "Subsidiary" shall mean any corporation of which a
majority of any class of equity security (as defined in Rule 3a11-1 of the
General Rules and Regulations under the Exchange Act) is owned, directly or
indirectly, by the Corporation; PROVIDED, HOWEVER, that for the purposes of
the definition of Interested Stockholder set forth in paragraph 2 of this
section (c) the term "Subsidiary" shall mean only a corporation of which a
majority of each class of equity security is owned, directly or indirectly,
by the Corporation.
(d) A majority of the directors shall have the power and duty
to determine for the purposes of this Article EIGHTH on the basis of
information known to them, (1) whether a person is an Interested Stockholder,
(2) the number of Voting Shares beneficially owned by any person, (3) whether
a person is an Affiliate or Associate of another, (4) whether a person has an
agreement, arrangement or understanding with another as to the matters
referred to in paragraph 3 of section (c) or (5) whether the assets subject
to any Business Combination or the consideration received for the issuance or
transfer of securities by the Corporation or any Subsidiary constitutes not
less than five percent of the total assets of the Corporation.
(e) Nothing contained in this Article EIGHTH shall be
construed to relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
(f) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at
least 66-2/3% of the combined voting power of all shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to alter, change, amend, repeal or adopt any
provision inconsistent with, this Article EIGHTH.
6.
<PAGE>
NINTH. This Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
TENTH. A Director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, iii) under Section 174 of the General
Corporation Law of Delaware or iv) for any transaction from which the
Director derived any improper personal benefit. If the General Corporation
Law of Delaware is hereafter amended to authorize, with the approval of a
corporation's stockholders, further reductions in the liability of a
corporation's directors for breach of fiduciary duty, then a Director of the
Corporation shall not be liable for any such breach to the fullest extent
permitted by the General Corporation Law of Delaware as so amended. Any
repeal or modification of the foregoing provisions of this Article NINTH by
the stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such
repeal or modification.
7.
<PAGE>
EXHIBIT 11.1
ADVANCED FIBRE COMMUNICATIONS, INC.
SCHEDULE RE: COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------------
1997 1996 1997 1996
-------- -------- ---------- --------
Net income $10,791 $ 3,204 $ 23,746 $ 1,663
------- ------- -------- -------
Weighted average common shares
outstanding 71,951 11,062 69,365 10,922
Redeemable convertible preferred
stock, on an as-if converted
basis - 37,434 - 37,288
Common stock equivalents - stock
options and warrants 7,161 13,010 8,072 11,296
Staff Accounting Bulletin No. 83
issuances and grants:
Stock options - - - 506
Redeemable convertible
preferred stock issued - - - 104
------- ------- -------- -------
Shares used in per share
computations 79,112 61,506 77,437 60,116
------- ------- -------- -------
Net income per share $ 0.14 $ 0.31
------- --------
------- --------
Pro forma net income per share $ 0.05 $ 0.03
------- -------
------- -------
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,774
<SECURITIES> 99,985
<RECEIVABLES> 59,499
<ALLOWANCES> 0
<INVENTORY> 42,227
<CURRENT-ASSETS> 216,626
<PP&E> 25,950
<DEPRECIATION> (3,337)
<TOTAL-ASSETS> 245,854
<CURRENT-LIABILITIES> 39,279
<BONDS> 0
0
0
<COMMON> 722
<OTHER-SE> 205,058
<TOTAL-LIABILITY-AND-EQUITY> 245,854
<SALES> 181,309
<TOTAL-REVENUES> 182,402
<CGS> 93,851
<TOTAL-COSTS> 99,984
<OTHER-EXPENSES> 48,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,323)
<INCOME-PRETAX> 37,692
<INCOME-TAX> 13,946
<INCOME-CONTINUING> 23,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,746
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
