<PAGE> 1
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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 MARCH 31, 1998
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 68-0277743
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
ONE WILLOW BROOK COURT
PETALUMA, CALIFORNIA 94954
(707) 794-7700
(ADDRESS 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:
<TABLE>
<CAPTION>
OUTSTANDING AS OF
CLASS APRIL 27, 1998
----- --------------
<S> <C>
Common Stock, $0.01 par value 74,231,941
</TABLE>
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<PAGE> 2
ADVANCED FIBRE COMMUNICATIONS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March 31, 1998 and
December 31, 1997......................................... 2
Condensed Consolidated Statements of Operations Three months
ended
March 31, 1998 and 1997................................. 3
Condensed Consolidated Statements of Cash Flows Three months
ended
March 31, 1998 and 1997................................. 4
Notes to Condensed Consolidated Financial Statements........ 5
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............................ 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,699 $ 9,053
Marketable securities..................................... 83,041 96,143
Accounts receivable, net.................................. 91,501 79,098
Inventories, net.......................................... 59,812 52,073
Other current assets...................................... 6,608 6,090
-------- --------
Total current assets................................... 249,661 242,457
Property and equipment, net................................. 31,400 24,506
Other assets................................................ 10,141 6,330
-------- --------
Total assets...................................... $291,202 $273,293
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 22,310 $ 18,475
Accrued liabilities....................................... 26,665 30,342
-------- --------
Total current liabilities.............................. 48,975 48,817
Long term liabilities..................................... 1,135 756
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized in 1998 and 1997; no shares issued and
outstanding............................................ -- --
Common stock, $0.01 par value; 200,000,000 shares
authorized in 1998 and 1997; 74,029,273 and 72,626,370
shares issued and outstanding in 1998 and 1997,
respectively........................................... 740 726
Additional paid-in capital................................ 198,684 193,183
Notes receivable from stockholders........................ (835) (835)
Retained earnings......................................... 42,503 30,646
-------- --------
Total stockholders' equity............................. 241,092 223,720
-------- --------
Total liabilities and stockholders' equity........ $291,202 $273,293
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Revenues.................................................... $85,744 $44,405
Cost of revenues............................................ 45,575 24,977
------- -------
Gross profit...................................... 40,169 19,428
------- -------
Operating expenses:
Research and development.................................. 8,312 4,850
Selling, general and administrative....................... 14,761 7,798
------- -------
Total operating expenses.......................... 23,073 12,648
------- -------
Operating income.................................. 17,096 6,780
Other income, net......................................... 1,145 996
------- -------
Income before income taxes........................ 18,241 7,776
Income taxes................................................ 6,384 2,877
------- -------
Net income........................................ $11,857 $ 4,899
======= =======
Basic net income per share.................................. $ 0.16 $ 0.07
======= =======
Shares used in basic per share computations................. 73,838 66,344
======= =======
Diluted net income per share................................ $ 0.15 $ 0.06
======= =======
Shares used in diluted per share computations............... 79,134 78,208
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 11,857 $ 4,899
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Tax benefit from option exercises...................... 3,210 --
Deferred incomes taxes................................. (229) --
Depreciation and amortization.......................... 1,115 494
Changes in operating assets and liabilities:
Accounts receivable.................................. (12,403) (9,298)
Inventories.......................................... (7,739) (2,323)
Accounts payable..................................... 3,835 3,825
Other, including other current assets and accrued
liabilities......................................... (3,906) 4,512
Other, including other long term assets and
liabilities......................................... (3,484) 91
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES...................................... (7,744) 2,200
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of marketable securities............ 13,102 (14,093)
Purchase of property and equipment........................ (8,009) (4,793)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES...................................... 5,093 (18,886)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options and
warrants............................................... 2,297 616
Proceeds from secondary offering of common stock.......... -- 8,272
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 2,297 8,888
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (354) (7,798)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 9,053 24,942
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 8,699 $ 17,144
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 6
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 year ended December 31, 1997, contained in the
Company's annual report on Form 10-K.
The condensed 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 months ended March 31, 1998 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):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials........................................ $26,781 $17,369
Work in progress..................................... 613 666
Finished goods....................................... 32,418 34,038
------- -------
Inventories, net..................................... $59,812 $52,073
======= =======
</TABLE>
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)
(the "UMC" system). 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 were placed 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 sought 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
5
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ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company filed a counterclaim against the trustee claiming, among other things,
that the trustee improperly disclosed the design documentation to third parties.
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
alleged that ITRI breached the ITRI Agreements, among other things, 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 sought 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 had breached the ITRI Agreements
and was 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
ASICs sales and alleged failure to provide certain other UMC technology to the
Member Companies. The complaint filed by the Member Companies alleged 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 sought 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 was required to supply the Member Companies with a
specified number of ASICs during the ensuing two month period 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.
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 to require the Company to continue supplying ASICs. 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., to which ITRI
purportedly assigned member company rights under the ITRI Agreements without the
Company's consent.
In March 1998, the Company, ITRI, the Member Companies and the trustee
entered into a definitive Settlement Agreement that resolved all claims among
such parties. Under the Settlement Agreement, all claims involved in the
proceedings between such parties will be dismissed with prejudice. The
Settlement Agreement provides that the Member Companies will pay an aggregate of
$6.3 million to the Company over a five year period, and will pay the Company
royalties on the purchase of certain ASICs by the Member Companies. Under the
Settlement Agreement, the Company granted a limited license to the Member
Companies to certain of the Company's technology, agreed to sell certain ASICs
to the Member Companies, and agreed to pay $500,000 to ITRI over a three year
period for legal fees incurred by ITRI in the proceedings. The Settlement
Agreement does not grant to the Member Companies any rights to the
6
<PAGE> 8
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's UMC 1000 Third Generation Digital Loop Carrier(TM) ("3GDLC")
technology or products. In addition, the Settlement Agreement does not affect
the Company's claims against Acer Netxus, Inc.
The Company believes that its claims against Acer Netxus, Inc. are
meritorious and intends to pursue these claims vigorously. However, due to the
nature of the claims, 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 this proceeding, including any potential settlement, are uncertain
and there can be no assurance to that effect.
DSC
On December 22, 1997, the Company filed a lawsuit in Sonoma County Superior
Court in California against DSC Communications Corporation ("DSC") related to
its hiring of a former employee of DSC, to become the Company's Vice President,
Product Planning. The Company's complaint responded to DSC's litigation threats
and seeks a declaratory judgement that its hiring of the former DSC employee was
lawful.
On January 22, 1998, DSC filed a lawsuit against the Company and the former
DSC employee in the United States District Court, Eastern District of Texas,
alleging "inevitable" trade secret misappropriation and related claims. DSC also
asserted a separate claim against the Company for patent infringement alleging
that the Company's 3GDLC product infringes a DSC patent. DSC's complaint seeks
unspecified damages, injunctions relating to the alleged misappropriation and
patent infringement, attorneys' fees and other relief. On February 5, 1998, the
United States District Court, Eastern District of Texas granted the Company's
motion to dismiss all non-patent claims in this lawsuit.
On February 18, 1998, DSC filed a motion in the lawsuit filed by the
Company in Sonoma County Superior Court in California to allow DSC to file a
cross-complaint against the Company to allege the "inevitable" trade secret
misappropriation and related claims, seeking unspecified damages, injunctions
relating to the alleged misappropriation, attorneys' fees and other relief. This
motion was granted on April 13, 1998.
The Company believes that all of DSC's misappropriation and other claims
related to the hiring of the former DSC employee are without merit, and the
Company intends to defend the lawsuits vigorously. Based on the Company's
preliminary review of the patent claim, the Company believes that the Company's
3GDLC product does not infringe the DSC patent, and that the Company has
meritorious defenses to such claim. The Company intends to vigorously defend the
litigation against DSC and prosecute its declaratory judgement action. However,
the Company cannot predict the ultimate outcome of these lawsuits. In addition,
patent litigation is highly complex and can extend for a protracted period of
time, which can divert the attention of the Company's management and technical
personnel and require the Company to incur substantial costs and expenses. If
the patent claim were to be resolved against the Company, this could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RELTEC Corporation
On November 26, 1997, the Company filed a lawsuit in Sonoma County Superior
Court in California against RELTEC Corporation, alleging trade secret
misappropriation, tortious interference with a contract, and related claims. The
case involves RELTEC's acquisition of the Company's technology through the
Company's Taiwan-based licensee, Vidar-SMS Co., Ltd. On January 21, 1998, the
Company filed for and
7
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ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
obtained an order to show cause, and RELTEC stipulated to most of the Company's
requested injunctive relief in April and May 1998.
NOTE 4 NET INCOME PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share effective December 15, 1997. SFAS
No. 128 requires the presentation of basic net income per share and, for
companies with complex capital structures, diluted net income per share. Basic
net income per share is computed using the weighted average number of shares of
common stock outstanding. Diluted net income per share is computed using the
weighted average number of shares of common stock and common equivalent shares
from options and warrants to purchase common stock using the treasury stock
method, when dilutive.
The following tables set forth the computations of shares and net income
used in the calculation of basic and diluted net income per share for the
quarters ended March 31, 1998, and 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Basic net income per share:
Net income.................................................. $11,857 $ 4,899
======= =======
Actual weighted average common shares outstanding for the
period.................................................... 73,838 66,344
======= =======
Basic net income per share.................................. $ 0.16 $ 0.07
======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Diluted net income per share:
Net income.................................................. $11,857 $ 4,899
======= =======
Actual weighted average common shares outstanding for the
period.................................................... 73,838 66,344
Weighted average number of shares upon exercise of dilutive
options and warrants...................................... 5,296 11,864
------- -------
Shares used in per share calculations....................... 79,134 78,208
======= =======
Diluted net income per share................................ $ 0.15 $ 0.06
======= =======
</TABLE>
NOTE 5 COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 requires classification of
items of other comprehensive income by nature in a financial statement and a
breakout of the accumulated balance of other comprehensive income separately
from retained earnings and additional paid in capital in the equity section of a
statement of financial position. Reporting comprehensive income provides a
measure of all changes in equity that result from recognized transactions and
other economic events of the period other than transactions with owners in their
capacity as owners. Adoption of this statement did not have a material effect on
the Company's consolidated financial position or results of operations because
there are no material differences between net income and comprehensive income in
the Company's circumstances.
8
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ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 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.
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) impact of the year 2000 on operating
systems, (xii) customer concentration, (xiii) risks associated with
international markets, including currency and economic risks, (xiv) dependence
on key personnel, (xv) compliance with regulations and industry standards and
(xvi) 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
The Company designs, develops, manufactures, markets and supports the
Universal Modular Carrier 1000(TM) (the "UMC" system), a cost effective,
multi-feature digital loop carrier system developed to serve small line size
markets. The Company's UMC system is designed to enable telephone companies and
other service providers to connect subscribers to the central office switch for
voice and data communications over copper, fiber and analog radio networks. The
Company sells its product worldwide, primarily through its direct sales force in
the domestic market, and through its direct sales force, distributors and agents
in the international markets.
RESULTS OF OPERATIONS
REVENUES. For the three months ended March 31, 1998, revenues increased
$41.3 million, or 93%, to $85.7 million from $44.4 million for the same period
in 1997. International revenues increased $16.5 million, or 120%, to $30.2
million for the first quarter of 1998 from $13.7 million for 1997. International
revenues represented 35% and 31% of total revenues for the three months ending
March 31, 1998 and 1997, respectively.
The improvement in revenues for the three month period of 1998 was
primarily due to the increase in international revenues, continued market
acceptance of the UMC 1000 Third Generation Digital Loop
9
<PAGE> 11
Carrier(TM) ("3GDLC") and other new features of the UMC system, and the
expansion of the Company's customer base.
For the three months ended March 31, 1998, Integrators of System Technology
(Pty) Ltd. in South Africa, France Telecom, and GTE Communication Systems
Corporation ("GTE") accounted for 13%, 11% and 11% of total revenues,
respectively. For the three months ended March 31, 1997, GTE accounted for 13%
of total revenues. No other customer accounted for 10% or more of total revenues
in either 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 March 31, 1998, gross profit
totaled $40.2 million, or 46.8% of total revenues, compared with $19.4 million
or 43.8% of total revenues in the same period in 1997.
The improvement in gross profit margins from 1997 to 1998 for the three
month period resulted from the customer mix, higher margin product mix, greater
efficiencies achieved in purchasing and manufacturing activities associated with
higher unit volume and from engineering design improvements. In the future,
gross profits may fluctuate due to a wide variety of factors, including: the mix
between domestic and international sales; the customer mix; the product 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; 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 March 31, 1998,
research and development expenses increased $3.4 million, or 71%, to $8.3
million from $4.9 million for the same period in 1997. Research and development
expenses were 9.7% and 10.9% of revenues for the first quarter of 1998 and 1997,
respectively.
The increase in research and development expenses from 1997 to 1998 for the
three month period was primarily due to the addition of personnel in
engineering, the use of outside services for certain development and testing
efforts and higher costs for material and test equipment used to develop and
test new products and features. As of March 31, 1998, the number of employees in
research and development was 185 compared with 130 as of March 31, 1997, an
increase of 42.3%. The Company expects that research and development
expenditures will generally continue to increase in absolute dollars to support
the continued development of new products and features and the efforts to reduce
product costs. All research and development costs to date have been expensed as
incurred.
SELLING, GENERAL AND ADMINISTRATIVE. For the three months ended March 31,
1998, selling, general and administrative expenses increased $7.0 million, or
89%, to $14.8 million from $7.8 million for the same period in 1997. Selling,
general and administrative expenses were 17.2% and 17.6% of revenues for the
respective first quarters of 1998 and 1997.
Additional employees and associated salaries and benefits, higher
facilities costs and legal costs associated with the ITRI litigation primarily
accounted for the increase in general and administrative expenses from first
quarter 1997 to first quarter 1998. The increase in sales and marketing expenses
from 1997 to 1998 for the three month period was attributable primarily to the
impact of higher revenue levels on commissions earned by the Company's sales
force and by international distributors and additional sales and marketing
personnel. Selling, general and administrative headcount increased 87.4% to 311
from 166 as of March 31, 1998 and 1997, respectively.
INCOME TAXES. For the three months ended March 31, 1998 and 1997, the
Company recorded income taxes at an effective rate that approximated the
combined federal and state statutory rates. The effective tax rate declined from
37% in the first quarter of 1997 to 35% in the comparable period of 1998.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's cash and marketable securities totaled
$91.7 million compared with $105.2 million at December 31, 1997.
The Company completed its initial public offering in October 1996, in which
it issued and sold 10,350,000 shares of Common Stock for aggregate proceeds to
the Company of $120.3 million. Of the aggregate proceeds received in the
offering, $2.2 million was used to defray costs and expenses related to the
offering, resulting in net proceeds of approximately $118.1 million. Of the net
proceeds, $14.8 million was used to reduce debt. The remainder is invested in
cash equivalents and marketable securities.
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 $7.7 million was used in operating activities in the first
quarter of 1998. This was primarily the result of an increase in receivables due
to higher sales volume including increased international sales which typically
have longer payment terms and an increase in inventory in anticipation of
expected customer demand for the Company's products offset by increased earnings
and increased accounts payable. Net cash of $5.1 million was provided by
investing activities through sales of marketable securities, partially offset by
purchases of property and equipment. The Company continues to invest in capital
equipment to support its employee and facility growth 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%, or 9%, at March 31, 1998. The line of credit expires in June 1998 and
the Company intends to renew it at that time. 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 $50.0 million on behalf of the Company. The bank line requires
the Company to comply with certain debt and financial covenants. As of March 31,
1998, and December 31, 1997, no borrowings were outstanding under the bank line,
and the Company was in compliance with the covenants contained in the agreement.
At March 31, 1998, and December 31, 1997, $290,000 and $140,000, respectively,
were reserved for letters of credit under the line and $6,855,000 and
$2,900,000, respectively, were reserved for foreign exchange contracts under the
line.
The Company also has lease lines totaling $8.6 million that are used for
equipment and furniture purchases.
The Company believes that its existing cash and short term investments,
available credit facilities and cash flows will be adequate to support the
Company's financial resource needs, including working capital requirements,
capital expenditures and operating lease obligations for the next twelve months.
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 system 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
Communications Corporation. There can be no assurance that the Company will
sustain or increase its profitability in the future.
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS AND 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
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particular period. These factors include: the mix between domestic and
international sales; the customer mix; the product 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; 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 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.
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 have a material adverse effect on 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.
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 U.S. and developing countries.
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.
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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"), codec components, 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 components
and equipment. Many of the Company's competitors are much 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. There can be no
assurance that shortages of components 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
to 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., Solectron Inc., 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 ("PCBAs"), (ii) Paragon, Inc., and Tyco Printed Circuit Group Inc. to
manufacture backplanes and channel bank assemblies ("CBAs"), (iii) AMI American
Microsystems,
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Inc. for ASICs and (iv) Sonoma Metal Products, Inc., and Cowden Metal San Jose,
Inc., to manufacture the external housing 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 the Company's 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. The Company
is in the process of bringing its 24 hour on line technical support services in
house to improve quality and responsiveness of service, while Point To Point
will continue to provide field support. There can be no assurance that this
transition will not adversely affect current technical and post sales support
functions.
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 Communications Corporation, 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, pursuant to the
Settlement Agreement recently entered into and related agreements with the
Industrial Technology Research Institute ("ITRI"), and such member companies
have been granted 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
certain restrictions set forth in such agreements, in January 2005, such member
companies will have a worldwide, non-exclusive, royalty-free, irrevocable
license to use certain 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 Acer Netxus, Inc.,
as to, among other things, whether Acer Netxus, Inc. possesses a valid license
to manufacture and sell the ETSI version of the UMC system as an ITRI member
company. Depending on the outcome of this dispute, the Company may face
competition from Acer Netxus, Inc., for the ETSI version of the UMC system. 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.
See "Part II; Item 1 -- Legal Proceedings."
RISKS ASSOCIATED WITH PENDING LITIGATION. The Company is a party to certain
legal proceedings as described in "Part II; Item 1 -- Legal Proceedings." The
Company is unable to predict the ultimate outcome of these proceedings or
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. See "Part II; Item 1 -- Legal Proceedings."
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, contractual obligations, and
patents. The Company does not presently hold any patents for its existing
products, but has one patent application 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 U.S.
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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 January 1998, DSC filed a lawsuit against the
Company alleging, among other things, that the Company's 3GDLC product infringes
a DSC patent. See "Part II; Item 1 -- Legal Proceedings." 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
potential future growth required the Company to implement a new management and
accounting system. Management evaluated and purchased a new management and
accounting system and implemented the system effective November 1997.
Information systems expansion or replacement can be a complex, costly and time
consuming process, and there can be no assurance that the Company's system
transition and further implementation 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.
EXPANDING OPERATIONS. Effective February 1998, the Company moved its
domestic manufacturing and distribution operations into a new facility to double
its capacity and increase its efficiency. Although the Company attempted to move
its operations in an orderly manner, there can be no assurance there will not be
an interruption of business, or that such interruption will not have a material
adverse effect on the Company's business, manufacturing and distribution
functions.
YEAR 2000. The Company believes that it has adequately addressed the year
2000 issue by utilizing operating systems and software applications that were
designed and developed to properly reflect the year 2000 and subsequent years'
data. Although the Company believes that its products and systems are year 2000
compliant, the Company's manufacturing suppliers may utilize equipment or
software that is not year 2000 compliant. The failure on the part of any
supplier to adequately address its own year 2000 compliance issues could lead to
delays on the part of the supplier in the delivery of subassemblies for use in
the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
CUSTOMER CONCENTRATION. For the quarter ended March 31, 1998, approximately
13%, 11% and 11% of the Company's total revenues were derived from sales to
Integrators of System Technology (Pty) Ltd. in South Africa, France Telecom and
GTE. No other single customer accounted for 10% or more of total revenues in the
first quarter of 1998. For the three months ended March 31, 1997, GTE accounted
for 13% of
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total revenues and no other single customer accounted for 10% or more of
revenues in that period. For the three months ended March 31, 1998 and 1997, the
Company's five largest customers accounted for 50% and 42% 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 have entered into
agreements requiring them to purchase minimum amounts 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 35% and 31% of the Company's total revenues for the quarters ended
March 31, 1998 and 1997, 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 is expanding its existing international operations and is entering
new international markets, which 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
continue to 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. 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 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.
Currently, the Company's international sales 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. Additionally, the Asia Pacific region's economy has
deteriorated recently resulting in the devaluation of currencies in certain of
the countries of this region. However, to date, the economic downturn in the
Asia Pacific region has not had a material effect on the Company's financial
condition.
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.
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
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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 U.S. are determined by the
Federal Communications Commission ("FCC"), Underwriters Laboratories, Bell
Communications Research ("Bellcore"), other independent third party testing
organizations, and by independent telephone companies. In international markets,
the Company's products must comply with recommendations issued by the
Consultative Committee on International Telegraph and Telephony and individual
regional carriers' network operating system requirements and specifications. In
addition, the Company's products must comply with standards issued by the
European Telecommunications Standards Institute and 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 equipment integrated into their
networks to 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 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 May 1998, the Company received FCC laboratory compliance approval of its
UMC Spread Spectrum Radio transport transceiver, which provides wireless radio
transport and is suited for low density, undeveloped geographical terrain. There
can be no assurance that the Company will maintain such compliance, and failure
to do so 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 affect 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)
(the "UMC" system). 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 were placed 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 sought 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.
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
alleged that ITRI breached the ITRI Agreements, among other things, 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 sought 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 had breached the ITRI Agreements
and was 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
ASICs sales and alleged failure to provide certain other UMC technology to the
Member Companies. The complaint filed by the Member Companies alleged 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 sought 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 was required to supply the Member Companies with a
specified number of ASICs during the ensuing two month period 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.
18
<PAGE> 20
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 to require the Company to continue supplying ASICs. 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., to which ITRI
purportedly assigned member company rights under the ITRI Agreements without the
Company's consent.
In March 1998, the Company, ITRI, the Member Companies and the trustee
entered into a definitive Settlement Agreement that resolved all claims among
such parties. Under the Settlement Agreement, all claims involved in the
proceedings between such parties will be dismissed with prejudice. The
Settlement Agreement provides that the Member Companies will pay an aggregate of
$6.3 million to the Company over a five year period, and will pay the Company
royalties on the purchase of certain ASICs by the Member Companies. Under the
Settlement Agreement, the Company granted a limited license to the Member
Companies to certain of the Company's technology, agreed to sell certain ASICs
to the Member Companies, and agreed to pay $500,000 to ITRI over a three year
period for legal fees incurred by ITRI in the proceedings. The Settlement
Agreement does not grant to the Member Companies any rights to the Company's UMC
1000 Third Generation Digital Loop Carrier(TM)("3GDLC") technology or products.
In addition, the Settlement Agreement does not affect the Company's claims
against Acer Netxus, Inc.
The Company believes that its claims against Acer Netxus, Inc. are
meritorious and intends to pursue these claims vigorously. However, due to the
nature of the claims, 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 this proceeding, including any potential settlement, are uncertain
and there can be no assurance to that effect.
DSC
On December 22, 1997, the Company filed a lawsuit in Sonoma County Superior
Court in California against DSC Communications Corporation ("DSC") related to
its hiring of a former employee of DSC, to become the Company's Vice President,
Product Planning. The Company's complaint responded to DSC's litigation threats
and seeks a declaratory judgement that its hiring of the former DSC employee was
lawful.
On January 22, 1998, DSC filed a lawsuit against the Company and the former
DSC employee in the United States District Court, Eastern District of Texas,
alleging "inevitable" trade secret misappropriation and related claims. DSC also
asserted a separate claim against the Company for patent infringement alleging
that the Company's 3GDLC product infringes a DSC patent. DSC's complaint seeks
unspecified damages, injunctions relating to the alleged misappropriation and
patent infringement, attorneys' fees and other relief. On February 5, 1998, the
United States District Court, Eastern District of Texas granted the Company's
motion to dismiss all non-patent claims in this lawsuit.
On February 18, 1998, DSC filed a motion in the lawsuit filed by the
Company in Sonoma County Superior Court in California to allow DSC to file a
cross-complaint against the Company to allege the "inevitable" trade secret
misappropriation and related claims, seeking unspecified damages, injunctions
relating to the alleged misappropriation, attorneys' fees and other relief. This
motion was granted on April 13, 1998.
The Company believes that all of DSC's misappropriation and other claims
related to the hiring of the former DSC employee are without merit, and the
Company intends to defend the lawsuits vigorously. Based on the Company's
preliminary review of the patent claim, the Company believes that the Company's
3GDLC product does not infringe the DSC patent, and that the Company has
meritorious defenses to such claim. The
19
<PAGE> 21
Company intends to vigorously defend the litigation against DSC and prosecute
its declaratory judgement action. However, the Company cannot predict the
ultimate outcome of these lawsuits. In addition, patent litigation is highly
complex and can extend for a protracted period of time, which can divert the
attention of the Company's management and technical personnel and require the
Company to incur substantial costs and expenses. If the patent claim were to be
resolved against the Company, this could have a material adverse effect on the
Company's business, results of operations and financial condition.
RELTEC Corporation
On November 26, 1997, the Company filed a lawsuit in Sonoma County Superior
Court in California against RELTEC Corporation, alleging trade secret
misappropriation, tortious interference with a contract, and related claims. The
case involves RELTEC's acquisition of the Company's technology through the
Company's Taiwan-based licensee, Vidar-SMS Co., Ltd. On January 21, 1998, the
Company filed for and obtained an order to show cause and RELTEC stipulated to
most of the Company's requested injunctive relief in April and May 1998.
ITEM 2. CHANGES IN SECURITIES:
ISSUANCE OF UNREGISTERED SECURITIES
Between January 1, 1998 and March 31, 1998, 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 587,657 shares
of Common Stock upon the net exercise of warrants to one person for aggregate
consideration of 431 shares of Common Stock.
The sale and issuance of securities in the transaction described above was
deemed to be exempt from registration under the Securities Act in reliance upon
Section 4(2) of the Securities Act as a transaction by an issuer not involving
any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
ITEM 5. OTHER INFORMATION: None
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.(4)
3.5 Amended and Restated Bylaws of the Registrant.(3)
4.1 Specimen Certificate of Common Stock.(1)
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.(1)
4.3 Certificate of Incorporation of the Registrant (included in
Exhibit 3.3.1).
10.1 Form of Warrant Issued In Connection with the Sale of the
Registrant's Series A Preferred Stock on January 6, 1993.(1)
10.2 Form of Warrant Issued In Connection with the Sale of the
Registrant's Series B Preferred Stock on October 5, 1993.(1)
10.3 Form of Warrant Issued in Connection with the Sale of the
Registrant's Series C Preferred Stock on March 16, 1994.(1)
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<S> <C>
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.(1)
10.4.1 Form of Amendment to Warrants and Performance Warrants.(1)
10.5 Warrant Issued in Connection with the Sale of the
Registrant's Series E Preferred Stock on September 29,
1995.(1)
10.6 Restricted Stock Issuance Agreement, dated May 19, 1995,
between the Registrant, Donald Green and Maureen Green.(1)
10.7 Compensation Agreement, dated May 19, 1995, between the
Registrant and Donald Green.(1)
10.8 Promissory Note Secured by Pledge Agreement, dated May 31,
1995, by Donald Green in favor of the Registrant.(1)
10.9 Stock Pledge Agreement, dated June 16, 1995, between the
Registrant and Donald Green.(1)
10.10 Promissory Note issued by Carl Grivner, dated October 5,
1995, in favor of the Registrant.(1)
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.(1)+
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.(1)+
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.(1)+
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.(1)
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.(1)
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.(1)
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.(1)
10.19 Second Amended and Restated Loan and Security Agreement,
dated December 7, 1995, between the Registrant and Bank of
the West.(1)
10.20 Form of Indemnification Agreement for Executive Officers and
Directors of the Registrant.(1)
10.21 The Registrant's 1993 Stock Option/Stock Issuance Plan, as
amended (the "1993 Plan").(1)
10.22 Form of Stock Option Agreement pertaining to the 1993
Plan.(1)
10.23 Form of Notice of Grant of Stock Option pertaining to the
1993 Plan.(1)
10.24 Form of Stock Purchase Agreement pertaining to the 1993
Plan.(1)
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<S> <C>
10.25 The Registrant's 1996 Stock Incentive Plan (the "1996
Plan").(1)
10.26 Form of Stock Option Agreement pertaining to the 1996
Plan.(1)
10.26.1 Form of Automatic Stock Option Agreement pertaining to the
1996 Plan.(1)
10.27 Form of Notice of Grant of Stock Option pertaining to the
1996 Plan.(1)
10.27.1 Form of Notice of Grant of Non-Employee Director Automatic
Stock Option pertaining to the 1996 Plan.(1)
10.28 Form of Stock Issuance Agreement pertaining to the 1996
Plan.(1)
10.29 The Registrant's Employee Stock Purchase Plan.(1)
10.30 Termination Agreement of Joint Venture and Partnership
Agreement, dated December 23, 1996, between the Registrant
and Tellabs Operations, Inc.(2)
10.31 License and Marketing Agreement, dated December 23, 1996,
between the Registrant and Tellabs Operations, Inc.(2)
10.32 OEM Agreement, dated December 23, 1996, between the
Registrant and Tellabs Operations, Inc.(2)
10.33 Stock Issuance Agreement, dated June 30, 1997, between the
Registrant and Peter A. Darbee.(3)
10.34 Note secured by Stock Pledge Agreement, dated June 30, 1997,
by Peter A. Darbee in favor of the Registrant.(3)
10.35 Stock Pledge Agreement, dated June 30, 1997, between the
Registrant and Peter A. Darbee.(3)
10.36 Consulting Agreement, dated May 19, 1997, between the
Registrant and Peter A. Darbee.(3)
10.37 Cypress Center Net Lease, dated October 9, 1997, between the
Registrant and RNM Lakeville L.P., for the premises located
at 2210 South McDowell Boulevard.(5)
10.38 Termination Agreement and General Release, dated December
22, 1997, between the Registrant and Dan E. Steimle.(5)
10.39 Consulting Agreement, dated December 22, 1997, between the
Registrant and Dan E. Steimle.(5)
21.1 Subsidiaries of the Registrant.(1)
27.1 Financial data schedule.
27.397 Financial data schedule (restated) for the three month
period ended March 31, 1997.
</TABLE>
- ---------------
(1) 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.
(2) 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.
(3) 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.
(4) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed with the Securities and
Exchange Commission on November 7, 1997.
(5) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Securities and Exchange
Commission on March 23, 1998.
+ Portions of this Exhibit have been granted Confidential Treatment.
(B) REPORTS ON FORM 8-K: None
22
<PAGE> 24
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: May 8, 1998 By: /s/ PETER A. DARBEE
--------------------------------------
Name: Peter A. Darbee
Title: Vice President, Chief
Financial Officer and
Secretary
23
<PAGE> 25
ADVANCED FIBRE COMMUNICATIONS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<S> <C>
27.1 Financial data schedule.
27.397 Financial data schedule (restated) for the three month
period ending March 31, 1997.
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,699
<SECURITIES> 83,041
<RECEIVABLES> 94,469
<ALLOWANCES> (2,968)
<INVENTORY> 59,812
<CURRENT-ASSETS> 249,661
<PP&E> 36,720
<DEPRECIATION> (5,320)
<TOTAL-ASSETS> 291,202
<CURRENT-LIABILITIES> 48,975
<BONDS> 0
0
0
<COMMON> 740
<OTHER-SE> 240,352
<TOTAL-LIABILITY-AND-EQUITY> 291,202
<SALES> 82,033
<TOTAL-REVENUES> 85,744
<CGS> 42,607
<TOTAL-COSTS> 45,575
<OTHER-EXPENSES> 23,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,087)
<INCOME-PRETAX> 18,241
<INCOME-TAX> 6,384
<INCOME-CONTINUING> 11,857
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,857
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
10K-1997
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,144
<SECURITIES> 97,581
<RECEIVABLES> 42,081
<ALLOWANCES> 0
<INVENTORY> 19,672
<CURRENT-ASSETS> 180,272
<PP&E> 15,873
<DEPRECIATION> (1,985)
<TOTAL-ASSETS> 198,060
<CURRENT-LIABILITIES> 25,354
<BONDS> 0
0
0
<COMMON> 670
<OTHER-SE> 171,139
<TOTAL-LIABILITY-AND-EQUITY> 198,060
<SALES> 43,808
<TOTAL-REVENUES> 44,405
<CGS> 23,709
<TOTAL-COSTS> 24,977
<OTHER-EXPENSES> 12,638
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (986)
<INCOME-PRETAX> 7,776
<INCOME-TAX> 2,877
<INCOME-CONTINUING> 4,899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,899
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.06
</TABLE>
