<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission file number: 0-28734
ADVANCED FIBRE COMMUNICATIONS, INC.
-----------------------------------
A Delaware I.R.S. Employer
Corporation Identification No.
68-0277743
One Willow Brook Court
Petaluma, California 94954
Telephone: (707) 794-7700
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 [ ]
As of July 30, 1999, 77,067,929 shares of the Registrant's common stock, $0.01
par value, were outstanding.
<PAGE> 2
================================================================================
ADVANCED FIBRE COMMUNICATIONS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998...........................................2
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1999 and 1998.............................3
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998.......................................4
Notes to Condensed Consolidated Financial Statements..............................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................21
Item 2. Changes in Securities and Use of Proceeds...........................................21
Item 3. Defaults Upon Senior Securities.....................................................21
Item 4. Submission of Matters to a Vote of Security Holders.................................21
Item 5. Other Information...................................................................21
Item 6. Exhibits and Reports on Form 8-K....................................................22
</TABLE>
1
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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)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,759 $ 20,669
Marketable securities 112,478 90,084
Accounts receivable, net 65,453 74,967
Inventories, net 41,222 53,060
Other current assets 7,720 8,257
--------- ---------
Total current assets 257,632 247,037
Property and equipment, net 54,453 49,315
Other assets 10,505 11,531
--------- ---------
TOTAL ASSETS $ 322,590 $ 307,883
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,846 $ 12,573
Accrued liabilities 25,466 25,140
--------- ---------
Total current liabilities 40,312 37,713
Long-term liabilities 2,322 1,870
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized in 1999 and 1998; no shares issued
and outstanding -- --
Common stock, $0.01 par value; 200,000,000 shares
authorized in 1999 and 1998; 76,929,690 and 75,716,153
shares issued and outstanding in 1999 and 1998,
respectively 769 757
Additional paid-in capital 215,653 210,420
Notes receivable from stockholders (436) (730)
Retained earnings 63,970 57,853
--------- ---------
Total stockholders' equity 279,956 268,300
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 322,590 $ 307,883
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 4
ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 68,832 $ 85,345 $133,798 $171,089
Cost of revenues 36,932 46,696 72,414 92,271
-------- -------- -------- --------
Gross profit 31,900 38,649 61,384 78,818
-------- -------- -------- --------
Operating expenses:
Research and development 11,942 10,429 23,548 18,741
Selling, general and administrative 16,710 18,068 31,586 32,829
-------- -------- -------- --------
Total operating expenses 28,652 28,497 55,134 51,570
-------- -------- -------- --------
Operating income 3,248 10,152 6,250 27,248
Other income, net 1,387 980 2,881 2,125
-------- -------- -------- --------
Income before income taxes 4,635 11,132 9,131 29,373
Income taxes 1,530 3,896 3,014 10,280
-------- -------- -------- --------
Net income $ 3,105 $ 7,236 $ 6,117 $ 19,093
======== ======== ======== ========
Basic net income per share $ 0.04 $ 0.10 $ 0.08 $ 0.26
======== ======== ======== ========
Shares used in basic per share
computations 76,800 74,298 76,689 74,225
======== ======== ======== ========
Diluted net income per share $ 0.04 $ 0.09 $ 0.08 $ 0.24
======== ======== ======== ========
Shares used in diluted per share
computations 79,501 79,741 79,610 79,608
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 5
ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,117 $ 19,093
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,604 2,744
Tax benefit from option exercises 2,388 8,092
Deferred income taxes 666 (457)
Changes in operating assets and liabilities:
Accounts receivable 9,514 (8,556)
Inventories 11,838 (3,296)
Other assets 546 (4,832)
Accounts payable 2,273 2,875
Other liabilities 778 (4,395)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 40,724 11,268
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Property and equipment additions, net (11,391) (16,012)
Net sales (purchases) of marketable securities (22,394) 7,513
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (33,785) (8,499)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options and 3,151 4,406
warrants, net
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,151 4,406
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 10,090 7,175
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,669 9,053
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,759 $ 16,228
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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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 year ended December 31, 1998, contained in the
Company's Annual Report on Form 10-K.
The unaudited condensed consolidated financial statements include Advanced Fibre
Communications, Inc., and its subsidiaries ("AFC" or the "Company"). Significant
intercompany transactions and accounts have been eliminated. Certain prior
period amounts have been reclassified to conform with the current period
presentation.
AFC operates on 13-week fiscal quarters ending on the last Saturday of each
fiscal period. For presentation purposes only, the fiscal periods are shown as
ending on the last day of the month of the respective fiscal period. The results
of operations for the second quarter and first half of 1999 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>
June 30, December 31,
1999 1998
------- -------
<S> <C> <C>
Raw materials $ 9,316 $16,135
Work-in-progress 913 566
Finished goods 30,993 36,359
------- -------
Inventories, net $41,222 $53,060
======= =======
</TABLE>
NOTE 3 COMMITMENTS AND CONTINGENCIES
ALCATEL USA/DSC During 1998, DSC filed a claim in the United States District
Court, Eastern District of Texas, against the Company for patent infringement,
alleging that AFC's 3GDLC product infringes a DSC patent. DSC was acquired in
1998 and is now a part of Alcatel USA, Inc.; for purposes of this footnote,
reference is made only to DSC. Certain discovery occurred and the parties filed
various motions, including cross-motions for summary judgment on our defense
that a prior Settlement Agreement between the Company and DSC barred DSC's
patent claims. We filed a counterclaim against DSC in the patent action alleging
federal antitrust violations, unfair competition, breach of a prior settlement
agreement and other related claims. By a Report And Recommendation filed October
2, 1998, the United States Magistrate Judge recommended that the District Court
grant summary judgment in our favor on the patent claim based on the Settlement
Agreement. Pursuant to a settlement reached in June 1999, the Court dismissed
the entire case without prejudice on June 29, 1999.
MARCONI/RELTEC CORPORATION In 1997, AFC filed a lawsuit against RELTEC
Corporation, alleging trade secret misappropriation, tortious interference with
a contract, and related claims. RELTEC was acquired in 1999 by GEC and has
changed its name to Marconi Communications, Inc.; for purposes of this footnote,
reference is made only to RELTEC. The case involves RELTEC's acquisition of
AFC's technology through the Company's Taiwan-based licensee,
5
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Vidar-SMS Co., Ltd. A pre-trial hearing is scheduled for August 27, 1999. We
expect that trial will commence within 90 days after this hearing.
STOCKHOLDER LITIGATION AFC and various of its current and former officers and
directors are parties to a consolidated lawsuit which purports to be a class
action filed on behalf of certain of our stockholders (excluding the defendants
and parties related to them). The lawsuit alleges that the defendants violated
certain federal securities laws. The plaintiffs filed a consolidated Amended
Complaint on or about January 27, 1999. Defendants' motion to dismiss the
complaint is currently pending before the court. Limited discovery has occurred,
and only limited discovery is expected to occur pending ruling on the motion to
dismiss.
This action is in the early stages of proceedings. Based on current information,
we believe the suit to be without merit and intend to defend the Company and its
officers and directors vigorously. Although it is reasonably possible we may
incur a loss upon the conclusion of this claim, an estimate of any loss or range
of loss cannot be made. No provision for any liability that may result upon
adjudication has been made in the consolidated financial statements. In the
opinion of management, resolution of this matter is not expected to have a
material adverse effect on our financial position. However, depending on the
amount and timing, an unfavorable resolution of this matter could materially
affect our future results of operations or cash flows in a particular period. In
connection with these legal proceedings, we expect to incur substantial legal
and other expenses. Stockholder suits of this kind are highly complex and can
extend for a protracted period of time, which can substantially increase the
cost of such litigation and divert the attention of management from the
operations of AFC.
NOTE 4 COMPREHENSIVE INCOME
We have adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 requires
classification of items of comprehensive income, which includes changes in
stockholders' equity with the exception of additional investments by
stockholders. Additional disclosures required by this statement have not been
included in the condensed consolidated financial statements because there are no
material differences between net income and comprehensive income for all periods
presented.
NOTE 5 SEGMENT REPORTING
We derive substantially all of our revenues from sales of one product, the
Universal Modular Carrier 1000(TM) (the "UMC1000"), and our company is not
organized by multiple operating segments for the purpose of making operating
decisions or assessing performance. Accordingly, we operate in one operating
segment and report only certain enterprise-wide disclosures.
For the second quarter of 1999, revenues from sales to external customers were
$68,802,000, compared with $83,730,000 in the same period of 1998. Revenues from
sales to external customers for the six months ended June 30, 1999 were
$133,667,000, as compared with $165,763,000 in the comparable period of 1998. We
operate in one operating segment; thus, there is not a difference between
reportable income and consolidated income. Long-lived assets located in the U.S.
increased to $63,829,000 as of June 30, 1999 from $59,368,000 as of December 31,
1998. Long-lived assets located in foreign countries decreased to $1,129,000 as
of June 30, 1999 from $1,393,000 as of December 31, 1998.
NOTE 6 NET INCOME PER SHARE
Basic earnings per share were calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share were calculated by dividing net income by the sum of the weighted
average number of common shares outstanding plus all additional common shares
that would have been outstanding if potentially dilutive common shares had been
issued.
6
<PAGE> 8
The following table sets forth the computations of shares and net income used in
the calculation of basic and diluted net income per share for the second quarter
and first half of 1999 and 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 3,105 $ 7,236 $ 6,117 $19,093
======= ======= ======= =======
Shares used in basic per share
calculations, actual weighted
average common shares outstanding
for the period 76,800 74,298 76,689 74,225
Weighted average number of shares upon
conversion of redeemable convertible
preferred stock -- -- -- --
Weighted average number of shares upon
exercise of dilutive options and warrants 2,701 5,443 2,921 5,383
------- ------- ------- -------
Shares used in diluted per share calculations 79,501 79,741 79,610 79,608
======= ======= ======= =======
Basic net income per share $ 0.04 $ 0.10 $ 0.08 $ 0.26
======= ======= ======= =======
Diluted net income per share $ 0.04 $ 0.09 $ 0.08 $ 0.24
======= ======= ======= =======
</TABLE>
7
<PAGE> 9
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:
- - Potential Fluctuations in Future Operating Results and Seasonality
- - Customer Concentration
- - Delays in Product Development and Product Feature Releases
- - Risks Associated with International Markets
- - Competition
- - Risk of Failure to Manage Expanding Operations
- - Concentrated Product Line, New Product Features and Rapid Technological
Change
- - Limited Protection of Proprietary Technology; Risk of Third-Party Claims
of Infringement
- - Dependence on the Telecommunications Industry and Small to Mid-Line Size
Market
- - Dependence on Sole Source and Limited Number of Third-Party
Manufacturers and Support Organizations
- - Dependence on Key Personnel
- - Risks Associated with Pending Litigation
- - Year 2000 Readiness
- - Compliance with Regulations and Industry Standards
- - 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, on pages 2 through 7 of this Form 10-Q.
OVERVIEW
AFC designs, develops, manufactures, markets and supports the Universal Modular
Carrier 1000(TM) ("UMC1000"), a cost-effective, multi-service digital loop
carrier system developed to serve small to mid-line size markets. We have
designed the UMC1000 to enable telecommunications 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 Third
Generation Digital Loop Carrier(TM) ("3GDLC") is an enhanced version of the
UMC1000 designed to accommodate the bandwidth and connectivity requirements of
current and future local loop applications, including GR-303 digital interfaces.
RESULTS OF OPERATIONS
REVENUES. In the second quarter ended June 30, 1999, our revenues decreased
$16.5 million, or 19.3%, to $68.8 million as compared with $85.3 million for the
same period of 1998. Revenues in the first half of 1999 were $133.8 million, a
decrease of $37.3 million, or 21.8%, as compared with $171.1 million recorded in
the first half of 1998.
The decreases in revenues in the second quarter and first half of 1999 from the
comparable periods in 1998 were primarily due to lower international sales in
1999. International revenues totaled $8.1 million in the second quarter of 1999,
compared with $26.5 million for the comparable period in 1998, and represented
11.8% and 31.1% of total
8
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revenues, respectively. The decline in international revenues was primarily due
to lower sales to customers in South Africa, Venezuela, and France.
International revenues were $16.8 million in the first half of 1999, compared
with $56.8 million in the first half of 1998, and represented 12.6% and 33.2% of
total revenues, respectively. Revenues from sales to customers in South Africa,
Venezuela, and France, which accounted for an aggregate of 23.8% of total
revenues in the first half of 1998, declined in the comparable period of 1999 to
an aggregate of 5.8% of total revenues. We also experienced lower international
royalty income levels in the quarter and year-to-date periods ended June 30,
1999 as compared with the corresponding periods of 1998.
Domestic revenues in the second quarter of 1999 were $60.7 million as compared
with $58.8 million in the corresponding quarter of 1998, an increase of 3.2%. In
the first half of 1999, domestic revenues were $117.0 million as compared with
$114.3 million in the corresponding period of 1998. The increase in domestic
revenues for both periods was primarily due to higher sales to Regional Bell
Operating Company and Competitive Local Exchange Company customers, partially
offset by lower sales to GTE.
In 1999, North Supply Company, a subsidiary of Sprint, accounted for 15.2% of
total revenues in the second quarter and 14.4% in the first half of the year.
During 1998, Integrators of System Technology (Pty) Ltd. in South Africa
accounted for 13.0% of total revenues in the second quarter and 13.1% in the
first half of the year. No other customer accounted for 10% or more of total
revenues in any of these periods. Although the Company's largest customers have
varied from period to period, we anticipate that 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 our principal
customers will continue to purchase product from us at current levels, if at
all. The loss of one or more principal customers may result in lower revenues
and decreased net income.
GROSS PROFIT. In the second quarter of 1999, gross profit as a percentage of
revenues grew to 46.3% from 45.3% in 1998. In the first half of 1999 and 1998,
gross profit was 45.9% and 46.1%, respectively.
The increase in gross profit margin in the second quarter of 1999 as compared
with 1998 was primarily due to lower product costs, reflecting customer and
product mix and product cost savings. However, the gross profit margin
decreased in the first half of 1999 as compared with the corresponding
period of 1998, as a result of lower royalty income levels and higher
manufacturing variances partially offset by lower product costs. In the future,
gross profit may fluctuate due to a wide variety of factors, including: the mix
between domestic and international sales, the customer mix, the product feature
component 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, our ability to introduce new products and technologies on a
timely basis, the timing of new product feature introductions or announcements
by us or our competitors, price competition, unit volume, royalty revenues,
and changes in warranty coverage.
RESEARCH AND DEVELOPMENT. In the second quarter of 1999, research and
development expenses increased $1.5 million to $11.9 million compared with $10.4
million for the same period in 1998 and represented 17.3% and 12.2% of total
revenues, respectively. In the first half of 1999, research and development
expenses increased $4.8 million to $23.5 million compared with $18.7 million in
1998 and represented 17.6% and 10.9% of total revenues, respectively.
The increases in research and development expenses for the second quarter and
first half of 1999 as compared with 1998 reflects our continuing research and
development efforts in areas such as fiber to the curb technology, asymmetric
digital subscriber line, digital subscriber line services, switch interfaces,
and asynchronous transfer mode broadband capabilities, among other projects. The
increases were primarily a result of salaries and benefits and material and
depreciation costs associated with test equipment used to develop and test new
product features. Also included in the 1999 second quarter expenses was
approximately $0.5 million in severance and other charges associated with the
closure of a development office, reduction in force, and the write-off of a
software license. As of June 30, 1999, the number of employees in research and
development was 251 compared with 248 as of June 30, 1998. The company-wide
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<PAGE> 11
reduction in force, which averaged 9% company-wide, is reflected in the
June 30, 1999 headcount level. All research and development costs to date have
been expensed as incurred.
SELLING, GENERAL AND ADMINISTRATIVE. For the second quarter of 1999, selling,
general and administrative expenses decreased $1.3 million to $16.7 million
compared with $18.0 million for the same period in 1998 and represented 24.3%
and 21.2% of total revenues, respectively. In the first half of 1999, selling,
general and administrative expenses decreased $1.2 million to $31.6 million
compared with $32.8 million for the same period in 1998 and represented 23.6%
and 19.2% of total revenues, respectively.
The decreases in selling, general and administrative expenses in the 1999
periods as compared with 1998 reflect several factors, including lower
international distributor commissions, savings in hiring and relocation costs,
cost containment efforts in travel and entertainment, and decreased use of
outside consultants and services. These declines in expenses were partially
offset by higher litigation costs and approximately $1.6 million in severance
costs and charges for consolidating and closing down certain offices in the
second quarter of 1999. Leasehold improvements were written off for two
buildings we plan to sublease, and we also closed our India office resulting
in a write-off of the investment in our India subsidiary. Selling, general and
administrative headcount decreased 15.3% to 299 as of June 30, 1999 from 353
as of June 30, 1998, reflecting the company-wide reduction in force, which
occurred in May 1999.
INCOME TAXES. For the second quarter and first half of 1999 and 1998, we
recorded income taxes at an effective rate that approximated the combined
federal and state statutory rates. The effective tax rate declined from 35.0% in
the second quarter and first half of 1998 to 33.0% in the comparable periods of
1999. This reduction was primarily due to an increase in expected tax credits
derived from research and development, a lower combined effective state income
tax expense, and benefits from tax exempt interest income and our Foreign Sales
Corporation.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, cash and cash equivalents were $30.8 million, compared with
$20.7 million as of December 31, 1998. Marketable securities totaled $112.5
million as of June 30, 1999, compared with $90.1 million as of December 31,
1998.
Operating activities for the first half of 1999 generated net cash of $40.7
million. This was primarily the result of net income, non-cash depreciation and
amortization expenses and decreases in accounts receivable and inventory. Net
cash of $33.8 million was used in investing activities in the first half of
1999, as a result of net purchases of marketable securities and capital asset
acquisitions.
We are in the process of renewing our $50.0 million unsecured bank line, pending
AFC board of directors' approval in August. The existing bank line is through
two banks with an interest rate of prime, or LIBOR plus .75%. The terms of the
existing agreement originally expired in July 1999, but have been extended
pending the board's approval. Under the bank line, the banks may issue letters
of credit up to $10.0 million on our behalf. The bank line requires us to comply
with certain debt and financial covenants. As of June 30, 1999, $2.2 million in
letters of credit and no borrowings were outstanding under the bank line, and we
were in compliance with the covenants.
We have lease lines totaling $5.1 million that were used for equipment and
furniture purchases.
We also maintain bank facilities with two banks under which we may open foreign
exchange contracts up to $40.0 million. There are no borrowing provisions
associated with these facilities. As of June 30, 1999, there were $1.2 million
in foreign exchange contracts outstanding.
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<PAGE> 12
Our facility obligations and commitments are based in part on anticipated growth
projections, and, in the near-term, are relatively fixed. Based on existing
commitments for additional office space, we will have excess office space in the
near future. We have subleased a portion of the excess office space and we are
actively pursuing subleasing additional space that will become available in the
future. We are also currently in negotiations with our landlord to restructure
the existing commitments. Our operating expenses and cash flows could be
adversely affected if we are unable to, in a timely manner, restructure our
existing commitments or sublease the excess facility space at rents comparable
to our obligations.
We believe that our existing cash and short-term investments, available credit
facilities and cash flows from operating and financing activities will be
adequate to support AFC's financial resource needs, including working capital
requirements, capital expenditures and operating lease obligations for the next
twelve months.
FOREIGN CURRENCY AND INTEREST RATE RISK
We are exposed to market risk as a result of foreign exchange rate fluctuations.
We sell the UMC1000 in the Asia Pacific region, an area in which some countries
have experienced adverse economic conditions and the devaluation of certain
currencies. The UMC1000 is sold in this region, primarily in China, under U.S.
dollar-denominated contracts. The UMC1000 is also marketed in Central and Latin
American countries, including Venezuela and Brazil. The decrease in oil revenues
in Venezuela, combined with the effects of that country's monetary policy, have
led to adverse economic conditions and a decline in the value of the bolivar
relative to the dollar. Deterioration in the Brazilian economy has resulted in
the significant devaluation of the Brazilian real. The impact of these downturns
on other countries in the region has yet to be determined. Sales of the UMC1000
in this region are made under U.S. dollar denominated contracts. One of our
customer contracts is payable in French francs and the receivable is hedged
using forward currency exchange contracts. The remainder of international sales
are denominated in U.S. dollars. The introduction in 1999 of the "Euro" currency
could cause increased competition among European companies which in turn could
cause the value of the Euro to materially fluctuate relative to the U.S. dollar.
Adoption of the Euro has not had a material impact on our business, results of
operations or financial condition. We have sales and representative offices in
Hong Kong, Shanghai and the U.K. Operating expenses for these offices have
historically been short-term in nature and are immaterial on a consolidated
basis.
Changes in domestic interest rates create risk for AFC and may cause adverse
fluctuations of its marketable securities portfolio and cash flows. Changes in
short-term U.S. interest rates affect the market value of those marketable
securities. Because of the short-term nature of its investment portfolio, we
believe our exposure to these market fluctuations is not significant. We may be
affected by changes in the short-term U.S. Prime Rate and the resulting interest
rate on amounts borrowed under the line of credit.
SEASONALITY
Our customers normally install a portion of the UMC1000 in outdoor locations.
Shipments of the UMC1000 are subject to the effects of seasonality, with fewer
installation projects scheduled for the winter months. The majority of our sales
are to companies in North America, and, accordingly, we believe the effect of
seasonality will cause our revenues in the quarter ended March 31 to be lower
than revenues in the preceding quarter ended December 31.
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YEAR 2000 READINESS DISCLOSURE
We have formed a Year 2000 Committee to understand and address the year 2000
("Y2K") issue as it affects AFC's infrastructure, operations, and the UMC1000
product. Representatives from each functional area are responsible for
identifying and assessing organizational readiness, preparing remediation steps,
testing, and applying new standards and contingency plans. We have identified
and assessed a majority of the potential Y2K-affected hardware, software,
facility equipment, and vendors. For the most part, our systems and software
have been found to be Y2K compliant, or have been upgraded to compliance through
manufacturers' upgrades.
We have surveyed 100% of our mission critical vendors regarding their Y2K
readiness. In some cases, we reviewed vendors' Y2K readiness plans to gain
further assurance as to the adequacy and scope of their assessment, testing,
remediation, and contingency plans in the event of Y2K-related failures. We have
developed our own contingency plans in case of vendors' failures which include
pre-qualified alternative vendors, multiple vendor sources for critical
components and assemblies, and adequate supplies of key components on hand.
However, there can be no assurance that we will be able to obtain sufficient
materials from alternative sources. Current or alternative manufacturers may not
be able to meet our supply requirements and such supplies may not continue to be
made available at favorable prices, or at all.
We are currently surveying our leased properties and facilities, including
vendors providing power, local and long distance telecommunications, water,
heating and cooling, and various services to determine the status of embedded
technology equipment that could affect our operations. Vendors' Y2K
non-compliance may affect the delivery of power, telecommunications, water, and
heating and cooling services. Additionally, transportation, banking, and
government services may be impacted by non-compliance. In such an event, we may
experience temporary disruption of our manufacturing, customer service, sales
and marketing, research and development, information systems, treasury, and
administrative functions. Due to additional leased property commitments
beginning in Fall 1999, we have extended the period for assessing and completing
the property and facility vendor surveys until after we have completed a planned
move into the facilities. We plan to test and validate the operations of the new
facility and finalize and implement contingency plans by late 1999.
The UMC1000 was originally designed and developed to be Y2K ready. The UMC1000
utilizes operating systems and software applications that were designed and
developed to properly reflect the year 2000 and subsequent years' data. Although
we believe that the UMC1000 is Y2K ready, our manufacturing suppliers may
utilize equipment or software that is not compliant. Vendors' failures to
adequately address their own Y2K compliance issues could lead to disruption of
services provided by vendors, delays in delivery of components used to assemble
the UMC1000, and may affect the timing of our shipment of finished product. Any
of these factors could result in, among other things, delays in or loss of
customer orders, decreased revenue levels, and delays in customer service.
We believe we are taking the steps necessary to understand and resolve the Y2K
issues; however, failure to adequately address all known and unknown Y2K
readiness issues could result in, among other things, unforeseen operating
expenses, and lowered net income. The remaining Y2K readiness activities are not
expected to result in significant incremental operating expenses; and we
estimate the cost to complete our Y2K readiness and contingency plans will not
exceed $200,000. We track external costs incurred to remedy Y2K-effected
software, hardware, and embedded technology; however, we do not separately track
internal costs incurred, such as the Y2K-related pro-rata payroll costs for
employee representatives from each functional area of the Company. Expenditures
to date in relation to Y2K readiness have been immaterial.
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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.
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS AND SEASONALITY. Our
operating results have been, and will continue to be, affected by a wide variety
of factors, some of which are outside of our control, that could, among other
things, lower revenues, increase operating expenses, and lower net income. These
factors include:
- - Domestic and International sales mix
- - Customer mix
- - Product component mix
- - Timing and size of orders which are received and can be shipped in a quarter
- - Availability of adequate supplies of key components and assemblies
- - Ability to introduce new product features and technologies on a timely basis
- - Timing of new product feature introductions or announcements by us or by our
competitors
- - Price competition
- - Unit volume
- - Royalty revenue levels
- - Excess or obsolete inventory
- - Adequacy of manufacturing capacity
- - Customers' ability to pay when due
- - Expanded warranty coverage
We sell the UMC1000 primarily to telecommunications companies installing the
UMC1000 as part of their access networks. Additions to those networks represent
complex engineering projects, requiring lengthy periods from project
conceptualization to completion. The UMC1000 typically represents only a portion
of a given project and, therefore, the timing of product shipment and revenue
recognition is often difficult to forecast. Our customers normally install a
portion of the UMC1000 in outdoor locations. Shipments of the system can be
subject to the effects of seasonality, with fewer installation projects
scheduled for the winter months. In developing countries, delays and reductions
in the planned project deployment can be caused by additional factors, including
currency fluctuations, reductions in capital availability due to declines in the
local economy, priority changes in the governments' budgets, political
environment and delays in receiving government approval for deployment of the
UMC1000 system in the local loop.
Expenditures for research and development, marketing and sales, and general and
administrative functions are based in part on future growth projections and in
the near term are relatively fixed. We may be unable to adjust spending in a
timely manner in response to any unanticipated failure to meet these growth
projections. Accordingly, any significant decline in demand for the UMC1000
relative to planned levels could result in, among other things, higher operating
expenses and lowered net income.
All of the above factors are difficult to forecast, and these or other factors
could, among other things, lower revenues, increase operating expenses, and
lower net income. As a result, we believe that period to period comparisons are
not necessarily meaningful and should not be relied upon as indications of
future performance. There can be no assurance that we will sustain or increase
our profitability in the future.
Fluctuations in our operating results may cause volatility in the price of our
common stock. It is possible that in any given period, revenues or operating
results will be below the expectations of public market analysts and investors.
In such event, the market price of our common stock would likely be materially
adversely affected. We attempt, through timely press releases and announcements,
to disclose significant factors impacting, or expected to impact, the business,
financial condition, and results of operations. However, due to factors outside
our control, there may be little or no meaningful relationship between the
resulting market price of our common stock and the results of operations.
Factors
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outside of our control, such as market analysts' published expectations
and short traders' activities can cause a material fluctuation in the stock
price. The significant decline in the market price of our common stock in
mid-1998 resulted in stockholder litigation against AFC and various officers and
directors. Such litigation could result in substantial litigation costs, and a
diversion of management's attention and resources from the operations of AFC.
See Part I "Note 3 Commitments and Contingencies" as it pertains to this matter
on page 6 of this Quarterly Report on Form 10-Q.
CUSTOMER CONCENTRATION. For the second quarter of 1999, North Supply Company, a
subsidiary of Sprint, accounted for 15.2% of total revenues and Integrators of
System Technology (Pty) Ltd. in South Africa accounted for 13.0% in the second
quarter of 1998. In the first half of 1999, North Supply Company accounted for
14.4% of total revenues. In the first half of 1998, Integrators of System
Technology (Pty) Ltd. accounted for 13.1% of total revenues. No other single
customer accounted for 10% or more of total revenues in any of these period.
Our five largest customers accounted for 40.7% of total revenues in the second
quarter of 1999 and 44.0% in the corresponding period of 1998. Year to date,
our five largest customers accounted for 40.9% of total revenues in 1999, and
44.8% in 1998. Although our largest customers have varied from period to
period, we anticipate that 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 our customers have entered into agreements requiring them
to purchase a minimum amount of product from us. There can be no assurance
that principal customers will continue to purchase product at current levels,
if at all. In the event that a significant existing customer merged with
another telecommunications company, there can be no assurance that such
customer will continue to purchase the UMC1000. The loss of one or more major
customers could, among other things, decrease revenues and net income, and
increase our dependency on our remaining major customers.
DELAYS IN PRODUCT DEVELOPMENT & PRODUCT FEATURE RELEASES. We have experienced
delays in completing development and introduction of new product variations and
feature enhancements, and there can be no assurance that such delays will not
continue or re-occur in the future. We could incur contract penalties should we
fail to meet production and delivery time schedules on certain orders. There can
be no assurance that we will be successful in developing new product features
and releasing products to the market before our competitors. The UMC1000
contains a significant amount of complex hardware and software that may contain
undetected or unresolved errors that may become apparent as product features are
introduced, or as new versions are released. Technical difficulties have been
discovered in certain system installations. It is possible that, despite
significant testing, hardware or software errors will be found in the UMC1000
after commencement of shipments, resulting in delays in, or cancellation of,
customer orders, payment of contract penalties to customers, or the loss of
market acceptance. Any of these factors could result in, among other things,
decreased revenues, lowered net income, and decreases in cash flows.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. Operating in international markets
subjects us to certain risks, including:
- - Political and economic conditions
- - Tariffs or other barriers
- - Staffing and managing international operations
- - Exchange rate fluctuations
- - Exchange and repatriation controls on foreign earnings
- - Changes in regulatory requirements
- - Negative tax consequences
- - Longer sales and payment cycles
- - Collection of accounts receivable
International sales constituted 11.8% of total revenues in the second quarter of
1999 and 12.6% year to date. International sales in the corresponding quarter
and year to date period of 1998 were 31.1% and 33.2%, respectively. Sales to
customers in South Africa, Venezuela, and France decreased significantly in the
second quarter and year-to-date periods of 1999 as compared with the
corresponding periods in 1998. We continue to experience certain difficulties in
international markets. The economies in some of the Asia Pacific and Central and
Latin America countries have deteriorated, resulting in the devaluation of
currencies in certain of these countries. We expect that adverse economic
conditions in foreign countries or foreign currency exchange rates could result
in, among other
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things, delays in or cancellation of customer orders, decreased revenues, and
lowered net income. Our management is currently in the process of re-evaluating
our international strategies. There can be no assurance that we will
successfully expand our international operations. Failure to meet revenue
projections in the international market could, among other things, adversely
affect consolidated revenues, gross profit, and net income.
We are entering new international markets, which demand significant management
attention and financial commitment. Successful expansion of international
operations and sales in certain markets may depend on our ability to establish
and maintain productive strategic relationships. We rely on a number of third
party distributors and sales representatives to market and sell the UMC1000
outside of North America. There can be no assurance that such distributors or
sales representatives will provide the support and effort necessary to service
international markets effectively. There can be no assurance that we 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. There can be no assurance that we will be
able to increase international sales of the UMC1000 through strategic
relationships or joint ventures. The failure to do so could significantly limit
the ability to expand international operations and could, among other things,
decrease revenues, gross profit, and net income.
Many international telecommunications companies are owned or strictly regulated
by local authorities. Access to such markets is often difficult to obtain due to
trade barriers and established relationships between a government-owned or
controlled telecommunications company and its traditional indigenous equipment
suppliers. Many of these companies require extended payment terms and financing
options which increase the risk of nonpayment and may, among other things, have
the effect of increasing our operating expenses, lowering our net income, and
decreasing cash flows. We are required to post bid and performance bonds for
certain customers in some international markets. Failure to meet delivery
schedules could also result in the loss of collateral posted for the bonds or
financial penalties, which could, among other things, increase our operating
expenses and lower our net income.
International sales are currently primarily U.S. dollar denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our product less competitive in international markets.
Refer to Part I - "Foreign Currency and Interest Rate Risk" as it pertains to
this matter on page 11 of this Quarterly Report on Form 10-Q.
Compliance with various country-specific regulations and standards must be
attained to compete in international markets. Any inability to obtain local
regulatory approval could delay or prevent entrance into international markets,
which could result in, among other things, delays in or loss of customer orders,
decreased revenues, and lowered net income.
COMPETITION. Many of our competitors have more extensive financial, marketing
and technical resources than AFC and enjoy superior name recognition in the
market. Our primary competitors include: ADC Telecommunications, Inc., Alcatel
Alsthom Compagnie, Ericsson Inc., Fujitsu America, Inc., Hitron Technology,
Inc., Huawei Technologies Co. Ltd., Lucent Technologies, Inc., Marconi
Communications, Inc., NEC America, Inc., Nokia Telecommunications, Northern
Telecom Ltd., Opnet Technologies Co. Ltd., Shenzhen Zhongxing Telecom
Corporation, Ltd., UT Starcom, Inc., and Vidar-SMS Co. Ltd.
As a result of the Settlement Agreement and related agreements entered into with
the Industrial Technology Research Institute, certain of its Member Companies
have been granted certain rights to manufacture and sell the European
Telecommunications Standards Institute version of the UMC1000 outside of North
America. Such entities currently compete with AFC in international markets,
primarily in China. Upon termination of certain restrictions set forth in the
Settlement Agreement, those Member Companies will gain a worldwide,
non-exclusive, royalty-free, irrevocable license to use certain UMC1000
technology in January 2005, and will be able to compete with us worldwide. We
have successfully settled our litigation against Acer Netxus, Inc. ("Acer").
Among other things, the Settlement Agreement and a related Federal Court
judgment permanently enjoin Acer from developing, manufacturing, or selling any
product that uses or derives from the UMC1000 technology.
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We believe rapid technological change, continuing regulatory change and industry
consolidation will continue to cause rapid evolution in the competitive
environment of the telecommunications equipment market, the full scope and
nature of which is difficult to predict. Industry consolidation among our
competitors may provide those companies with price competition leverage and
broader product lines superior to AFC's pricing and present technology.
Moreover, we believe that technological and regulatory change will continue to
attract new entrants to the market in which we compete. There can be no
assurance that AFC will be able to compete successfully in the future.
RISK OF FAILURE TO MANAGE EXPANDING OPERATIONS. We have experienced a period of
rapid growth over the last several years, which has imposed significant burdens
on management, operations, finance, and other resources. We need to continue to
recruit, train, assimilate, motivate and retain qualified managers and employees
to effectively manage our operations. Our results of operations could be
adversely affected if revenues do not increase sufficiently to compensate for
any increase in operating expenses and facility obligations resulting from any
expansion. Any business disruption, other system transition difficulties or
failure to effectively manage our domestic and international operations or any
current or future growth could result in, among other things, increased
operating expenses, lowered net income, and decreases in cash flow.
There can be no assurance that we will not have excess manufacturing capacity or
that further utilization of our manufacturing and distribution facility will
continue without interruption.
Our facility obligations and commitments are based in part on anticipated growth
projections, and in the near term are relatively fixed. Based on existing
commitments for additional office space, we will have excess office space in the
future. We have subleased a portion of the excess office space and we are
actively pursuing subleasing additional space that will become available in the
future. We are also currently in negotiations with our landlord to restructure
the existing commitments. Our operating expenses, net income, and cash flow
could be adversely affected if we are unable, in a timely manner, to restructure
our existing commitments or sublease the excess facility space at rents
comparable to our obligations.
CONCENTRATED PRODUCT LINE, NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE.
Substantially all of our revenues are derived from the UMC1000 and we expect
this concentration will continue in the foreseeable future. Any decrease in the
overall level of sales of, or the prices for the UMC1000 could result in, among
other things, decreased revenues and lowered net income. Factors potentially
affecting sales include price competition, introductions or announcements by
competitors, a decline in the demand for the UMC1000, or product obsolescence,
among others.
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. Our success will depend
upon our ability to enhance the UMC1000 technology and to develop and introduce,
on a timely basis, new products or new product feature enhancements. New product
feature enhancements must 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 we will be successful in
identifying, developing, manufacturing, and marketing new products or product
enhancements that respond to technological change or evolving industry
standards. There can be no assurance that we will overcome difficulties that
could delay or prevent the successful development, introduction and marketing of
these products and enhancements, or that new products or enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Substantial costs may be incurred to modify the UMC1000 and build
our infrastructure to accommodate these changes. From time to time, we may
announce new products or product enhancements, services or technologies that
have the potential to replace or shorten the life cycle of the UMC1000 and that
may cause customers to defer purchasing the UMC1000.
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The introduction of new industry digital switch interfaces, such as GR-303,
TR-08, and V5 reduce the amount of equipment required to support each access
line or port. There can be no assurance that technological advances in the
telecommunications industry will not reduce sales of the UMC1000, diminish
market acceptance of the system or render the system obsolete and possibly
result in, among other things, loss of customer orders, decreased revenues, and
lowered net income.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISK OF THIRD PARTY CLAIMS OF
INFRINGEMENT. We attempt to protect our technology through a combination of
copyrights, trade secret laws, contractual obligations, and patents. We do not
presently hold any patents for the UMC1000 product, but four patent applications
are pending. These intellectual property protection measures may not be
sufficient to prevent misappropriation of AFC's technology nor will they prevent
competitors from independently developing technologies that are substantially
equivalent or superior to our technology. The laws of many foreign countries do
not protect our intellectual property rights to the same extent as the laws of
the U.S. Failure to protect proprietary information could result in, among other
things, loss of our competitive advantage, loss of customer orders, decreased
revenues, and lower net income. We are currently involved in a dispute with
RELTEC Corporation regarding, among other things, alleged trade secret
misappropriation. See Part I - "Note 3 Commitments and Contingencies" as it
pertains to this matter on page 5 of this Quarterly Report on Form 10-Q.
In 1996, we settled litigation with DSC Communications, Inc. ("DSC") under which
DSC had claimed proprietary rights to the UMC1000 technology. In June 1999, we
settled litigation with DSC under a separate proprietary rights claim to our
UMC1000 technology. See Part I "Note 3 Commitments and Contingencies" on page 5
of this Quarterly Report on Form 10-Q.
In 1998, we settled litigation with the Industrial Technology Research Institute
and its sub-licensee Member Companies, and others, involving breach of a prior
agreement, trade secret misappropriation, unfair competition and related claims.
This settlement involved AFC granting a limited license to certain of the
Company's proprietary technology. In September 1998, we settled litigation with
Acer Netxus, Inc. enjoining them from developing, manufacturing, and selling any
device utilizing or deriving from our UMC1000 technology.
In the future, we 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 AFC. Any such litigation could be costly and cause diversion of
management's attention from running the operations of AFC, either of which could
result in, among other things, increased operating expenses and lowered net
income, and failure to remain competitive in a rapidly changing technological
environment. Adverse determinations in such litigation could result in the loss
of our proprietary rights, subject us to significant liabilities, require us to
seek licenses from third parties, or prevent us from manufacturing or selling
our products, any one of which could, among other things, decrease our revenues,
increase our operating expenses, lower our net income, and decrease our cash
flows. Furthermore, there can be no assurance that any necessary licenses will
be available on reasonable terms.
DEPENDENCE ON THE TELECOMMUNICATIONS INDUSTRY AND SMALL TO MID-LINE SIZE MARKET.
Our customers are concentrated in the public carrier telecommunications industry
and, in the U.S. market include Competitive Local Exchange Carriers, National
Local Exchange Carriers, Independent Local Exchange Carriers, and the Regional
Bell Operating Companies. Accordingly, our future success depends upon the
capital spending patterns of such customers and the continued demand by such
customers for the UMC1000. The target markets for the systems are the U.S. and
international small to mid-line size markets. Historically, these markets have
had little access to the advanced services that can be made available through
the UMC1000 and 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. The system may not be met with widespread acceptance
among the telecommunications companies and other potential customers in small to
mid-line size markets. Existing customers and potential customers may adopt
alternative architectures or technologies that are incompatible with the UMC1000
technology which could result in, among other things, delays in or cancellation
of customer orders, decreased revenues, and lower net income. There can be no
assurance that
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telecommunications companies, foreign governments or other customers will pursue
infrastructure upgrades that will necessitate the implementation of advanced
products such as the UMC1000. Infrastructure improvements 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.
DEPENDENCE ON SOLE SOURCE AND LIMITED NUMBER OF THIRD PARTY MANUFACTURERS AND
SUPPORT ORGANIZATIONS. Certain components used in our products, including our
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. A
limited number of independent contractors manufacture the subassemblies to our
specifications for use in our systems. Some of the sole source suppliers are
companies who, from time to time, allocate parts to telecommunications equipment
manufacturers due to market demand for components and equipment. Many of our
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 our having to pay
a higher price for components. If sufficient quantities of these or any other
components cannot be obtained, delays or reductions in manufacturing or product
shipments could occur which could result in, among other things, delays in or
cancellation of customer orders, decreased revenues, lower gross profit, lower
net income, and decreased cash flows. In particular, we rely upon:
- - Flextronics International Ltd. and Solectron International USA, Inc. to
manufacture printed circuit board assemblies ("PCBAs")
- - Siemens Microelectronics, Inc. for PCBAs components
- - Paragon Electronic Systems, Inc., and Tyco Printed Circuit Group Inc. to
manufacture backplanes and channel bank assemblies
- - Celestica, Inc. for channel bank assemblies and protector panel
subassemblies
- - General Cable Corporation for protector panel subassemblies
- - CMOR Manufacturing and Wilco Wire Technology, Inc. for cable and wire
harnesses and various turnkey assemblies
- - American Microsystems, Inc. for ASICs
- - Hendry Telephone Products for fuse panels and racks
- - Powersafe Standby Batteries Inc. for battery systems
- - LeeMah Electronics Inc. for fully integrated cabinets
- - Pairgain Technologies Inc. for custom enclosures and boards
- - Sonoma Metal Products, Inc., Cowden Metal San Jose, Inc., Mayville Metal
Products, and EMAR Inc. to manufacture the external housing cabinets
- - Advanced Digital Graphics, Inc. for system documentation
Our production and shipping schedules could be adversely affected if one or more
of our subcontractors were to experience financial, operational, production, or
quality assurance difficulties that resulted in a reduction or interruption in
supply to us or otherwise failed to meet our manufacturing requirements. We may
not be able to establish sufficient manufacturing supply from alternative
sources. Current or alternative manufacturers may not be able to meet our future
requirements and such manufacturing services may not continue to be made
available to us at favorable prices, or at all.
Various third party support organizations provide post sales support to our
domestic sales customers. There can be no assurance that these organizations
will be able to provide the level of customer support demanded by existing or
potential customers.
DEPENDENCE ON KEY PERSONNEL. Our success depends to a significant extent upon
key technical and management employees. The loss of the services of any of these
key employees could result in, among other things, loss of our competitive
position in a rapidly changing technological environment, which in turn could
lead to decreased revenues, increased operating expenses to locate experienced
replacements, and lowered net income. In general, we do not have employment
agreements with, or key person life insurance for, our employees. Competition
for highly qualified
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employees is intense and the process of locating key technical and management
personnel with the required combination of skills and attributes is often
lengthy. There can be no assurance that we will be successful in retaining our
existing key personnel or in attracting and retaining the additional employees
we may require. There can be no assurance as to the ongoing effect of key
personnel on AFC's business, financial condition and results of operations.
RISKS ASSOCIATED WITH PENDING LITIGATION. We are a party to certain legal
proceedings as described in Part I - "Note 3 Commitments and Contingencies"
beginning on page 5 of this Quarterly Report on Form 10-Q. We are 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, these proceedings could
result in significant diversion of management's time, and significant legal
costs which could result in, among other things, increased operating expenses
and lowered net income, and failure to remain competitive in a rapidly changing
technological environment.
YEAR 2000 READINESS. See discussion above under Year 2000 Readiness Disclosure
beginning on page 12 of this Quarterly Report on Form 10-Q.
COMPLIANCE WITH REGULATIONS AND INDUSTRY STANDARDS. The UMC1000 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 within specific
international markets. Standards for new services continue to evolve, and we
will need to modify the UMC1000 or develop new versions to meet these standards.
Failure of our systems to comply with, or delays in meeting compliance of
evolving standards both in domestic and international markets, could impact our
ability to sell the UMC1000, and may, among other things, lead to delays or loss
of customer orders, decreased revenues, and lower net income. Standards setting
and compliance verification in the U.S. are determined by the Federal
Communications Commission, Underwriters Laboratories, QMI, Telcordia
Technologies, Inc. ("Telcordia"), other independent third party testing
organizations, and by independent telecommunications companies. In international
markets, our products must comply with recommendations issued by the
Consultative Committee on International Telegraph and Telephony, Industry
Canada, and individual regional carriers' network operating system requirements
and specifications. In addition, our 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.
We need to continue to ensure that the UMC1000 is easily integrated with various
network management systems. Telcordia testing on the UMC1000 is often required
to ensure interoperability with various standards of operations, administration,
maintenance and provisioning systems. Telcordia testing requires significant
investments in time and money to achieve compliance. Some UMC1000 features must
pass Telcordia testing prior to field release. Failure to maintain such
compliance or to obtain it on new features released in the future could result
in, among other things, delays in or loss of customer orders, decreased
revenues, and lowered net income.
AFC was first certified ANSI/ISO/ASQC Q9001-1994 ("ISO") compliant in 1997. The
ISO standard defines a quality system aimed at achieving quality in design,
development, production, installation and servicing. In November 1998, Quality
Management Institute certified our annual ISO standard. There can be no
assurance that we will maintain such certification. The failure to maintain such
certification may preclude selling the UMC1000 in certain markets and could
adversely affect our ability to compete with other suppliers of
telecommunications equipment.
Our ability to compete with other telecommunications equipment suppliers could
be adversely effected should we fail to maintain interoperability with other
companies or adopt or maintain industry standards in the UMC1000.
In 1996, the U.S. Congress passed 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 have had 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 could cause, among other things, delays in
or loss of customer orders,
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and lowered revenues. There can be no assurance that any regulatory changes will
not have a material adverse effect on the demand for the UMC1000. Uncertainty
regarding future policies combined with emerging new competition may also affect
the demand for telecommunications products such as the UMC1000 system.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion in Part I "Note 3 Commitments and Contingencies" beginning on
page 5 of this Quarterly Report on Form 10-Q.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
(a). CHANGES IN SECURITIES: None
(b). USE OF PROCEEDS:
We completed our initial public offering in October 1996, in which we issued and
sold 10,350,000 shares of common stock for aggregate proceeds of $120.3 million.
Of the aggregate proceeds received in the offering, $2.2 million were 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Our 1999 Annual Meeting of Stockholders was held on May 25, 1999. The following
matters were voted upon by the stockholders:
- - Election of two Class III Directors. Donald Green and Dan Rasdal were
elected to serve terms extending from the date of election and
qualification, continuing through the third Annual Meeting of Stockholders
following election. Furthermore, each of their terms will also continue
until their resignation, removal from office, or until the time when a
successor director is elected and qualified. The result of the voting was as
follows: 70,092,805 shares in favor of Donald Green, with 527,333 shares
withheld, and 70,167,297 shares in favor of Dan Rasdal, with 452,841 shares
withheld. The terms of office of AFC's other Directors, Clifford H.
Higgerson and Alex Sozonoff continue until the 2000 Annual Meeting of
Stockholders, and Herbert M. Dwight Jr. and Ruann F. Ernst continue until
the 2001 Annual Meeting of Stockholders.
- - Ratification of the selection of KPMG LLP as independent public accountants
for the Company for the fiscal year ending December 31, 1999. The result of
the vote was 70,233,444 shares in favor, 246,642 shares against, and 140,052
shares abstaining.
ITEM 5. OTHER INFORMATION:
None
21
<PAGE> 23
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)
3.3.2 Certificate of Designation of Series A Junior Participating Preferred
Stock. (5)
3.5 Amended and Restated Bylaws of the Registrant. (2)
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).
4.4 Rights Agreement dated as of May 13, 1998, between the Registrant and
BankBoston, N.A.(5)
4.5 Amendment to Rights Agreement dated as of October 19, 1998 between the
Registrant and BankBoston, N.A.(7)
10.3 Form of Warrant Issued in Connection with the Sale of the Registrant's
Series C Preferred Stock on March 16, 1994. (1)
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 Compensation Agreement, dated March 23, 1999 between the Registrant and
John A. Schofield. (9)
10.11 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) +
10.12 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)
10.14 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)
10.15 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)
10.17 Form of Indemnification Agreement for Executive Officers and Directors
of the Registrant. (1)
10.18 The Registrant's 1993 Stock Option/Stock Issuance Plan, as amended (the
"1993 Plan"). (1)
10.19 Form of Stock Option Agreement pertaining to the 1993 Plan. (1)
10.20 Form of Notice of Grant of Stock Option pertaining to the 1993 Plan. (1)
10.21 Form of Stock Purchase Agreement pertaining to the 1993 Plan. (1)
10.22 The Registrant's 1996 Stock Incentive Plan (the "1996 Plan"). (1)
10.23 Form of Stock Option Agreement pertaining to the 1996 Plan. (1)
10.23.1 Form of Automatic Stock Option Agreement pertaining to the 1996 Plan. (1)
10.24 Form of Notice of Grant of Stock Option pertaining to the 1996 Plan. (1)
</TABLE>
22
<PAGE> 24
<TABLE>
<S> <C>
10.24.1 Form of Notice of Grant of Non-Employee Director Automatic Stock Option
pertaining to the 1996 Plan. (1)
10.25 Form of Stock Issuance Agreement pertaining to the 1996 Plan. (1)
10.26 The Registrant's Employee Stock Purchase Plan. (1)
10.27 Stock Issuance Agreement, dated June 30, 1997 between the Registrant and
Peter A. Darbee. (2)
10.28 Note secured by Stock Pledge Agreement, dated June 30, 1997 by Peter A.
Darbee in favor of the Registrant. (2)
10.29 Stock Pledge Agreement, dated June 30, 1997 between the Registrant and
Peter A. Darbee. (2)
10.30 Consulting Agreement, dated May 19, 1997 between the Registrant and
Peter A. Darbee. (2)
10.31 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. (4)
10.32 Redwood Business Park Net Lease, dated August 4, 1997 between the
Registrant and G & W/ Copley Redwood Business Park, L.P., for the
premises located at 1435 McDowell Boulevard North. (8)
10.33 Redwood Business Park Net Lease, dated October 23, 1997 between the
Registrant and G & W/ Copley Redwood Business Park, L.P., for the
premises located at 1465 McDowell Boulevard North. (8)
10.34 Revolving Credit Agreement, dated July 30, 1998 between the Registrant
and Banque Nationale De Paris and Bank of America National Trust and
Savings Association. (6)
10.35 Redwood Business Park Net Lease, dated July 10, 1998 between the
Registrant and G & W/Copley Redwood Business Park, L.P., for the
premises located at 1347 Redwood Way. (8)
21.1 Subsidiaries of the Registrant. (1)
27.1 Financial data schedule.
</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 Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed with the Securities
and Exchange Commission on August 8, 1997.
3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997, filed with the
Securities and Exchange Commission on November 7, 1997.
4) 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.
5) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 19, 1998.
6) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998, filed with the Securities
and Exchange Commission on August 10, 1998.
7) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 29, 1998.
23
<PAGE> 25
8) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the Securities and Exchange
Commission on March 24, 1999.
9) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999, filed with the
Securities and Exchange Commission on May 7, 1999.
+ Portions of this Exhibit have been granted Confidential Treatment.
(b). REPORTS ON FORM 8-K: None
24
<PAGE> 26
SIGNATURE
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: August 6, 1999 By: /s/ Peter A. Darbee
---------------------------------
Name: Peter A. Darbee
Title: Vice President, Chief
Financial Officer, Treasurer and
Secretary (Duly Authorized Signatory
and Principal Financial Officer)
25
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit
Numbers Exhibit Index
- -------- -------------
<S> <C>
3.3.1 Fifth Amended and Restated Certificate of Incorporation of the
Registrant. (3)
3.3.2 Certificate of Designation of Series A Junior Participating Preferred
Stock. (5)
3.5 Amended and Restated Bylaws of the Registrant. (2)
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).
4.4 Rights Agreement dated as of May 13, 1998, between the Registrant and
BankBoston, N.A.(5)
4.5 Amendment to Rights Agreement dated as of October 19, 1998 between the
Registrant and BankBoston, N.A.(7)
10.3 Form of Warrant Issued in Connection with the Sale of the Registrant's
Series C Preferred Stock on March 16, 1994. (1)
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 Compensation Agreement, dated March 23, 1999 between the Registrant and
John A. Schofield. (9)
10.11 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) +
10.12 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)
10.14 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)
10.15 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)
10.17 Form of Indemnification Agreement for Executive Officers and Directors
of the Registrant. (1)
10.18 The Registrant's 1993 Stock Option/Stock Issuance Plan, as amended (the
"1993 Plan"). (1)
10.19 Form of Stock Option Agreement pertaining to the 1993 Plan. (1)
10.20 Form of Notice of Grant of Stock Option pertaining to the 1993 Plan. (1)
10.21 Form of Stock Purchase Agreement pertaining to the 1993 Plan. (1)
10.22 The Registrant's 1996 Stock Incentive Plan (the "1996 Plan"). (1)
10.23 Form of Stock Option Agreement pertaining to the 1996 Plan. (1)
10.23.1 Form of Automatic Stock Option Agreement pertaining to the 1996 Plan. (1)
10.24 Form of Notice of Grant of Stock Option pertaining to the 1996 Plan. (1)
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
10.24.1 Form of Notice of Grant of Non-Employee Director Automatic Stock Option
pertaining to the 1996 Plan. (1)
10.25 Form of Stock Issuance Agreement pertaining to the 1996 Plan. (1)
10.26 The Registrant's Employee Stock Purchase Plan. (1)
10.27 Stock Issuance Agreement, dated June 30, 1997 between the Registrant and
Peter A. Darbee. (2)
10.28 Note secured by Stock Pledge Agreement, dated June 30, 1997 by Peter A.
Darbee in favor of the Registrant. (2)
10.29 Stock Pledge Agreement, dated June 30, 1997 between the Registrant and
Peter A. Darbee. (2)
10.30 Consulting Agreement, dated May 19, 1997 between the Registrant and
Peter A. Darbee. (2)
10.31 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. (4)
10.32 Redwood Business Park Net Lease, dated August 4, 1997 between the
Registrant and G & W/ Copley Redwood Business Park, L.P., for the
premises located at 1435 McDowell Boulevard North. (8)
10.33 Redwood Business Park Net Lease, dated October 23, 1997 between the
Registrant and G & W/ Copley Redwood Business Park, L.P., for the
premises located at 1465 McDowell Boulevard North. (8)
10.34 Revolving Credit Agreement, dated July 30, 1998 between the Registrant
and Banque Nationale De Paris and Bank of America National Trust and
Savings Association. (6)
10.35 Redwood Business Park Net Lease, dated July 10, 1998 between the
Registrant and G & W/Copley Redwood Business Park, L.P., for the
premises located at 1347 Redwood Way. (8)
21.1 Subsidiaries of the Registrant. (1)
27.1 Financial data schedule.
</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 Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed with the Securities
and Exchange Commission on August 8, 1997.
3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997, filed with the
Securities and Exchange Commission on November 7, 1997.
4) 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.
5) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 19, 1998.
6) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998, filed with the Securities
and Exchange Commission on August 10, 1998.
7) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 29, 1998.
<PAGE> 29
8) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the Securities and Exchange
Commission on March 24, 1999.
9) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999, filed with the
Securities and Exchange Commission on May 7, 1999.
+ Portions of this Exhibit have been granted Confidential Treatment.
(b). REPORTS ON FORM 8-K: None
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 30,759
<SECURITIES> 112,478
<RECEIVABLES> 68,200
<ALLOWANCES> (2,747)
<INVENTORY> 41,222
<CURRENT-ASSETS> 257,632
<PP&E> 70,961
<DEPRECIATION> (16,508)
<TOTAL-ASSETS> 322,590
<CURRENT-LIABILITIES> 40,312
<BONDS> 0
0
0
<COMMON> 769
<OTHER-SE> 279,187
<TOTAL-LIABILITY-AND-EQUITY> 322,590
<SALES> 133,667
<TOTAL-REVENUES> 133,798
<CGS> 68,300
<TOTAL-COSTS> 72,414
<OTHER-EXPENSES> 55,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,619)
<INCOME-PRETAX> 9,131
<INCOME-TAX> 3,014
<INCOME-CONTINUING> 6,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,117
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
