<PAGE>
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 Quarterly Period Ended June 30, 1996
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: 000-23774
ASCEND COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3092033
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1275 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA 94502
(510) 769-6001
(Address of principal executive offices, zip code and telephone number)
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
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 112,448,399 as of June 30, 1996.
This report, including exhibits, consists of 24 pages. The Index To Exhibits is
found on page 19.
<PAGE>
ASCEND COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page No.
--------
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for
the Quarters and Six Months Ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults upon Senior Securities 15
Item 4: Submissions of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 16
A: Exhibits 16
B: Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In Thousands)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $128,012 $120,237
Short-term investments......................... 104,123 90,843
Accounts receivable, net....................... 66,024 30,553
Inventories.................................... 53,794 24,855
Deferred income taxes.......................... 5,874 5,874
Other current assets........................... 8,300 2,179
-------- --------
Total current assets........................ 366,127 274,541
Investments....................................... 44,310 51,515
Furniture, fixtures and equipment, net............ 18,012 8,931
Other assets...................................... 2,488 463
-------- --------
Total assets................................ $430,937 $335,450
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 24,427 $ 12,862
Accrued liabilities............................ 20,339 20,162
Accrued compensation and related liabilities... 6,331 6,296
-------- --------
Total current liabilities................... 51,097 39,320
Commitments
Stockholders' equity:
Common stock................................... 112 110
Additional paid-in capital..................... 298,869 265,509
Retained earnings.............................. 80,859 30,511
-------- --------
Total stockholders' equity.................. 379,840 296,130
-------- --------
Total liabilities and stockholders' equity.. $430,937 $335,450
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales.............................. $123,345 $ 28,581 $214,423 $ 48,944
Cost of sales.......................... 43,436 9,819 75,284 16,818
-------- -------- -------- --------
Gross profit........................ 79,909 18,762 139,139 32,126
Operating expenses:
Research and development............ 8,064 1,915 13,559 3,805
Sales and marketing................. 22,621 6,728 42,170 11,337
General and administrative.......... 3,669 1,865 6,625 3,548
-------- -------- -------- --------
Total operating expenses........ 34,354 10,508 62,354 18,690
-------- -------- -------- --------
Operating income....................... 45,555 8,254 76,785 13,436
Interest income, net................... 2,500 367 5,057 770
-------- -------- -------- --------
Income before income taxes............. 48,055 8,621 81,842 14,206
Provision for income taxes............. 18,261 3,279 31,100 5,399
-------- -------- -------- --------
Net income............................. $ 29,794 $ 5,342 $ 50,742 $ 8,807
======== ======== ======== ========
Net income per share................... $ 0.24 $ 0.05 $ 0.41 $ 0.09
======== ======== ======== ========
Number of shares used in per share
calculation........................... 123,487 102,500 122,581 101,840
======== ======== ======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income............................................................ $ 50,742 $ 8,807
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation.................................................... 2,373 627
Changes in operating assets and liabilities:
Accounts receivable.......................................... (35,471) (5,681)
Inventories.................................................. (28,939) (6,836)
Other current assets......................................... (6,121) (660)
Other assets................................................. (2,025) (251)
Accounts payable and accrued liabilities..................... 11,742 6,527
Accrued compensation and related liabilities................. 35 1,149
-------- --------
Net cash provided by (used in) operating activities...... (7,664) 3,682
-------- --------
Investing activities:
Purchases of investments........................................ (85,615) (10,045)
Maturities and sales of investments............................. 79,540 14,970
Purchases of furniture, fixtures and equipment.................. (11,454) (3,219)
-------- --------
Net cash provided by (used in) investing activities......... (17,529) 1,706
-------- --------
Financing activities:
Proceeds from issuance of common stock, net..................... 7,447 864
Tax benefit related to exercise of stock options................ 25,521 2,838
-------- --------
Net cash provided by financing activities................... 32,968 3,702
-------- --------
Net increase in cash and cash equivalents............................. 7,775 9,090
Cash and cash equivalents, beginning of period........................ 120,237 6,600
-------- --------
Cash and cash equivalents, end of period.............................. $128,012 $ 15,690
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
GENERAL
Ascend Communications, Inc. ("Ascend" or the "Company") develops, manufactures,
markets, sells and supports a broad range of high-speed digital remote
networking access products that enable its customers to build: (i) Internet
access systems consisting of point-of-presence ("POP") termination equipment for
Internet service providers ("ISPs") and remote site Internet access equipment
for Internet subscribers; (ii) extensions and enhancements to corporate backbone
networks that facilitate access to these networks by remote offices,
telecommuters and mobile computer users; and (iii) videoconferencing and
multimedia access facilities. These products are termed bandwidth on demand
systems because they establish high-speed switched digital connections whose
bandwidth, duration and destination can be adjusted to suit user application
needs. These products support existing digital and analog networks.
The interim condensed consolidated financial statements of Ascend
Communications, Inc. have been prepared by the Company without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The information
included in this report should be read in conjunction with the Company's audited
financial statements and notes thereto included in the Company's 1995 Annual
Report. The condensed balance sheet data as of December 31, 1995 included
herein has been derived from such audited financial statements.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the financial
position, results of operations and cash flows for such periods. The results
for the interim periods ended June 30, 1996 are not necessarily indicative of
the results that may be expected for any future periods.
CONCENTRATION OF CREDIT RISK
The Company sells and distributes a substantial percentage of its products to
Internet service providers, value-added resellers and distributors, and local
and long-distance telecommunications carriers, throughout North America, Europe
and Asia and the Pacific Basin. Accounts receivable are principally from these
customers. The Company conducts ongoing credit evaluations of its customers and
maintains reserves for potential credit losses.
6
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in, first-
out method) or market. Inventories consist of (in thousands):
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
Finished goods.................... $15,373 $ 9,522
Products in process............... 13,999 7,981
Raw materials and supplies........ 24,422 7,352
------- -------
$53,794 $24,855
======= =======
</TABLE>
COMMITMENTS
In March 1996, the Company entered into an agreement to lease 13 acres of land
located in Alameda, California. Certain buildings to be used for the Company's
headquarters are being constructed on the land The lessor of the land and
buildings has committed to fund up to a maximum of $25.0 million (subject to
reductions based on certain conditions in the lease) for construction of the
buildings, with the portion of the committed amount to be actually utilized to
be determined by the Company. The rent obligation for the lease will commence
upon the earlier of the Company's occupation of the buildings or eighteen months
from the lease inception date. The lease has an initial term of five years and
an option to renew for two years, subject to the lessor's consent. At any time
during the term of the lease, the Company may purchase the land and buildings.
If the Company does not exercise its purchase option at the end of the lease,
the Company will guarantee a residual value for the land and buildings as
determined at the lease inception date of the agreement (up to a maximum of
approximately $22.4 million).
INCOME TAXES
As of June 30, 1996, the Company's income taxes currently payable for both
federal and state purposes have been reduced by a tax benefit of approximately
$25.5 million from stock option transactions which was credited directly to
stockholders' equity. The Company made cash payments of $19.7 million and $3.2
million for income taxes during the six months ended June 30, 1996 and 1995,
respectively.
7
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
STOCKHOLDERS' EQUITY
In August 1995, the Company completed a public offering of its common stock
consisting of 12,650,000 shares at $17.625 per share, with proceeds, net of
issuance costs, of approximately $211,743,000 (issuance costs were approximately
$11,213,000). On May 29, 1996, the Company's stockholders approved an amendment
to the Company's Certificate of Incorporation that increased the authorized
common stock from 200,000,000 to 400,000,000 shares.
In May, October and December of 1995 the Company's Board of Directors approved
two-for-one stock splits, payable in the form of a stock dividend to all
stockholders of record. All share and per share data have been retroactively
adjusted to reflect these stock splits.
EARNINGS PER SHARE
Earnings per share for the quarters and six months ended June 30, 1996 and 1995
were computed based on the weighted average number of common and common
equivalent shares outstanding. The computations of the weighted average number
of shares outstanding for the quarters ended June 30, 1996 and 1995 are as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Common Stock................................. 112,448 96,732 111,837 96,420
Common Stock Equivalents (Stock Options)..... 11,039 5,768 10,744 5,420
-------- -------- -------- --------
Total........................................ 123,487 102,500 122,581 101,840
======== ======== ======== ========
Net Income................................... $ 29,794 $ 5,342 $ 50,742 $ 8,807
======== ======== ======== ========
Net Income Per Share......................... $ 0.24 $ 0.05 $ 0.41 $ 0.09
======== ======== ======== ========
</TABLE>
8
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
BUSINESS COMBINATIONS
In March 1996, the Company acquired Morning Star Technologies, Inc. ("Morning
Star") in a transaction that was accounted for as a pooling of interests. The
Company issued approximately 440,000 shares of its common stock to Morning Star
shareholders in exchange for all outstanding Morning Star shares.
On May 30, 1996, the Company entered into an agreement under which it will
acquire NetStar, Inc. ("NetStar") of Eden Prairie, Minnesota. Under the terms of
the agreement, NetStar stockholders will receive .35398 of a share of Ascend
common stock for each outstanding share of NetStar common stock. Outstanding
options and warrants to purchase NetStar common stock will be converted to
Ascend options and warrants, respectively. The transaction will be accounted for
as a pooling of interests and is intended to qualify as a tax-free
reorganization. The transaction is expected to be completed prior to August 31,
1996 and is subject to NetStar shareholder approval and other customary closing
conditions.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASCEND COMMUNICATIONS, INC.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE CURRENT VIEWS
OF THE COMPANY WITH RESPECT TO FUTURE EVENTS THAT WILL HAVE AN EFFECT ON ITS
FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INCLUDE THE WORDS "EXPECTS,"
"BELIEVES" AND SIMILAR EXPRESSIONS. THESE FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE REFERRED TO UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE HEREIN, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE CURRENTLY
ANTICIPATED. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS.
The information set forth below should be read in conjunction with the unaudited
interim condensed consolidated financial statements and notes thereto included
in Part 1 - Item 1 of this Quarterly Report and the audited financial statements
and notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 1995
contained in the Company's 1995 Annual Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain line items from the Company's Condensed
Consolidated Statements of Income for the quarters and six months ended June 30,
1996 and 1995, respectively:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................ 100% 100% 100% 100%
Cost of sales........................ 35 34 35 34
-------- -------- -------- --------
Gross Margin....................... 65 66 65 66
Operating expenses:
Research and development........... 7 7 6 8
Sales and marketing................ 18 23 20 23
General and administrative......... 3 7 3 7
-------- -------- -------- --------
Total operating expenses..... 28 37 29 38
-------- -------- -------- --------
Operating income..................... 37 29 36 28
Interest, net........................ 2 1 2 1
-------- -------- -------- --------
Income before income taxes........... 39 30 38 29
Provision for income taxes........... 15 11 14 11
-------- -------- -------- --------
Net income........................... 24% 19% 24% 18%
======== ======== ======== ========
</TABLE>
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ASCEND COMMUNICATIONS, INC.
NET SALES
Net sales for the second quarter ended June 30, 1996 were $123.3 million, an
increase of 332% over net sales of $28.6 million for the second quarter of 1995.
Net sales for the six months ended June 30, 1996 were $214.4 million, an
increase of 338% over net sales of $48.9 million for the six months ended June
30, 1995. These increases in net sales were primarily due to an increase in unit
shipments of MAX products and increased international sales. The increase in
unit shipments of the MAX family of products was primarily attributable to the
growth in business from Internet service providers and increased demand for
corporate remote networking applications. For the second quarter ended June 30,
1996, MAX products accounted for approximately 85% of net sales as compared to
approximately 52% of net sales in the second quarter of 1995. For the six months
ended June 30, 1996, MAX products accounted for approximately 79% of net sales
as compared to approximately 51% of net sales in the first six months of 1995.
Net sales of the Pipeline family of products were approximately 10% of net sales
in the second quarter of 1996 as compared to approximately 21% of net sales in
the second quarter of 1995, but increased in absolute dollars when compared to
the same period. Net sales of the Pipeline family of products were approximately
14% of net sales for the six months ended June 30, 1996 as compared to
approximately 21% of net sales for the six months ended June 30, 1995, but
increased in absolute dollars when compared to the same period. Net sales of
the Company's Multiband products accounted for approximately 5% of net sales for
the second quarter of 1996 as compared to approximately 24% for the second
quarter of 1995. Net sales of the Company's Multiband products accounted for
approximately 6% of net sales for the six months ended June 30, 1996 as compared
to approximately 25% for the six months ended June 30, 1995. The decrease in
Multiband and Pipeline net sales as a percentage of total net sales was
primarily due to the increase in net sales of the Company's MAX products.
For the quarter ended June 30, 1996 there were no customers which accounted for
10% or more of net sales. UUNET, an Internet service provider, accounted for
approximately 10% and 20% of net sales for each of the six months ended June 30,
1996 and 1995, respectively. International sales accounted for approximately
44% of net sales for the second quarter of 1996 compared to approximately 23% of
net sales for the second quarter of 1995. International sales accounted for
approximately 43% of net sales for the six months ended June 30, 1996 compared
to approximately 23% of net sales for the six months ended June 30, 1995. This
increase was principally due to increased sales of the Company's products in
Asia and the Pacific Basin.
GROSS MARGIN
Gross margin was 65% for the second quarter and six months ended June 30, 1996
as compared to 66% for the same periods ended June 30, 1995. These decreases in
gross margin were primarily attributable to increased shipments of various
products in the Pipeline family, which have a lower gross margin than the MAX
and Multiband product families. In the future, the Company's gross margins may
be affected by several factors, including the mix of products sold, the price of
products sold, the introduction of new products with lower gross margins, the
distribution channels used, price competition, increases in material costs and
changes in other components of cost of sales.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ASCEND COMMUNICATIONS, INC.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 321% to $8.1 million in the second
quarter of 1996 from $1.9 million in the second quarter of 1995. Research and
development expenses increased 256% to $13.6 million for the six months ended
June 30, 1996 from $3.8 million for the six months ended June 30, 1995. These
increases were primarily due to the addition of engineering personnel, payments
for consulting services in connection with developing and enhancing the
Company's existing and new products, and payments for consulting services
related to filing applications and product testing required to obtain
governmental approvals to resell the Company's products outside of North
America. Research and development expenses as a percent of net sales were 7%
for the second quarter of both 1996 and 1995 and decreased as a percent of net
sales to 6% for the first six months of 1996 from 8% for the comparable period
in 1995. This decrease was primarily due to increased net sales.
SALES AND MARKETING
Sales and marketing expenses increased 236% to $22.6 million in the second
quarter of 1996 from $6.7 million in the second quarter of 1995. Sales and
marketing expenses increased 272% to $42.2 million for the six months ended June
30, 1996 from $11.3 million for the six months ended June 30, 1995. These
increases in expenses were primarily due to the addition of sales, marketing and
technical support personnel, increased commissions, spending for marketing
materials and trade shows, expenditures for demonstration and loaner equipment
used by customers and expenses associated with opening additional sales offices
in North America, Europe and Asia and the Pacific Basin. The growth in sales,
marketing and technical support personnel was primarily due to the need to
manage the activities of an increased number of value-added resellers and
distributors, end-user customers and new products. Sales and marketing expenses
as a percent of net sales decreased to 18% in the second quarter of 1996 as
compared to 23% for the same quarter of 1995. Sales and marketing expenses as a
percent of net sales decreased to 20% for the first six months of 1996 as
compared to 23% for the comparable period in 1995. These decreases in sales and
marketing expenses as a percentage of net sales were due primarily to increased
net sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 97% to $3.7 million in the second
quarter of 1996 from $1.9 million in the second quarter of 1995. General and
administrative expenses increased 87% to $6.6 million for the six months ended
June 30, 1996 from $3.5 million for the six months ended June 30, 1995. These
increases were primarily due to the addition of finance, information systems and
administrative personnel, accruals for performance bonuses and the cost of
investor relations activities. General and administrative expenses decreased as
a percent of net sales to 3% for the quarter and six months ended June 30, 1996
from 7% for the comparable periods in 1995. These decreases in general and
administrative expenses as a percentage of net sales were due primarily to
increased net sales.
12
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ASCEND COMMUNICATIONS, INC.
INTEREST INCOME, NET
Interest income (net) increased by $2.1 million to $2.5 million (2% of net
sales) for the second quarter of 1996 compared to $367,000 for the second
quarter of 1995. Interest income (net) increased by $4.3 million to $5.1 million
(2% of net sales) for the six months ended June 30, 1996 compared to $770,000
for the six months ended June 30, 1995. These increases in interest income were
due primarily to the investment of proceeds from the Company's public offering
of its common stock which was completed in August 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes for the quarters ended and six months ended June
30, 1996 and 1995 is based on a combined federal and state rate of 38% , which
approximates the net effective statutory federal and state rates adjusted for
tax exempt interest income and the tax benefits associated with the Company's
Foreign Sales Corporation.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company's principal sources of liquidity included $276.4
million of cash and cash equivalents, short-term investments and investments,
and an unsecured $15.0 million revolving line of credit which expires in
November 1997. There were no borrowings under the line of credit in the first
six months of 1996. The increase in cash and cash equivalents of $7.8 million
for the six months ended June 30, 1996 was principally due to $33.0 million of
proceeds from, and tax benefits related to, the exercise of stock options and
issuance of common stock in connection with the Company's employee and outside
director stock plans, partially offset by $7.7 million of funds used in
operations and by $17.5 million of funds used in investment activities. The net
cash used by operating activities for the six months ended June 30, 1996 was
primarily due to increases in inventories and accounts receivable, partially
offset by increases in net income, accounts payable and accrued liabilities.
Net cash used in investing activities of $17.5 million for the six months ended
June 30, 1996 related primarily to expenditures for furniture, fixtures and
equipment of $11.4 million and net purchases of investments of $6.1 million.
Financing activities provided $33.0 million for the six months ended June 30,
1996, primarily due to proceeds from, and tax benefits related to, the exercise
of stock options and issuance of common stock in connection with the Company's
employee and outside director stock plans.
At June 30, 1996, the Company had $315.0 million in working capital. The
Company currently has no significant capital commitments other than commitments
under facilities and operating leases. The Company believes that its available
sources of funds and anticipated cash flow from operations will be adequate to
finance current operations, anticipated investments and capital expenditures for
at least the next twelve months.
13
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ASCEND COMMUNICATIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly and year-to-year operating results are affected by a
wide variety of risks and uncertainties as discussed in the Company's
Registration Statement on Form S-4 filed on June 14, 1996. This Report on Form
10-Q should be read in conjunction with such Form S-4, particularly "Risk
Factors" contained in Form S-4. These risks and uncertainties include but are
not limited to competition, the mix of products sold, the mix of distribution
channels employed, the Company's success in developing, introducing and shipping
new products, the Company's success in integrating acquired operations, the
Company's dependence on single or limited source suppliers for certain
components used in its products, price reductions for the Company's products,
changes in the levels of inventory held by third-party resellers, the timing of
orders from and shipments to customers, seasonality and general economic
conditions.
In particular, a substantial portion of the Company's sales of MAX and Pipeline
products is related to the Internet industry. There can be no assurance that
this industry and its infrastructure will continue to develop. The Company
believes competition in the Internet industry will increase significantly in the
future and could adversely affect the Company's business, results of operations
and financial condition.
The Company expects to conclude the acquisition of NetStar prior to August 31,
1996. Achieving the anticipated benefits of the NetStar acquisition will depend
in part upon whether the integration of the two companies' product offerings and
technologies, research and development activities, and sales, marketing and
administrative organizations is accomplished in an efficient and effective
manner, and there can be no assurance that this will occur. Moreover, the
integration process may temporarily distract management attention from the day-
to-day business of the Company. Failure to successfully accomplish the
integration could have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company expects that its gross margins could be adversely affected in future
periods by price adjustments as a result of increased competition. In addition,
the Company also expects that its gross margins could be adversely affected in
future periods by increased sales of its Pipeline products as a percentage of
net sales. These products have lower gross margins than the Company's other
products. In addition, the Company's use of third parties to distribute its
products to other value-added resellers may adversely affect the Company's gross
margins.
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ASCEND COMMUNICATIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS (Continued)
The Company typically operates with a relatively small backlog. As a result,
quarterly sales and operating results generally depend on the volume of, timing
of and ability to fulfill orders received within the quarter, which are
difficult to forecast. A significant portion of the Company's expense levels is
relatively fixed in advance based in large part on the Company's forecasts of
future sales. If sales are below expectations in any given quarter, the adverse
impact of the shortfall on the Company's operating results may be magnified by
the Company's inability to adjust spending to compensate for the shortfall. The
Company may also increase spending in response to competition or to pursue new
market opportunities.
In consideration of these factors, there can be no assurance that the Company
will be able to sustain profitability, particularly on a period-to-period basis.
15
<PAGE>
ASCEND COMMUNICATIONS, INC.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings:
Not Applicable.
Item 2: Changes in Securities:
Not Applicable.
Item 3: Defaults upon Senior Securities:
Not Applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
The Company's Annual Meeting of Stockholders was held on May 29, 1996. Proxies
for the meeting were solicited pursuant to Regulation 14A. At the meeting,
management's nominees for directors were elected. A summary of the nominees and
voting results are as follows:
<TABLE>
<CAPTION>
Shares
----------------------
Nominee Voting for Withheld
- --------------- ---------- --------
<S> <C> <C>
Mory Ejabat 97,704,616 256,268
Robert K. Dahl 97,701,562 259,322
Betsy S. Atkins 97,770,827 190,057
Roger Evans 97,884,566 76,318
C. Richard Kramlich 97,878,924 81,960
James P. Lally 97,884,549 76,335
</TABLE>
Additionally, the selection of Ernst & Young LLP as independent public
accountants for the year ending December 31, 1996 was ratified with 97,830,217
shares voting in favor, 26,945 shares voting against and 103,722 shares
abstaining. In addition, an amendment to the Company's Certificate of
Incorporation to increase the authorized common stock of the Company from
200,000,000 shares to 400,000,000 shares was approved with 92,167,180 shares
voting in favor, 5,164,739 shares voting against, 127,190 shares abstaining and
501,775 broker non-votes. Also, an amendment to the Company's 1989 Stock Option
Plan to increase by 50,000,000 the number of shares reserved for issuance
thereunder was not approved with 32,846,573 shares voting in favor, 47,418,806
shares voting against, 255,357 abstaining and 17,440,148 broker non-votes.
Item 5: Other Information:
Not Applicable
16
<PAGE>
Item 6: Exhibits and Reports on Form 8-K:
A: Exhibits
<TABLE>
<CAPTION>
No. DESCRIPTION
- --------- ------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation.
(1) 3.2 By-Laws.
(1) 10.1 First Amended and Restated 1989 Stock Option Plan and forms of
stock option agreements used thereunder.
(1) 10.2 Ascend Communications, Inc. 1994 Employee Stock Purchase Plan.
(1) 10.3 Ascend Communications, Inc. 1994 Outside Directors Stock Option
Plan.
(1) 10.4 Loan Agreement and related agreements, dated October 21, 1993,
by and between the Registrant and First Interstate Bank of
California.
(1) 10.5 Lease dated August 8, 1991, by and between the Registrant and
Harbor Bay Isle Associates, the First Addendum thereto, dated
August 8, 1991, and the Second Addendum thereto, dated February
25, 1994.
(1) 10.6 OEM Contract Agreement #LGSC102DS, dated September 28, 1992, by
and between the Registrant and AT&T Paradyne Corporation,
Amendment Number 1 thereto, dated September 30, 1992; Amendment
No. 2 thereto, dated March 9, 1993; Amendment No. 3 thereto,
dated March 10, 1993; and Amendment No. 4 thereto, dated
December 15, 1993.
(1) 10.7 Agreement, dated March 15, 1993, by and between the Registrant and
North Supply Company.
(1) 10.8 Form of Indemnity Agreement for directors and officers.
(2) 10.9 Loan Agreement and related agreements, dated July 29, 1994, by
and between the Registrant and First Interstate Bank of
California.
(3) 10.10 Lease Agreement, Lease Rider and Second Lease Rider, dated May
17, 1995 by and between the Registrant and Resurgence
Properties, Inc.
</TABLE>
17
<PAGE>
(A) Exhibits (continued)
<TABLE>
<CAPTION>
No. DESCRIPTION
- --------- ------------------------------------------------------------------
<C> <S>
(4) 10.11 Loan Agreement and related agreements, dated November 30, 1995, by
and between the Registrant and Wells Fargo Bank of California.
(5) 10.12 Lease agreement dated March 27, 1996, by and between the
Registrant and Sumitomo Bank Leasing and Financing, Inc.
11.1 Statement regarding computation of earnings per share included in
notes to condensed consolidated financial statements page 8.
27.0 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference from the Company's Registration Statement (No. 33-
77146), effective May 12, 1994.
(2) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1994.
(3) Incorporated by reference from the Company's Form 10-Q for the quarter ended
June 30, 1995.
(4) Incorporated by reference from the Company's Form 10-K for the year ended
December 31, 1995.
(5) Incorporated by reference from the Company's Form 10-Q for the quarter ended
March 31, 1996.
B: Form 8-K
The Company filed a Report on Form 8-K on June 7, 1996 announcing it
had entered into an agreement to acquire all of the outstanding common
stock of NetStar, Inc. in exchange for Ascend common stock.
18
<PAGE>
ASCEND COMMUNICATIONS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASCEND COMMUNICATIONS, INC.
Date August 14, 1996 by /s/ Robert K. Dahl
--------------- ---------------------------------------
Robert K. Dahl, Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
Date August 14, 1996 by /s/ Michael J. Johnson
--------------- ---------------------------------------
Michael J. Johnson, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
19
<PAGE>
ASCEND COMMUNICATIONS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
No. DESCRIPTION
- --------- ------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation.
(1) 3.2 By-Laws.
(1) 10.1 First Amended and Restated 1989 Stock Option Plan and forms of
stock option agreements used thereunder.
(1) 10.2 Ascend Communications, Inc. 1994 Employee Stock Purchase Plan.
(1) 10.3 Ascend Communications, Inc. 1994 Outside Directors Stock Option
Plan.
(1) 10.4 Loan Agreement and related agreements, dated October 21, 1993,
by and between the Registrant and First Interstate Bank of
California.
(1) 10.5 Lease dated August 8, 1991, by and between the Registrant and
Harbor Bay Isle Associates, the First Addendum thereto, dated
August 8, 1991, and the Second Addendum thereto, dated February
25, 1994.
(1) 10.6 OEM Contract Agreement #LGSC102DS, dated September 28, 1992, by
and between the Registrant and AT&T Paradyne Corporation,
Amendment Number 1 thereto, dated September 30, 1992; Amendment
No. 2 thereto, dated March 9, 1993; Amendment No. 3 thereto,
dated March 10, 1993; and Amendment No. 4 thereto, dated
December 15, 1993.
(1) 10.7 Agreement, dated March 15, 1993, by and between the Registrant and
North Supply Company.
(1) 10.8 Form of Indemnity Agreement for directors and officers.
(2) 10.9 Loan Agreement and related agreements, dated July 29, 1994, by
and between the Registrant and First Interstate Bank of
California.
(3) 10.10 Lease Agreement, Lease Rider and Second Lease Rider, dated May
17, 1995 by and between the Registrant and Resurgence
Properties, Inc.
</TABLE>
20
<PAGE>
INDEX TO EXHIBITS (continued)
<TABLE>
<CAPTION>
No. DESCRIPTION
- --------- ------------------------------------------------------------------
<C> <S>
(4) 10.11 Loan Agreement and related agreements, dated November 30, 1995, by
and between the Registrant and Wells Fargo Bank of California.
(5) 10.12 Lease agreement dated March 27, 1996, by and between the
Registrant and Sumitomo Bank Leasing and Financing, Inc.
11.1 Statement regarding computation of earnings per share included in
notes to condensed consolidated financial statements page 8.
27.0 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference from the Company's Registration Statement (No. 33-
77146), effective May 12, 1994.
(2) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1994.
(3) Incorporated by reference from the Company's Form 10-Q for the quarter ended
June 30, 1995.
(4) Incorporated by reference from the Company's Form 10-K for the year ended
December 31, 1995.
(5) Incorporated by reference from the Company's Form 10-Q for the quarter ended
March 31, 1996.
21
<PAGE>
Ascend Communications, Inc.
EXHIBIT 3.1
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "ASCEND COMMUNICATIONS, INC.", FILED IN THIS OFFICE ON THE THIRTIETH DAY OF
MAY, A.D. 1996, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY
RECORDER OF DEEDS FOR RECORDING.
[SEAL OF THE STATE OF DELAWARE APPEARS HERE]
/s/ Edward J. Freel
--------------------------------
Edward J. Freel, Secretary of State
2383993 8100 AUTHENTICATION: 7967094
960157111 DATE: 05-30-96
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 05/30/1996
960157111-2383993
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
ASCEND COMMUNICATIONS, INC.
Pursuant to Section 242 of the General Corporation Law
of the State of Delaware
The undersigned, Anthony Stagno, Vice President, Manufacturing of Ascend
Communications, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), in accordance with
the provisions of Section 242 thereof, certifies as follows:
1. That the amendment to the Corporation's Restated Certificate of
Incorporation set forth below has been approved by the Corporation's Board of
Directors and stockholders and was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
2. That Article FOURTH, paragraph A of the Corporation's Certificate of
Incorporation is hereby amended to read in full as follows:
"FOURTH:
------
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Four Hundred Two
Million (402,000,000) consisting of Four Hundred Million
(400,000,000) shares of Common Stock, par value one-tenth of one
cent ($.001) per share (the "Common Stock") and Two Million
(2,000,000) shares of Preferred Stock, par value one-tenth of one
cent ($.001) per share (the "Preferred Stock")."
IN WITNESS WHEREOF, this Certificate of Amendment has been executed on
behalf of the Corporation by its Vice President, Manufacturing on this 29th day
of May, 1996.
ASCEND COMMUNICATIONS, INC.
By: /s/ Anthony Stagno
------------------------
Anthony Stagno
Vice President, Manufacturing
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 128,012
<SECURITIES> 104,123
<RECEIVABLES> 68,024
<ALLOWANCES> 2,000
<INVENTORY> 53,794
<CURRENT-ASSETS> 366,127
<PP&E> 24,036
<DEPRECIATION> 6,024
<TOTAL-ASSETS> 430,937
<CURRENT-LIABILITIES> 51,097
<BONDS> 0
0
0
<COMMON> 112
<OTHER-SE> 379,728
<TOTAL-LIABILITY-AND-EQUITY> 430,937
<SALES> 123,345
<TOTAL-REVENUES> 123,345
<CGS> 43,436
<TOTAL-COSTS> 43,436
<OTHER-EXPENSES> 34,354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,500)
<INCOME-PRETAX> 48,055
<INCOME-TAX> 18,261
<INCOME-CONTINUING> 29,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,794
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
