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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1701 HARBOR BAY PARKWAY, ALAMEDA, CA 94502
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (510) 769-6001
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 31, 1996 the approximate aggregate market value of voting stock
held by non-affiliates of the Registrant was $6,752,292,426 (based upon the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market on that date). Shares of Common Stock held by each
officer, director and holder of 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. The
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 28, 1997, 120,453,082 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual stockholders meeting to be held
on May 20, 1997 are incorporated by reference into Part III of this Report on
Form 10-K.
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ASCEND COMMUNICATIONS, INC.
FORM 10-K
TABLE OF CONTENTS
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Page No.
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Part I:
ITEM 1. Business 3
ITEM 2. Properties 20
ITEM 3. Legal Proceedings 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
Part II:
ITEM 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 20
ITEM 6. Selected Financial Data 21
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
ITEM 8. Financial Statements and Supplementary Data 27
ITEM 9. Changes in and Disagreements with Accountants on 27
Accounting and Financial Disclosure
Part III:
ITEM 10. Directors and Executive Officers of the Registrant 27
ITEM 11. Executive Compensation 27
ITEM 12. Security Ownership of Certain Beneficial Owners 27
and Management
ITEM 13. Certain Relationships and Related Transactions 27
Part IV:
ITEM 14. Exhibits, Financial Statement Schedules, and 28
Reports on Form 8-K
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THIS REPORT ON FORM 10-K 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 FUTURE RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
THOSE CURRENTLY ANTICIPATED. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS.
PART 1
ITEM 1. BUSINESS
Ascend Communications, Inc. ("Ascend" or the "Company") develops,
manufactures, markets, sells and supports a broad range of high-speed
integrated remote networking 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) high speed IP switches for
application in telecommunications carriers and ISP backbone networks (iii)
extensions and enhancements to corporate backbone networks that facilitate
access to these networks by remote offices, telecommuters and mobile computer
users; and (iv) videoconferencing and multimedia access facilities. These
products support existing digital and analog networks.
The Company has four product families, each of which is focused on a major
application segment: MAX products for wide area network ("WAN") access to
corporate backbone networks, Internet access in POPs and multimedia access
facilities; GRF products for high performance Internet Protocol ("IP") switching
in carrier and ISP backbone networks; Pipeline and NetWarp products for
telecommuting, remote office access and Internet access by individual sites or
users; and Multiband products for videoconferencing and multimedia networks. The
Company's products offer integrated security and network management
functionality. These products support a wide variety of application interfaces,
switched digital services, digital modem services and digital and analog access
line types. This wide range of connectivity and interoperability options
significantly increases the number of telecommunication carrier, ISP POP,
corporate and individual sites that can benefit from Ascend's products. The
Company's products are distributed and serviced globally and the Company
maintains marketing and sales relationships with ISPs, including UUNET, PSI,
BBN, MCI, Demon Internet (UK) and IIJ (Japan), with major telecommunications
carriers, including AT&T, Sprint, MCI, GTE, Pacific Bell, Southwestern Bell,
British Telecom, France Telecom, Deutsche Telekom and NTT in Japan, with video
equipment providers, including Compression Labs, PictureTel and VTEL, and with
value-added resellers and distributors throughout the world.
APPLICATIONS
As a consequence of the availability of a broad range of network services,
a new class of internetworking applications has emerged. Four such applications
include WAN and Internet access; WAN and Internet backbone switching; remote
local area network ("LAN") and Internet subscriber access; and videoconferencing
and multimedia access.
WAN and Internet Access. The WAN and Internet access markets are driven by
the growth of switched digital services offered by telecommunications carriers
and by the growth of dial-up internetworking offered through Internet service
providers, public information network providers, private network service
providers and large corporate telecommunications centers. WAN and Internet
access requires managed, high capacity, high density termination of digital and
analog switched connections and flexible communications to the appropriate
backbone network or the Internet through LAN or WAN circuit or frame relay
connections.
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WAN and Internet Backbone Switching. The WAN and Internet backbone
switching markets are driven by the high growth of the Internet due to increases
in the number of individual Internet subscribers and the number of corporations
using the Internet as a virtual private network. This growing traffic on the
Internet has put increased demands on the backbone equipment at the core of WAN
and Internet networks. Today's backbone switches must handle millions of packets
of data per second and simultaneously communicate with the approximately 46,000,
and growing, peer devices that form the foundation of today's Internet.
Remote LAN and Internet Subscriber Access. The remote office and
telecommuting/SOHO market is driven primarily by the need for organizations to
increase the productivity of network users by extending their corporate backbone
network beyond its dedicated leased digital circuit boundaries to remote
offices, telecommuters, mobile computer users, vendors and customers. The
Internet access market is driven by the need for organizations and individuals
to have switched digital connections to Internet services such as inter-company
electronic mail, file transfers and the World Wide Web. Remote LAN and Internet
subscriber access requires managed, cost-effective connections that can be
established and terminated as needed, at sufficient bandwidth.
Videoconferencing and Multimedia Access. Today's videoconferencing market
is driven by corporate demands for better and more efficient communications,
thereby enhancing video room system access and worker productivity. With the
emergence of the desktop video market, the demand for high performance switched
connectivity allowing intra-company as well as inter-company video access
equipment has grown. The multimedia market is driven by an array of emerging
multimedia access applications which include multimedia banking, telemedicine
and distance learning.
Coincident with the demand for connectivity driven by these applications
has been the need for integrated security. In addition, connectivity equipment
must contain sophisticated bandwidth management technology to address the
significant connectivity challenges posed by the large variety of network
services, communications protocols and application specific requirements.
Furthermore, connectivity equipment must have the reliability and scalability
demanded by large telecommunications carriers and ISPs, which provide these
services on a worldwide basis.
THE ASCEND SOLUTION
Ascend provides the major components of a remote networking solution:
access equipment for the remote site, access equipment for the edge of the
network, and high speed backbone switching equipment for the core of the
network. Ascend's access and backbone systems establish high-speed transparent
connections whose bandwidth, duration and destination can be adjusted to suit
user application needs.
The Company's remote LAN and Internet subscriber access products and WAN
and Internet access products integrate digital modem technology in addition to
switched digital technology, allowing dynamic selection of analog or digital
dial-up services and a seamless transition and integration of digital and analog
services within a telecommunications carrier, corporation or an ISP's network.
The Company's products also provide integrated network management and security
functionality.
The Company's product families incorporate scaleable, modular software and
hardware architectures that facilitate rapid, flexible customer deployments.
This scalability and modularity also has allowed the Company to rapidly develop
new products and additional features. Hardware platforms range from lower cost
systems using general purpose microprocessors to high-performance scaleable
systems with state-of-the-art RISC processors. All products have integrated
hardware and software platforms that can be configured into a wide variety of
systems to suit customers' specific needs for capacity, functionality and cost
effectiveness.
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COMPANY STRATEGY
The Company's objective is to maintain a leadership position in the market
for remote networking systems using the following strategies:
Focus on Targeted Applications Markets
Ascend's first product family, the Multiband family, was introduced in
February 1991. By focusing on videoconferencing and working closely with
telecommunications carriers such as AT&T, MCI and Sprint, Ascend became a market
leader in bandwidth on demand videoconferencing access.
Building on this success and on the existing Multiband technology, Ascend
introduced the MAX product family in late 1992. The MAX family of products
supports WAN, Internet and multimedia access applications, and has been widely
deployed by Internet service providers. In 1996, 1995 and 1994, the MAX product
family accounted for approximately 82%, 63% and 26% of the Company's net sales,
respectively. In late 1996, the Company introduced the MAX TNT, a carrier class,
high-speed/high-capacity WAN access switch that is the newest member of the MAX
product family.
In late 1993, to address the expanding remote LAN and Internet access
market, Ascend leveraged the technology incorporated in its MAX and Multiband
product families and introduced a new product family of remote site access
equipment, the Pipeline family of products. In 1996, 1995 and 1994, the Pipeline
product family accounted for approximately 12%, 20% and 10% of the Company's net
sales, respectively.
In late 1996, the Company introduced the GRF product family of high
performance IP switches. The GRF is the first product family to be introduced by
the Company's High Performance Networking Division (formerly NetStar, Inc.),
based in Minneapolis, Minnesota.
Also in late 1996, to enhance its offerings to the remote LAN and Internet
access market, the Company introduced the NetWarp product family of high
performance ISDN terminal adapters.
The Company will continue to monitor future trends and evolving
applications, and intends to enhance and expand its range of product offerings
to suit the particular network access requirements of significant new
applications markets.
Provide "Any to Any" Connectivity
The Company believes that its products must support and enable
interoperability among common network services and interfaces. The Company
currently supports major network services including analog modem, ISDN BRI, ISDN
PRI, dedicated digital services up to and including SONET(OC12 - 622 KB/second),
Frame Relay, emerging xDSL networks and other derivatives. In addition, the
Company currently supports major equipment interfaces such as serial cabling
interfaces (V.35), 10/100 MB Ethernet, FDDI, as well as very high speed
interfaces such as HIPPI and HISSI. The Company intends to support additional
application cabling interfaces, digital access lines and analog and digital
services when such offerings become necessary to satisfy the needs of end-user
customers in the targeted applications markets.
Leverage Strategic Distribution and Marketing Relationships
Since its inception in 1989, the Company has developed close relationships
with important value-added resellers ("VARs"), distributors, ISPs,
telecommunications carriers and applications equipment manufacturers around the
world to support marketing and sales activities in each of its targeted
applications markets. The Company leverages the capabilities, resources,
expertise and market presence of these strategic partners to bring the Company's
products to market rapidly and to respond to developments in these markets. The
Company intends to develop similar strategic relationships with additional
partners in the future to obtain comparable benefits.
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Focus on Global Markets and Applications
Organizations around the world utilize the applications targeted by the
Company's products, often across national borders. In order to insure its
continued success, the Company's products must support analog and digital
services available in the major industrial countries throughout the world and
enable interoperability of these services. The Company intends to continue to
invest in product development aimed at these global markets. The Company
currently markets and sells its products outside of North America in Europe,
Asia, the Pacific Basin and Latin and South America. The Company intends to
support telecommunications services in additional countries as those services
become available.
Exploit Flexible Product Architecture For Rapid Time to Market
All of the Company's products leverage integrated core software components.
This core software is designed to be extensible to accommodate new applications,
cabling interfaces, digital access lines and carrier digital services. The
software currently operates on three different families of microprocessors, from
relatively low-cost processors, such as the Intel 80C18 and Motorola's 68xxx, to
state-of-the-art RISC-based processors such as the Intel i960, and is designed
to be ported to other microprocessors in the future. In addition, the Company
has designed its hardware architecture in a modular fashion so that it can use
elements of this architecture in future products. This flexibility, portability
and modularity are intended to facilitate a relatively short product design and
development cycle and to enable the Company to address new applications markets
and support new network services offered by telecommunications carriers.
PRODUCTS
Ascend has developed four product families based on an integrated software-
based architecture intended to permit its products to: (i) connect to the major
types of analog and digital access lines worldwide; (ii) connect to widely
available dedicated line services, switched digital services and digital modem
services; (iii) connect to the major types of telecommunications services
worldwide; (iv) provide support for different types of applications and
application interfaces; and (v) accommodate network growth and application
expansion in a scaleable fashion.
The Company provides integrated firewall and encryption security software
for its products. In addition, the Company's products also support local and
remote management of the access equipment, the access line interface and the
application interface. Ascend products can be managed from a central location
using either Ascend's proprietary remote management protocols or standards-based
Simple Network Management Protocol (SNMP).
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MAX
Ascend introduced its first MAX products in late 1992. Sales of MAX
products accounted for approximately 82%, 63% and 26% of the Company's net sales
in 1996, 1995 and 1994, respectively. Products in the MAX product family range
from the low-end MAX 200+ to the recently introduced MAX TNT, a carrier class,
high-speed/high-capacity WAN access switch. The entire MAX family of integrated
access servers provide bandwidth on demand for WAN, Internet and multimedia
access over common sets of digital access lines. Each MAX product supports a
modular card and backplane system that allows users to configure each unit
according to application and bandwidth requirements. MAX products can be
configured with HDLC and digital modem cards to act as a central site remote LAN
access server, allowing up to 672 simultaneous remote users to dial into the
corporate backbone network or ISP network. MAX 2000 and 4000 series units can be
configured with Multiband cards, providing up to 36 high-speed inverse
multiplexing ports for central site videoconferencing, dedicated circuit backup
and disaster recovery, dedicated circuit overflow and load balancing, high speed
bulk file transfer, high quality audio transmission and other applications. MAX
product family features include:
. Wide capacity range from MAX 200+ (8 sessions) to MAX TNT (672
sessions).
. High density digital modem support (72 per MAX 4004; 672 per multi-shelf
MAX TNT).
. Frame relay connectivity via a high speed serial connection (1 X 8Mbps
per MAX 4004; 4 X 53Mbps per MAX TNT), connection to a local frame relay
switch or integrated T1 CSU/DSU (4 X 24 DS0s per MAX 4000; 128 X 24 DS0s
per MAX TNT) access to a remote switch.
. Dynamic Bandwidth Allocation (MP, MPP, BACP) and Inverse Multiplexing
(AIM, BONDING) support facilitates the needs of modern remote access and
videoconferencing environments.
. The TNT can accommodate a full DS3, and has 10/100Mbps Ethernet, HSSI,
FDDI, V.35, POTS, E1/T1/PRI, Digital Modem, Unchannelized T1,
redundant AC or DC power supply and hot-swappable modules.
. Translation of traditional T1/PRI signaling to out-of-band ISDN
signaling for support of voice services offered through a PBX.
. Support of network access from multiple diverse network carriers and
unique hardware provides load-based, circuit-level automatic backup and
overflow accommodation for fault-tolerance.
. Heterogeneous network access, providing T1, ISDN PRI and ISDN BRI
concurrently in the same device to optimize bandwidth utilization and
cost. Low-bandwidth, low-cost ISDN BRI access lines may be used as
backup for a T1 access line. ISDN BRI may also provide ISDN to the
desktop for desktop videoconferencing.
Ascend has obtained certification for MAX products in approximately 35
countries and has applied for certification in several other countries. Low and
mid-level MAX units generally range in list price from $2,400 to $30,000, with
units fully configured with digital modems ranging up to approximately $60,000.
MAX TNT units generally range in list price from $60,000 for a basic
configuration to $300,000 for a multi-shelf configuration.
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GRF
Ascend introduced its first GRF products in September 1996. The GRF family
of high-performance IP switches enable telecommunications carriers and ISPs to
cost-effectively offer competitive network access and backbone services. The
GRF's unique architecture combines its Layer-3 switch with intelligent IP
forwarding media cards to deliver scaleable performance up to 10 million
packets per second. The GRF products are equipped to handle the high-bandwidth
requirements of demanding network environments, such as the Internet.
The GRF easily integrates into existing networks using industry-standard
LAN and WAN interfaces. Network designers can place the GRF into their backbone
network to consolidate equipment, increase port density, increase packet
handling and router handling capacity and reduce the cost of ownership.
The GRF Family includes the GRF 400 and GRF 1600. Introduced in September
1996, the GRF 400 offers 4 Gb/s bandwidth to support up to four media cards and
forward up to 2.8 million packets per second. Ascend announced its newest IP
switching product, the GRF 1600, in February 1997. The GRF 1600 has 16 Gb/s
bandwidth to support up to 16 media cards and deliver scaleable performance of
up to 10 million packets per second.
GRF IP switch features include:
. Support for industry-standard media types such as HSSI, 10/100 Base-T,
ATM OC3c, IP/SONET OC-3cf, ATM OC-12c, FDDI, CDDI and HPPI.
. Quick Branch Routing Technology (QBRT) for hardware-assisted full route
table lookup of up to 150,000 routes in less than 2.5 microseconds.
. Full suite of routing protocols including multicast, BGP3/4 and IS-IS.
. High-availability features including redundant load-balancing power
supplies, redundant load-balancing fans (GRF 1600), hot swappable media
cards and remote access and reboot.
The GRF 400 is now available with a base unit price of approximately
$15,650. The GRF 1600 base unit is scheduled to be available in North America in
the second quarter of 1997 at a starting price of approximately $32,000. Media
cards for the GRF 400 and GRF 1600 are currently available at prices ranging
from $13,500 to $25,000. A typical system configuration is $96,000.
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PIPELINE AND NETWARP
Ascend introduced its first Pipeline products in late 1993. Sales of
Pipeline products accounted for approximately 12%, 20% and 10% of the Company's
net sales in 1996, 1995 and 1994, respectively. The Pipeline product family
provides access equipment for remote office, telecommuting, SOHO and Internet
access. Pipeline products incorporate standards-based LAN routing and bridging
protocols transmitted over switched or dedicated digital services, and include
inverse multiplexing functionality to allow users to obtain higher data rates
than are available from individual digital access lines and switched digital
circuits.
Pipeline products support the major types of digital access lines and
provide interoperability between different access line types. Certain of the
Pipeline features enabling remote LAN access include:
. Security protocols such as Challenge Handshake Authentication Protocol
(CHAP), Password Authentication Protocol (PAP) and UNIX Syslog. Security
protocols are crucial to ensure the integrity of the backbone network.
. Support of additional security capabilities including call-back and
filtering on a per-caller basis.
. Packet-level inverse multiplexing for greater performance than can be
obtained over single channel connections.
. Support for key encapsulation protocols including PPP, MP and Ascend's
and other companies' proprietary encapsulation protocols.
. Support for data compression over wide area networks for improved
performance.
. Support of protocol spoofing to minimize connect-time costs over the
wide area network and to maximize remote site performance.
. Call Detail Recording ("CDR") for billing and monitoring purposes.
. Filter-based call establishment and termination to ensure that
connections are active only for the duration required for the
application.
. Telnet and SNMP network management capabilities.
Members of the Pipeline product family include the low-end Pipeline 25-PX
and Pipeline 25-FX, the mid-range Pipeline 50 and Pipeline 75 and the Pipeline
130, which may be used for high-end remote LAN access or as a small central site
WAN access device. The low-end products in the Pipeline product family are
targeted at the telecommuting and Internet access market and are designed for
the less technically sophisticated user. The Company distributes these product
through channels targeted at such users. These product have yielded lower gross
margins than the Company's other products. Ascend has obtained certification for
Pipeline products in approximately 30 countries and has applied for
certification in several other countries. Pipeline 25-PX units generally range
in list price from $595 to $695. Pipeline 50 units generally range in list price
from $895 to $1,695 and Pipeline 130 units generally range in list price from
$1,895 to $1,995.
In late 1996, to enhance its offerings in the remote LAN and Internet
access market, the Company introduced the NetWarp family of high performance
ISDN terminal adapters ("TAs"). NetWarp products address the burgeoning market
of home users who want high-speed ISDN access to the Internet. NetWarp products
are designed to address the three primary end-user requirements for ISDN dial-
up: performance, low cost and easy installation. The NetWarp ISDN terminal
adapters support all three Windows environments: Windows 3.x, Windows/NT and
Windows 95. To facilitate installation and ease of set-up, NetWarp products are
plug and play capable and include automatic switch protocol detection to
eliminate error-prone manual configuration required in existing TA-type
products. NetWarp units generally range in list price from $169 to $349.
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MULTIBAND
Ascend introduced its first Multiband products in February 1991 and
introduced a cost-reduced product, the Multiband Plus, in May 1992. In 1995, the
Company introduced the Multiband VSX, a less expensive, reduced functionality
version of its Multiband Plus product. Sales of Multiband products accounted for
approximately 5%, 15% and 58% of the Company's net sales in 1996, 1995 and 1994,
respectively. The Multiband family is focused primarily on videoconferencing and
multimedia applications. This family of bandwidth on demand controllers provides
global bandwidth on demand at speeds from 56 kbit/s to 4 Mbit/s using switched
digital services.
The Multiband Plus product supports four simultaneous high-speed digital
connections, connecting to applications using serial ports. The product
incorporates inverse multiplexing, dynamic bandwidth allocation, global
connectivity and comprehensive management capabilities to allow users to create
bandwidth on demand network solutions primarily for videoconferencing and
multimedia applications. Multiband Remote Port Modules (RPM) facilitate
bandwidth distribution within a facility by extending serial data ports from
Multiband products over unshielded twisted pair wiring to applications
throughout a facility for distances up to 3,400 feet.
Certain of the key Multiband features enabling videoconferencing access
include:
. Inverse multiplexing.
. Support for all major inverse multiplexing standards, including
BONDING.
. Remote management capability on all models.
. Integrated SNMP management with direct Ethernet access.
. Support for all major videoconferencing dialing protocols, such as RS-
366, extended Switched Digital Services Applications Forum (SDSAF),
V.25 bis and X.21 for international compatibility.
. Support for dual paired ports to interoperate with the installed base
of videoconferencing systems that do not support inverse multiplexing.
. Compatibility with the major brands of videoconferencing equipment.
Ascend has obtained country certifications for Multiband Plus products in
approximately 24 countries and has applied for certification in several other
countries. Multiband VSX units generally range in list price from $1,200 to
$7,500. Multiband Plus units generally range in list price from $7,000 to
$12,000.
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TECHNOLOGY
Ascend has developed a core software architecture that is modular and
portable. This software is used throughout all products and runs on three
different hardware microprocessors: Intel 80C188, Intel RISC i960 and Motorola
68xxx. The key capabilities of Ascend's technology are:
Wide Area Network Protocol Software. Ascend products connect to and manage
wide area communications for a variety of digital and analog access lines and
switched and leased digital services worldwide. Each digital or analog access
line and digital service has specific connect and disconnect protocols. The
Company's products support 36 wide area network protocols and five wide area
digital access interfaces. These protocols include 20 different ISDN call
signaling protocols worldwide.
Bandwidth Management Software. The Company's products manage wide area
network bandwidth over a variety of digital services, digital access lines and
user applications. The Company's products support several bandwidth on demand
technologies which allow dynamic changes in bandwidth during a communications
session, including Ascend Inverse Multiplexing (AIM) industry standard
inverse multiplexing, such as BONDING, as well as software data compression.
Remote LAN Access Software. The Company's products incorporate standards
used in remote LAN access including PPP (Point-to Point Protocol) and MP
(Multilink PPP). The Company has also developed proprietary extensions to the
standard protocols by optimizing them for remote LAN access. These include
MPP, Ascend's Multipoint Point-to-Point Protocol.
Standards-Based Security. The Company's products support many standard and
extended methods for providing security and access control for WAN access,
including CHAP, PAP, Extended TACACS, Radius and UNIX Syslog.
Application Specific Software. The Company's products support a wide
variety of application equipment, such as videoconferencing equipment, routers,
T1 multiplexers and PBXs, and a wide variety of application cabling, such as
serial ports and unshielded twisted pair wiring. The Company's Multiband product
family implements the videoconferencing protocol RS-366 and is compatible with
videoconferencing equipment manufactured by Compression Labs, PictureTel,
VTEL, British Telecom, GPT, Panasonic and others. In addition, the Company's
products support network management, remote diagnostics and a wide variety of
advanced security protocols.
MARKETING AND SALES
The Company's marketing and sales objective is to ensure that subscribers
to network services and users of applications equipment requiring such services
are aware of the capabilities and benefits of the Company's products. To
accomplish this objective the Company has developed and maintains marketing and
sales relationships with value-added resellers, distributors, ISPs, major
telecommunications carriers and applications equipment manufacturers who, in
turn, market and sell the Company's products to end-user customers. The
Company's sales force also sells products directly to certain end-user
customers.
The primary role of the Company's sales force is to: (i) provide support to
the value-added resellers, distributors, ISPs, telecommunications carriers and
applications equipment manufacturers; (ii) assist ISPs and end-user customers in
addressing complex network and Internet access problems; (iii) differentiate the
features and capabilities of the Company's products from competitive offerings;
and (iv) continually monitor and understand ISPs' and end-user customers'
evolving needs for network services.
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The Company also has several marketing programs to support the sale and
distribution of its products. The objective of these programs is to inform
value-added resellers, distributors, ISPs, telecommunications carriers,
applications equipment manufacturers and end-user customers about the
capabilities and benefits available with the use of the Company's remote
networking equipment. The programs include participation in industry trade
shows and technical conferences, design and presentation of technology
seminars, publication of customer newsletters and technical and educational
articles for the trade press and other industry journals and frequent
communications with the installed base of end-user customers regarding
evolving applications for the Company's products.
Internet Service Providers
The Company's MAX and Pipeline products are sold through its direct, value-
added reseller and distributor channels to ISPs. The Company has relationships
with many major ISPs worldwide, including UUNET, PSI, BBN, MCI, Demon Internet
and IIJ. UUNET, who first commenced volume purchases of the Company's products
in 1995, accounted for approximately 7% and 11% of net sales in 1996 and 1995,
respectively.
Value-Added Resellers and Distributors
In North America, the Company employs a two-tier reseller channel strategy.
As part of this strategy, the Company maintains contractual relationships with
and sells its products to VARs and end-users around the world through three
large distributors: Merisel, Ingram and Tech Data. In addition, the Company has
entered into non-exclusive agreements with approximately 87 premier VARs to sell
and service the Company's products. The terms of the agreements generally are
for periods not in excess of twelve months, subject to annual renewals and
earlier termination by either party with prior notice. Value-added resellers and
distributors are entitled to periodically return unsold inventory to the
Company. Returns are subject to a maximum limit and may be subject to a minimum
restocking requirement. To date such inventory returns have not been material.
Telecommunications Carriers
The Company's products are sold and serviced by major telecommunications
carriers around the world, including AT&T, Sprint, MCI, GTE, Pacific Bell,
Southwestern Bell, U.S. West, Ameritech, British Telecom, France Telecom,
Deutsche Telekom and NTT in Japan. Sales to telecommunications carriers are
made on open account and are subject to the Company's standard terms and
conditions of sale. Certain of the telecommunications carriers are entitled to
periodically exchange unsold inventory for other products offered by the
Company, subject to a maximum exchange limit and subject to a minimum
restocking requirement for returned inventory. To date, such inventory
exchanges have not been material.
Applications Equipment Manufacturers
The Company's products are also sold and serviced by several applications
equipment manufacturers, including Lucent Technologies, Inc. ("Lucent"),
Northern Telecom, Inc., Alcatel and NEC. Under its agreement with Lucent, the
Company provides its Multiband, MAX and Pipeline products for resale by Lucent
under the Lucent label. Lucent may, at any time, cancel orders for product
delivery which it has placed with the Company, subject to the payment of
specified minimum amounts. In addition, the Company has entered into
agreements with applications equipment manufacturers and integrators of
videoconferencing equipment, including Compression Labs, PictureTel, VTEL, and
Panasonic, which authorize these companies to resell the Company's products
using the Company's identification label. These videoconferencing applications
equipment manufacturers are not obligated to purchase minimum volumes of
product and they may cancel orders placed with the Company at any time prior
to scheduled payment.
12
<PAGE>
North American Sales and Marketing Organization
As of December 31, 1996, the Company's North America sales and marketing
organization included 265 individuals, including managers, sales
representatives, and technical and administrative support personnel. The Company
has 44 sales offices located in the following metropolitan areas: Atlanta,
Boston, Chicago, Cincinnati, Cleveland, Columbus, Durham, Dallas, Denver,
Hartford, Houston, Indianapolis, Kansas City, Los Angeles, Minneapolis, New
York, Orlando, Phoenix, Portland, Providence, San Francisco, Seattle, St.
Louis, Tampa, Toronto, Vancouver and Washington D.C.. The Company intends to
continue to recruit highly trained individuals for its North America sales
organization.
International Sales
The Company's international sales have been principally export sales and
currently are made through approximately 200 telecommunications carriers,
Internet service providers, value-added resellers and distributors servicing
approximately 50 countries, including Japan, Germany, United Kingdom, France,
Sweden, Belgium, Italy, Spain, Hong Kong, Australia, Singapore, Korea, Taiwan
and China. The carriers, value-added resellers and distributors generally
provide system installation, technical assistance and support to end-user
customers within their area of responsibility. Generally, international
telecommunications carriers, value-added resellers and distributors have non-
exclusive rights to sell and market the Company's products within their
respective countries.
As of December 31, 1996, the Company's international sales organization
included 101 individuals, including managers, sales representatives and
technical and administrative support personnel. The Company has sales offices in
the United Kingdom, Germany, France, Belgium, Japan, Hong Kong, Singapore and
Australia.
International sales accounted for approximately 48%, 29% and 20% of net
sales in 1996, 1995 and 1994, respectively (See Note 1 of Notes to
Consolidated Financial Statements). International sales are made in United
States dollars and are subject to government controls and other risks associated
with international business activities. To date, the Company has not experienced
any material difficulties or interruptions with respect to its international
business activities.
TECHNICAL ASSISTANCE AND SUPPORT
A high level of continuing technical assistance and support is important to
the Company's objective of developing long-term relationships with customers.
The majority of these technical assistance and support activities are related to
installations and network configuration issues and are primarily provided by
third parties distributing the Company's products. The Company supports its
sales personnel and customers by providing telephone support and remote access
to customer installations through the Company's Technical Assistance Centers in
Alameda, California and Sophia Antipolis, France. Remote access is accomplished
either through a digital dial-up network connection directly to a customer's
installation or through a modem connection to the control port of the customer's
system. The connection allows the Company's technical support personnel to
remotely analyze and correct software, installation and configuration problems.
The Company also offers on-site installation and technical assistance for fixed
fees, which to date have not been significant.
The Company's products have standard warranties of up to 12 months. The
Company has a variety of comprehensive and flexible hardware and software
maintenance and support programs available for products no longer under
warranty, with services ranging from time and materials remote service support
to 24-hour on-site support, depending on the end-user customer preference. The
Company also offers various training courses for its third party resellers and
end-user customers. To date, revenues attributable to customer service, support
and training services have not been significant.
13
<PAGE>
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in part on its ability
to continue to enhance its existing products and to develop new products that
maintain technological competitiveness. The Company also believes its product
development activities should be directed to solving the practical needs of its
customers. The Company monitors changing customer needs and works closely with
users of network access products, including ISPs, telecommunications carriers,
applications equipment manufacturers, value-added resellers and distributors,
end-user customers and market research organizations to monitor changes in the
marketplace. The Company intends to remain dedicated to industry standards and
to continue to support emerging wide area networking protocol standards and
carrier services.
The Company's software and hardware architecture is modular in design,
facilitating a relatively short product design and development cycle and
reducing the time to market for new products and features. The Company has
utilized this architectural design to develop and introduce numerous product
models and enhancements since the introduction of its first products in 1991.
The Company intends to continue to utilize this architectural design to develop
and introduce additional products and enhancements in the future.
The Company and its major customers test new products prior to their
general commercial availability. The Company conducts both internal testing and
beta testing with selected customers. To date, the Company has not experienced
any material product returns or software or hardware defects.
The Company has expanded its research and development expertise by
acquiring key technologies and core competencies through mergers with and
acquisitions of public and private companies in the networking industry. In
1997, the company acquired InterCon Systems Corporation ("InterCon"), a leading
developer of client software products for both the corporate and ISP markets and
has entered into an agreement to acquire Whitetree, Inc.("Whitetree") a
developer and manufacturer of high-speed switching products. In December 1996,
the Company acquired StonyBrook Services, Inc. ("StonyBrook"), a developer of
network management software. In August 1996, the Company acquired NetStar, Inc.
("NetStar"), a developer and manufacturer of high performance, high speed
Internet Protocol (IP) network switches. In August 1996, the Company acquired
Subspace Communications, Inc. ("Subspace"), a developer of PC-based data and
telecommunications products for the home and small office environments. In March
1996, the Company acquired Morning Star Technologies, Inc. ("Morning Star"), a
developer of network routing software and advanced network security products.
The Company is currently undertaking development efforts for each of its
product families. MAX development efforts include improving network access and
network management capabilities as well as improving price/performance. Pipeline
development efforts include digital and analog integration, support of
additional WAN protocols and cost reduction engineering. Multiband development
efforts include integration of emerging multimedia access applications such as
multimedia banking, telemedicine and distance learning as well as improving
price/performance.
Schedules for high technology products are inherently difficult to predict,
and there can be no assurance that the Company will achieve its scheduled first
customer shipment dates. Also, there can be no assurance that the Company's
product development efforts will result in commercially successful products, or
that the Company's products will not be rendered obsolete by changing technology
or new product announcements by other companies.
The Company's research and development expenditures were $40.3 million,
$12.4 million and $6.1 million in 1996, 1995 and 1994, respectively. Research
and development expenditures are expensed as incurred. At December 31, 1996, 210
full-time employees were engaged in research and development. During 1996, the
Company added development facilities in Columbus, Ohio; Fremont, California;
Minneapolis, Minnesota and Bohemia, New York.
14
<PAGE>
COMPETITION
The market for remote networking systems is highly competitive and subject
to rapid technological change. The Company expects competition to persist and
increase in the future. The Company's current competitors can be divided into
four groups: manufacturers of WAN and Internet access equipment, manufacturers
of high speed switching equipment for backbone networks, manufacturers of remote
LAN and Internet subscriber access equipment and manufacturers of bandwidth on
demand products addressing the needs of the videoconferencing and multimedia
market.
In the WAN and Inernet access market, the Company's primary competitors are
Cisco Systems ("Cisco"), U.S. Robotics and Shiva Corporation. Cisco has
substantially greater financial, marketing and technical resources than the
Company. In the WAN and Internet backbone switching market, the Company's
primary competitor is Cisco. In the remote LAN access and Internet subscriber
access market, competiton is widespread, although few companies have positioned
their products specifically as digital bandwidth on demand network access
systems. The Company's primary competitors in this market are Gandalf, Cisco,
Shiva and 3Com. In the videoconferencing and multimedia access market,
competitors include Teleos Communications (a subsidiary of Madge Networks,
Inc.), Adtran and Promptus Communications (a subsidiary of GTI).
Competitive factors in the remote networking market include core
technology, breadth of product features, scalability of products, product
quality and functionality, pricing, marketing and distribution resources,
international certifications and technical service and support. The Company
believes it presently competes favorably with respect to each of these factors
and is positioned to respond to anticipated competitive actions.
Competitive factors in the high speed switching market include support for
standards based protocols, the need for multiple interfaces, the ability to
handle the size and dynamic nature of the Internet addressing infrastructure
and throughput measured in packets per second. The Company believes it presently
competes favorably with respect to each of these factors and is positioned to
respond to anticipated competitive actions.
The Company expects additional competition from existing competitors and
from a number of other companies that may enter the Company's existing and
future markets. The additional competition could adversely affect the Company's
business, results of operations and financial condition. Some of the Company's
current and potential competitors have substantially greater financial,
marketing and technical resources than the Company.
MANUFACTURING AND QUALITY
The Company has received the International Standard Organization (ISO) 9001
certification for quality. The Company's manufacturing operations consist
primarily of materials planning and procurement, final assembly, burn-in, final
system testing and quality control. The Company designs all of the hardware
sub-assemblies for its products and uses the services of contract manufacturers
to build these sub-assemblies and certain of its products to the Company's
specifications. The Company presently uses a variety of independent third party
contract assembly companies to perform printed circuit board assembly and in-
circuit testing. The Company installs its proprietary software into the
electronically erasable programmable read only memory (EEPROM) of its systems in
order to configure products to meet customer needs and to maintain quality
control and system security. The manufacturing process enables the Company to
configure the hardware and software in combinations to meet a wide variety of
individual customer requirements. The Company uses automated testing equipment
and burn-in procedures, as well as comprehensive inspection, testing and
statistical process control testing by technicians, to assure the quality and
reliability of its products. To date, the Company has not experienced
significant product defects or customer returns of products.
15
<PAGE>
Although the Company generally uses standard parts and components for its
products, certain components including certain key microprocessors and
integrated circuits, are presently available only from a single source or from
limited sources. The Company has no supply commitments from its vendors and
generally purchases components on a purchase order basis as opposed to entering
into long term procurement agreements with vendors. The Company has generally
been able to obtain adequate supplies of components in a timely manner from
current vendors or, when necessary to meet production needs, from alternate
vendors. The Company believes that, in most cases, alternate vendors can be
identified if current vendors are unable to fulfill needs. However, delays or
failure to identify alternate vendors, if required, or a reduction or
interruption in supply or a significant increase in the price of components
could adversely affect the Company's revenues and financial results and could
impact customer relations.
The Company increased its manufacturing capacity in 1996, 1995 and 1994 by
adding additional facilities and personnel and will continue to increase its
manufacturing capacity as needed. The Company's financial results could be
adversely affected if it encounters delays or for any other reason does not
expand manufacturing capacity as required.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology, although the Company believes that its success is more
dependent upon its technical expertise than its proprietary rights. The Company
relies on a combination of patent, copyright and trade secret laws and non-
disclosure agreements to protect its proprietary technology. The Company
generally enters into confidentiality or license agreements with its employees,
distributors, customers and potential customers and limits access to its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by the Company in this regard will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. The Company is also subject to the risk of
adverse claims and litigation alleging infringement of the intellectual property
rights of others. From time to time the Company has received claims of
infringement of other parties' proprietary rights. There can be no assurance
that third parties will not assert infringement claims in the future with
respect to the Company's current or future products or that any such claims will
not require the Company to enter into license arrangements or result in
protracted and costly litigation, regardless of the merits of such claims. No
assurance can be given that any necessary licenses will be available or that, if
available, such licenses can be obtained on commercially reasonable terms.
EMPLOYEES
As of December 31, 1996, the Company employed 721 persons, including 366 in
sales and marketing, 83 in manufacturing, 210 in engineering and 62 in finance
and administration. Of these, 88 were employed outside of North America. None
of the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes its relationship with its employees
is good.
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product development
personnel. The Company does not have employment contracts with its key
personnel and does not maintain any key person life insurance policies. The
loss of key management or technical personnel could adversely affect the
Company.
The Company is currently experiencing rapid growth and expansion, which has
placed, and will continue to place, a significant strain on its administrative,
operational and financial resources and increased demands on its systems and
controls. This growth has resulted in a continuing increase in the level of
responsibility for both existing and new management personnel. The Company
anticipates that its continued growth will require it to recruit and hire a
substantial number of new engineering, sales, marketing and managerial
personnel. There can be no assurance that the Company will be successful at
hiring or retaining these personnel. The Company's ability to manage its growth
successfully will also require the Company to continue to expand and improve its
operational, management and financial systems and controls and to expand its
manufacturing capacity. If the Company's management is unable to manage growth
effectively, the Company's business, results of operations and financial
condition may be materially and adversely affected.
16
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's corporate executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
Mory Ejabat......................... 46 President, Chief Executive Officer and Director 1990
Curtis N. Sanford................... 38 Senior Vice President, International Sales and 1990
General Manager of International Operations
Robert K. Dahl...................... 56 Vice President, Finance, Chief Financial Officer and Director 1994
Michael Hendren..................... 50 Senior Vice President, North America Sales 1994
Anthony Stagno...................... 56 Vice President, Manufacturing 1992
Michael J. Johnson.................. 44 Controller and Chief Accounting Officer 1994
Jeanette Symons..................... 34 Executive Vice President, Advanced Products and Technology Group and 1989
Chief Technical Officer
Bernard Schneider................... 40 Vice President, Strategic Business Development 1995
William H. Kind..................... 41 Vice President, Engineering 1996
</TABLE>
17
<PAGE>
Mr. Ejabat joined the Company in January 1990 as Vice President,
Operations, and he served in this capacity until December 1992. From December
1992 until March 1994, he served as Executive Vice President. From March 1994
until June 1995, he served as President, Chief Operating Officer and a director
of the Company. Since June 1995, he has served as President, Chief Executive
Officer and a director of the Company. From January 1979 to June 1989, Mr.
Ejabat was employed by Micom Systems, Inc., a data communications equipment
manufacturer, where he served in various management capacities, including Vice
President for Wide Area Communications Products and Vice President of
Development and Operations.
Mr. Sanford joined the Company in January 1990 as Vice President,
International. From January 1993 until May 1994 he served as Vice President,
Worldwide Marketing and International Sales. From May 1994 to December 1995 he
served as Vice President, International Sales. Since December 1995, he has
served as Senior Vice President, International Sales and General Manager of
International Operations. From June 1980 to December 1989, Mr. Sanford was
employed by BBN Communications Corporation, a data communications equipment
manufacturer, most recently as Director, Far East Operations.
Mr. Dahl joined the Company in January 1994 as Vice President, Finance and
Chief Financial Officer. He has served as a director of the Company since July
1995. From May 1991 to December 1993, Mr. Dahl was a private investor and a
principal in Dahl-De Vivo Management Co., a private investment firm. From
January 1991 to May 1991, he was employed as Executive Vice President and Chief
Financial Officer for Digital Microwave Corporation. From January 1988 to
December 1990, Mr. Dahl was Senior Vice President, Chief Financial Officer and a
member of the Board of Directors of American President Cos., Ltd., a diversified
transportation company. From July 1986 to December 1987, he was employed by
Ungermann-Bass, Inc., a networking equipment supplier, as Executive Vice
President and Chief Financial Officer and also served as a member of its Board
of Directors. From June 1979 to July 1986, he was employed as Vice President and
Chief Financial Officer of ROLM Corporation, a manufacturer of customer premises
communications equipment.
Mr. Hendren joined the Company in May 1994 as Vice President, North
American Sales. Since December 1995, he has served as Senior Vice President,
North America Sales. From January 1990 to April 1994, Mr. Hendren was employed
by ACC Corp., a communications equipment manufacturer, most recently as Vice
President of Sales.
Mr. Stagno joined the Company in January 1992 as Director, Quality
Assurance, and since July 1994 has served as Vice President, Manufacturing. From
November 1989 to December 1991, Mr. Stagno was employed by MiniMed Technologies,
an electronic medical instruments manufacturer, most recently as Director,
Quality Assurance.
Mr. Johnson joined the Company in May 1994 as Controller and Chief
Accounting Officer. From December 1992 to May 1994, Mr. Johnson was Vice
President of Finance and Chief Financial Officer for Skylawn Corporation. From
October 1990 to November 1992, he was employed as Controller and Chief
Accounting Officer for Itel Rail Corporation, a rail car leasing, maintenance,
and transportation company. From July 1987 to September 1990, Mr. Johnson was
Vice President and Chief Financial Officer of the Oakland Tribune, Inc., a
newspaper publisher. From May 1981 to June 1987, he was employed as Controller
of Baron Data Systems, Inc., a computer software and equipment manufacturer.
Ms. Symons is a co-founder of the Company and served as Director of
Engineering from inception until March 1994. From March 1994 to June 1995, Ms.
Symons served as Assistant Vice President, Engineering. From June 1995 to
January 1997 she served as Vice President, Engineering and Chief Technical
Officer. Since January 1997, she has served as Executive Vice President,
Advanced Products and Technology Group and Chief Technical Officer. From October
1983 to December 1988, she was employed as an engineer by Hayes Microcomputer
Products, Inc., a data communications equipment manufacturer.
Mr. Schneider joined the Company in June 1995 as Vice President, Marketing
and served in this capacity until July 1996. Since July 1996, Mr. Schneider has
served as Vice President, Strategic Business Development. From July 1990 to June
1995, Mr. Schneider was Director of Data Product Management of Sprint Corp., a
telecommunications equipment provider. From October 1983 to July 1990, Mr.
Schneider was Director, Telecommunications for United Stationers, an office
products company.
18
<PAGE>
Mr. Kind joined the Company in October 1996 as Vice President, Engineering.
From October 1995 to October 1996, Mr. Kind was Senior Director of Engineering
at Cisco Systems. From October 1985 to June 1995, Mr. Kind served in various
senior engineering management positions in the Networking Division of Hewlett
Packard in Roseville, California.
19
<PAGE>
ITEM 2. PROPERTIES
The Company's principal administrative, engineering, manufacturing,
marketing and sales facilities total approximately 250,000 square feet and are
located in four buildings in Alameda, California. The Company occupies its
current facilities under leases which expire at various dates through December
2001. In addition, the Company leases sales offices and development centers in
the metropolitan areas of Atlanta, Boston, Chicago, Cincinnati, Cleveland,
Columbus, Durham, Dallas, Denver, Hartford, Houston, Indianapolis, Kansas City,
Los Angeles, Minneapolis, New York, Orlando, Phoenix, Portland, Providence, Salt
Lake City, San Francisco, Seattle, St. Louis, Tampa, Toronto, Vancouver and
Washington D.C. The Company expects that it will require additional facilities
over the next few years, and the Company believes that additional space will be
available.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of Ascend
Communications, Inc. during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol ASND. As of February 28, 1997 there were
approximately 1,144 stockholders of record. The following table sets forth for
the period indicated, the high and low closing prices for Ascend's Common Stock
as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
High Low High Low
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fourth quarter ended December 31, $ 73.88 $ 60.13 $ 40.63 $ 16.50
Third quarter ended September 30, 67.81 41.75 21.56 12.25
Second quarter ended June 30, 70.63 51.75 13.00 7.84
First quarter ended March 31, 57.00 32.25 8.22 4.94
</TABLE>
The Company has not paid cash dividends on its Common Stock to date. The
Company currently intends to retain earnings, if any, for use in its business,
and does not anticipate paying cash dividends to its stockholders in the near
future.
The Company believes factors such as quarter-to-quarter variances in
financial results and announcements of new products and new orders by the
Company or its competitors could cause the market price of the Company's Common
Stock to fluctuate substantially. In addition, the stock prices for many high
technology companies typically experience extreme price fluctuations, which
often are not related to changes in the operating performance of the specific
companies. Broad market fluctuations as well as general economic conditions such
as a recessionary period or high interest rates may adversely affect the market
price of the Company's Common Stock.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Consolidated Statements of Year Ended December 31,
Operations Data: ----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ------------ ----------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $549,297 $152,604 $39,655 $16,215 $ 7,236
Cost of sales 192,226 53,296 13,387 5,587 3,439
-------- -------- ------- ------- -------
Gross profit 357,071 99,308 26,268 10,628 3,797
Operating expenses:
Research and development 40,291 12,400 6,139 3,092 2,480
Sales and marketing 111,599 35,447 11,409 5,790 4,305
General and administrative 16,745 9,129 3,569 2,208 1,214
Purchased research and development - 3,032 - - -
Costs of merger 13,900 - - - -
-------- -------- ------- ------- -------
Total operating expenses 182,535 60,008 21,117 11,090 7,999
-------- -------- ------- ------- -------
Operating income (loss) 174,536 39,300 5,151 (462) (4,202)
Interest, net 11,879 5,122 969 97 138
-------- -------- ------- ------- -------
Income (loss) before income taxes 186,415 44,422 6,120 (365) (4,064)
Provision (benefit) for income taxes 73,304 16,887 (430) - -
-------- -------- ------- ------- -------
Net income (loss) $113,111 $ 27,535 $ 6,550 $ (365) $(4,064)
======== ======== ======= ======= =======
Net income (loss) per share $ 0.89 $ 0.25 $ 0.07 $ 0.00 $ (0.34)
======== ======== ======= ======= =======
Number of shares used in per share
calculation 127,809 111,362 94,583 83,117 12,051
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
Consolidated Balance Sheet Data: 1996 1995 1994 1993 1992
----------- ------------ ------------ ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $467,883 $262,750 $46,107 $10,578 $ 8,037
Total assets 651,866 370,014 60,857 15,362 11,041
Total stockholders' equity 547,450 324,987 50,675 12,122 9,100
</TABLE>
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Ascend Communications, Inc. develops, manufactures, markets, sells and
supports a broad range of high-speed integrated remote networking 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) high speed Internet Protocol ("IP") switches for application in
telecommunications carriers and ISP backbone networks; (iii) extensions and
enhancements to corporate backbone networks that facilitate access to these
networks by remote offices, telecommuters and mobile computer users; and (iv)
videoconferencing and multimedia access facilities. These products support
existing digital and analog networks. Net sales have increased due to the
market acceptance of MAX and Pipeline products and continuing acceptance of
the Multiband product family, and due to the expansion of the Company's
domestic and international distribution network.
The Company acquired four companies in the year ended December 31, 1996. In
December 1996, the Company acquired StonyBrook Services, Inc. ("StonyBrook"), a
developer of network management software. In August 1996, the Company acquired
NetStar, Inc. ("NetStar"), a developer and manufacturer of high performance,
high speed IP network switches and Subspace Communications, Inc. ("Subspace"),
a manufacturer of PC-based data and telecommunications products for the home
and small office environments. In March 1996, the Company acquired Morning
Star Technologies, Inc. ("Morning Star"), a manufacturer of network routing
software and advanced network security products (See Note 8 to the Financial
Statements).
In addition, in 1997 the company aquired InterCon Systems Corporation
("InterCon"), a leading developer of client software products for both the
corporate and ISP markets and has entered into an agreement to acquire
Whitetree, Inc.("Whitetree") a developer and manufacturer of high-speed
switching products. (See Note 10 to the Financial Statements).
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 consolidated
statements of income:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales............................................... 100% 100% 100%
Cost of sales........................................... 35 35 34
--- --- ---
Gross profit.................................... 65 65 66
Operating expenses:
Research and development........................ 7 8 15
Sales and marketing............................. 20 23 29
General and administrative...................... 3 6 9
Purchased research and development.............. - 2 -
Costs of merger................................. 3 - -
--- --- ---
Total operating expenses................ 33 39 53
--- --- ---
Operating income ....................................... 32 26 13
Interest, net........................................... 2 3 2
--- --- ---
Income before income taxes.............................. 34 29 15
Provision (benefit) for income taxes.................... 13 11 (1)
--- --- ---
Net income.............................................. 21% 18% 16%
=== === ===
</TABLE>
22
<PAGE>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net Sales. Net sales for 1996 increased 260% to $549.3 million as compared
to $152.6 million in 1995, which increased 285% from $39.7 million in 1994.
International sales (sales outside of North America) increased to $261.4 million
in 1996 as compared to $43.9 million in 1995 and to $7.9 million in 1994 and
accounted for 48%, 29% and 20% of net sales in 1996, 1995 and 1994,
respectively.
The growth in net sales during 1996 and 1995 was attributable primarily to
an increase in unit shipments as a result of market acceptance of the Company's
MAX and Pipeline product families and the expansion of the domestic and
international distribution network. 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 wide area network
access applications. The MAX product family accounted for approximately 82% of
net sales in 1996 as compared to approximately 63% in 1995 and approximately 26%
in 1994. The Pipeline product family accounted for approximately 12% of net
sales in 1996 as compared to approximately 20% of net sales in 1995, but
increased in absolute dollars for the same time period. The Pipeline product
family accounted for approximately 10% of net sales in 1994. The increase in net
sales of the Pipeline family of products from 1994 to 1996 was principally due
to growth in the Company's value-added reseller and distributor channels and
increased demand for remote and Internet access products by end-user customers.
Net sales of the Company's Multiband products accounted for approximately 5% of
net sales in 1996 compared to approximately 15% of net sales in 1995 and
approximately 58% of net sales in 1994. The decreases in Multiband net sales as
a percentage of total net sales were due to the rapid increase in sales of the
Company's MAX and Pipeline products.
In North America, the Company relies on third party distribution channels,
including value-added resellers and distributors, major telecommunications
carriers and applications equipment manufacturers for a substantial portion of
its net sales. Sales to these third party distribution channels accounted for
approximately 31%, 48% and 64% of the Company's net sales in 1996, 1995 and
1994, respectively. AT&T, a telecommunications carrier, accounted for
approximately 3%, 5% and 15% of net sales in 1996, 1995 and 1994, respectively.
Also, UUNET, an Internet service provider that first commenced volume purchases
of the Company's products in 1995, accounted for approximately 7% and 11% of net
sales in 1996 and 1995, respectively. International sales (sales outside of
North America) are made through telecommunications carriers, Internet service
providers, value-added resellers and distributors, and accounted for 48%, 29%
and 20% of net sales in 1996, 1995 and 1994, respectively. There can be no
assurance that sales to these entities or any of the Company's other customers
will remain at or exceed historical levels in any future period.
Gross Margin. Gross margin was 65% for 1996 and 1995 compared to 66% for
1994. The decrease in gross margin between 1994 and 1995 was primarily due to
increased unit shipments of the Pipeline family of products which has a lower
gross margin than the Multiband and MAX products. In the past, gross
margins have been affected by the mix of products sold and the mix of
distribution channels used by the Company. 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.
Research and Development. Research and development expenses increased to
$40.3 million in 1996 compared to $12.4 million in 1995 and $6.1 million in
1994. 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. In 1996, research and development expenses increased in part through
the addition of engineering personnel as a result of the Company's mergers and
acquisitions. Research and development expenses as a percent of net sales
decreased to 7% in 1996 from 8% in 1995 and 15% in 1994, primarily due to
increased net sales. The Company expects that spending for research and
development will increase in absolute dollars in 1997 but may continue to vary
as a percentage of net sales.
23
<PAGE>
Sales and Marketing. Sales and marketing expenses were $111.6 million,
$35.4 million and $11.4 million for 1996, 1995 and 1994, respectively. These
increases in expenses were primarily due to the addition of sales, marketing and
technical support personnel, increased commissions, 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, distributors, end-user customers and to the introduction
of several new products. Sales and marketing expenses as a percent of net sales,
however, decreased to 20% in 1996 from 23% in 1995 and 29% in 1994, primarily
due to increased net sales. The Company expects that sales and marketing
expenses will increase in absolute dollars in 1997 but may continue to vary as a
percentage of net sales.
General and Administrative. General and administrative expenses increased
to $16.7 million in 1996 as compared to $9.1 million in 1995 and $3.6 million in
1994. These increases were primarily due to the addition of finance and
administrative personnel, bonus compensation paid to the Company's employees,
increased costs for insurance and contract personnel associated with information
systems service and support, and increased costs associated with being a public
company. General and administrative expenses as a percent of net sales decreased
to 3% in 1996 from 6% in 1995 and 9% in 1994, primarily due to increased net
sales. The Company expects that spending for general and administrative
activities will increase in absolute dollars in 1997 but may continue to vary as
a percentage of net sales.
Purchased Research and Development. Purchased research and development
costs were $3.0 million for 1995. These costs were for the purchase of
technology and related assets associated with the DaynaLINK product family from
Dayna Communications, Inc. on September 1, 1995. The acquisition provides
technology and expertise that the Company is using to enhance and expand the
functionality of its MAX family of products.
Costs of Merger. For the year ended December 31, 1996, the Company charged
to operations one-time merger costs of approximately $13.9 million. These costs
principally related to the acquisition of NetStar and StonyBrook during 1996 and
consist primarily of investment banking and professional fees and other direct
costs associated with the merger. Of the $13.9 million in one-time merger costs,
approximately $7.5 million are not deductible for income tax purposes, and
approximately $11.5 million have been paid as of December 31, 1996.
Interest Income. Interest income increased to $11.9 million in 1996
compared to $5.1 million in 1995 and $969,000 in 1994. The increase in interest
income during 1996 and 1995 is due primarily to the investment of proceeds from
the Company's public offerings of its common stock which were completed in
August 1995 and May 1994, proceeds from the exercise of stock options and
issuance of common stock in connection with the Company's employee and outside
director stock plans and cash from operations.
Provision for Income Taxes. The provision for income taxes for 1996 was
$73.3 million, an effective tax rate of 39.3%, compared to an effective tax
rate of 38% and 0% for 1995 and 1994, respectively. The Company's effective
tax rate for 1996 was impacted by approximately $7.5 million of non-
deductible one-time merger costs associated with the NetStar, Morning Star,
Subspace and StonyBrook acquisitions. The Company's effective tax rate of
38% for the year ended December 31, 1995 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. The
provision for income taxes for 1994 reflects the utilization of Ascend's net
operating loss carryforwards, which were substantially utilized as of December
31, 1994.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's principal sources of liquidity included
$408.9 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
1996. The increase in cash and cash equivalents of $66.9 million for 1996 was
principally due to $103.6 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 and by $54.5 million of
funds provided by operations, offset by $89.1 million of funds used in
investment activities and $2.1 million of repayment of notes payable. The net
cash provided by operating activities for 1996 was primarily due to net income
and increases in accounts payable, accrued liabilities and accrued compensation
and related liabilities offset by increases in accounts receivable, inventories
and other assets.
Net cash used in investing activities of $89.1 million for 1996 related
primarily to expenditures for furniture, fixtures and equipment of $38.7 million
and net purchases of investments of $52.6 million. Financing activities
provided $101.5 million for 1996, primarily due to $103.6 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 less $2.1 million used to repay notes payable.
At December 31, 1996, the Company had $467.9 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly and annual 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 in the first quarter of 1997 in connection with the
anticipated acquisition of Whitetree. This Report on Form 10-K should be read in
conjunction with such Form S-4, particularly the section entitled "Risk Factors"
contained in the 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,
risks inherent in international sales, changes in the levels of inventory held
by third-party resellers, the timing of orders from and shipments to
customers, seasonality, the volatility in the trading price of the Company's
common stock 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 has concluded the acquisition of four companies in 1996. The
Company has completed a fifth acquisition in 1997 and announced a sixth
acquisition expected to be completed in the second quarter of 1997. Achieving
the anticipated benefits of these acquisitions will depend in part upon whether
the integration of the acquired companies' products 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 divert management attention from the day-to-day business of the
Company. Failure to successfully accomplish the integration of the acquired
companies could have a material adverse effect on the Company's business,
results of operations and financial condition.
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.
25
<PAGE>
The Company expects that international sales will continue to account for a
significant portion of the Company's net sales in future periods. International
sales are subject to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable and potentially adverse tax consequences. The Company depends on
third party resellers for a substantial portion of its international sales.
Certain of these third party resellers also act as resellers for competitors of
the Company that can devote greater effort and resources to marketing
competitive products. The loss of certain of these third party resellers could
have a material adverse effect on the Company's business and results of
operations. Although the Company's sales will be denominated in U.S. dollars,
fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales and profitability in that country. Furthermore, future
international activity may result in foreign currency denominated sales, and, in
such event, gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations may
contribute to fluctuation in the Company's results of operations. In addition,
sales in Europe and certain other parts of the world typically are adversely
affected in the third quarter of each calendar year as many customers reduce
their business activities during the summer months. These seasonal factors may
have an effect on the Company's business, results of operations and financial
condition.
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
are 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.
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. In September 1996, the Company introduced the
MAX TNT, a high density, high capacity WAN access switch, and the GRF400, a high
performance IP Switch. The introduction of these and other new products
requires the Company to manage the transition from older products in order to
minimize disruption in customer ordering patterns, avoid excessive levels of
older product inventories and ensure that adequate supplies of new products can
be delivered to meet customer demand. Furthermore, products such as those
offered by the Company may contain undetected or unresolved hardware problems or
software errors when they are first introduced or as new versions are released.
There can be no assurance that, despite extensive testing by the Company,
hardware problems or software errors will not be found in new products such as
the MAX TNT and the GRF400 after commencement of commercial shipments, resulting
in delay in or loss of market acceptance. Future delays in the introduction or
shipment of new or enhanced products, the inability of such products to gain
market acceptance or problems associated with new product transitions could
adversely affect the Company's business, results of operations and financial
condition.
For additional risks relating to the Company's business, see the
discussions under the headings "Manufacturing and Quality", "Competition",
"Proprietary Rights" and "Employees" in the "Business" section of this filing.
In consideration of these factors, there can be no assurance that the
Company will be able to sustain growth in revenues or profitability,
particularly on a period-to-period basis.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is presented on pages F-1 to F-19 of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers - See the section entitled "Executive Officers of the
------------------
Registrant" in Part I, Item 1 hereof.
(b) Directors - The information contained in Ascend Communications, Inc.'s
---------
Proxy Statement for the stockholders' meeting to be held on May 20, 1997,
with respect to "Election of Directors", is incorporated herein by
reference in response to this item. The Proxy Statement will be filed with
the Securities and Exchange Commission not later than April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in Ascend Communications, Inc.'s Proxy Statement
for the stockholders' meeting to be held on May 20, 1997, with respect to
"Executive Compensation and Other Matters" is incorporated herein by reference
in response to this item. The Proxy Statement will be filed with the Securities
and Exchange Commission not later than April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in Ascend Communications, Inc.'s Proxy Statement
for the stockholders' meeting to be held on May 20, 1997, with respect to "Stock
Ownership of Certain Beneficial Owners and Management", is incorporated herein
by reference in response to this item. The Proxy Statement will be filed with
the Securities and Exchange Commission not later than April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in Ascend Communications, Inc.'s Proxy Statement
for the stockholders' meeting to be held on May 20, 1997, with respect to
"Certain Relationships and Related Transactions", is incorporated herein by
reference in response to this item. The Proxy Statement will be filed with the
Securities and Exchange Commission not later than April 30, 1997.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
The following consolidated financial statements of Ascend Communications,
Inc. are filed as part of this Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1996 and 1995 F-2
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
2. Consolidated Financial Statements Schedules
The following consolidated financial statements schedules of
Ascend Communications, Inc. are filed as part of this Report and should be
read in conjunction with the consolidated financial statements of Ascend
Communications, Inc.
Schedule Page
-------- ----
II. Valuation and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
28
<PAGE>
3. Exhibits
<TABLE>
<CAPTION>
No. Description
---------- ------------------------------------------------------------------------------------------------
<C> <S>
(6) 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>
29
<PAGE>
3. 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.
10.13 Ascend Communications, Inc. 1996 Restricted Stock Plan.
11.1 Statement regarding computation of earnings per share.
21.1 Subsidiaries of Ascend Communications, Inc.
23.1 Consent of Independent Auditors.
24.1 Power of attorney (see signature page)
27 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.
(6) Incorporated by reference from the Company's Form 10-Q for the quarter
ended June 30, 1996.
30
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended December
31, 1996.
(c) Exhibits
See Item 14(a) 3 above.
(d) Financial Statements Schedules
See item 14(a) 1 and 2 above.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ASCEND COMMUNICATIONS, INC.
Date February 28, 1997 by /s/ Mory Ejabat
----------------- -------------------------------------------------
Mory Ejabat, President, Chief Executive Officer and
Director
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Mory Ejabat and Robert K. Dahl, jointly and
severally, his attorney in fact, each with the full power of substitution, for
such person, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
Date February 28, 1997 by /s/ Mory Ejabat
----------------- ---------------------------------
Mory Ejabat, President, Chief Executive Officer and
Director
Date February 28, 1997 by /s/ Robert K. Dahl
----------------- ---------------------------------
Robert K. Dahl, Vice President, Finance,
Chief Financial Officer and Director
(Principal Financial Officer)
Date February 28, 1997 by /s/ Michael J. Johnson
----------------- ---------------------------------
Michael J. Johnson, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Date February 28, 1997 by /s/ Roger L. Evans
----------------- ---------------------------------
Roger L. Evans
Director
Date February 28, 1997 by /s/ James P. Lally
----------------- ---------------------------------
James P. Lally
Director
Date February 28, 1997 by /s/ C. Richard Kramlich
----------------- ---------------------------------
C. Richard Kramlich
Director
Date February 28, 1997 by /s/ Betsy S. Atkins
----------------- ---------------------------------
Betsy S. Atkins
Director
Date February 28, 1997 by /s/ Martin L. Schoffstall
----------------- ---------------------------------
Martin L. Schoffstall
Director
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
No. Description
----------- ------------------------------------------------------------------------------------------------
<C> <S>
(6) 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>
33
<PAGE>
ASCEND COMMUNICATIONS, INC.
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.
10.13 Ascend Communications, Inc. 1996 Restricted Stock Plan.
11.1 Statement regarding computation of earnings per share.
21.1 Subsidiaries of Ascend Communications, Inc.
23.1 Consent of Independent Auditors.
24.1 Power of attorney (see signature page)
27 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.
(6) Incorporated by reference from the Company's Form 10-Q for the quarter
ended June 30, 1996.
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ascend Communications, Inc.
We have audited the accompanying consolidated balance sheets of Ascend
Communications, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ascend Communications, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Walnut Creek, California
January 24, 1997, except Note 10 as to which
the date is February 14, 1997
F-1
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $213,970 $147,050
Short-term investments.................................................. 159,181 90,843
Accounts receivable, less allowance for uncollectible accounts of $2,000
and $900 at December 31, 1996 and 1995, respectively............ 103,145 31,238
Inventories............................................................. 49,241 26,868
Deferred income taxes................................................... 33,489 9,370
Other current assets.................................................... 13,273 2,408
-------- --------
Total current assets.................................... 572,299 307,777
Investments..................................................................... 35,771 51,515
Furniture, fixtures and equipment, net.......................................... 40,034 10,108
Other assets.................................................................... 3,762 614
-------- --------
Total assets............................................ $651,866 $370,014
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 43,268 $13,571
Accrued liabilities..................................................... 39,003 20,861
Accrued compensation and related liabilities............................ 22,145 6,419
Notes payable........................................................... - 4,176
-------- --------
Total current liabilities............................... 104,416 45,027
Commitments
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 2,000
No shares issued or outstanding......................... - -
Common stock, $.001 par value:
Authorized shares - 400,000
119,417 shares issued
(113,211 - 1995)........................................ 119 113
Additional paid-in capital.............................................. 412,227 302,110
Retained earnings....................................................... 135,652 23,312
Notes receivable from stockholders...................................... (548) (548)
-------- --------
Total stockholders' equity.............................. 547,450 324,987
-------- --------
Total liabilities and stockholders' equity.............. $651,866 $370,014
======== ========
</TABLE>
See accompanying notes
F-2
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
----------- ------------- ----------
<S> <C> <C> <C>
Net sales............................................ $549,297 $152,604 $39,655
Cost of sales........................................ 192,226 53,296 13,387
-------- -------- -------
Gross profit................................. 357,071 99,308 26,268
Operating expenses:
Research and development..................... 40,291 12,400 6,139
Sales and marketing.......................... 111,599 35,447 11,409
General and administrative................... 16,745 9,129 3,569
Purchased research and development........... - 3,032 -
Costs of merger.............................. 13,900 - -
-------- -------- -------
Total operating expenses............. 182,535 60,008 21,117
-------- -------- -------
Operating income .................................... 174,536 39,300 5,151
Interest income, net................................. 11,879 5,122 969
-------- -------- -------
Income before income taxes........................... 186,415 44,422 6,120
Provision (benefit) for income taxes................. 73,304 16,887 (430)
-------- -------- -------
Net income........................................... $113,111 $ 27,535 $ 6,550
======== ======== =======
Net income per share................................. $ 0.89 $ 0.25 $ 0.07
======== ======== =======
Number of shares used in per share
calculation.................................. 127,809 111,362 94,583
======== ======== =======
</TABLE>
See accompanying notes
F-3
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Retained Notes
Preferred Stock Common Stock Additional Earnings Receivable
-------------------- ------------------ Paid-in (Accumulated From
Shares Amount Shares Amount Capital Deficit) Stockholders Total
------ ------ ------- ------ ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1993.................... 61,256 $18,228 11,471 $ 11 $ 4,656 $ (10,773) $ - $12,122
Issuance of common
stock, net of
issuance costs.............. - - 717 1 6,606 - - 6,607
Conversion of
preferred stock into
common stock, NetStar....... (61,256) (18,228) 61,226 62 18,166 - - -
Issuance of common
stock in initial public
offering, net of
issuance costs.............. - - 17,456 18 25,157 - - 25,175
Conversion of warrants into
common stock, NetStar - - 503 - - - - -
Issuances of common stock
under stock option plans.... - - 6,117 6 1,009 - (794) 221
Net income.......................... - - - - - 6,550 - 6,550
------ ------- ------- ------ -------- --------- ------ --------
Balance at December
31, 1994.................... - - 97,490 98 55,594 (4,223) (794) 50,675
Tax benefit related to
exercise of
stock options............... - - - - 7,803 - - 7,803
Payments from
stockholders................ - - - - - - 246 246
Issuance of warrants to
purchase shares of
common stock, NetStar....... - - - - 134 - - 134
Issuance of common
stock under
employee stock
option and stock
purchase plans.............. - - 1,724 1 2,134 - - 2,135
Issuance of common stock in
initial public offering, net
of issuance costs, NetStar - - 1,347 1 24,715 - - 24,716
Issuance of common
stock in public
offering, net
of issuance costs........... - - 12,650 13 211,730 - - 211,743
Net income.......................... - - - - - 27,535 - 27,535
------ ------- ------- ------ -------- --------- ------ --------
Balance at December
31, 1995.................... - - 113,211 113 302,110 23,312 (548) 324,987
Tax benefit related to
exercise of
stock options............... - - - - 64,551 - - 64,551
Effect of poolings.................. - - 1,350 2 6,504 (771) - 5,735
Exercise of warrants, NetStar....... - - 399 - 7,904 - - 7,904
Issuance of common
stock under
employee stock
option and stock
purchase plans.............. - - 4,457 4 31,158 - - 31,162
Net income.......................... - - - - - 113,111 - 113,111
------ ------- ------- ------ -------- --------- ------ --------
Balance at December
31, 1996.................... - $ - 119,417 $ 119 $412,227 $ 135,652 $ (548) $547,450
====== ======= ======= ====== ======== ========= ====== ========
</TABLE>
See accompanying notes
F-4
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
------------- ------------- ----------
<S> <C> <C> <C>
Operating activities:
Net income.............................................................. $113,111 $ 27,535 $ 6,550
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation............................................ 8,801 3,083 1,002
Deferred income taxes................................... (22,654) (6,389) (2,981)
Allowance for uncollectible accounts.................... 1,100 200 650
Changes in operating assets and liabilities:
Accounts receivable............................. (73,007) (23,560) (4,931)
Inventories..................................... (22,373) (20,467) (4,543)
Other current assets............................ (10,865) (1,332) (753)
Other assets.................................... (3,148) (173) (102)
Accounts payable and accrued liabilities........ 47,839 25,473 6,285
Accrued compensation and related liabilities.... 15,726 5,196 631
-------- --------- --------
Net cash provided by operating activities 54,530 9,566 1,808
-------- --------- --------
Investing activities:
Purchases of investments................................. (245,431) (161,119) (71,208)
Maturities and sales of investments...................... 192,837 47,709 46,995
Purchases of furniture, fixtures and equipment........... (38,703) (10,286) (2,260)
Effect of business combinations.......................... 2,202 - -
-------- --------- --------
Net cash used in investing activities............ (89,095) (123,696) (26,473)
-------- --------- --------
Financing activities:
Proceeds from issuance of common stock, net.............. 39,066 238,728 32,003
Proceeds from notes receivable from stockholders......... - 246 -
Proceeds from (repayment of) notes payable............... (2,132) 3,730 -
Tax benefit related to exercise of stock options......... 64,551 7,803 -
-------- --------- --------
Net cash provided by financing activities........ 101,485 250,507 32,003
-------- --------- --------
Net increase in cash and cash equivalents................................ 66,920 136,377 7,338
Cash and cash equivalents, beginning of year............................. 147,050 10,673 3,335
-------- --------- --------
Cash and cash equivalents, end of year................................... $213,970 $ 147,050 $ 10,673
======== ========= ========
Supplemental disclosure of cash flow information:
Income tax payments...................................... $ 34,095 $ 8,152 $ 1,381
======== ========== ========
Supplemental schedule of noncash investing and financing
activities information:
Notes receivable related to exercise of stock options.... $ - $ - $ 794
======== ========== ========
Exercise of warrants in exchange for retirement of
notes payable.................................... $ 2,068 $ - $ -
======== ========== ========
</TABLE>
See accompanying notes
F-5
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Company -- Ascend Communications, Inc. ("Ascend" or the "Company")
develops, manufactures, markets, sells and supports a broad range of
high-speed integrated remote networking 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) high speed IP
switches for application in telecommunications carriers and ISP backbone
networks; (iii) extensions and enhancements to corporate backbone networks that
facilitate access to these networks by remote offices, telecommuters and
mobile computer users; and (iv) videoconferencing and multimedia access
facilities. These products support existing digital and analog networks.
Basis of Presentation -- The consolidated financial statements include the
accounts of Ascend and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
As more fully described in Note 8, in August 1996, the Company merged with
NetStar, Inc. ("NetStar"). The merger has been accounted for as a pooling of
interests, and the historical consolidated financial statements of the Company
for all periods prior to the merger have been restated to include the financial
position, results of operations and cash flows of NetStar.
Cash and Cash Equivalents -- Cash and cash equivalents consist of demand
deposits and commercial paper in highly liquid short-term instruments with
original maturities of three months or less from the date of purchase and are
stated at cost, which approximates market. Substantially all of the Company's
cash and cash equivalents are maintained by four major financial institutions.
Short-Term Investments and Investments -- The Company adopted SFAS 115 in
January 1994. Accordingly, management determines the appropriate classification
of debt securities at the time of purchase and re-evaluates such designation as
of each balance sheet date. On November 15, 1995, the FASB staff issued a
Special Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities. In accordance with
provisions in that Special Report, the Company chose to reclassify securities
from held-to-maturity to available-for-sale. At the date of transfer, the fair
value of all of the Company's investments approximated their cost. Available-
for-sale securities are carried at amounts which approximate fair value, with
unrealized gains and losses, net of tax, recorded in stockholders' equity until
disposition. Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale debt and equity securities are included in
interest and other income. At December 31, 1996 and 1995, the Company's
investments consisted primarily of obligations of the U.S. government
($23,401,000 - 1996 and $13,000,000 - 1995), states and political subdivisions
($156,948,000 - 1996 and $114,698,000 - 1995), U.S. corporate securities
($9,500,000 - 1996 and $14,660,000 - 1995) and foreign debt securities
($5,103,000 - 1996 and None - 1995). Unrealized gains and losses for 1996, 1995
and 1994 were not material.
Accounts Receivable -- 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 an allowance for doubtful
accounts.
Inventories -- Inventories are stated at the lower of cost (determined by
the first-in, first-out method) or market. The Company provides for obsolete
inventories in the period when obsolescence is determined to have occurred.
F-6
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
Depreciation -- Furniture, fixtures and equipment are recorded at cost.
Depreciation is provided using the straight-line method over estimated useful
lives of three to four years.
Major Customers and Revenues by Geographic Area -- No customer accounted for
more than 10% of net sales in 1996. One customer accounted for 11% of net sales
in 1995. A second customer accounted for 15% of net sales in 1994. Net sales
were derived from customers based in the following geographic areas (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
North America........................... $287,849 $108,662 $31,781
Europe.................................. 104,582 19,818 5,957
Asia and Pacific Basin.................. 152,371 24,124 1,917
Latin and South America................. 4,495 - -
-------- -------- -------
$549,297 $152,604 $39,655
======== ======== =======
</TABLE>
Revenue Recognition -- The Company recognizes revenue from product sales upon
shipment provided that no significant customer and post-contract support
obligations remain and collection of the related receivable is deemed
probable. The Company defers recognition of revenue on initial shipments of
certain new products until such products have been tested in the marketplace.
The Company accounts for all costs relating to customer and post-contract
support obligations, which are not significant in amount, at the time of
shipment by accruing such costs. In addition, the Company provides for
potential product returns and estimated warranty costs in the period of the
sale.
The Company's revenue recognition policy is in compliance with the American
Institute of Certified Public Accountants' Statement of Position 91-1, Software
Revenue Recognition.
Key Suppliers -- The Company is dependent on single or limited source
suppliers for certain components used in its products. The Company has generally
been able to obtain adequate supplies of these components. In addition, the
Company believes that there are alternative suppliers for the components used in
its products. However, an extended interruption in the supply of the components
currently obtained from single or limited source suppliers could adversely
effect the Company's business and results of operations.
Research and Development -- Costs to develop the Company's products are
expensed as incurred in accordance with Statement of Financial Accounting
Standards No. 2, Accounting for Research and Development Costs, which
establishes accounting and reporting standards for research and development.
Software Development Costs -- The Company accounts for software development
costs in accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. The Company's products include a software component. The Company has
expensed substantially all software development costs to date as such
development costs have been incurred prior to the Company's products attaining
technological feasibility.
F-7
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation -- In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). In accordance with the
provisions of SFAS 123, the Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans and,
accordingly, has not recognized compensation cost in connection with such plans.
Note 5 to the consolidated financial statements contains a summary of the pro
forma effects to reported net income and net income per share for 1996 and 1995
as if the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123.
Net Income Per Share -- Net income per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from stock options and warrants (using the treasury stock method) have been
included in the computation when dilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued by the Company at prices below the initial public offering price
during the twelve-month period prior to the initial public offering have been
included in the calculation as if they were outstanding for all periods prior to
the initial public offering (using the treasury stock method). The difference
between primary and fully diluted earnings per share is not material for all
periods presented.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications -- Certain 1994 and 1995 balances have been reclassified to
conform to the 1996 presentation.
F-8
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. BALANCE SHEET DETAILS (IN THOUSANDS)
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Finished goods.......................................... $ 6,854 $10,687
Products in process..................................... 6,992 8,001
Raw materials and supplies.............................. 35,395 8,180
------- -------
$49,241 $26,868
======= =======
</TABLE>
Furniture, Fixtures and Equipment consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Computer equipment...................................... $26,967 $ 7,836
Laboratory equipment.................................... 10,060 3,119
Furniture and fixtures.................................. 16,573 3,942
------- -------
53,600 14,897
Less accumulated depreciation........................... (13,566) (4,789)
------- -------
$40,034 $10,108
======= =======
</TABLE>
Accrued Liabilities consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Income taxes payable.................................... $ 6,298 $ 8,419
Other accrued liabilities............................... 19,849 5,570
Customer deposits....................................... 12,856 6,872
------- -------
$39,003 $20,861
======= =======
</TABLE>
3. NOTES PAYABLE
In June 1995, NetStar issued $4,200,000 of convertible notes payable
("Bridge Notes") in a private placement. In connection with this financing,
NetStar also issued warrants to the holders of the Bridge Notes to purchase
297,343 shares of common stock. During 1996, $2,068,000 of principal outstanding
under the Bridge Notes was exchanged for 130,713 shares of the Company's common
stock. The remaining $2,132,000 was repaid during 1996.
F-9
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, under which the
liability method is used to calculate deferred income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences
between financial reporting and income tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The realization of deferred tax assets
is based on historical tax positions and expectations about future taxable
income.
The following is a geographical breakdown of consolidated income before income
taxes (including intercompany revenue and expenses) by income tax jurisdiction
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
United States................................... $183,766 $43,977 $6,120
Foreign......................................... 2,649 445 -
-------- ------- ------
Total $186,415 $44,422 $6,120
======== ======= ======
</TABLE>
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal......................................... $80,395 $17,782 $1,582
State........................................... 14,623 5,316 969
Foreign......................................... 940 178 -
------- ------- ------
Total current........................................... 95,958 23,276 2,551
Deferred:
Federal......................................... (19,597) (5,572) (2,649)
State........................................... (3,057) (817) (332)
------- ------- ------
Total deferred (benefit)................................ (22,654) (6,389) (2,981)
------- ------- ------
Total provision (benefit)............................... $73,304 $16,887 $ (430)
======= ======= ======
</TABLE>
F-10
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES (CONTINUED)
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of income is as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate.......................................... $65,245 $15,548 $ 2,081
State rate, net of federal benefit.............................. 11,690 2,617 428
Tax-exempt interest............................................. (3,168) (1,097) -
Foreign Sales Corporation benefit............................... (4,842) (466) -
Non-deductible merger expenses.................................. 2,625 - -
Utilization of net operating loss carryforwards
and credits............................................. - - (3,824)
Other........................................................... 1,754 285 885
------- ------- -------
Total tax provision............................................. $73,304 $16,887 $ (430)
======= ======= =======
Effective tax rate.............................................. 39.3% 38.0% 0.0%
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Reserve for uncollectible accounts.............................. $ 2,305 $1,623
Reserve for warranties and inventories.......................... 8,080 1,462
Purchased research and development.............................. 673 1,176
State taxes..................................................... 716 421
Customer deposits............................................... 12,238 -
Net operating loss carryovers and tax credits
of acquired companies................................... 7,507 3,496
Other........................................................... 1,970 1,192
------- ------
Total net deferred tax assets........................................... $33,489 $9,370
======= ======
</TABLE>
F-11
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY
Public Offering -- 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 September 25, 1995 and May 29, 1996, the
Company's stockholders approved amendments to the Company's Certificate of
Incorporation that increased the authorized common stock from 50,000,000 to
200,000,000 and 200,000,000 to 400,000,000 shares, respectively.
Stock Splits -- 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 shares and per share data in the
accompanying consolidated financial statements have been retroactively adjusted
to reflect these stock splits.
Preferred Stock -- The Company's Board of Directors has the authority to issue
these shares in one or more series and to fix the rights, preferences,
privileges and restrictions of ownership. At December 31, 1996, there were no
outstanding shares of preferred stock.
Notes Receivable -- Notes receivable from stockholders resulted from the
purchase of common stock from the Company pursuant to the exercise of stock
options. Such notes are due on demand, bear interest at 5.4% and are secured by
certain common shares.
Warrants -- As of December 31, 1996, warrants to purchase 66,531 shares of
common stock with exercise prices ranging from $3.53 to $29.66 were outstanding.
The warrants expire at various dates ranging from 1997 to 2000.
1994 Employee Stock Purchase Plan -- In March 1994, the Board of Directors
approved an Employee Stock Purchase Plan under which eligible employees may
purchase common stock at a price equal to 85% of the lower of the fair market
value of the common stock at the beginning or end of each offering period.
Participation in the offering is limited to 10% of an employee's compensation
(not to exceed amounts allowed by the Internal Revenue Code), may be terminated
at any time by the employee and automatically ends on termination of employment
with the Company. A total of 2,800,000 shares of common stock have been reserved
for issuance under this plan and the first offering commenced on the effective
date of the Company's initial public offering of shares of its common stock and
continued through January 31, 1995. Subsequent six-month offering periods
commenced on each February 1 and August 1 thereafter. During 1996 and 1995,
86,870 and 252,120 shares of common stock were issued under this plan,
respectively.
1989 Stock Option Plan -- The Company has a Stock Option Plan under which a
total of 45,000,000 shares of common stock have been reserved for issuance to
employees, officers, directors and consultants of the Company. Options granted
to date are immediately exercisable and unvested shares are subject to
repurchase by the Company. Options and unvested shares typically vest ratably
over four years from the date of grant. In the event option holders cease to be
employed by the Company, all unvested options are forfeited and all vested
options may be exercised within a 30-day period after termination; the Company
also has the right to repurchase any unvested (but issued) shares if the holder
is no longer employed by the Company. As of December 31, 1996, options to
purchase approximately 476,091 shares had been exercised but were not vested.
F-12
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Stock options are granted at not less than the fair market value of common
stock on the date of grant. All options expire no later than ten years from the
date of grant, except options granted to 10% stockholders, which have a maximum
term of five years. The exercise price of stock options granted to a stockholder
possessing 10% or more of the total combined voting power of all classes of
stock may not be less than 110% of the fair market value of common stock on the
date of grant. As of December 31, 1996, no options had been granted to 10%
stockholders.
The Company has adopted SFAS 123 which was issued in October 1995. In
accordance with the provisions of SFAS 123, the Company applies APB Opinion 25
and related Interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS 123, net income and net income per share would
have been reduced to the pro forma amounts indicated in the table below (in
thousands except per share amounts):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995
------------ ----------
<S> <C> <C>
Net income - as reported........................ $113,111 $27,535
Net income - pro forma.......................... $ 68,266 $19,247
Net income per share - as reported.............. $ 0.89 $ 0.25
Net income per share - pro forma................ $ 0.54 $ 0.18
</TABLE>
The effect on net income and earnings per share is not expected to be indicative
of the effects on net income and earnings per share in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995
------------ ----------
<S> <C> <C>
Expected volatility............................. 0.610 0.610
Risk-free interest rate......................... 6.20% 6.05%
Expected life of options in years............... 3.0 3.0
Expected dividend yield......................... 0.00% 0.00%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in these subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.
F-13
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes activity under the Company's 1989 Stock
Option Plan from December 31, 1993 through December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
----------- --------
<S> <C> <C>
Balance at December 31, 1993............................................ 7,238,839 $ 0.15
Granted......................................................... 5,530,234 1.70
Exercised....................................................... (6,116,928) 0.18
Forfeited....................................................... (845,548) 0.39
----------
Balance at December 31, 1994............................................ 5,806,597 1.03
Granted......................................................... 11,196,310 15.76
Exercised....................................................... (1,451,494) 1.01
Forfeited....................................................... (586,266) 6.39
----------
Balance at December 31, 1995............................................ 14,965,147 12.04
Granted......................................................... 7,716,873 54.44
Exercised....................................................... (4,294,248) 6.53
Forfeited....................................................... (233,084) 29.45
----------
Balance at December 31, 1996............................................ 18,154,688 $30.70
==========
Outstanding options exercisable and vested at December 31, 1996......... 2,966,733 $12.57
==========
Options available for grant at December 31, 1996........................ 14,267,495
==========
</TABLE>
The weighted average fair value of options granted during 1996 and 1995 is
$24.05 and $6.78 per share, respectively.
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Number Contractual Exercise Exercisable Exercise
Exercise Prices Outstanding Life Price and Vested Price
- ------------------------ -------------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.01 - $ 5.06 1,717,617 4.89 $ 1.34 760,180 $ 0.98
5.81 1,521,193 7.77 5.81 591,625 5.81
7.28 - 11.13 2,278,192 7.94 10.07 615,462 10.26
14.13 - 21.75 2,319,250 8.06 17.30 476,752 17.01
25.13 - 35.25 2,220,794 8.85 32.92 462,607 32.94
35.38 - 43.50 2,326,956 9.30 41.26 32,604 37.35
43.75 - 58.25 2,191,955 9.37 51.43 1,455 60.55
59.00 - 63.38 2,316,500 9.80 61.82 671 59.39
64.75 - 73.88 1,262,231 9.61 68.13 25,377 66.07
---------- ---------
18,154,688 2,966,733
========== =========
</TABLE>
F-14
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
1994 Outside Directors Stock Option Plan -- In March 1994, the Board of
Directors approved an Outside Directors Stock Option Plan under which directors
of the Company who are not officers or employees of the Company may receive
nonstatutory options to purchase shares of common stock of the Company. A total
of 2,000,000 shares of common stock have been reserved for issuance under this
plan, and options to purchase 384,000, 640,000 and 320,000 shares of common
stock were granted during 1996, 1995 and 1994, respectively, at weighted average
exercise prices of $61.50, $10.25 and $1.63 per share, respectively. During
1996, options to purchase 76,000 shares of common stock were exercised at a
weighted average exercise price of $7.98 per share. During 1995, options to
purchase 20,000 shares of common stock were exercised at a weighted average
exercise price of $1.63 per share.
1996 Restricted Stock Plan -- In October 1996, the Board of Directors approved
a Restricted Stock Plan under which employees and consultants of the Company who
are not officers or directors of the Company may receive shares of common stock
of the Company. A total of 200,000 shares of common stock have been reserved
for issuance under this plan, and 25,000 shares of common stock were granted
during 1996 at a purchase price of $1.00 per share.
Reserved for Future Issuance -- As of December 31, 1996, the Company has
reserved the following shares of its common stock for future issuance:
<TABLE>
<S> <C>
1989 Stock Option Plan.................................................. 32,422,183
1994 Outside Directors Stock Option Plan................................ 1,904,000
1994 Employee Stock Purchase Plan....................................... 2,461,010
1996 Restricted Stock Plan.............................................. 200,000
-------------
Total shares reserved................................................... 36,987,193
============
</TABLE>
6. RETIREMENT PLAN
In July 1993, the Company established a profit sharing plan, which has been
qualified under Section 401(k) of the Internal Revenue Code, covering
substantially all employees who meet certain minimum eligibility requirements.
The Company does not contribute to the plan. Eligible employees can contribute
amounts to the plan via payroll withholdings, subject to certain limitations.
7. COMMITMENTS
Leases -- The Company leases office and warehouse space under noncancelable
operating leases. Rent expense on these operating leases was $4,051,000,
$1,164,000 and $636,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
In March 1996, the Company entered into an agreement to lease 13 acres of
land located in Alameda, California. Certain buildings currently being used for
the Company's headquarters have been constructed on the land. The lessor has
funded approximately $24.9 million for the land and construction of the
buildings. The lease has an initial term of three years and an option to renew
for two years, subject to the lessor's consent. The rent obligation for the
lease commenced in December 1996. 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 has guaranteed a
residual value of approximately $22.4 million.
F-15
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS (CONTINUED)
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consist of the following at December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
Operating
Leases
----------
<S> <C>
1997.................................................................... $ 4,053
1998.................................................................... 3,480
1999.................................................................... 2,705
2000.................................................................... 2,403
2001 and beyond......................................................... 2,330
-------
Total minimum lease payments............................................ $14,971
=======
</TABLE>
Line of Credit -- The Company entered into a $15,000,000 bank line of credit
agreement in November 1995, which expires in November 1997. Interest is computed
at the bank's prime rate or 1.0% over LIBOR, at the option of the Company. There
is a commitment fee of 0.2% on the unused portion of the line of credit. The
line of credit requires the Company to maintain certain financial ratios,
minimum net worth and profitability on a quarterly and year-to-date basis. There
were no borrowings under the line of credit agreement during 1996.
8. BUSINESS COMBINATIONS
In August 1996, the Company acquired NetStar, a developer and manufacturer of
high performance, high speed IP network routers, in a transaction that was
accounted for as a pooling of interests. The Company issued approximately
3,869,000 shares of its common stock to NetStar shareholders in exchange for all
outstanding NetStar shares. Outstanding options and warrants to purchase NetStar
common stock were exchanged for options and warrants to purchase approximately
535,000 and 203,000 shares, respectively, of the Company's common stock. The
Company's historical consolidated financial statements for prior periods have
been restated to reflect the financial position and results of operations of
NetStar.
NetStar had a fiscal year that ended on September 30. NetStar's statements
of operations for the years ended September 30, 1995 and 1994 have been combined
with the Company's statements of income for the years ended December 31, 1995
and 1994, respectively. In order to conform NetStar's year end to Ascend's year
end, the consolidated statement of income for the year ended December 31, 1996
excludes the results of operations for the three months ended December 31, 1995
for NetStar. Accordingly, an adjustment has been made to retained earnings for
the year ended December 31, 1996 for the exclusion of NetStar's net loss
(including the tax benefit to the Company) of approximately $660,000 for the
three months ended December 31, 1995.
F-16
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. BUSINESS COMBINATIONS (CONTINUED)
Separate results of operations for the periods prior to the merger with
NetStar are as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
-------------- ----------------------------------
1996 1995 1994
-------------- -------------- ------------
<S> <C> <C> <C>
Net Sales: Ascend.................................. $214,423 $149,590 $39,343
NetStar................................. 2,754 3,014 312
-------- --------- -------
Total................................. $217,177 $152,604 $39,655
======== ========= =======
Net Income: Ascend.................................. $ 50,742 $ 30,573 $ 8,699
NetStar................................. (5,833) (4,898) (3,785)
-------- -------- -------
Total................................. 44,909 25,675 4,914
Adjustment to reflect elimination of income tax
valuation allowance................................ 2,215 1,860 1,636
-------- -------- -------
Net income, as restated............................. $ 47,124 $ 27,535 $ 6,550
======== ======== =======
</TABLE>
In December 1996, the Company acquired StonyBrook Services, Inc.
("StonyBrook"), a developer of network management software, in a transaction
that was accounted for as a pooling of interests. The Company issued
approximately 480,000 shares of its common stock to StonyBrook shareholders in
exchange for all outstanding StonyBrook shares.
In August 1996, the Company acquired Subspace Communications, Inc.
("Subspace"), a manufacturer of PC-based data and telecommunications products
for the home and small office environments, in a transaction that was accounted
for as a pooling of interests. The Company issued approximately 90,000 shares
of its common stock to Subspace shareholders for all outstanding Subspace
shares.
In March 1996, the Company acquired Morning Star Technologies, Inc. ("Morning
Star"), a manufacturer of network routing software and advanced network security
products, 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.
The results of operations of StonyBrook, Subspace and Morning Star, which
have not been material in relation to those of the Company, are included in the
consolidated results of operations for periods subsequent to the acquisition.
The Company's historical consolidated financial statements prior to the
combinations have not been restated to reflect the financial results of these
acquisitions as these results were not material to the Company.
F-17
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended December 31, 1996:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
<S> <C> <C> <C> <C>
1996
Net sales....................... $92,028 $125,149 $154,629 $177,491
Gross profit.................... 59,462 80,440 100,665 116,504
Operating income................ 28,408 41,989 41,325 62,814
Net income...................... 19,386 27,738 24,894 41,093
Net income per share............ 0.15 0.22 0.20 0.32
1995
Net sales....................... $20,716 $29,591 $40,909 $61,388
Gross profit.................... 13,507 19,082 26,546 40,173
Operating income................ 4,121 7,376 8,301 19,502
Net income...................... 2,832 4,810 6,436 13,457
Net income per share............ 0.03 0.05 0.06 0.11
</TABLE>
10. SUBSEQUENT EVENTS
On February 14, 1997, the Company entered into an agreement to acquire
Whitetree, Inc. ("Whitetree"), a privately held provider of high speed switching
products, in a transaction that is to be accounted for as a pooling of
interests. Based on the market prices at the time of signing, the Company would
issue a total of approximately 1,100,000 shares of its common stock to Whitetree
shareholders, warrantholders and optionholders in exchange for all outstanding
Whitetree shares and warrants and upon the exercise of all Whitetree options
assumed by the Company. The actual number of shares to be issued in connection
with the transaction is subject to adjustment depending upon the average last
sale price of the Company's common stock on The Nasdaq National Market for the
five days preceding the closing date and will be no fewer than 970,000 nor more
than 1,350,000 common shares.
Whitetree has a fiscal year that ends on September 30. Whitetree's statements
of operations for the years ended September 30, 1996, 1995 and 1994 will be
combined with the Company's statements of income for the years ended December
31, 1996, 1995 and 1994, respectively. In order to conform Whitetree's year end
to the Company's year end, the consolidated statement of income for the year
ended December 31, 1996 will exclude the results of operations for the three
months ended December 31, 1996 for Whitetree.
The following unaudited pro forma summary includes the historical operations
of the Company and the historical operations of Whitetree for all periods
presented. The unaudited pro forma summary does not purport to be indicative
of what would have occurred had the acquisition been made at the beginning of
the periods presented or the results which may occur in the future.
F-18
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
Unaudited pro forma summary results of operations (in thousands except per share
information):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
----------- ------------ ----------
<S> <C> <C> <C>
Net sales............................... $560,977 $152,896 $39,655
Net income.............................. 108,204 23,175 5,130
Net income per share.................... $ 0.84 $ 0.21 $ 0.05
Shares used in per share computations... 128,760 112,132 95,134
</TABLE>
In February 1997, the Company acquired substantially all of the outstanding
stock of InterCon Systems Corporation. The purchase price consisted of a
cash payment of $12,000,000 and the assumption of approximately $9,000,000 of
liabilities. The Company is currently in the process of allocating the
purchase price.
F-19
<PAGE>
ASCEND COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balances at Charged to Balances at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- -------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for uncollectible accounts $ 900 $1,100 $ - $2,000
Warranty reserve 475 1,115 - 1,590
------ ------ ----- ------
$1,375 $2,215 $ - $3,590
====== ====== ===== ======
Year ended December 31, 1995:
Allowance for uncollectible accounts $ 700 $ 300 $(100) $ 900
Warranty reserve 250 225 - 475
------ ------ ----- ------
$ 950 $ 525 $(100) $1,375
====== ====== ===== ======
Year ended December 31, 1994:
Allowance for uncollectible accounts $ 50 $ 650 $ - $ 700
Valuation allowance for deferred tax assets 3,824 - (3,824) (1) -
Warranty reserve 20 230 - 250
------ ------ ----- ------
$3,894 $ 880 $(3,824) $950
====== ====== ======= ======
</TABLE>
(1) Utilization of portion of net operating loss carryforwards credited to
income tax provision.
S-1
<PAGE>
EXHIBIT 10.13
ASCEND COMMUNICATIONS, INC.
1996 RESTRICTED STOCK PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
----------------------------------------
1 ESTABLISHMENT. The Ascend Communications, Inc. 1996 Restricted
Stock Plan (the "PLAN") is hereby established effective as of October 25, 1996
(the "EFFECTIVE DATE").
2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its stockholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Stock acquired under the plan have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
-----------------------------
1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Ascend Communications, Inc., a Delaware
corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or
a Director.
1
<PAGE>
(f) "DIRECTOR" means a member of the Board or of the board
of directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "FAIR MARKET VALUE" means, as of any date, the value of
a share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(i) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(j) "PARTICIPANT" means a person who has been granted one
or more Purchase Rights.
(k) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(l) "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating Companies.
(m) "PURCHASE RIGHT" means a right to purchase Stock
pursuant to the terms and conditions of the Plan.
(n) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(o) "STOCK PURCHASE AGREEMENT" means a written agreement
between the Company and a Participant setting forth the terms, conditions and
restrictions of the Purchase Right granted to the Participant.
(p) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
2
<PAGE>
3. ADMINISTRATION.
---------------
1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the board, including any duly appointed Committee of the Board. All questions
of interpretation of the Plan or of any Purchase Right shall be determined by
the Board, and such determinations shall be final and binding upon all persons
having an interest in the Plan or such Purchase Right. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.
2 POWERS OF THE BOARD. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times
at which, Purchase Rights shall be granted and the number of shares of
Stock to be subject to each Purchase Right;
(b) to determine the terms, conditions and restrictions
applicable to each Purchase Right (which need not be identical) and any
shares acquired upon the exercise thereof, including, without limitation,
(i) the purchase price per share of Stock, (ii) the method of payment for
shares purchased upon the exercise of the Purchase Right, (iii) the method
for satisfaction of any tax withholding obligation arising in connection
with the Purchase Right or such shares, including by the withholding or
delivery of shares of stock, (iv) the vesting of any shares acquired upon
the exercise of a Purchase Right, and (v) all other terms, conditions and
restrictions applicable to the Purchase Right or such shares not
inconsistent with the terms of the Plan;
(c) to approve one or more forms of Stock Purchase
Agreement;
(d) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the
tax policy or custom of, foreign jurisdictions whose citizens may be
granted Purchase Rights; and
(e) to correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Stock Purchase Agreement and to make
all other determinations and take such other actions with respect to the
Plan or any Purchase Right as the Board may deem advisable to the extent
consistent with the Plan and applicable law.
3
<PAGE>
4. SHARES SUBJECT TO PLAN.
----------------------
1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred thousand (200,000) and shall
consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. If an outstanding Purchase Right for any reason expires or
is terminated or canceled, or shares of Stock acquired, subject to repurchase,
upon the exercise of a Purchase Right are repurchased by the Company, the shares
of Stock allocable to the unexercised portion of such Purchase Right, or such
repurchased shares of Stock, shall again be available for issuance under the
Plan.
2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the plan and to any outstanding Purchase Rights and in the purchase
price per share of any outstanding Purchase Rights. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded up or down to the nearest whole number, as
determined by the Board. The adjustments determined by the Board pursuant to
this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY. Purchase Rights may be granted only to Employees and
-----------
Consultants; provided, however, that Purchase Rights may not be granted to (a) a
person who is an officer or director of a Participating Company, or (b) any
person whose eligibility to participate in the Plan would require the Company to
obtain stockholder approval of the Plan pursuant to the Bylaws of the National
Association of Securities Dealers (including any schedules thereto) or any other
applicable law, regulation or rule. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Purchase Rights are
granted in connection with written offers of employment with the Participating
Company Group, and "Consultants" shall include prospective Consultants to whom
Purchase Rights are granted in connection with written offers of engagement with
the Participating Company Group. No Purchase Right granted to a prospective
Employee or a prospective Consultant may be exercised prior to the date on which
such person commences service with a Participating Company. Eligible persons
may be granted more than one (1) Purchase Right.
6. TERMS AND CONDITIONS OF PURCHASE RIGHTS. Purchase Rights shall be
---------------------------------------
evidenced by Stock Purchase Agreements specifying the number of shares of Stock
covered thereby, in such form as the Board shall from time to time establish.
Stock Purchase Agreements may incorporate all or any of the terms of the Plan by
reference and shall comply with and be subject to the following terms and
conditions:
1 PURCHASE PRICE. The purchase price for each Purchase Right shall
be established in the sole discretion of the Board. The Board may, in its sole
discretion, provide that a Participant is not required to make any monetary
payment as a condition of receiving a grant of shares of Stock pursuant to the
Plan.
4
<PAGE>
2 PAYMENT OF PURCHASE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the purchase price for the Stock being acquired
pursuant to any Purchase Right shall be made (i) in cash, or by check, (ii) by
tender to the Company of shares of Stock owned by the Participant having a Fair
Market Value (as determined by the Company without regard to any restrictions on
transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for the Company), (iii) by
such other consideration as may be approved by the Board from time to time to
the extent permitted by applicable law, or (iv) by any combination thereof. The
Board may at any time or from time to time, by adoption of or by amendment to
the standard form of Stock Purchase Agreement described in Section 7, or by
other means, grant Purchase Rights which do not permit all of the foregoing
forms of consideration to be used in payment of the purchase price or which
otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, a Purchase
Right may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions of
any law, regulation or agreement restricting the redemption of the Company's
stock. Unless otherwise provided by the Board, a Purchase Right may not be
exercised by tender to the Company of shares of Stock unless such shares either
have been owned by the Participant for more than six (6) months or were not
acquired, directly or indirectly, from the Company.
3 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of a
Purchase Right, or to accept from the Participant the tender of, a number of
whole shares of Stock having a Fair Market Value, as determined by the Company,
equal to all or any part of the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group with respect
to such Purchase Right or the shares acquired upon the exercise thereof.
Alternatively or in addition, in its sole discretion, the Company shall have the
right to require the Participant, through payroll withholding, cash payment or
otherwise, to make adequate provision for any such tax withholding obligations
of the Participating Company Group arising in connection with the Purchase Right
or the shares acquired upon the exercise thereof. The Company shall have no
obligation to deliver shares of Stock or to release shares of Stock from an
escrow established pursuant to the Stock Purchase Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Participant.
7. STANDARD FORM OF STOCK PURCHASE AGREEMENT.
-----------------------------------------
1 STANDARD FORM OF AGREEMENT. Unless otherwise provided by the
Board at the time the Purchase Right is granted, a Purchase Right shall comply
with and be subject to the terms and conditions set forth in the form of Stock
Purchase Agreement adopted by the Board concurrently with its adoption of the
Plan and as amended from time to time.
5
<PAGE>
2 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of the standard form of Stock Purchase Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Purchase Right or in connection with the authorization of a new
standard form or forms; provided, however, that the terms and conditions of any
such new, revised or amended standard form or forms of Stock Purchase Agreement
are not inconsistent with the terms of the Plan.
8. PROVISION OF INFORMATION. Each Participant shall be given access to
------------------------
information concerning the Company equivalent to that information generally made
available to the Company's common stockholders.
9. NONTRANSFERABILITY. No Purchase Right shall be assignable or
------------------
transferable by the Participant.
10. INDEMNIFICATION. In addition to such other rights of indemnification
---------------
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
11. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
--------------------------------
the Plan at any time. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Purchase Right or any shares of Stock
acquired pursuant to the exercise of a Purchase Right, without the consent of
the Participant.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing Ascend Communications, Inc. 1996 Restricted Stock Plan was duly
adopted by the Board on October 25, 1996.
6
<PAGE>
PLAN HISTORY
------------
October 25, 1996 Board adopts Plan, with an initial reserve of 200,000
shares.
7
<PAGE>
STANDARD FORM OF
ASCEND COMMUNICATIONS, INC.
STOCK PURCHASE AGREEMENT
<PAGE>
ASCEND COMMUNICATIONS, INC.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "AGREEMENT") is made and entered into as
of October 10, 1996, by and between Ascend Communications, Inc. and William H.
Kind (the "PURCHASER").
The Company has granted to the Purchaser pursuant to the Ascend
Communications, Inc. 1996 Restricted Stock Plan a right to purchase certain
shares of Stock upon the terms and conditions set forth in this Agreement (the
"PURCHASE RIGHT").
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "DATE OF GRANT" means (insert date of grant)
(b) "NUMBER OF SHARES" means (insert number of shares) shares of
Stock, as adjusted from time to time pursuant to Section 7.
(c) "PURCHASE PRICE" means $(insert purchase price) per share of
Stock, as adjusted from time to time pursuant to Section 7.
(d) "INITIAL VESTING DATE" means (Insert Initial Vesting Date)
(e) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows: (Insert Vesting Ratio)
(f) "EXPIRATION DATE" means the date five (5) years after the
Date of Grant.
(g) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" shall also mean such Committee(s).
(h) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(i) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the
1
<PAGE>
Committee shall have all of the powers of the Board granted in the Plan,
including, without limitation, the power to amend or terminate the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law.
(j) "COMPANY" means Ascend Communications, Inc., a Delaware
corporation, or any successor corporation thereto.
(k) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(l) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(m) "DISABILITY" means the permanent and total disability of the
Purchaser within the meaning of Section 22(e)(3) of the Code.
(n) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for this purpose.
(o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(p) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(q) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(r) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(s) "PLAN" means the Ascend Communications, Inc. 1996 Restricted
Stock Plan.
(t) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
2
<PAGE>
(u) "SERVICE" means the Purchaser's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Purchaser's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Purchaser
renders Service to the Participating Company Group or a change in the
Participating Company for which the Purchaser renders such Service, provided
that there is no interruption or termination of the Purchaser's Service. The
Purchaser's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Purchaser performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Purchaser's Service
has terminated and the effective date of such termination.
(v) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 7.
(w) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Agreement. Except when otherwise indicated by the context,
the singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
2. ADMINISTRATION. All questions of interpretation concerning this
--------------
Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in this Agreement. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
3. EXERCISE OF THE PURCHASE RIGHT.
------------------------------
1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Purchase Right shall be exercisable on and after the Initial Vesting Date and
prior to the termination of the Purchase Right (as provided in Section 5) in an
amount not to exceed the Number of Shares multiplied by the Vested Ratio less
the number of shares previously acquired upon exercise of the Purchase Right. In
no event shall the Purchase Right be exercisable for more shares than the Number
of Shares.
2 METHOD OF EXERCISE. Exercise of the Purchase Right shall be by
written notice to the Company which must state the election to exercise the
Purchase Right, the number of whole shares of Stock for which the Purchase Right
is being exercised and such other representations and agreements as to the
Purchaser's investment intent with respect to such shares
3
<PAGE>
as may be required pursuant to the provisions of this Agreement. The written
notice must be signed by the Purchaser and must be delivered in person, by
certified or registered mail, return receipt requested, by confirmed facsimile
transmission, or by such other means as the Company may permit, to the Chief
Financial Officer of the Company, or other authorized representative of the
Participating Company Group, prior to the termination of the Purchase Right as
set forth in Section 5, accompanied by full payment of the aggregate Purchase
Price for the number of shares of Stock being purchased. The Purchase Right
shall be deemed to be exercised upon receipt by the Company of such written
notice and the aggregate Purchase Price.
3 PAYMENT OF PURCHASE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Purchase Price for the number of shares
of Stock for which the is being exercised shall be made (i) in cash, by check,
or cash equivalent, (ii) by means of a Cashless Exercise, as defined in Section
3.3(b), or (iii) by any combination of the foregoing.
(b) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Purchase Right pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4 TAX WITHHOLDING. At the time the Purchase Right is exercised, in
whole or in part, or at any time thereafter as requested by the Company, the
Purchaser hereby authorizes withholding from payroll and any other amounts
payable to the Purchaser, and otherwise agrees to make adequate provision for
(including by means of a Cashless Exercise to the extent permitted by the
Company), any sums required to satisfy the federal, state, local and foreign tax
withholding obligations of the Participating Company Group, if any, which arise
in connection with this Agreement, including, without limitation, obligations
arising upon (i) the exercise, in whole or in part, of the Purchase Right, (ii)
the transfer, in whole or in part, of any shares acquired upon exercise of the
Purchase Right, (iii) the operation of any law or regulation providing for the
imputation of interest, or (iv) the lapsing of any restriction with respect to
any shares acquired upon exercise of the Purchase Right. The Purchaser is
cautioned that the Purchase Right is not exercisable unless the tax withholding
obligations of the Participating Company Group are satisfied. Accordingly, the
Purchaser may not be able to exercise the Purchase Right when desired even
though the Purchase Right is vested, and the Company shall have no obligation to
issue a certificate for such shares.
5 CERTIFICATE REGISTRATION. Except in the event the Purchase Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Purchase Right is
4
<PAGE>
exercised shall be registered in the name of the Purchaser, or, if applicable,
in the names of the heirs of the Purchaser.
6 RESTRICTIONS ON ISSUANCE OF SHARES. The issuance of shares of
Stock upon exercise of the Purchase Right shall be subject to compliance with
all applicable requirements of federal, state or foreign law with respect to
such securities. The Purchase Right may not be exercised if the issuance of
shares of Stock upon exercise would constitute a violation of any applicable
federal, state or foreign securities laws or other law or regulations or the
requirements of any stock exchange or market system upon which the Stock may
then be listed. The inability of the Company to obtain from any regulatory body
having jurisdiction the authority, if any, deemed by the Company's legal counsel
to be necessary to the lawful issuance and sale of any shares subject to the
Purchase Right shall relieve the Company of any liability in respect of the
failure to issue or sell such shares as to which such requisite authority shall
not have been obtained. As a condition to the exercise of the Purchase Right,
the Company may require the Purchaser to satisfy any qualifications that may be
necessary or appropriate, to evidence compliance with any applicable law or
regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Purchase Right.
4. NONTRANSFERABILITY OF THE PURCHASE RIGHT. The Purchase Right may be
----------------------------------------
exercised during the lifetime of the Purchaser only by the Purchaser or the
Purchaser's guardian or legal representative and may not be assigned or
transferred in any manner except by will or by the laws of descent and
distribution. Following the death of the Purchaser, the Purchase Right, to the
extent provided in Section 6, may be exercised by the Purchaser's legal
representative or by any person empowered to do so under the deceased
Purchaser's will or under the then applicable laws of descent and distribution.
5. TERMINATION OF THE PURCHASE RIGHT. The Purchase Right shall terminate
---------------------------------
and may no longer be exercised on the first to occur of (a) the Expiration Date,
or (b) the last date for exercising the Purchase Right following termination of
the Purchaser's Service as described in Section 6.
6. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
1 PURCHASE RIGHT EXERCISABILITY.
(a) DISABILITY. If the Purchaser's Service with the
Participating Company Group is terminated because of the Disability of the
Purchaser, the Purchase Right, to the extent unexercised and exercisable on the
date on which the Purchaser's Service terminated, may be exercised by the
Purchaser (or the Purchaser's guardian or legal representative) at any time
prior to the expiration of twelve (12) months after the date on which the
Purchaser's Service terminated, but in any event no later than the Expiration
Date.
5
<PAGE>
(b) DEATH. If the Purchaser's Service with the Participating
Company Group is terminated because of the death of the Purchaser, the Purchase
Right, to the extent unexercised and exercisable on the date on which the
Purchaser's Service terminated, may be exercised by the Purchaser's legal
representative or other person who acquired the right to exercise the Purchase
Right by reason of the Purchaser's death at any time prior to the expiration of
twelve (12) months after the date on which the Purchaser's Service terminated,
but in any event no later than the Expiration Date. The Purchaser's Service
shall be deemed to have terminated on account of death if the Purchaser dies
within one (1) month after the Purchaser's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Purchaser's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Purchase Right, to the extent unexercised and
exercisable by the Purchaser on the date on which the Purchaser's Service
terminated, may be exercised by the Purchaser within one (1) month (or such
other longer period of time as determined by the Board, in its sole discretion)
after the date on which the Purchaser's Service terminated, but in any event no
later than the Expiration Date.
2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Purchase Right within the applicable time
periods set forth in Section 6.1 is prevented by the provisions of Section 3.6,
the Purchase Right shall remain exercisable until three (3) months after the
date the Purchaser is notified by the Company that the Purchase Right is
exercisable, but in any event no later than the Expiration Date.
3 EXTENSION IF PURCHASER SUBJECT TO SECTION 16(b). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
6.1 of shares acquired upon the exercise of the Purchase Right would subject the
Purchaser to suit under Section 16(b) of the Exchange Act, the Purchase Right
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Purchaser would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Purchaser's termination of Service, or (iii) the Expiration Date.
4 LEAVE OF ABSENCE. For purposes of Section 6.1, the Purchaser's
Service with the Participating Company Group shall not be deemed to terminate if
the Purchaser takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Purchaser's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Purchaser's right to return to Service with the Participating Company Group
remains guaranteed by statute or contract. Notwithstanding the foregoing,
unless otherwise designated by the Company (or required by law), a leave of
absence shall not be treated as Service for purposes of determining the
Purchaser's Vested Ratio.
7. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar
6
<PAGE>
change in the capital structure of the Company, appropriate adjustments shall be
made in the number, Purchase Price and class of shares of stock subject to the
Purchase Right. In the event of any such amendment, the Number of Shares and the
Purchase Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 7 shall
be rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the Purchase Price be decreased to an amount less than the
par value, if any, of the stock subject to the Purchase Right. The adjustments
determined by the Board pursuant to this Section 7 shall be final, binding and
conclusive.
8. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Purchaser shall
-----------------------------------------------
have no rights as a stockholder with respect to any shares covered by the
Purchase Right until the date of the issuance of a certificate for the shares
for which the Purchase Right has been exercised (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company). No adjustment shall be made for dividends, distributions or other
rights for which the record date is prior to the date such certificate is
issued, except as provided in Section 7. Nothing in this Agreement shall confer
upon the Purchaser any right to continue in the Service of a Participating
Company or interfere in any way with any right of the Participating Company
Group to terminate the Purchaser's Service as an Employee or Consultant, as the
case may be, at any time.
9. LEGENDS. The Company may at any time place legends referencing any
-------
applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Agreement. The Purchaser shall, at the request of the Company, promptly present
to the Company any and all certificates representing shares acquired pursuant to
the Purchase Right in the possession of the Purchaser in order to carry out the
provisions of this Section.
10. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise
----------------------------------
of the Purchase Right may be sold, exchanged, transferred (including, without
limitation, any transfer to a nominee or agent of the Purchaser), assigned,
pledged, hypothecated or otherwise disposed of, including by operation of law,
in any manner which violates any of the provisions of this Agreement, and any
such attempted disposition shall be void. The Company shall not be required (a)
to transfer on its books any shares which will have been transferred in
violation of any of the provisions set forth in this Agreement or (b) to treat
as owner of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares will have been so transferred.
11. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
12. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Purchase Right at any time; provided, however, that no such termination
or amendment may adversely affect the Purchase Right or any unexercised portion
hereof without the consent of the
7
<PAGE>
Purchaser unless such termination or amendment is necessary to comply with any
applicable law or government regulation. No amendment or addition to this
Agreement shall be effective unless in writing.
13. INTEGRATED AGREEMENT. This Agreement constitutes the entire
--------------------
understanding and agreement of the Purchaser and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Purchaser and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Agreement shall survive any exercise
of the Purchase Right and shall remain in full force and effect.
14. APPLICABLE LAW. This Agreement shall be governed by the laws of the
--------------
State of California as such laws are applied to agreements between California
residents entered into and to be performed entirely within the State of
California.
ASCEND COMMUNICATIONS, INC.
By:________________________________
Title:_____________________________
The Purchaser represents that the Purchaser is familiar with the terms and
provisions of this Agreement and hereby accepts the Purchase Right subject to
all of the terms and provisions thereof. The Purchaser hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Agreement.
PURCHASER
Date:__________________________________ ___________________________________
8
<PAGE>
EXHIBIT 11.1
ASCEND COMMUNICATIONS, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Net income $113,111 $ 27,535 $ 6,550
======== ======== ========
Computation of weighted average common and
common equivalent shares outstanding:
Weighted average common shares outstanding 116,723 103,998 88,961
Common equivalent shares attributable to:
Stock options and warrants (treasury stock method) 11,086 7,364 5,622
-------- -------- ------
Shares used in computing net income per share 127,809 111,362 94,583
======== ======== ======
Net income per share $ 0.89 $ 0.25 $ 0.07
======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 21.1
ASCEND COMMUNICATIONS, INC.
SUBSIDIARIES OF ASCEND COMMUNICATIONS, INC.
(a) Ascend Foreign Sales Corporation
(b) Ascend Credit Corporation
(c) Ascend Communications Europe Limited (England)
(d) Ascend Communications France SarL
(e) Ascend Communications Japan KK
(f) Ascend Communications Pty. Limited (Australia)
(g) Ascend Communications GmbH (Germany)
(h) Ascend Communications (HK) Limited (Hong Kong)
(i) Ascend Communications Canada Ltd.
(j) Ascend Communications Pte. Ltd. (Singapore)
(k) Ascend Communications Benelux (Belgium)
(l) Ascend Communications Nordic AB (Sweden)
(m) Ascend Communications S.r.l. (Italy)
<PAGE>
EXHIBIT 23.1
ASCEND COMMUNICATIONS, INC.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the First Amended and Restated 1989 Stock Option Plan,
1994 Employee Stock Purchase Plan, 1994 Outside Directors Stock Option Plan,
Individual Option Agreements Issued by Morning Star Technologies, Inc. and
Assumed by Ascend Communications, Inc., 401(k) Savings Plan, and 1996 Restricted
Stock Plan and in the Registration Statements (Form S-3) No. 333-13377,
No. 333-11091, and No. 333-21751 and in the related Prospectuses, of Ascend
Communications, Inc. of our report dated January 24, 1997, except Note 10 as to
which the date is February 14, 1997, with respect to the consolidated financial
statements and financial statement schedule of Ascend Communications, Inc.
included in this annual report (Form 10-K) for the year ended December 31, 1996.
Ernst & Young LLP
Walnut Creek, California
February 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<CASH> 213,970 147,050 0
<SECURITIES> 159,181 90,843 0
<RECEIVABLES> 105,145 32,138 0
<ALLOWANCES> 2,000 900 0
<INVENTORY> 49,241 26,868 0
<CURRENT-ASSETS> 572,299 307,777 0
<PP&E> 53,600 14,897 0
<DEPRECIATION> 13,566 4,789 0
<TOTAL-ASSETS> 651,866 370,014 0
<CURRENT-LIABILITIES> 104,416 45,027 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 119 113 0
<OTHER-SE> 547,331 324,874 0
<TOTAL-LIABILITY-AND-EQUITY> 651,866 370,014 0
<SALES> 549,297 152,604 39,655
<TOTAL-REVENUES> 549,297 152,604 39,655
<CGS> 192,226 53,296 13,387
<TOTAL-COSTS> 192,226 53,296 13,387
<OTHER-EXPENSES> 182,535 60,008 21,117
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (11,879) (5,122) (969)
<INCOME-PRETAX> 186,415 44,422 6,120
<INCOME-TAX> 73,304 16,887 (430)
<INCOME-CONTINUING> 113,111 27,535 6,550
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 113,111 27,535 6,550
<EPS-PRIMARY> 0.89 0.25 0.07
<EPS-DILUTED> 0.89 0.25 0.07
</TABLE>
