<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 000-23774
ASCEND COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3092033
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA 94502
(510) 769-6001
(Address of principal executive offices, zip code and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 216,931,604 as of October 31, 1998.
This report, including exhibits, consists of 29 pages. The Index To Exhibits is
found on page 27.
<PAGE>
ASCEND COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Page No.
--------
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the Quarters and Nine Months Ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 22
A: Exhibits 22
B: Reports on Form 8-K 25
Signatures 26
Index to Exhibits 27
2
<PAGE>
<TABLE>
<CAPTION>
Part I: Financial Information
Item I: Financial Statements
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In Thousands)
Sept. 30, Dec. 31,
1998 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 176,225 $ 240,817
Short-term investments .......................... 176,386 234,610
Accounts receivable, net ........................ 311,379 234,183
Inventories ..................................... 131,790 99,637
Deferred income taxes ........................... 111,479 85,057
Other current assets ............................ 34,213 20,283
---------- ----------
Total current assets ..................... 941,472 914,587
Investments .......................................... 420,625 101,212
Furniture, fixtures and equipment, net ............... 174,595 114,351
Other assets ......................................... 31,962 7,744
---------- ----------
Total assets ............................. $1,568,654 $1,137,894
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 92,429 $ 54,414
Accrued compensation and related liabilities .... 23,841 25,315
Accrued liabilities ............................. 131,105 88,909
---------- ----------
Total current liabilities ................ 247,375 168,638
Stockholders' equity:
Common stock .................................... 199 191
Additional paid-in capital ...................... 1,052,937 878,455
Retained earnings ............................... 268,143 90,610
---------- ----------
Total stockholders' equity ............... 1,321,279 969,256
---------- ----------
Total liabilities and stockholders' equity $1,568,654 $1,137,894
========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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<TABLE>
<CAPTION>
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In Thousands, Except Per Share Data)
Quarter Ended Sept 30, Nine Months Ended Sept 30,
---------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $370,346 $270,372 $1,002,815 $ 874,805
Cost of sales........................ 133,444 97,181 360,373 308,245
-------- -------- ---------- ---------
Gross profit........................ 236,902 173,191 642,442 566,560
Operating expenses:
Research and development............ 53,418 40,706 140,849 115,595
Sales and marketing................. 72,553 66,499 207,616 179,616
General and administrative.......... 33,042 8,475 52,803 27,019
Purchased research and development.. -- -- -- 231,100
Cost of mergers..................... (18,279) -- (18,279) 150,271
-------- -------- ---------- ---------
Total operating expenses........... 140,734 115,680 382,989 703,601
-------- -------- ---------- ---------
Operating income (loss).............. 96,168 57,511 259,453 (137,041)
Interest income, net................. 6,276 6,161 17,163 17,739
-------- -------- ---------- ---------
Income (loss) before income taxes.... 102,444 63,672 276,616 (119,302)
Provision for income taxes........... 36,368 23,544 99,083 52,648
-------- -------- ---------- ---------
Net income (loss).................... $ 66,076 $ 40,128 $ 177,533 $(171,950)
======== ======== ========== =========
Net income (loss) per share :
Basic............................... $ 0 33 $ 0 21 $ 0 91 $ (0 92)
======== ======== ========== =========
Diluted ............................ $ 0 32 $ 0 20 $ 0 86 $ (0 92)
======== ======== ========== =========
Number of shares used in per share
calculations:
Basic............................... 197,689 189,562 194,779 187,920
======== ======== ========== =========
Diluted ............................ 208,515 199,838 205,805 187,920
======== ======== ========== =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
<CAPTION>
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In Thousands)
Nine Months Ended Sept 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating activities:
Net income (loss) ....................................... $ 177,533 $(171,950)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization .................... 44,844 31,798
Purchased research and development ............... -- 231,100
Cost of mergers .................................. -- 150,271
Deferred income taxes ............................ (26,422) (14,490)
Changes in operating assets and liabilities:
Accounts receivable .......................... (77,196) (60,713)
Inventories .................................. (32,153) (68,302)
Other current assets ......................... (13,930) 5,822
Other assets ................................. (26,231) 2,358
Accounts payable ............................. 38,015 11,336
Accrued liabilities and accrued compensation . 40,722 (34,406)
--------- ---------
Net cash provided by operating activities . 125,182 82,824
--------- ---------
Investing activities:
Purchases of investments ......................... (741,657) (403,247)
Maturities and sales of investments .............. 480,468 261,578
Purchases of furniture, fixtures and equipment ... (103,075) (83,494)
Effect of business combinations .................. -- (9,361)
--------- ---------
Net cash used in investing activities ........ (364,264) (234,524)
--------- ---------
Financing activities:
Proceeds from issuance of common stock, net ...... 119,631 44,753
Tax benefit related to exercise of stock options . 54,859 37,175
--------- ---------
Net cash provided by financing activities .... 174,490 81,928
--------- ---------
Net increase (decrease) in cash and cash equivalents .... (64,592) (69,772)
Cash and cash equivalents, beginning of period .......... 240,817 312,369
--------- ---------
Cash and cash equivalents, end of period ................ $ 176,225 $ 242,597
========= =========
Supplemental non-cash investing and financing activities:
Liabilities assumed in business combination .......... $ -- $ 9,600
========= =========
Cash paid for income taxes ........................... $ 58,892 $ 9,107
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
GENERAL
Ascend Communications, Inc. (the "Company" or "Ascend") develops, manufactures
and sells wide area networking solutions for telecommunications carriers,
Internet service providers and corporate customers worldwide that enable them to
build: (i) Internet access systems consisting of point-of-presence termination
("POP") equipment for Internet service providers ("ISPs") and remote site
Internet access equipment for Internet subscribers; (ii) high speed Frame Relay,
Asynchronous Transfer Mode ("ATM") and 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. The
Company's products support existing digital and analog networks.
On June 30, 1997, the Company acquired Cascade Communications Corp. ("Cascade"),
a leading developer and manufacturer of carrier class Frame Relay, ATM and IP
switching products. The transaction was accounted for as a pooling of interests.
The consolidated financial statements of Ascend for prior periods have been
restated to include the financial position and results of operations of Cascade.
On January 28, 1997, Cascade completed its acquisition of Sahara Networks, Inc.
("Sahara"), a privately held developer of scaleable high-speed broadband access
products. The acquisition was accounted for under the purchase method of
accounting. The operations of Sahara have been included for periods subsequent
to the acquisition.
The interim condensed consolidated financial statements of Ascend have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations.
The information included in this report should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the financial
position, results of operations and cash flows for such periods. The results
for the interim period ended September 30, 1998 are not necessarily indicative
of the results that may be expected for any future periods.
6
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Concentration of Credit Risk
The Company sells and distributes a substantial percentage of its products to
ISPs, value-added resellers and distributors, and local and long-distance
telecommunications carriers throughout North America, Europe and Asia and the
Pacific Basin. Accounts receivable are principally from these customers. The
Company conducts ongoing credit evaluations of its customers and maintains
reserves for potential credit losses.
Inventories
Inventories are stated at the lower of cost (determined by the first-in, first-
out method) or market. Inventories consist of (in thousands):
<TABLE>
<CAPTION>
Sept 30, Dec 31,
1998 1997
--------- --------
<S> <C> <C>
Finished goods ........... $ 59,719 $ 18,053
Products in process ...... 53,018 15,579
Raw materials and supplies 19,053 66,005
-------- --------
$131,790 $ 99,637
======== ========
</TABLE>
7
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Net Income (Loss) Per Share
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128. This Statement requires the presentation of basic and diluted net income
(loss) per share. Basic net income (loss) per common share is computed using
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of stock options and
warrants. The Company has restated all prior period per share data presented as
required by SFAS No. 128.
The following table presents the calculation of basic and diluted earnings per
share for the quarters and nine months ended September 30, 1998 and 1997 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Common Stock.............................................. 197,689 189,562 194,779 187,920
Common Stock Equivalents.................................. 10,826 10,276 11,026 --
-------- -------- -------- ---------
Total.................................................... 208,515 199,838 205,805 187,920
======== ======== ======== =========
Net Income (Loss)......................................... $ 66,076 $ 40,128 $177,533 $(171,950)
======== ======== ======== =========
Shares used in computing net income (loss)
per share calculation - Basic............................. 197,689 189,562 194,779 187,920
======== ======== ======== =========
Shares used in computing net income (loss)
per share calculation - Diluted........................... 208,515 199,838 205,805 187,920
======== ======== ======== =========
Net income (loss) per share - Basic....................... $ 0.33 $ 0.21 $ 0.91 $ (0.92)
======== ======== ======== =========
Net income (loss) per share - Diluted..................... $ 0.32 $ 0.20 $ 0.86 $ (0.92)
======== ======== ======== =========
</TABLE>
8
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
LITIGATION
The Company and various of its current and former officers and directors are
parties to a number of consolidated lawsuits pending in the United States
District Courts for the Central District of California, which purport to be
class actions filed on behalf of all persons who purchased or acquired the
Company's stock (excluding the defendants and parties related to them) for the
period November 5, 1996 to September 30, 1997. In addition, the Company and one
if its officers were recently named as defendants in a securities action filed
in the Superior Court of Alameda County, California. The Alameda County action
purports to be brought in behalf of all purchasers of the Company's stock
between July 15, 1997 and September 29, 1997 (excluding the defendants). The
lawsuits allege that the defendants violated the federal or state securities
laws by engaging in a scheme to artificially inflate and maintain the Company's
stock price by disseminating materially false and misleading information
concerning its business and earnings and the development, efficiency,
introduction and deployment of its digital modems based on 56K-bps technology.
These actions are in the early stages of proceedings and the Company is
currently investigating the allegations. Based on its current information, the
Company believes the suits to be without merit and intends to defend itself and
its officers and directors vigorously. Although it is reasonably possible the
Company may incur a loss upon the conclusion of these claims, an estimate of any
loss or range of loss cannot be made. No provision for any liability that may
result upon adjudication has been made in the Company's consolidated financial
statements. In the opinion of management, resolution of this matter is not
expected to have a material adverse effect on the financial position of the
Company. However, depending on the amount and timing, an unfavorable resolution
of this matter could materially affect the Company's future results or cash
flows in a particular period. In connection with these legal proceedings, the
Company expects to incur substantial legal and other expenses. Shareholder
suits of this kind are highly complex and can extend for a protracted period of
time, which can substantially increase the cost of such litigation and divert
the attention of the Company's management.
On April 16, 1997, a civil action was filed against Sahara, its three founders
and ten employees of Sahara by General Datacomm Industries, Inc. in the Superior
Court for the State of Connecticut. The complaint alleges several causes of
action, including: breach of contract; tortious interference with contractual
relations; misappropriation of trade secrets; unfair competition and violation
of the Connecticut Unfair Trade Practices Act. The plaintiff seeks relief of
unspecified monetary damages, costs and injunctive relief. The Company has not
yet engaged in substantive discovery and the ultimate outcome of this matter
cannot yet be determined. The Company plans to vigorously defend this lawsuit.
No provision for any liability that may result from the action has been
recognized in the consolidated financial statements. In the opinion of
management, resolution of this litigation is not expected to have a material
adverse effect on the financial position of the Company. However, depending on
the amount and timing, an unfavorable resolution of this matter could materially
affect the Company's future results or cash flows in a particular period.
9
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
LITIGATION (continued)
The Company is a party as a defendant in various other lawsuits, contractual
disputes and other legal claims, the results of which are not presently
determinable. However, in the opinion of management, after consultation with
legal counsel, the amount of losses that might be sustained, if any, from these
lawsuits would not materially affect the Company's financial position. However,
depending on the amount and timing, an unfavorable resolution of some or all of
these matters could materially affect the Company's future results of operations
or cash flows in a particular period.
PURCHASE COMBINATION COMPLETED SUBSEQUENT TO QUARTER-END
On October 19, 1998, the Company completed its merger with Stratus Computer,
Inc. ("Stratus"). Under the terms of the merger, the Company acquired all of the
outstanding shares of Stratus in exchange for approximately 18,134,000 shares of
Ascend common stock. In addition, the Company assumed all outstanding stock
options of Stratus and such options are now exercisable for approximately
3,032,000 shares of Ascend common stock. The combination will be accounted for
as a purchase completed in the fourth quarter of 1998.
Stratus is divided into four business units: a Telecom Carrier business unit
which includes SS7 switching technology (the intelligent management of a
telephone network), OSS software (Operations Systems Software) and fault-
tolerant platform; an Enterprise Computer business unit; and two business units
comprised of Financial and Enterprise Software (TCAM and S2). The Company plans
to divest the non-telecom businesses.
10
<PAGE>
ASCEND COMMUNICATIONS, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report contains forward-looking statements which reflect the current views
of the Company with respect to future events that will have an effect on its
future financial performance. These statements include the words "expects,"
"believes," "estimates," 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.
The information set forth below should be read in conjunction with the unaudited
interim condensed consolidated financial statements and notes thereto included
in Part 1 - Item 1 of this Quarterly Report and the audited financial statements
and notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 1997
included in the Company's 1997 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain line items from the Company's Condensed
Consolidated Statements of Operations for the quarters and nine months ended
September 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.................................................. 100% 100% 100% 100%
Cost of sales.............................................. 36 36 36 35
---- ---- ---- ----
Gross margin............................................. 64 64 64 65
Operating expenses:
Research and development................................. 14 15 14 13
Sales and marketing...................................... 20 24 21 21
General and administrative............................... 9 3 5 3
Purchased research and development....................... - - - 27
Cost of mergers.......................................... (5) - (2) 17
---- ---- ---- ----
Total operating expenses............................... 38 42 38 81
---- ---- ---- ----
Operating income (loss).................................... 26 22 26 (16)
Interest income, net....................................... 2 2 2 2
---- ---- ---- ----
Income (loss) before income taxes.......................... 28 24 28 (14)
Provision for income taxes................................. 10 9 10 6
---- ---- ---- ----
Net income (loss).......................................... 18% 15% 18% (20)%
==== ==== ==== ====
</TABLE>
11
<PAGE>
ASCEND COMMUNICATIONS, INC.
Net Sales
Net sales for the quarter ended September 30, 1998 were $370.3 million, an
increase of 37% over net sales of $270.4 million for the third quarter of 1997.
Net sales for the nine months ended September 30, 1998 were $1.0 billion, an
increase of 15% over net sales of $874.8 million for the nine months ended
September 30, 1997. UUNET, an Internet service provider, accounted for
approximately 10% and 15% of net sales for the quarters ended September 30, 1998
and 1997, respectively. UUNET also accounted for 12% and 16% of net sales for
the nine months ended September 30, 1998 and 1997, respectively. International
sales accounted for approximately 30% of net sales for the quarter ended
September 30, 1998 compared to 29% of net sales for the same period in 1997.
International sales accounted for approximately 30% of net sales for the nine
months ended September 30, 1998 compared to 32% of net sales for the same period
in 1997. The decrease in 1998 was principally due to decreased sales of the
Company's products in Europe and Asia.
The following table provides a breakdown of net sales by business unit as a
percentage of total Company net sales for the quarters and nine months ended
September 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------- --------------------------
Business Unit 1998 1997 1998 1997
- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Access Switching........................... 48% 50% 45% 55%
Core Systems............................... 41 36 43 33
Enterprise Access.......................... 7 9 8 8
Other...................................... 4 5 4 4
---- ---- ---- ----
Total Company.......................... 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
ACCESS SWITCHING The Access Switching business unit is composed of the MAX
family of products. MAX products accounted for 48% and 50% of total Company net
sales for the quarters ended September 30, 1998 and 1997, respectively. MAX
products accounted for 45% and 55% of total Company net sales for the nine
months ended September 30, 1998 and 1997, respectively. The decrease in net
sales of MAX products was primarily attributable to large shipments of TNT
product to customers in North America in the first three quarters of 1997. The
TNT was first made available for commercial shipments in the first quarter of
1997 and demand for the product had accumulated in anticipation of its general
release.
CORE SYSTEMS The Core Systems business unit offers the B-STDX family of Frame
Relay switches, the CBX500 and GX550 families of core ATM switches, the SA
family of broadband ATM switches and the GRF family of IP switches. Core Systems
products accounted for 41% and 36% of total Company net sales for the quarters
ended September 30, 1998 and 1997, respectively. Core Systems products accounted
for 43% and 33% of total Company net sales for the nine months ended September
30, 1998 and 1997, respectively. The increase in net sales of Core Systems
products is primarily due to strong demand for ATM and Frame Relay worldwide and
shipments of the GX550.
12
<PAGE>
ASCEND COMMUNICATIONS, INC.
ENTERPRISE ACCESS
The Enterprise Access business unit offers the Pipeline family of remote access
equipment as well as the Multiband MAX family of inverse multiplexing equipment.
Enterprise Access products accounted for 7% and 9% of total Company net sales
for the quarters ended September 30, 1998 and 1997, respectively. Enterprise
Access products accounted for 8% of total Company net sales for the nine months
ended September 30, 1998 and 1997.
GROSS MARGIN
Gross margin was 64% and 65% for the quarters and nine months ended September
30, 1998 and 1997, respectively. The decrease in gross margin was primarily due
to a decrease in average sales price. 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 31% to $53.4 million in the third
quarter of 1998 from $40.7 million in the third quarter of 1997. Research and
development expenses increased 22% to $140.8 million for the nine months ended
September 30, 1998 from $115.6 million for the nine months ended September 30,
1997. Research and development expenses as a percent of net sales decreased to
14% for the third quarter of 1998 compared to 15% for the same quarter of 1997.
Research and development expenses as a percent of net sales increased to 14% for
the first nine months of 1998 compared to 13% for the same period of 1997. 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, 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, addition of
development laboratory equipment, and material costs associated with new product
prototypes. In addition, research and development expenses increased, in part,
through the addition of engineering personnel and facilities as a result of the
Company's merger and acquisition activities.
SALES AND MARKETING
Sales and marketing expenses increased 9% to $72.6 million for the third quarter
of 1998 from $66.5 million for the third quarter of 1997. Sales and marketing
expenses increased 16% to $207.6 million for the first nine months of 1998 from
$179.6 million for the same period of 1997. Sales and marketing expenses as a
percent of net sales decreased to 20% for the third quarter of 1998 compared to
24% for the same period in 1997. Sales and marketing expenses as a percent of
net sales were 21% for the nine months ended September 30, 1998 and 1997.
Increases in sales and marketing expenses were primarily due to the addition of
sales, marketing and technical support personnel, increased commissions due to
increased net sales, spending for marketing materials and trade shows, expanded
advertising and promotional programs, 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.
13
<PAGE>
ASCEND COMMUNICATIONS, INC.
SALES AND MARKETING (continued)
The growth in sales, marketing and technical support personnel was primarily due
to the need to manage the activities of an increasing number of customers and
new products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 290% to $33.0 million for the
third quarter of 1998 from $8.5 million for the third quarter of 1997. General
and administrative expenses increased 95% to $52.8 million for the first nine
months of 1998 from $27.0 million for the first nine months of 1997. These
increases were due to the effect of charges totaling $20.7 million related to
the settlement of a patent issue, the settlement of an outstanding receivable
from a contract manufacturer and the establishment of a reserve against working
capital loans. Excluding the effect of these charges, general and administrative
expenses as a percent of net sales were 3% for the quarters and nine months
ended September 30, 1998 and 1997.
PURCHASED RESEARCH AND DEVELOPMENT
Purchased research and development costs were $231.1 million for the first nine
months of 1997. These costs were for the purchase of technology and related
assets associated with the acquisitions of InterCon Systems and Sahara
Networks, Inc. during the first quarter of 1997. These acquisitions provided
technology and expertise that the Company is using to enhance and expand the
breadth of its offerings to end-user markets. In connection with its
acquisition of Stratus in October, 1998, the Company expects to incur one-time
research and development costs of approximately $305.0 million in the quarter
ending December 31, 1998.
COST OF MERGERS
For the nine months ended September 30, 1997, the Company charged to operations
one-time merger costs of approximately $150.3 million. These costs related to
the acquisitions of Cascade and Whitetree and consist primarily of investment
and professional fees and other costs associated with the mergers. Of the
$150.3 million in one-time merger costs, approximately $44.9 million are not
deductible for tax purposes. During the quarter ended September 30, 1998, $18.3
million of accruals for merger charges were determined to be no longer
necessary and were reversed.
INTEREST INCOME, NET
Interest income (net) increased by approximately $100,000 to $6.3 million (2% of
net sales) for the third quarter of 1998 compared to $6.2 million for the same
quarter of 1997. Interest income (net) decreased by approximately $500,000 to
$17.2 million (2% of net sales) for the first nine months of 1998 compared to
$17.7 million for same period of 1997.
14
<PAGE>
ASCEND COMMUNICATIONS, INC
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the quarter ended September 30, 1998 and
1997 was 35.5% and 37.0%, respectively, exclusive of the effect of one-time non-
deductible in-process research and development expenses and certain merger
related expenses. The effective tax rate for the nine months ended September
30, 1998 and 1997 was 35.8% and 37.0%, respectively. The lower effective tax
rate for 1998 is primarily attributable to reduction in the overall state
effective tax rate and utilization of various tax credits. The Company
anticipates its 1998 effective tax rate to be approximately 35.5%, however, the
rate could vary based upon a change in the geographic mix of the Company's
earnings, changes in U.S. tax law such as reinstatement of the research tax
credit, or the effect of future acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's principal sources of liquidity included
$773.2 million of cash and cash equivalents, short-term investments and
investments and an unsecured $25.0 million revolving line of credit which
expires in June 1999. There were no borrowings under the line of credit during
the nine months ended September 30, 1998. The net decrease in cash and cash
equivalents of $64.6 million for the nine month period ended September 30, 1998
was principally due to $364.3 million of funds used in investing activities,
partially offset by $174.5 million of funds provided by financing activities and
$125.2 million of funds provided by operating activities. The net cash provided
by operating activities for the nine months ended September 30, 1998 was
primarily due to increased net income, increases in accrued liabilities and
compensation, and accounts payable, partially offset by increases in accounts
receivable, inventories, deferred income taxes, and other assets.
Net cash used in investing activities of $364.3 million for the nine months
ended September 30, 1998 related primarily to net purchases, maturities and
sales of investments, and expenditures for furniture, fixtures and equipment.
Financing activities provided $174.5 million for the nine months ended September
30, 1998, primarily due to proceeds from, and tax benefits related to, the
exercise of stock options and issuance of common stock in connection with the
Company's employee and outside director stock plans.
At September, 1998, the Company had $694.1 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.
15
<PAGE>
ASCEND COMMUNICATIONS, INC.
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/A (No. 333-62281) filed on September 9, 1998 in connection
with the acquisition of Stratus and the Company's and Stratus' 1997 Annual
Report on Form 10-K. This Report on Form 10-Q should be read in conjunction
with such Forms S-4/A and 10-K, particularly the section "Factors That May
Affect Future Results." 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 ability to attract and retain key employees, 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 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. In North America, the Company
sells a substantial percentage of its products, particularly its MAX products,
to ISPs. Additionally, a substantial portion of the Company's sales of core
systems products is related to the telecommunications carrier industry. In
North America, the Company sells a substantial percentage of the core systems
products to public carriers. There can be no assurance that these industries
and their infrastructure will continue to develop or that acceptance of the
Company's products by these industries will be sustained. The Company believes
competition in the Internet and telecommunications carrier industry will
increase significantly in the future and could adversely affect 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 changes as a result of increased competition. In addition,
increased sales of Pipeline products as a percentage of net sales may adversely
affect the Company's gross margins in future periods as these products have
lower gross margins than the Company's other products. Further, the Company's
use of third parties to distribute its products to other value-added resellers
may adversely affect the Company's gross margins.
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 are 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
16
<PAGE>
ASCEND COMMUNICATIONS, INC.
Factors That May Affect Future Results (continued)
from international operations may contribute to fluctuations 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 adverse effect on the Company's
business, results of operations and financial condition. In recent periods the
Company's results of operations have been adversely affected by general economic
problems in Asia. There can be no assurance these problems will not continue in
future periods.
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. In the Company's most recent quarters, the sequential
sales growth slowed from prior levels, and a disproportionate share of the sales
occurred in the last month of the quarter. The Company's ability to meet
financial expectations could be hampered if the nonlinear sales pattern
continues in future periods. Accordingly, the cancellation or delay of even a
small percentage of customer purchases could adversely affect the Company's
results of operations in the quarter. A significant portion of the Company's
net sales in prior periods has been derived from relatively large sales to a
limited number of customers, and therefore the failure of the Company to secure
expected large sales may have a material adverse impact on results of
operations. A significant portion of the Company's expense levels is relatively
fixed in advance based in large part on the Company's forecasts of future sales.
If sales are below expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the shortfall.
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. The introduction of 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 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.
17
<PAGE>
ASCEND COMMUNICATIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)
The Year 2000 computer issue creates a risk for Ascend and therefore the Company
makes the following Year 2000 readiness disclosure. If computer systems do not
correctly recognize date information when the year changes to 2000, there could
be an adverse impact on the Company's operations. The risk for Ascend exists in
four areas: systems used by the Company to run its business, systems used by
the Company's suppliers, potential warranty or other claims from Ascend
customers, and the potential reduced spending by other companies on networking
solutions as a result of significant information systems spending on Year 2000
remediation. The Company is currently evaluating its exposure in all of these
areas and expects to complete such evaluation no later than June 30, 1999.
INTERNAL SYSTEMS
Ascend is in the process of conducting a comprehensive assessment and evaluation
of its systems, equipment and facilities. Ascend has a number of projects
underway to test and replace or upgrade systems, equipment and facilities that
are known to be Year 2000 non-compliant. The Company expects Year 2000 internal
testing to be complete by March 1999. The Company has not identified
alternative remediation plans if upgrade or replacement is not feasible. The
Company will consider the need for such remediation plans as it continues to
assess the Year 2000 risk. For the Year 2000 non-compliance issues identified
to date, the cost of upgrade or remediation is not expected to be material to
the Company's operating results. If implementation of replacement systems is
delayed, or if significant new non-compliance issues are identified, the
Company's results of operations or financial condition could be materially
adversely affected.
SUPPLIERS
Ascend is also in the process of contacting its critical suppliers to determine
that the suppliers' operations and the products and services they provide are
Year 2000 compliant. Ascend's process for assessing such compliance includes
obtaining supplier certifications, supplier follow-up meetings and external
testing, if required. Supplier certifications, supplier follow-up meetings and
external testing, if required, are expected to be completed by March 1999. In
the event that suppliers are not Year 2000 compliant, the Company will seek
alternative sources of supplies. However, such failures remain a possibility
and could have an adverse impact on the Company's results of operations or
financial condition. Additionally, litigation may arise from situations in
which the Company has minimum purchase commitment contracts with suppliers that
are not Year 2000 compliant.
WARRANTY
The Company believes the majority of its current products are Year 2000
compliant; however, since all customer situations cannot be anticipated,
particularly those involving third party products, Ascend may see an increase in
warranty and other claims as a result of the Year 2000 transition. In addition,
litigation in general may increase regarding Year 2000 compliance issues. For
these reasons, the impact of customer claims could have a material adverse
impact on the Company's results of operations or financial condition.
18
<PAGE>
ASCEND COMMUNICATIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)
SALES IMPACT
Year 2000 compliance is an issue for almost all businesses, whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to
devote a substantial portion of their information systems' spending to fund such
upgrades and modifications and divert spending away from networking solutions.
Such changes in customers' spending patterns could have a material adverse
impact on the Company's sales, operating results or financial condition.
GENERAL
In order to evaluate the risks outlined above and to implement Year 2000
compliance solutions, Ascend has established a company wide team coupled with
outside consultants. The internal Ascend Year 2000 compliance team consists of
representatives from various functional areas, including risk management,
finance, engineering, purchasing, and legal. The external Year 2000 compliance
team includes various national Year 2000 compliance consultants. The team has
established an overall Year 2000 compliance goal, incremental milestones and
meets regularly to assess progress on its milestones. Currently, the Company
is establishing contingency plans to address the impact to Ascend in the event
its suppliers, products and internal systems are not Year 2000 compliant.
Costs incurred to date on the Ascend Year 2000 compliance project are
approximately $11.0 million. Total costs of the project and compliance are
estimated to be $15.0 to $19.0 million and should be significantly incurred by
April 30, 1999. However, there can be no assurance that these costs will not be
greater than anticipated, or that corrective actions undertaken will be
completed before any Year 2000 compliance problems occur.
Ascend's Year 2000 compliance criteria comply with the requirements established
by the US Government as stated in the The Final GSA - Year 2000 Compliance.
The Company mainly competes in four segments of the data networking market : (i)
wide area network ("WAN") and Internet access, (ii) WAN and Internet backbone
switching, (iii) remote LAN access and Internet subscriber access, and (iv)
videoconferencing and multimedia access. The Company competes in one or more of
these market segments with Cisco Systems, Inc., 3Com Corporation, Inc.,
Newbridge Networks, Inc., Shiva Corporation, Northern Telecom, Inc., and many
others. Some of these competitors have substantially greater financial,
marketing and technical resources than the Company. The Company expects
additional competition from existing competitors and from a number of other
companies, some of which may have substantially greater financial, marketing and
technical resources than the Company, that may enter the Company's existing and
future markets. Increased competition could result in price reductions, reduced
profit margins and loss of market share, each of which would adversely affect
the Company's business, results of operations and financial condition.
19
<PAGE>
ASCEND COMMUNICATIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)
The Company's sales are, to a significant degree, made through
telecommunications carriers, value-added resellers ("VARs") and distributors.
Accordingly, the Company is dependent on the continued viability and financial
stability of these companies. While the Company has contractual relationships
with many telecommunications carriers, VARs and distributors, these agreements
do not require these companies to purchase the Company's products and can be
terminated by these companies at any time. There can be no assurance that any
of the telecommunications carriers, VARs or distributors will continue to market
the Company's products. The telecommunications carrier customers, to the extent
they are resellers, VARs and distributors, generally offer products of several
different companies, including products that are competitive with the Company's
products. Accordingly, there is a risk that these companies may give higher
priority to products of other suppliers, thus reducing their efforts to sell the
Company's products. Any special distribution arrangement and product pricing
arrangement that the Company may implement in one or more distribution channels
for strategic purposes could adversely affect gross profit margins.
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 typically does not have employment contracts with its
key personnel and does not maintain any key person life insurance policies. The
loss of key 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's
anticipated 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.
The Company relies on a combination of patents, copyright, and trade secret laws
and non-disclosure agreements to protect its proprietary technology. The
Company is currently involved in patent disputes the results of which are not
presently determinable. Such disputes could result in significant expenses to
the Company and divert the efforts of the Company's technical and management
personnel.
20
<PAGE>
ASCEND COMMUNICATIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)
Although the Company generally uses standard parts and components for its
products, certain components, including certain key microprocessors and
integrated circuits, are presently available 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 results of operations and could impact
customer relations.
The Company has concluded the acquisition of four companies in 1997 and five
companies in 1996. On October 19, 1998, the Company completed its acquisition of
Stratus. Achieving the anticipated benefits of these acquisitions or any other
acquisitions the Company may undertake 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, financial condition and/or
results of operations.
The Company's common stock has experienced significant price volatility, and
such volatility may occur in the future, particularly as a result of quarter-to-
quarter variations in the actual or anticipated financial results of the Company
or other companies in the networking industry, announcements by the Company or
competitors regarding new product introductions or other developments affecting
the Company and/or changes in financial estimates by public market analysts. In
addition, the market has experienced extreme price and volume fluctuations that
have affected the market price of many technology companies' stocks and that
have been unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations may adversely affect the market
price of the Company's common stock.
Recent periods of volatility in the market price of the Company's securities
resulted in securities class action litigation against the Company and various
officers and directors. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on the results of operations and financial condition of the
Company.
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.
21
<PAGE>
ASCEND COMMUNICATIONS, INC.
Item 6: Exhibits and Reports on Form 8-K:
A: Exhibits
<TABLE>
<CAPTION>
NO. DESCRIPTION
------------- -----------------------------------------------
<C> <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) 10.8 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.
(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.
(7) 10.13 Ascend Communications, Inc. 1996 Restricted
Stock Plan.
(8) 10.14 Cascade Communications Corp. Amended and
Restated 1991 Stock Plan.
(9) 10.15 Cascade Communications Corp. 1994 Employee
Stock Purchase Plan.
</TABLE>
22
<PAGE>
ASCEND COMMUNICATIONS, INC.
(A) EXHIBITS (continued)
<TABLE>
<CAPTION>
NO. DESCRIPTION
-------------------- ----------------------------------------
<C> <C> <S>
(9) 10.16 Cascade Communications Corp. 1994
Non-Employee Director Stock Plan.
(9) 10.17 Letter of Employment dated March 12, 1992
between the Registrant and Daniel E.
Smith.
(9)(10)(11) 10.18 Lease dated July 27, 1993 between
Glenborough Corporation and the
Registrant; as amended by the first
amendment thereto dated February 24, 1994;
as amended by the second amendment thereto
dated July 24, 1994; as amended by the
third amendment thereto dated November 10,
1994; as amended by the fourth amendment
thereto dated December 1, 1995.
(12) 10.19 Lease dated November 14, 1996 between the
Registrant and Nashoba View Associated,
LLC.
(13) 10.20 Loan Agreement and related agreements,
date November 30, 1995, by and between the
Registrant and Wells Fargo Bank of
California, as amended by the first
amendment thereto, dated October 15, 1997
(14) 10.21 Lease agreement dated March 20, 1998, by
and between the Registrant and Sumitomo
Bank Leasing and Financing, Inc.
(14) 10.22 Form of Change in Control Agreement for
CEO and Executive Vice Presidents
(14) 10.23 Form of Change in Control Agreement for
Vice Presidents
(15) 10.24 Ascend Communications, Inc. 1998 Stock
Incentive Plan
(16) 10.25 Ascend Communications, Inc. 1998
Supplemental Stock Incentive Plan
27.0 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference from the Company's Registration
Statement (No. 33- 77146), effective May 12, 1994.
(2) Incorporated by reference from the Company's Form 10-Q for the
quarter ended September 30, 1994.
(3) Incorporated by reference from the Company's Form 10-Q for the
quarter ended June 30, 1995.
(4) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1995.
(5) Incorporated by reference from the Company's Form 10-Q for the
quarter ended March 31, 1996.
23
<PAGE>
ASCEND COMMUNICATIONS, INC.
(A) EXHIBITS (continued)
<TABLE>
<CAPTION>
NO. DESCRIPTION
----- -------------------------------------------------------------
<C> <S>
(6) Incorporated by reference from the Company's Form 10-Q for
the quarter ended June 30, 1996.
(7) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1996.
(8) Incorporated by reference from Cascade Communications Corp.'s
Registration Statement on Form S-8 (File No. 33-93152) filed
with the Securities Commission and Exchange Commisstion (the
"Commission") on June 6, 1995.
(9) Incorporated by reference from Cascade Communications Corp.'s
Registration Statement on Form S-1 (File No. 33-79330) filed
with the Commission on May 26, 1994, as amended, which
Registration Statement became effective on July 28, 1994.
(10) Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Cascade Communications
Corp.'s Form 10-K filed for the fiscal year ended December
31, 1994 on March 29, 1995.
(11) Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Cascade Communications
Corp.'s Form 10-K filed for the fiscal year ended December
31, 1995 on March 1, 1996.
(12) Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Cascade Communications
Corp.'s Form 10-K filed for the fiscal year ended December
31, 1996 on March 14, 1997.
(13) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1997.
(14) Incorporated by reference from the Company's Form 10-Q for
the quarter ended March 31, 1998
(15) Incorporated by refernce from the Company's Registration
Statement on Form S-8 (File No. 333-54029) filed with the
Commission on June 1, 1998.
(16) Incorporated by refernce from the Company's Registration
Statement on Form S-8 (File No. 333-65467) filed with the
Commission on October 8, 1998.
</TABLE>
24
<PAGE>
ASCEND COMMUNICATIONS, INC.
B: Reports on Form 8K:
On July 2, 1998, the Company filed a Report on Form 8-K announcing that former
Federal Communications (FCC) Chairman, Reed E. Hundt, joined the Company's Board
of Directors. The Company also announced that Daniel E. Smith, Executive Vice
President and General Manager of the Core Systems Division, resigned from the
Company and the Board of Directors, effective July 6, 1998. Dr. Hassan Ahmed
replaced Daniel E. Smith as Executive Vice President and General Manager of the
Core Systems Division.
On August 14, 1998, the Company filed a Report on Form 8-K announcing that on
August 3, 1998, the Company and Stratus Computer, Inc. ("Stratus") announced in
a press release that they had signed a definitive merger agreement pursuant to
which a wholly-owned subsidiary of the Company will merge with and into Stratus.
On October 15, 1998, the Company filed a Report on Form 8-K announcing that the
Company had received clearance from both the United States and Foreign Anti-
Trust Regulators for its proposed merger with Stratus.
On October 23, 1998, the Company filed a Report on Form 8-K announcing that on
October 19, 1998, the Company completed its merger with Stratus. On November 3,
1998, the Compnay filed on Form 8-K/A an amendment to the Form 8-K previously
filed on October 23, 1998 for required financial statement disclosure.
25
<PAGE>
ASCEND COMMUNICATIONS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASCEND COMMUNICATIONS, INC.
DATE November 13, 1998 by /S/ Michael F.G. Ashby
----------------- ------------------------------
Michael F.G. Ashby, Executive
Vice President, and Chief
Financial Officer (Principal
Financial Officer)
DATE November 13, 1998 by /S/ Bernard V. Schneider
----------------- ------------------------------
Bernard V. Schneider, Vice
President and Treasurer
26
<PAGE>
<TABLE>
<CAPTION>
ASCEND COMMUNICATIONS, INC.
INDEX TO EXHIBITS
NO. DESCRIPTION
------------- -----------------------------------------------
<C> <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) 10.8 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.
(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.
(7) 10.13 Ascend Communications, Inc. 1996 Restricted
Stock Plan.
(8) 10.14 Cascade Communications Corp. Amended and
Restated 1991 Stock Plan.
(9) 10.15 Cascade Communications Corp. 1994 Employee
Stock Purchase Plan.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
ASCEND COMMUNICATIONS, INC.
Index to Exhibits (continued)
NO. DESCRIPTION
-------------------- -----------------------------------------
<C> <C> <S>
(9) 10.16 Cascade Communications Corp. 1994
Non-Employee Director Stock Plan.
(9) 10.17 Letter of Employment dated March 12, 1992
between the Registrant and Daniel E.
Smith.
(9)(10)(11) 10.18 Lease dated July 27, 1993 between
Glenborough Corporation and the
Registrant; as amended by the first
amendment thereto dated February 24, 1994;
as amended by the second amendment thereto
dated July 24, 1994; as amended by the
third amendment thereto dated November 10,
1994; as amended by the fourth amendment
thereto dated December 1, 1995.
(12) 10.19 Lease dated November 14, 1996 between the
Registrant and Nashoba View Associated,
LLC.
(13) 10.20 Loan Agreement and related agreements,
date November 30, 1995, by and between the
Registrant and Wells Fargo Bank of
California, as amended by the first
amendment thereto, dated October 15, 1997
(14) 10.21 Lease agreement dated March 20, 1998, by
and between the Registrant and Sumitomo
Bank Leasing and Financing, Inc.
(14) 10.22 Form of Change in Control Agreement for
CEO and Executive Vice Presidents
(14) 10.23 Form of Change in Control Agreement for
Vice Presidents
(15) 10.24 Ascend Communications, Inc. 1998 Stock
Incentive Plan
(16) 10.25 Ascend Communications, Inc. 1998
Supplemental Stock Incentive Plan
27.0 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference from the Company's Registration
Statement (No. 33- 77146), effective May 12, 1994.
(2) Incorporated by reference from the Company's Form 10-Q for the
quarter ended September 30, 1994.
(3) Incorporated by reference from the Company's Form 10-Q for the
quarter ended June 30, 1995.
(4) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1995.
(5) Incorporated by reference from the Company's Form 10-Q for the
quarter ended March 31, 1996.
28
<PAGE>
<TABLE>
<CAPTION>
ASCEND COMMUNICATIONS, INC
INDEX TO EXHIBITS (CONTINUED)
NO. DESCRIPTION
----- -------------------------------------------------------------
<C> <S>
(6) Incorporated by reference from the Company's Form 10-Q for
the quarter ended June 30, 1996.
(7) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1996.
(8) Incorporated by reference from Cascade Communications Corp.'s
Registration Statement on Form S-8 (File No. 33-93152) filed
with the Securities Commission and Exchange Commisstion (the
"Commission") on June 6, 1995.
(9) Incorporated by reference from Cascade Communications Corp.'s
Registration Statement on Form S-1 (File No. 33-79330) filed
with the Commission on May 26, 1994, as amended, which
Registration Statement became effective on July 28, 1994.
(10) Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Cascade Communications
Corp.'s Form 10-K filed for the fiscal year ended December
31, 1994 on March 29, 1995.
(11) Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Cascade Communications
Corp.'s Form 10-K filed for the fiscal year ended December
31, 1995 on March 1, 1996.
(12) Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Cascade Communications
Corp.'s Form 10-K filed for the fiscal year ended December
31, 1996 on March 14, 1997.
(13) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1997.
(14) Incorporated by reference from the Company's Form 10-Q for
the quarter ended March 31, 1998
(15) Incorporated by refernce from the Company's Registration
Statement on Form S-8 (File No. 333-54029) filed with the
Commission on June 1, 1998.
(16) Incorporated by refernce from the Company's Registration
Statement on Form S-8 (File No. 333-65467) filed with the
Commission on October 8, 1998.
</TABLE>
29
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<PAGE>
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0
0
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