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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, 1997
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
incorporation or organization) Identification No.)
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, 1997 the approximate aggregate market value of voting stock
held by non-affiliates of the Registrant was $4,320,434,003 (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, 1998, 191,906,397 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 21, 1998 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
<TABLE>
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Part I: Page No.
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<C> <C> <S> <C>
ITEM 1. Business 3
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 13
ITEM 4. Submission of Matters to a Vote of
Security Holders 14
Part II:
ITEM 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 14
ITEM 6. Selected Financial Data 15
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 16
ITEM 8. Financial Statements and Supplementary Data 23
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 23
Part III:
ITEM 10. Directors and Executive Officers of the
Registrant 23
ITEM 11. Executive Compensation 23
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 23
ITEM 13. Certain Relationships and Related
Transactions 23
Part IV:
ITEM 14. Exhibit, Financial Statement Schedule,
and Reports on Form 8-K 24
</TABLE>
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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 I
Item I: Business
Ascend Communications, Inc. (the "Company") 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) telecommunications carrier and
ISP backbone networks utilizing high speed Frame Relay, Asynchronous Transfer
Mode ("ATM") and Internet Protocol ("IP") switches for application; (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.
Wide Area Networking
The continuing growth in the need for individuals, groups and businesses to
exchange information electronically has given rise to the multi-billion dollar
wide area networking ("WAN") industry. Wide area networking solutions involve
the use of public carrier telecommunications networks as a medium to accomplish
electronic information exchange. The typical WAN system infrastructure can be
conveniently broken down into three layers:
The Edge Layer
The edge layer is an end-user's first point of connection to the WAN. A
typical edge-layer device is a home or branch office router, which connects one
or more computers to the WAN via a dial-up or dedicated network connection. In
this market, competitors differentiate themselves based on price, ease of
installation and management, security and enhanced user-friendly features.
The Access Layer
The access layer is the first point of connection within the public carrier
network where many edge layer connections are terminated and consolidated for
transport over the public backbone network. A common access-layer device is an
access concentrator, which terminates a high volume and wide variety of dial-up
and dedicated WAN connections. Products in this market are differentiated based
on the variety of access services supported, port density, price per port,
operational support system ("OSS"), and management platform.
The Core Layer
The Core Layer represents the public carrier's backbone network, which takes
the data traffic that is handed off from the access concentrators and carries it
from one point of the network to the other at very high speeds. A typical core
layer device is a backbone switch, that uses either IP, Frame Relay or ATM
protocols to move network traffic quickly and efficiently over the backbone.
In this market, the products are differentiated by aggregate capacity,
reliability, scalability, maximum performance, OSS and network management.
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Ascend's Strategy
Ascend's strategy is to provide end-to-end WAN solutions through a broad
set of products spanning all three layers of the typical WAN infrastructure,
from the core to the edge. The Company's product families incorporate scaleable,
modular software and hardware architectures that facilitate rapid, flexible
customer deployments. The Company provides integrated firewall and encryption
security software for its products. 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).
Products
Ascend has developed various products to address the three layers of the typical
WAN infrastructure as follows:
The Access Layer
The MAX family of integrated access switches provides 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 architecture that allows
users to configure each unit according to the specific application and bandwidth
requirements. Products in the MAX product family range from the low-end MAX
200+, which would commonly be used in small company or branch offices, to the
high-end MAX TNT, used by the largest carriers and ISPs worldwide. The Max
family of products are multi-service platforms supporting a wide variety of
access services such as Digital Subscriber Line ("DSL") technology, Integrated
Services Digital Network ("ISDN"), analog, Frame Relay and digital private
lines. These products also combine the dial access capability, router
functionality, security features and network management, all on a single
integrated platform. The high-end Max TNT is a carrier class product due to its
high density, reliability, and high-speed architecture. Specific high-speed
interfaces supported by the MAX TNT include channelized and unchannelized T3,
various types of DSL technology and other types of access services including
56kbps modem technology, ISDN, and Frame Relay. The MAX TNT is also Network
Equipment Building System (NEBS) compliant, a key carrier requirement, and
supports a common OSS to ease operational management.
The Core Layer
To meet the backbone requirements of large carrier and ISP networks, Ascend
has developed a broad set of routing and switching products: the GRF family of
IP routers, the B-STDX family of Frame Relay switches, the SA family, the CBX
500 and GX 550 ATM switches. Incorporating switched backplane architecture,
distributed processing and modular design to bring redundancy, flexibility and
scalability, these products use IP, Frame Relay and ATM switching technologies
to improve the speed, performance and reliability of backbone carrier networks.
These products support a high number of connections ranging in speed from T1
(1.5Mbps) to OC-48 (2,488Mbps), and incorporate switched backplane architecture,
distributed processing and modular design to bring redundancy, flexibility and
scalability to carrier networks.
The GRF family of products has an innovative architecture, combining Layer-
3 switching with intelligent IP forwarding media cards to deliver scalable
performance up to 10 million packets per second. The B-STDX family of products
provide scalable, multi-service support for interworking among broadband packet
networks, including Frame Relay, ATM, SMDS and ISDN. The SA family of products
is designed to provide cost points that make ATM-based services viable for even
small branch offices, providing carriers a cost-effective solution to deliver
native ATM services to their customers. The CBX 500 product is a high-speed,
multi-service ATM switch, supporting ATM, Frame Relay and IP access on a highly
scalable, highly reliable carrier-class platform. The GX 550 product is a very
high-speed ATM switch that is scalable from 25Gbps to 100Gbps.
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The Edge Layer
The Pipeline Family of routers are designed for the home or branch office
to link one or more computers to the wide area network. These routers connect
from an ethernet local area network ("LAN") via one or more ports, to the WAN
via one or more ports ranging in speed from ISDN to T1/PRI. The Pipeline family
of products are easy to install and manage using a JAVA configuration utility,
and provide robust security solutions using virtual private networking ("VPN"),
tunneling, and an integrated firewall technology. These products also provide
user-friendly enhancements such as IP address translation, support for automatic
backup, dynamic bandwidth on demand and support for multiple protocols such as
IP, AppleTalk and IPX.
The Multiband family and Multiband Max family of products use inverse
multiplexing technology to provide dynamic bandwidth on demand for
videoconferenceing operations, data backup and overflow, and other applications
with fluctuating bandwidth needs. These products use Ascend Inverse
Multiplexing ("AIM") to optimize the dial-up bandwidth process, and conform with
standards such as the Bandwidth ON Demand Interoperability Group ("BONDING").
The Multiband family and Multiband Max family of products scale from 128kbs
speed to 3Mbps on a single connection, and the Multiband Max family is scalable
enough to upgrade to remote access capabilities, offering true multi-service
flexibility.
Network Management and Security
The Navis family and SecureConnect family of network management and
security products provide comprehensive network management and security across
the Company's broad product offering. The Navis network management family
provides comprehensive operations control for Ascend access and switch devices,
using the latest client/server and web technologies to ease operator use. The
Navis family consists of NavisCore, NavisXtend and NavisAccess, which are
applications that deliver management features such as discovery and mapping,
configuration management, performance measurement and fault monitoring. These
features provide customized information about the network ranging from the "big
picture" view to the smallest details.
The SecureConnect family of security products work hand-in-hand with the
Max and Pipeline family of products to bring affordable network security to both
central sites and branch offices. The SecureConnnect family includes the Secure
Access Firewall, an integrated firewall software, the Secure Control Manager, a
configuration and management utility, and Ascend Access Control, a software
product which supports user authentication, billing and accounting.
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 major telecommunications carriers, ISPs, value-added
resellers, distributors, 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
telecommunications carriers, ISPs, value-added resellers, distributors, and
applications equipment manufacturers; (ii) assist telecommunications carriers,
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
telecommunications carriers, 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
telecommunications carriers, ISPs, value-added resellers, distributors,
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.
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, US 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.
Internet Service Providers
The Company's 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
accounted for 14% of net sales in 1997.
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 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.
Applications Equipment Manufacturers
The Company's products are also sold and serviced by several applications
equipment manufacturers, including Lucent Technologies, Inc. ("Lucent"), IBM,
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.
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North American Sales and Marketing Organization
As of December 31, 1997, the Company's North America sales and marketing
organization included 497 individuals, including managers, sales
representatives, and technical and administrative support personnel. The Company
has sales offices located in major metropolitan areas including: 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 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, India 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, 1997, the Company's international sales organization
included 147 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, China, Singapore
and Australia.
International sales accounted for approximately 31%, 35% and 23% of net
sales in 1997, 1996 and 1995, 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.
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, Sophia Antipolis, France and Melbourne, Australia. 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.
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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 telecommunications carriers, ISPs,
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.
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 Cascade Communications Corp. ("Cascade"), a leading
developer and manufacturer of wide area network switching products, Whitetree,
Inc. ("Whitetree"), a developer and manufacturer of high-speed switching
products, and InterCon Systems Corporation ("InterCon"), a leading developer of
client software products for both the corporate and ISP markets. Also, in
January 1997, Cascade acquired Sahara Networks, Inc., a leading developer of
broadband network access technology. In 1996, the Company acquired StonyBrook
Services, Inc., a developer of network management software, NetStar, Inc.
("NetStar"), a developer and manufacturer of high performance, high speed IP
network switches, Subspace Communications, Inc. a developer of PC-based data and
telecommunications products for the home and small office environments, and
Morning Star Technologies, Inc. ("Morning Star"), a developer of network routing
software and advanced network security products. Also, in 1996, Cascade acquired
Arris Networks, Inc., a developer of access switching equipment.
The Company is currently undertaking development efforts for all of its
product families with emphasis on increasing reliability and availability, cost-
reduction engineering to stay price-competitive and to reduce the overall
network operating costs to end users, increasing scalability driven by the
increasing size of networks and increasing functionality such as support for
VPNs, for new routing protocols, and for higher speed interfaces. 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 $156.0 million,
$93.7 million and $36.1 million in 1997, 1996 and 1995, respectively. Research
and development expenditures are expensed as incurred. At December 31, 1997, 634
full-time employees were engaged in research and development. During 1997, the
Company added development facilities in Westford, MA, Wallingford, CT, Mountain
View, CA, and Herndon, VA.
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Competition
The market for WAN products is highly competitive and subject to rapid
technological change. The Company expects competition to continue and increase
in the future. The Company's primary competitors are Cisco, 3Com, Bay Networks,
Newbridge and Nortel. Cisco and Nortel have substantially greater financial and
marketing resources than the Company.
Competitive factors in the WAN 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.
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) 9002
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.
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 1997, 1996 and 1995 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.
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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, 1997, the Company employed 1644 persons, including 692
in sales and marketing, 217 in manufacturing, 634 in engineering and 101 in
finance and administration. Of these, 129 were employed outside of North
America. None of the Company's employees are 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.
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Executive Officers of the Registrant
The Company's corporate executive officers are as follows:
<TABLE>
<CAPTION>
Employed
Name Age Position Since
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<S> <C> <C> <C>
Mory Ejabat............ 48 President, Chief Executive Officer and Director 1990
Michael F.G. Ashby..... 49 Executive Vice President, Chief Financial Officer 1997
and Secretary
Jeanette A. Symons..... 35 Executive Vice President, Advanced Products and 1989
Chief Technical Officer
Daniel E. Smith........ 48 Execuive Vice President and General Manager, 1997
Core Systems
Bernard V. Schneider... 41 Vice President & Treasurer 1995
Michael J. Johnson..... 45 Controller and Chief Accounting Officer 1994
David Misunas.......... 47 Vice President, Strategic Business Development 1997
Michael E. Hendron..... 51 Senior Vice Preident, North America Sales and 1994
Serivce
Curtis N. Sanford...... 39 Senior Vice President, International Sales and 1990
General Manager of International Operations
Anthony Stagno......... 56 Vice President, Manufacturing 1992
Robert N. Machlin...... 40 Vice President, Marketing 1997
</TABLE>
Mory Ejabat has served as President, Chief Executive Officer and Director
of the Company since June 1995. Prior to that, Mr. Ejabat served as the
Company's President, Chief Operating Officer and Director from March 1994 to
June 1995, as Executive Vice President from December 1992 to March 1994 and as
Vice President, Operations from January 1990 to December 1992. Mr. Ejabat also
served in various management capacities, including Vice President for Wide Area
Communications Products and Vice President of Development and Operations for
Micom Systems, Inc., a data communications equipment manufacturer.
Michael F.G. Ashby joined the Company in October 1997 as Executive Vice
President and Chief Financial Officer. Before joining Ascend, Mr. Ashby was
Vice President and CFO at Pacific Telesis from September 1995 to October 1997.
Mr. Ashby served as CFO from September 1992 to August 1995 and President and CEO
from January 1995 to August 1995 of Network Systems Corporation in Minneapolis.
Prior to that, Mr. Ashby served as CFO from 1988 to August 1992 of Teradata
Corporation in Los Angeles.
Jeanette A. Symons is co-founder of the Company and has served as
Executive Vice President of Advanced Products and Chief Technical Officer since
June 1995. Prior to that time, Ms. Symons served as Vice President of
Engineering for the Company from January 1994 to June 1995 and served in
various other management positions with the Company from 1989 to 1993. Ms.
Symons served as a software engineer from October 1983 to December 1988 for
Hayes Microcomputer, where she developed and managed its ISDN program.
Daniel E. Smith has served as Executive Vice President and General Manager,
Core Systems and Director since June 1997. Prior to that, Mr. Smith served
as President, Chief Executive Officer and Director of Cascade Communications
Corp. from April 1992 to June 1997. From August 1987 until April 1992, Mr. Smith
served as Vice President of Sales for Proteon, Inc., a producer of LAN and LAN
internetworking products.
Bernard V. Schneider has served as Vice President and Treasurer of the
Company since October 1997. Prior to that, Mr. Schneider served as the
Company's Vice President of Strategic Business Development from July 1996
to October 1997 and Vice President of Marketing from June 1995 to July 1996.
From July 1990 to June 1995, Mr. Schneider served as Director of Data Product
Management of Sprint Corp., a telecommunications equipment provider.
11
<PAGE>
Michael J. Johnson joined Ascend 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, Mr. Johnson served as Controller and Chief
Accounting Officer for Itel Rail Corporation, a rail car leasing, maintenance,
and transportation company.
David Misunas joined Ascend in September 1997 as Vice President of
Strategic Business Development. Prior to that time, Mr. Misunas served as
Director of Marketing Development from August 1995 to May 1996 and Vice
President, Development from May 1996 to September 1997 at Micom Communications
Corp. Mr. Misunas served in marketing and business development roles at
Microelectronics and Computer Technology Corporation from 1991 to 1993 and as
Vice President, Marketing at Tamarack Storage Devices, Inc. from 1993 to 1994.
Curtis N. Sanford has served as Senior Vice President, International Sales
and General Manager of International Operations since December 1995. Prior to
that time, Mr. Sanford served as the Company's Vice President of
International Sales from May 1994 to December 1995, as Vice President Worldwide
Marketing and International Sales from January 1993 to May 1994 and Vice
President, International from January 1990 to January 1993. From June 1980 to
December 1989, Mr. Sanford served in various positions, including Director, Far
East Operations for BBN Communications Corporation, a data communications
equipment manufacturer.
Michael E. Hendren has served as Senior Vice President, North American
Sales and Service of the Company since December 1995. Prior to that, Mr.
Hendren served as Vice President, North American Sales of the Company from
May 1994 to December 1995. From January 1990 to April 1994, Mr. Hendren served
in various management positions, including Vice President of Sales for ACC
Corp., a communications equipment manufacturer.
Anthony Stagno has served as Vice President of Manufacturing for the
Company since July 1994. Prior to that time, Mr. Stagno served as the
Company's Director, Quality Assurance from January 1992 to July 1994.
From November 1989 to December 1991, Mr. Stagno served in various positions,
including Director, Quality Assurance, for MiniMed Technologies, an electronic
medical instruments manufacturer.
Robert N. Machlin has served as Vice President of Marketing of Ascend since
June 1997. Prior to that time, Mr. Machlin served as Vice President of Marketing
of Cascade Communications Corp. from October 1994 to June 1997. Mr. Machlin
served as an independent consultant to manufacturers of networking equipment
from December 1993 to September 1994. Mr. Machlin served as Vice President of
Marketing at Coral Network Corporation from October 1992 to November 1993 and as
Vice President of Marketing at Amnet, Inc., a manufacturer of wide area network
switches, from December 1988 to October 1992.
12
<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
major metropolitan areas including 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
The Company and various of its current and former officers and directors
are parties to a number of related lawsuits 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. The lawsuits, which are substantially identical,
allege that the defendants violated the federal 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.
All of 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 of 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
13
<PAGE>
resolution of this matter could materially affect the Company's future results
or cash flows in a particular period.
On April 18, 1997, the Company received a claim and request for royalties
alleging patent infringement on four separate patents. Subsequently, the claim
and request for royalties was amended to include four additional patents. The
Company is currently investigating the claims of such infringement and thus the
ultimate outcome of this claim cannot yet be determined. No provision for any
liability that may result from the claim has been recognized in the 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.
The Company is a party as a defendant in various 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 from these lawsuits,
if any, 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.
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 1997.
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, 1998, there
were approximately 3,142 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>
1997 1996
----------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
Fourth quarter ended December 31, $35.69 $22.00 $73.88 $60.13
Thrid quarter, ended September 30, 56.75 30.00 67.81 41.75
Second quarter ended June 30, 60.00 36.13 70.63 51.75
First quarter ended March 31, 80.25 40.12 57.00 32.25
</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.
14
<PAGE>
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.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Consolidated Statements of Year Ended December 31,
Operations Data: --------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $1,167,352 $ 890,273 $ 287,438 $ 89,715 $ 23,175
Cost of sales 413,570 311,745 101,859 32,500 9,003
---------- ---------- ---------- ---------- ----------
Gross profit 753,782 578,528 185,579 57,215 14,172
Operating expenses:
Research and development 155,996 93,669 36,083 13,523 6,059
Sales and marketing 249,129 156,286 56,034 21,956 8,379
General and administrative 35,267 29,855 16,084 6,268 2,916
Purchased research and development 231,100 - - - -
Costs of mergers 150,271 13,900 - - -
---------- ---------- ---------- ---------- ----------
Total operating expenses 821,763 293,710 108,201 41,747 17,354
---------- ---------- ---------- ---------- ----------
Operating income (loss) (67,981) 284,818 77,378 15,468 (3,182)
Interest, net 23,029 17,186 8,360 1,750 204
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (44,952) 302,004 85,738 17,218 (2,978)
Provision for income taxes 79,422 118,114 32,793 1,402 -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (134,374) $ 183,890 $ 52,945 $ 15,816 $ (2,978)
========== ========== ========== ========== ==========
Net income (loss) per share - diluted $ (0.66) $ 0.94 $ 0.30 $ 0.11 $ (.04)
========== ========== ========== ========== ==========
Number of shares used in per share
calculation - diluted 189,129 196,246 175,216 148,516 77,469
========== ========== ========== ========== ==========
Year Ended December 31,
--------------------------------------------------------------------
Consolidated Balance Sheet Data: 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(in thousands)
Working capital $ 745,949 $ 652,447 $ 331,937 $ 92,415 $ 20,844
Total assets 1,137,894 922,127 481,873 126,620 31,432
Total stockholders' equity 969,256 767,233 411,293 103,154 23,550
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Ascend Communications, Inc. (the "Company") 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) telecommunications carrier and
ISP backbone networks utilizing high speed Frame Relay, Asynchronous Transfer
Mode ("ATM") and Internet Protocol ("IP") switches for application; (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.
The Company aquired four companies in the year ended December 31, 1997.
In February 1997, the Company purchased InterCon Systems Corporation
("InterCon"), a leading developer of remote access client software products for
both corporate and ISP markets. On April 1, 1997, the Company acquired
Whitetree, Inc. ("Whitetree"), a developer and manufacturer of high speed ATM
switching products. 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. In January 1997,
Cascade acquired Sahara Networks, Inc. ("Sahara"), a privately held developer of
scaleable high-speed broadband access products (See Note 8 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 operations:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net sales....................................... 100 % 100 % 100 %
Cost of sales................................... 35 35 35
------- ------ ------
Gross profit................................. 65 65 65
Operating expenses:
Research and development..................... 14 10 13
Sales and marketing.......................... 21 18 20
General and administrative................... 3 3 6
Purchased research and development........... 20 - -
Costs of mergers............................. 13 2 -
------- ------ ------
Total operating expenses.................. 71 33 39
------- ------ ------
Operating income (loss)......................... (6) 32 26
Interest income................................. 2 2 3
------- ------ ------
Income (loss) before income taxes............... (4) 34 29
Provision for income taxes...................... 7 13 11
------- ------ ------
Net income (loss)............................... (11) % 21 % 18 %
======= ====== ======
</TABLE>
16
<PAGE>
Years Ended December 31, 1997, 1996 and 1995
Net Sales. Net sales for 1997 increased 31% to $1.167 billion as compared
to $890.3 million in 1996, which increased 210% from $287.4 million in 1995.
International sales (sales outside of North America) increased to $362.3 million
in 1997 as compared to $313.3 million in 1996 and to $65.5 million in 1995 and
accounted for 31%, 35% and 23% of net sales in 1997, 1996 and 1995,
respectively.
The following table provides a breakdown of net sales by business unit as a
percentage of total Company net sales for 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Business Unit 1997 1996 1995
- ---------------------------- ------ ------ -------
<S> <C> <C> <C>
Access Switching............ 52% 48% 28%
Core Systems................ 35 36 46
Enterprise Access........... 9 13 22
Other....................... 4 3 4
--- --- ---
Total Company............ 100% 100% 100%
=== === ===
</TABLE>
Access Switching - The Access Switching business unit offers of the MAX
family of products. MAX products accounted for 52%, 48% and 28% of total Company
net sales for 1997, 1996 and 1995, respectively.
The increase in unit shipments of MAX products was primarily attributable to the
growth in business from ISPs and increased demand for corporate remote
networking applications.
Core Systems - The Core Systems business unit offers of the B-STDX family of
Frame Relay switches, the CBX500 family of ATM switches and the GRF family of
Internet Protocol ("IP") switches. Core Systems products accounted for 35%, 36%
and 46% of total Company net sales for 1997, 1996 and 1995, respectively. The
decline in Core Systems sales as a percent of net sales was primarily
attributable to the increase in the sales of the MAX family of products.
Enterprisee Access - The Enterprise Access business unit offers the Pipeline
family remote access equipment as well as the Multiband MAX family of inverse
multiplexing equipment. Enterprise Access products accounted for 9%, 13% and 22%
of total Company net sales for 1997, 1996 and 1995, respectively. The decline of
Enterprise Access net sales as a percent of total Company net sales was
primarily attributable to the increase in the sales of the MAX family of
products and price reductions of the Pipeline products due to increased
competition.
Gross Margin. Gross margin was 65% for 1997, 1996 and 1995. 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
margin 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
$156.0 million in 1997 compared to $93.7 million in 1996 and $36.1 million in
1995. These increases were primarily due to the addition of engineering
personnel, payments for consulting services in connection with developing and
enhancing the Company's existing and new products and payments for consulting
services related to filing applications and product testing required to obtain
governmental approvals to resell the Company's products outside of North
America. In 1997, 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
17
<PAGE>
of net sales increased to 14% in 1997 from 10% in 1996 which decreased from 13%
in 1995. The Company expects that spending for research and development will
increase in absolute dollars in 1998 but may continue to vary as a percentage of
net sales.
Sales and Marketing. Sales and marketing expenses were $249.1 million,
$156.3 million and $56.0 million for 1997, 1996 and 1995, 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, and end-user customers and to the
introduction of several new products. Sales and marketing expenses as a
percent of net sales, however, increased to 21% in 1997 from 18% in 1996 which
decreased from 20% in 1995. The Company expects that sales and marketing
expenses will increase in absolute dollars in 1998 and may continue to vary as
a percentage of net sales.
General and Administrative. General and administrative expenses increased to
$35.3 million in 1997 as compared to $29.9 million in 1996 and $16.1 million in
1995. 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 were 3%
in 1997 and 1996 as compared to 6% in 1995. The Company expects that spending
for general and administrative activities will increase in absolute dollars in
1998 and may continue to vary as a percentage of net sales.
Purchased Research and Development. Purchased research and development costs
were $231.1 million for 1997. These costs were for the purchase of technology
and related assets associated with the acquistions of InterCon and Sahara during
the first quarter of 1997. These acquisitions provide technology and expertise
that the Company is using to enhance and expand the breadth of its offerings to
end-user markets.
Costs of Mergers. For the year ended December 31, 1997, the Company charged
to operations one-time merger costs of approximately $150.3 million. These costs
principally related to the acquisitions of Cascade and Whitetree during 1997 and
consist primarily of investment banking fees, professional fees and reserves for
redundant assets, redundant products and employee severance packages. 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
acquisitions of NetStar, Inc. and StonyBrook Services, Inc. during 1996 and
consisted primarily of investment banking fees, professional fees and other
direct costs associated with the acquisitions.
Interest Income. Interest income increased to $23.0 million in 1997 compared
to $17.2 million in 1996 and $8.4 million in 1995. The increase in interest
income during 1997 and 1996 is due primarily to the investment of proceeds from
the Company's public offering of its common stock which was completed in August
1995, 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 1997 was
$79.4 million compared to $118.1 million for 1996 and $32.8 million in 1995. The
Company's tax expense for 1997 was impacted by non-deductible costs associated
with the acquisitions of Cascade and Whitetree and approximately $213.1 million
of non-deductible purchased research and development costs associated with the
acquisition of Sahara. Exclusive of the effects of these non-deductible one-time
charges, the Company's effective tax rate for 1997 was 37.3%, which approximates
the effective statutory federal and state income tax rates adjusted for the
impact of tax exempt interest and the benefits associated with the Company's
Foreign Sales Corporation. Exclusive of the effects of non-deductible one-time
charges, the Company's effective tax rate was 38.2% for both 1996 and 1995.
18
<PAGE>
Liquidity and Capital Resources
At December 31, 1997, the Company's principal sources of liquidity included
$576.6 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 or amounts outstanding under the
line of credit as of December 31, 1997. The decrease in cash and cash
equivalents of $71.6 million for 1997 was principally due to $246.0 million of
cash used in investing activities, offset by $109.3 million of cash provided by
financing activities and $65.1 million of cash provided by operations. The net
cash provided by operating activities for 1997 was primarily due to net loss,
adjusted for the effects of purchased research and development, costs of mergers
and depreciation, offset by decreases in accounts payable and accrued
liabilities and by increases in accounts receivable and inventories.
Net cash used in investing activities of $246.0 million for 1997 related
primarily to net purchases of investments of $127.0 million and expenditures for
furniture, fixtures and equipment of $105.3 million. Financing activities
provided $109.3 million for 1997, primarily due to $109.1 million of proceeds
from, and tax benefits related to, stock options and issuance of common stock in
connection with the Company's employee and outside director stock plans.
At December 31, 1997, the Company had $745.9 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/A (No. 333-25287) filed on April 22, 1997 in connection
with the acquisition of Cascade. This Report on Form 10-K should be read in
conjunction with such Form S-4, particularly the section entitled "Risk
Factors". 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 Compay's sales of core
systems products is reltated 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 public carrier 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 1997 and five
companies in 1996. 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 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
19
<PAGE>
adversely affect the Company's gross margins in future periods as 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.
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 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.
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. These occurrences are extremely
difficult to predict and may happen in the future. 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.
Many computer systems were not designed to handle any dates beyond the Year
1999, and therefore computer hardware and software will need to be modified
prior to the Year 2000 in order to remain functional. The Company is concerned
that many enterprises will be devoting a substantial portion of their
information systems spending to resolving this upcoming Year 2000 problem. This
may result in spending being diverted from networking solutions over the next
three years. Additionally, the Company will have to devote resources to
providing the Year 2000 solution for its own products. The Year 2000 issue could
lower demand for the Company's products while increasing the Company's costs.
These combining factors could have a material adverse impact on the Company's
financial results.
20
<PAGE>
The Company believes the majority of its major systems are currently Year 2000
compliant, and costs to transition the Company's remaining systems to Year 2000
compliance are not anticipated to be material. There can be no assurance that
systems operated by third parties that interfere with or contain the Company's
products will timely achieve Year 2000 compliance. Any failure of these third
parties' systems to timely achieve Year 2000 compliance could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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, Bay Networks,
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.
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 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
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.
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 management personnel.
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
21
<PAGE>
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'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 a 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 operating results 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.
22
<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 21, 1998,
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, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in Ascend Communications, Inc.'s Proxy Statement
for the stockholders' meeting to be held on May 21, 1998, with respect to
"Compensation and Other Information Concerning Directors and Officers" 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, 1998.
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 21, 1998, 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, 1998.
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 21, 1998, 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, 1998.
23
<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, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996
and 1995 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
2. Consolidated Financial Statement Schedule
The following consolidated financial statement schedule of Ascend
Communications, Inc. is filed as part of this Report and should be read in
conjunction with the consolidated financial statements of Ascend Communications,
Inc.
<TABLE>
<CAPTION>
Schedule Page
- -------- ----
<S> <C>
II Valuation and Qualifying Accounts S-4
</TABLE>
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.
24
<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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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 statment schedule based on
our audits. We did not audit the financial statements of Cascade Communications
Corp. ("Cascade") which statements reflect total assets constituting 29% in 1996
and total revenues constituting 38% in 1996 and 47% in 1995 of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for Cascade, is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Ascend Communications,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, 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 22, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cascade Communications Corp.:
We have audited the accompanying consolidated balance sheets of Cascade
Communications Corp. as of December 31, 1996 and 1995 and the related
consolidated statements of income, cash flows and stockholders' equity (deficit)
(none of which is presented here-in) for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cascade
Communications Corp. as of December 31, 1996 and 1995 and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 22, 1997,
except for Note M as to which
the date is March 30, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cascade Communications Corp.:
Our report on the consolidated financial statements of Cascade Communications
Corp. is included in this Annual Report on Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in item 14(a)(2) in this Annual Report on Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 22, 1997
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 240,817 $ 312,369
Short-term investments .......................................... 234,610 173,101
Accounts receivable, less allowance for uncollectible accounts of
$11,300 and $2,632 at December 31, 1997 and 1996, respectively 234,183 185,094
Inventories ..................................................... 99,637 68,544
Deferred income taxes ........................................... 85,057 42,862
Other current assets ............................................ 20,283 25,371
----------- -----------
Total current assets ...................................... 914,587 807,341
Investments ........................................................ 101,212 35,771
Furniture, fixtures and equipment, net ............................. 114,351 73,046
Other assets ....................................................... 7,744 5,969
----------- -----------
Total assets .............................................. $ 1,137,894 $ 922,127
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 54,414 $ 60,823
Accrued compensation and related liabilities .................... 25,315 29,426
Accrued liabilities ............................................. 88,909 64,645
----------- -----------
Total current liabilities ................................. 168,638 154,894
Commitments and contingencies (Notes 7 and 9)
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
191,216 shares issued and outstanding
(182,525 - 1996) .......................................... 191 182
Additional paid-in capital ...................................... 878,749 534,063
Retained earnings ............................................... 90,610 233,536
Notes receivable from stockholders .............................. (294) (548)
----------- -----------
Total stockholders' equity ................................ 969,256 767,233
----------- -----------
Total liabilities and stockholders' equity ................ $ 1,137,894 $ 922,127
=========== ===========
</TABLE>
See accompanying notes
F-2
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ........................... $ 1,167,352 $ 890,273 $ 287,438
Cost of sales ....................... 413,570 311,745 101,859
----------- ----------- -----------
Gross profit ..................... 753,782 578,528 185,579
Operating expenses:
Research and development ......... 155,996 93,669 36,083
Sales and marketing .............. 249,129 156,286 56,034
General and administrative ....... 35,267 29,855 16,084
Purchased research and development 231,100 -- --
Costs of mergers ................. 150,271 13,900 --
----------- ----------- -----------
Total operating expenses ...... 821,763 293,710 108,201
----------- ----------- -----------
Operating income (loss) ............. (67,981) 284,818 77,378
Interest income ..................... 23,029 17,186 8,360
----------- ----------- -----------
Income (loss) before income taxes ... (44,952) 302,004 85,738
Provision for income taxes .......... 79,422 118,114 32,793
----------- ----------- -----------
Net income (loss) ................... $ (124,374) $ 183,890 $ 52,945
=========== =========== ===========
Net income (loss) per share - diluted $ (0.66) $ 0.94 $ 0.30
=========== =========== ===========
Number of shares used in per share
calculation - diluted ............ 189,129 196,246 175,216
=========== =========== ===========
Net income (loss) per share - basic . $ (0.66) $ 1.03 $ 0.33
=========== =========== ===========
Number of shares used in per share
calculation - basic .............. 189,129 178,630 162,181
=========== =========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Retained Notes
Common Stock Additional Earnings Receivable
----------------- Paid-in (Accumulated From
Shares Amount Capital Deficit) Stockholders Total
------ ------ ---------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994 ................................. 154,532 $155 $105,601 $ (1,808) $(794) $ 103,154
Tax benefit related to
stock options ............................ -- -- 13,946 -- -- 13,946
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 ................. 3,329 3 4,407 -- -- 4,410
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 .................................. -- -- -- 52,945 -- 52,945
------- ---- -------- --------- ----- ---------
Balance at December
31, 1995 ................................. 171,858 172 360,533 51,137 (548) 411,294
Tax benefit related to
stock options ............................ -- -- 104,823 -- -- 104,823
Effect of poolings .......................... 3,129 3 12,122 (1,491) -- 10,634
Exercise of warrants, NetStar ............... 399 -- 7,904 -- -- 7,904
Issuance of common stock
under employee stock option
and stock purchase plans ................. 6,695 7 42,373 -- -- 42,380
Issuance of common stock .................... 444 -- 6,308 -- -- 6,308
Net income .................................. -- -- -- 183,890 -- 183,890
------- ---- -------- --------- ----- ---------
Balance at December
31, 1996 ................................. 182,525 182 534,063 233,536 (548) 767,233
Tax benefit related to
stock options ............................ -- -- 59,294 -- -- 59,294
Effect of poolings .......................... 1,350 1 22,510 (18,552) -- 3,959
Purchase of Sahara .......................... 2,386 3 213,097 -- -- 213,100
Issuance of common stock
under employee stock option
and stock purchase plans ................. 4,955 5 49,785 -- -- 49,790
Payments from stockholders .................. -- -- -- -- 254 254
Net loss .................................... -- -- -- (124,374) -- (124,374)
------- ---- -------- --------- ----- ---------
Balance at December
31, 1997 ................................. 191,216 $191 $878,749 $ 90,610 $(294) $ 969,256
======= ==== ======== ========= ===== =========
</TABLE>
See accompanying notes
F-4
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ........................................................................ $(124,374) $ 183,890 $ 52,945
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ........................................................................ 45,733 22,463 8,586
Costs of mergers .................................................................... 150,271 13,900 --
Purchased research and development .................................................. 231,100 -- --
Deferred income taxes ............................................................... (29,778) (27,529) (9,440)
Changes in operating assets and liabilities:
Accounts receivable .............................................................. (58,418) (133,946) (35,043)
Inventories ...................................................................... (42,797) (37,331) (20,175)
Other current assets ............................................................. 6,337 (20,869) (1,773)
Other assets ..................................................................... (2,905) (2,366) (4,346)
Accounts payable and accrued liabilities ......................................... (105,951) 76,901 34,576
Accrued compensation and related liabilities ..................................... (4,111) 1,839 8,362
--------- --------- ---------
Net cash provided by operating activities ..................................... 65,107 76,952 33,692
--------- --------- ---------
Investing activities:
Purchases of investments ............................................................ (483,122) (272,631) (197,148)
Maturities and sales of investments ................................................. 356,172 211,237 93,339
Purchases of furniture, fixtures and equipment, net ................................. (105,343) (72,121) (23,815)
Effect of business combinations ..................................................... (13,704) 9,169 --
--------- --------- ----------
Net cash used in investing activities ............................................ (245,997) (124,346) (127,624)
--------- -------- ---------
Financing activities:
Proceeds from issuance of common stock, net ......................................... 49,790 54,524 241,003
Tax benefit related to options ...................................................... 59,294 104,823 13,946
Proceeds from notes receivable from stockholders .................................... 254 -- 246
Proceeds from (repayment of) notes payable .......................................... -- (2,108) 3,729
--------- --------- ---------
Net cash provided by financing activities ........................................ 109,338 157,239 258,924
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..................................... (71,552) 109,845 164,992
Cash and cash equivalents, beginning of year ............................................. 312,369 202,524 37,532
--------- --------- ---------
Cash and cash equivalents, end of year ................................................... $ 240,817 $ 312,369 $ 202,524
Supplemental disclosure of cash flow information: ========= ========= =========
Income tax payments ................................................................. $ 45,395 $ 54,270 $ 17,980
========= ========= =========
Supplemental schedule of noncash investing and financing
activities information:
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" of the "Company")
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) telecommunications carriers and ISP backbone networks utilizing high speed
Frame Relay, Asynchronous Transfer Mode ("ATM") and Internet Protocol ("IP")
switches for application; (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.
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, the Company merged with Cascade
Communications Corp. ("Cascade") in June 1997. The Company merged with NetStar,
Inc. ("Netstar") in August 1996. These mergers have been accounted for as
poolings of interests, and the historical consolidated financial statements of
the Company for all periods prior to these mergers have been restated to include
the financial positions, results of operations and cash flows of Cascade and
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 five major financial institutions.
Short-Term Investments and Investments - The Company places its investments
with high credit, quality financial institutions. Management determines the
appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. Available-for-sale
securities are carried at acquired costs 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, 1997 and 1996, the Company's
investments are all classified as available-for-sale and consisted primarily of
obligations of the U.S. government ($22,386,000 - 1997 and $32,327,000 - 1996),
states and political subdivisions ($277,251,000 - 1997 and $156,948,000 - 1996),
U.S. corporate securities ($36,185,000 - 1997 and $14,494,000 - 1996) and
foreign debt securities ($0 - 1997 and $5,103,000 - 1996). As of December 31,
1997, $77,612,000 of the Company's investments are due between one and five
years and $23,600,000 of these securities are due between five and ten years.
Unrealized gains and losses for 1997, 1996 and 1995 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. The Company does not require collateral and has historically not
experienced significant losses on trade receivables.
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)
Furniture, Fixtures and Equipment - 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 - One customer accounted
for 14% of net sales in 1997. No customer accounted for more than 10% of net
sales in 1996 or 1995. Net sales were derived from customers based in the
following geographic areas (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
North America .................. $ 805,012 $ 576,996 $ 221,982
Europe ......................... 157,960 129,126 31,531
Asia and Pacific Basin ......... 189,675 170,747 32,499
Latin and South America ........ 14,705 13,404 1,426
------------- ------------ -----------
$1,167,352 $ 890,273 $ 287,438
============= ============ ===========
</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.
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
affect 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.
F-7
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Accounting Policies (continued)
Stock-Based Compensation. In accordance with Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"), the
Company applies Accounting Principles Bulletin ("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 (loss) and net income (loss) per share
for 1997, 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 FAS 123.
Net Income (Loss) Per Share - In 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share ("FAS 128"). FAS 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options and warrants. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Net income (loss) per share - diluted, as reported, includes
the effect of dilutive employee stock options and warrants (using the treasury
stock method). For 1997, the effect of options and warrants has been excluded as
their effect would be anti-dilutive. All net income (loss) per share amounts
presented have been restated to conform to FAS128 requirements, where
appropriate.
Recent Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, Reporting Comprehensive Income ("FAS
130"), and Statement No. 131, Disclosure about Segments of an Enterprise and
Related Information ("FAS 131"). The Company is required to adopt these
statements in fiscal year 1998. FAS 130 establishes new standards for reporting
and displaying comprehensive income and its components. FAS 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. Adoption of these
statements is expected to have no impact on the Company's consolidated financial
position, results of operations or cash flows.
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 1995 and 1996 balances have been reclassified
to conform to the 1997 presentation.
2. Balance Sheet Details (in thousands)
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Finished goods ............................... $18,053 $10,778
Products in process .......................... 15,579 7,544
Raw materials and supplies ................... 66,005 50,222
------- -------
$99,637 $68,544
======= =======
</TABLE>
F-8
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Balance Sheet Details (continued)
Furniture, Fixtures and Equipment consist of:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Computer equipment .................................... $ 87,640 $ 61,001
Laboratory equipment .................................. 47,779 22,284
Furniture and fixtures ................................ 38,009 22,524
-------- --------
173,428 105,809
Less accumulated depreciation ......................... (59,077) (32,763)
-------- --------
$114,351 $ 73,046
======== ========
</TABLE>
Accrued Liabilities consist of:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Income taxes payable .................................. $ 9,432 $ 6,298
Other accrued liabilities ............................. 57,421 35,940
Customer deposits ..................................... 22,056 22,407
------- -------
$88,909 $64,645
======= =======
</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.
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.
F-9
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Income Taxes (continued)
The following is a geographical breakdown of consolidated income (loss)
before income taxes (including intercompany revenue and expenses) by income
tax jurisdiction (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
United States .............. $(50,392) $299,355 $ 85,293
Foreign .................... 5,440 2,649 445
-------- -------- --------
Total ...................... $(44,952) $302,004 $ 85,738
======== ======== ========
</TABLE>
Significant components of the provision for income taxes attributable to
operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal ................ $ 89,899 $121,975 $34,523
State .................. 17,338 22,728 7,532
Foreign ................ 1,963 940 178
-------- -------- -------
Total current ............... 109,200 145,643 42,233
Deferred:
Federal ................ (25,381) (23,985) (8,266)
State .................. (4,397) (3,544) (1,174)
-------- -------- -------
Total deferred .............. (29,778) (27,529) (9,440)
-------- -------- -------
Total provision ............. $ 79,422 $118,114 $32,793
======== ======== =======
</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 operations is as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
US federal taxes (benefit) at statutory rate $ (15,733) $ 105,701 $ 30,009
State taxes, net of federal benefit ........ 12,941 16,545 4,476
Tax-exempt interest ........................ (4,552) (3,168) (1,097)
Foreign Sales Corporation .................. (3,465) (5,304) (714)
Costs of mergers ........................... 15,682 2,625 --
Purchased research and development ......... 74,585 -- --
Other ...................................... (36) 1,715 119
--------- --------- ---------
Total tax provision ........................ $ 79,422 $ 118,114 $ 32,793
========= ========= =========
Effective tax rate ......................... -- 39.1% 38.2%
========= ========= =========
</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 net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Reserve for uncollectible accounts ............... $ 11,147 $ 2,548
Reserve for warranties and inventories ........... 33,992 14,534
Purchased research and development ............... 7,691 673
Customer deposits ................................ 8,736 12,238
Net operating loss and tax credit carryovers
of acquired companies ......................... 12,799 8,272
Accrued expenses ................................. 6,934 2,331
Depreciation ..................................... 711 359
Other ............................................ 3,047 2,672
-------- --------
Total deferred tax assets ........................... 85,057 43,627
Valuation allowance .............................. -- (765)
-------- --------
Total net deferred tax assets ....................... $ 85,057 $ 42,862
======== ========
</TABLE>
The valuation allowance decreased by $765,000 in 1997.
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).
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, 1997 and 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.
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 1997, 1996 and
1995, 96,242, 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, 1997, options to
purchase approximately 3,660,658 shares of common stock were available for grant
under this plan.
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, 1997, no options had been granted to 10%
stockholders.
F-12
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Stockholders' Equity (continued)
In October and November 1997, the Board of Directors approved stock option
repricing programs pursuant to which all employees of the Company (excluding
certain executive officers) could elect to exchange or amend their then
outstanding employee stock options for new employee stock options having
exercise prices of $34.94 per share and $24.44 per share, respectively (equal to
the then fair market values), with excercisability generally prohibited until
January 19, 1998 and February 27, 1998, respectively. A total 13,962,994 and
15,513,687 options with exercise prices ranging from $35.13 to $113.04 per
share and $24.75 to $104.46 per share, respectively, were exchanged or amended
under these programs.
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. As of December 31, 1997, options to purchase 416,000 shares were available
for grant under this plan.
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. As of December 31, 1997, 60,000 shares
of common stock were available for grant under this plan. The Company recorded
$434,000 of compensation during 1997 relating to this plan.
The Company has adopted FAS 123, which was issued in October 1995. In
accordance with the provisions of FAS 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 FAS 123, net income (loss) and net income (loss) 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,
---------------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Net income (loss) - as reported ................... $(124,374) $183,890 $52,945
Net income (loss) - pro forma ..................... $(275,758) $118,136 $41,445
Net income (loss) per share (diluted) - as reported $ (0.66) $ 0.94 $ 0.30
Net income (loss) per share (diluted) - pro forma . $ (1.46) $ 0.60 $ 0.24
Net income (loss) per share (basic) - as reported . $ (0.66) $ 1.03 $ 0.33
Net income (loss) per share (basic) - pro forma ... $ (1.46) $ 0.66 $ 0.26
</TABLE>
The effect on net income (loss) and net income (loss) per share is not
expected to be indicative of the effects 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,
---------------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Expected volatility ............. 0.657 0.610 0.610
Risk-free interest rate ......... 6.24% 6.20% 6.05%
Expected life of options in years 3.5 3.5 3.5
Expected dividend yield ......... 0.00% 0.00% 0.00%
</TABLE>
F-13
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Stockholders' Equity (continued)
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. The following table summarizes
activity under the Company's Stock Option Plans from December 31, 1994 through
December 31, 1997 (all repricing activity is reflected as cancellations and
subsequent grants):
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
----------- --------
<S> <C> <C>
Balance at December 31, 1994 ......................... 13,491,994 $ 1.52
Granted ........................................... 15,452,002 18.19
Exercised ......................................... (2,906,739) 0.98
Cancelled ......................................... (845,872) 5.99
-----------
Balance at December 31, 1995 ......................... 25,191,385 11.66
Granted ........................................... 10,353,380 58.52
Exercised ......................................... (6,528,853) 5.71
Cancelled ......................................... (456,636) 30.85
-----------
Balance at December 31, 1996 ......................... 28,559,276 29.76
Granted ........................................... 44,654,323 33.33
Exercised ......................................... (4,775,087) 8.80
Cancelled ......................................... (35,994,523) 42.53
-----------
Balance at December 31, 1997 ......................... 32,443,989 $23.60
===========
Outstanding options exercisable at December 31, 1997 . 28,607,600 $23.47
===========
Options available for grant at December 31, 1997 ..... 4,136,658
===========
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and 1995
is $33.42, $29.06 and $9.34 per share, respectively.
F-14
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Stockholders' Equity (continued)
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -------------------------------- ------------ ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.01 -- $ 5.81 4,683,766 5.61 $ 2.56 4,004,780 $ 2.76
7.07 -- 18.81 4,580,008 6.97 13.16 3,737,772 13.05
19.00 -- 23.63 2,107,076 9.29 22.87 1,941,397 22.97
23.69 -- 24.44 15,541,785 8.88 24.44 14,254,876 24.44
24.50 -- 61.88 4,860,079 8.91 45.04 4,204,500 44.52
62.32 -- 89.46 671,275 8.53 69.30 464,275 67.55
---------- ----------
32,443,989 28,607,600
========== ==========
</TABLE>
Reserved for Future Issuance - As of December 31, 1997, the Company has
reserved the following shares of its common stock for future issuance:
<TABLE>
<S> <C>
Stock Option Plans.......................................................... 36,580,647
Employee Stock Purchase Plan................................................ 2,364,768
----------
Total shares reserved....................................................... 38,945,415
==========
</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.
Company contributions to the plan were $2,479,000 in 1997 (no contributions were
made in 1996 or 1995). Eligible employees can contribute amounts to the plan via
payroll withholdings, subject to certain limitations.
F-15
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Commitments
Leases - The Company leases office and warehouse space under noncancelable
operating leases. Rent expense on these operating leases was approximately
$9,165,000, $6,449,000 and $2,351,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consist of the following at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
Operating
Leases
-------
<S> <C>
1998.................................. $ 9,359
1999.................................. 7,732
2000.................................. 6,829
2001.................................. 6,199
2002.................................. 3,354
2003 and beyond....................... 15,215
-------
Total minimum lease payments.......... $48,688
=======
</TABLE>
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 five 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 or if the Company does not maintain
certain financial and other covenants, the Company has guaranteed a residual
value relating to the land and buildings of approximately $22.4 million.
Line of Credit - The Company has a bank line of credit to borrow up to
$25,000,000 which expires in June 1999. Interest is computed at the bank's prime
rate or 0.5% over LIBOR, at the option of the Company. The line of credit
requires the Company to maintain certain financial ratios, minimum net worth and
profitability on a quarterly basis. There were no borrowings under the line of
credit agreement during 1997.
F-16
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Business Combinations
On June 30, 1997, the Company acquired Cascade, a developer and
manufacturer of wide area network switches, in a transaction that was accounted
for as a pooling of interests. The Company issued approximately 66.3 million
shares of its common stock to Cascade stockholders in exchange for all
outstanding Cascade shares. Outstanding options to purchase Cascade common stock
were converted to options to purchase approximately 8.5 million shares of Ascend
common stock. The historical consolidated financial results of Ascend for prior
periods have been restated to include the financial position and results of
operations of Cascade. The following table shows the historical results of
Ascend and Cascade for the periods prior to the consummation of the merger of
the two entities:
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
--------- ------------------------
Revenue: 1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Ascend.................. $ 202,412 $549,297 $152,604
Cascade................. 90,328 340,976 134,834
--------- -------- --------
Total................. $ 292,740 $890,273 $287,438
========= ======== ========
- ---------------------------------------------------------------------
Net Income (loss):
Ascend.................. $ 35,093 $113,111 $ 27,535
Cascade................. (198,334) 70,779 25,410
--------- -------- --------
Total................. $(163,241) $183,890 $ 52,945
========= ======== ========
</TABLE>
In February 1997, the Company acquired all of the outstanding stock of
InterCon Systems Corporation, a developer of remote access client software
products for both corporate and ISP markets, in a transaction that was accounted
for as a purchase. The purchase price consisted of a cash payment of $12.0
million, the assumption of approximately $9.0 million of liabilities and
transaction costs of approximately $600,000. The total purchase price of $21.6
million was allocated to the net assets acquired based upon their estimated fair
market value. The estimated fair value of tangible net assets acquired was
$600,000. In addition, $18.0 million of the purchase price was allocated to
purchased research and development that had not reached technological
feasibility and that had no alternative future use, and $3.0 million was
allocated to purchased software.
On April 1, 1997, the Company acquired Whitetree, Inc. ("Whitetree"), a
developer and manufacturer of high speed ATM switching products, in a
transaction that was accounted for as a pooling of interests. The Company issued
approximately 1.3 million shares of its common stock to Whitetree shareholders
in exchange for all outstanding Whitetree shares. In addition, the Company
assumed all outstanding Whitetree stock options to purchase approximately 99,000
shares of the Company's stock. The results of operations of Whitetree, 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
combination have not been restated to reflect the financial results of Whitetree
as these results were not material to the Company.
F-17
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Business Combinations (continued)
On January 28, 1997, Cascade completed its acquisition of Sahara Networks,
Inc. ("Sahara"), a privately held developer of scaleable high-speed broadband
access products, in a transaction that was accounted for as a purchase. Cascade
issued approximately 3.4 million shares of Cascade common stock (or 2.4 million
equivalent shares of the Company's common stock after exchange ratio) in
exchange for all the outstanding shares of Sahara. In addition, Cascade assumed
all outstanding Sahara stock options to purchase approximately 400,000 shares of
Cascade common stock. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the purchase price of approximately $219.0
million was allocated to the net assets acquired based upon their estimated fair
market value. The estimated fair value of the tangible net assets acquired was
approximately $6.0 million. In addition, approximately $213.0 million of the
purchase price was allocated to in-process research and development that had not
reached technological feasibility and that had no alternative future use.
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 3.9
million shares of its common stock to NetStar shareholders in exchange for all
outstanding NetStar shares. The Company`s historical consolidated financial
statements for prior periods have been restated to reflect the financial
position and results of operations of NetStar.
9. Litigation
The Company and various of its current and former officers and directors
are parties to a number of related lawsuits 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. The lawsuits, which are substantially identical,
allege that the defendants violated the federal 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.
All of 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.
F-18
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
On April 18, 1997, the Company received a claim and request for royalties
alleging patent infringement on four separate patents. Subsequently, the claim
and request for royalties was amended to include four additional patents. The
Company is currently investigating the claims of such infringement and thus the
ultimate outcome of this claim cannot yet be determined. No provision for any
liability that may result from the claim has been recognized in the 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.
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
10. 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, 1997
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net sales ............................................ $ 292,740 $ 311,693 $ 270,372 $ 292,547
Gross profit ......................................... 190,353 203,016 173,191 187,222
Operating income (loss) .............................. (137,745) (56,807) 57,511 69,060
Net income (loss) .................................... (163,241) (48,837) 40,128 47,576
Net income (loss) per share - diluted ................ (0.88) (0.26) 0.20 0.24
Net income (loss) per share - basic .................. (0.88) (0.26) 0.21 0.25
1996
Net sales ............................................ $ 148,065 $ 205,581 $ 248,836 $ 287,791
Gross profit ......................................... 95,717 132,722 161,907 188,182
Operating income ..................................... 44,780 67,903 72,851 99,284
Net income ........................................... 29,821 44,424 45,157 64,488
Net income per share - diluted ....................... 0.15 0.23 0.23 0.32
Net income per share - basic ......................... 0.17 0.25 0.25 0.35
</TABLE>
The net income (loss) per share amounts have been restated to comply with
FAS128.
F-19
<PAGE>
ASCEND COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<TABLE>
<CAPTION>
Balances at Charged to Balances at
Beginning Costs and End of
of Period Expenses Deductions Period
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997 $ 2,632 $ 9,300 $ (632) $11,300
======= ======= ======= =======
Year Ended December 31, 1996 $ 1,202 $ 1,435 $ (5) $ 2,632
======= ======= ======= =======
Year Ended December 31, 1995 $ 775 $ 538 $ (111) $ 1,202
======= ======= ======= =======
</TABLE>
<PAGE>
3. Exhibits
No. Description
-------- -------------------------------------------------------
/(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 Idenmnity 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.
/(6)/ 10.13 Ascend Communications, Inc. 1996 Restricted Stock Plan.
/(8)/ 10.14 Cascade Communications Corp. Amended and Restated 1991 Stock
Plan.
<PAGE>
3. Exhibits (continued)
No. Description
----------- ----------------------------------------------------
/(9)/ 10.15 Cascade Communications Corp. 1994 Employee Stock
Purchase Plan.
/(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.
10.20 Loan Agreement and related agreements, dated November
30, 1995, by and between the Registrant and Wells
Fargo Bank of California, as ammended by the first
ammendment thereto, date October 15, 1997.
11.1 Statement regarding computation of earnings (loss)
per share
21.1 List of Subsidiaries of Ascend Communication
23.1 Consent of Independent Auditors
23.2 Consent of Independent Accountants
27.0 Financial Data Schedule.
/(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 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.
<PAGE>
3. Exhibits (continued)
No. Description
------- --------------------------------------------------------
/(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 Commission (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 references 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended
December 31, 1997.
(c) Exhibits
See Item 14(a) 3 above.
(d) Financial Statement Schedule
See Item 14(a) 1 and 2 above.
<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 March 31, 1998 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 Michael F.G. Ashby, 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:
DATE March 31, 1998 by /s/ Mory Ejabat
-------------- -----------------------------------
Mory Ejabat, President, Chief
Executive Officer and Director
DATE March 31, 1998 by /s/ Michael F.G. Ashby
-------------- -----------------------------------
Michael F.G. Ashby, Executive Vice
President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
DATE March 31, 1998 by /s/ Michael J. Johnson
-------------- -----------------------------------
Michael J. Johnson, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
DATE March 31, 1998 by /s/ Daniel E. Smith
-------------- -----------------------------------
Daniel E. Smith, Executive Vice
President and General Manager, Core
Systems and Director
DATE March 31, 1998 by /s/ Robert K. Dahl
-------------- -----------------------------------
Robert K. Dahl
Director
DATE March 31, 1998 by /s/ Roger L. Evans
-------------- -----------------------------------
Roger L. Evans
Director
DATE March 31, 1998 by /s/ James P. Lally
-------------- -----------------------------------
James P. Lally
Director
<PAGE>
SIGNATURES (continued):
DATE March 31, 1998 by /s/ Richard Kramlich
-------------- -------------------------------------
C. Richard Kramlich
Director
DATE March 31, 1998 by /s/ Betsy S. Atkins
-------------- -------------------------------------
Betsy S. Atkins
Director
DATE March 31, 1998 by /s/ Martin L. Schoffstall
-------------- -------------------------------------
Martin L. Schoffstall
Director
<PAGE>
ASCEND COMMUNICATIONS, INC.
INDEX TO EXHIBITS
No. Description
----------- --------------------------------------------------------
/(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.
<PAGE>
ASCEND COMMUNICATIONS, INC.
INDEX TO EXHIBITS (continued)
No. Description
----------- --------------------------------------------------------
/(9)/ 10.15 Cascade Communications Corp. 1994 Employee Stock
Purchase Plan.
/(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.
10.20 Loan Agreement and related agreements, dated November
30, 1995, by and between the Registrant and Wells Fargo
Bank of California, as ammended by the first ammendment
thereto, dated October 15, 1997.
11.1 Statement regarding computation of earnings (loss) per
share.
21.1 List of Subsidiaries of Ascend Communication
23.1 Consent of Independent Auditors
23.2 Consent of Independent Accountants
27.0 Financial Data Schedule.
/(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.
<PAGE>
ASCEND COMMUNICATIONS, INC.
INDEX TO EXHIBITS (continued)
No. Description
----------- -------------------------------------------------------
/(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 Commission (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.
<PAGE>
EXHIBIT 10.20
REVOLVING LINE OF CREDIT NOTE
$25,000,000.00 Walnut Creek, California
October 15, 1997
FOR VALUE RECEIVED, the undersigned ASCEND COMMUNICATIONS, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at Mt. Diablo Regional Commercial Banking
Office, 1320 Willow Pass Road, Ste 440, Concord, California, or at such other
place as the holder hereof may designate, in lawful money of the United States
of America and in immediately available funds, the principal sum of Twenty Five
Million Dollars ($25,000,000.00), or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance from the date
of its disbursement (computed on the basis of a 360-day year, actual days
elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in
effect from time to time, or (ii) at a fixed rate per annum determined by Bank
to be one half of one percent (1/2%) above LIBOR published on the first day of
the applicable Fixed Rate Term. When interest is determined in relation to the
Prime Rate, each change in the rate of interest hereunder shall become effective
on the date each Prime Rate change is announced within Bank. With respect to
each LIBOR option selected hereunder, Bank is hereby authorized to note the
date, principal amount, interest rate and Fixed Rate Term applicable thereto and
any payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to this Note, which notations
shall be prima facie evidence of the accuracy of the information noted.
A. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each:
1. "Business Day" means any day except a Saturday, Sunday or any other day
designated as a holiday under Federal or California statute or regulation.
2. "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), three (3) or six (6) months, as designated by Borrower,
during which all or a portion of the outstanding principal balance of this Note
bears interest determined in relation to Bank's LIBOR; provided however, that no
Fixed Rate Term may be selected for a principal amount less than One Hundred
Thousand Dollars ($100,000.00); and provided further, that no Fixed Rate Term
shall extend beyond the
<PAGE>
scheduled maturity date hereof. If any Fixed Rate Term would end on a day
which is not a Business Day, then such Fixed Rate Term shall be extended to
the next succeeding Business Day.
3. "LIBOR" means the rate published in the Money Rates Section of the Wall
Street Journal as the one (1), three (3) or six (6) month LIBOR (as applicable
to the Fixed Rate Term in question) without regard to any reference in said
Money Rates Section to contracts entered into subsequent to the date of
publication.
4. "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office in San Francisco as its Prime
Rate, with the understanding that the Prime Rate is one of Bank's base rates and
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto, and is evidenced by the recording thereof
after its announcement in such internal publication or publications as Bank may
designate.
B. INTEREST:
1. Payment of Interest. Interest accrued on this Note shall be payable on
-------------------
the last day of each month, commencing November 30, 1997.
2. Selection of Interest Rate Options. At any time any portion of this
----------------------------------
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or in
relation to LIBOR for a new Fixed Rate Term designated by Borrower. At any time
any portion of this Note bears interest determined in relation to the Prime
Rate, Borrower may convert all or a portion thereof so that it bears interest
determined in relation to LIBOR for a Fixed Rate Term designated by Borrower.
At the time each advance is requested hereunder or Borrower wishes to select the
LIBOR option for all or a portion of the outstanding principal balance hereof,
and at the end of each Fixed Rate Term, Borrower shall give Bank notice
specifying (a) the interest rate option selected by Borrower, (b) the principal
amount subject thereto, and (c) if the LIBOR option is selected, the length of
the applicable Fixed Rate Term. Any such notice may be given by telephone so
long as, with respect to each LIBOR selection, (i) Bank receives written
confirmation from Borrower not later than three (3) Business Days after such
telephone notice is given, and (ii) such notice is given to Bank prior to 10:00
a.m., California time, on the first day of the Fixed Rate Term. For each LIBOR
option requested hereunder, Bank will quote the applicable fixed rate to
Borrower at approximately 10:00 a.m., California time, on the first day of the
Fixed Rate Term. If Borrower does not immediately accept the rate quoted by
Bank, any subsequent acceptance by Borrower shall be subject to a
-2-
<PAGE>
redetermination by Bank of the applicable fixed rate; provided however, that
if Borrower fails to accept any such rate by 11:00 a.m., California time, on
the Business Day such quotation is given, then the quoted rate shall expire
and Bank shall have no obligation to permit a LIBOR option to be selected on
such day. If no specific designation of interest is made at the time any
advance is requested hereunder or at the end of any Fixed Rate Term, Borrower
shall be deemed to have made a Prime Rate interest selection for such advance
or the principal amount to which such Fixed Rate Term applied.
3. Additional LIBOR Provisions. If Bank at any time shall determine that
---------------------------
for any reason adequate and reasonable means do not exist for ascertaining
LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice
is given and until such notice has been withdrawn by Bank, then (i) no new LIBOR
option may be selected by Borrower, and (ii) any portion of the outstanding
principal balance hereof which bears interest determined in relation to Bank's
LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall
bear interest determined in relation to the Prime Rate.
4. Default Interest. From and after the maturity date of this Note, or
----------------
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to two percent (2%) above
the rate of interest from time to time applicable to this Note.
C. BORROWING AND REPAYMENT:
1. Borrowing and Repayment. Borrower may from time to time during the
-----------------------
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon from time to time
by the holder. The outstanding principal balance of this Note shall be due and
payable in full on June 30,1999.
2. Advances. Advances hereunder, to the total amount of the principal sum
--------
stated above, may be made by the holder at the oral or written request of (a)
Mory Ejabat or Michael Ashby or Michael J. Johnson, any one acting alone, who
are authorized to request advances and direct the disposition of any advances
until written notice of the revocation of such authority is received by
-3-
<PAGE>
the holder at the office designated above, or (b) any person, with respect to
advances deposited to the credit of any account of any Borrower with the
holder, which advances, when so deposited, shall be conclusively presumed to
have been made to or for the benefit of each Borrower regardless of the fact
that persons other than those authorized to request advances may have
authority to draw against such account. The holder shall have no obligation to
determine whether any person requesting an advance is or has been authorized
by any Borrower.
3. Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
Bank's LIBOR, with such payments applied to the oldest Fixed Rate Term first.
D. EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of November 30,
1995, as amended from time to time (the "Credit Agreement"). Any default in the
payment or performance of any obligation under this Note, or any defined event
of default under the Credit Agreement, shall constitute an "Event of Default"
under this Note.
E. MISCELLANEOUS:
1. Remedies. Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are expressly
waived by each Borrower, and the obligation, if any, of the holder to extend any
further credit hereunder shall immediately cease and terminate. Each Borrower
shall pay to the holder immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel fees and all allocated costs of the holder's in-house
counsel), incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, and including any of the foregoing incurred in connection with any
bankruptcy proceeding relating to any Borrower.
2. Regulatory Costs and Reserve Percentages. Upon Bank's demand, Borrower
----------------------------------------
shall pay to Bank, in addition to all other
-4-
<PAGE>
amounts which may be, or become, due and payable under this Note any and all
future, supplemental, emergency or other changes in Reserve Percentages (as
defined below), assessment rates imposed by the Federal Deposit Insurance
Corporation, or similar requirements or costs imposed by any domestic or
foreign governmental authority and related in any manner to LIBOR
(collectively, "Regulatory Costs"), to the extent they are not internalized by
calculation of LIBOR. Further, at Bank's option, LIBOR shall be automatically
adjusted by adjusting the Reserve Percentage, as determined by Bank in its
prudent banking judgment, from the date of imposition (or subsequent date
selected by Bank) of any such Regulatory Costs. Bank shall give Borrower
notice of any Regulatory Costs as soon as practicable after their occurrence,
but Borrower shall be liable for any Regulatory Costs regardless of whether or
when notice is so given. As used herein, "Reserve Percentage" shall mean at
any time the percentage announced within Bank as the reserve percentage under
Regulation D for loans and obligations making reference to LIBOR for a Fixed
Rate Term or time remaining in a Fixed Rate Term, as appropriate; the Reserve
Percentage shall be based on Regulation D or other regulations from time to
time in effect concerning reserves for Eurocurrency Liabilities from related
institutions as though Bank were in a net borrowing position, as promulgated
by the Board of Governors of the Federal Reserve System or its successor.
3. Indemnification. Borrower hereby agrees to indemnify and hold Bank
---------------
free and harmless from any loss or expense (including, without limitation, any
loss or expense incurred by reason of the liquidation or redeployment of
deposits or other funds acquired by Bank to fund or maintain any LIBOR based
advances which Bank may incur as a result of (a) a default by Borrower in
payment when due of the principal amount or interest on any LIBOR based advance,
(b) Borrower's failure to make a borrowing, conversion or extension with respect
to a LIBOR based advance after making a request therefor, (c) a prepayment
(whether mandatory or otherwise) of a LIBOR based advance prior to the
expiration of a related Fixed Rate Term, and (d) any demand for payment
following default of a LIBOR Loan by Bank prior to the expiration of the related
Fixed Rate Term. At the election of Bank such losses shall be conclusively
deemed to consist of an amount equal to the sum of:
(a) the interest that would have been received from Borrower on the
amounts to be reemployed during the Fixed Rate Term (or remaining
portion thereof) in question had Borrower not prepaid, repaid or
failed to borrow, convert or extend, such funds, as the case may
be, less
(b) the return which Bank could have obtained had it placed such
funds on deposit in the interbank dollar market selected by Bank
in its sole
-5-
<PAGE>
discretion on the date of such prepayment, repayment or failure
to borrow, convert or extend, as the case may be, and such
funds had remained on deposit until the end of the relevant
Fixed Rate Term.
4. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California, except to the extent Bank
has greater rights or remedies under Federal law, whether as a national bank or
otherwise, in which case such choice of California law shall not be deemed to
deprive Bank of any such rights and remedies as may be available under Federal
law.
ASCEND COMMUNICATIONS, INC.
By: /s/ Michael Ashby
----------------------------
Michael Ashby
Executive Vice President and
Chief Financial Officer
-6-
<PAGE>
FOREIGN CURRENCY NOTE
$__________ Dollar Oakland, California
equivalent of _______________. ________, 199_
FOR VALUE RECEIVED, the undersigned ASCEND COMMUNICATIONS, INC. promises to
pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at the
location specified in each Notice of Borrowing, or at such other place as the
holder hereof may designate, in lawful money of _______________________ and in
immediately available funds, the Dollar equivalent principal sum of
_______________________ Dollars ($___________) outstanding, with interest
thereon, to be computed on the outstanding principal balance hereof from the
date of disbursement (computed on the basis of a 360-day year, actual days
elapsed) at a fixed rate per annum determined by Bank to be one-half percent
(.50%) above LIBOR published on the first day of the applicable Term.
A. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each:
1. "Business Day" means any day except a Saturday, Sunday, any other day
designated as a holiday under Federal or California statute or regulation or any
day on which banks in _______________ are not open for the regular conduct of
business.
2. "LIBOR" means the rate published in the Money Rates Section of the Wall
Street Journal as the one (1), three (3) or six (6) month LIBOR (as applicable
to the Term in question) without regard to any reference in said Money Rates
Section to contracts entered into subsequent to the date of publication.
3. "Notice of Borrowing" means a notice of borrowing in the form of
Exhibit A attached hereto, duly completed and executed.
4. "Term" means with respect to each Advance hereunder, a period
commencing on a Business Day and terminating one, three or six months
thereafter, as selected by Borrower, provided however, that no Term shall extend
beyond the scheduled maturity date of the Line of Credit. If the last day of a
Term falls on a day which is not a Business Day, the Term shall be extended to
the next Business Day.
<PAGE>
Terms used herein and defined in the Credit Agreement have the meanings
herein ascribed to them in the Credit Agreement.
B. INTEREST/PRINCIPAL:
1. Payment of Interest and Principal. Interest accrued on this Note,
---------------------------------
together with the principal amount of this Note, shall be due and payable in
full on the last day of the Term selected by Borrower.
2. Payments. All payments to be made and all proceeds received by Bank
--------
under this Note shall be in immediately available funds in the Foreign Currency
denominated above, without any setoff or counterclaim and free and clear of, and
without deduction for, any and all present and future taxes, duties,
withholdings, fees, levies, imposts or any other charges of any nature
whatsoever. Without reducing any amount which Bank is to receive under this
Note, Borrower, for and on behalf of Bank, agrees to pay or cause to be paid
directly to the appropriate governmental authorities, or to reimburse Bank for
the cost of, any and all present and future taxes, withholdings, duties, fees,
levies, imposts and other charges of any nature whatsoever, including, but not
limited to, United States of America interest equalization taxes, if any, levied
or imposed by any governmental authority on or with regard to any aspect of the
transaction contemplated in or by this Note, except such taxes as may be
measured by or imposed upon Bank's net income by, or franchise taxes imposed
upon Bank by, the United States of America or the State of California. Any
stamp tax required for this transaction, whether at execution or subsequently,
shall be paid by Borrower.
3. Withholding. If Borrower is prohibited by any law of any jurisdiction
-----------
from making payments under this Note unless a tax, withholding, duty, fee or
other charge (hereinafter collectively called "Withholding Taxes") is deducted
or withheld therefrom, or from reimbursing Bank for any tax, duty, fee, levy or
impost or other charge as provided above, Borrower shall pay to Bank or any
other holder of this Note as of the date of payment of any Withholding Taxes,
such additional amounts as may be necessary in order that the net amount
received by Bank or any other holder of this Note after such deduction or
withholding shall equal the amount which would have been received if such
deduction or withholding was not required. Borrower shall confirm that all such
Withholding Taxes imposed on this transaction or on any payments made or
received by Bank under this Note shall have been paid to the appropriate taxing
authorities by delivering to Bank within thirty (30) days after payment of any
such Withholding Taxes, valid and properly completed official tax receipts or
notarized copies of such
<PAGE>
receipts together with any other evidence requested by Bank to document such
payment.
4. Additional LIBOR Rate Provision. If any law, treaty, rate, regulation
-------------------------------
or determination of a court or governmental authority or any change therein
makes it unlawful for Bank to (i) make or (ii) maintain a Foreign Currency Loan
under this Note, then, in the former case, any obligation of Bank to make such
Foreign Currency Loan shall be cancelled, and, in the latter case, Borrower
shall immediately upon demand by Bank prepay all principal and interest, fees,
costs and expenses owing with respect to such Foreign Currency Loans, including,
without limitation amounts due under paragraph B.5(a) hereof.
5. Additional Provisions.
---------------------
(a) The Borrower hereby agrees to indemnify and hold the Bank free and
harmless from any loss or expense (including, without limitation, any loss or
expense incurred by reason of hedging, funding or breakage in connection with
Foreign Currency Loan hereunder and/or the liquidation or redeployment of
deposits or other funds acquired by Bank to fund or maintain any advance bearing
interest in relation to LIBOR which Bank may incur as a result of (i) the
failure by the Borrower to accept or complete a borrowing after making a request
therefor, (ii) a prepayment in whole or in part of this Note prior to the
expiration of the selected Term; or (iii) the failure to pay principal and
interest on this Note in full on the last day of the selected Term. At the
election of Bank such losses shall be conclusively deemed to consist of an
amount equal to the sum of:
(a) the interest that would have been received from Borrower on the
amounts to be reemployed during the Term (or remaining portion
thereof) in question had Borrower not prepaid, repaid or failed
to borrow, such funds, as the case may be, less
(b) the return which Bank could have obtained had it placed such
funds on deposit in the interbank dollar market selected by Bank
in its sole discretion on the date of such prepayment, repayment
or failure to borrow, as the case may be, and such funds had
remained on deposit until the end of the relevant Term.
Bank shall deliver to the Borrower a written statement of any amounts due
Bank as provided above, and such statement, in the absence of manifest error,
shall be fixed and binding on both parties. Borrower agrees to pay all such
costs and expenses incurred by Bank on demand by Bank.
-3-
<PAGE>
(c) Upon Bank's demand, Borrower shall pay to Bank, in addition to all
other amounts which may be, or become, due and payable under this Note any and
all future, supplemental, emergency or other changes in Reserve Percentages (as
defined below), assessment rates imposed by the Federal Deposit Insurance
Corporation, or similar requirements or costs imposed by any domestic or foreign
governmental authority and related in any manner to LIBOR (collectively,
"Regulatory Costs"), to the extent they are not internalized by calculation of
LIBOR. Further, at Bank's option, LIBOR shall be automatically adjusted by
adjusting the Reserve Percentage, as determined by Bank in its prudent banking
judgment, from the date of imposition (or subsequent date selected by Bank) of
any such Regulatory Costs. Bank shall give Borrower notice of any Regulatory
Costs as soon as practicable after their occurrence, but Borrower shall be
liable for any Regulatory Costs regardless of whether or when notice is so
given. As used herein, "Reserve Percentage" shall mean at any time the
percentage announced within Bank as the reserve percentage under Regulation D
for loans and obligations making reference to LIBOR for a Fixed Rate Term or
time remaining in a Fixed Rate Term, as appropriate; the Reserve Percentage
shall be based on Regulation D or other regulations from time to time in effect
concerning reserves for Eurocurrency Liabilities from related institutions as
though Bank were in a net borrowing position, as promulgated by the Board of
Governors of the Federal Reserve System or its successor.
6. Default Interest. From and after the last day of the selected Term, or
----------------
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to two percent (2%) above
the rate of interest from time to time applicable to this Note.
C. BORROWING AND REPAYMENT:
1. Advances. The proceeds of this Note shall be deposited by Bank into
--------
the account designated in the Notice of Borrowing.
2. Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
3. Prepayment. Borrower may not prepay principal on this Note, unless
----------
required to do so under Section B.4 or E.1. of this Note. All prepayments are
subject to the terms of Section B.5(a).
-4-
<PAGE>
D. EVENTS OF DEFAULT:
This Note is a Foreign Currency Note made pursuant to and is subject to the
terms and conditions of the Credit Agreement dated November 30, 1995 between
Bank and Borrower, as amended, renewed or restated from time to time. Any
default in the payment or performance of any obligation, or any defined event of
default, under said Credit Agreement shall constitute an "Event of Default"
under this Note.
E. MISCELLANEOUS:
1. Remedies. Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, may, subject to Section 6.2 of the Credit
Agreement, declare all sums of principal and interest outstanding hereunder to
be immediately due and payable without presentment, demand, protest or notice of
dishonor, all of which are expressly waived by Borrower, and the obligation, if
any, of the holder to extend any further credit hereunder shall immediately
cease and terminate. Borrower shall pay to the holder immediately upon demand
the full amount of all payments, advances, charges, costs and expenses,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of the holder's in-house counsel), incurred by the holder in
connection with the enforcement of the holder's rights and/or the collection of
any amounts which become due to the holder under this Note, and the prosecution
or defense of any action in any way related to this Note, including without
limitation, any action for declaratory relief, and including any of the
foregoing incurred in connection with any bankruptcy proceeding relating to
Borrower.
2. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California, except to the extent Bank
has greater rights or remedies under Federal law, whether as a national bank or
otherwise, in which case such choice of California law shall not be deemed to
deprive Bank of any such rights and remedies as may be available under Federal
law, without, in either case, giving effect to the principles of choice of law
of the State of California or Federal law.
3. Determination. The determination of the Dollar equivalent principal
-------------
balance of this Note shall be made from time to time by Bank on the basis of the
generally prevailing spot rate of exchange in San Francisco, California, at 11
a.m. on each
-5-
<PAGE>
date of determination, for the sale against Dollars of cable transfers of the
applicable Foreign Currency from San Francisco to the applicable foreign
country.
ASCEND COMMUNICATIONS, INC.
By: __________________________
Title: _____________________
-6-
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into
as of October 15, 1997, by and between ASCEND COMMUNICATIONS, INC., a Delaware
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
--------
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of November 30, 1995, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.1(a) is hereby amended (a) by deleting "November 30, 1997" as
the last day on which Bank will make advances under the Line of Credit, and by
substituting for said date "June 30, 1999," and (b) by deleting "Fifteen Million
Dollars ($15,000,000.00)" as the maximum principal amount available under the
Line of Credit, and by substituting for said amount "Twenty-Five Million Dollars
($25,000,000.00)," with such changes to be effective upon the execution and
delivery to Bank of a promissory note substantially in the form of Exhibit A
attached hereto (which promissory note shall replace and be deemed the Line of
Credit Note defined in and made pursuant to the Credit Agreement) and all other
contracts, instruments and documents required by Bank to evidence such change.
2. Section 1.1(b) is hereby amended by deleting "Fifteen Million Dollars
($15,000,000.00)" as the maximum principal amount available under the Foreign
Currency Subfeature, and by substituting for said amount "Twenty-Five Million
Dollars ($25,000,000.00," with such changes to be effective upon the execution
and delivery to Bank of a promissory note substantially in the form of Exhibit B
attached hereto (which promissory note shall replace and be deemed the form of
Foreign Currency Note defined in and made pursuant to the Credit Agreement) and
all other contracts, instruments and documents required by Bank to evidence such
change.
-1-
<PAGE>
3. The following is hereby added to the Credit Agreement as Section 1.1(c),
and section 1.1(c) shall be renumbered as Section 1.1(d), respectively:
"(c) Letter of Credit Subfeature. As a subfeature under the
---------------------------
Line of Credit, Bank agrees from time to time during the term thereof
to issue standby letters of credit for the account of Borrower to
support obligations of Borrower incurred in the ordinary course of
business (each, a "Letter of Credit" and collectively, "Letters of
Credit"); provided however, that the form and substance of each Letter
of Credit shall be subject to approval by Bank, in its sole
discretion; and provided further, that the aggregate undrawn amount of
all outstanding Letters of Credit shall not at any time exceed Ten
Million dollars ($10,000,000.00). No Letter of Credit shall have an
expiration date subsequent to the maturity date of the Line of Credit.
The undrawn amount of all Letters of Credit shall be reserved under
the Line of Credit and shall not be available for borrowings
thereunder. Each Letter of Credit shall be subject to the additional
terms and conditions of the Letter of Credit Agreement and related
documents, if any, required by Bank in connection with the issuance
thereof (each, a "Letter of Credit Agreement" and collectively,
"Letter of Credit Agreements"). Each draft paid by Bank under a
Letter of Credit shall be deemed an advance under the Line of Credit
and shall be repaid by Borrower in accordance with the terms and
conditions of this Agreement applicable to such advances; provided
however, that if advances under the line of Credit are not available,
for any reason, at the time any draft is paid by Bank, than Borrower
shall immediately pay to Bank the full amount of such draft, together
with interest thereon from the date such amount is paid by Bank to the
date such amount is fully repaid by Borrower, at the rate of interest
applicable to advances under the Line of Credit. In such event
Borrower agrees that Bank, in its sole discretion, may debit any
demand deposit account maintained by Borrower with Bank for the amount
of any such draft."
4. Section 1.2(c) is hereby deleted in its entirety, and the following
substituted therefor:
"(c) Letter of Credit Fees. Borrower shall pay to Bank (i) fees
---------------------
upon the issuance of each Letter of Credit equal to fifty-five
hundredths of one percent (.55%) per annum (computed on the basis of a
360-day year, actual days elapsed) of the face amount
-2-
<PAGE>
thereof, and (ii) fees upon the payment or negotiation by Bank of
each draft under any Letter of Credit and fees upon the occurrence
of any other activity with respect to any Letter of Credit
(including without limitation, the transfer, amendment or
cancellation of any Letter of Credit) determined in accordance with
Bank's standard fees and charges then in effect for such activity."
5. Section 4.9(a) is hereby deleted in its entirety, and the following
substituted therefor:
"(a) Tangible Net Worth not at any time less than $300,000.00,
with "Tangible Net Worth" defined as the aggregate of total
stockholders' equity less goodwill."
6. Section 4.9(b) is hereby deleted in its entirety, and the following
substituted therefor:
"(b) Total Liabilities divided by Tangible Net Worth not at any
time greater than 0.75 to 1.00, with "Total Liabilities" defined as
the aggregate of current liabilities and non-current liabilities, and
with "Tangible Net Worth" as defined above."
7. Section 4.9(c) is hereby deleted in its entirety, and the following
substituted therefor:
"(c) Quick Ratio not at any time less than 1.00 to 1.00, with
"Quick Ratio" defined as the aggregate of unrestricted cash,
unrestricted marketable securities and receivables convertible into
cash divided by total current liabilities plus the outstanding
principal balance of the Line of Credit at the time of determination
of the Quick Ratio."
8. Sections 4.9(d) and (f) are deleted without substitution. Sections
4.9(e) remains in effect.
9. Section 5.2 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.2. ACQUISITIONS, LEASES AND CAPITAL EXPENDITURES.
Acquire all or substantially all of the assets or stock of any other
entity or make any additional
-3-
<PAGE>
investment in fixed assets in any fiscal year or incur new
obligations for the lease or hire of real or personal property
requiring payments in any fiscal year in excess of an aggregate of
$250,000,000.00, provided however, that for the purpose of this
covenant, payments in the form of Borrower's stock shall be excluded
in computing the payments permitted in a fiscal year. Notify Bank of
any transaction or series of related transactions of the types
referenced in this Section 5.2 requiring payment by Borrower of
$100,000,000.00 or more, subject to the "provided, however" clause
above."
10. Section 5.3 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or
permit to exist any indebtedness or liabilities resulting from
borrowings, loans or advances, whether secured or unsecured, matured
or unmatured, liquidated or unliquidated, joint or several, except (a)
the liabilities of Borrower to Bank, and (b) any other liabilities of
Borrower existing as of, and disclosed to Bank prior to, the date
hereof; (c) trade debt incurred in the ordinary course of business,
and (d) other debt not to exceed $100,000,000.00 outstanding in the
aggregate incurred for the purpose of acquiring equipment and/or real
estate."
11. The reference in Section 5.7 to "September 30, 1995" is hereby amended
to read "September 30, 1997".
12. The references in Sections 6.1(d) and (e) to "25,000,000.00" are
hereby amended to read "$50,000,000.00".
13. The following is hereby added to the Credit Agreement as Section 7.10:
"SECTION 7.10. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall
-----------
be resolved by binding arbitration (except as set forth in (e) below)
in accordance with the terms of this Agreement. A "Dispute" shall
mean any action, dispute, claim or controversy of any kind, whether in
contract or tort, statutory
-4-
<PAGE>
or common law, legal or equitable, now existing or hereafter arising
under or in connection with, or in any way pertaining to, any of the
Loan Documents, or any past, present or future extensions of credit
and other activities, transactions or obligations of any kind
related directly or indirectly to any of the Loan Documents,
including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other
remedies pursuant to any of the Loan Documents. Any party may by
summary proceedings bring an action in court to compel arbitration
of a Dispute. Any party who fails or refuses to submit to
arbitration following a lawful demand by any other party shall bear
all costs and expenses incurred by such other party in compelling
arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be
---------------
administered by the American Arbitration Association ("AAA") or such
other administrator as the parties shall mutually agree upon in
accordance with the AAA Commercial Arbitration Rules. All Disputes
submitted to arbitration shall be resolved in accordance with the
Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the
Loan Documents. The arbitration shall be conducted at a location in
California selected by the AAA or other administrator. If there is
any inconsistency between the terms hereof and any such rules, the
terms and procedures set forth herein shall control. All statutes of
limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to
matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court
having jurisdiction; provided however, that nothing contained herein
shall be deemed to be a waiver by any party that is a bank of the
protections afforded to it under 12 U.S.C. (S)91 or any similar
applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure.
----------------------------------------------------------
No provision hereof shall limit the right of any party to exercise
self-help remedies such as setoff, foreclosure against or sale of any
real or personal property collateral
-5-
<PAGE>
or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a
court of competent jurisdiction before, after or during the pendency
of any arbitration or other proceeding. The exercise of any such
remedy shall not waive the right of any party to compel arbitration
or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators
--------------------------------------------
must be active members of the California State Bar or retired judges
of the state or federal judiciary of California, with expertise in the
substantive laws applicable to the subject matter of the Dispute.
Arbitrators are empowered to resolve Disputes by summary rulings in
response to motions filed prior to the final arbitration hearing.
Arbitrators (i) shall resolve all Disputes in accordance with the
substantive law of the state of California, (ii) may grant any remedy
or relief that a court of the state of California could order or grant
within the scope hereof and such ancillary relief as is necessary to
make effective any award, and (iii) shall have the power to award
recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules
of Civil Procedure or other applicable law. Any Dispute in which the
amount in controversy is $5,000,000 or less shall be decided by a
single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By
submission to a single arbitrator, each party expressly waives any
right or claim to recover more than $5,000,000. Any Dispute in which
the amount in controversy exceeds $5,000,000 shall be decided by
majority vote of a panel of three arbitrators; provided however, that
all three arbitrators must actively participate in all hearings and
deliberations.
(e) Judicial Review. Notwithstanding anything herein to the
---------------
contrary, in any arbitration in which the amount in controversy
exceeds $25,000,000, the arbitrators shall be required to make
specific, written findings of fact and conclusions of law. In such
arbitrations (i) the arbitrators shall not have the power to make any
award which is not supported by
-6-
<PAGE>
substantial evidence or which is based on legal error, (ii) an award
shall not be binding upon the parties unless the findings of fact
are supported by substantial evidence and the conclusions of law are
not erroneous under the substantive law of the state of California,
and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or
correcting an award the right to judicial review of (A) whether the
findings of fact rendered by the arbitrators are supported by
substantial evidence, and (B) whether the conclusions of law are
erroneous under the substantive law of the state of California.
Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial
evidence and not based on legal error under the substantive law of
the state of California.
(f) Real Property Collateral; Judicial Reference.
--------------------------------------------
Notwithstanding anything herein to the contrary, no Dispute shall be
submitted to arbitration if the Dispute concerns indebtedness secured
directly or indirectly, in whole or in part, by any real property
unless (i) the holder of the mortgage, lien or security interest
specifically elects in writing to proceed with the arbitration, or
(ii) all parties to the arbitration waive any rights or benefits that
might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of
the parties, and all mortgages, liens and security interests securing
such indebtedness and obligations, shall remain fully valid and
enforceable. If any such Dispute is not submitted to arbitration, the
Dispute shall be referred to a referee in accordance with California
Code of Civil Procedure Section 638 et seq., and this general
reference agreement is intended to be specifically enforceable in
accordance with said Section 638. A referee with the qualifications
required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a
referee shall be entered in the court in which such proceeding was
commenced in accordance with California Code of Civil Procedure
Sections 644 and 645.
-7-
<PAGE>
(g) Miscellaneous. To the maximum extent practicable, the AAA,
-------------
the arbitrators and the parties shall take all action required to
conclude any arbitration proceeding within 180 days of the filing of
the Dispute with the AAA. No arbitrator or other party to an
arbitration proceeding may disclose the existence, content or results
thereof, except for disclosures of information by a party required in
the ordinary course of its business, by applicable law or regulation,
or to the extent necessary to exercise any judicial review rights set
forth herein. If more than one agreement for arbitration by or
between the parties potentially applies to a Dispute, the arbitration
provision most directly related to the Loan Documents or the subject
matter of the Dispute shall control. This arbitration provision shall
survive termination, amendment or expiration of any of the Loan
Documents or any relationship between the parties."
14. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
15. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
ASCEND COMMUNICATIONS, INC. NATIONAL ASSOCIATION
By: /s/Michael Ashby By: /s/Steve Bojkovic
---------------------------- ---------------------
Michael Ashby Steven Bojkovic
Executive Vice President Vice President
and Chief Financial Officer
-8-
<PAGE>
REVOLVING LINE OF CREDIT NOTE
$25,000,000.00 Walnut Creek, California
October 15, 1997
FOR VALUE RECEIVED, the undersigned ASCEND COMMUNICATIONS, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at Mt. Diablo Regional Commercial Banking
Office, 1320 Willow Pass Road, Ste 440, Concord, California, or at such other
place as the holder hereof may designate, in lawful money of the United States
of America and in immediately available funds, the principal sum of Twenty Five
Million Dollars ($25,000,000.00), or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance from the date
of its disbursement (computed on the basis of a 360-day year, actual days
elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in
effect from time to time, or (ii) at a fixed rate per annum determined by Bank
to be one half of one percent (1/2%) above LIBOR published on the first day of
the applicable Fixed Rate Term. When interest is determined in relation to the
Prime Rate, each change in the rate of interest hereunder shall become effective
on the date each Prime Rate change is announced within Bank. With respect to
each LIBOR option selected hereunder, Bank is hereby authorized to note the
date, principal amount, interest rate and Fixed Rate Term applicable thereto and
any payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to this Note, which notations
shall be prima facie evidence of the accuracy of the information noted.
A. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each:
1. "Business Day" means any day except a Saturday, Sunday or any other day
designated as a holiday under Federal or California statute or regulation.
2. "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), three (3) or six (6) months, as designated by Borrower,
during which all or a portion of the outstanding principal balance of this Note
bears interest determined in relation to Bank's LIBOR; provided however, that no
Fixed Rate Term may be selected for a principal amount less than One Hundred
Thousand Dollars ($100,000.00); and provided further, that no Fixed Rate Term
shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term
would end
<PAGE>
on a day which is not a Business Day, then such Fixed Rate Term shall
be extended to the next succeeding Business Day.
3. "LIBOR" means the rate published in the Money Rates Section of the Wall
Street Journal as the one (1), three (3) or six (6) month LIBOR (as applicable
to the Fixed Rate Term in question) without regard to any reference in said
Money Rates Section to contracts entered into subsequent to the date of
publication.
4. "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office in San Francisco as its Prime
Rate, with the understanding that the Prime Rate is one of Bank's base rates and
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto, and is evidenced by the recording thereof
after its announcement in such internal publication or publications as Bank may
designate.
B. INTEREST:
1. Payment of Interest. Interest accrued on this Note shall be payable on
-------------------
the last day of each month, commencing November 30, 1997.
2. Selection of Interest Rate Options. At any time any portion of this
----------------------------------
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or in
relation to LIBOR for a new Fixed Rate Term designated by Borrower. At any time
any portion of this Note bears interest determined in relation to the Prime
Rate, Borrower may convert all or a portion thereof so that it bears interest
determined in relation to LIBOR for a Fixed Rate Term designated by Borrower.
At the time each advance is requested hereunder or Borrower wishes to select the
LIBOR option for all or a portion of the outstanding principal balance hereof,
and at the end of each Fixed Rate Term, Borrower shall give Bank notice
specifying (a) the interest rate option selected by Borrower, (b) the principal
amount subject thereto, and (c) if the LIBOR option is selected, the length of
the applicable Fixed Rate Term. Any such notice may be given by telephone so
long as, with respect to each LIBOR selection, (i) Bank receives written
confirmation from Borrower not later than three (3) Business Days after such
telephone notice is given, and (ii) such notice is given to Bank prior to 10:00
a.m., California time, on the first day of the Fixed Rate Term. For each LIBOR
option requested hereunder, Bank will quote the applicable fixed rate to
Borrower at approximately 10:00 a.m., California time, on the first day of the
Fixed Rate Term. If Borrower does not immediately accept the rate quoted by
Bank, any subsequent acceptance by Borrower shall be subject to a
redetermination by Bank of the applicable fixed rate; provided
-2-
<PAGE>
however, that if Borrower fails to accept any such rate by 11:00 a.m.,
California time, on the Business Day such quotation is given, then the quoted
rate shall expire and Bank shall have no obligation to permit a LIBOR option
to be selected on such day. If no specific designation of interest is made at
the time any advance is requested hereunder or at the end of any Fixed Rate
Term, Borrower shall be deemed to have made a Prime Rate interest selection
for such advance or the principal amount to which such Fixed Rate Term
applied.
3. Additional LIBOR Provisions. If Bank at any time shall determine that
---------------------------
for any reason adequate and reasonable means do not exist for ascertaining
LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice
is given and until such notice has been withdrawn by Bank, then (i) no new LIBOR
option may be selected by Borrower, and (ii) any portion of the outstanding
principal balance hereof which bears interest determined in relation to Bank's
LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall
bear interest determined in relation to the Prime Rate.
4. Default Interest. From and after the maturity date of this Note, or such
----------------
earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to two percent (2%) above
the rate of interest from time to time applicable to this Note.
C. BORROWING AND REPAYMENT:
1. Borrowing and Repayment. Borrower may from time to time during the
-----------------------
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon from time to time
by the holder. The outstanding principal balance of this Note shall be due and
payable in full on June 30,1999.
2. Advances. Advances hereunder, to the total amount of the principal sum
--------
stated above, may be made by the holder at the oral or written request of (a)
Mory Ejabat or Michael Ashby or Michael J. Johnson, any one acting alone, who
are authorized to request advances and direct the disposition of any advances
until written notice of the revocation of such authority is received by the
holder at the office designated above, or (b) any person,
-3-
<PAGE>
with respect to advances deposited to the credit of any account of any
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of each Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall
have no obligation to determine whether any person requesting an advance is or
has been authorized by any Borrower.
3. Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
Bank's LIBOR, with such payments applied to the oldest Fixed Rate Term first.
D. EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of November 30,
1995, as amended from time to time (the "Credit Agreement"). Any default in the
payment or performance of any obligation under this Note, or any defined event
of default under the Credit Agreement, shall constitute an "Event of Default"
under this Note.
E. MISCELLANEOUS:
1. Remedies. Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are expressly
waived by each Borrower, and the obligation, if any, of the holder to extend any
further credit hereunder shall immediately cease and terminate. Each Borrower
shall pay to the holder immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel fees and all allocated costs of the holder's in-house
counsel), incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, and including any of the foregoing incurred in connection with any
bankruptcy proceeding relating to any Borrower.
2. Regulatory Costs and Reserve Percentages. Upon Bank's demand, Borrower
----------------------------------------
shall pay to Bank, in addition to all other amounts which may be, or become, due
and payable under this Note
-4-
<PAGE>
any and all future, supplemental, emergency or other changes in Reserve
Percentages (as defined below), assessment rates imposed by the Federal
Deposit Insurance Corporation, or similar requirements or costs imposed by any
domestic or foreign governmental authority and related in any manner to LIBOR
(collectively, "Regulatory Costs"), to the extent they are not internalized by
calculation of LIBOR. Further, at Bank's option, LIBOR shall be automatically
adjusted by adjusting the Reserve Percentage, as determined by Bank in its
prudent banking judgment, from the date of imposition (or subsequent date
selected by Bank) of any such Regulatory Costs. Bank shall give Borrower
notice of any Regulatory Costs as soon as practicable after their occurrence,
but Borrower shall be liable for any Regulatory Costs regardless of whether or
when notice is so given. As used herein, "Reserve Percentage" shall mean at
any time the percentage announced within Bank as the reserve percentage under
Regulation D for loans and obligations making reference to LIBOR for a Fixed
Rate Term or time remaining in a Fixed Rate Term, as appropriate; the Reserve
Percentage shall be based on Regulation D or other regulations from time to
time in effect concerning reserves for Eurocurrency Liabilities from related
institutions as though Bank were in a net borrowing position, as promulgated
by the Board of Governors of the Federal Reserve System or its successor.
3. Indemnification. Borrower hereby agrees to indemnify and hold Bank
---------------
free and harmless from any loss or expense (including, without limitation, any
loss or expense incurred by reason of the liquidation or redeployment of
deposits or other funds acquired by Bank to fund or maintain any LIBOR based
advances which Bank may incur as a result of (a) a default by Borrower in
payment when due of the principal amount or interest on any LIBOR based advance,
(b) Borrower's failure to make a borrowing, conversion or extension with respect
to a LIBOR based advance after making a request therefor, (c) a prepayment
(whether mandatory or otherwise) of a LIBOR based advance prior to the
expiration of a related Fixed Rate Term, and (d) any demand for payment
following default of a LIBOR Loan by Bank prior to the expiration of the related
Fixed Rate Term. At the election of Bank such losses shall be conclusively
deemed to consist of an amount equal to the sum of:
(a) the interest that would have been received from Borrower on the
amounts to be reemployed during the Fixed Rate Term (or remaining
portion thereof) in question had Borrower not prepaid, repaid or
failed to borrow, convert or extend, such funds, as the case may
be, less
(b) the return which Bank could have obtained had it placed such
funds on deposit in the interbank dollar market selected by Bank
in its sole discretion on the date of such prepayment,
-5-
<PAGE>
repayment or failure to borrow, convert or extend, as the case
may be, and such funds had remained on deposit until the end of
the relevant Fixed Rate Term.
4. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California, except to the extent Bank
has greater rights or remedies under Federal law, whether as a national bank or
otherwise, in which case such choice of California law shall not be deemed to
deprive Bank of any such rights and remedies as may be available under Federal
law.
ASCEND COMMUNICATIONS, INC.
By: ________________________
Michael Ashby
Executive Vice President and
Chief Financial Officer
-6-
<PAGE>
EXHIBIT 11.1
ASCEND COMMUNICATIONS, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Net income $ (124,374) $ 183,890 $ 52,945
========== ========= ========
Computation of weighted average
common and common equivalent
shares outstanding:
Weighted average common shares outstanding 189,129 178,630 162,181
Common equivalent shares attributable
to stock options and warrants (treasury
stock method) -- 17,616 13,035
---------- --------- --------
Shares used in computing net
income (loss) per share - diluted (1) 189,129 196,246 175,216
========== ========= ========
Net income (loss) per share - diluted $ (0.66) $ 0.94 $ 0.30
========== ========= ========
Shares used in computing net
income (loss) per share - basic 189,129 178,630 162,181
========== ========= ========
Net income (loss) per share - basic $ (0.66) $ 1.03 $ 0.33
========== ========= ========
</TABLE>
(1) Due to their anti-dilutive effect, 10,642 common equivalent shares
attributable to stock options and warrants were excluded from the
computation of net loss per share - diluted for the year ended December 31,
1997.
<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 (United Kingdom)
(d) Ascend Communications France SARL
(e) Ascend Communications Premea SARL
(f) Ascend Communications Japan KK
(g) Ascend Australia Pty. Limited (Australia)
(h) Ascend Communications GmbH (Germany)
(i) Ascend Communications (HK) Limited (Hong Kong)
(j) Ascend Communications Canada Ltd.
(k) Ascend Communications Pte. Ltd. (Singapore)
(l) Ascend Communications Benelux (Belgium)
(m) Ascend Communications Nordic AB (Sweden)
(n) Ascend Communications SRL (Italy)
(o) Ascend Communications M.E., Inc.
(p) NetStar International, Ltd.
(q) StonyBrook Services Inc.
(r) Whitetree, Inc.
(s) InterCon Systems Corporation
(t) Sahara Networks, Inc.
(u) Cascade Communications Corp.
(v) Cascade Communications Securities Corporation
(w) Cascade Communications Asia Corporation
(x) Cascade Communications HC Corporation
(y) Arris Networks, Inc.
<PAGE>
EXHIBIT 21.1
ASCEND COMMUNICATIONS, INC.
SUBSIDIARIES OF ASCEND COMMUNICATIONS, INC. (continued)
(z) Cascade Export, Inc.
(aa) Cascade Communications Limited (United Kingdom)
(ab) Cascade Communications, LTDA (Brazil)
(ac) Cascade Communications (Canada) Corp.
(ad) Cascade Communications France SARL
<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
and 1994 Outside Directors Stock Option Plan; 1994 Employee Stock Purchase Plan;
Individual Option Agreements Issued by Morning Star Technologies, Inc. and
Assumed by Ascend Communications, Inc.; 401(k) Savings Plan; 1996 Restricted
Stock Plan; 1989 Stock Option Plan and Individual Option Agreements Issued by
NetStar, Inc. and Assumed by Ascend Communications, Inc.; and Options Granted
under the Whitetree, Inc. 1993 Incentive Stock Plan, Cascade Communications
Corp. Amended and Restated 1991 Stock Plan, Cascade Communications Corp. 1994
Non-Employee Director Stock Option Plan, Arris Networks, Inc. 1995 Stock Option
Plan and Sahara Networks, Inc. 1995 Stock Plan and Assumed by Ascend
Communications, Inc. and in the Registration Statements (Form S-3) No. 333-
13377, No. 333-11091, No. 333-21751, and No. 333-32781 and in the related
Prospectuses, of Ascend Communications, Inc. of our report dated January 22,
1998, 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, 1997.
Walnut Creek, California ERNST & YOUNG LLP
March 30, 1998
<PAGE>
EXHIBIT 23.2
ASCEND COMMUNICATIONS, INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
on Form S-8 (File Nos. 33-82550, 33-94886, 333-00442, 333-03686, 333-10879, 333-
15697, and 333-30823) and in the registration statements on Form S-3 (File Nos.
333-13377, 333-11091, 333-21751 and 333-32781) and in the related prospectuses
of Ascend Communications, Inc. and in the registration statements on Form S-8
(File Nos. 33-93152, 333-06417 and 333-20659) and in the related prospectuses of
Cascade Communications Corp. of our report dated January 22, 1997, except for
note M as to which the date is March 30, 1997, on our audits of the consolidated
financial statements and our report dated January 22, 1997 on our audits of the
consolidated financial statement schedule of Cascade Communications Corp. as of
December 31 1996 and 1995, and for the years then ended, which reports are
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Boston Massachusetts
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ASCEND
COMMUNICATIONS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 240,817 312,369 202,524
<SECURITIES> 335,822 208,872 147,478
<RECEIVABLES> 245,483 187,726 52,350
<ALLOWANCES> 11,300 2,632 1,202
<INVENTORY> 99,637 68,544 34,513
<CURRENT-ASSETS> 914,587 807,341 402,517
<PP&E> 173,428 105,809 36,101
<DEPRECIATION> 59,077 32,763 12,013
<TOTAL-ASSETS> 1,137,894 922,127 481,873
<CURRENT-LIABILITIES> 168,638 154,894 70,580
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 191 182 172
<OTHER-SE> 969,065 767,051 411,121
<TOTAL-LIABILITY-AND-EQUITY> 1,137,894 922,127 481,783
<SALES> 1,167,352 890,273 287,438
<TOTAL-REVENUES> 1,167,352 890,273 287,438
<CGS> 413,570 311,745 101,859
<TOTAL-COSTS> 413,570 311,745 101,859
<OTHER-EXPENSES> 821,763 293,710 108,201
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (44,952) 302,004 85,738
<INCOME-TAX> 79,422 118,114 32,793
<INCOME-CONTINUING> (124,374) 183,890 52,945
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (124,374) 183,890 52,945
<EPS-PRIMARY> (.66) 1.03 .33
<EPS-DILUTED> (.66) .94 .30
</TABLE>
