UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 000-23774
ASCEND COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3092033
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA 94502
(510) 769-6001
(Address of principal executive offices, zip code and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
- -
The number of shares outstanding of the Registrant's Common Stock, $0.001
par value, was 197,823,660 as of July 31, 1998.
This report, including exhibits, consists of 31 pages. The Index To
Exhibits is found on page 29.
PORTIONS AMENDED
The Registrant hereby amends and restates the Footnote titled "Litigation"
to the Condensed Consolidated Financial Statements of the Registrant set
forth in this Quarterly Report on Form 10-Q and Item 2 of this Quarterly
Report on Form 10-Q, in each case as set forth below.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
LITIGATION
The Company and various of its current and former officers and directors
are parties to a number of consolidated lawsuits pending in the United
Stated District Courts for the Central District of California, which
purport to be class actions filed on behalf of all persons who purchased or
acquired the Company's stock (excluding the defendants and parties related
to them) for the period November 5, 1996 to September 30, 1997. In
addition, the Company and one if its officers were recently named as
defendants in a securities action filed in the Superior Court of Alameda
County, California. The Alameda County Action purports to be brought in
behalf of all purchasers of the Company's stock between July 15, 1997 and
September 29, 1997 (excluding the defendants). The lawsuits allege that the
defendants violated the federal or state securities laws by engaging in a
scheme to artificially inflate and maintain the Company's stock price by
disseminating materially false and misleading information concerning its
business and earnings and the development, efficiency, introduction and
deployment of its digital modems based on 56K-bps technology.
These actions are in the early stages of proceedings and the Company is
currently investigating the allegations. Based on its current information,
the Company believes the suits to be without merit and intends to defend
itself and its officers and directors vigorously. Although it is reasonably
possible the Company may incur a loss upon the conclusion of these claims,
an estimate of any loss or range of loss cannot be made. No provision for
any liability that may result upon adjudication has been made in the
Company's consolidated financial statements. In the opinion of management,
resolution of this matter is not expected to have a material adverse effect
on the financial position of the Company. However, depending on the amount
and timing, an unfavorable resolution of this matter could materially
affect the Company's future results or cash flows in a particular period.
In connection with these legal proceedings, the Company expects to incur
substantial legal and other expenses. Shareholder suits of this kind are
highly complex and can extend for a protracted period of time, which can
substantially increase the cost of such litigation and divert the attention
of the Company's management.
On April 16, 1997, a civil action was filed against Sahara, its three
founders and ten employees of Sahara by General Datacomm Industries, Inc.
in the Superior Court for the State of Connecticut. The complaint alleges
several causes of action, including: breach of contract; tortious
interference with contractual relations; misappropriation of trade secrets;
unfair competition and violation of the Connecticut Unfair Trade Practices
Act. The plaintiff seeks relief of unspecified monetary damages, costs and
injunctive relief. The Company has not yet engaged in substantive discovery
and the ultimate outcome of this matter cannot yet be determined. The
Company plans to vigorously defend this lawsuit. No provision for any
liability that may result from the action has been recognized in the
consolidated financial statements. In the opinion of management, resolution
of this litigation is not expected to have a material adverse effect on the
financial position of the Company. However, depending on the amount and
timing, an unfavorable resolution of this matter could materially affect
the Company's future results or cash flows in a particular period.
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 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 arising in the ordinary course
of business, 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.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report contains forward-looking statements which reflect the current
views of the Company with respect to future events that will have an effect
on its future financial performance. These statements include the words
"expects," "believes," "estimates," and similar expressions. These
forward-looking statements are subject to various risks and uncertainties,
including those referred to under "Factors That May Affect Future Results"
and elsewhere herein, that could cause actual future results to differ
materially from historical results or those currently anticipated. Readers
are cautioned not to place undue reliance on these forward-looking
statements.
The information set forth below should be read in conjunction with the
unaudited interim condensed consolidated financial statements and notes
thereto included in Part 1 - Item 1 of this Quarterly Report and the
audited financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the year
ended December 31, 1997 included in the Company's 1997 Annual Report on
Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain line items from the Company's Condensed
Consolidated Statements of Operations for the quarters and six month
periods ended June 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- -------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales .............................. 100% 100% 100% 100%
Cost of sales .......................... 36 35 36 35
---- ---- ---- ----
Gross profit ......................... 64 65 64 65
Operating expenses:
Research and development ............. 14 13 14 12
Sales and marketing .................. 21 19 21 19
General and administrative ........... 3 3 3 3
Purchased research and development.... -- -- -- 38
Cost of mergers ...................... -- 48 -- 25
---- ---- ---- ----
Total operating expenses ........... 38 83 38 97
---- ---- ---- ----
Operating income (loss) ................ 26 (18) 26 (32)
Interest income, net ................... 2 2 2 2
---- ---- ---- ----
Income (loss) before income taxes ...... 28 (16) 28 (30)
Provision for income taxes ............. 10 -- 10 5
---- ---- ---- ----
Net income (loss) ...................... 18% (16)% 18% (35)%
==== ==== ==== ====
</TABLE>
NET SALES
Net sales for the quarter ended June 30, 1998 were $327.4 million, an
increase of 5% over net sales of $311.7 million for the second quarter of
1997. Net sales for the six months ended June 30, 1998 were $632.5 million,
an increase of 5% over net sales of $604.4 million for the six months ended
June 30, 1997. For the quarter ended June 30, 1998, no individual customer
accounted for more than 10% of net sales. UUNET, an Internet service
provider, accounted for approximately 13% of net sales for the quarter
ended June 30, 1997. UUNET also accounted for 12% and 16% of net sales for
the six months ended June 30, 1998 and June 30, 1997, respectively.
International sales accounted for approximately 34% of net sales for the
quarter ended June 30, 1998 compared to 38% of net sales for the same
period in 1997. This decrease is principally due to decreased sales of the
Company's products in Asia. International sales accounted for approximately
30% of net sales for the six months ended June 30, 1998 compared to 34% of
net sales for the same period in 1997. This decrease for the first half of
1998 was principally due to decreased sales of the Company's products in
Europe and Asia.
The following table provides a breakdown of net sales by business unit as a
percentage of total Company net sales for the quarters and six month
periods ended June 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ --------------------------
BUSINESS UNIT 1998 1997 1998 1997
- --------------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
Access Switching........... 42 % 55 % 43 % 57 %
Core Systems............... 47 32 44 31
Enterprise Access.......... 6 9 8 8
Other...................... 5 4 5 4
-------- -------- -------- -------
Total Company............ 100 % 100 % 100 % 100 %
======== ======== ======== =======
</TABLE>
ACCESS SWITCHING - The Access Switching business unit is composed of the
MAX family of products. MAX products accounted for 42% and 55% of total
Company net sales for the quarters ended June 30, 1998 and 1997,
respectively. MAX products accounted for 43% and 57% of total Company net
sales for the six months ended June 30, 1998 and 1997, respectively. The
decrease in net sales of MAX products was primarily attributable to large
shipments of TNT product to customers in North America in the first two
quarters of 1997. The TNT was first made available for commercial shipments
in the first quarter of 1997 and demand for the product had accumulated in
anticipation of its general release.
CORE SYSTEMS - The Core Systems business unit offers the B-STDX family of
Frame Relay switches, the CBX500 and GX550 families of core ATM switches,
the SA family of broadband ATM switches and the GRF family of IP switches.
Core Systems products accounted for 47% and 32% of total Company net sales
for the quarters ended June 30, 1998 and 1997, respectively. Core Systems
products accounted for 44% and 31% of total Company net sales for the six
months ended June 30, 1998 and 1997, respectively. The increase in net
sales of Core Systems products is primarily due to strong demand for ATM
and Frame Relay worldwide and shipments of the GX550.
ENTERPRISE ACCESS - The Enterprise Access business unit offers the Pipeline
family of remote access equipment as well as the Multiband MAX family of
inverse multiplexing equipment. Enterprise Access products accounted for 6%
and 9% of total Company net sales for the quarters ended June 30, 1998 and
1997, respectively. Enterprise Access products accounted for 8% of total
Company net sales for the six months ended June 30, 1998 and 1997.
GROSS MARGIN
Gross margin was 64% and 65% for the quarters and six months ended June 30,
1998 and 1997, respectively. The decrease in gross margin was primarily due
to increased manufacturing period costs. In the future, the Company's gross
margins may be affected by several factors, including the mix of products
sold, the price of products sold, the introduction of new products with
lower gross margins, the distribution channels used, price competition,
increases in material costs and changes in other components of cost of
sales.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 15% to $46.4 million in the
second quarter of 1998 from $40.2 million in the second quarter of 1997.
Research and development expenses increased 17% to $87.4 million for the
six months ended June 30, 1998 from $74.9 million for the six months ended
June 30, 1998. Research and development expenses as a percent of net sales
increased to 14% for the second quarter of 1998 compared to 13% for the
same quarter of 1997. Research and development expenses as a percent of net
sales increased to 14% for the first six months of 1998 compared to 12% for
the same period of 1997. These increases were primarily due to the addition
of engineering personnel, payments for consulting services in connection
with developing and enhancing the Company's existing and new products,
payments for consulting services related to filing applications and product
testing required to obtain governmental approvals to resell the Company's
products outside of North America, addition of development laboratory
equipment, and material costs associated with new product prototypes. In
addition, research and development expenses increased, in part, through the
addition of engineering personnel and facilities as a result of the
Company's merger and acquisition activities.
SALES AND MARKETING
Sales and marketing expenses increased 13% to $67.7 million for the second
quarter of 1998 from $59.9 million for the second quarter of 1997. Sales
and marketing expenses increased 19% to $135.1 million for the first six
months of 1998 from $113.1 million for the same period of 1997. Sales and
marketing expenses as a percent of net sales increased to 21% for the
second quarter and six months ended June 30, 1998 compared to 19% for the
same periods in 1997. These increases were primarily due to the addition of
sales, marketing and technical support personnel, increased commissions due
to increased net sales, spending for marketing materials and trade shows,
expanded advertising and promotional programs, and 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 increasing number of customers and new products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 3% to $9.7 million for the
second quarter of 1998 from $9.5 million for the second quarter of 1997.
General and administrative expenses increased 7% to $19.8 million for the
first six months of 1998 from $18.5 million for the first six months of
1997. These increases were primarily due to the addition of finance,
information systems and administrative personnel, accruals for performance
bonuses, increased facilities costs and the cost of investor relations
activities. General and administrative expenses as a percent of net sales
were 3% for the quarters and six months periods ended June 30, 1998 and
1997.
PURCHASED RESEARCH AND DEVELOPMENT
Purchased research and development costs were $231.1 million for the first
six months of 1997. These costs were primarily attributable to the purchase
of technology and related assets associated with the acquisition of Sahara
during the first quarter of 1997. This acquisition provided technology and
expertise that the Company is using to enhance and expand the breadth of
its offerings to end-user markets.
COST 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 and
consist primarily of merger transaction costs and accruals for redundant
assets, redundant products, fees relating to the cancellation of certain
obligations and employee severance packages. The total charge included
$54.1 million relating to merger transaction costs and $96.2 million of
integration expenses. Included in integration expenses are the following
amounts: (1) $7.2 million for severance and outplacement costs for
employees involved in duplicate functions, including manufacturing and
logistics, sales and marketing, and finance and administration, (2) $67.4
million for redundant assets and assets relating to duplicate product
lines, and (3) $21.6 million relating to the cancellation of redundant
facility leases and other contracts and obligations.
The following summarizes merger related accrual activity for the quarter
ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
CASH EXPENDITURES NON-CASH ACTIVITY
--------------------------------------------- -----------------
CANCELLATION ASSETS
MERGER SEVERANCE OF FACILITY ASSOCIATED
TRANSACTION AND LEASES AND WITH DUPLICATE
COSTS OUT-PLACEMENT OTHER CONTRACTS PRODUCT LINES TOTAL
----------- ------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
3/31/98 Balance $ 6,075 $ - $ 12,018 $ 5,544 $ 23,637
Cash Payments - - (3,647) - (3,647)
Asset Writeoffs - - - - -
--------- ------------- ------------- ------------- -----------
6/30/98 Balance $ 6,075 $ - $ 8,371 $ 5,544 $ 19,990
========= ============= ============= ============= ===========
</TABLE>
The remaining portion of the merger related accruals at June 30, 1998 was
approximately $20.0 million. Total expected cash expenditures for the
mergers were estimated to be approximately $82.9 million, of which
approximately $68.5 million was disbursed prior to June 30, 1998.
INTEREST INCOME, NET
Interest income (net) decreased by approximately $.4 million to $5.9
million (2% of net sales) for the second quarter of 1998 compared to $6.3
million for the same quarter of 1997. Interest income (net) decreased by
approximately $.7 million to $10.9 million (2% of net sales) for the first
six months of 1998 compared to $11.6 million for same period of 1997. This
decrease in interest income (net) is due to shifting investments from
taxable to non-taxable securities.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the quarter ended June 30, 1998 and
1997 was 36% and 37.4%, respectively, exclusive of the effect of one-time
non- deductible in-process research and development expenses and certain
merger related expenses. The effective tax rate for the six months ended
June 30, 1998 and 1997 was 36% and 37.8%, respectively. The lower effective
tax rate for 1998 is primarily attributable to reduction in the overall
state effective tax rate and utilization of various tax credits. The
Company anticipates its 1998 effective tax rate to be approximately 36.0%,
however, the rate could change upon a change in the estimated amount or
geographic mix of the Company's earnings, changes in U.S. tax law such as
reinstatement of the research tax credit, or the effect of future
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's principal sources of liquidity included
$703.8 million of cash and cash equivalents, short-term investments and
investments, and an unsecured $25.0 million revolving line of credit which
expires in June 1999. There were no borrowings under the line of credit
during the six months ended June 30, 1998. The net decrease in cash and
cash equivalents of $76.0 million for the period was principally due to
$255.9 million of funds used in investing activities, partially offset by
$106.9 million of funds provided by financing activities and $72.9 million
of funds provided by operating activities. The net cash provided by
operating activities for the six months ended June 30, 1998 was primarily
due to increased net income, increases in accrued liabilities and
compensation, and accounts payable, partially offset by increases in
accounts receivable, inventories, deferred income taxes, and other assets.
Net cash used in investing activities of $255.9 million for the six months
ended June 30, 1998 related primarily to net purchases, maturities and
sales of investments, and expenditures for furniture, fixtures and
equipment. Financing activities provided $106.9 million for the six months
ended June 30, 1998, primarily due to proceeds from, and tax benefits
related to, the exercise of stock options and issuance of common stock in
connection with the Company's employee and outside director stock plans.
At June 30, 1998, the Company had $686.9 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 1997
Annual Report on Form 10-K. This Report on Form 10-Q should be read in
conjunction with that Form 10-K, particularly the section "Factors That May
Affect Future Results." These risks and uncertainties include but are not
limited to competition, the mix of products sold, the mix of distribution
channels employed, the Company's success in developing, introducing and
shipping new products, the Company's ability to attract and retain key
employees, the Company's success in integrating acquired operations, the
Company's dependence on single or limited source suppliers for certain
components used in its products, price reductions for the Company's
products, risks inherent in international sales, changes in the levels of
inventory held by third-party resellers, the timing of orders from and
shipments to customers, seasonality and general economic conditions.
In particular, a substantial portion of the Company's sales of MAX and
Pipeline products is related to the Internet industry. In North America,
the Company sells a substantial percentage of its products, particularly
its MAX products, to ISPs. Additionally, a substantial portion of the
Company's sales of core systems products is related to the
telecommunications carrier industry. In North America, the Company sells a
substantial percentage of the core systems products to public carriers.
There can be no assurance that these industries and their infrastructure
will continue to develop or that acceptance of the Company's products by
these industries will be sustained. The Company believes competition in the
Internet and telecommunications carrier industry will increase
significantly in the future and could adversely affect the Company's
business, results of operations and financial condition.
The Company expects that its gross margins could be adversely affected in
future periods by price changes as a result of increased competition. In
addition, increased sales of Pipeline products as a percentage of net sales
may adversely affect the Company's gross margins in future periods as these
products have lower gross margins than the Company's other products.
Further, the Company's use of third parties to distribute its products to
other value-added resellers may adversely affect the Company's gross
margins.
The Company expects that international sales will continue to account for a
significant portion of the Company's net sales in future periods.
International sales are subject to certain inherent risks, including
unexpected changes in regulatory requirements and tariffs, difficulties in
staffing and managing foreign operations, longer payment cycles, problems
in collecting accounts receivable and potentially adverse tax consequences.
The Company depends on third party resellers for a substantial portion of
its international sales. Certain of these third party resellers also act as
resellers for competitors of the Company that can devote greater effort and
resources to marketing competitive products. The loss of certain of these
third party resellers could have a material adverse effect on the Company's
business and results of operations. Although the Company's sales are
denominated in U.S. dollars, fluctuations in currency exchange rates could
cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales and
profitability in that country. Furthermore, future international activity
may result in foreign currency denominated sales, and, in such event, gains
and losses on the conversion to U.S. dollars of accounts receivable and
accounts payable arising from international operations may contribute to
fluctuations in the Company's results of operations. In addition, sales in
Europe and certain other parts of the world typically are adversely
affected in the third quarter of each calendar year as many customers
reduce their business activities during the summer months. These seasonal
factors may have an adverse effect on the Company's business, results of
operations and financial condition. In recent periods the Company's results
of operations have been adversely affected by general economic problems in
Asia. There can be no assurance these problems will not continue in future
periods.
The Company typically operates with a relatively small backlog. As a
result, quarterly sales and operating results generally depend on the
volume of, timing of and ability to fulfill orders received within the
quarter, which are difficult to forecast. In the Company's most recent
quarters, the sequential sales growth slowed from prior levels, and a
disproportionate share of the sales occurred in the last month of the
quarter. The Company's ability to meet financial expectations could be
hampered if the nonlinear sales pattern continues in future periods.
Accordingly, the cancellation or delay of even a small percentage of
customer purchases could adversely affect the Company's results of
operations in the quarter. A significant portion of the Company's net sales
in prior periods has been derived from relatively large sales to a limited
number of customers, and therefore the failure of the Company to secure
expected large sales may have a material adverse impact on results of
operations. A significant portion of the Company's expense levels is
relatively fixed in advance based in large part on the Company's forecasts
of future sales. If sales are below expectations in any given quarter, the
adverse impact of the shortfall on the Company's operating results may be
magnified by the Company's inability to adjust spending to compensate for
the shortfall.
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, frequent new product
introductions and short product life cycles. The introduction of new
products requires the Company to manage the transition from older products
in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand.
Furthermore, products such as those offered by the Company may contain
undetected or unresolved hardware problems or software errors when they are
first introduced or as new versions are released. There can be no assurance
that, despite extensive testing by the Company, hardware problems or
software errors will not be found in new products after commencement of
commercial shipments, resulting in delay in or loss of market acceptance.
Future delays in the introduction or shipment of new or enhanced products,
the inability of such products to gain market acceptance or problems
associated with new product transitions could adversely affect the
Company's business, results of operations and financial condition.
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 factors could have a material adverse
impact on the Company's financial results.
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 interoperate 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 vendors or, when necessary to meet
production needs, from alternate vendors. The Company believes that, in
most cases, alternate vendors can be identified if current vendors are
unable to fulfill needs. However, delays or failure to identify alternate
vendors, if required, or a reduction or interruption in supply, or a
significant increase in the price of components could adversely affect the
Company's results of operations and could impact customer relations.
The Company has concluded the acquisition of four companies in 1997 and
five companies in 1996. On August 3, 1998, the Company announced that it
had entered into a definitive merger agreement to acquire Stratus Computer,
Inc, subject to customary closing conditions. Achieving the anticipated
benefits of these acquisitions or any other acquisitions the Company may
undertake will depend in part upon whether the integration of the acquired
companies' products and technologies, research and development activities,
and sales, marketing and administrative organizations is accomplished in an
efficient and effective manner, and there can be no assurance that this
will occur. Moreover, the integration process may temporarily divert
management attention from the day-to-day business of the Company. Failure
to successfully accomplish the integration of the acquired companies could
have a material adverse effect on the Company's business, financial
condition and/or results of operations.
The Company's common stock has experienced significant price volatility,
and such volatility may occur in the future, particularly as a result of
quarter-to- quarter variations in the actual or anticipated financial
results of the Company or other companies in the networking industry,
announcements by the Company or competitors regarding new product
introductions or other developments affecting the Company and/or changes in
financial estimates by public market analysts. In addition, the market has
experienced extreme price and volume fluctuations that have affected the
market price of many technology companies' stocks and that have been
unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations may adversely affect the market
price of the Company's common stock. Recent periods of volatility in the
market price of the Company's securities resulted in securities class
action litigation against the Company and various officers and directors.
Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse
effect on the results of operations and financial condition of the Company.
In consideration of these factors, there can be no assurance that the
Company will be able to sustain growth in revenues or profitability,
particularly on a period-to-period basis.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASCEND COMMUNICATIONS, INC.
DATE May 19, 1999 by /s/ Michael F.G. Ashby
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Michael F.G. Ashby, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
