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 September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 000-23774
ASCEND COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3092033
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA 94502
(510) 769-6001
(Address of principal executive offices, zip code and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.001
par value, was 216,931,604 as of October 31, 1998.
This report, including exhibits, consists of 29 pages. The Index To
Exhibits is found on page 27.
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. 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 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.
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. 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 from these claims has been
recognized in the consolidated financial statements. 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 nine months
ended September 30, 1998 and 1997, respectively:
Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales............ 100% 100% 100% 100%
Cost of sales........ 36 36 36 35
---- ---- ---- ----
Gross margin....... 64 64 64 65
Operating expenses:
Research and
development...... 14 15 14 13
Sales and marketing.. 20 24 21 21
General and
administrative..... 9 3 5 3
Purchased research
and development.... - - - 27
Cost of mergers...... (5) - (2) 17
---- ---- ---- ----
Total operating
expenses......... 38 42 38 81
---- ---- ---- ----
Operating income
(loss)............... 26 22 26 (16)
Interest income, net.... 2 2 2 2
---- ---- ---- ----
Income (loss) before
income taxes........ 28 24 28 (14)
Provision for income
taxes................ 10 9 10 6
---- ---- ---- ----
Net income (loss)...... 18% 15% 18% (20)%
==== ==== ==== ====
Net Sales
Net sales for the quarter ended September 30, 1998 were $370.3 million, an
increase of 37% over net sales of $270.4 million for the third quarter of
1997. Net sales for the nine months ended September 30, 1998 were $1.0
billion, an increase of 15% over net sales of $874.8 million for the nine
months ended September 30, 1997. UUNET, an Internet service provider,
accounted for approximately 10% and 15% of net sales for the quarters ended
September 30, 1998 and 1997, respectively. UUNET also accounted for 12% and
16% of net sales for the nine months ended September 30, 1998 and 1997,
respectively. International sales accounted for approximately 30% of net
sales for the quarter ended September 30, 1998 compared to 29% of net sales
for the same period in 1997. International sales accounted for
approximately 30% of net sales for the nine months ended September 30, 1998
compared to 32% of net sales for the same period in 1997. The decrease in
1998 was principally due to decreased sales of the Company's products in
Europe and Asia.
The following table provides a breakdown of net sales by business unit as a
percentage of total Company net sales for the quarters and nine months
ended September 30, 1998 and 1997, respectively:
Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------- ---------------------------
Business Unit 1998 1997 1998 1997
- ------------- ---- ---- ---- ----
Access Switching... 48% 50% 45% 55%
Core Systems....... 41 36 43 33
Enterprise Access.. 7 9 8 8
Other.............. 4 5 4 4
---- ---- ---- ----
Total Company... 100% 100% 100% 100%
==== ==== ==== ====
ACCESS SWITCHING The Access Switching business unit is composed of the MAX
family of products. MAX products accounted for 48% and 50% of total Company
net sales for the quarters ended September 30, 1998 and 1997, respectively.
MAX products accounted for 45% and 55% of total Company net sales for the
nine months ended September 30, 1998 and 1997, respectively. The decrease
in net sales of MAX products was primarily attributable to large shipments
of TNT product to customers in North America in the first three quarters of
1997. The TNT was first made available for commercial shipments in the
first quarter of 1997 and demand for the product had accumulated in
anticipation of its general release.
CORE SYSTEMS The Core Systems business unit offers the B-STDX family of
Frame Relay switches, the CBX500 and GX550 families of core ATM switches,
the SA family of broadband ATM switches and the GRF family of IP switches.
Core Systems products accounted for 41% and 36% of total Company net sales
for the quarters ended September 30, 1998 and 1997, respectively. Core
Systems products accounted for 43% and 33% of total Company net sales for
the nine months ended September 30, 1998 and 1997, respectively. The
increase in net sales of Core Systems products is primarily due to strong
demand for ATM and Frame Relay worldwide and shipments of the GX550.
ENTERPRISE ACCESS
The Enterprise Access business unit offers the Pipeline family of remote
access equipment as well as the Multiband MAX family of inverse
multiplexing equipment. Enterprise Access products accounted for 7% and 9%
of total Company net sales for the quarters ended September 30, 1998 and
1997, respectively. Enterprise Access products accounted for 8% of total
Company net sales for the nine months ended September 30, 1998 and 1997.
GROSS MARGIN
Gross margin was 64% and 65% for the quarters and nine months ended
September 30, 1998 and 1997, respectively. The decrease in gross margin was
primarily due to a decrease in average sales price. In the future, the
Company's gross margins may be affected by several factors, including the
mix of products sold, the price of products sold, the introduction of new
products with lower gross margins, the distribution channels used, price
competition, increases in material costs and changes in other components of
cost of sales.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 31% to $53.4 million in the
third quarter of 1998 from $40.7 million in the third quarter of 1997.
Research and development expenses increased 22% to $140.8 million for the
nine months ended September 30, 1998 from $115.6 million for the nine
months ended September 30, 1997. Research and development expenses as a
percent of net sales decreased to 14% for the third quarter of 1998
compared to 15% for the same quarter of 1997. Research and development
expenses as a percent of net sales increased to 14% for the first nine
months of 1998 compared to 13% for the same period of 1997. These increases
were primarily due to the addition of engineering personnel, payments for
consulting services in connection with developing and enhancing the
Company's existing and new products, payments for consulting services
related to filing applications and product testing required to obtain
governmental approvals to resell the Company's products outside of North
America, addition of development laboratory equipment, and material costs
associated with new product prototypes. In addition, research and
development expenses increased, in part, through the addition of
engineering personnel and facilities as a result of the Company's merger
and acquisition activities.
SALES AND MARKETING
Sales and marketing expenses increased 9% to $72.6 million for the third
quarter of 1998 from $66.5 million for the third quarter of 1997. Sales and
marketing expenses increased 16% to $207.6 million for the first nine
months of 1998 from $179.6 million for the same period of 1997. Sales and
marketing expenses as a percent of net sales decreased to 20% for the third
quarter of 1998 compared to 24% for the same period in 1997. Sales and
marketing expenses as a percent of net sales were 21% for the nine months
ended September 30, 1998 and 1997. Increases in sales and marketing
expenses were primarily due to the addition of sales, marketing and
technical support personnel, increased commissions due to increased net
sales, spending for marketing materials and trade shows, expanded
advertising and promotional programs, expenditures for demonstration and
loaner equipment used by customers and expenses associated with opening
additional sales offices in North America, Europe and Asia and the Pacific
Basin.
The growth in sales, marketing and technical support personnel was
primarily due to the need to manage the activities of an increasing number
of customers and new products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 290% to $33.0 million for the
third quarter of 1998 from $8.5 million for the third quarter of 1997.
General and administrative expenses increased 95% to $52.8 million for the
first nine months of 1998 from $27.0 million for the first nine months of
1997. These increases were due to the effect of charges totaling $20.7
million related to the settlement of a patent issue, the settlement of an
outstanding receivable from a contract manufacturer and the establishment
of a reserve against working capital loans. Excluding the effect of these
charges, general and administrative expenses as a percent of net sales were
3% for the quarters and nine months ended September 30, 1998 and 1997.
PURCHASED RESEARCH AND DEVELOPMENT
Purchased research and development costs were $231.1 million for the first
nine months of 1997. These costs were for the purchase of technology and
related assets associated with the acquisitions of InterCon Systems and
Sahara Networks, Inc. during the first quarter of 1997. These acquisitions
provided technology and expertise that the Company is using to enhance and
expand the breadth of its offerings to end-user markets. In connection with
its acquisition of Stratus in October, 1998, the Company expects to incur
one-time research and development costs of approximately $305.0 million in
the quarter ending December 31, 1998.
COST OF MERGERS
For the 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. During the third quarter of
1998, the Company reversed approximately $18.3 million of the previously
recorded charges, due primarily to reductions in estimates for the
remaining charges associated with assets relating to duplicate product
lines and the cancellation of redundant facility leases and other contracts
and obligations. The net charge of $132.0 million includes $48.1 million
relating to merger transaction costs and $83.9 million of integration
expenses. Included in integration expenses were 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) $61.8 million for redundant
assets and assets relating to duplicate product lines, and (3) $14.9
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 September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Cash Expenditures Non-Cash Activity
-------------------------------------------- -----------------
Assets
Cancellation Associated
of Facility with
Merger Severance Leases Duplicate
Transaction and and Other Product
Costs Out-Placement Contracts Lines Total
----------- ------------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
6/30/98 Balance $ 6,075 $ - $ 8,371 $ 5,544 $ 19,990
Cash Payments - - (1,711) - (1,711)
Asset Writeoffs - - - - -
Change in
reserve (6,075) - (6,660) (5,544) (18,279)
---------- ---------- ---------- --------- ----------
9/30/98 Balance $ - - - - -
========== ========== ========== ========= ==========
</TABLE>
There were no remaining merger related accruals at September 30, 1998.
INTEREST INCOME, NET
Interest income (net) increased by approximately $100,000 to $6.3 million
(2% of net sales) for the third quarter of 1998 compared to $6.2 million
for the same quarter of 1997. Interest income (net) decreased by
approximately $500,000 to $17.2 million (2% of net sales) for the first
nine months of 1998 compared to $17.7 million for same period of 1997.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the quarter ended September 30, 1998
and 1997 was 35.5% and 37.0%, respectively, exclusive of the effect of
one-time non- deductible in-process research and development expenses and
certain merger related expenses. The effective tax rate for the nine months
ended September 30, 1998 and 1997 was 35.8% and 37.0%, respectively. The
lower effective tax rate for 1998 is primarily attributable to reduction in
the overall state effective tax rate and utilization of various tax
credits. The Company anticipates its 1998 effective tax rate to be
approximately 35.5%, however, the rate could vary based upon a change in
the geographic mix of the Company's earnings, changes in U.S. tax law such
as reinstatement of the research tax credit, or the effect of future
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's principal sources of liquidity
included $773.2 million of cash and cash equivalents, short-term
investments and investments and an unsecured $25.0 million revolving line
of credit which expires in June 1999. There were no borrowings under the
line of credit during the nine months ended September 30, 1998. The net
decrease in cash and cash equivalents of $64.6 million for the nine month
period ended September 30, 1998 was principally due to $364.3 million of
funds used in investing activities, partially offset by $174.5 million of
funds provided by financing activities and $125.2 million of funds provided
by operating activities. The net cash provided by operating activities for
the nine months ended September 30, 1998 was primarily due to increased net
income, increases in accrued liabilities and compensation, and accounts
payable, partially offset by increases in accounts receivable, inventories,
deferred income taxes, and other assets.
Net cash used in investing activities of $364.3 million for the nine months
ended September 30, 1998 related primarily to net purchases, maturities and
sales of investments, and expenditures for furniture, fixtures and
equipment. Financing activities provided $174.5 million for the nine months
ended September 30, 1998, primarily due to proceeds from, and tax benefits
related to, the exercise of stock options and issuance of common stock in
connection with the Company's employee and outside director stock plans.
At September, 1998, the Company had $694.1 million in working capital. The
Company currently has no significant capital commitments other than
commitments under facilities and operating leases. The Company believes
that its available sources of funds and anticipated cash flow from
operations will be adequate to finance current operations, anticipated
investments and capital expenditures for at least the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of risks and uncertainties as discussed in the Company's
Registration Statement on Form S-4/A (No. 333-62281) filed on September 9,
1998 in connection with the acquisition of Stratus and the Company's and
Stratus' 1997 Annual Report on Form 10-K. This Report on Form 10-Q should
be read in conjunction with such Forms S-4/A and 10-K, particularly the
section "Factors That May Affect Future Results." These risks and
uncertainties include but are not limited to competition, the mix of
products sold, the mix of distribution channels employed, the Company's
success in developing, introducing and shipping new products, the Company's
ability to attract and retain key employees, the Company's success in
integrating acquired operations, the Company's dependence on single or
limited source suppliers for certain components used in its products, price
reductions for the Company's products, risks inherent in international
sales, changes in the levels of inventory held by third-party resellers,
the timing of orders from and shipments to customers, seasonality and
general economic conditions.
In particular, a substantial portion of the Company's sales of MAX and
Pipeline products is related to the Internet industry. In North America,
the Company sells a substantial percentage of its products, particularly
its MAX products, to ISPs. Additionally, a substantial portion of the
Company's sales of core systems products is related to the
telecommunications carrier industry. In North America, the Company sells a
substantial percentage of the core systems products to public carriers.
There can be no assurance that these industries and their infrastructure
will continue to develop or that acceptance of the Company's products by
these industries will be sustained. The Company believes competition in the
Internet and telecommunications carrier industry will increase
significantly in the future and could adversely affect the Company's
business, results of operations and financial condition.
The Company expects that its gross margins could be adversely affected in
future periods by price changes as a result of increased competition. In
addition, increased sales of Pipeline products as a percentage of net sales
may adversely affect the Company's gross margins in future periods as these
products have lower gross margins than the Company's other products.
Further, the Company's use of third parties to distribute its products to
other value-added resellers may adversely affect the Company's gross
margins.
The Company expects that international sales will continue to account for a
significant portion of the Company's net sales in future periods.
International sales are subject to certain inherent risks, including
unexpected changes in regulatory requirements and tariffs, difficulties in
staffing and managing foreign operations, longer payment cycles, problems
in collecting accounts receivable and potentially adverse tax consequences.
The Company depends on third party resellers for a substantial portion of
its international sales. Certain of these third party resellers also act as
resellers for competitors of the Company that can devote greater effort and
resources to marketing competitive products. The loss of certain of these
third party resellers could have a material adverse effect on the Company's
business and results of operations. Although the Company's sales are
denominated in U.S. dollars, fluctuations in currency exchange rates could
cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales and
profitability in that country. Furthermore, future international activity
may result in foreign currency denominated sales, and, in such event, gains
and losses on the conversion to U.S. dollars of accounts receivable and
accounts payable arising 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.
The Year 2000 computer issue creates a risk for Ascend and therefore the
Company makes the following Year 2000 readiness disclosure. If computer
systems do not correctly recognize date information when the year changes
to 2000, there could be an adverse impact on the Company's operations. The
risk for Ascend exists in four areas: systems used by the Company to run
its business, systems used by the Company's suppliers, potential warranty
or other claims from Ascend customers, and the potential reduced spending
by other companies on networking solutions as a result of significant
information systems spending on Year 2000 remediation. The Company is
currently evaluating its exposure in all of these areas and expects to
complete such evaluation no later than June 30, 1999.
INTERNAL SYSTEMS
Ascend is in the process of conducting a comprehensive assessment and
evaluation of its systems, equipment and facilities. Ascend has a number of
projects underway to test and replace or upgrade systems, equipment and
facilities that are known to be Year 2000 non-compliant. The Company
expects Year 2000 internal testing to be complete by March 1999. The
Company has not identified alternative remediation plans if upgrade or
replacement is not feasible. The Company will consider the need for such
remediation plans as it continues to assess the Year 2000 risk. For the
Year 2000 non-compliance issues identified to date, the cost of upgrade or
remediation is not expected to be material to the Company's operating
results. If implementation of replacement systems is delayed, or if
significant new non-compliance issues are identified, the Company's results
of operations or financial condition could be materially adversely
affected.
SUPPLIERS
Ascend is also in the process of contacting its critical suppliers to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant. Ascend's process for assessing such
compliance includes obtaining supplier certifications, supplier follow-up
meetings and external testing, if required. Supplier certifications,
supplier follow-up meetings and external testing, if required, are expected
to be completed by March 1999. In the event that suppliers are not Year
2000 compliant, the Company will seek alternative sources of supplies.
However, such failures remain a possibility and could have an adverse
impact on the Company's results of operations or financial condition.
Additionally, litigation may arise from situations in which the Company has
minimum purchase commitment contracts with suppliers that are not Year 2000
compliant.
WARRANTY
The Company believes the majority of its current products are Year 2000
compliant; however, since all customer situations cannot be anticipated,
particularly those involving third party products, Ascend may see an
increase in warranty and other claims as a result of the Year 2000
transition. In addition, litigation in general may increase regarding Year
2000 compliance issues. For these reasons, the impact of customer claims
could have a material adverse impact on the Company's results of operations
or financial condition.
SALES IMPACT
Year 2000 compliance is an issue for almost all businesses, whose computer
systems and applications may require significant hardware and software
upgrades or modifications. Companies owning and operating such systems may
plan to devote a substantial portion of their information systems' spending
to fund such upgrades and modifications and divert spending away from
networking solutions. Such changes in customers' spending patterns could
have a material adverse impact on the Company's sales, operating results or
financial condition.
GENERAL
In order to evaluate the risks outlined above and to implement Year 2000
compliance solutions, Ascend has established a company wide team coupled
with outside consultants. The internal Ascend Year 2000 compliance team
consists of representatives from various functional areas, including risk
management, finance, engineering, purchasing, and legal. The external Year
2000 compliance team includes various national Year 2000 compliance
consultants. The team has established an overall Year 2000 compliance goal,
incremental milestones and meets regularly to assess progress on its
milestones. Currently, the Company is establishing contingency plans to
address the impact to Ascend in the event its suppliers, products and
internal systems are not Year 2000 compliant.
Costs incurred to date on the Ascend Year 2000 compliance project are
approximately $11.0 million. Total costs of the project and compliance are
estimated to be $15.0 to $19.0 million and should be significantly incurred
by April 30, 1999. However, there can be no assurance that these costs will
not be greater than anticipated, or that corrective actions undertaken will
be completed before any Year 2000 compliance problems occur. Ascend's Year
2000 compliance criteria comply with the requirements established by the US
Government as stated in the Final GSA - Year 2000 Compliance.
The Company mainly competes in four segments of the data networking market:
(i) wide area network ("WAN") and Internet access, (ii) WAN and Internet
backbone switching, (iii) remote LAN access and Internet subscriber access,
and (iv) videoconferencing and multimedia access. The Company competes in
one or more of these market segments with Cisco Systems, Inc., 3Com
Corporation, Inc., Newbridge Networks, Inc., Shiva Corporation, Northern
Telecom, Inc., and many others. Some of these competitors have
substantially greater financial, marketing and technical resources than the
Company. The Company expects additional competition from existing
competitors and from a number of other companies, some of which may have
substantially greater financial, marketing and technical resources than the
Company, that may enter the Company's existing and future markets.
Increased competition could result in price reductions, reduced profit
margins and loss of market share, each of which would adversely affect the
Company's business, results of operations and financial condition.
The Company's sales are, to a significant degree, made through
telecommunications carriers, value-added resellers ("VARs") and
distributors. Accordingly, the Company is dependent on the continued
viability and financial stability of these companies. While the Company has
contractual relationships with many telecommunications carriers, VARs and
distributors, these agreements do not require these companies to purchase
the Company's products and can be terminated by these companies at any
time. There can be no assurance that any of the telecommunications
carriers, VARs or distributors will continue to market the Company's
products. The telecommunications carrier customers, to the extent they are
resellers, VARs and distributors, generally offer products of several
different companies, including products that are competitive with the
Company's products. Accordingly, there is a risk that these companies may
give higher priority to products of other suppliers, thus reducing their
efforts to sell the Company's products. Any special distribution
arrangement and product pricing arrangement that the Company may implement
in one or more distribution channels for strategic purposes could adversely
affect gross profit margins.
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product
development personnel. The Company typically does not have employment
contracts with its key personnel and does not maintain any key person life
insurance policies. The loss of key personnel could adversely affect the
Company.
The Company is currently experiencing rapid growth and expansion, which has
placed, and will continue to place, a significant strain on its
administrative, operational and financial resources and increased demands
on its systems and controls. This growth has resulted in a continuing
increase in the level of responsibility for both existing and new
management personnel. The Company's anticipated continued growth will
require it to recruit and hire a substantial number of new engineering,
sales, marketing and managerial personnel. There can be no assurance that
the Company will be successful at hiring or retaining these personnel. The
Company's ability to manage its growth successfully will also require the
Company to continue to expand and improve its operational, management and
financial systems and controls and to expand its manufacturing capacity. If
the Company's management is unable to manage growth effectively, the
Company's business, results of operations and financial condition may be
materially and adversely affected.
The Company relies on a combination of patents, copyright, and trade secret
laws and non-disclosure agreements to protect its proprietary technology.
The Company is currently involved in patent disputes the results of which
are not presently determinable. Such disputes could result in significant
expenses to the Company and divert the efforts of the Company's technical
and management personnel.
Although the Company generally uses standard parts and components for its
products, certain components, including certain key microprocessors and
integrated circuits, are presently available from a single source or from
limited sources. The Company has no supply commitments from its vendors and
generally purchases components on a purchase order basis as opposed to
entering into long term procurement agreements with vendors. The Company
has generally been able to obtain adequate supplies of components in a
timely manner from current vendors or, when necessary to meet production
needs, from alternate vendors. The Company believes that, in most cases,
alternate vendors can be identified if current vendors are unable to
fulfill needs. However, delays or failure to identify alternate vendors, if
required, or a reduction or interruption in supply, or a significant
increase in the price of components could adversely affect the Company's
results of operations and could impact customer relations.
The Company has concluded the acquisition of four companies in 1997 and
five companies in 1996. On October 19, 1998, the Company completed its
acquisition of Stratus. Achieving the anticipated benefits of these
acquisitions or any other acquisitions the Company may undertake will
depend in part upon whether the integration of the acquired companies'
products and technologies, research and development activities, and sales,
marketing and administrative organizations is accomplished in an efficient
and effective manner, and there can be no assurance that this will occur.
Moreover, the integration process may temporarily divert management
attention from the day-to-day business of the Company. Failure to
successfully accomplish the integration of the acquired companies could
have a material adverse effect on the Company's business, financial
condition and/or results of operations.
The Company's common stock has experienced significant price volatility,
and such volatility may occur in the future, particularly as a result of
quarter-to- quarter variations in the actual or anticipated financial
results of the Company or other companies in the networking industry,
announcements by the Company or competitors regarding new product
introductions or other developments affecting the Company and/or changes in
financial estimates by public market analysts. In addition, the market has
experienced extreme price and volume fluctuations that have affected the
market price of many technology companies' stocks and that have been
unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations may adversely affect the market
price of the Company's common stock.
Recent periods of volatility in the market price of the Company's
securities resulted in securities class action litigation against the
Company and various officers and directors. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the results of operations and
financial condition of the Company.
In consideration of these factors, there can be no assurance that the
Company will be able to sustain growth in revenues or profitability,
particularly on a period-to-period basis.
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
------------ -----------------------------
Michael F.G. Ashby, Executive
Vice President, and Chief
Financial Officer (Principal
Financial Officer)
DATE May 19, 1999 by /S/ Bernard V. Schneider
------------ ------------------------------
Bernard V. Schneider, Vice
President and Treasurer
