<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
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 222,655,604 as of March 31, 1999.
<PAGE>
ASCEND COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page No.
--------
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
Quarters Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the Quarters Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 28
A: Exhibits 28
B: Reports on Form 8-K 28
Signatures 29
2
<PAGE>
Part I: Financial Information
Item I: Financial Statements
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In Thousands)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 489,019 $ 442,625
Short-term investments.................................. 219,032 237,330
Accounts receivable, net................................ 453,968 390,103
Inventories............................................. 242,449 197,896
Deferred income taxes................................... 179,311 151,782
Other current assets.................................... 52,404 57,335
------------ ------------
Total current assets............................... 1,636,183 1,477,071
Investments............................................... 525,861 457,387
Property and equipment, net............................... 283,203 282,260
Other assets.............................................. 319,916 314,760
------------ ------------
Total assets....................................... $2,765,163 $2,531,478
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 129,311 $ 113,060
Accrued compensation and related liabilities............ 45,896 72,896
Other accrued liabilities............................... 281,460 240,330
------------ ------------
Total current liabilities.......................... 456,667 426,286
Deferred income taxes..................................... 11,030 11,048
Commitments and contingencies
Stockholders' equity:
Common stock............................................ 222 220
Additional paid-in capital.............................. 2,117,505 2,022,968
Retained earnings....................................... 179,739 70,956
------------ ------------
Total stockholders' equity......................... 2,297,466 2,094,144
------------ ------------
Total liabilities and stockholders' equity......... $2,765,163 $2,531,478
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net sales...................................................... $509,395 $305,114
Cost of sales.................................................. 192,026 109,810
-------- --------
Gross profit................................................ 317,369 195,305
Operating expenses:
Research and development.................................... 83,904 40,988
Sales and marketing......................................... 100,530 67,339
General and administrative................................... 17,135 10,044
Purchased in-process research and development............... (23,919) -
-------- --------
Total operating expenses................................. 177,650 118,371
-------- --------
Operating income............................................... 139,719 76,933
Interest income................................................ 10,862 4,964
-------- --------
Income before income taxes..................................... 150,581 81,897
Provision for income taxes..................................... 41,798 29,525
-------- --------
Net income..................................................... $108,783 $ 52,372
======== ========
Net income per share - Basic................................... $ 0.49 $ 0.27
======== ========
Net income per share - Diluted................................. $ 0.46 $ 0.26
======== ========
Number of shares used in per share calculations - Basic.......... 221,900 192,849
======== ========
Number of shares used in per share calculation - Diluted....... 238,683 203,245
======== ========
</TABLE>
See notes condensed consolidated financial statements.
4
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In Thousands)
<TABLE>
<CAPTION>
Quarters Ended March 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net income ............................................................................ $ 108,783 $ 52,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................................................... 30,169 13,725
Purchased in-process research and development...................................... (23,919) -
Deferred income taxes.............................................................. (27,547) (20,000)
Tax benefit related to stock options............................................... 29,470 8,956
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (63,865) (8,819)
Inventories...................................................................... (44,553) (3,299)
Other current assets............................................................. 4,931 1,721
Other assets..................................................................... (6,924) (11,066)
Accounts payable................................................................. 16,251 17,844
Accrued compensation and related liabilities..................................... (27,000) (8,544)
Other accrued liabilities........................................................ 41,130 73,731
------------ ------------
Net cash provided by operating activities..................................... 36,926 116,621
------------ ------------
Investing activities:
Purchases of investments.......................................................... (247,235) (103,274)
Maturities and sales of investments............................................... 283,737 88,673
Investments in privately held companies........................................... (64,086) -
Purchases of property and equipment............................................... (28,017) (26,074)
------------ ------------
Net cash used in investing activities.......................................... (55,601) (40,675)
------------ ------------
Financing activities:
Proceeds from issuance of common stock............................................. 65,069 24,259
------------ ------------
Net cash provided by financing activities....................................... 65,069 24,259
------------ ------------
Net increase in cash and cash equivalents.............................................. 46,394 100,205
Cash and cash equivalents, beginning of period......................................... 442,625 240,817
------------ ------------
Cash and cash equivalents, end of period............................................... $ 489,019 $ 341,022
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
GENERAL
Ascend Communications, Inc. ("Ascend" or the "Company") develops, manufactures
and sells wide area networking solutions for telecommunications carriers,
Internet service providers and corporate customers worldwide which 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; (iii)
extensions and enhancements to corporate backbone networks that facilitate
access by remote offices, telecommuters and mobile computer users; (iv) non-stop
computing platforms and Intelligent Networking ("IN") solutions for enhanced
voice services in telephony networks; and (v) videoconferencing and multimedia
access solutions. The Company's products support existing digital and analog
networks.
In January 1999, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Lucent Technologies Inc. ("Lucent"), pursuant to which
each outstanding share of Ascend common stock will be exchanged for 0.825 shares
of Lucent common stock, and each outstanding option or warrant to purchase
Ascend common stock will be converted into an option or warrant to purchase
Lucent common stock (adjusted for the exchange ratio). The merger is expected
to be accounted for as a pooling of interests, is subject to stockholder and
standard regulatory approvals and is expected to close during the second quarter
of 1999. In the event the merger is not successfully completed, the Company's
results of operations and common stock price could be materially adversely
affected.
In February 1999, Lucent announced a two-for-one stock split, payable on April
1, 1999 to shareholders of record as of March 5, 1999. Under the terms of the
Merger Agreement the exchange ratio will be adjusted for the effect of this
stock split and any similar changes in the capitalization of Lucent.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BASIS OF PRESENTATION
The interim condensed consolidated financial statements of Ascend have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations.
The information included in this report should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's 1998 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the financial
position, results of operations and cash flows for such periods. The results
for the interim period ended March 31, 1999 are not necessarily indicative of
the results that may be expected for any future periods.
SEGMENT DISCLOSURES
The Company operates in one business segment, which is the global communications
networking industry. For management purposes, the Company is divided into three
primary business units, Core Systems, Access Switching and Enterprise Access.
Each of these groups has a vice president who reports directly to the Chief
Executive Officer ("CEO"), who is the Chief Operating Decision Maker as defined
by SFAS 131. The measures of profitability reviewed by the CEO consists of
revenues, gross profit and contribution margin. The majority of the Company's
operating expenses are not allocated to the business units, but are treated as
corporate expenses.
For financial reporting purposes, the Core Systems and Access Switching business
units (which total approximately 87%, 87% and 84% of total revenues in fiscal
1998, 1997 and 1996, respectively) are combined into a single industry segment,
because the nature of the products and services, the production processes, types
of customers, distribution method and gross margins for these business units are
similar. No other business units meet the revenue, profit/loss or assets
criteria for reportable segments as defined by SFAS 131.
CONCENTRATION OF CREDIT RISK
The Company sells and distributes a substantial percentage of its products to
ISPs, value-added resellers and distributors, and local and long-distance
telecommunications carriers throughout North America, Europe and Asia and the
Pacific Basin. Accounts receivable are principally from these customers. The
Company conducts ongoing credit evaluations of its customers and maintains
reserves for potential credit losses.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inventories
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories consist of (in thousands):
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
--------- ----------
<S> <C> <C>
Finished goods................................... $104,829 $ 66,199
Products in process.............................. 50,888 59,285
Raw materials and supplies....................... 86,732 72,412
-------- --------
$242,449 $197,896
======== ========
</TABLE>
Commitments & Contingencies
In March 1996, the Company entered into an agreement to lease its corporate
facilities located in Alameda, California; the agreement was subsequently
amended in March 1998. Certain buildings currently being used for the Company's
headquarters have been constructed on the land. The lessor has funded
approximately $42.5 million for the land and construction of the buildings. The
lease term will expire in March 2003, unless subsequently amended. 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 $38.2 million.
Net Income Per Share
Basic net income per share is calculated using the weighted average shares of
common stock outstanding during the period. Diluted net income per share is
calculated using the weighted average shares of common stock outstanding, plus
the dilutive effect of stock options and warrants, calculated using the treasury
stock method.
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The computations of basic and diluted net income per share are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended March 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Shares used in computing net
income per share - Basic (common
stock outstanding)............... 221,900 192,849
Common stock equivalents......... 16,783 10,396
-------------- -----------
Shares used in computing net
income per share - Diluted....... 238,683 203,245
============== ===========
Net income....................... $ 108,783 $ 52,372
============== ===========
Net income per share - Basic..... $ 0.49 $ 0.27
============== ===========
Net income per share - Diluted... $ 0.46 $ 0.26
============== ===========
</TABLE>
Acquisition of Stratus Computer, Inc.
In October 1998, the Company acquired Stratus Computer, Inc. ("Stratus"), a
manufacturer of fault-tolerant computer systems, in exchange for 18.1 million
shares of the Company's common stock. The purchase price of $916.7 million was
allocated as follows (millions):
<TABLE>
<S> <C>
Net tangible assets............................. $400.2
Assets held for sale............................ $116.0
Purchased in-process research and development... $267.0
Existing technology............................. $130.0
Assembled work force............................ $ 3.5
</TABLE>
Prior to the consummation of the acquisition of Stratus, the Company announced
its intention to divest the non-telecommunication business units of Stratus,
which consisted of the Enterprise computer business unit, two business units
comprised of financial and enterprise software (TCAM and S2), and a software
joint venture interest (Astria). Accordingly, these business units were recorded
at their estimated fair value upon acquisition and were classified as assets
held for sale at December 31, 1998. The estimated fair value was based on
discussions with independent third parties that expressed interest in acquiring
these business units.
In January and February 1999, the Company entered into definitive agreements to
divest each of these business units. As the sales proceeds from the disposition
of the business units exceeded the carrying value of the assets held for sale,
the Company reduced its original charge for
9
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
purchased in-process research and development and reduced the amount of the
purchase price allocated to non-current assets on a pro-rata basis. This
resulted in a credit to purchased in-process research and development in the
amount of $23.9 million during the quarter ended March 31, 1999.
Included in the liabilities assumed are $49.3 million of accrued merger costs,
which consist of $7.6 million of merger transaction costs and $41.7 million of
integration expenses. Integration expenses consist of $2.4 million for severance
and outplacement costs, $34.8 million for costs associated with the divestiture
of the non-telecommunications business units, and $4.5 million of other merger
related costs. The $2.4 million of severance and outplacement costs relates to
approximately 150 employees involved in duplicate functions, including
manufacturing and logistics, sales and marketing, and finance and
administration. The $34.8 million of costs associated with the divestiture of
the non-telecommunications business units consists of the following major
components: 1) $22.2 million of costs associated with termination of lease
agreements and relocation of the non-telecommunication business units, 2) $8.5
million of investment banker and other professional fees related to the
divestitures, and 3) $4.0 million of other miscellaneous expenses. Substantially
all of the accrued merger costs represent anticipated cash expenditures.
The following summarizes merger related accrual activity for the quarter ended
March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Merger Severance
Transaction and Out- Divestiture Total Accrued
Costs Placement Cost Merger Costs
----------------------------------------------------------
<S> <C> <C> <C> <C>
10/19/98 Balance $12,100 $2,400 $34,800 $49,300
Cash payments 5,009 101 2,689 7,799
Asset writeoffs 3,870 3,870
Change in reserves -
----------------------------------------------------------
12/31/98 Balance 7,091 2,299 28,241 37,631
----------------------------------------------------------
Cash payments 880 1,354 9,073 11,307
Asset writeoffs -
Change in reserves (1,000) (1,000)
----------------------------------------------------------
03/31/98 Balance $6,211 $ 945 $20,168 $27,324
==========================================================
</TABLE>
10
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The historical consolidated financial results of Ascend for the prior period
have not been restated to include the financial position and results of
operations of Stratus Computers. The following table shows the historical
results of Ascend and Stratus Computers for the prior period.
<TABLE>
<CAPTION>
Proforma Three
months ended
March 31, 1998
------------------
<S> <C> <C>
Revenue: Ascend.......... $305.114
Stratus......... 67,100
------------------
Total........... $372,214
==================
Net Income: Ascend.......... $49,146
Stratus......... 1,410
------------------
Total........... $50,556
==================
</TABLE>
11
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report on Form 10-Q 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", "anticipates", and similar expressions. These
forward-looking statements are subject to various risks and uncertainties,
including without limitation those referred to under "Factors Which 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,
1998 included in the Company's 1998 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 Statements
of Operations for the quarters ended March 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
Quarter Ended March 31,
---------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Net sales........................ 100 % 100 %
Cost of sales.................... 38 36
------------- ------------
Gross margin................... 62 64
Operating expenses:
Research and development....... 17 14
Sales and marketing............ 20 22
General and administrative..... 3 3
Purchased in-process research
and development.............. (5) -
------------- ------------
Total operating expenses... 35 39
------------- ------------
Operating income................. 27 25
Interest income.................. 2 2
------------- ------------
Income before income taxes....... 29 27
Provision for income taxes....... 8 10
------------- ------------
Net income....................... 21 % 17 %
============= ============
12
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Net Sales
Net sales for the quarter ended March 31, 1999 were $509.4 million, an increase
of 67% over net sales of $305.1 million for the first quarter of 1998. The net
sales for the quarter ended March 31, 1999 include incremental revenues
resulting from the acquisition of Stratus. International sales accounted for
approximately 27% of net sales for the quarter ended March 31, 1999 compared to
26% of net sales for the same period in 1998. Substantially all of the increase
in net sales was attributable to increases in unit shipments of the Company's
products.
The following table provides a breakdown of net sales by business unit as a
percentage of total net sales:
<TABLE>
<CAPTION>
Quarter Ended March 31,
------------------------------------
Business Unit 1999 1998
- ------------------------ -------------- --------------
<S> <C> <C>
Core Systems............ 47 % 41 %
Access Switching........ 40 44
Enterprise Access....... 5 10
Other................... 8 5
-------------- --------------
Total Company......... 100 % 100 %
============== ==============
</TABLE>
Core Systems - The Core Systems business unit consists of the B-STDX family of
Frame Relay switches, the CBX500 and GX 550 ATM switches, the SA family of
broadband access products, the Intelligent Networking products acquired from
Stratus and the GRF family of IP switches. Core Systems products accounted for
47% and 41% of total Company net sales for the quarters ended March 31, 1999 and
1998, respectively. The increase in Core Systems sales as a percentage of net
sales was primarily attributable to significant growth in sales of ATM switches.
Incremental revenues from the acquisition of Stratus also contributed to the
increase, to a lesser extent.
Access Switching - The Access Switching business unit offers the MAX family of
products. Access Switching products accounted for 40% and 44% of total Company
net sales for the quarters ended March 31, 1999 and 1998, respectively. Access
Switching revenues increased by approximately 50% compared to the previous year,
but declined as a percentage of total sales due to the significant increase in
Core Systems revenues.
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 5% and
10% of total Company net sales for the quarters ended March 31, 1999 and 1998,
respectively. Enterprise Access revenues declined by approximately 10% compared
to the previous year, and declined to 5% of total sales due to the significant
increase in total revenues.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
GROSS MARGIN
Gross margin was 62% and 64% for the quarters ended March 31, 1999 and 1998,
respectively. The decrease in gross margin for the quarter ended March 31, 1999
was primarily due to decreases in the average selling prices of the Company's
products, and to a lesser extent, lower average gross margins attributable to
products acquired from Stratus during the fourth quarter of 1998. 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 105% to $83.9 million in the first
quarter of 1999 from $41.0 million in the first quarter of 1998. Research and
development expenses as a percent of net sales increased to 17% for the first
quarter of 1999 compared to 14% for the same quarter of 1998. The increase was
primarily due to the addition of engineering personnel, in part due to the
acquisition of Stratus, and expenses related to the development and enhancement
of the Company's existing and new products.
SALES AND MARKETING
Sales and marketing expenses increased 49% to $100.5 million for the first
quarter of 1999 from $67.3 million for the first quarter of 1998. Sales and
marketing expenses as a percent of net sales decreased to 20% for the first
quarter of 1999 as compared to 22% for the same quarter of 1998. The increase in
absolute dollars was primarily due to the addition of sales, marketing and
technical support personnel and related commissions, and expenses associated
with expanding sales offices and technical support operations 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 and distributors,
end-user customers and new products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 71% to $17.1 million for the first
quarter of 1999 from $10.0 million for the first quarter of 1998. General and
administrative expenses as a percent of net sales were 3% for the quarters ended
March 31, 1999 and 1998. The increase in absolute dollars was primarily due to
the addition of finance, information systems and administrative personnel and
increased facilities costs. During 1998, the Company expanded its headquarters
facility in Alameda, California, and acquired additional facilities through the
acquisition of Stratus.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
During the quarter ended March 31, 1999, the Company recorded a credit to
purchased in-process research and development expense in the amount of $23.9
million which related to the acquisition of Stratus in the fourth quarter of
1998. The credit resulted from the pro-rata allocation of the excess of the
sales proceeds of the non-telecommunications business units of Stratus over the
carrying value of the assets held for sale. Accordingly, the total charge for
purchased in-process research and development for the acquisition of Stratus was
reduced from $267.0 million to $243.1 million.
INTEREST INCOME
Interest income increased by 119% to $10.9 million for the first quarter of 1999
compared to $5.0 million for the same quarter of 1998. The increase was
primarily attributable to increases in cash balances due to the acquisition of
Stratus and cash flow generated by operations.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the quarters ended March 31, 1999 and 1998
was 33.0% and 36.0%, respectively, excluding the effect of the tax benefit
associated with the credit to purchased in-process research and development
recorded in the first quarter of 1999. The lower effective tax rate for 1999 is
primarily attributable to a shift in certain manufacturing operations to foreign
jurisdictions with lower tax rates. The Company anticipates its 1999 effective
tax rate to be approximately 33.0%; however, the rate could change depending on
changes in the estimated amount or geographic mix of the Company's earnings,
changes in tax laws and regulations, or the effect of future acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's principal sources of liquidity included $1.24
billion 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 March 31, 1999. The increase in cash and cash equivalents of $46.4 million
for the period was principally due to $39.6 million provided by operating
activities and $65.1 million provided by financing activities, offset by $55.6
million used in investing activities. Net cash provided by operating
activities for the three months ended March 31, 1999 was primarily due to net
income, adjusted for non-cash charges and changes in working capital assets.
Net cash used in investing activities of $55.6 million for the three months
ended March 31, 1999 related primarily to net sales of investments,
investments in privately held companies, and expenditures for property and
equipment. Financing activities provided $65.1 million for the three months
ended March 31, 1999, due to proceeds from the exercise of stock options and
issuance of common stock in connection with the Company's stock plans.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
At March 31, 1999, the Company had $1.180 billion 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.
RECENT PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9, Modification of SOP 97-2, "Software Revenue
Recognition," with Respect to Certain Transactions ("SOP 98-9"). SOP 98-9 amends
SOP 97-2 to require recognition for multiple-element arrangements by means of
the "residual method" in certain circumstances. The provisions of SOP 98-9 that
extend the deferral of certain passages of SOP 97-2 became effective December
15, 1998. All other provisions are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Earlier application for financial
statements or information that has not been issued is permitted and retroactive
application is prohibited. SOP 98-9 is not expected to have a material impact on
Ascend's consolidated results of operations, financial position or cash flows.
Effective January 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement establishes
standards for reporting and displaying income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires the classification of items of comprehensive
income by their nature in a financial statement and the accumulated balance of
other comprehensive income separately accumulated other comprehensive income in
the in the equity section of the balance sheet. The Company's accumulated other
comprehensive income consists of investment valuation and foreign currency
adjustments. Comprehensive income (loss) does not have a material impact on
Ascend's consolidated results of operations, financial position, cash flows or
total shareowners' equity.
16
<PAGE>
ASCEND COMMUNICATIONS, INC.
PART I-ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK FACTORS:
- -------------
FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of risks and uncertainties as discussed below.
MERGER AGREEMENT WITH LUCENT
On January 12, 1999, the Company and Lucent executed a definitive merger
agreement pursuant to which Dasher Merger Inc., a Delaware corporation and a
wholly owned subsidiary of Lucent, will merge, subject to certain conditions,
with and into the Company and the Company will become a wholly owned subsidiary
of Lucent. Under the terms of the merger, each outstanding share of common
stock of the Company will be exchanged for 1.65 shares of common stock of
Lucent, which number of shares gives effect to the two-for-one stock split
announced by Lucent in February 1999 and is subject to further changes in
Lucent's capitalization. The announcement of the merger could have an impact on
the ability of the Company to market its products and services to its customers,
possibly causing operating results to vary from those expected. The merger is
subject to approval by the Company's stockholders and various regulatory
agencies, including the Department of Justice, and there can be no assurance
that the merger will be successfully completed. In the event that the merger is
not successfully completed, the Company's results of operations and common stock
price could be materially adversely affected.
If the merger is successfully completed, holders of the Company's common stock
will become holders of Lucent common stock. Lucent's business is different from
that of the Company, and Lucent's results of operations, as well as the price of
Lucent common stock, may be affected by factors different than those affecting
the Company's results of operations and the price of the Company's common stock.
For a discussion of Lucent's business and certain factors to consider in
connection with such business, see Lucent's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998.
DEPENDENCE ON THE INTERNET ACCESS AND TELECOMMUNICATIONS MARKETS
A substantial portion of the Company's sales of its 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 its core systems
products is related to the telecommunications carrier industry. In North
America, the Company sells a substantial percentage of its 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 have a material adverse effect on the
Company's business, results of operations or financial condition.
17
<PAGE>
RISK FACTORS (CONTINUED)
INTEGRATION OF ACQUISITIONS
The Company concluded the acquisition of one company in 1998 and four
companies in 1997. 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. 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 acquired
companies could have a material adverse effect on the Company's business,
financial condition or results of operations.
INTERNATIONAL SALES
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, political and economic instability,
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, financial condition or results of operations. Although substantially
all of 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 a material
adverse effect on the Company's business, results of operations and financial
condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
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, all of which are
difficult to forecast. In the Company's most recent quarters, the sequential
sales growth has fluctuated significantly, 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
18
<PAGE>
RISK FACTORS (CONTINUED)
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 materially 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 expenses are 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 sales
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the shortfall.
RAPIDLY CHANGING TECHNOLOGIES
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 have a material adverse effect on
the Company's business, results of operations or financial condition.
COMPETITION
The Company mainly competes in four segments of the data networking market:
(i) 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, 3Com, Newbridge, Nortel 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 have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company expects that its gross margins could be adversely affected in
future periods by price changes resulting from increased competition. In
addition, increased sales of Pipeline
19
<PAGE>
RISK FACTORS (CONTINUED)
products as a percentage of net sales may materially adversely affect the
Company's gross margins in future periods as these products have lower gross
margins than the Company's other products.
RELIANCE ON THIRD PARTY TELECOMMUNICATIONS CARRIERS, VALUE-ADDED RESELLERS AND
DISTRIBUTORS
The Company's use of third parties to distribute its products to VARs may
adversely affect the Company's gross margins. The Company's sales are, to a
significant degree, made through telecommunications carriers, 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 or product pricing arrangement that the Company may implement in one
or more distribution channels for strategic purposes could materially adversely
affect gross profit margins.
DEPENDENCE ON KEY PERSONNEL
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 materially adversely affect the Company.
MANAGEMENT OF GROWTH
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.
20
<PAGE>
RISK FACTORS (CONTINUED)
PROPRIETARY RIGHTS
The Company relies on a combination of patents, copyright, trade secret laws
and non-disclosure agreements to protect its proprietary technology. However,
there can be no assurance that any of the Company's proprietary technology
rights will not be challenged, invalidated or circumvented, or that any such
rights will provide significant competitive advantage. From time to time, the
Company receives notices from third parties regarding patent or copyright
claims. Any such claims, with or without merit, could be time-consuming to
defend, result in costly litigation, divert management's attention and resources
and cause the Company to incur significant expenses. 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.
DEPENDENCE ON CONTRACT MANUFACTURERS AND SINGLE-SOURCE SUPPLIERS
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 materially adversely affect the Company's revenues and financial results
and could impact customer relations.
ASCEND YEAR 2000 READINESS DISCLOSURE
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 a materially adverse impact on the Company's operations. The risk for
the Company 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 the Company's customers, and the potential reduced spending the
Company's customers 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.
21
<PAGE>
RISK FACTORS (CONTINUED)
Internal Systems. The Company has almost completed a comprehensive assessment
and evaluation of its systems, equipment and facilities. The Company 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 June 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. The Company is also in the process of contacting its critical
suppliers to determine whether the suppliers' operations and the products and
services they provide are Year 2000 compliant. The Company'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 June 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 a materially 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. On the basis of product designs and quality assurance tests, the
Company believes the majority of its current products are Year 2000 compliant;
however, some of the products sold by the Company in the past may not be Year
2000 compliant. The Company currently identifies the products that it has
certified as Y2K compliant through its Year 2000 readiness disclosure to
customers, and has not warranted that its other products are Year 2000
compliant. However, because the Company's products are sometimes bundled or
marketed with, or used by customers with, third party products which may not
always be Year 2000 compliant, the Company may experience an increase in
warranty and other claims as a result of the Year 2000 transition and such
claims could have a material adverse impact on the Company's results of
operations or financial condition. In addition, in the event that a significant
number of the Company's customers experience Year 2000-related problems, whether
or not due to the Company's products, demand for technical support and
assistance may increase substantially. In such case, the Company's costs for
providing technical support may rise and the quality of such technical support
or the Company's ability to manage incoming requests may be impaired.
22
<PAGE>
RISK FACTORS (CONTINUED)
Sales Impact. Year 2000 compliance is an issue for almost all businesses,
whose computer systems and applications may require significant hardware and
software upgrades or modifications. Companies owning and operating such systems
may plan to devote a substantial portion of their information systems' spending
to fund such upgrades and modifications and divert spending away from networking
solutions. Such changes in customers' spending patterns could have a material
adverse impact on the Company's sales, operating results or financial condition.
General. In order to evaluate the risks outlined above and to implement Year
2000 compliance solutions, Ascend has established a company-wide team coupled
with outside consultants. The internal Ascend Year 2000 compliance team
consists of representatives from various functional areas, including risk
management, finance, engineering, purchasing, and legal. The external Year 2000
compliance team includes various national Year 2000 compliance consultants. The
team has established an overall Year 2000 compliance goal, incremental
milestones and meets regularly to assess progress towards its milestones.
Currently, the Company is establishing contingency plans to address the impact
to the Company in the event its suppliers, products or internal systems are not
Year 2000 compliant.
Costs incurred to date on the Company's Year 2000 compliance project are
approximately $ 12.6 million. Total costs of the project and compliance are
estimated to be $20.0 million to $24.0 million and should be substantially
incurred by June 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.
VOLATILITY OF STOCK PRICE
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 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 materially adversely affect the
market price of the Company's common stock. 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 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.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 13, 1999, four purported class action complaints challenging the
proposed merger between Ascend and Lucent were filed in the Delaware Court of
Chancery by individuals who claim to be stockholders of Ascend. The complaints
name the Company, its directors and certain former directors of Cascade
Communications Corp. as defendants. One of the complaints also names Lucent as
a defendant. The complaints allege, among other things, that the defendants
have resolved to wrongfully allow Lucent to obtain the assets of Ascend at a
bargain price, that the defendants have breached their fiduciary duties to the
class, that action by the defendants will prevent Ascend's stockholders from
receiving a fair price for their shares, that Ascend's directors failed to make
an informed decision in recommending Lucent's offer, and that the terms of the
proposed merger fail to include appropriate mechanisms to protect Ascend's
stockholders against a decline in the price of Lucent's or Ascend's stock. The
complaint naming Lucent alleges that it aided and abetted the breaches of
fiduciary duty by the other defendants. The plaintiffs seek, among other
things, (i) a declaration that the proposed transaction is unfair, unjust and
inequitable; (ii) preliminary and permanent injunctive relief against the
consummation or closing of the proposed transaction; (iii) rescission of the
transaction in the event it is consummated; (iv) damages, (v) allowance for
plaintiffs' attorneys' fees and expenses; and, (vi) other relief as the Court
may deem just and proper.
By Order of the Court of Chancery dated April 8, 1999, the four actions were
consolidated for all purposes. The Order provides, among other things, that
plaintiffs will file a consolidated amended complaint. No such consolidated
amended complaint has been filed as of April 27, 1999.
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
the named defendants 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 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 financial position, future results of
operations or cash flows in a particular period.
The Company and various of its current and former officers and directors are
defendants in a number of consolidated class action lawsuits pending in the
United States District Courts for the Central District of California, which have
been 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 ("federal securities actions"). In
addition, the Company and one of its officers are defendants in a securities
action filed in the Superior Court of Alameda County, California ("state
securities action"). The state securities action purports to be brought on
behalf of all purchasers of the Company's stock between July 15, 1997 and
September 29, 1997 (excluding the defendants and parties related to them). The
lawsuits allege
24
<PAGE>
LEGAL PROCEEDINGS (CONTINUED)
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.
On August 17, 1998, the Court certified the federal securities actions as a
class action and appointed four plaintiffs to serve as class representatives.
On September 4, 1998, plaintiffs filed a second Amended and Consolidated
Complaint. On February 2, 1999, the Court issued an Order granting the motion
to dismiss and allowing plaintiffs to file an amended complaint. The amended
federal securities action complaint is due on June 4, 1999. On April 2, 1999,
defendants filed a demurrer to the state securities action complaint. This
motion is scheduled to be heard on June 15, 1999.
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 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 financial position, future results of
operations 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.
In April 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. General Datacomm
Industries amended its complaint in February 1999 to assert breach of contract
and breach of fiduciary duty claims against the three founders. These claims
include an assertion by General Datacomm Industries that it owns certain
intellectual property developed by Sahara in the six month period following the
termination of the founder's employment with General Datacomm Industries. 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
25
<PAGE>
LEGAL PROCEEDINGS (CONTINUED)
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.
26
<PAGE>
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Please refer to Part I-Item 3-quantitative and qualitative disclosures about
market risk.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
27
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
Current Report on Form 8-K dated January 15, 1999 was filed pursuant to
Item 5 (Other Events), announcing that on January 12, 1999, the Company had
entered into an agreement and plan of merger and related stock option
agreement with Lucent Technologies, Inc.
28
<PAGE>
ASCEND COMMUNICATIONS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASCEND COMMUNICATIONS, INC.
DATE May 17, 1999 by /s/ Michael F.G. Ashby
- --------------------- ------------------------------
Michael F.G. Ashby, Vice President,
Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 489,019
<SECURITIES> 219,032
<RECEIVABLES> 479,887
<ALLOWANCES> 25,919
<INVENTORY> 242,449
<CURRENT-ASSETS> 1,636,183
<PP&E> 618,385
<DEPRECIATION> 335,182
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<CURRENT-LIABILITIES> 456,667
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<COMMON> 222
<OTHER-SE> 2,297,244
<TOTAL-LIABILITY-AND-EQUITY> 2,765,163
<SALES> 509,395
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<CGS> 192,026
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<OTHER-EXPENSES> 177,650
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