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 March 31, 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 192,849,018 as of March 31, 1998.
This report, including exhibits, consists of 218 pages. The Index To
Exhibits is found on page 26.
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 related lawsuits which purport to be class
actions filed on behalf of all persons who purchased or acquired the
Company's stock (excluding the defendants and parties related to them) for
the period November 5, 1996 to September 30, 1997. The lawsuits, which are
substantially identical, allege that the defendants violated the federal
securities laws by engaging in a scheme to artificially inflate and
maintain the Company's stock price by disseminating materially false and
misleading information concerning its business and earnings and the
development, efficiency, introduction and deployment of its digital modems
based on 56K-bps technology.
All of these actions are in the early stages of proceedings and the Company
is currently investigating the allegations. Based on its current
information, the Company believes the suits to be without merit and intends
to defend itself and its officers and directors vigorously. Although it is
reasonably possible the Company may incur a loss upon the conclusion of
these claims, an estimate of any loss or range of loss cannot be made. No
provision for any liability that may result upon adjudication has been made
in the Company's consolidated financial statements. In the opinion of
management, resolution of this matter is not expected to have a material
adverse effect on the financial position of the Company. However, depending
on the amount and timing, an unfavorable resolution of this matter could
materially affect the Company's future results or cash flows in a
particular period. In connection with these legal proceedings, the Company
expects to incur substantial legal and other expenses. Shareholder suits of
this kind are highly complex and can extend for a protracted period of
time, which can substantially increase the cost of such litigation and
divert the attention of the Company's management.
On April 16, 1997, a civil action was filed against Sahara, its three
founders and ten employees of Sahara by General Datacomm Industries, Inc.
in the Superior Court for the State of Connecticut. The complaint alleges
several causes of action, including: breach of contract; tortious
interference with contractual relations; misappropriation of trade secrets;
unfair competition and violation of the Connecticut Unfair Trade Practices
Act. The plaintiff seeks relief of unspecified monetary damages, costs and
injunctive relief. The Company has not yet engaged in substantive discovery
and the ultimate outcome of this matter cannot yet be determined. The
Company plans to vigorously defend this lawsuit. No provision for any
liability that may result from the action has been recognized in the
consolidated financial statements. In the opinion of management, resolution
of this litigation is not expected to have a material adverse effect on the
financial position of the Company. However, depending on the amount and
timing, an unfavorable resolution of this matter could materially affect
the Company's future results or cash flows in a particular period.
On April 18, 1997, the Company received a claim and request for royalties
alleging patent infringement on four separate patents. Subsequently, the
claim and request for royalties was amended to include four additional
patents. The Company is currently investigating the claims of such
infringement and thus the ultimate outcome of this claim cannot yet be
determined. No provision for any liability that may result from the claim
has been recognized in the consolidated financial statements. In the
opinion of management, resolution of this matter is not expected to have a
material adverse effect on the financial position of the Company. However,
depending on the amount and timing, an unfavorable resolution of this
matter could materially affect the Company's future results or cash flows
in a particular period.
The Company is a party as a defendant in various other lawsuits,
contractual disputes and other legal claims arising in the ordinary course
of business, the results of which are not presently determinable. However,
in the opinion of management, after consultation with legal counsel, the
amount of losses that might be sustained, if any, from these lawsuits would
not materially affect the Company's financial position. However, depending
on the amount and timing, an unfavorable resolution of some or all of these
matters could materially affect the Company's future results of operations
or cash flows in a particular period.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE CURRENT
VIEWS OF THE COMPANY WITH RESPECT TO FUTURE EVENTS THAT WILL HAVE AN EFFECT
ON ITS FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INCLUDE THE WORDS
"EXPECTS," "BELIEVES," "ESTIMATES," AND SIMILAR EXPRESSIONS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING THOSE REFERRED TO UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS"
AND ELSEWHERE HEREIN, THAT COULD CAUSE ACTUAL FUTURE RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE CURRENTLY ANTICIPATED. READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS.
The information set forth below should be read in conjunction with the
unaudited interim condensed consolidated financial statements and notes
thereto included in Part 1 - Item 1 of this Quarterly Report and the
audited financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the year
ended December 31, 1997 included in the Company's 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 ended March 31, 1998
and 1997, respectively:
QUARTER ENDED MARCH 31, 1997
----------------------------
1998 1997
------ ------
Net sales.................................. 100% 100%
Cost of sales.............................. 36 35
------ ------
Gross margin............................. 64 65
Operating expenses:
Research and development................. 14 12
Sales and marketing...................... 22 18
General and administrative............... 3 3
Purchased research and development....... - 79
------ ------
Total operating expenses............... 39 112
------ ------
Operating income (loss).................... 25 (47)
Interest income, net....................... 2 2
------ ------
Income (loss) before income taxes.......... 27 (45)
Provision for income taxes................. 10 11
------ ------
Net income (loss).......................... 17% (56)%
======= ======
NET SALES
Net sales for the quarter ended March 31, 1998 were $305.1 million, an
increase of 4% over net sales of $292.7 million for the first quarter of
1997. UUNet, an Internet Service Provider, accounted for approximately 20%
and 18% of net sales for the quarters ended March 31, 1998 and 1997,
respectively. International sales accounted for approximately 26% of net
sales for the quarter ended March 31, 1998 compared to 30% of net sales for
the same period in 1997. This decreases was principally due to decreased
sales of the Company's products in Europe.
The following table provides a breakdown of net sales by business unit as a
percentage of total net sales:
QUARTER ENDED MARCH 31,
-----------------------
BUSINESS UNIT 1998 1997
- ---------------------------------------- -------- --------
Access Switching......................... 44% 59%
Core Systems............................. 41 30
Enterprise Access........................ 10 8
Other.................................... 5 3
-------- --------
Total Company.......................... 100% 100%
======== ========
ACCESS SWITCHING - The Access Switching business unit offers the MAX family
of products. Access Switching products accounted for 44% and 59% of total
Company net sales for the quarters ended March 31, 1998 and 1997,
respectively. The decrease in net sales of Access Switching products was
primarily attributable to large shipments of TNT product to customers in
North America in the first quarter 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, 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 30% of total Company net sales for
the quarters ended March 31, 1998 and 1997, respectively. The increase in
net sales of Core Systems products was primarily attributable to continuing
market acceptance of the CBX500 ATM switches.
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
10% and 8% of total Company net sales for the quarters ended March 31, 1998
and 1997, respectively. The increase in net sales of Enterprise Access
products was primarily attributable to strength in demand for Pipelines
from the Company's indirect distribution channels.
GROSS MARGIN
Gross margin was 64% and 65% for the quarters ended March 31, 1998 and
1997, respectively. The decrease in gross margin for the quarter ended
March 31, 1998 was primarily due to increased manufacturing period costs.
In the future, the Company's gross margins may be affected by several
factors, including the mix of products sold, the price of products sold,
the introduction of new products with lower gross margins, the distribution
channels used, price competition, increases in material costs and changes
in other components of cost of sales.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 18% to $41.0 million in the
first quarter of 1998 from $34.7 million in the first quarter of 1997.
Research and development expenses as a percent of net sales increased to
14% for the first quarter of 1998 compared to 12% for the same quarter 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 research and 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 27% to $67.3 million for the first
quarter of 1998 from $53.2 million for the first quarter of 1997. Sales and
marketing expenses as a percent of net sales increased to 22% for the first
quarter of 1998 as compared to 18% for the same quarter of 1997. These
increases were primarily due to the addition of sales, marketing and
technical support personnel, increased commissions, spending for marketing
materials and trade shows, advertising and promotions, expenditures for
demonstration and loaner equipment used by customers, and expenses
associated with opening additional sales offices in North America, Europe
and Asia and the Pacific Basin. The growth in sales, marketing and
technical support personnel was primarily due to the need to manage the
activities of an increased number of value-added resellers and
distributors, end-user customers and new products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 11% to $10.0 million for the
first quarter of 1998 from $9.1 million for the first quarter of 1997. This
increase was primarily due to the addition of finance, information systems
and administrative personnel, accruals for performance bonuses, increased
facilities costs and the cost of investor relations activities. General and
administrative expenses as a percent of net sales were 3% for the quarters
ended March 31, 1998 and 1997.
PURCHASED RESEARCH AND DEVELOPMENT
Purchased research and development costs were $231.1 million for the
quarter ended March 31, 1997. These costs were for the purchase of
technology and related assets associated with the acquisitions of InterCon
Systems Corporation and Sahara Networks, Inc. during the first quarter of
1997. These acquisitions provided technology and expertise that the Company
used to enhance and expand the breadth of its offerings to end-user
markets.
COST OF MERGERS
For the year ended December 31, 1997, the Company charged to operations
one-time merger costs of approximately $150.3 million. These costs
principally related to the acquisitions of Cascade and Whitetree and
consist primarily of merger transaction costs and accruals for redundant
assets, redundant products, fees relating to the cancellation of certain
obligations and employee severance packages. The total charge included
$54.1 million relating to merger transaction costs and $96.2 million of
integration expenses. Included in integration expenses are the following
amounts: (1) $7.2 million for severance and outplacement costs for
employees involved in duplicate functions, including manufacturing and
logistics, sales and marketing, and finance and administration, (2) $67.4
million for redundant assets and assets relating to duplicate product
lines, and (3) $21.6 million relating to the cancellation of redundant
facility leases and other contracts and obligations.
The following summarizes merger related accrual activity for the quarter
ended March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
NON-CASH
CASH EXPENDITURES ACTIVITY
------------------------------------------- ------------
ASSETS
CANCELLATION ASSOCIATED
MERGER SEVERANCE OF FACILITY WITH
TRANSACTION AND LEASES AND DUPLICATE
COSTS OUT-PLACEMENT OTHER CONTRACTS PRODUCT LINES TOTAL
----------- ------------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
12/31/97 $ 6,075 $ 488 $ 15,378 $ 10,373 $ 32,314
Balance
Cash Payments - (488) (3,360) - (3,848)
Asset
Writeoffs - - - (4,829) (4,829)
-------- -------- --------- --------- ----------
3/31/98
Balance $ 6,075 - 12,018 5,544 23,637
======== ======== ========= ========= ==========
</TABLE>
The remaining portion of the merger related accruals at March 31, 1998 was
approximately $23.6 million. Total expected cash expenditures for the
mergers were estimated to be approximately $82.9 million, of which
approximately $64.8 million was disbursed prior to March 31, 1998.
Termination benefits paid to 267 employees through March 31, 1998 were $7.2
million.
INTEREST INCOME, NET
Interest income (net) decreased by approximately $312,000 to $5.0 million
(2% of net sales) for the first quarter of 1998 compared to $5.3 million
for the same quarter of 1997. This decrease in interest income (net) is due
primarily to shifting investments from taxable securities to non-taxable
securities.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the quarters ended March 31, 1998 and
1997 was 36.0% and 38.2%, respectively, exclusive of the effect of one-time
non-deductible in-process research and development expenses. The lower
effective tax rate for 1998 is primarily attributable to reduction in the
overall state effective tax rate and utilization of various tax credits.
The Company anticipates its 1998 effective tax rate to be approximately
36.0%, however, the rate could change upon a change in the estimated amount
or geographic mix of the Company's earnings, changes in U.S. tax law such
as reinstatement of the research tax credit, or the effect of future
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's principal sources of liquidity included
$691.4 million of cash and cash equivalents, short-term investments and
investments, and an unsecured $25.0 million revolving line of credit which
expires in June 1999. There were no borrowings or amounts outstanding under
the line of credit as of March 31, 1998. The increase in cash and cash
equivalents of $100.2 million for the period was principally due to $107.7
million of funds provided by operating activities and $33.2 million of
funds provided by financing activities, partially offset by $40.7 million
of funds used in investing activities. The net cash provided by operating
activities for the three months ended March 31, 1998 was primarily due to
increases in accrued liabilities, accrued compensation and accounts payable
and increased net income, partially offset by increases in other assets,
accounts receivable and inventories.
Net cash used in investing activities of $40.7 million for the three months
ended March 31, 1998 related primarily to net purchases, maturities and
sales of investments and expenditures for furniture, fixtures, and
equipment. Financing activities provided $33.2 million for the three months
ended March 31, 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 March 31, 1998, the Company had $823.0 million in working capital. The
Company currently has no significant capital commitments other than
commitments under facilities and operating leases. The Company believes
that its available sources of funds and anticipated cash flow from
operations will be adequate to finance current operations, anticipated
investments and capital expenditures for at least the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of risks and uncertainties as discussed in the Company's 1997
Annual Report on Form 10-K. This Report on Form 10-Q should be read in
conjunction with Form 10-K, particularly the section entitled "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 public carrier industry will increase significantly in the
future and could adversely affect the Company's business, results of
operations and financial condition.
The Company 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.
The Company typically operates with a relatively small backlog. As a
result, quarterly sales and operating results generally depend on the
volume of, timing of and ability to fulfill orders received within the
quarter, which are difficult to forecast. In the Company's most recent
quarters, the sequential sales growth slowed from prior levels, and a
disproportionate share of the sales occurred in the last month of the
quarter. These occurrences are extremely difficult to predict and may
happen in the future. The Company's ability to meet financial expectations
could be hampered if the nonlinear sales pattern continues in future
periods. Accordingly, the cancellation or delay of even a small percentage
of customer purchases could adversely affect the Company's results of
operations in the quarter. A significant portion of the Company's net sales
in prior periods has been derived from relatively large sales to a limited
number of customers, and therefore the failure of the Company to secure
expected large sales may have a material adverse impact on results of
operations. A significant portion of the Company's expense levels is
relatively fixed in advance based in large part on the Company's forecasts
of future sales. If sales are below expectations in any given quarter, the
adverse impact of the shortfall on the Company's operating results may be
magnified by the Company's inability to adjust spending to compensate for
the shortfall.
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, frequent new product
introductions and short product life cycles. The introduction of new
products requires the Company to manage the transition from older products
in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand.
Furthermore, products such as those offered by the Company may contain
undetected or unresolved hardware problems or software errors when they are
first introduced or as new versions are released. There can be no assurance
that, despite extensive testing by the Company, hardware problems or
software errors will not be found in new products after commencement of
commercial shipments, resulting in delay in or loss of market acceptance.
Future delays in the introduction or shipment of new or enhanced products,
the inability of such products to gain market acceptance or problems
associated with new product transitions could adversely affect the
Company's business, results of operations and financial condition.
Many computer systems were not designed to handle any dates beyond the Year
1999, and therefore computer hardware and software will need to be modified
prior to the Year 2000 in order to remain functional. The Company is
concerned that many enterprises will be devoting a substantial portion of
their information systems spending to resolving this upcoming Year 2000
problem. This may result in spending being diverted from networking
solutions over the next three years. Additionally, the Company will have to
devote resources to providing the Year 2000 solution for its own products.
The Year 2000 issue could lower demand for the Company's products while
increasing the Company's costs. These factors could have a material adverse
impact on the Company's financial results.
The Company believes the majority of its major systems are currently Year
2000 compliant, and costs to transition the Company's remaining systems to
Year 2000 compliance are not anticipated to be material. There can be no
assurance that systems operated by third parties that interfere with or
contain the Company's products will timely achieve Year 2000 compliance.
Any failure of these third parties' systems to timely achieve Year 2000
compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company mainly competes in four segments of the data networking market:
(i) wide area network ("WAN") and Internet access, (ii) WAN and Internet
backbone switching, (iii) remote LAN access and Internet subscriber access,
and (iv) videoconferencing and multimedia access. The Company competes in
one or more of these market segments with Cisco Systems, Inc., 3Com
Corporation, Bay Networks, Inc., Newbridge Networks, Inc., Shiva
Corporation, Northern Telecom, Inc., and many others. Some of these
competitors have substantially greater financial, marketing and technical
resources than the Company. The Company expects additional competition from
existing competitors and from a number of other companies, some of which
may have substantially greater financial, marketing and technical resources
than the Company, that may enter the Company's existing and future markets.
Increased competition could result in price reductions, reduced profit
margins and loss of market share, each of which would adversely affect the
Company's business, results of operations and financial condition.
The Company's sales are, to a significant degree, made through
telecommunications carriers, value-added resellers ("VARs") and
distributors. Accordingly, the Company is dependent on the continued
viability and financial stability of these companies. While the Company has
contractual relationships with many telecommunications carriers, VARs and
distributors, these agreements do not require these companies to purchase
the Company's products and can be terminated by these companies at any
time. There can be no assurance that any of the telecommunications
carriers, VARs or distributors will continue to market the Company's
products. The telecommunications carrier customers, to the extent they are
resellers, VARs and distributors, generally offer products of several
different companies, including products that are competitive with the
Company's products. Accordingly, there is a risk that these companies may
give higher priority to products of other suppliers, thus reducing their
efforts to sell the Company's products. Any special distribution
arrangement and product pricing arrangement that the Company may implement
in one or more distribution channels for strategic purposes could adversely
affect gross profit margins.
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product
development personnel. The Company does not have employment contracts with
its key personnel and does not maintain any key person life insurance
policies. The loss of key personnel could adversely affect the Company.
The Company is currently experiencing rapid growth and expansion, which has
placed, and will continue to place, a significant strain on its
administrative, operational and financial resources and increased demands
on its systems and controls. This growth has resulted in a continuing
increase in the level of responsibility for both existing and new
management personnel. The Company anticipates that its continued growth
will require it to recruit and hire a substantial number of new
engineering, sales, marketing and managerial personnel. There can be no
assurance that the Company will be successful at hiring or retaining these
personnel. The Company's ability to manage its growth successfully will
also require the Company to continue to expand and improve its operational,
management and financial systems and controls and to expand its
manufacturing capacity. If the Company's management is unable to manage
growth effectively, the Company's business, results of operations and
financial condition may be materially and adversely affected.
The Company relies on a combination of patents, copyright, and trade secret
laws and non-disclosure agreements to protect its proprietary technology.
The Company is currently involved in patent disputes the results of which
are not presently determinable. Such disputes could result in significant
expenses to the Company and divert the efforts of the Company's technical
management personnel.
Although the Company generally uses standard parts and components for its
products, certain components, including certain key microprocessors and
integrated circuits, are presently available only from a single source or
from limited sources. The Company has no supply commitments from its
vendors and generally purchases components on a purchase order basis as
opposed to entering into long term procurement agreements with vendors. The
Company has generally been able to obtain adequate supplies of components
in a timely manner from current vendors or, when necessary to meet
production needs, from alternate vendors. The Company believes that, in
most cases, alternate vendors can be identified if current vendors are
unable to fulfill needs. However, delays or failure to identify alternate
vendors, if required, or a reduction or interruption in supply, or a
significant increase in the price of components could adversely affect the
Company's revenues and financial results and could impact customer
relations.
The Company has concluded the acquisition of four companies in 1997 and
five companies in 1996. Achieving the anticipated benefits of these
acquisitions or any other acquisitions the Company may undertake will
depend in part upon whether the integration of the acquired companies'
products and technologies, research and development activities, and sales,
marketing and administrative organizations is accomplished in an efficient
and effective manner, and there can be no assurance that this will occur.
Moreover, the integration process may temporarily divert management
attention from the day-to-day business of the Company. Failure to
successfully accomplish the integration of the acquired companies could
have a material adverse effect on the Company's business, financial
condition and/or results of operations.
The Company's common stock has experienced significant price volatility,
and such volatility may occur in the future, particularly as a result of
quarter-to-quarter variations in the actual or anticipated financial
results of the Company or other companies in the networking industry,
announcements by the Company or competitors regarding new product
introductions or other developments affecting the Company and/or changes in
financial estimates by public market analysts. In addition, the market has
experienced extreme price and volume fluctuations that have affected the
market price of many technology companies' stocks and that have been
unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations may adversely affect the market
price of the Company's common stock. Recent periods of volatility in the
market price of a Company's securities resulted in securities class action
litigation against the Company and various officers and directors. Such
litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse
effect on the operating results and financial condition of the Company.
In consideration of these factors, there can be no assurance that the
Company will be able to sustain growth in revenues or profitability,
particularly on a period-to-period basis.
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)
