<PAGE>
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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, 1996
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 0-25740
ACT NETWORKS, INC.
(Exact name of registrant as specified in its charter)
____________________
DELAWARE 77-0396887
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
188 CAMINO RUIZ, CAMARILLO, CALIFORNIA 93012
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (805) 388-2474
________________________________________________________________________________
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: Not Applicable
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
_____ _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
_____ _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of April 30, 1996, there were 7,469,532 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1996 and June 30, 1995 . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
March 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements
of Cash Flows for the Nine Month Periods
Ended March 31, 1996 and 1995. . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . 13
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACT NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,327,767 $ 30,546,278
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,076,470 ---
Accounts receivable, less allowances of $64,875
in March and $63,000 in June . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,983,417 4,529,210
Accounts receivable from stockholder . . . . . . . . . . . . . . . . . . . . . . . . 446,244 669,160
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,268,784 4,677,190
Tax credits and grants receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 514,250 ---
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 667,875 394,591
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,284,807 40,816,429
Plant, equipment and other improvements:
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,627,750 1,696,257
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361,349 359,500
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,389 411,438
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543,667 284,659
------------ ------------
4,253,155 2,751,854
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 1,927,736 1,233,003
------------ ------------
2,325,419 1,518,851
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,955,797 ---
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464,486 561,498
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,030,509 $ 42,896,778
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,649,490 $ 1,475,020
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,985 625,627
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,078 239,888
Accrued commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,522 153,656
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,089 86,958
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,568,164 2,581,149
Notes payable and capital leases, less current portion . . . . . . . . . . . . . . . . . 187,547 ---
Stockholders' equity:
Common stock, $.01 par value
Authorized - 40,000,000
Issued and outstanding - 7,456,830 in
March and 7,149,830 in June . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,327 7,150
Common stock paid-in capitalin excess of par
value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,058,649 42,662,121
Promon secured deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- (45,000)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,781,175) (2,308,642)
Accumulated translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . (10,003) ---
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,274,798 40,315,629
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . $ 39,030,509 $ 42,896,778
============ ============
</TABLE>
See notes to condensed financial sheets
3
<PAGE>
ACT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,030,487 $ 5,535,332 $ 19,299,372 $ 14,823,421
Expenses:
Cost of goods sold . . . . . . . . . . . . . . . . . . . 3,687,135 2,444,879 10,020,685 6,592,050
Research and development . . . . . . . . . . . . . . . . 1,271,054 973,729 3,550,015 2,696,181
Sales and marketing . . . . . . . . . . . . . . . . . . 1,910,100 1,305,515 5,068,552 3,382,907
General and administrative . . . . . . . . . . . . . . . 904,226 411,812 2,311,262 1,291,741
In-process research and
development . . . . . . . . . . . . . . . . . . . . . --- --- 5,600,000 ---
----------- ----------- ------------ ------------
7,772,515 5,135,935 26,550,514 13,962,879
----------- ----------- ------------ ------------
Income (loss) from operations . . . . . . . . . . . . . . . 257,972 399,397 (7,251,142) 860,542
Other:
Interest and other income
(expense) . . . . . . . . . . . . . . . . . . . . . . 269,532 (1,453) 951,250 (9,233)
Interest expense . . . . . . . . . . . . . . . . . . . . (39,345) (80,706) (39,345) (132,957)
----------- ----------- ------------ ------------
230,187 (82,159) 911,905 (142,190)
----------- ----------- ------------ ------------
Income (loss) before income taxes . . . . . . . . . . . . . 488,159 317,238 (6,339,237) 718,352
Provision for income taxes . . . . . . . . . . . . . . . . 93,567 --- 132,997 14,000
----------- ----------- ------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 394,592 $ 317,238 $ (6,472,234) $ 704,352
=========== =========== ============ ============
Net income (loss) per share . . . . . . . . . . . . . . . . $ 0.05 $ 0.07 $ (0.83) $ 0.15
=========== =========== ============ ============
Shares used in computing net
income (loss) per share . . . . . . . . . . . . . . . . 7,990,561 4,818,000 7,768,360 4,726,124
=========== =========== ============ ============
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
ACT NETWORKS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------------------
1996 1995
-------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,472,233) $ 704,352
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 792,797 421,415
Write-off of in-process research and development . . . . . . . . . . . . . . . . . 5,600,000 ---
Shareholder research and development . . . . . . . . . . . . . . . . . . . . . . . --- 225,000
Changes in operating assets
and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,201,182) (1,175,376)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,230,326) (2,172,820)
Prepaid expenses and
deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (776,803) 28,331
Accounts payable, accrued
expenses and income taxes
payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (263,982) 720,532
-------------- ------------
Net cash used in operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,551,729) (1,248,566)
INVESTING ACTIVITIES
Decrease (Increase) in short-term investments . . . . . . . . . . . . . . . . . . . . (6,596,398) ---
Purchase of plant, equipment
and other fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,388,199) (1,025,662)
Acquisition of Presticom, Inc.
net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,880,470) ---
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,012 (633,251)
-------------- ------------
Net cash used in investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,768,055) (1,658,913)
FINANCING ACTIVITIES
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (124,900) (2,150,000)
Stock warrants and options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,801 128,319
Shareholder secured research
and development deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 ---
Borrowings on line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,675 4,350,000
-------------- ------------
Net cash provided by financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,576 2,328,319
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,302) ---
-------------- ------------
Net decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,218,510) (579,160)
Cash and cash equivalents at
beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,546,278 796,476
-------------- ------------
Cash and cash equivalents at
end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,327,768 $ 217,316
-------------- ------------
-------------- ------------
Cash and cash equivalents paid
during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,575 $ 141,031
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,012 $ 14,000
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
ACT NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended March 31, 1996 are not necessarily indicative of the results that may
be expected for the year ended June 30, 1996. For further information, refer
to the financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended June 30, 1995.
The balance sheet at June 30, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. See notes to condensed financial statements.
2. BUSINESS ACQUISITION
On November 30, 1995, ACT Networks, Inc. and Canada Inc., a wholly-owned
subsidiary of the Company, acquired all the issued and outstanding shares of
Presticom Inc., a Canadian corporation ("Presticom"). Presticom is a
developer of multiple protocol frame relay access devices with expertise in
the SNA environment. The aggregate purchase price paid by the Company was
approximately $8,568,346 consisting of $7,287,495 paid in cash and the
issuance of 176,365 shares of common stock of the Company with an estimated
fair market value of $1,289,851, representing a discount from the quoted
market price at the date of acquisition due to certain trading restrictions
placed on the stock pursuant to the agreement.
The acquisition was accounted for as a purchase and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of acquisition. The purchase price plus costs directly
attributable to the completion of the acquisition have been allocated to the
assets and liabilities acquired. Approximately $5,600,000 of the total
purchase price represented the value of in-process research and development
that had not yet reached technological feasibility and was charged to the
Company's operations.
The Company's consolidated results of operations include the operating
results of Presticom from the acquisition date. The following unaudited pro
forma information combines the consolidated results of operations of the
Company and Presticom as if the acquisition had occurred on July 1, 1995 and
1994. Adjustments have been made to reflect the amortization of goodwill
identified in the purchase price allocation, the reduction in interest income
earned or increase in interest expense incurred due to the decrease in cash
position or increased borrowings resulting from the cash used as part of the
acquisition consideration, and the issuance of common stock as part of the
acquisition consideration. The pro forma information is presented for
illustrative purposes only, and is not necessarily indicative of what the
actual results of operations would have been during such periods or
representative of future operations.
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
----------------- -----------------
Net sales $ 20,177,453 $ 16,242,030
Net income (loss) (1,534,523) 55,327
Net income (loss) per share (0.20) 0.01
The pro forma information presented above does not reflect the write off of in-
process research and development costs of $5,600,000 which was included in the
actual operating results for the nine-months ended March 31, 1996.
6
<PAGE>
3. CREDITS AND GRANTS
The Company receives foreign credits and grants from Canada and the Province
of Quebec related to research and development expenditures made by its
Canadian subsidiary. These amounts are reflected as a reduction of research
and development expense in the Company's Statement of Operations. Amounts
receivable as of March 31, 1996 of such credits and grants amounted to
$514,250. For the nine months ended March 31, 1996, $78,400 of these credits
and grants were reflected as a reduction of research and development expense.
4. INVENTORIES
The components of inventory consist of the following:
MARCH 31, 1996 JUNE 30, 1995
-------------- -------------
Purchased parts . . . . . . . . . . . . . . . $ 1,879,420 $ 2,177,590
Sub-assemblies; finished goods . . . . . . . 5,389,364 2,499,600
-------------- -------------
$ 7,268,784 $ 4,677,190
============== =============
5. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options and warrants (using the modified treasury stock method) have been
included in the computation when dilutive. Pursuant to the Securities and
Exchange Commission (SEC) Staff Accounting Bulletins, all common and common
equivalent shares issued by the Company at an exercise price below the public
offering price during the twelve-month period prior to the offering (cheap
stock) have been included in the calculation as if they were outstanding for
the nine months ended March 31, 1995 (using the treasury stock method at the
initial public offering price per share and the if-converted method for
convertible preferred stock).
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
"RISK FACTORS" SECTION UNDER "OTHER INFORMATION."
GENERAL
ACT Networks, Inc. (the "Company") was founded in May 1987 to design,
manufacture and market wide area network communication products incorporating
advanced compression and integration technologies. Until September 1988, the
Company was primarily engaged in research and development. In fiscal 1989,
the Company shipped its first integrated product, the SDM-1, a point-to-point
multiplexer designed for use on a voice-band analog circuit. In fiscal 1991,
the Company began shipping the SDM-T, a point-to-point integrated multiplexer
designed for use over digital leased lines. The Company experienced
significant growth in net sales and first achieved profitability in fiscal
1991 as a result of the market acceptance of its SDM-T product. In fiscal
1993, the Company introduced the SDM-FP, its first integrated Frame Relay
access product.
On November 30, 1995, ACT Networks, Inc. and Canada Inc., a wholly-owned
subsidiary of the Company, acquired all the issued and outstanding shares of
Presticom Inc., a Canadian corporation ("Presticom"). Presticom is a
developer of multiple protocol frame relay access devices with expertise in
the SNA environment. The aggregate purchase price paid by the Company was
approximately $8,568,346 consisting of $7,287,495 paid in cash and the
issuance of 176,365 shares of the Company's Common Stock. The acquisition
was accounted for as a purchase and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair market values at the date
of acquisition. The purchase price plus costs directly attributable to the
completion of the acquisition have been allocated to the assets and
liabilities acquired. Approximately $5,600,000 of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and was charged to the Company's operations.
The Company's future operating results will be dependent upon the
development and growth of the public and private wide area network
communications markets for its products and, in particular, its integrated
Frame Relay access products. Certain of these markets are currently emerging
and may not continue to develop, whether as a result of competition,
technological change, market forces or otherwise.
The average sales price for each of the Company's products has tended to
decrease over time due to competition and other factors. The Company
anticipates that this trend will continue. Price erosion of existing
products and the introduction of less expensive networking alternatives by
the Company or competitors could adversely affect the Company's margins and
results of operations.
Sales to customers outside the United States accounted for approximately
68%, 70% and 66% of the Company's net sales for the fiscal years ended June
30, 1993, 1994 and 1995, respectively, and approximately 56% for the nine
months ended March 31, 1996, and the Company expects that international sales
will continue to account for a significant portion of the Company's net sales
in future periods. In addition, the Company believes that a majority of its
sales to customers inside the United States represent sales of products which
are used or resold in markets outside the United States. International sales
are subject to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, problems and delays in collecting
accounts receivable and economic downturns in foreign markets. A significant
number of the Company's products are sold or installed in countries,
including several in South America, where political or economic issues could
adversely affect the purchasing decision of the customer. In addition,
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 or profitability in that country.
A small number of customers have historically accounted for a
substantial portion of the Company's net sales. The Company's five largest
customers accounted for approximately 45% and 43% of the Company's net sales
for the fiscal years ended June 30, 1994 and 1995, respectively, and
approximately 49% for the nine months ended March 31, 1996. Any reduction,
delay or change in orders from such customers could have a material adverse
effect on the Company's business.
8
<PAGE>
The Company's operating results have in the past, and may in the
future, fluctuate from quarter to quarter as a result of a number of factors.
The Company's sales in a particular quarter are typically characterized by
several large orders and a large number of small orders, primarily from
distributors. While it is difficult for the Company to accurately forecast
the timing and quantity of orders on a quarter to quarter basis, the Company
intends to increase expenses with the expectation of future sales. The
failure of the Company to accurately forecast the timing and volume of orders
for a quarter would adversely affect the results of operations for such
quarter and, potentially, for future periods.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the
percentages of net sales represented by each item in the Company's statement
of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . 45.9 44.2 51.9 44.5
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . 54.1 55.8 48.1 55.5
Operating expenses:
Research and development . . . . . . . . 15.8 17.6 18.4 18.2
Sales and marketing . . . . . . . . . . 23.8 23.6 26.3 22.8
General and administrative . . . . . . . 11.3 7.4 12.0 8.7
In process research and development . . 0.0 0.0 29.0 0.0
-------- -------- -------- --------
Total operating expenses . . . . . . . . . 50.9 48.6 85.6 49.7
Income (loss) from operations . . . . . . . 3.2 7.2 (37.6) 5.8
Net interest and other income (expense) . . 2.9 (1.5) 4.7 (1.0)
-------- -------- -------- --------
Income (loss) before taxes . . . . . . . . 6.1 5.7 (32.8) 4.8
Provision for income taxes . . . . . . . . 1.2 0.0 0.7 0.1
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . 4.9% 5.7% (33.5)% 4.8%
======== ======== ======== ========
</TABLE>
NET SALES
Net sales increased approximately 45% to $8.0 million for the three
months ended March 31, 1996 from $5.5 million for the corresponding period in
1995. The increase was primarily the result of shipments of the Company's
Frame Relay and OEM products. Frame Relay sales increased $1.2 million or
29% for the three months ended March 31, 1996 over the corresponding period
in 1995. Sales of OEM products also increased $1.2 million primarily due to
increased shipments to one customer. Net sales of point-to-point products
increased by approximately $0.2 million for the three months ended March 31,
1996 over the corresponding period in 1995. Net sales of products acquired
as a result of the Presticom acquisition totaled approximately $0.9 million
for the three months ended March 31, 1996 and are included in the totals for
Frame Relay and point-to-point products.
Net sales increased 30% to $19.3 million for the nine month ended March
31, 1996 from $14.8 million for the nine months ended March 31, 1995. This
increase was primarily due to increased sales of the Company's Frame Relay
and OEM products and, to a lesser extent, shipments of products acquired in
the Presticom acquisition which accounted for $1.4 million, or 31% of the
increase in net sales. Net sales of Frame Relay products were $12.2 million
and $6.3 million for the nine month periods ended March 31, 1996 and March
31, 1995, respectively. Net sales of point to point products decreased to
$3.0 million from $7.3 million for the nine month periods ended March 31,
1996 and March 31, 1995, respectively. While the Company anticipated the
continued decline of sales of point-to-point products due primarily to the
conversion of customers to Frame Relay products, the decrease in such sales
during the period was greater than anticipated by the Company. Net sales of
OEM products increased to $4.1 million for the nine months ended March 31,
1996 from $1.2 million for the nine months ended March 31, 1995. The
increase in OEM shipments was primarily due to unusually large orders
received from one customer and the Company does not anticipate this level of
OEM sales to continue in the future.
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GROSS PROFIT
Gross profit represents net sales less the cost of goods sold, which
includes cost of materials, manufacturing overhead costs and direct labor
expenses. The Company's gross profit was $4.3 million, or 54.1% of net
sales, for the three months ended March 31, 1996 compared to $3.1 million, or
55.8% of net sales, for the corresponding period in 1995. The decrease in
gross margins was primarily due to shipment of a higher percentage of OEM
products.
The Company's gross profit was $9.3 million, or 48.1% of net sales, for
the nine months ended March 31, 1996. The nine months ended March 31, 1996
included a $0.7 million charge for obsolete inventory that was taken to
recognize the decreased demand for certain point-to-point products. Gross
profit, not including this charge, was $10.0 million, or 51.7%, of net sales,
for the nine months ended March 31, 1996, as compared to 55.5% of net sales
for the comparable period in 1995. This decrease in gross profit as a
percentage of sales was primarily attributable to the change in product mix
including increased OEM sales and decreased sales of voice cards. The gross
margins generated from OEM product sales are considerably lower than those
from Frame Relay or point-to-point products. In the future, gross profit may
be affected by price competition, product mix, product configuration, changes
in unit volume, cost of components and manufacturing and other factors.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Engineering and development expense increased
30.0% to $1.3 million for the three months ended March 31, 1996 from $1.0
million for the three months ended March 31, 1995. These increases were
primarily due to increased personnel costs resulting from the addition of the
Presticom development team and the continued expansion required to maintain
and develop new products.
Research and development expense increased to $3.6 million, or 18.4% of
net sales, for the nine months ended March 31, 1996 from $2.7 million, or
18.2% of net sales, for the nine months ended March 31, 1995. These
increases were primarily attributable to the costs of personnel for the
development of new products and enhancement of existing products, which
increased to approximately $2.3 million from approximately $1.6 million
during the preceding comparable period. While the actual amount expended
will depend upon a variety of factors, the Company anticipates increasing
research and development expenses in the near term.
SALES AND MARKETING. Sales and Marketing expense increased to $1.3 million,
or 30.0% of net sales, for the three month period ended March 31, 1996 over
the corresponding period in 1995. This increase was primarily due to
increased personnel costs resulting from a 50% increase in sales and
marketing personnel.
Sales and marketing expense increased to $5.1 million, or 26.3% of net
sales, for the nine months ended March 31, 1995 from $3.4 million, or 22.8%
of net sales, for the nine months ended March 31, 1995. This dollar increase
was primarily attributable to the addition of personnel and increased
marketing activities. While actual amounts expended will depend upon a
variety of factors, the Company anticipates increasing sales and marketing
expenses in the near term.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
119% to $0.9 million for the three months period ended March 31, 1996 from
$0.4 million for the three months ended March 31, 1995. This increase was
primarily due to additional expenses incurred as a result of being a public
company, in addition to increased personnel and other costs associated with
the Presticom facility in Montreal, Canada.
General and administrative expense increased to $2.3 million, or 12.0%
of net sales, for the nine months ended March 31, 1996 from $1.3 million, or
8.7% of net sales, for the nine months ended March 31, 1995. This increase
in expense levels was primarily attributable to the addition of
administrative personnel and additional expenses incurred as a result of
being a public company.
The Company expects to continue to expand its operations, resulting in
dollar increases in each category of operating expenses. The Company's
operating results and net income will be adversely affected to the extent
that net sales and gross profits do not increase sufficiently to offset such
increased expenses.
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NET INTEREST AND OTHER INCOME (EXPENSE)
Net interest income was approximately $0.3 million for the three months
period ended March 31, 1996 and $0.9 million for the nine months period ended
March 31, 1996 compared to net interest expense of approximately $0.1 million
in both of the corresponding periods in 1995. This change was primarily
attributable to interest received on the proceeds from the Company's public
offering in May 1995.
INCOME TAXES
There was no provision for income taxes for the nine month periods ended
March 31, 1995, and the provision for March 31, 1996, totaled $0.1 million.
Subject to certain limitations, the Company has a research and development
tax credit carryforward and federal and state operating loss due to net
operating loss carryforwards, a portion of which it expects to apply against
its income tax liability for 1996. If the Company generates profits, the net
operating loss carryforwards and research and development tax credit
carryforward will be utilized and the Company's effective tax rates will
increase.
The Company adopted the provisions of the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," effective July
1, 1993. The adoption of this statement did not have a material effect on
the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from the sale of
preferred stock and Common Stock, borrowings from investors, borrowings under
a bank facility and sales of the Company's products. Proceeds, net of
offering costs, from sales of preferred stock were $2.6 million and $2.1
million for the fiscal years ended June 30, 1993 and 1994, respectively. Net
proceeds from the sale of Common Stock in the Company's initial public
offering in May 1995 were $33.8 million. For the nine months ended March 31,
1996, the Company's operating activities used cash of approximately $5.6
million. At March 31, 1996, the Company had approximately $30.7 million in
working capital, including $10.3 million in cash.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, computer software and leasehold improvements
amounted to approximately $1.4 million for the nine months ended March 31,
1996. The Company currently has no material commitments for capital
expenditures. However, the Company anticipates spending between $2.0 million
and $3.0 million during the next 12 months to acquire test equipment,
computer equipment, office furniture, tooling and leasehold improvements.
On November 30, 1995, the Company, through a wholly-owned subsidiary,
acquired all of the issued and outstanding shares of Presticom. The
aggregate purchase was approximately $8.5 million which consisted of
$7,287,495 in cash and 176,365 in shares of the Company's Common Stock. In
connection with the acquisition, the Company took a one-time in-process
research and development charge to operations of $5.6 million.
In March 1993, May 1994 and March 1995, the Company entered into
agreements (the "Loan Agreements") with Silicon Valley Bank (the "Bank"),
which provided for two revolving credit facilities and a term loan secured by
a blanket lien on all of the Company's assets. Under the two revolving
credit facilities, the Company may borrow up to the lesser of $1.5 million or
a total of (i) 90% of the net amount of the Company's approved accounts
receivable owing from customers outside the United States plus (ii) 70% of
the value of the Company's inventory held for export outside the United
States, provided that such borrowings are guaranteed by the Export-Import
Bank of the United States. Alternatively, borrowings under the facilities
may be made up to the lesser of $3.0 million or 75% of the net amount of the
Company's accounts receivable from customers within the United States. The
Bank may also issue up to $500,000 in letters of credit for the account of
the Company. The amount available for borrowing under the revolving credit
facilities is reduced by the aggregate amount of such Letters of Credit
outstanding from time to time. In no event may the aggregate outstanding
principal balance of all loans made to the Company under the Loan Agreements
exceed $3.0 million.
The Loan Agreements also require the Company to maintain certain
financial ratios and limit the Company's ability to incur additional debt, to
repurchase the Company's stock and to pay dividends. The Company is
currently in compliance with all such financial ratios and covenants. As of
March 31, 1996, the Company had no outstanding balance under its revolving
credit facilities and under its term loan. As of March 31, 1996, an
aggregate of $3.0 million was available under the Loan Agreements. The
Company believes that available cash, cash equivalents and short-term
investments
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together with amounts available under its credit facilities and cash flow
from operation, will be sufficient to meet its normal operating and capital
requirements through at least March 31, 1997.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. None.
ITEM 5. OTHER INFORMATION.
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO
THE OTHER INFORMATION CONTAINED IN THIS REPORT:
LIMITED HISTORY OF OPERATIONS AND PROFITABILITY. The Company was
organized in May 1987 and commenced shipments of its first product in October
1988. While the Company first achieved profitability in the fourth calendar
quarter of 1990, it incurred losses in periods subsequent to that time. Due
to the Company's limited history of profitable operations, there can be no
assurance that it will attain profitability or, if attained, sustain
profitability on a quarterly or annual basis in the future. The Company
plans to continue to expand its level of operations, resulting in increased
fixed costs and operating expenses. The Company's operating results and net
income will be adversely affected to the extent that net sales and gross
profits do not increase sufficiently to offset such increased expenses.
There can be no assurance that the Company will be able to maintain or
increase net sales or gross profits. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has
experienced operating losses in recent quarters. The Company has experienced
and may in the future experience significant fluctuations in revenues and
operating results from quarter to quarter as a result of a number of factors
including, without limitation, the volume and timing of orders from, and
shipments to, major customers; the ability of the Company's customers,
particularly international customers, to obtain financing for the purchase of
the Company's products; changes in pricing policies or price reductions by
the Company or its competitors; variations in the Company's sales channels or
the mix of product sales; the timing of new product announcements and product
introductions by the Company or its competitors; product obsolescence
resulting from new product introductions or changes in customer demand; the
availability and cost of supplies; the financial stability of major
customers; market acceptance of the Company's products; the rate of end-user
adoption of integrated voice, data and facsimile over Frame Relay; changes in
regulatory requirements and the development of public telecommunications
infrastructures, particularly in international markets; and currency
fluctuations. While the Company regularly engages in price discounting,
significant discounts in a particular quarter could adversely affect the
results of operations for such quarter. In addition, significant and
continuing discounts due to competition or other factors could adversely
affect the Company's business, operating results and financial condition.
The Company has generally not experienced seasonality in its net sales,
although the Company has from time to time experienced decreased net sales to
customers in Europe in the third calendar quarter of each year and has
experienced some decreases in net sales in other international markets during
certain periods during the year. Due to all of the foregoing factors, it is
likely that in some future periods the Company's operating results will be
below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock could be materially adversely
affected. Quarterly results are not necessarily indicative of future
performance for any particular period and there can be no assurance that the
Company will attain or sustain growth in net sales and profitability on a
quarterly or annual basis.
The Company's sales in a particular quarter are typically characterized
by several large orders and a large number of small orders, primarily from
distributors. Distributors typically do not stock a supply of the Company's
products and place orders with the Company only after they have received
orders from end-users. In addition, the Company's backlog at the beginning
of a quarter is generally insufficient to achieve expected net sales for the
quarter. While it is difficult for the Company to accurately forecast the
timing and quantity of orders on a quarter
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to quarter basis, the Company intends to increase expenses with the
expectation of future sales. The failure of the Company to accurately
forecast the timing and volume of orders for a quarter would adversely affect
the results of operations for such quarter and, potentially, for future
periods. Fluctuations in quarterly results may result in significant
volatility in the market price of the Company's Common Stock. In addition,
sales of networking products fluctuate from time to time based on numerous
factors, including capital spending levels and general economic and market
conditions. Future declines in networking product sales, as a result of
general economic conditions or for any other reason, could have a material
adverse effect on the Company's business, operating results and financial
condition.
TECHNOLOGICAL CHANGE, CHANGING MARKETS AND NEW PRODUCTS. The market for
the Company's products is characterized by rapid technological advances,
evolving industry standards, frequent new product introductions and
enhancements, and significant price competition. The introduction of
products involving superior or alternative technologies, the emergence of new
industry standards, governmental regulation or changes in a market's pricing
structure could render the Company's existing products, as well as products
currently under development, obsolete and unmarketable in one or more markets
which could adversely affect the Company's business, operating results and
financial condition. The Company has experienced instances where one or more
of those factors resulted in a significant decrease in sales of the Company's
products in particular markets. For example, a faster than anticipated shift
in product sales from time division multiplexing ("TDM") to Frame Relay
resulted in inventory obsolescence and a reserve for TDM inventory in the
second quarter of fiscal 1996.
The market for Frame Relay products, especially access devices such as
those produced by the Company, is currently emerging and may not continue to
develop, whether as a result of competition, technological change, market
forces or otherwise. In addition, the transmission of voice and facsimile
over a Frame Relay network is a new application that has not received
widespread acceptance. The Company's future operating results and ability to
implement its strategy successfully will be dependent in part upon the
development and growth of the public Frame Relay services market for
applications which integrate compressed voice, data and facsimile, as well as
the acceptance of Frame Relay technology for integrated private networks.
There can be no assurance that such markets will develop. Even if such
markets develop, the Company's success will depend, in part, on the viability
of the Company's products in such markets, and the ability of the Company to
develop effective distribution channels to address this market. There can be
no assurance that the Company's products will be widely accepted in this
market. In addition, the widespread acceptance of Asynchronous Transfer Mode
("ATM"), an alternative fast packet technology which is in an early stage of
deployment, could have a material adverse effect on the Company's ability to
obtain market acceptance of its Frame Relay products. Failure of the
Company's products to achieve market acceptance could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company believes its future success will depend, in part, upon its
ability to expand and enhance the features of its existing products and to
develop or acquire and introduce new products designed to meet changing
customer needs on a cost-effective and timely basis. Failure by the Company
to respond on a timely basis to technological developments, changes in
industry standards or customer requirements, or any significant delay in
product development or introduction, could have a material adverse effect on
the Company's business, operating results and financial condition. There can
be no assurance that the Company will respond effectively to technological
changes or new product announcements by others or that the Company will be
able to successfully develop and market new products or product enhancements
and that any new product or product enhancement will gain market acceptance.
In November of 1995, the Company acquired Presticom Inc., a Canadian
corporation ("Presticom"), and developer of multiple protocol Frame Relay
access devices, to enhance the Company's data capabilities. There can be no
assurance that the Company can successfully integrate Presticom's technology
and products with the Company's products. See "Integration of Presticom;
Future Acquisitions."
The Company expects that the average sales prices of its products will
decline in the future primarily due to increased competition and the
introduction of new technologies. Accordingly, the Company's ability to
maintain or increase net sales and gross margins will depend in part upon its
ability to reduce its cost of sales, to increase unit sales volumes of
existing products and to introduce and sell new products. There can be no
assurance that the Company will be able to reduce its cost of sales in the
future to respond effectively to declining sales prices.
The Company budgets research and development expenditures based on
planned product introductions and enhancements; however, actual expenditures
may significantly differ from budgeted expenditures. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced products and product enhancements is a complex and
uncertain process requiring high levels of innovation, as well as the
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accurate anticipation of technological and market trends. There can be no
assurance that the Company will successfully identify, develop or introduce
new products or product enhancements. Products such as those offered by the
Company may contain undetected or unresolved 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, software errors will not be
found in new products or upgrades 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 operating results,
particularly on a quarterly basis. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
COMPETITION. The market for the Company's products is highly
competitive. The Company competes directly domestically and internationally
with a variety of companies offering multiplexers and switches using a
variety of technologies, including Micom Communications Corp. ("Micom"),
Newbridge Networks Corp., Ascom-Timeplex, Sync Research, Inc., Motorola
Information Systems Group ("Motorola"), Hypercom Network Systems
("Hypercom"), Memotec Communications, Inc. ("Memotec") and other companies.
Recently, a number of companies including Micom, Memotec, Motorola and
Hypercom began offering a Frame Relay access device which integrates voice
and data and the Company believes that additional companies intend to offer
such a product. Similar products may be introduced by a variety of other
telecommunications companies or public carriers including, without
limitation, manufacturers of data only Frame Relay access devices and
manufacturers of Frame Relay switches, such as Cascade Communications Corp.
("Cascade") and StrataCom, Inc. ("StrataCom") who are also suppliers to or
customers of the Company.
The Company also competes indirectly with public carriers, such as AT&T
and MCI. These companies either do, or may in the future, compete with the
Company by offering alternative products or services. For example, in the
United States market, the availability of inexpensive voice communications
services may mitigate the cost-effectiveness of the Company's integrated
solution in such market. Decreased costs of telecommunications services in
the United States and other markets could adversely affect the Company's
ability to compete in such markets.
Many of the Company's current and potential competitors have
substantially greater name recognition and financial, marketing, technical
and other resources than the Company. Many of these companies sell directly
to end-users, which the Company believes may provide a competitive edge over
the Company when marketing either similar products or alternative networking
solutions. Unlike the Company, many of these companies are ISO-9000
certified. Many telecommunications firms will not purchase products from
suppliers that do not meet ISO-9000 specifications. Accordingly, until it
has obtained ISO-9000 certification, the Company may be precluded from
selling its products to such organizations and its ability to compete with
other suppliers of network communications equipment may be adversely
affected. Consequently, the Company expects to continue to experience
increased competition, which could result in significant price reductions,
decreased gross margins, loss of market share and lack of acceptance of
Company's products. There can be no assurance that the Company will be able
successfully to compete against either current or potential competitors or
that competition will not have a material adverse effect on the Company's
business, operation results and financial condition.
INTEGRATION OF PRESTICOM; FUTURE ACQUISITIONS. The Company acquired
Presticom in November of 1995 and may in the future pursue acquisitions of
related businesses, products or technologies. Future acquisitions by the
Company may result in potentially dilutive issuances of equity securities,
the incurrence of additional debt, and amortization expenses related to
goodwill and other tangible assets, all of which could adversely affect the
Company's profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks associated with the Company's entering markets in
which it has no or limited direct prior experience, and the potential loss of
key employees of the acquired company. In the event that such an acquisition
does occur, however, no assurances can be given as to the effect thereof on
the Company's business, operating results and financial condition.
MANAGEMENT OF GROWTH. The Company has recently experienced growth in
its operations, both internally and as a result of the acquisition of
Presticom. This growth has placed, and will continue to place, strain on the
Company's managerial, operational and financial resources and systems and
controls. This is particularly true with respect to sales in a number of
international markets since each specific international market has its own
unique regulatory, financial, technical, customer and other characteristics
which often require the Company to devote significant resources to sell
products in that country. The Company's future operating results will depend
on its
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ability to attract, hire and retain skilled employees, and to expand and
improve the Company's operational, product development, management
information and financial systems and controls. The Company is currently
implementing new management information and product development systems. The
Company's failure to manage growth effectively, successfully upgrade its
systems or to hire, retain and integrate necessary qualified personnel could
adversely affect the Company's business, operating results and financial
condition.
CUSTOMER CONCENTRATION. A small number of customers have historically
accounted for a substantial portion of the Company's net sales. In
particular, Scientific Atlanta accounted for approximately 7% and 20% of the
Company's net sales for the fiscal year ended June 30, 1995 and for the nine
months ended March 31, 1996, respectively. In addition, Stratacom and IMPSAT
accounted for 8% and 14% for the fiscal year ended June 30, 1995 and 8% and
12% for the nine months ended March 31, 1996, respectively. During those
periods the Company's five largest customers accounted for 43% and 49%,
respectively, of net sales. There can be no assurance that a major customer
will not reduce or delay the amount of products ordered from the Company or
significantly change the terms upon which the Company and such customer do
business. Any such reduction, delay or change could have a material adverse
effect on the Company's business. In general, the Company's major customers
either sell or deploy the Company's products outside the United States, which
subjects the Company to a variety of other risks.
INTERNATIONAL SALES, TARIFF AND REGULATORY MATTERS. Sales of the
Company's products to customers outside the United States accounted for
approximately 70% and 66% of the Company's net sales for the fiscal years
ended June 30, 1994 and June 30, 1995, respectively, and approximately 56% of
the Company's net sales for the nine months ended March 31, 1996. In
addition, the Company believes that a majority of its sales to customers
inside the United States represent sales of products which are used or resold
in markets outside the United States. 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, potentially adverse
tax consequences and problems in collecting accounts receivable. A
significant number of the Company's products are sold or installed in
countries, including several in South America, where political or economic
issues could adversely affect the purchasing decision of the customer.
Although the Company's sales are currently 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 or 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. The financial stability of foreign markets could also
affect the Company's international sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Rates for telecommunications services are governed by tariffs of
licensed carriers that are subject to regulatory approval. Future changes in
these tariffs could have a material adverse effect on the Company's business.
For example, should tariffs for public switched digital services increase in
the future relative to tariffs for private leased services, the cost-
effectiveness of certain of the Company's products would be reduced, and its
business and results of operations could be adversely affected. In addition,
the Company's products must meet standards and receive certification for
connection with the public telecommunications networks of a country prior to
their sale in such country. In the United States, for example, the Company's
products must comply with certain regulations promulgated by the Federal
Communications Commission, and to date all of the Company's products have so
complied. The Company's products must also be certified by domestic
telecommunications carriers. In foreign countries, the Company's products
are subject to a wide variety of governmental review and certification
requirements. From time to time, foreign governments have altered
certification or regulatory requirements which has adversely impacted the
Company's ability to sell products in such markets. Any future inability to
obtain on a timely basis or retain domestic certificate or foreign regulatory
approvals could have a material adverse effect on the Company's business,
operating results and financial condition.
RELIANCE ON THIRD PARTY SUPPLIERS. The Company relies on third party
suppliers who supply the components used in the Company's products. Most
components are readily available from alternate sources. However, the
unavailability of certain components from current suppliers, especially
components custom designed for the Company, could result in delays in the
shipment of the Company's products as well as additional expenses associated
with obtaining and qualifying a new supplier. The Company experienced a
situation where a third party supplier ceased manufacturing a component,
which resulted in additional expense to the Company. In addition, certain
key components used in the Company's products are available only from single
sources and the Company
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does not have long term contracts ensuring the supply of such components. As
the Company typically maintains less than 90 days supply of such components,
there can be no assurance that components will be available to meet the
Company's future requirements at favorable prices, if at all. The Company's
inability to obtain components in a timely manner would materially and
adversely affect the Company's business and financial condition. In
addition, any significant increase in component prices could also adversely
affect the Company's results of operations.
The Company resells Frame Relay switches purchased from Cascade.
Although the Company believes similar products can be purchased from other
sources, the process of qualifying replacement suppliers, generating the
supporting documentation, performing system level integration, obtaining
standards-compliant approval for its products, and retraining sales and
marketing channels would take a significant amount of time and expense. The
Company's ability to offer an integrated, cost-effective networking solution
is based, in part, on its ability to sell such products as part of its
present line. The Company's inability to source these products at
satisfactory quality and quantity levels and with the appropriate lead time
would adversely affect the Company's business and operations.
RELIANCE ON INDIRECT DISTRIBUTION. The Company markets and sells
products domestically and internationally primarily through resellers, such
as distributors, value-added resellers and system integrators. The number of
qualified resellers in certain countries is limited. Resellers typically are
not effective at selling the Company's products until they have been trained
and have successfully completed several sales. The Company's performance
depends in part on attracting, retaining and motivating such resellers.
Certain of the Company's resellers also act as resellers for competitors of
the Company and could devote greater effort and resources to marketing
competitive products. The Company's resellers are generally provided
discounts and, occasionally, are entitled to special pricing or distribution
arrangements, the effect of which is to decrease the Company's gross margins.
While the Company has contractual relationships with many of its resellers,
these agreements do not require the resellers to purchase the Company's
products and can generally be terminated on short notice by the reseller.
Resellers in many countries have title to the governmental authorizations and
certifications necessary to market the Company's products in such country,
and there is no assurance that, in the event a reseller ceased marketing the
Company's products, the reseller would transfer such authorization or
certification to the Company or that the expense and delay associated with
obtaining a new authorization or certification would not adversely affect the
Company's business and operations in such country. There can be no assurance
that resellers will continue to market the Company's products or devote the
resources necessary to provide effective sales and marketing support to the
Company. In addition, the Company is dependent on the continued viability
and financial stability of its resellers, many of which are small
organizations with limited capital. In the first fiscal quarter of 1993, one
of the Company's European resellers filed for bankruptcy, ceased operations,
and was subsequently replaced by a number of nonexclusive resellers. The
Company's inability to collect a significant sum from the reseller, the time
involved in reestablishing a new distribution channel in that market and the
difficulties in having certain regulatory approvals transferred to the
Company all adversely affected the Company's business. The loss of any key
reseller could adversely affect the Company's business.
The Company's sales through original equipment manufacturers ("OEMs")
who purchase custom modules for the fiscal years ended June 30, 1994 and
1995, and for the nine month period ended March 31, 1996 accounted for
approximately 6.3%, 9% and 21.5%, respectively, of the Company's net sales.
The Company does not classify private label sales of standard products as OEM
sales. In 1995, virtually all of the Company's OEM sales were generated by
Scientific-Atlanta. The Company's OEM and private label business is subject
to risks such as contract termination, products developed by a third party or
by the third party's internal development team, change in corporate
ownership, business direction or product mix by the third party, and
assumption of manufacturing rights by the third party. There can be no
assurance that these factors will not adversely affect the Company's business
and, consequently, the Company's operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success will
depend in part on its proprietary technology. In addition, certain
technology licensed from third parties is incorporated in the Company's
products. In particular, the Company licenses certain of its voice
compression algorithms, components of its network management system software
and other software and technology embedded in the hardware incorporated into
the Company's products pursuant to nonexclusive license agreements. The
failure of the Company to retain such licenses or obtain new licenses as
improvements in such technology are developed and new technology is
introduced could adversely affect the Company's business. The Company has
not applied for and does not currently hold any patents. The Company relies
principally on copyright, trade secret and contract law to protect its
proprietary technology. There can be no assurance that such measures are
adequate to protect the Company's
17
<PAGE>
proprietary technology. The Company has substantial international operations
and the laws of foreign countries treat the protection of proprietary rights
differently from, and may not protect the Company's proprietary rights to the
same extent as do, laws in the United States.
Since patent applications in the United States are not publicly
disclosed until the patent issues, applications may have been filed which, if
issued as patents, would relate to the Company's products. In addition, the
Company has never conducted a comprehensive patent search relating to the
technology used in its products. Accordingly, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such
claims, regardless of the merits of such claims. Parties making such claims
may be able to obtain injunctive or other equitable relief which could
effectively block the Company's ability to sell its products in the United
States and abroad, and could result in an award of substantial damages. In
the event of a successful claim of infringement, the Company, its customers
and end-users may be required to obtain one or more licenses from third
parties. There can be no assurance that the Company or its customers could
obtain necessary licenses from third parties at a reasonable cost or at all.
The defense of any lawsuit could result in time consuming and expensive
litigation, damages, license fees, royalty payments and restrictions on the
Company's ability to sell its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent in
large part on its ability to retain its executive officers, the loss of one
or more of whom could adversely affect the Company's business. The Company
is also dependent on other members of management and its sales and technical
personnel. The Company believes that its future success will depend in large
part upon its continued ability to attract, retain and motivate highly
skilled employees, who are in great demand. There can be no assurance that
the Company will be able to do so.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
has experienced negative cash flow since inception. The Company anticipates
that its existing capital resources, including bank borrowings, cash flow
from operations and the net proceeds of its initial public offering ("IPO"),
will be adequate to satisfy its capital requirements through at least the
next 12 months. The Company's future capital requirements will depend on
many factors including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's products, the
levels of promotion and advertising required to launch such products and
attain a competitive position in the marketplace, and the extent to which the
Company invests in new technology and improvements to its existing
technology. To the extent that existing resources and future earnings are
insufficient to fund the Company's activities, the Company may need to raise
additional funds through public or private financings including equity
financings. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the
Company will be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's
Common Stock. No assurance can be given that additional financing will be
available or that, if available, it can be obtained on terms favorable to the
Company and its stockholders. The Company's lack of authorized Preferred
Stock and the right of the Board representatives of the Company's two largest
stockholders to approve certain below market sales of securities could hinder
the Company's ability to obtain financing. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate some
or all of its research and development, to curtail its operations
significantly or to obtain funds through arrangements with strategic partners
or others that may require the Company to relinquish rights to certain of its
technologies or potential markets. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
CONTROL BY EXISTING STOCKHOLDERS. As of April 30, 1996, the executive
officers and directors, together with their affiliates, in the aggregate,
owned approximately 42% of the Company's outstanding shares of Common Stock.
In addition, such stockholders hold options and warrants to purchase
additional shares of the Company's Common Stock. Accordingly, these
stockholders, acting together, may have the ability to control the approval
of most matters requiring approval by the Board of Directors and stockholders
of the Company, including the election of at least a majority of the Board of
Directors of the Company and the authorization of Preferred Stock. This
concentration of ownership under certain circumstances could have the effect
of delaying or preventing a change in control of the Company or a financing
of the Company. In addition, the Company has entered into an agreement with
its two largest stockholders, Promon International, Inc. ("Promon") and
Pacific Technology Fund ("PTF"), that obligates the Company to nominate a
representative of each such stockholder to the Board of Directors as long as
such stockholder owns at least 10% of the Company's then outstanding voting
securities. The Company has agreed that it will not issue securities at less
than 95% of market value, or at a price below 85% of market value
18
<PAGE>
with respect to employee stock purchases or option plans, without the
approval of the representatives of Promon and PTF, again provided that such
stockholder owns at least 10% of the Company's then outstanding voting
securities.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
the IPO, no public market for the Company's Common Stock existed, and there
can be no assurance that an active trading market will be sustained. The
trading price of the Common Stock has undergone significant fluctuations
since the IPO and could continue to be subject to significant fluctuations in
response to variations in quarterly operating results, the gain or loss of
significant contracts, changes in management, announcements of technological
innovations or new products by the Company or its competitors, legislative or
regulatory changes, general trends in the industry and other events or
factors. In addition, the stock market has experienced extreme price and
volume fluctuations which have particularly affected the market price for
many high technology companies and which have often been unrelated to the
operating performance of these companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Certificate
of Incorporation provides for a Board of Directors with staggered terms which
may discourage or prevent certain types of transactions involving an actual
or potential change in control of the Company, including transactions in
which the stockholders might otherwise receive a premium for their shares
over then current market prices. Certain provisions of Delaware law
applicable to the Company, including Section 203 of the Delaware General
Corporation Law, could have the effect of delaying, deferring or preventing a
change of control of the Company. It is possible that the staggered board
and Section 203 of the Delaware General Corporation Law may have the effect
of delaying, deferring or preventing a change of control of the Company, may
discourage bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of the
Common Stock.
LACK OF DIVIDENDS. The Company has never paid cash dividends of shares
of its capital stock. The Company currently intends to retain any future
earnings in its business and does not anticipate paying any cash dividends in
the future. Furthermore the Company's agreement with its lender currently
limits the Company's ability to pay cash dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
Exhibit 3.1 -- Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
Exhibit 3.2 -- Bylaws of the Company. Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
Exhibit 4.1 -- Specimen certificate representing shares of
Common Stock of the Company. Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
Exhibit 4.2 -- Form of Warrant of the Company. Incorporated
by reference to Exhibit 4.2 to the Company's Registration Statement on Form
S-1, Registration No. 33-90394.
Exhibit 10.1 -- Standard Industrial/Commercial Multi-Tenant
Lease-Modified Net dated May 23, 1994 by and between Herman Bennett and the
Company. Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
19
<PAGE>
Exhibit 10.2 -- Master Lease Agreement dated January 11, 1994
and between the Company and Leasetec Corporation, as amended and
supplemented. Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.3 -- Loan and Security Agreement dated March 23,
1993, as amended, between Silicon Valley Bank and the Company and related
agreements and documents. Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.4 -- Loan and Security Agreement (Exim) dated May
11, 1994, as amended, between Silicon Valley Bank and the Company and related
agreements and documents. Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.5 -- Executive Employment Agreement dated December
23, 1992, by and between the Company and Martin Shum. Incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form
S-1, Registration No. 33-90394.
Exhibit 10.6 -- Form of Indemnification Agreement.
Incorporated by reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.7 -- 1987 Stock Option Plan (the "1987 Plan").
Incorporated by reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.8 -- Form of Amended Notice of Grant of Stock
Option with respect to holders of installment incentive stock options granted
under the 1987 Plan. Incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.9 -- Form of 1987 Installment Incentive Stock
Option Agreement, Immediately Exercisable Stock Option Agreement and
Immediately Exercisable Non-Qualified Stock Option Agreement generally used
in connection with the 1987 Plan. Incorporated by reference to Exhibit 10.9
to the Company's Registration Statement on Form S-1, Registration No.
33-90394.
Exhibit 10.10 -- Form of 1987 Stock Purchase Agreement
generally used in connection with the 1987 Plan. Incorporated by reference
to Exhibit 10.10 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
Exhibit 10.11 -- 1993 Stock Option Plan as amended (the "1993
Plan"). Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.12 -- Form of Notice of Grant of Stock Option
generally used in connection with the 1993 Plan. Incorporated by reference
to Exhibit 10.12 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
Exhibit 10.13 -- Form of 1993 Stock Option Agreement generally
used in connection with the 1993 Plan. Incorporated by reference to Exhibit
10.13 to the Company's Registration Statement on Form S-1, Registration No.
33-90394.
Exhibit 10.14 -- Form of 1993 Stock Purchase Agreement
generally used in connection with the 1993 Plan. Incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
**Exhibit 10.15 -- Cooperation and Supply Agreement dated as of
November 19, 1993 by and between StrataCom, Inc. and the Company.
Incorporated by reference to Exhibit 10.15 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.16 -- Technical Information Escrow Agreement dated
July 18, 1994 by and between StrataCom, Inc., the Indianapolis Vault Company
and the Company. Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
20
<PAGE>
Exhibit 10.17 -- Memorandum of Agreement dated January 19,
1995 by and between the Company, Promon International, Inc. and Pacific
Technology Fund. Incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.18 -- Shareholder Rights Agreement dated as of
April 23, 1992, as amended by Amendment No. 1 to Shareholder Rights Agreement
dated as of August 11, 1992, Amendment No. 2 to Shareholder Rights Agreement
dated as of October 19, 1992, Amendment No. 3 to Shareholder Rights Agreement
dated as of December 18, 1992, Amendment No. 4 to Shareholder Rights
Agreement dated as of March 15, 1993, Amendment No. 5 to Shareholder Rights
Agreement dated as of November 16, 1993, and Amendment No. 6 to Shareholder
Rights Agreement dated as of December 15, 1994. Incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
Exhibit 10.19 -- Virtual DAMA Agreement dated December 31,
1993, by and between the Company and Promon Technical Services, Inc., as
amended. Incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
Exhibit 10.20 -- 1995 Stock Option/Stock Issuance Plan (the
"1995 Plan"). Incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
Exhibit 10.22 -- Form of Stock Option Agreement generally used
in connection with the Discretionary Option Grant Program of the 1995 Plan.
Incorporated by reference to Exhibit 99.3 to the Company's Registration
Statement on Form S-8, Registration No. 33-80007.
Exhibit 10.21 -- Form of Addendum to Stock Option Agreement
(Limited Stock Appreciation Right). Incorporated by reference to Exhibit
99.4 to the Company's Registration Statement on Form S-8, Registration No.
33-80007.
Exhibit 10.24 -- Form of Addendum to Stock Option Agreement
(Involuntary Termination Following Change of Control). Incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on Form
S-8, Registration No. 33-80007.
Exhibit 10.25 -- Form of Addendum to Stock Option Agreement
(Special Tax Elections). Incorporated by reference to Exhibit 99.6 to the
Company's Registration Statement on Form S-8, Registration No. 33-80007.
Exhibit 10.26 -- Form of Automatic Stock Option Agreement.
Incorporated by reference to Exhibit 99.9 to the Company's Registration
Statement on Form S-8, Registration No. 33-80007.
Exhibit 10.27 -- Form of Stock Issuance Agreement generally
used in connection with the Discretionary Option Grant Program of the 1995
Plan. Incorporated by reference to Exhibit 99.10 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
Exhibit 10.28 -- Form of Addendum to Stock Issuance Agreement
(Involuntary Termination Following Change of Control). Incorporated by
reference to Exhibit 99.11 to the Company's Registration Statement on Form
S-8, Registration No. 33-80007.
Exhibit 10.29 -- Form of Addendum to Stock Issuance Agreement
(Special Tax Elections). Incorporated by reference to Exhibit 99.12 to the
Company's Registration Statement on Form S-8, Registration No. 33-80007.
Exhibit 10.30 -- Employee Stock Purchase Plan. Incorporated
by reference to Exhibit 99.13 to the Company's Registration Statement on Form
S-8, Registration No. 33-80007.
Exhibit 10.31 -- The Share Purchase Agreement By and Among the
Company, Canada Inc. and Certain Presticom Stockholders, dated as of November
24, 1995. Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, dated November 30, 1995.
21
<PAGE>
Exhibit 11.1 -- Statement Regarding Computation of Earnings
Per Share.
___________
** The Company has received confidential treatment for certain portions of
this document filed with the Commission.
(B) REPORTS ON FORM 8-K.
On February 13, 1996, an amended Current Report on Form 8-K
dated November 30, 1995, was filed in the quarter ended March 31, 1996, with
disclosure under Item 7. The amended Current Report on Form 8-K was filed to
include the financial statements which were not available for filing with the
Current Report on Form 8-K filed on December 7, 1995.
22
<PAGE>
SIGNATURE
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.
Date: May 5, 1996 ACT NETWORKS, INC.
/s/ MELVIN L. FLOWERS
---------------------------------------------
Melvin L. Flowers
Vice President, Finance and Administration,
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
No. Numbered Page
- ----------- ---------------
11.1
24
<PAGE>
Exhibit 11.1
Exhibit 11.1 - Statement Re: Computation of Per-Share Earnings
<TABLE>
<CAPTION>
Three Months Ended March 31 Nine Months Ended March 31
--------------------------- ---------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Primary
Average common shares outstanding 1,380,878 7,344,287 1,329,526 7,233,789
Effect of assumed conversion of preferred stock 2,721,416 --- 2,721,416 ---
Options and warrants issued during
twelve-month period prior to the initial public
offering at an exercise price below the
assumed public offering price in accordance
with the staff accounting Bulletin No. 83 242,034 --- 242,034 ---
Net effect of dilutive options and warrants --
based on the treasury stock method (or
modified treasury stock method if applicable)
using average market price 473,388 596,274 433,148 534,571
------------ ------------ ------------ ------------
4,817,716 7,940,561 4,726,124 7,768,360
============ ============ ============ ============
Net income (loss) $ 317,238 $ 394,592 $ 704,352 $ (6,472,234)
============ ============ ============ ============
Per Share amount $ 0.07 $ 0.05 $ 0.15 $ (0.83)
============ ============ ============ ============
Fully Diluted
Average common shares outstanding 1,380,878 7,344,287 1,329,526 7,233,789
Effect of assumed conversion of preferred stock 2,721,416 --- 2,721,416 ---
Options and warrants issued during
twelve-month period prior to the initial public
offering at an exercise price in accordance
with staff accounting Bulletin No. 83 242,034 --- 242,034 ---
Net effect of dilutive options and warrants --
based on the treasury stock method (or
modified treasury stock method if applicable)
using year-end market price 501,875 717,372 533,982 682,493
------------ ------------ ------------ ------------
4,846,203 8,111,654 4,826,958 7,916,262
============ ============ ============ ============
Net Income (loss) $ 317,238 $ 394,592 $ 704,352 $ (6,472,234)
============ ============ ============ ============
Per Share amount $ 0.07 $ 0.05 $ 0.15 $ (0.82)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 10,327,767
<SECURITIES> 7,076,470
<RECEIVABLES> 8,429,661
<ALLOWANCES> 64,875
<INVENTORY> 7,268,784
<CURRENT-ASSETS> 34,284,807
<PP&E> 4,253,155
<DEPRECIATION> 1,927,736
<TOTAL-ASSETS> 39,030,509
<CURRENT-LIABILITIES> 3,755,711
<BONDS> 0
0
0
<COMMON> 44,065,976
<OTHER-SE> (8,791,178)
<TOTAL-LIABILITY-AND-EQUITY> 39,030,509
<SALES> 8,030,487
<TOTAL-REVENUES> 8,030,487
<CGS> 3,687,135
<TOTAL-COSTS> 7,772,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,345
<INCOME-PRETAX> 488,159
<INCOME-TAX> 93,567
<INCOME-CONTINUING> 394,592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 394,592
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
