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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of Class)
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
--- ---
Indicated by a check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Based on the closing sale price on Nasdaq National Market on August 30,
1996, the aggregate market value of the voting stock held by non-affiliates of
the registrant was $185,372,575.
As of August 30, 1996, there were 9,129,124 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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ACT NETWORKS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 15
ITEM 3. LEGAL MATTERS...................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS................ 15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................ 16
ITEM 6. SELECTED FINANCIAL DATA............................................ 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................... 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 23
ITEM 11. EXECUTIVE COMPENSATION............................................. 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K... 34
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ITEM 1. BUSINESS
ACT Networks, Inc., a Delaware corporation ("ACT" or the "Company"),
develops, manufactures, markets and sells Frame Relay wide-area network access
products which support a broad range of voice, data and integrated applications.
End-users and service providers worldwide use the Company's products to build
cost-effective, bandwidth efficient, easy-to-manage wide area networks ("WANs").
The Company's products incorporate advanced voice and data compression
algorithms, voice and data access switching capabilities, and proprietary voice,
data and facsimile integration technologies. The Company's products are designed
to work with either terrestrial or wireless media.
The Company was incorporated in California in May 1987 under the name
Advanced Compression Technology, Inc., changed its name to ACT Networks, Inc. in
May 1994, and reincorporated in the state of Delaware on May 2, 1995. The
Company's executive offices are located at 188 Camino Ruiz, Camarillo,
California 93012 and its telephone number at that location is (805) 388-2474.
INDUSTRY BACKGROUND
The communications traffic of many organizations has grown steadily
during the past two decades due to increased use of office automation,
distributed computing, electronic mail, facsimile transmission, electronic
transaction processing and corporate-wide voice communications systems. This
evolution has led to the use of wide area networks to provide interoffice
information access and communications, which in turn has produced an increasing
need for cost-effective, reliable and flexible WAN solutions.
The WAN solutions available to an organization vary substantially
depending on the organization's size and communications needs, and the state of
development of the local telecommunications infrastructure. Large organizations
in the United States and certain countries in Europe with large amounts of data
traffic have traditionally relied upon wideband digital transmission circuits
(such as T1 and E1) leased from public carriers to provide voice, facsimile and
data communications between regional offices. Organizations in these countries
with less data traffic, including middle market companies and branch offices of
large organizations, have traditionally used a combination of low speed leased
digital circuits (such as DDS 56K) for data and analog lines or public switched
telephone networks for voice and facsimile communications. In certain other
international markets, such as Korea, Spain and Italy, carriers are implementing
digital circuits which organizations are using to build private networks which
connect geographically disparate offices. The cost of these circuits generally
limits their use to large organizations with substantial communications traffic.
In other international markets where the public telecommunication infrastructure
is less developed, such as Argentina, China, India and Russia, organizations are
increasingly relying on satellite transmission and other wireless media to build
or lease private digital networks to transmit voice, facsimile and data between
multiple locations.
Conventional WANs are typically comprised of leased dedicated circuits,
circuit switching mechanisms and network access equipment based on time division
multiplexing ("TDM"). This WAN solution has inherent limitations which may
reduce its cost-effectiveness in certain applications. The deployment of a
leased circuit to connect two remote sites is often inefficient because the
entire bandwidth capacity is dedicated to the organization 24 hours a day even
during periods of little or no communications traffic. Leased circuits are also
expensive and in many cases can comprise a significant portion of an
organization's total networking budget. In addition, conventional WAN solutions
are inflexible as bandwidth within the network is static between two fixed
points and cannot be dynamically switched among multiple locations on demand. As
a result, conventional WAN solutions are not ideally suited to voice and
facsimile transmissions.
In response to the need for services that allow the flexible allocation
and efficient utilization of bandwidth among multiple network sites, public
carriers began providing packet-based services such as X.25. Although these
services generally cost less than dedicated digital circuits and provide
reliable transmission of low-speed asynchronous data, they impose substantial
transmission delays and thus are not well suited for high-speed synchronous
data, voice, facsimile and other delay-sensitive applications. Two "fast packet"
networking technologies, Frame Relay and Asynchronous Transfer Mode ("ATM"),
have emerged to address the need for integrated, cost-effective, flexible WAN
solutions. Fast packet networks provide significantly reduced network delays
while still permitting bandwidth capacity to be allocated on demand between any
two endpoints on a WAN, thereby improving utilization efficiency and supporting
a broader range of communications applications. A number of public carriers and
alternative service providers in the United States and around the world are
increasingly providing public fast packet services for high-speed communications
traffic. In countries where carriers do not provide public fast packet
transmission services, organizations can build private fast packet networks that
offer many of the same benefits. While ATM is not generally available through
public carriers, Frame Relay services are now widely offered in the United
States and
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certain countries in Europe as a cost-effective, variable bandwidth networking
solution. Vertical Systems Group, a telecommunications consulting group, has
estimated that worldwide revenues from Frame Relay services will increase from
approximately $250 million in 1994 to over $2 billion in 1997 and that worldwide
Frame Relay equipment revenues will increase from approximately $525 million in
1994 to over $1.5 billion in 1997.
The Company believes the increased availability and acceptance of Frame
Relay services is creating new applications for Frame Relay access products.
Enterprises are using Frame Relay to integrate voice, data and facsimile traffic
over public and private Frame Relay networks. Data service providers may use
Frame Relay to offer voice over their existing networks. Carriers and
alternative service providers may use Frame Relay to improve the cost-efficiency
of their voice services. Large data communications users may migrate from
private leased lines to public Frame Relay services for the transmission of SNA
and other legacy protocol data. Finally, enterprises in countries lacking a
developed terrestrial infrastructure may use Frame Relay over satellite to
fulfill their integrated networking needs.
THE ACT SOLUTION
ACT's technologies and products are designed to support a wide variety of
applications in the emerging Frame Relay marketplace. ACT provides
cost-effective, bandwidth efficient WAN solutions to customers worldwide for the
transmission of voice, data and facsimile communications traffic using Frame
Relay. The Company's products incorporate advanced voice and data compression
algorithms, voice and data access switching capabilities, and proprietary voice,
data and facsimile integration technologies. ACT's products are based on current
international standards and are designed to work with either terrestrial media
(such as copper, fiber and coaxial transmission lines) or wireless media (such
as satellite and microwave).
MARKETS AND APPLICATIONS
The following describes the primary markets and applications for the
Company's current products:
Integrated Frame Relay Networks. The integrated Frame Relay networks
market is currently the primary market for the Company's products. This market
consists of companies that consolidate their voice, data and facsimile
applications over a public or private network. ACT's customers in this market
include domestic and international end-users who choose to build a private
network or to access public Frame Relay networks, as well as alternative service
providers primarily in international markets who offer their customers a
cost-effective networking alternative to local public carriers. Representative
applications in this market include:
- Private Frame Relay Network. In markets with developing public
telecommunications infrastructures, large companies use the
Company's products to access terrestrial or wireless media to
establish cost-effective and bandwidth efficient private networks
using leased transmission circuits. The application of advanced
compression technologies in the Company's networking products to
voice, data and facsimile traffic allows multinational users to
connect their remote sites while reducing bandwidth requirements.
For example, a large bank in Korea has deployed the Company's
integrated Frame Relay access devices ("IFRADs") to build an
integrated private frame relay network connecting approximately 350
sites. This network provides switched voice and facsimile
connectivity among these locations and concurrently supports both
SNA and LAN data applications.
- Public Frame Relay Network Access. Service providers in the United
States and certain European countries offer public Frame Relay
services. The Company's IFRADs allow end-users, whose
telecommunications bandwidth requirements do not justify leasing
wideband dedicated digital circuits, to connect directly to a
public Frame Relay network and to eliminate many of the problems
and costs associated with managing and supporting a private
network. Middle market companies in the domestic market use ACT's
IFRADs to access public Frame Relay services. For example, a large
food broker and distribution company in the southeast United States
uses public Frame Relay services in conjunction with the Company's
IFRADs to provide corporate-wide voice, voice mail, facsimile and
full data and LAN connectivity. Currently, this network covers five
remote sites and, since its installation, has significantly reduced
this customer's annual intra-company communications expenses.
- Frame Relay Over Satellite. Organizations in countries without a
developed terrestrial public network have limited alternatives to
meet their networking needs. By deploying the Company's products,
alternative service providers in developing countries can provide
businesses with toll-quality voice, facsimile and data transmission
services. Alternatively, businesses can use the Company's products
to implement a private satellite-based network. Historically, the
Company has served this market through
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the deployment of point-to-point products. The Company believes
that its recently introduced SkyFrame product line is well-suited
for this market. For example, a major Latin American
satellite-based alternative service provider uses the Company's
integrated point-to-point products and IFRADs to provide turn-key
integrated private networks to major corporate clients in
Argentina, Columbia, Venezuela and Mexico. These wireless networks
now provide more than 250 companies with voice, facsimile and data
services to over 1,200 locations.
Voice Over Frame Relay Market. Frame Relay service providers have, to
date, focused on data-only applications. The Company believes that carriers
currently offering data-only services can, by using the Company's products to
add a Frame Relay voice component to their service, offer voice services at a
lower cost than the customer is currently paying for their separate voice
network. The Company believes that a voice offering enhances the competitive
position of this type of carrier. The domestic acceptance of voice-specific
applications has been limited to date by a variety of factors. However, ACT
believes that its recent development of many functional telephony capabilities
necessary to support this application, combined with the growing acceptance of
voice over Frame Relay as a technology, will result in increased utilization of
this application. For example, EMI Communications Corp., a regional service
provider, has announced a voice over Frame Relay service and has entered into a
supply agreement with the Company. In addition, Infonet Services Corporation, a
global provider of data services, has announced it intends to offer integrated
services over its Frame Relay network and has entered into a supply agreement
with the Company.
PRODUCTS
The Company's product families consist of ACTnet Frame Relay,
NetPerformer and SkyFrame. The chassis of each of the Company's products has a
modular architecture which enables the Company to upgrade its products to meet
changing market needs by adding enhancement cards or plug-in modules. The
Company also offers Actview, a Microsoft Windows-based network management
system. This software product allows users to perform network configuration,
diagnostics, software downloading and network alarms reporting. ACTview can
manage a network of up to 255 SDM-FPs or SDM-JFPs. In addition, the Company
continues to sell, but not actively market, its ACTnet point-to-point products.
These products provide networking communications between two fixed locations and
include an integrated time division multiplexer, data compression devices,
inverse multiplexers and point-to-point digital radio modems.
ACTnet Frame Relay products include IFRADs and Frame Relay switches which
enable organizations to access public Frame Relay services and build private
Frame Relay networks. The Company's MS-1000 and MS-2000 Frame Relay switches are
supplied by Cascade under a private label agreement. ACTnet Frame Relay products
are described below.
PRODUCT NAME Product Description
- --------------------------------------------------------------------------------
SDM-FP IFRAD with 5 low speed data channels, 1 high speed data
channel and 8 expansion slots
- --------------------------------------------------------------------------------
SDM-JFP IFRAD with 1 low speed data channels, 1 high speed data
channel and 4 expansion slots
- --------------------------------------------------------------------------------
VFC-03 4.8 to 16 Kbps voice and fax module
- --------------------------------------------------------------------------------
LB-01 Multiport Ethernet LAN module
- --------------------------------------------------------------------------------
DSM-03 3-port Frame Relay access module
- --------------------------------------------------------------------------------
DSE-03 3-port expansion module for DSM-03
- --------------------------------------------------------------------------------
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NetPerformer products include multiprotocol data FRADs, multiprotocol
IFRADs and central site units, which enable organizations to build public or
private networks supporting legacy data (e.g., SNA) applications as well as
token-ring or Ethernet LAN traffic. NetPerformer products are described below.
PRODUCT NAME Product Description
- --------------------------------------------------------------------------------
SN-8600 4 port multiprotocol data FRAD with token ring or
Ethernet support
- --------------------------------------------------------------------------------
SN-8700 4 port multiple protocol data FRAD
- --------------------------------------------------------------------------------
SN-7040 SN-8600 combined with SDM-JFP
- --------------------------------------------------------------------------------
SN-7080 SN-8600 combined with SDM-FP
- --------------------------------------------------------------------------------
CS-9500 Central site shelf
- --------------------------------------------------------------------------------
SkyFrame products include IFRADs and satellite modulators and
demodulators, which enable organizations to build integrated Frame Relay
networks using satellite transmission facilities. SkyFrame products are
described below.
PRODUCT NAME Product Description
- --------------------------------------------------------------------------------
SF-800 SDM-FP with Skyframe operating system
- --------------------------------------------------------------------------------
SF-400 SDM-JFP with Skyframe operating system
- --------------------------------------------------------------------------------
MOS-01 Satellite modulator with Frame Relay switch
- --------------------------------------------------------------------------------
DEF-01 Satellite demodulator with Frame Relay filter
- --------------------------------------------------------------------------------
The price of the Company's products depends on the type of network
access device, the number and type of expansion modules and the software
selected. The average list price of a complete network access device ranges from
$5,000 to $10,000. For example, an SDM-JFP equipped with two voice channel cards
and one master data channel card has a list price of approximately $7,050 and
ACTview for ACTnet Frame Relay has a list price of $2,000. The Company
customarily discounts from the list price of its products.
CUSTOMERS
End-users of the Company's products include government agencies,
financial institutions, retail chains, distribution companies and manufacturing
organizations. The Company's products are also used by public carriers and
alternative telecommunications service providers. A small number of customers
have historically accounted for a substantial portion of the Company's net
sales. In particular, IMPSAT, StrataCom and Scientific Atlanta accounted
for 10%, 7% and 17% of the Company's net sales for the fiscal year ended June
30, 1996, respectively. A representative list of end-users, alternative service
providers, OEMs and private label resellers of the Company's products is set
forth below:
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Domestic End-Users Alternative Service Providers
------------------ -----------------------------
Bonnecker & Leigh AT&T Wireless
First Chicago Bank Department of Telecom, India
Idaho National Guard Entel-Chile
Intelsat IMPSAT
National Semiconductor Infonet Services Corporation
Pyrodyne Philippine Long Distance Company
South East Frozen Food Russtel, Russia
Worldex Telefonica de Espana
Telefonica de Peru
International End-Users Teleport Europe, Germany
----------------------- Victori
American Express, Argentina OEMs and Private Label Resellers
Bank of Brazil --------------------------------
Cheietsee, Japan
Duty-Free, Australia Daimler-Benz
Industrial Bank of Korea IS Networks
Memorex Telex, Australia LNR Communications
RadioCel/Biper, Mexico Scientific Atlanta
Samsung, Korea StrataCom
Ssangyong, Korea Viacom (Cable & Wireless)
TAM, Brazil
SALES AND MARKETING
The Company markets and sells its products primarily through a
worldwide network of over 100 resellers, including distributors, value-added
resellers and systems integrators. Because the WAN needs of end-users vary
significantly from market to market, the Company focuses on contracting with
local resellers who have the technical capability and the market presence to
assist end-users in developing networking solutions to meet their particular
needs. The Company devotes resources to educating resellers as to the benefits
of the Company's products and to training them in the proper installation and
support of the Company's products. The Company's salespersons support the
Company's resellers in their marketing and sales efforts.
To enhance the Company's ability to reach broader markets and to
increase its customer base, the Company has entered into agreements with OEMs
for the development and distribution of custom versions of the Company's
products. For example, the Company has developed custom voice modules for
Scientific Atlanta for their satellite-based communications systems. The Company
also sells its products through a number of private label resellers, including
StrataCom. The Company intends to focus on developing additional OEM and private
label reseller relationships to increase the distribution of its products.
The Company also sells its products directly to carriers, alternate
service providers and large end-users. The Company believes that these customers
can best be addressed by a direct sales force and the Company intends to
continue to increase the number of sales personnel focused on these customers.
The Company's marketing efforts include participating in major
telecommunication trade shows held annually in the United States, Europe, Asia
Pacific and Latin America; advertising in major trade journals; conducting
direct mail marketing campaigns; publishing newsletters and technical articles;
and conducting conferences for resellers. As of June 30, 1996, the Company's
marketing department consisted of eleven full-time employees.
CUSTOMER SUPPORT AND TRAINING
The Company considers on-going technical support, training, service
and repair of its products an integral part of its business. The Company's
standard product warranty includes one-year factory hardware repair, one-year
telephone and facsimile technical support and a 90-day dead-on-arrival express
replacement service. In addition, the Company offers extended out-of-warranty
hardware repair and maintenance programs, software upgrades, a modem dial-in
service and a 24-hour priority technical support hot line. Other service
programs include network design and analysis, network optimizing and tuning,
network staging and on-site installation and troubleshooting. Resellers and
certain third party service organizations provide additional customer support.
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The Company offers its resellers a variety of one-week training
modules covering product sales, technical matters and new products. In certain
circumstances, the Company also offers similar training programs to end-users.
Classes are conducted regularly at the Company's facility in Camarillo,
California, as well as in the field. The Company intends to expand its training
program strategy to include in-country training seminars for resellers and
end-users.
PRODUCT DEVELOPMENT
The Company's product development efforts are directed toward
enhancing existing products and developing new products in order to meet
changing end-user needs and to support an increasing number of applications. The
Company believes its existing expertise in compression and integration,
including proprietary echo cancellation technology, international
standards-compliant telephone interfaces and protocols, embedded coding
techniques, congestion management and packet jitter-correction methodology,
provide the Company with a strong technology base to pursue this objective. The
Company's product development efforts focus on the following principles:
- Develop New Products and Technology. The Company continually
assesses market trends, both domestic and international,
with the focus of developing new products designed to meet
emerging market demands. In developing new products, the
Company attempts to combine its existing technology base
with new technologies to provide a broader range of
networking solutions to the end-user.
- Improve Existing Technology. The Company seeks to expand the
features and functionality of its existing product lines
through technology modifications and enhancements to meet
the changing needs of its customers. The Company
continuously reviews the design and manufacturing process of
its products to determine areas of product cost savings or
enhanced product quality.
- Leverage Software-defined Products. The Company has designed
and continues to develop a small number of programmable
hardware designs, each of which can be used for multiple
products through the installation of application software
that define features and functionality. This strategy allows
the Company to reduce hardware design changes and retooling
costs and to accelerate the certification processes for new
products.
As of June 30, 1996, the Company employed 58 persons in engineering,
35 of which were engaged primarily in software development.
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 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 and results of
operations. 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Operating Expenses--Research and Development."
COMPETITION
The market for the Company's products is highly competitive. The
Company competes directly domestically and internationally with a variety of
companies offering Frame Relay access products including FastComm Communications
("FastComm"), Memotec Communications, Inc. ("Memotec"), MICOM Communications
Corp. ("MICOM"), Motorola Information Systems Group ("Motorola"), Sync Research,
Inc. ("Sync") and other companies. The Company anticipates competition from
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 expects substantial additional competition from existing
competitors and from a number of other companies which may enter the Company's
existing or future 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. Consolidations in the industry, such as the
acquisitions of StrataCom by Cisco Systems Inc. and MICOM by Northern Telecom
Limited, could enhance the capabilities of the Company's competitors. There can
be no
6.
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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.
The principal competitive factors in the markets for the Company's
products are price, quality, product features, performance, reliability, product
reputation and customer support. The Company believes it presently competes
favorably in all of these areas.
MANUFACTURING
The Company's manufacturing operations consist primarily of quality
control, functional testing, final assembly, burn-in and shipping. The Company
uses third parties for circuit board assembly and in-circuit testing. This
approach minimizes both inventory and capital expenditures while providing
production scheduling and capacity flexibility. The Company performs extensive
testing and inspection of all of its products prior to shipment. The Company's
facility in Camarillo, California received ISO-9001 certification in July 1996.
The Company currently procures all of its components from outside
suppliers. The Company has generally been able to obtain adequate supplies of
all components in a timely manner from existing sources. In order to minimize
the risk of supply interruption, the Company maintains quantities of selected
parts and has arrangements with various suppliers to maintain shelf stock to
support its near-term requirements. None of these arrangements with alternative
suppliers and subcontractors obligate the Company to purchase the suppliers
shelf stock.
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.
Certain components used in the Company's products are available only
from single sources. These include digital signal processors, microprocessors,
programmable gate array devices, power supplies and passive components. Although
the Company generally buys components under purchase orders and does not have
long-term agreements with its suppliers, it expects its suppliers, most of whom
are large companies such as Texas Instruments and Motorola, to be able to
continue to satisfy its requirements. Although the Company believes that
alternative sources are available, if the Company's ability to obtain these
components were impaired or interrupted for any reason, there could be a
substantial disruption in the supply of the Company's products, which could
adversely affect the Company's business and financial condition and results of
operations.
GOVERNMENTAL REGULATION
The Company's products are subject to regulations promulgated by the
Federal Communications Commission (FCC) regarding emission of electromagnetic
energy, which may interfere with other equipment. All of the Company's current
products have been tested and comply with the relevant FCC regulations and with
all required Underwriters Laboratories safety specifications.
The Company's products are also subject to extensive governmental
regulation and product certification in certain foreign countries. These
regulations and product certification requirements are often significantly more
stringent and burdensome than the regulations to which the Company's products
are subject in the United States. In addition, the certification process to
which the Company must subject its products before they can be marketed in such
countries is time consuming and expensive.
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.
7.
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PROPRIETARY RIGHTS
The Company does not hold any patents and historically has relied on a
combination of contractual rights, trade secrets, copyright and trademark law
and technical measures to establish and protect its proprietary rights in its
products. However, the Company may seek patent protection for certain of its
technologies, when appropriate, in the future. Although the Company relies to a
great extent on trade secret protection for much of its technology, and obtains
confidentiality agreements from its employees, consultants and other third
parties to whom the Company reveals confidential information pursuant to their
business relationships, there can be no assurance that third parties will not
independently develop the same or similar technology, obtain unauthorized access
to the Company's proprietary technology or misuse the technology to which the
Company has granted them access. 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.
Certain technology licensed from third parties is incorporated in the
Company's products. In particular, the Company licenses certain of its voice
compression algorithms, the right to commercialize its SkyFrame products,
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 and results of operations.
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. In addition, the Company has
in the past, and may in the future, pay significant sums to obtain licenses from
third parties to avoid the costs and uncertainties associated with defending a
potential claim. 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 and results of operations.
EMPLOYEES
As of June 30, 1996, the Company employed 158 full-time persons,
including 34 in operations, 36 in sales and marketing, 14 in customer service,
58 in engineering and 20 in finance and administration. The Company also employs
a small number of temporary and contract employees. None of the Company's
employees is represented by a labor union. The Company is not a party to any
collective bargaining agreement or other similar agreement. The Company has
experienced no work stoppages to date. The Company believes that its
relationship with its employees is good.
RISK FACTORS
This Report contains forward-looking statements which involve risks
and uncertainties. Actual results could differ materially from those discussed
in the forward-looking statements. Certain of the factors that could cause
actual results to differ materially are discussed below. The following risks
should be considered carefully, in addition to the other information contained
in this Report, before purchasing shares of the Company's Common Stock.
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; market acceptance of the Company's products; the rate of
end-user adoption of voice over Frame Relay; 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
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obsolescence resulting from new product introductions or changes in customer
demand; the availability and cost of supplies; the financial stability of major
customers; expenses associated with the acquisition of technologies or
businesses; changes in regulatory requirements; 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. In the quarter ended September 30, 1995,
the Company's revenues decreased when compared to the preceding quarter,
primarily due to a reduced demand for certain point-to-point products. As a
result, the price of the Company's Common Stock was 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's sales are primarily through resellers and are typically
characterized by several large orders and a large number of small orders.
Resellers typically do not stock a supply of the Company's products and place
orders with the Company only after they have received orders from their
customers. 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 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.
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 be profitable in future periods. 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."
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 rapid decline in the market for certain
point-to-point products resulted in reduced sales and an inventory write-down in
the quarter ended December 31, 1995.
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 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 voice, data and integrated applications. Public carriers
such as AT&T and MCI offer services which may adversely affect the adoption of
services and products based on Frame Relay technologies. For example, the
availability of inexpensive voice communications services in the United States
may reduce or eliminate the cost
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advantages of voice over Frame Relay services in the United States. If the costs
of telecommunications services in the United States and other markets decline,
the market for the Company's products may either not materialize or could be
adversely affected. 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 these markets.
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, 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. 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 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."
Substantial Competition. The market for the Company's products is
highly competitive. The Company competes directly domestically and
internationally with a variety of companies offering Frame Relay access products
including FastComm, Memotec, MICOM, Motorola, Sync and other companies. The
Company anticipates competition from manufacturers of Frame Relay switches, such
as Cascade and StrataCom, who are also suppliers to, or customers of, the
Company.
The Company expects substantial additional competition from existing
competitors and from a number of other companies which may enter the Company's
existing or future 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. Consolidations in the industry, such as the
proposed acquisitions of StrataCom by Cisco Systems Inc. and MICOM by Northern
Telecom Limited, could enhance the capabilities of the Company's competitors.
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. See "--Competition" and "--Manufacturing."
Integration of Presticom; Future Acquisitions. A component of the
Company's strategy is to acquire complementary technologies and businesses. Such
acquisitions involve significant risks. The Company acquired Presticom, Inc., a
Canadian corporation, in November 1995. To obtain benefits from this
acquisition, the Company must successfully integrate Presticom's and the
Company's sales, research and development and administrative functions. In
addition, the Company also must integrate Presticom's technology, which is
primarily based on the
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<PAGE> 13
transmission of data using Frame Relay, into the Company's products, which
emphasize voice transmission using Frame Relay, and must also integrate the
Company's technology into Presticom's products. Developing Presticom's business
as a part of the Company will also require the use of cash resources. Due in
part to consolidation in the Company's industry, the Company 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 the creation and
amortization of goodwill and the incurrence of acquisition related expenses, all
of which could adversely affect the Company's profitability. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies 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 an acquisition does occur, no assurances can be given
as to the effect thereof on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 17% of the Company's net
sales for the fiscal years ended June 30, 1995 and 1996, respectively. In
addition, StrataCom and IMPSAT accounted for 8% and 14% of the Company's net
sales for the fiscal year ended June 30, 1995 and 7% and 10% for the fiscal year
ended June 30, 1996, respectively. During those periods the Company's five
largest customers accounted for 43% and 46%, 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. The Company believes its OEM voice
card sales to Scientific Atlanta will be significantly lower in fiscal 1997 than
in fiscal 1996. 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. See
"--International Sales, Tariffs and Regulatory Matters."
Management of Growth. The Company has recently experienced growth in
its operations, both internally and as a result of the acquisition of Presticom.
During the last 12 months, the Company has significantly increased the number of
sales, marketing, engineering and other personnel and expects to continue to
increase the number of its personnel. The Company's 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 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. In addition, the Company engages from time to time in customer
development activities for customers which require the allocation of significant
resources. The Company's future operating results will depend on its 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 continues to upgrade its 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.
International Sales, Tariff and Regulatory Matters. Sales of the
Company's products to customers outside of North America accounted for
approximately 66% and 63% of the Company's net sales for the fiscal years ended
June 30, 1995 and June 30, 1996, respectively. In addition, the Company believes
that a majority of its sales to customers inside North America represent sales
of products which are used or resold in markets outside of North America. 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" and "--Sales and Marketing."
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<PAGE> 14
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. See
"--Governmental Regulation."
Reliance on Third Party Suppliers. The Company relies on third party
suppliers who supply the components used in the Company's products. 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. In addition, certain key
components used in the Company's products are available only from single sources
and the Company 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. See "--Manufacturing" and "--Proprietary
Rights."
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 require 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. See "--Manufacturing."
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. See "--Governmental Regulation."
The Company's sales through OEMs who purchased custom products for the
fiscal years ended June 30,
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1995 and 1996 accounted for approximately 9.0% and 17.7%, respectively, of the
Company's net sales. The Company does not classify private label sales of
standard products as OEM sales. In fiscal 1995 and 1996, virtually all of the
Company's OEM sales were generated by sales of custom voice cards to Scientific
Atlanta for use in its satellite based communication system. The Company
believes its OEM voice card sales to Scientific Atlanta will be significantly
lower in fiscal year 1997. None of the OEMs have contracts with the Company
which require the OEMs to purchase any products. 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, operating results and financial condition. See "--Sales and
Marketing."
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, the right to commercialize its SkyFrame products, 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 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
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. See "--Proprietary Rights."
Since patent applications in the United States are not publicly
disclosed until the patent is issued, 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. The Company has in the past,
and may in the future, pay significant sums to obtain licenses from third
parties to avoid the costs and uncertainties associated with defending a
potential claim. 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. See "Directors and Executive Officers of Registrant."
Future Capital Needs; Uncertainty of Additional Funding. The Company
anticipates that available cash together with amounts available under its credit
facilities and cash flow from operations, 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 cost of acquisitions of businesses, products and technologies, 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 could hinder the
Company's ability to obtain financing. If adequate funds are not
13.
<PAGE> 16
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."
Volatility of Stock Price. The trading price of the Common Stock has
undergone significant fluctuations and is expected to 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.
Forward-Looking Statements. This Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements under "Business" include, without limitation, the Company's
statements regarding: the growth and opportunities in the market for the
Company's products; the strategies, products and capabilities required to
penetrate and be a leader in the FRAD market; engaging in strategic alliances
and selective acquisitions to address the data over Frame Relay market; and
expanding its OEM and distribution relationships. The forward-looking statements
also include the Company's expectation that sales of its Frame Relay access
products will increase due to factors affecting the market for Frame Relay
services and equipment, increased Frame Relay transmission services, and the
cost effectiveness of integrated networks and voice over Frame Relay solutions.
Such forward-looking statements also include the Company's projections of the
product mix of future revenues; increase in the level of expenses; and the
sufficiency of capital resources under "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These statements are only
predictions and actual events or results may differ materially as a result of
the risk factors discussed above and the risks associated with: the possibility
that the market for Frame Relay products will not continue to develop or that
the Company's products and capabilities will not address emerging market needs;
the effect of increased competition; changing technologies and new product
developments; integration of products and technologies; product obsolescence;
the loss of significant customers; and changes in revenues and expenses
resulting in fluctuations in quarterly results.
Lack of Dividends. The Company has never paid cash dividends on 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.
14.
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ITEM 2. PROPERTIES.
The Company's principal administrative, engineering and manufacturing
facilities are located in one 52,000 square foot leased facility in Camarillo,
California, under a lease that expires on July 1, 1999. The lease was amended
November 17, 1995 to add approximately 16,000 square feet. The base rent is
currently approximately $43,000 a month. In addition to the base rent, the
Company pays its share of the operating expenses, property tax, and insurance
premiums on the building. The Company also leases 6,000 square feet of space in
Montreal, Canada. ACT maintains small sales support offices in the United
Kingdom and in the State of Maryland. The Company believes its facilities are
adequate for its current needs and that suitable additional or substitute space
will be available as needed.
ITEM 3. LEGAL MATTERS.
The Company has no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security-holders during the
quarter ended June 30, 1996.
15.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the Nasdaq National Market under the symbol "ANET." The following
table sets forth, for the periods indicated, the high and low last reported sale
prices for the Common Stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
- ----------- ---- ---
<S> <C> <C>
1997
1st Quarter (through September 16, 1996) $37 1/4 $21 1/2
FISCAL YEAR HIGH LOW
- ----------- ---- ---
1996
4th Quarter 47 1/2 22 1/8
3rd Quarter 26 11 3/4
2nd Quarter 16 1/2 6 1/8
1st Quarter 17 7/8 9 3/4
FISCAL YEAR HIGH LOW
- ----------- ---- ---
1995
4th Quarter (from May 3, 1995) 22 15 3/4
3rd Quarter N/A N/A
2nd Quarter N/A N/A
1st Quarter N/A N/A
</TABLE>
As of September 16, 1996, there were 70 record holders of the
Company's Common Stock. On September 16, 1996, the last reported sale price of
the Common Stock on the Nasdaq National Market was $31.50 per share.
DIVIDEND POLICY
The Company has never paid cash dividends on shares of its capital
stock. The Company currently intends to retain any future earnings for use 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
16.
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data with respect to the Company's
statement of operations for each of the five fiscal years ended June 30, 1992,
1993, 1994, 1995 and 1996 and the balance sheet data at June 30, 1992, 1993,
1994, 1995 and 1996 are derived from the audited financial statements of the
Company. The financial statements and the related report of independent auditors
for the fiscal years ended June 30, 1992 and 1993 are not included in this
Report. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Financial Statements of the Company and the related
notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30
-------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales .............................. $ 5,437 $ 6,207 $ 12,654 $ 20,566 $ 28,404
Cost of goods sold ..................... 1,918 3,185 5,939 9,244 13,998
-------- -------- -------- -------- --------
Gross profit ........................ 3,519 3,022 6,715 11,322 14,406
Operating expenses:
Research and development ............ 1,192 1,504 1,955 3,586 5,026
In-process research and development.. 5,600
Sales and marketing ................. 1,448 1,777 2,943 4,785 7,174
General and administrative .......... 849 1,158 1,335 1,736 3,257
-------- -------- -------- -------- --------
Total operating expenses ............... 3,489 4,439 6,233 10,107 21,057
-------- -------- -------- -------- --------
Income (loss) from operations .......... 30 (1,417) 482 1,215 (6,651)
Net interest income and other income
(expense) ........................... (18) (18) (8) 69 1,219
Loss due to earthquake ................. -- -- (281) -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes ...... 12 (1,435) 209 1,284 (5,432)
Provision for income taxes ............. 2 -- -- 22 295
-------- -------- -------- -------- --------
Net income (loss) ...................... $ 10 $ (1,435) $ 209 $ 1,262 $ (5,727)
======== ======== ======== ======== ========
Net income (loss) per share ............ $ 0.01 $ (0.52) $ 0.05 $ 0.24 $ (0.78)
======== ======== ======== ======== ========
Shares used in per share
calculations ........................... 2,547 2,739 3,852 5,211 7,308
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) .......... $ 930 $ 2,284 $ 3,923 $ 38,235 $ 84,747
Total assets .......................... 2,644 3,837 6,398 42,847 93,851
Total long-term debt, excluding current
maturities ......................... 27 10 -- -- 147
Accumulated deficit ................... (2,345) (3,780) (3,571) (2,304) (8,036)
Total stockholders' equity (1) ....... 1,475 2,739 4,847 40,316 90,140
</TABLE>
- -----------
(1) The Company has never paid cash dividends on shares of its capital stock.
17.
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the Financial Statements and related Notes thereto contained elsewhere in
this Report. This Report contains forward-looking statements that involve a
number of risks and uncertainties including, without limitation, those set forth
in "Business--Risk Factors." The Company's actual results may differ materially
from any future performance discussed in the forward-looking statements and in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
GENERAL
ACT 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, a point-to-point multiplexer designed for use on a
voice-band analog circuit. In fiscal 1991, the Company began shipping a
point-to-point integrated multiplexer designed for use over digital leased
lines. In fiscal 1993, the Company introduced its integrated Frame Relay access
product.
In November 1995 the Company acquired all the outstanding shares of
Presticom, a developer of multiprotocol Frame Relay access devices. The Company
recorded an acquisition cost of approximately $9.1 million, of which
approximately $7.3 million in cash and 176,365 shares of Common Stock
represented the consideration paid to Presticom's shareholders and of which
approximately $0.6 million represented transaction expenses. As a result of the
acquisition, the Company expensed approximately $5.6 million in the quarter
ended December 31, 1995 as acquired in-process research and development and is
amortizing approximately $2.1 million of goodwill over seven years.
The Company's future operating results will be dependent upon the
development and growth of the public and private wide area network
communications market for its Frame Relay access products. This market and
product applications within this market are currently emerging and may not
continue to develop, whether as a result of competition, technological change,
market forces or otherwise.
The Company anticipates that, in general, the average sales price for
its products will decrease over time due to competition and other factors. In
addition, the Company has from time to time introduced new products which are
less expensive alternatives to the Company's older products. In such instances,
the Company must sell more units to maintain the same level of aggregate net
sales. Price erosion of existing products and the Company's introduction of less
expensive networking alternatives could adversely affect the Company's margins
and results of operations.
Sales to customers outside of North America accounted for approximately
70%, 66% and 63% of the Company's net sales for the fiscal years ended June 30,
1994, 1995 and 1996, respectively. 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 North America represent sales of products which are used or
resold in markets outside of North America. 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. See Note 1 to Notes to Financial Statements.
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 17% of the Company's net sales for
the fiscal years ended June 30, 1995 and June 30, 1996, respectively. In
addition, StrataCom and IMPSAT accounted for approximately 8% and 14% for the
fiscal year ended June 30, 1995 and 7% and 10% for the fiscal year ended June
30, 1996, respectively, of net sales. During those periods the Company's five
largest customers accounted for 43% and 46%, respectively, of net sales. The
Company believes that its OEM voice card sales to Scientific Atlanta will be
significantly lower in the fiscal 1997 than in fiscal 1996. Any reduction, delay
or change in orders from such customers could have a material adverse effect on
the Company's business.
18.
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth for the years indicated, the percentages
of net sales represented by each item in the Company's statement of operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ..................................... 100.0% 100.0% 100.0%
Cost of goods sold ............................ 46.9 44.9 49.3
------ ------ ------
Gross profit .................................. 53.1 55.1 50.7
Operating expenses:
Research and development ................... 15.5 17.4 17.7
Sales and marketing ........................ 23.3 23.3 25.2
General and administrative ................. 10.5 8.4 11.5
Acquired in-process research and development 19.7
------ ------ ------
Total operating expenses ...................... 49.3 49.1 74.1
------ ------ ------
Income (loss) from operations ................. 3.8 5.9 (23.4)
Net interest and other income ................. -- 0.3 4.3
Loss due to earthquake ........................ (2.2) -- --
------ ------ ------
Income (loss) before taxes .................... 1.6 6.2 (19.1)
Provision for income taxes .................... -- 0.1 1
------ ------ ------
Net income (loss) ............................. 1.6% 6.1% (20.1)%
====== ====== ======
</TABLE>
Net sales
Net sales increased 38.1% to $28.4 million for the fiscal year ended
June 30, 1996 from $20.6 million for the fiscal year ended June 30, 1995. The
increase was primarily due to increased sales of the Company's Frame Relay and
OEM products and to shipments of products acquired in the Presticom acquisition
which accounted for $3.5 million, or 44.4% of the increase in net sales. Net
sales of Frame Relay products were $18.8 million and $9.2 million for fiscal
1996 and 1995, respectively. Net sales of point-to-point products decreased to
$4.6 million from $9.6 million for the fiscal years ended June 30, 1996 and June
30, 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. The Company anticipates that sales of
point-to-point products will continue to decline, although significant orders
for large point-to-point networks, if any, could contribute to variability in
net sales from quarter to quarter. Net sales of OEM products increased to $5.0
million for the fiscal year ended June 30, 1996 from $1.8 million for the fiscal
year ended June 30, 1995. The increase in OEM shipments was primarily due to
unusually large orders received from Scientific Atlanta and the Company does not
anticipate this level of OEM sales to continue in the future.
Net sales increased 62.5% to $20.6 million for fiscal 1995 from $12.7
million for fiscal 1994. This increase was primarily due to increased sales of
the Company's Frame Relay products and, to a lesser extent, increased sales of
its point-to-point products. Net sales of Frame Relay products were $2.8 million
and $9.2 million for fiscal 1994 and 1995, respectively. Net sales of point to
point products were $9.1 million and $9.6 million for fiscal 1994 and 1995,
respectively.
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 $14.4 million, or 50.7% of net sales,
for the fiscal year ended June 30, 1996. Fiscal 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 $15.1 million, or 53.2% of net sales, for the fiscal year ended June 30,
1996, as compared to 55.1% of net sales for fiscal 1995. This decrease in gross
profit as a percentage of sales was primarily attributable to changes in product
mix, including increased OEM sales and decreased sales of voice cards. The gross
margins generated from OEM product sales are typically lower than those from
certain of the Company's other products. In the future, gross profit may be
affected by price competition and discounts, product mix, product configuration,
changes in unit volume, cost of components and manufacturing and other factors.
19.
<PAGE> 22
The Company's gross profit was $11.3 million, or 55.1% of net sales,
for fiscal 1995 compared to $6.7 million, or 53.1% of net sales, for fiscal
1994. This increase in gross margin was primarily attributable to a decline in
the Company's unit cost of certain components due to decreases in supplier
prices and volume discounts and, to a lesser extent, increased manufacturing
efficiencies and increased sales of the Company's voice cards, which generally
have a higher margin than the Company's multiplexer products. The Company
generally experiences higher manufacturing, component and other costs, and
commensurately lower margins, for new products for a period of time following
their introduction.
Operating Expenses
Research and development. Research and development expense increased to $5.0
million, or 17.7% of net sales, for the fiscal year ended June 30, 1996 from
$3.6 million, or 17.4% of net sales, for the fiscal year ended June 30, 1995.
These increases were primarily attributable to the cost of personnel for the
development of new products and enhancement of existing products, which
increased to approximately $2.5 million from approximately $1.7 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.
Research and development expense increased to $3.6 million, or 17.4% of
net sales, for fiscal 1995 from $2.0 million, or 15.5% of net sales, for fiscal
1994. These increases were primarily attributable to the cost of personnel for
the development of new products and enhancement of existing products, which
increased to approximately $1.7 million from approximately $1.0 million during
the preceding comparable period; payments to third party developers, which
increased to $0.3 million from nothing during the preceding comparable period;
and costs associated with obtaining product approvals in certain countries,
which increased to approximately $0.2 million from approximately $0.1 million
during the preceding comparable period.
Sales and marketing. Sales and marketing expense increased to $7.2 million, or
25.2% of net sales, for the fiscal year ended June 30, 1996 from $4.8 million,
or 23.3% of net sales, for the fiscal year ended June 30, 1995. This dollar
increase was primarily attributable to the addition of personnel and increased
marketing activities. The Company anticipates adding sales personnel and
increasing sales and marketing expenses in the near term.
Sales and marketing expense increased to $4.8 million, or 23.3% of net
sales, for fiscal 1995 from $2.9 million, or 23.3% of net sales, for fiscal
1994. This dollar increase was primarily attributable to the addition of
personnel and increased marketing activities. Sales and marketing expense as a
percentage of net sales remained relatively constant between these periods.
General and administrative. General and administrative expense increased to $3.3
million, or 11.5% of net sales, for the fiscal year ended June 30, 1996 from
$1.7 million, or 8.4% of net sales, for the fiscal year ended June 30, 1995.
This increase in expense levels was primarily attributable to the addition of
administrative personnel and additional expense incurred as a result of being a
public company. General and administrative expenses will be impacted by
approximately $300,000 per year for seven years commencing November 30, 1995 due
to amortization of goodwill associated with the acquisition of Presticom.
General and administrative expense increased to $1.7 million, or 8.4%
of net sales, for fiscal 1995 from $1.3 million, or 10.5% of net sales, for
fiscal 1994. This dollar increase in expense levels was primarily attributable
to the addition of administrative personnel. The decrease as a percentage of net
sales was due to a more rapid increase in net sales than these expenses.
The Company expects to continue to expand its operations, resulting in
potentially substantial 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.
Net interest and other income (expense)
Net interest income was $1,219,400 for the fiscal year ended June
30,1996 compared to net interest income of $68,400 in fiscal 1995. Net interest
income was $8,800 for fiscal 1994. These changes were primarily attributable to
interest received on the proceeds from the Company's public offering in May
1995.
20.
<PAGE> 23
Income Taxes
The provision for income taxes for the fiscal year ended June 30, 1996
totaled approximately $295,000. The provision for income taxes differs from the
federal statutory rate due to the foreign income taxes related to the Company's
Canadian subsidiary, the effect of Federal and state alternative minimum taxes,
net operating losses incurred for the period that are not benefited and certain
expenses including a $5,600,000 charge for acquired in-process research and
development which are not deductible for tax purposes. At June 30, 1996, subject
to certain limitations, the Company has research and development credit
carryforwards of approximately $301,000 and $286,000 for federal and state tax
purposes, respectively, and approximately $7,062,000 and $1,791,000 in federal
and state operating loss carryforwards, respectively. See Note 4 to Notes to
Financial Statements.
There was no provision for income taxes for fiscal 1994 and only a
nominal provision of $21,800 for income taxes for the year ended June 30, 1995
due to reductions in the deferred tax valuation allowance attributable to
utilization of net operating loss carryforwards by the Company.
Inflation/Accounting Pronouncements
Although management cannot accurately anticipate the effect of
inflation on its operations, to date inflation has not had a material effect on
product sales or results of operations. There are no recently issued accounting
pronouncements that management believes will have a significant impact on
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from the sale of stock,
borrowings from investors, borrowings under a bank facility and sales of the
Company's products. Net proceeds from the sale of Common Stock in the Company's
secondary offering in June 1996 were $53.7 million. For fiscal 1996, the
Company's operating activities used cash of approximately $4.9 million. At June
30, 1996, the Company had approximately $84.7 million in working capital,
including $70.4 million in cash and cash equivalents.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, computer software and leasehold improvements amounted
approximately $1.8 million for the fiscal year ended June 30, 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.
The Company has a loan and security agreement (the "Loan Agreement")
with Silicon Valley Bank (the "Bank"), which provides for aggregate borrowings
up to a maximum of $3,000,000. Under the loan agreement, the Company may borrow
up to the lesser of $3,000,000 or 75% of eligible accounts receivable (the
revolving line of credit). The revolving line of credit expires July 5, 1997. At
June 30, 1996 and June 30, 1995 there were no outstanding balances under any of
the lines of credit. Interest on the revolving line of credit is payable monthly
at a rate equal to the bank's prime rate, which was 8.25% at June 30, 1996, plus
1.5%. The loan agreement provides for the issuance of letters of credit in a
aggregate amount outstanding up to $500,000. Letters of credit outstanding
reduce the amount available under the revolving line of credit. At June 30, 1996
and June 30, 1995, no letters of credit were outstanding.
The loan and security agreement contain certain covenants that, among
other things, require the Company to maintain certain financial ratios and limit
the Company's ability to obtain certain forms of additional debt, to repurchase
the Company's stock and pay dividends. The Company believes that available cash,
together with amounts available under its credit facilities and internally
generated cash flow, will be adequate to satisfy its capital requirements for at
least the next twelve months.
21.
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by
Regulation S-X are included in this Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
22.
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
executive officers and directors of the Company as of August 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Martin Shum 48 Chairman of the Board of Directors, President and
Chief Executive Officer
Suresh Nihalani 43 Vice President, Product Marketing
Shaun Manesh 41 Vice President, Manufacturing
John W. Tucker 51 Vice President, Sales and Marketing
Melvin L. Flowers 43 Vice President, Finance and Administration, and Chief
Financial Officer
Andre de Fusco 38 Vice President, Strategic Planning and Business
Development
Peter Staab 49 Vice President, Engineering
Linda Carlson 51 Vice President, Worldwide Sales
Jean-Guy Lacombe 39 Vice President, Operations
Brig. Gen. Harold R. Johnson (1) 73 Director
Dr. Michael Feuer (2) 54 Director
Carlos M. Siffert (2) 58 Director
William Ambrose (1) 38 Director
Archie J. McGill (1)(2) 65 Director
</TABLE>
- -----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Martin Shum founded the Company in May 1987 and has served as Chairman
of the Board of Directors, President and Chief Executive Officer since that
time. Prior to founding ACT, Mr. Shum was employed in various capacities by
several telecommunications companies, including Vice President of Marketing and
Development at MICOM, Director of Business Planning and Director of Engineering
at General DataComm, and senior member of the technical staff at Plessey
Telecommunications Research.
Suresh Nihalani has served as Vice President, Product Marketing since
December 1995. Mr. Nihalani served as the Company's Senior Vice President of
Business Development from July 1995 to December 1995, Senior Vice President of
Operations from April 1993 to June 1995, Vice President of Business Planning
from 1990 to 1993 and Vice President of Engineering from 1987 to 1990. Before
joining the Company in 1987, Mr. Nihalani was employed as Director of Product
Development at MICOM.
Shaun Manesh has served as Vice President, Manufacturing since 1990.
Mr. Manesh was the Company's Director of Operations from 1988 to 1990. Prior to
June 1988, Mr. Manesh was employed in various capacities with Tekelec and MICOM.
John W. Tucker has served as Vice President, Sales and Marketing since
December 1995, and served as the Company's Vice President of Sales from June
1990 until December 1995. Mr. Tucker was employed as a marketing consultant from
1988 to 1990, as Assistant Vice President of North American Sales at MICOM from
1985 to 1988 and as Director of Sales at Interlan, a local area network
component manufacturer, from 1984 to 1985.
Melvin L. Flowers has served as Chief Financial Officer and Vice
President of Finance since July 1993 and as Vice President, Finance and
Administration since December 1995. Prior to joining the Company, Mr. Flowers
served as President and Chief Financial Officer of Pacific Earth Resources, an
ornamental horticultural company, from 1991 to 1993 and from 1989 to 1991,
respectively, and as Vice President and Chief Financial Officer of Spectramed
Incorporated, a medical device manufacturing company, from 1986 to 1989.
23.
<PAGE> 26
Andre de Fusco has served as Vice President, Strategic Planning and
Business Development since December 1995. Mr. de Fusco joined the Company in
December 1994 and served as its Vice President of Marketing until December 1995.
Mr. de Fusco was employed as Director of International Accounts and Director of
Business Development for Northern Telecom from 1991 to 1994 and as Vice
President of Marketing and President of MaxCom, a developer of electronic mail
systems, from 1984 to 1991.
Peter Staab joined the Company in June 1995 as its Vice President of
Engineering. Before joining the Company, Mr. Staab was employed at General
DataComm as Director of Network Management and Systems from 1992 to 1995 and
Director of Transmission Products from 1985 to 1992.
Linda Carlson has served as Vice President, Worldwide Sales since
December 1995. Ms. Carlson served as the Company's Assistant Vice President of
Sales--Americas from January 1991 to December 1995. Prior to January 1991, Ms.
Carlson was employed at various telecommunication companies, including RED-SAC
and MICOM.
Jean-Guy Lacombe has served as Vice President, Operations of the
Company and the General Manager of Presticom since December 1995. Mr. Lacombe
was the Chairman of the Board and Chief Executive Officer of Presticom from
February 1988 until November 1995.
Brig. Gen. (retired) Harold R. Johnson has served as a member of the
Board of Directors of the Company since 1988. Brig. Gen. Johnson is currently
the Senior Vice President of Business Development at The Fairchild Corporation,
an aerospace and communications company, and has been with Fairchild in various
capacities since 1988. From 1980 to 1988, Brig. Gen. Johnson was founder,
President and Chief Executive Officer of Telebit Corporation, a manufacturer of
modems.
Dr. Michael Feuer has served as a member of the Board of Directors
since 1992. Dr. Feuer is a general partner of Pacific Technology Fund, a venture
capital firm with which he has been associated since 1992, and the President of
Santa Clara Associates, Inc., an investment management company and an affiliate
of Pacific Technology Fund with which Dr. Feuer has been associated since 1987.
Since 1991, Dr. Feuer has been a director of Fiberstars, Inc., a manufacturer of
specialized lighting equipment. Dr. Feuer was elected as a director of the
Company in connection with an investment in the Company by Pacific Technology
Fund.
Carlos M. Siffert has served as a member of the Board of Directors
since 1993. Mr. Siffert is a Director of Promon, a large Brazilian
telecommunications and engineering services company. Mr. Siffert is also the
Chief Executive Officer of Promon Tecnologia, S.A., an entity controlled by
Promon, and has been associated with Promon Tecnologia, S.A. for over 30 years.
Mr. Siffert was elected as a director of the Company pursuant to a voting
agreement entered into in connection with Promon International's investment in
the Company.
William W. Ambrose has served as a member of the Board of Directors
since 1993. Mr. Ambrose is the President of Pyramid Research, Inc. a
telecommunications market research organization which he founded in 1986. Mr.
Ambrose was elected as a director of the Company pursuant to a voting agreement
entered into in connection with investment in the Company by a subsidiary of
Promon.
Archie J. McGill has served as a member of the Board of Directors since
1994. Mr. McGill is the President and Chief Executive Officer of Chardonnay
Inc., an investment management company, and has served in such position since
1986. Mr. McGill served as President of Rothschild, Inc., a venture capital
investment firm, from 1983 to 1986. Mr. McGill was previously President of the
AIS/American Bell division of AT&T and a Vice President of Marketing for
International Business Machines.
The Board of Directors of the Company is divided into three classes,
designated "Class I," "Class II" and "Class III," respectively. Each director
serves for a term ending on the date of the third annual meeting of stockholders
following the annual meeting at which such director was elected. However, each
initial director in Class I (Mr. Siffert and Dr. Feuer) serves for a term ending
on the date of the annual meeting of stockholders held in 1998; each initial
director in Class II (Mr. Ambrose and Mr. McGill) serves for a term ending on
the date of the annual meeting of stockholders held in 1997 and each initial
director in Class III (Mr. Shum and Brig. Gen. Johnson) serves for a term ending
on the date of the annual meeting of stockholders held in 1996.
24.
<PAGE> 27
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such person.
Based solely on the Company's review of such forms furnished to the
Company and written representations from certain reporting persons, the Company
believes that all filing requirements applicable to the Company's executive
officers, directors and more than 10% stockholders were complied with, except
for the following transactions which were reported late: A statement of changes
in beneficial ownership for the purchase of 1,000 shares in May 1995 by Mr.
Flowers, the grant of 65,000 stock options in September 1995 by Mr. Tucker, the
grant of 40,000 stock options in September 1995 by Mr. Staab, the indirect
purchase of 519 shares in December 1995 by Mr. Lacombe, the exercise of a
warrant to purchase 7,788 shares and sale of 7,788 shares by an affiliate of
Pacific Technology Fund in February 1996, the exercise of a stock option to
purchase 4,286 shares by Gerard Johnson in March 1996, the indirect purchase of
164 shares by Mr. Shum in July 1996 and the purchase of 332 shares by Mr.
Lacombe in July 1996.
25.
<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by any
person for all services rendered in all capacities to the Company to the Chief
Executive Officer and to each of the four additional most highly compensated
executive officers (the "Named Executive Officers") for the fiscal year ended
June 30, 1994, 1995 and 1996. Except as indicated below, during fiscal year
1994, 1995, and 1996, no Named Executive Officer received other compensation in
excess of the lesser of $50,000 or 10% of such officer's compensation, nor did
any such officer receive any restricted stock award, stock appreciation right or
payment under any long term incentive plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------- ---------------------
SECURITIES
FISCAL BONUS / UNDERLYING
YEAR SALARY ($) COMMISSION ($) OPTIONS(#)
NAME AND PRINCIPAL POSITIONS (1) ------- ----------- ------------------ ---------------------
- --------------------------------
<S> <C> <C> <C> <C>
Martin Shum......................................... 1996 190,000 - 251,500(3)(4)
1995 175,000 - 57,143(2)
1994 150,000 - -
Linda Carlson ...................................... 1996 117,553 87,200 38,429(3)(4)(5)
1995 92,000 55,000 4,571(2)
1994 149,000 - -
John W. Tucker...................................... 1996 102,510 65,714 67,286(3)(4)
1995 115,000 - 4,571(2)
1994 100,000 - -
Suresh Nihalani..................................... 1996 115,000 11,222 54,857(3)(4)
1995 120,000 5,000 5,714(2)
1994 120,000 - -
Andre de Fusco...................................... 1996 123,335 7,677 54,286(3)(4)
1995 100,000 - 6,857(2)
1994 94,000 - -
</TABLE>
- -----------
(1) See "Directors and Executive Officers of Registrant" for the complete
title of the position held by each Named Executive Officer.
(2) These options were granted on July 18, 1994 pursuant to the Company's
1994 Stock Option Bonus Program. See "Stock Option Bonus Program."
(3) Each of the Named Executive Officers were granted the following stock
options on August 1, 1995 pursuant to the Company's 1995 Option Bonus
Program at an exercise price of $16.50: Mr. Shum, 24,000; Ms. Carlson,
1,429; Mr. Tucker, 2,286; Mr. Nihalani, 2,857; and Mr. de Fusco, 2,286.
The options are immediately exercisable with any unvested shares
acquired under such option being subject to repurchase by the Company,
at the exercise price, upon termination of the optionee's service with
the Company, and vest according to the following schedule ("Standard
Vesting"): twenty-four percent (24%) of the shares vest upon completion
of one year following the vesting commencement and the balance will
vest at a rate of two percent (2%) per full month of employment
thereafter.
(4) Each of the Named Executive Officers were granted the following Stock
Options on September 19, 1996 at an exercise price of $13.00: Mr. Shum,
227,500; Ms. Carlson, 7,000; Mr. Tucker, 65,000; Mr. Nihalani, 52,000;
and Mr. de Fusco, 52,000. The options were immediately exercisable with
any unvested shares acquired under such option being subject to
repurchase by the Company, at the exercise price, upon termination of
the optionee's service with the Company, and is subject to the
Company's Standard Vesting.
(5) Ms. Carlson was elected to serve as the Company's Vice President,
Worldwide Sales on December 11, 1995 and granted a stock option to
purchase 30,000 shares of the Company's Common Stock. The option is
26.
<PAGE> 29
immediately exercisable with any unvested shares acquired under such
option being subject to repurchase by the Company, at the exercise
price, upon termination of the Optionee's service with the Company and
is subject to the Company's Standard Vesting.
OPTION GRANTS
The following table sets forth, for the fiscal year ended June 30,
1996, information concerning the grant of options to purchase shares of Common
Stock under the Company's 1995 Plan to the Named Executive Officers. No stock
appreciation rights were granted to any of the Named Executive Officers during
fiscal year 1996.
OPTION GRANTS IN YEAR ENDED JUNE 30, 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZATION
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OF TERM(4)
OPTIONS EMPLOYEES IN BASE EXPIRATION ----------------------------
NAME GRANTED(1)(2) FISCAL 1996 PRICE(3) DATE 5% 10%
- ---- -------------- ----------- -------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Martin Shum 24,000 2.33% $16.50 07/31/05 $ 198,000 $ 396,000
227,500 22.14% $13.00 09/18/05 1,478,750 2,957,500
Linda Carlson 1,429 .14% $16.50 07/31/05 11,789 23,578
7,000 .68% $13.00 09/18/05 45,500 91,000
30,000 2.92% $13.00 12/10/05 195,000 390,000
John W. Tucker 2,286 .22% $16.50 07/31/05 18,860 37,719
65,000 6.33% $13.00 09/18/05 422,500 845,000
Suresh Nihalani 2,857 .28% $16.50 07/31/05 23,570 47,140
52,000 5.06% $13.00 09/18/05 338,000 676,000
Andre de Fusco 2,286 .22% $16.50 07/31/05 18,860 37,719
52,000 5.06% $13.00 09/18/05 338,000 676,000
</TABLE>
- ---------------
(1) The options granted to the Named Executive Officers were granted on
August 1, 1995 and September 19, 1995 and have a maximum term of 10
years, subject to earlier termination in the event of the optionee's
cessation of service with the Company.
(2) The options are immediately exercisable with any unvested shares
acquired under such option being subject to repurchase by the Company,
at the exercise price, upon termination of the optionee's service with
the Company, and vest according to the following schedule: twenty-four
percent (24%) of the shares vest upon completion of one year following
the vesting commencement date or grant date, as applicable, and the
balance will vest at a rate of two percent (2%) per full month of
employment thereafter. However, the option shares will immediately vest
in the event the Company is acquired by a merger or asset sale, unless
the options are assumed by the acquiring entity.
(3) The exercise price may be paid in cash, in shares of Common Stock
valued at fair market value on the exercise date or pursuant to a
cashless exercise procedure. The Company may also finance the option
exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares.
(4) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the 10-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of
the Common Stock does in fact appreciate over the option term, no value
will be realized from the option grants.
27.
<PAGE> 30
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the number and
value of shares acquired on exercise of options held by each of the Named
Executive Officers during the fiscal year ended June 30, 1996 and the number and
value of unexercised options held by each of the Named Executive Officers as of
June 30, 1996. No stock appreciation rights were exercised during fiscal year
1996 and no such appreciation rights were outstanding as of June 30, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996
AND OPTION VALUES FOR FISCAL YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE MONEY OPTIONS
NUMBER OF AT JUNE 30, 1996(1) AT JUNE 30, 1996 ($)(2)
SHARES ------------------------- --------------------------
NAME ACQUIRED ON VALUE
EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin Shum .......... 29,980 $1,118,254 398,663 -- $9,440,033 --
Linda Carlson ........ 16,500 513,100 42,643 -- 877,469 --
John W. Tucker ....... 32,500 999,018 86,500 -- 1,930,263 --
Suresh Nihalani ...... 37,029 541,302 57,828 -- 1,151,910 --
Andre de Fusco ....... 9,000 266,494 81,000 -- 1,787,882 --
</TABLE>
- -----------
(1) All of the options of the Named Executive Officers are immediately
exercisable, with any unvested shares acquired under such option being
subject to repurchase by the Company, at the exercise price, upon
termination of the optionee's service with the Company, and vest
according to the following schedule: twenty-four percent (24%) of the
shares vest upon completion of one year following the vesting
commencement date or grant date, as applicable and the balance will
vest at a rate of two percent (2%) per full month of employment
thereafter. At June 30, 1996, each of the Named Executive Officers
owned the following number of options for which vested shares were
issuable upon exercise: Mr. Shum, 140,374; Ms. Carlson, 3,871; Mr.
Tucker, 18,724; Mr. Nihalani, 2,342; and Mr. de Fusco, 4,681.
(2) Calculated based on the closing sale price at June 28, 1996 of $32 1/2
per share, less the applicable exercise price. All of the options of
these Named Executive Officers are immediately exercisable, with any
unvested shares acquired under such option being subject to repurchase
by the Company, at the exercise price, upon termination of the
optionee's service with the Company. The value of vested shares
issuable upon exercise of "in-the-money" options at June 28, 1996 for
each of the Named Executive Officers was as follows: Mr. Shum,
$2,106,632; Ms. Carlson, $112,717; Mr. Tucker, $595,423; Mr. Nihalani
$53,235; and de Fusco, $119,649.
STOCK OPTION BONUS PROGRAM
On October 10, 1994, the Company adopted a Fiscal Year 1995 Employee
Stock Option Bonus Program (the "1995 Option Bonus Program"). Each full-time
exempt employee of the Company on July 1, 1994 was eligible to receive stock
options under the 1995 Option Bonus Program. The Board could also include in the
1995 Option Bonus Program other employees who commenced employment with the
Company after July 1, 1994. Individuals not employed with the Company on the
date of grant of such options were not eligible to receive any options. In
addition, the receipt of options and the number of shares underlying such
options was dependent on, and subject to, the individual's job performance.
The 1995 Option Bonus Program was administered under the Company's 1993
Stock Option Plan and was subject to the terms and conditions thereof. A total
of 63,999 options under the program were granted on August 1, 1995 at an
exercise price of $16.50, the fair market value of the Company's Common Stock on
August 1, 1995, to 53 employees, including 24,571 options to Martin Shum
(including 571 options to Mr. Shum's spouse, who is an employee of the Company),
1,429 options to Linda Carlson, 2,286 options to John Tucker, 3,428 options to
Suresh Nihalani (including 571 options to Mr. Nihalani's spouse, who is an
employee of the Company), and 2,286 options to Shaun Manesh. A total of 611,500
options were granted on September 19, 1995 at the exercise price of $13.00, the
fair market value of the Company's Common Stock on September 19, 1995, to 20
employees, including 227,000 options to Martin Shum, 7,000 options to Linda
Carlson, 65,000 options to John
28.
<PAGE> 31
Tucker, 52,000 options to Suresh Nihalani, and 52,000 options to Andre de Fusco.
In addition, Linda Carlson was granted 30,000 options at the exercise price of
$13.00 on December 11, 1995 upon her election to serve as the Company's Vice
President, Worldwide Sales. Options granted under the 1995 Option Bonus Program
vest, in general, over approximately three years from the grant date.
The Company operated a similar stock option bonus plan for the 1994
fiscal year. An aggregate of 131,694 options to purchase common stock of the
Company at an exercise price of $1.75 per share were granted in July 1994 to 36
employees, including 58,570 options to Martin Shum (including 1,428 options to
Mr. Shum's spouse, who is an employee of the Company), 10,857 options to Melvin
Flowers, 7,428 options to John Tucker (including 2,857 options to Mr. Tucker's
spouse, who is an employee of the Company), 6,316 options to Suresh Nihalani
(including 1,142 options to Mr. Nihalani's spouse, who is an employee of the
Company) and 6,857 options to Shaun Manesh.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has a Compensation Committee (the "Compensation
Committee"), which administers the Company's stock option plans. The members of
the Compensation Committee are Mr. William Ambrose, Brig. Gen. (ret.) Harold R.
Johnson and Mr. Archie J. McGill. None of these individuals were at any time
during the fiscal year ended June 30, 1996 an officer or employee of the
Company.
The Board of Directors has an Audit Committee (the "Audit Committee")
which supervises and makes recommendations and decisions with respect to the
periodic audits of the Company's financial results. The members of the Audit
Committee are Dr. Michael Feuer, Mr. Carlos M. Siffert and Mr. Archie J. McGill.
DIRECTOR COMPENSATION
Each non-employee director (which does not include any director who
serves as representative of a stockholder who owns more than 5% of the Company's
voting securities) receives $6,000 annually for services as a member of the
Board of Directors. Non-employee directors are reimbursed for their
out-of-pocket expenses in serving on the Board of Directors. There are no family
relationships among any of the executive officers or directors of the Company.
During the 1996 fiscal year, certain non-employee directors were
eligible to receive option grants under the Automatic Option Grant Program in
effect under the Company's 1995 Stock Option/Stock Issuance Plan. Accordingly,
at the 1995 Annual Shareholders Meeting held on December 4, 1995, each of the
following non-employee directors received an option grant under the Automatic
Option Grant Program for 7,000 shares of Common Stock with an exercise price of
$12.00 per share: Messrs. Ambrose and McGill and Brig. Gen. (ret.) Johnson. The
exercise price in effect for each option is equal to the fair market value per
share of Common Stock on the grant date. Each option has a maximum term of ten
(10) years measured from the grant date, subject to earlier termination
following the optionee's cessation of Board service. Each option is immediately
exercisable for all of the option shares; however, any shares purchased under
the option will be subject to repurchase by the Company, at the option exercise
price paid per share, upon the optionee's cessation of Board service prior to
vesting in those shares. The shares subject to each 7,000-share grant will vest
on the day immediately preceding the date of the 1996 Annual Meeting, provided
the optionee continues in Board service through that date.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Company
can indemnify its directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). The Company's Bylaws provide that the Company
will indemnify its directors and officers to the fullest extent permitted by law
and require the Company to advance litigation expenses upon receipt by the
Company of an undertaking by the director or officer to repay such advances if
it is ultimately determined that the director or officer is not entitled to
indemnification. The Bylaws further provide that rights conferred under such
Bylaws do not exclude any other right such persons may have or acquire under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
The Company's Certificate of Incorporation provides that, pursuant to
Delaware Law, its directors shall not be liable for monetary damages for breach
of the directors fiduciary duty of care to the Company and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the duty
of care, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware Law.
In addition, each director will continue to be subject to liability for breach
of the
29.
<PAGE> 32
director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
The Company has entered into agreements to indemnify its directors and
certain of its officers in addition to the indemnification provided for in the
Certificate of Incorporation and Bylaws. These agreements, among other things,
indemnify the Company's directors and certain of its officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by such person in any action or proceeding, including any action by or
in the right of the Company, on account of services as a director or officer of
the Company, or as a director or officer of any other company or enterprise to
which the person provides services at the request of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 31, 1996 by (i)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group:
<TABLE>
<CAPTION>
Shares Beneficially
Owned(1)
Directors, Five Percent Stockholders, Named Executive -----------------------------------
Officers and Directors and Officers as a Group Number PERCENT
- -------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C>
PROMON Ltd.
AVE Pres. Juscelino Kubitschek, 1830
04543 Sao Paulo, SP, Brazil (2) .................................. 784,768 8.6%
Pacific Technology Fund
P.O. Box 1704
Palo Alto, CA 94302-1704 ......................................... 638,751 7.0
AIM Management Group Inc.
11 Greenway Plaza, Suite 1919
Houston, Texas 77046 (3) ......................................... 929,100 10.2
Martin Shum (4) .................................................... 440,030 4.6
William W. Ambrose (5) ............................................. 32,155 *
Dr. Michael Feuer (6) .............................................. 638,751 7.0
Brig. Gen. H. R. Johnson (7) ....................................... 12,116 *
Carlos M. Siffert (8) .............................................. 784,768 8.6
Archie J. McGill (9) ............................................... 39,857 *
Melvin L. Flowers (10) ............................................. 86,216 1.0
Suresh Nihalani (11) ............................................... 81,493 *
John Tucker (12) ................................................... 92,809 1.0
Andre de Fusco (13) ................................................ 82,000 *
Shaun Manesh (14) .................................................. 78,047 *
Peter Staab (15) ................................................... 74,359 *
Linda Carlson (16) ................................................ 42,762 *
Jean-Guy Lacombe (17) ............................................. 137,853 1.5
All directors and executive officers as a
group (14 persons) (18) ......................................... 2,604,977 25.9
</TABLE>
- -----------
* Less than 1%.
(1) Unless otherwise indicated, the persons named in the table have sole
voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where
applicable.
(2) The shares are owned beneficially and of record by FIQ-Trading,
Marketing, Servicos e Consultores Lda. ("FIQ"), a company controlled by
Promon Ltda. As such, Promon Ltda may be deemed to have beneficial
ownership of such shares.
(3) Based upon information contained in a Statement on Schedule 13G, dated
July 10, 1996, filed with the SEC by AIM Management Group Inc. ("AIM").
AIM is the parent holding company of the recordholders of the shares,
AIM Advisors, Inc. and AIM Capital Management, Inc., both registered
Investment Advisors under Section 203 of the Investor Advisors Act.
(4) Includes 38,735 shares held by members of Mr. Shum's family and 81
shares held by Helen Shum and Martin Shum as Trustees of the Shum
Trust, dated April 15, 1994. Also includes 400,641 shares issuable upon
exercise of immediately exercisable options (including 1,978 shares
issuable upon exercise of options held by Mr. Shum's spouse) of which
208,366 shares will be vested within 60 days from August 31, 1996.
30.
<PAGE> 33
(5) Includes 25,155 shares beneficially owned by Pyramid Research, Inc. Mr.
Ambrose, as President of Pyramid Research, Inc., may be deemed to have
beneficial ownership of these shares. Also includes 7,000 shares
issuable upon exercise of immediately exercisable options, which
options will vest on November 3, 1996.
(6) Includes 638,751 shares owned by Pacific Technology Fund. Dr. Feuer and
Belfield Services, Inc., as general partners of Pacific Technology
Fund, may be deemed to have beneficial ownership of these shares. Dr.
Feuer disclaims beneficial ownership of these shares.
(7) Includes 7,000 shares issuable upon exercise of immediately exercisable
options, which options will vest on November 3, 1996.
(8) Includes 784,765 shares beneficially owned by Promon Ltda. and FIQ. Mr.
Siffert, as Director of Promon Ltda., may be deemed to have beneficial
ownership of these shares. Mr. Siffert disclaims beneficial ownership
of these shares.
(9) Includes 39,857 shares issuable upon exercise of immediately
exercisable options. All such options will be vested on November 3,
1996.
(10) Includes 72,715 shares issuable upon exercise of immediately
exercisable options of which 20,650 shares will be vested within 60
days from August 31, 1996.
(11) Includes 2,285 shares held by members of Mr. Nihalani's family. Also
includes 59,280 shares issuable upon exercise of immediately
exercisable options (including 1,429 shares issuable upon exercise of
options held by Mr. Nihalani's spouse) of which 17,978 shares will be
vested within 60 days from August 31, 1996.
(12) Includes 86,500 shares issuable upon exercise of immediately
exercisable options of which 19,444 shares will be vested within 60
days from August 31, 1996. Excludes shares beneficially owned by Mr.
Tucker's spouse, Ms. Linda Carlson, an executive officer of the
Company.
(13) Includes 81,000 shares issuable upon exercise of immediately
exercisable options of which 21,240 shares will be vested within 60
days from August 31, 1996.
(14) Includes 53,857 shares issuable upon exercise of immediately
exercisable options of which 18,129 shares will be vested within 60
days from August 31, 1996.
(15) Includes 74,000 shares issuable upon exercise of immediately
exercisable options of which 12,400 shares will be vested within 60
days from August 31, 1996.
(16) Includes 42,643 shares issuable upon exercise of immediately
exercisable options of which 6,806 shares will be vested within 60 days
from August 31, 1996. Excludes shares beneficially owned by Ms.
Carlson's spouse, Mr. John Tucker, an executive officer of the Company.
(17) Includes 519 shares held by Michi Technical Services, Inc. ("Michi").
Mr. Lacombe is the sole shareholder of Michi. Includes 60,000 shares
issuable upon exercise of immediately exercisable options of which no
shares will be vested within 60 days from August 31, 1996.
(18) Includes 25,155 shares owned by Pyramid Research, Inc., 638,751 shares
owned by Pacific Technology Fund and 784,768 shares owned by Promon
Ltda. Also includes an aggregate of 963,493 shares issuable to the
Company's directors and executive officers upon the exercise of
immediately exercisable options held by such directors and executive
officers of which 378,870 shares will be vested within 60 days from
August 31, 1996.
31.
<PAGE> 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Securities Transactions
In connection with the Company's issuance of its Series D Preferred
Stock in March of 1993, the Company and certain stockholders entered into an
agreement providing Promon International, Inc. ("Promon") with certain rights to
elect directors and rights of first refusal, which agreement terminated in
connection with the Company's initial public offering. Mr. Carlos Siffert and
Mr. William Ambrose were elected to the Company's Board of Directors as nominees
of Promon. In January 1995, the Company entered into a Memorandum of Agreement
with its two largest stockholders, Promon and Pacific Technology Fund ("PTF")
(each, a "Major Stockholder"), pursuant to which the Company agreed, for so long
as Promon or PTF own at least ten percent of the Company's then outstanding
voting securities, to nominate to the Board of Directors of the Company one
representative designated in writing by each Major Stockholder and not to issue
equity securities at a price below ninety-five percent (95%) of fair market
value or at a price below eighty-five percent (85%) of fair market value with
respect to employee stock purchases or option plans unless the representative of
each Major Stockholder casts his or her vote as a Board member in favor of such
issuance. In June 1996, both Promon and PTF ceased to own at least ten percent
of the Company's stock, resulting in a termination of such rights.
Promon Virtual DAMA Agreement
In December 1993, in connection with the issuance and sale by the
Company of Series E Preferred Stock of the Company to Promon and Pyramid
Research, Inc., the Company entered into a Development Agreement with Promon
Technical Services, Inc., an affiliate of Promon ("PTS"), with respect to the
development of satellite technology for the Company. The Company paid $500,000
to PTS in connection with this agreement. See Note 6 to Financial Statements.
Promon Purchases
Promon, a significant stockholder and a distributor of the Company's
products, purchased $675,000 of the Company's products during fiscal year 1995.
32.
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
The Company's financial statements appear in a separate
section of this Annual Report on Form 10-K commencing on the pages referenced
below:
PAGE
Report of Ernst & Young LLP, Independent Auditors................ F-1
Consolidated Balance Sheets as of June 30, 1996 and 1995......... F-2
Consolidated Statements of Operations for the years ended
June 30, 1996, 1995 and 1994................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1996, 1995 and 1994............................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1995 and 1994................................... F-6
Notes to Consolidated Financial Statements....................... F-8
(2) FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules of the Company are included
in a separate section of this Annual Report on Form 10-K commencing on the pages
referenced below. All other schedules have been omitted because they are not
applicable, not required, or the information is included in the financial
statements or notes thereto.
PAGE
Schedule II - Valuation and Qualifying Accounts................ S-1
33.
<PAGE> 36
(3) EXHIBITS:
EXHIBIT NO.
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.
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.
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.
10.2 Master Lease Agreement dated January 11, 1994 by 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
34.
<PAGE> 37
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
10.32 License Agreement dated May 8, 1996, by and between the Company and
SkyData, Inc. Incorporated by reference to Exhibit 10.32 to the
Company's Registration Statement on Form S-3, Registration No.
333-04183.
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 List of Subsidiaries of the Company. Incorporated by reference to
Exhibit 23.1 to the Company's Registration Statement on Form S-3,
Registration No. 333-04183.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on page 37).
27.1 Financial Data Schedule.
* The Company has received confidential treatment for portions of this
document previously filed with the Commission.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
35.
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Camarillo, State of California, on September 27, 1996.
ACT NETWORKS, INC.
By: /s/ MARTIN SHUM
---------------------------------------
Martin Shum
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of ACT Networks, Inc., do
hereby constitute and appoint Martin Shum and Melvin L. Flowers, and each of
them, our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE Title Date
- --------- ----- ----
<S> <C> <C>
/s/ MARTIN SHUM Chairman, President and Chief September 27, 1996
- --------------- Executive Officer
Martin Shum
/s/ MELVIN L. FLOWERS Vice President, Finance and September 27, 1996
- --------------------- Chief Financial Officer (principal
Melvin L. Flowers financial and accounting officer)
/s/ WILLIAM W. AMBROSE Director September 27, 1996
- -----------------------
William W. Ambrose
/s/ MICHAEL FEUER Director September 27, 1996
- -----------------------
Michael Feuer
/s/ HAROLD R. JOHNSON Director September 27, 1996
- ----------------------
Harold R. Johnson
/s/ CARLOS M. SIFFERT Director September 27, 1996
- ----------------------
Carlos M. Siffert
/s/ ARCHIE J. MCGILL Director September 27, 1996
- ---------------------
Archie J. McGill
</TABLE>
36.
<PAGE> 39
Report of Independent Auditors
Board of Directors
ACT Networks, Inc.
We have audited the accompanying consolidated balance sheets of ACT Networks,
Inc. as of June 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a).These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ACT Networks, Inc.
at June 30, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1996
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
ERNST & YOUNG LLP
Woodland Hills, California
July 29, 1996
F-1
<PAGE> 40
ACT Networks, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 70,374,310 $ 30,546,278
Accounts receivable, less allowances of $287,000 in 1996 and
$63,000 in 1995 9,656,679 4,529,210
Accounts receivable from stockholder 205,274 669,160
Inventory 7,409,459 4,677,190
Prepaid expenses 599,765 244,315
Deposits 65,659 68,100
Deferred income taxes - 82,176
------------------------------------
Total current assets 88,311,146 40,816,429
Plant, equipment and other improvements:
Machinery and equipment 2,949,764 1,696,257
Furniture and fixtures 379,386 359,500
Computer software 801,643 411,438
Leasehold improvements 528,527 284,659
------------------------------------
4,659,320 2,751,854
Accumulated depreciation and amortization 2,180,970 1,233,003
------------------------------------
2,478,350 1,518,851
Goodwill 1,882,455 -
Other assets 1,178,565 561,498
------------------------------------
Total assets $ 93,850,516 $ 42,896,778
====================================
</TABLE>
F-2
<PAGE> 41
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 2,121,933 $ 1,475,020
Accrued expenses 639,746 625,627
Accrued vacation 334,635 239,888
Accrued commissions 143,243 153,656
Income taxes payable 245,241 86,958
Deferred income taxes 78,803 -
------------------------------------
Total current liabilities 3,563,601 2,581,149
Long-term debt 147,294 -
Stockholders' equity:
Common stock and additional paid-in capital; $.001 par value:
Authorized - 40,000,000
Issued and outstanding - 9,117,329 in 1996
and 7,149,830 in 1995 98,175,394 42,669,271
Promon secured deposit - (45,000)
Accumulated deficit (8,035,773) (2,308,642)
------------------------------------
Total stockholders' equity 90,139,621 40,315,629
------------------------------------
Total liabilities and stockholders' equity $ 93,850,516 $ 42,896,778
====================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 42
ACT Networks, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C>
Net sales $28,404,454 $20,566,247 $12,653,782
Expenses:
Cost of goods sold 13,997,928 9,244,460 5,939,497
Research and development 5,026,601 3,586,230 1,955,260
In process research and development 5,600,000 - -
Sales and marketing 7,174,339 4,784,467 2,942,734
General and administrative 3,257,349 1,735,759 1,334,641
---------------------------------------------------------
35,056,217 19,350,916 12,172,132
---------------------------------------------------------
Income (loss) from operations (6,651,763) 1,215,331 481,650
Other:
Interest and other income 1,264,944 252,172 29,498
Interest expense (45,552) (183,725) (20,747)
Loss due to earthquake - - (281,203)
---------------------------------------------------------
1,219,392 68,447 (272,452)
---------------------------------------------------------
Income (loss) before income taxes (5,432,371) 1,283,778 209,198
Provision for income taxes 294,760 21,782 -
---------------------------------------------------------
Net income (loss) $(5,727,131) $1,261,996 $209,198
=========================================================
Net income (loss) per share $(0.78) $0.24 $0.05
=========================================================
Shares used in computing net income (loss) per
share 7,307,664 5,210,910 3,851,964
=========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 43
ACT Networks, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------------------------------------------------
Shares Amount Shares Amount
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at July 1, 1993 12,781,666 $5,726,000 1,120,367 $1,120
Issuance of Series E convertible preferred stock 4,570,000 2,205,000 - -
Deposit secured by Series E preferred stock - - - -
Exercise of options and warrants to purchase
common stock - - 90,400 91
Net income - - - -
--------------------------------------------------------------------
Balance at June 30, 1994 17,351,666 7,931,000 1,210,767 1,211
Amortization of deposit secured by Series E preferred stock - - - -
Exercise of options and warrants to purchase common stock - - 312,647 313
Conversion of convertible preferred stock to common stock (17,351,666) (7,931,000) 2,721,416 2,721
Initial public offering - - 2,905,000 2,905
Net income - - - -
--------------------------------------------------------------------
Balance at June 30, 1995 - - 7,149,830 7,150
Amortization of deposit secured by Series E preferred stock - - - -
Exercise of options and warrants to purchase common stock - - 281,134 281
Secondary public offering - - 1,510,000 1,510
Shares issued in connection with acquisition - - 176,365 176
Net loss - - - -
--------------------------------------------------------------------
Balance at June 30, 1996 - $ - 9,117,329 $9,117
====================================================================
<CAPTION>
Common Stock
Paid-In
Capital Promon
in Excess of Secured Accumulated
Par Value Deposit Deficit Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at July 1, 1993 $ 792,070 $ - $(3,779,836) $ 2,739,354
Issuance of Series E convertible preferred stock (70,000) - - 2,135,000
Deposit secured by Series E preferred stock - (300,000) - (300,000)
Exercise of options and warrants to purchase
common stock 63,189 - - 63,280
Net income - - 209,198 209,198
--------------------------------------------------------------------
Balance at June 30, 1994 785,259 (300,000) (3,570,638) 4,846,832
Amortization of deposit secured by Series E preferred stock - 255,000 - 255,000
Exercise of options and warrants to purchase common stock 150,767 - - 151,080
Conversion of convertible preferred stock to common stock 7,928,279 - - -
Initial public offering 33,797,816 - - 33,800,721
Net income - - 1,261,996 1,261,996
--------------------------------------------------------------------
Balance at June 30, 1995 42,662,121 (45,000) (2,308,642) 40,315,629
Amortization of deposit secured by Series E preferred stock - 45,000 - 45,000
Exercise of options and warrants to purchase common stock 539,111 - - 539,392
Secondary public offering 53,684,370 - - 53,685,880
Shares issued in connection with acquisition 1,280,675 - - 1,280,851
Net loss - - (5,727,131) (5,727,131)
--------------------------------------------------------------------
Balance at June 30, 1996 $98,166,277 $ - $(8,035,773) $90,139,621
====================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 44
ACT Networks, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (5,727,131) $ 1,261,996 $ 209,198
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,216,277 583,730 269,979
Provision for allowances on accounts receivable 2,769 6,492 27,193
Provision for deferred taxes 68,039 (82,176) -
Loss on equipment disposals - - 37,853
Amortization of secured research and development
deposit 45,000 255,000 -
Write-off of in-process research and development 5,600,000 - -
Changes in operating assets and liabilities:
Accounts receivable (3,633,474) (2,549,094) (982,110)
Inventory (2,371,001) (2,876,827) (789,338)
Prepaid expenses (344,719) (97,906) (129,917)
Deposits 2,441 7,013 (54,109)
Accounts payable, accrued expenses and income
taxes payable 229,285 1,029,776 481,397
------------------------------------------------------
Net cash used in operations (4,912,514) (2,461,996) (929,854)
INVESTING ACTIVITIES
Purchase of plant, equipment and other fixed assets (1,794,089) (1,367,801) (610,601)
Acquisition of Presticom Inc., net of cash acquired (7,000,399) - -
Other assets (617,067) (372,202) (156,067)
------------------------------------------------------
Net cash used in investing activities (9,411,555) (1,740,003) (766,668)
FINANCING ACTIVITIES
Stock warrants and options 539,392 151,080 63,280
Issuance of preferred stock, net of offering costs - - 2,135,000
Shareholder secured research and development deposit - - (300,000)
Borrowings on line of credit - 2,850,000 -
Repayments of line of credit - (2,850,000) -
Net proceeds from stock offering 53,685,880 33,800,721 -
Repayment of notes payable (73,171) - -
Principal payments on capital lease - - (27,424)
------------------------------------------------------
Net cash provided by financing activities 54,152,101 33,951,801 1,870,856
------------------------------------------------------
Net increase in cash 39,828,032 29,749,802 174,334
Cash and cash equivalents at beginning of year 30,546,278 796,476 622,142
------------------------------------------------------
Cash and cash equivalents at end of year $ 70,374,310 $30,546,278 $ 796,476
======================================================
</TABLE>
F-6
<PAGE> 45
ACT Networks, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Supplemental cash flow information:
Interest and income taxes paid during the year:
Interest $ 6,387 $ 183,725 $ 20,747
Income taxes $ 9,787 $ 17,000 $ -
Non-cash investing and financing activities:
Acquisition of Presticom Inc.:
Fair market value of assets (including goodwill)
acquired $ 4,456,115 $ - $ -
Fair market value of in-process research and
development 5,600,000 - -
Fair market value of liabilities assumed (887,769) - -
Issuance of stock (1,280,851) - -
Cash acquired (887,096) - -
======================================================
$ 7,000,399 $ - $ -
======================================================
</TABLE>
See accompanying notes.
F-7
<PAGE> 46
ACT Networks, Inc.
Notes to Consolidated Financial Statements
June 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
ACT Networks, Inc. (the Company) was incorporated on May 15, 1987. The Company
develops, manufacturers and markets integrated wide-area network (WAN) access
products which use Frame Relay and Time Division Multiplexing. The Company's
products utilize advanced compression algorithms, access switching capabilities
and proprietary integration technologies to build cost-effective, bandwidth
efficient WANs.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All material intercompany transactions and balances
have been eliminated in consolidation.
CASH EQUIVALENTS
Short-term investments that are part of the Company's cash management portfolio
are classified as cash equivalents and are carried at cost which approximates
market value and are considered available for sale. These investments are highly
liquid, are of limited credit risk and have origninal maturities of three months
or less.
CONCENTRATION OF CREDIT RISKS AND SIGNIFICANT CUSTOMERS
Accounts receivable consist primarily of amounts due from various original
equipment manufacturers, end users and distributors primarily located in foreign
countries. The Company does not require collateral. However, the Company does
perform periodic credit evaluations and analysis of the amounts due from its
customers. In addition, the Company carries credit insurance on certain foreign
accounts receivable, which is subject to certain limits. Included in accounts
receivable at June 30, 1996 and 1995 is $6,234,438 and $3,256,939, respectively,
of amounts due from foreign customers. Credit losses have been within
management's expectations and management believes that potential uncollectible
accounts have been provided for in the financial statements.
F-8
<PAGE> 47
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISKS AND SIGNIFICANT CUSTOMERS (CONTINUED)
The three largest accounts receivable from individual customers represented
18.1%, 11.8% and 7.3% at June 30, 1996 and 18.1%, 12.7% and 8.2% at June 30,
1995 of total accounts receivable, respectively.
Sales included amounts to certain individual customers that exceed 10% of total
sales. Sales to one customer represented 17% of total sales for 1996, sales to
one customer represented 14% of total sales for 1995, and sales to one customer
represented 23% of total sales for 1994.
The Company's sales by geographic area are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
North America $ 10,568,213 $ 6,907,360 $ 3,841,546
Latin America 8,025,676 5,317,735 4,397,680
Europe 3,752,173 2,404,614 1,073,218
Asia Pacific 6,058,392 5,936,538 3,341,338
------------------------------------------------
$ 28,404,454 $ 20,566,247 $ 12,653,782
================================================
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenues from product sales upon shipment. The Company's
products are generally under warranty against defects and are sold with
provisions for certain levels of continuing customer support. The amount of any
potential warranty costs or other customer support costs are estimated and
provided for in the period of sale.
F-9
<PAGE> 48
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or market
and consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Purchased parts $ 3,629,460 $ 2,177,590
Sub-assemblies and finished goods 3,779,999 2,499,600
----------------------------------
$ 7,409,459 $ 4,677,190
==================================
</TABLE>
PLANT, EQUIPMENT AND OTHER IMPROVEMENTS
Plant, equipment and other improvements are stated on the basis of cost.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets or the lease term, which vary from
three to seven years.
ACCOUNTING FOR INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
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 June 30, 1996 of such credits and grants amounted to $454,685. For the
year ended June 30, 1996, $143,500 of these credits and grants were reflected as
a reduction of research and development expense in the accompanying statement of
operations.
F-10
<PAGE> 49
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill of $1,882,455 is net of accumulated amortization of $171,132. Goodwill
represents the excess of the purchase price over the estimated fair market value
of net assets acquired in business combination and is being amortized over 7
years.
LOSS DUE TO EARTHQUAKE
The Company incurred certain expenses and losses relating to the January 17,
1994 Northridge earthquake. These expenses and losses primarily relate to
outside service labor, materials used in repairs, storage rent charges, losses
on destroyed assets and charges incurred in relocating to a new facility after
the earthquake.
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 and common equivalent shares from the convertible
preferred stock which converted into common stock in connection with the
Company's initial public offering are included as if converted at the original
date of issuance even though inclusion is anti-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 all periods presented (using the treasury stock method at the initial public
offering price per share and the if-converted method for convertible preferred
stock) through the year ended June 30, 1994. For the year ended June 30, 1995,
such cheap stock shares were treated as being outstanding through the date of
the public offering.
Supplemental earnings per share for the year ended June 30, 1995 was $0.27.
Supplemental earnings per share reflects what earnings per share would have been
under APB No. 15 if the debt retired with the proceeds from the initial public
offering (see note 10) had been retired at the beginning of the period. The
weighted average number of shares of common stock whose presumed proceeds are to
be used to retire debt are included in this calculation.
F-11
<PAGE> 50
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
The Company had no such debt during the years ended June 30, 1996 and June 30,
1995; therefore supplemental calculations of earnigs per share are not
applicable.
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
EFFECT OF FOREIGN CURRENCY
The Company translates the assets and liabilities of its foreign subsidiaries at
the rate of exchange in effect at the period end. Revenues and expenses are
translated using an average of exchange rates in effect during the period.
Translation adjustments are recorded as a component of shareholders' equity in
the consolidated balance sheet.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the current
year presentation.
F-12
<PAGE> 51
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
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, including
approximately $600,000 in acquisition costs, was $9,168,346 consisting of
$7,887,495 paid in cash and the issuance of 176,365 shares of common stock of
the Company with an estimated fair market value of $1,280,851, representing a
30% 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 the 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. 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.
<TABLE>
<CAPTION>
JUNE 30
1996 1995
-------------------------------------
(Unaudited)
<S> <C> <C>
Net sales $29,282,535 $22,580,983
Net income (loss) (258,126) 1,384,442
Net earnings (loss) per share (.03) .26
</TABLE>
F-13
<PAGE> 52
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
2. BUSINESS ACQUISITION (CONTINUED)
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 year ended June 30, 1996.
3. LINE OF CREDIT AND NOTES PAYABLE
The Company has a loan and security agreement with a bank which provides for
aggregate borrowings from a bank up to a maximum of $3,000,000. Under the
agreement, the Company may borrow up to the lesser of $3,000,000 or 75% of
eligible accounts receivable (the revolving line of credit).
The revolving line of credit expires on July 5, 1997. At June 30, 1996 and June
30, 1995, there were no outstanding balances under any of the lines of credit.
Interest on the revolving line of credit is payable monthly at a rate equal to
the bank's prime rate, which was 8 1/4% at June 30, 1996, plus 1.5%.
The loan and security agreement provides for the issuance of letters of credit
in an aggregate amount outstanding up to $500,000. Letters of credit outstanding
reduce the amount available under the revolving line of credit. At June 30, 1996
and June 30, 1995, no letters of credit were outstanding.
The loan and security agreement contains certain covenants that, among other
things, requires the Company to maintain certain financial ratios and limits the
Company's ability to obtain certain forms of additional debt, to repurchase the
Company's stock and pay dividends.
F-14
<PAGE> 53
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 91,307 $ -
State - 18,659 -
Foreign 274,311 - -
-----------------------------
274,311 109,966 -
Deferred:
Federal - (88,184) -
State - - -
Foreign 20,449 - -
-----------------------------
20,449 (88,184) -
-----------------------------
$ 294,760 $ 21,782 $-
=============================
</TABLE>
The Company's foreign and domestic operations had income (loss) before income
taxes and eliminations of $871,772 and ($5,994,285) for the year ended June 30,
1996.
A reconciliation of the statutory federal income tax rate to the effective tax
rate, as a percentage of income before tax, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax
(benefit) rate (34)% 34% 34%
Amortization of goodwill 1 - -
Non-deductible in process research
and development 35 - -
Change in valuation allowance - (39) (34)
State income taxes - 5 -
Foreign income taxes 5 - -
Other (2) 2 -
-------------------------------------------
5% 2% -%
===========================================
</TABLE>
F-15
<PAGE> 54
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
The tax provision for the years ended June 30, 1995 and June 30, 1994 included
the application of net operating loss carryforwards which generated tax benefits
of approximately $519,000 and $77,000, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------
<S> <C> <C>
Deferred tax assets:
Technology deposit $ 108,390 $ 110,415
Allowance for losses on receivables 109,786 24,219
Vacation accruals 108,888 83,088
Depreciation 188,571 76,507
Inventory valuation allowance 322,674 39,986
Net operating loss carryforwards 2,394,364 568,845
Research and development credit carryforwards 630,923 497,331
AMT credits 19,844 82,176
Unicap adjustment 61,510 19,117
Other 43,598 38,521
------------------------------
Total deferred tax assets 3,988,548 1,540,205
Deferred tax liabilities:
Software development costs (28,138) (30,459)
License fee (420,000) -
Prepaid insurance (148,794) -
------------------------------
Total deferred tax liabilities (596,932) (30,459)
------------------------------
Net deferred tax assets 3,391,616 1,509,746
Valuation allowance (3,391,616) (1,427,570)
Foreign deferred tax liabilities (78,803) -
------------------------------
$ (78,803) $ 82,176
==============================
</TABLE>
F-16
<PAGE> 55
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
At June 30, 1996, the Company has net operating loss carryforwards for federal
tax and state tax purposes of approximately $7,061,723 and $1,791,261,
respectively, which expire in 2002 through 2011. The Company has research and
development credit carryforwards of $301,000 and $286,000 for federal and state
tax purposes, respectively, that expire through 2009 for federal and 2011 for
state.
Included in the net operating loss carryforwards are deductions for tax purposes
related to the exercise of stock options which are not reflected as an expense
for financial reporting purposes. The tax benefit of these deductions, net of a
100% valuation allowance, has been recorded in equity. Accordingly, the
reduction in the valuation allowance of approximately $2,189,555 upon the future
utilization of a portion of the net operating loss carryforward will be credited
directly to equity and not reflected as an income tax benefit in the statement
of operations.
5. STOCK OPTION AND PURCHASE PLANS
At June 30, 1995 and 1994, the Company had a 1987 stock option plan and a 1993
stock option plan which provided for granting stock options to key employees,
directors, outside consultants and independent contractors. In September 1995,
the Company adopted the 1995 stock option/stock issuance plan (the 1995 Plan)
and an employee stock purchase plan. The 1995 Plan serves as the successor to
the 1987 and 1993 stock option plans and all options outstanding and options
available for grant under the 1987 and 1993 stock option plans were incorporated
into the 1995 Plan.
Options granted under all stock option plans carry an exercise price of not less
than fair market value as of the date of the option grant and expire after ten
years. The Company executes individual option agreements under the stock option
plans which provide that options granted are immediately exercisable and the
shares underlying the options generally become vested at 24% of the total grant
after the completion of the first 12 full months of employment and 2% per month
thereafter. The Company may elect to repurchase those shares which have not
vested upon the employee's termination.
F-17
<PAGE> 56
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS (CONTINUED)
The following is a summary of all stock option activity for the three years
ended June 30, 1996:
<TABLE>
<CAPTION>
EXERCISE
PRICE NUMBER
PER SHARE OF SHARES
-----------------------------
<S> <C> <C>
Outstanding at June 30, 1993 $ .07-.70 627,000
Granted .70-1.75 55,357
Canceled .70 (20,600)
Exercised .70 (81,829)
---------
Outstanding at June 30, 1994 .07-1.05 579,928
Granted 1.75-4.90 263,000
Canceled .70-4.90 (25,303)
Exercised .70-1.75 (167,740)
---------
Outstanding at June 30, 1995 .07-4.90 649,885
Granted 8.25-23.88 1,073,458
Canceled .70-23.88 (31,612)
Exercised .70-17.25 (269,407)
---------
Outstanding at June 30, 1996 .07-23.88 1,422,324
=========
</TABLE>
At June 30, 1996, 1995 and 1994 options for 1,422,324, 649,885 and 579,928
shares were outstanding, respectively. At June 30, 1996, the Company has
authorized a total of 2,278,572 shares of common stock for issuance under the
1995 Plan. At June 30, 1996 approximately 313,000 shares remain available for
grant and 1,735,517 are reserved for issuance upon the exercise of outstanding
options and options available for grant under the 1995 Plan.
The Company has an employee stock purchase plan whereby, in accordance with
Section 423 of the Internal Revenue Code, eligible employees may authorize
payroll deductions of up to 10% of their salary to purchase shares of the
Company's common stock at the lower of 85% of the fair market value of common
stock on the first or last day of the offering period. No shares were issued
under this plan for the year ended June 30, 1996. There are 150,000 shares
authorized and available for future issuance under this plan.
F-18
<PAGE> 57
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK WARRANTS
On June 27, 1990, pursuant to a note and warrant purchase agreement (the
Agreement), the Company sold warrants to purchase up to 128,571 shares of the
Company's common stock at an exercise price of $.70 per share to a stockholder
for $10,000. On July 31, 1990, pursuant to the Agreement, the Company sold
warrants to purchase up to 290,571 shares of the Company's common stock at an
exercise price of $.70 per share to certain officers, stockholders and employees
for $22,600. Warrants issued under the Agreement were exercisable for a five
year period. On April 5, 1991, warrants to purchase 270,000 shares of common
stock were exercised. During the years ended June 30, 1995 and 1996, warrants to
purchase 144,907 shares and 11,727 shares of common stock, respectively, were
exercised and the remaining warrants were canceled as payment of the exercise
price for the warrant exercises.
On March 31, 1993, pursuant to a note and warrant purchase agreement dated
October 19, 1992, the Company sold to a lender warrants to purchase up to 14,286
shares of the Company's common stock at an exercise price of $7.00 per share for
$1,000. The warrants were exercised in February 1996.
In connection with a loan and security agreement executed in March 1993, the
Company issued warrants to purchase up to 4,286 shares of the Company's common
stock at an exercise price of $3.50 per share. These warrants were exercised in
June 1996.
The Company currently has no outstanding warrants.
F-19
<PAGE> 58
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
7. PRODUCT DEVELOPMENT AGREEMENT
In 1994, the Company executed a product development agreement with Promon
Technical Services, Inc. (PTS) a company under the control of Promon
International, Inc., a significant shareholder. The deemed fair value of the
contracted development effort was estimated to be approximately $350,000. Of the
$350,000 development contract $50,000 was recorded as research and development
expense in the year ended June 30, 1994, and the remaining $300,000 was recorded
as a contra-equity account to be charged to research and development expense
over the development period. For the year ended June 30, 1995, the Company
charged $255,000 of the $300,000 to research and development expense based on
the efforts expended during the year. The remaining $45,000 was charged to
research and development in the year ended June 30, 1996.
8. COMMITMENTS
The Company leases its office, manufacturing facility and certain equipment
under noncancelable lease agreements. The office and manufacturing facility
lease is subject to annual increases based on the Consumer Price Index. Future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30
-------------------------
<S> <C>
1997 $ 637,014
1998 656,387
1999 660,443
2000 71,543
2001 71,543
==========
$2,096,930
==========
</TABLE>
Rental expense under operating leases was $491,832, $537,000 and $240,000 for
the years ended June 30, 1996, 1995 and 1994, respectively.
F-20
<PAGE> 59
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEES' RETIREMENT PLAN
In 1994, the Company established a 401(k) Plan (the Plan) covering substantially
all of its full-time employees. Employees may make voluntary contributions to
the Plan. The Company may voluntarily contribute a percentage of the employee's
contribution, at its discretion, subject to certain limitations. The Company
made no contributions to the Plan during the years ended June 30, 1996, 1995 and
1994.
10. STOCKHOLDERS' EQUITY
In March 1995, the Board approved "reincorporation" in Delaware and a
one-for-seven reverse stock split of the Company's common stock. All share and
per share data has been adjusted retroactively to reflect the reverse stock
split.
In May 1995, the Company completed an initial public offering of 2,905,000
shares of the Company's unissued common stock and 200,000 shares of its
outstanding common stock being offered by certain selling shareholders at $13.00
per share. In connection with the offering all previously outstanding preferred
stock was automatically converted into common stock based on the appropriate
conversion ratios.
In June 1996, the Company completed a secondary public offering of 1,510,000
shares of the Company's unissued common stock and 1,490,000 shares of its
outstanding common stock being offered by certain selling shareholders at $38.00
per share.
F-21
<PAGE> 60
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
11. GEOGRAPHIC INFORMATION
Information about the Company's operations in the United States and Canada is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $25,647,700 $20,566,247 $12,653,782
Canada 2,757,044 - -
Transfers between geographic areas:
United States 254,134 - -
Canada 975,910 - -
Adjustments and eliminations (1,230,334) - -
-------------------------------------------
Total revenues $28,404,454 $20,566,247 $12,653,782
===========================================
Operating profit (loss):
United States $(7,219,838) $ 1,215,331 $ 481,650
Canada 877,933 - -
Adjustments and eliminations (309,858) - -
-------------------------------------------
Total operating profit (loss) $(6,651,763) $ 1,215,331 $ 481,650
===========================================
</TABLE>
F-22
<PAGE> 61
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
11. GEOGRAPHIC INFORMATION (CONTINUED)
Operating profit (loss) represents total revenue less operating expenses
directly attributable to each geographic area and does not include interest and
other income or interest expense. Included in the operating loss for the United
States is a write-off of in-process research and development of $5,600,000 for
the year ended June 30, 1996. Intercompany sales and transfers are recorded at
cost plus a normal mark up.
Information about the Company's identifiable assets in each geographic area is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1995
-----------------------------
<S> <C> <C>
Identifiable assets:
United States $86,059,199 $40,816,429
Canada 3,395,966 -
Adjustments and eliminations (1,144,019) -
-----------------------------
Total identifiable assets $88,311,146 $40,816,429
=============================
</TABLE>
Identifiable assets are those assets of the Company that are identified with the
operations in each geographic area. Canada's identifiable assets include
accounts receivable of approximately $1,232,505 at June 30, 1996 denominated in
foreign currencies.
F-23
<PAGE> 62
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY OPERATING DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------
FIRST SECOND* THIRD FOURTH
------------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
Net sales $ 5,102 $ 6,167 $ 8,030 $ 9,105
Gross profit 2,642 2,476 4,143 5,128
Net income (loss) (211) (6,656) 395 745
------------------------------------------------
Net income (loss) per share $ (0.03) $ (0.92) $ .05 $ .09
================================================
</TABLE>
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------
FIRST SECOND THIRD FOURTH
------------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Year ended June 30, 1995:
Net sales $ 4,411 $ 4,877 $ 5,535 $ 5,743
Gross profit 2,415 2,726 3,090 3,090
Net income 171 216 317 558
------------------------------------------------
Net income per share $ 0.04 $ 0.05 $ 0.07 $ 0.09
================================================
</TABLE>
*Included in the Company's net loss for the second quarter of 1996 is a
$5,600,000 charge due to the write-off of in-process research and development
purchased in connection with the acquisition of Presticom (see Note 2).
F-24
<PAGE> 63
ACT NETWORKS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three years ended June 30, 1996
<TABLE>
<CAPTION>
Additions Deductions
------------------------ ----------
Charged to Amounts
Other Charged to
Balance at Charged to Accounts Reserve Net Balance at
Beginning of Costs and (Primarily of Re- End of
Period Expense Gross Sales) instatement Period
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1994
Reserves and allowances deducted
from asset accounts:
Allowance for doubful items $ 59,452 $36,445 $ - $ 39,341 $ 56,556
Other (sales return reserve) 45,760 - - 45,760 -
--------- ------- -------- -------- --------
$105,212 $36,445 $ - $ 85,101 $ 56,566
-------- ------- -------- -------- --------
Year ended June 30, 1995
Reserves and allowance deducted
from asset accounts
Allowance for doubful items $ 56,566 $ 4,132 $ - $ (2,312) $ 63,000
--------- ------- -------- -------- --------
Year ended June 30, 1996
Reserves and allowance dedcuted
from asset accounts
Allowance for doubful items $ 63,000 $20,000 $ - $ 20,000 $ 63,000
Other (sales return reserve) - - 425,000 201,000 224,000
--------- ------- -------- -------- --------
$ 63,000 $20,000 $425,000 $221,000 $287,000
--------- ------- -------- -------- --------
</TABLE>
S-1
<PAGE> 1
EXHIBIT 11.1
<PAGE> 2
Exhibit 11.1 Statement Re: Computation of Per-Share Earnings
<TABLE>
<CAPTION>
Years Ended June 30
1994 1995 1996
Primar;y
<S> <C> <C> <C>
Average common shares outstanding 1,149,212 1,752,954 7,307,664
Effect of assumed conversion of preferred stock 2,393,507 2,722,619 -
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 242,034 212,908 -
accordance with the staff acccounting Bulletin No. 83
Net effect of dilutive options and warrants-
based on treasury stock method (or modified treasury
method if applicable) using average market price 67,211 522,429 -
----------- ----------- -----------
3,851,964 5,210,910 7,307,664
----------- ----------- -----------
Net Income (loss) $ 209,198 $ 1,291,996 $(5,727,131)
----------- ----------- -----------
Per Share amount $ 0.05 $ 0.24 $ (0.78)
----------- ----------- -----------
Fully Diluted
Average common shares outstanding 1,149,212 1,752,954 7,307,664
Effect of assumed conversion of preferred stock 2,393,507 2,722,619 -
Options and warrants issued during twelve-month
period prior to the initial public offering at an exercise
price in accordance with the staff acccounting Bulletin 242,034 212,908 -
No. 83
Net effect of dilutive options and warrants-
based on treasury stock method (or modified treasury
method if applicable) using year-end market price 255,711 586,710 -
----------- ----------- -----------
4,040,464 5,275,191 7,307,664
----------- ----------- -----------
Net (Loss) Income $ 209,198 $ 1,261,996 $(5,727,131)
----------- ----------- -----------
Per Share amount $ 0.05 $ 0.24 $ (0.78)
----------- ----------- -----------
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-80007) pertaining to Stock Option/Stock Issuance and Employee Stock
Purchase Plan of ACT Networks, Inc. of our report dated July 29, 1996 with
respect to the consolidated financial statements and schedule of ACT Networks,
Inc. included in the Annual Report (Form 10-K) for the year ended June 30, 1996.
ERNST & YOUNG LLP
Woodland Hills, California
September 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 62,683,918
<SECURITIES> 7,690,392
<RECEIVABLES> 10,148,953
<ALLOWANCES> 287,000
<INVENTORY> 7,409,459
<CURRENT-ASSETS> 88,311,146
<PP&E> 4,659,459
<DEPRECIATION> 2,180,970
<TOTAL-ASSETS> 93,850,516
<CURRENT-LIABILITIES> 3,563,601
<BONDS> 147,294
0
0
<COMMON> 9,117
<OTHER-SE> 90,130,504
<TOTAL-LIABILITY-AND-EQUITY> 93,850,516
<SALES> 28,404,454
<TOTAL-REVENUES> 28,404,454
<CGS> 13,997,928
<TOTAL-COSTS> 29,456,217
<OTHER-EXPENSES> 5,600,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,219,392)
<INCOME-PRETAX> (5,432,371)
<INCOME-TAX> 294,760
<INCOME-CONTINUING> (5,727,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,727,131)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
