<PAGE> 1
PROSPECTUS This filing is made
3,000,000 SHARES pursuant
to Rule 424(b)(1) under
LOGO the Securities Act of
1933 in connection with
COMMON STOCK Registration No. 333-04183
Of the 3,000,000 shares of Common Stock offered hereby, 1,510,000 shares
are being sold by ACT Networks, Inc. (the "Company" or "ACT") and 1,490,000
shares are being sold by the Selling Stockholders. The Company will not receive
any of the proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders."
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol ANET. On June 12, 1996, the last reported sale price of the Common
Stock was $38.25 per share. See "Price Range of Common Stock."
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $38.00 $1.90 $36.10 $36.10
- -------------------------------------------------------------------------------------------------
Total(3)..................... $114,000,000 $5,700,000 $54,511,000 $53,789,000
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $857,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Stockholders will be $131,000,000, $6,555,000, $70,756,000 and
$53,789,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about June 18, 1996, at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST WESSELS, ARNOLD & HENDERSON
June 12, 1996
<PAGE> 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company (File
No. 0-25740) with the Commission are incorporated herein by reference: (a)
Annual Report of the Company on Form 10-K for the fiscal year ended June 30,
1995; (b) Quarterly Reports of the Company on Form 10-Q for the fiscal quarters
ended September 30, 1995, December 31, 1995 and March 31, 1996; (c) the Current
Reports of the Company on Form 8-K and 8-K/A for a reportable event dated
November 30, 1995; (d) Proxy Statement for the Annual Meeting of Stockholders
held on December 4, 1995; and (e) the description of the Company's Common Stock
which is contained in its Registration Statement on Form 8-A filed under the
Exchange Act on March 21, 1995, including any amendments or reports filed for
the purpose of updating such description.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the filing
of a post-effective amendment which indicates that all securities offered hereby
have been sold or which deregisters all securities remaining unsold, shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement contained in a
document incorporated by reference herein shall be deemed modified or superseded
for purposes of this Prospectus to the extent that a statement contained or
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered a copy of any or all of such documents which are
incorporated herein by reference (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into the documents that
this Prospectus incorporates). Written or oral requests for copies should be
directed to Chief Financial Officer, ACT Networks, Inc., at the Company's
executive offices located at 188 Camino Ruiz, Camarillo, CA 93012 (805)
388-2474.
ACT(TM), ACT Networks(TM), ACTnet(R), ACTview(R), Presticom(TM),
NetPerformer(TM) and SkyFrame(TM) are trademarks of the Company. This Prospectus
also includes trade names and trademarks of companies other than the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information including "Risk Factors" and Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus or incorporated by reference in
this Prospectus. The shares of Common Stock offered hereby involve a high degree
of risk. Investors should carefully consider the information set forth under the
heading "Risk Factors."
THE COMPANY
ACT Networks, Inc. develops, manufactures, markets and sells Frame Relay
wide-area network access products which support a broad range of voice, data and
integrated network 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 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. In countries where
public Frame Relay services are available, the Company believes that there is an
emerging market for voice, data and integrated Frame Relay networking solutions
which allocate bandwidth on demand and minimize network expenditures. In
countries where public Frame Relay services are generally not available and
bandwidth is scarce and expensive, there is an increasing demand for integrated
networking solutions which maximize the use of available bandwidth and minimize
network expenditures.
The Company's integrated Frame Relay access devices ("IFRADs") allow
organizations with access to public Frame Relay services to establish a
cost-effective, integrated networking solution. Organizations without access to
public Frame Relay services can use the Company's products to build integrated
private networks. Carriers and alternative service providers in countries with
developing telecommunications infrastructures can use the Company's products to
provide turn-key integrated networking solutions to their customers.
The Company's objective is to be a leading worldwide provider of Frame
Relay access solutions. The Company believes increased availability and
acceptance of Frame Relay services is creating new applications for Frame Relay
access products. These new applications include voice and data specific
applications as well as Frame Relay over satellite. The Company's strategy is to
leverage its existing resources, including its expertise in voice over Frame
Relay, its recently introduced SkyFrame product family and the data capabilities
acquired from Presticom, to pursue opportunities in the emerging Frame Relay
access market.
The Company markets and sells its Frame Relay network access devices
worldwide primarily through over 120 resellers and original equipment
manufacturers ("OEMs"). The Company has established strategic marketing and
sales relationships with major telecommunication service and equipment
providers. As of March 31, 1996, the Company had delivered more than 12,600
integrated network access devices to customers in over 50 countries.
3
<PAGE> 4
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.............. 1,510,000 shares
Common Stock offered by the Selling
Stockholders................................... 1,490,000 shares
Common Stock to be outstanding after the
offering....................................... 8,966,830 shares(1)
Use of proceeds.................................. General corporate purposes, working
capital requirements and, potentially,
acquisitions of complementary businesses
and technologies
Nasdaq National Market symbol.................... ANET
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................................... $ 6,207 $12,654 $20,566 $14,823 $19,299
Gross profit.................................................. 3,022 6,715 11,322 8,231 9,279
Acquired in-process research and development.................. -- -- -- -- 5,600
Income (loss) from operations................................. (1,417) 482 1,215 860 (7,251)
Net income (loss)............................................. $(1,435) $ 209 $ 1,262 $ 704 $(6,472)
Net income (loss) per share................................... $ (0.52) $ 0.05 $ 0.24 $ 0.15 $ (0.89)
Shares used in per share calculations......................... 2,739 3,852 5,211 4,726 7,234
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................................... $30,529 $ 84,183
Total assets.......................................................................... 39,031 92,685
Accumulated deficit................................................................... (8,781) (8,781)
Total stockholders' equity............................................................ 35,275 98,092
</TABLE>
- ---------------
(1) Based on the number of shares outstanding at March 31, 1996. Excludes
1,472,173 shares of Common Stock issuable upon the exercise of stock options
outstanding as of March 31, 1996 with a weighted average exercise price of
$9.03 per share and 4,286 shares of Common Stock issuable upon the exercise
of outstanding warrants with a weighted average exercise price of $3.50 per
share.
(2) Adjusted to reflect the sale of 1,510,000 shares of Common Stock by the
Company in the offering at an offering price of $38.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
---------------
Except as otherwise indicated, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." See
"Glossary of Technical Terms" for the definition of certain terms used in this
Prospectus. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ substantially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed in "Risk Factors."
4
<PAGE> 5
RISK FACTORS
This Prospectus 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 Risk Factors
should be considered carefully in addition to the other information contained in
this Prospectus before purchasing the shares of Common Stock offered hereby:
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 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
5
<PAGE> 6
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 advantages of voice over Frame Relay services
in the United States, particularly those based on voice over Frame Relay. 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. Accord-
6
<PAGE> 7
ingly, 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
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.
Unlike the Company, many competitors of the Company are ISO-9000 certified.
Many telecommunications firms will not purchase products from suppliers that do
not meet ISO-9000 specifications. Accordingly, until it has obtained ISO-9000
certification, the Company may be precluded from selling its products to such
organizations and its ability to compete with other suppliers of network
communications equipment may be adversely affected, resulting in loss of sales,
loss of market share and lack of acceptance of the Company's products.
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 "Business -- 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. 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,
7
<PAGE> 8
which is primarily based on the 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.
Customer Concentration. A small number of customers have historically
accounted for a substantial portion of the Company's net sales. In particular,
Scientific Atlanta accounted for approximately 7% and 20% of the Company's net
sales for the fiscal year ended June 30, 1995 and for the nine months ended
March 31, 1996, respectively. In addition, StrataCom and IMPSAT accounted for 8%
and 14% of the Company's net sales for the fiscal year ended June 30, 1995 and
8% and 12% for the nine months ended March 31, 1996, respectively. During those
periods the Company's five largest customers accounted for 43% and 49%,
respectively, of net sales. There can be no assurance that a major customer will
not reduce or delay the amount of products ordered from the Company or
significantly change the terms upon which the Company and such customer do
business. Any such reduction, delay or change could have a material adverse
effect on the Company's business. In general, the Company's major customers
either sell or deploy the Company's products outside the United States, which
subjects the Company to a variety of other risks. 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 the United States accounted for approximately 70%
and 66% of the Company's net sales for the fiscal years ended June 30, 1994 and
June 30, 1995, respectively, and approximately 56% of the Company's net sales
for the nine months ended March 31, 1996. In addition, the Company believes that
a majority of its sales to customers inside the United States represent sales of
products which are used or resold in markets outside the United States. The
Company expects that international sales will continue to account for a
significant portion of the Company's net sales in future periods. International
sales are subject to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, potentially adverse tax conse-
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<PAGE> 9
quences 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
"Business -- Sales and Marketing."
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
"Business -- 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 "Business -- 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 "Business -- 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
9
<PAGE> 10
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 "Business -- Governmental
Regulation."
The Company's sales through original equipment manufacturers ("OEMs") who
purchased custom products for the fiscal years ended June 30, 1994 and 1995, and
for the nine month period ended March 31, 1996 accounted for approximately 6.3%,
9.0% and 21.5%, respectively, of the Company's net sales. The Company does not
classify private label sales of standard products as OEM sales. In 1995 and the
nine months ended March 31, 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 does not anticipate that
Scientific Atlanta will maintain its current level of sales. 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 "Business -- 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 "Business -- Proprietary
Rights."
10
<PAGE> 11
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 does not
have any employment contracts with its executive officers. 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 "Management."
Future Capital Needs; Uncertainty of Additional Funding. The Company
anticipates that its existing capital resources, including bank borrowings, cash
flow from operations and the net proceeds of this offering, 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 and the right of
the Board representatives of the Company's two largest stockholders to approve
certain below market sales of securities (which right may terminate upon the
consummation of this offering) could hinder the Company's ability to obtain
financing. If adequate funds are not available, the Company may be required to
delay, scale back or eliminate some or all of its research and development, to
curtail its operations significantly or to obtain funds through arrangements
with strategic partners or others that may require the Company to relinquish
rights to certain of its technologies or potential markets. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Control by Existing Stockholders. As of May 15, 1996, the executive
officers and directors, together with their affiliates, in the aggregate, owned
approximately 41% of the Company's outstanding shares of Common Stock. In
addition, such stockholders hold options and warrants to purchase additional
shares of the Company's Common Stock. Accordingly, these stockholders, acting
together,
11
<PAGE> 12
may have the ability to control the approval of most matters requiring approval
by the Board of Directors and stockholders of the Company, including the
election of at least a majority of the Board of Directors of the Company and the
authorization of Preferred Stock. This concentration of ownership under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or a financing of the Company. In addition, the Company
has entered into an agreement with its two largest stockholders, Promon Ltda.
("Promon") and Pacific Technology Fund ("PTF"), that obligates the Company to
nominate a representative of each such stockholder to the Board of Directors as
long as such stockholder owns at least 10% of the Company's then outstanding
voting securities. The Company has agreed that it will not issue securities at
less than 95% of market value, or at a price below 85% of market value with
respect to employee stock purchases or option plans, without the approval of the
representatives of Promon and PTF, again provided that such stockholder owns at
least 10% of the Company's then outstanding voting securities. However, upon the
closing of this offering, Promon and PTF will no longer hold 10% of the
Company's voting securities and the agreement with such stockholders will
terminate. See "Principal and Selling Stockholders."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after the offering could adversely affect the market
price of the Common Stock. Upon completion of this offering, the Company will
have approximately 8,966,830 shares of Common Stock outstanding. Subject in
certain cases to the volume and other limitations of Rule 144 and Rule 701 under
the Securities Act, substantially all of such shares will be available for
immediate sale in the public market as of the date of this Prospectus. However,
the Selling Stockholders and all officers and directors of the Company who will
hold, in the aggregate, approximately 2,000,000 shares after this offering, have
agreed not to sell their shares without the consent of Hambrecht & Quist LLC
during the 90 day period commencing on the date of this Prospectus. See
"Principal and Selling Stockholders."
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 Prospectus 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
strategies of maintaining its leadership position in voice over Frame Relay,
penetrating the integrated Frame Relay 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
12
<PAGE> 13
statements also include the Company's expectation that sales of its Frame Relay
access products will increase due to factors affecting the markets for these
products, such as demand for increased bandwidth, growth in the overall 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; expenditures for research and
development, sales and marketing and general and administrative purposes; and
the sufficiency of capital resources under the "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Actual results could
differ from those projected in any forward-looking statement for the reasons
detailed in the other sections of this "Risk Factors" portion of this
Prospectus. The forward-looking statements are made as of the date of this
Prospectus, and the Company assumes no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ from those
projected in the forward-looking statements.
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. See "Dividend Policy."
13
<PAGE> 14
THE COMPANY
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 Delaware in May 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. As used in this Prospectus,
the "Company" and "ACT" refer to ACT Networks, Inc. and its subsidiaries.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,510,000 shares of Common
Stock offered hereby by the Company are approximately $53.7 million ($69.9
million if the over-allotment option is exercised in full), at a public offering
price of $38.00 per share and after deducting underwriting discounts,
commissions and estimated offering expenses. The Company will not receive any
proceeds from the sale of the shares of Common Stock by the Selling
Stockholders.
The Company has not yet identified specific uses for the net proceeds of
this offering. The Company expects to use the proceeds of this offering for
general corporate purposes, including the funding of working capital
requirements, expansion of its sales and marketing activities for existing
products and new products, expansion of its research and development personnel
and activities, investment in new technology and broadening of its network
integration capabilities, and acquisitions of complementary business and
technologies. The Company currently has no agreement or understanding with
respect to any such acquisitions. From time to time the Company may evaluate
opportunities to enter into new strategic alliances, joint ventures or other
similar transactions and may use a portion of the proceeds to enter into such
transactions. The Company has not determined the amounts it plans to expend on
each of the listed uses or the timing of such expenditures. The amounts actually
expended for each purpose may vary significantly depending on a number of
factors, including future revenue growth, if any, the amount of cash generated
or used by the Company's operations, the progress of the Company's new product
development efforts, technological advances, the status of competitive products
and acquisition opportunities presented to the Company. Pending the use thereof,
the Company intends to invest the proceeds of this offering in short-term
interest bearing marketable securities.
14
<PAGE> 15
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market
on May 3, 1995 and is traded under the symbol "ANET." The following table sets
forth the range of high and low closing sale prices for the Common Stock for the
periods indicated, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
- --------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
1996
4th Quarter (through June 12, 1996)...................................... $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
1995
4th Quarter (From May 3, 1995)........................................... 22 15 3/4
</TABLE>
On June 12, 1996, the closing sale price of the Company's Common Stock as
reported on the Nasdaq National Market was $38.25 per share, and there were
approximately 125 holders of record of the Common Stock on such date.
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.
15
<PAGE> 16
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of March 31, 1996 and as adjusted to reflect the receipt and application of the
net proceeds from the sale of the 1,510,000 shares of Common Stock offered by
the Company hereby at an offering price of $38.00 per share, after deduction of
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Common stock, $.001 par value per share; Authorized shares --
40,000,000; Issued and outstanding -- 7,456,830;
As adjusted -- 8,966,830: (1)................................... 7 9
Additional paid in capital......................................... 44,059 97,711
Accumulated deficit................................................ (8,781) (8,781)
Accumulated translation adjustment................................. (10) (10)
Total stockholders' equity...................................... 35,275 88,929
------- -----------
Total capitalization....................................... $35,275 $ 88,929
======= =========
</TABLE>
- ---------------
(1) Excludes 1,472,173 shares of Common Stock issuable upon the exercise of
stock options outstanding as of March 31, 1996 with a weighted average
exercise price of $9.03 and 4,286 shares of Common Stock issuable upon the
exercise of outstanding warrants with a weighted average exercise price of
$3.50 per share.
16
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's
statement of operations for each of the fiscal years ended June 30, 1993, 1994
and 1995, and the balance sheet data at June 30, 1993, 1994 and 1995, are
derived from the audited financial statements of the Company. The financial data
of the Company as of and for the nine months ended March 31, 1995 and 1996 are
unaudited and were prepared by management of the Company on the same basis as
the audited consolidated financial statements included elsewhere herein and, in
the opinion of the Company, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results for the nine months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full fiscal year
ending June 30, 1996. The following information should be read in conjunction
with the Financial Statements of the Company and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED MARCH 31,
--------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 6,207 $12,654 $20,566 $14,823 $19,299
Cost of goods sold............................. 3,185 5,939 9,244 6,592 10,020
------- ------- ------- ------- -------
Gross profit................................ 3,022 6,715 11,322 8,231 9,279
Operating expenses:
Research and development.................... 1,504 1,955 3,586 2,696 3,550
Sales and marketing......................... 1,777 2,943 4,785 3,383 5,069
General and administrative.................. 1,158 1,335 1,736 1,292 2,311
Acquired in-process research and
development............................... -- -- -- -- 5,600
------- ------- ------- ------- -------
Total operating expenses....................... 4,439 6,233 10,107 7,371 16,530
------- ------- ------- ------- -------
Income (loss) from operations.................. (1,417) 482 1,215 860 (7,251)
Net interest income and other income
(expense)................................... (18) 8 69 (142) 912
Loss due to earthquake......................... -- (281) -- -- --
------- ------- ------- ------- -------
Income (loss) before income taxes.............. (1,435) 209 1,284 718 (6,339)
Provision for income taxes..................... -- -- 22 14 133
------- ------- ------- ------- -------
Net income (loss).............................. $(1,435) $ 209 $ 1,262 $ 704 $(6,472)
======= ======= ======= ======= =======
Net income (loss) per share.................... $ (0.52) $ 0.05 $ 0.24 $ 0.15 $ (0.89)
======= ======= ======= ======= =======
Shares used in per share calculations.......... 2,739 3,852 5,211 4,726 7,234
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------------------- ---------
1993 1994 1995 1996
------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $ 2,284 $ 3,923 $38,235 $30,529
Total assets..................................... 3,837 6,398 42,897 39,031
Total long-term debt, excluding current
maturities.................................... 10 -- -- --
Accumulated deficit.............................. (3,780) (3,571) (2,309) (8,781)
Total stockholders' equity....................... 2,739 4,847 40,316 35,275
</TABLE>
17
<PAGE> 18
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
Prospectus. This Prospectus contains forward-looking statements that involve a
number of risks and uncertainties including, without limitation, those set forth
in "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. Presticom
had sales of approximately $2.2 million for its fiscal year ended September 30,
1995.
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 the United States accounted for approximately
70% and 66% of the Company's net sales for the fiscal years ended June 30, 1994
and 1995, respectively, and approximately 56% of the Company's net sales for the
nine months ended March 31, 1996. The Company expects that international sales
will continue to account for a significant portion of the Company's net sales in
future periods. In addition, the Company believes that a majority of its sales
to customers inside the United States represent sales of products which are used
or resold in markets outside the United States. International sales are subject
to certain inherent risks, including unexpected changes in regulatory
requirements and tariffs, problems and delays in collecting accounts receivable
and economic downturns in foreign markets. A significant number of the Company's
products are sold or installed in countries, including several in South America,
where political or economic issues could adversely affect the purchasing
decision of the customer. In addition, fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. See Note 1 to Notes to Financial Statements.
18
<PAGE> 19
A small number of customers have historically accounted for a substantial
portion of the Company's net sales. In particular, Scientific Atlanta accounted
for approximately 7% and 20% of the Company's net sales for the fiscal year
ended June 30, 1995 and for the nine months ended March 31, 1996, respectively.
In addition, StrataCom and IMPSAT accounted for approximately 8% and 14% for the
fiscal year ended June 30, 1995 and 8% and 12% for the nine months ended March
31, 1996, respectively, of net sales. During those periods the Company's five
largest customers accounted for 43% and 49%, respectively, of net sales. Any
reduction, delay or change in orders from such customers could have a material
adverse effect on the Company's business.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages
of net sales represented by each item in the Company's statement of operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE NINE MONTHS
30, ENDED MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................. 51.3 46.9 44.9 44.5 51.9
----- ----- ----- ----- -----
Gross profit....................................... 48.7 53.1 55.1 55.5 48.1
Operating expenses:
Research and development......................... 24.2 15.5 17.4 18.2 18.4
Sales and marketing.............................. 28.6 23.3 23.3 22.8 26.3
General and administrative....................... 18.7 10.5 8.4 8.7 12.0
Acquired in-process research and development..... -- -- -- -- 29.0
----- ----- ----- ----- -----
Total operating expenses........................... 71.5 49.3 49.1 49.7 85.6
----- ----- ----- ----- -----
Income (loss) from operations...................... (22.8) 3.8 5.9 5.8 (37.6)
Net interest and other income (expense)............ (0.3) -- 0.3 (1.0) 4.7
Loss due to earthquake............................. -- (2.2) -- -- --
----- ----- ----- ----- -----
Income (loss) before taxes......................... (23.1) 1.6 6.2 4.8 (32.9)
Provision for income taxes......................... -- -- 0.1 0.1 0.7
----- ----- ----- ----- -----
Net income (loss).................................. (23.1)% 1.6% 6.1% 4.7% (33.6)%
===== ===== ===== ===== =====
</TABLE>
Net sales
Net sales increased 30.2% to $19.3 million for the nine months ended March
31, 1996 from $14.8 million for the nine months ended March 31, 1995. This
increase was primarily due to increased sales of the Company's Frame Relay and
OEM products and, to a lesser extent, shipments of products acquired in the
Presticom acquisition which accounted for $1.2 million, or 26.7% of the increase
in net sales. Net sales of Frame Relay products were $12.2 million and $6.3
million for the nine month periods ended March 31, 1996 and March 31, 1995,
respectively. Net sales of point-to-point products decreased to $3.0 million
from $7.3 million for the nine month periods ended March 31, 1996 and March 31,
1995, respectively. While the Company anticipated the continued decline of sales
of point-to-point products due primarily to the conversion of customers to Frame
Relay products, the decrease in such sales during the period was greater than
anticipated by the Company. 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 $4.1 million for
the nine months ended March 31, 1996 from $1.2 million for the nine months ended
March 31, 1995. The increase in OEM shipments was primarily due to unusually
large orders received from 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
19
<PAGE> 20
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.
Net sales increased 103.9% to $12.7 million in fiscal 1994 from $6.2
million in fiscal 1993. This increase was primarily due to increased sales of
the Company's point-to-point products to telecommunications service providers
and, to a lesser extent, sales of Frame Relay products, first introduced in
1993, and custom voice cards.
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 $9.3 million, or 48.1% of net sales,
for the nine months ended March 31, 1996. The nine months ended March 31, 1996
included a $0.7 million charge for obsolete inventory that was taken to
recognize the decreased demand for certain point-to-point products. Gross
profit, not including this charge, was $10.0 million, or 51.7%, of net sales,
for the nine months ended March 31, 1996, as compared to 55.5% of net sales for
the comparable period in 1995. This decrease in gross profit as a percentage of
sales was primarily attributable to 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.
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.
The Company's gross profit was $6.7 million, or 53.1% of net sales, in
fiscal 1994 compared to $3.0 million, or 48.7% of net sales, in fiscal 1993.
This increase was primarily due to unit cost decreases in certain components, an
increase in sales of the Company's voice cards and increased manufacturing
efficiencies.
Operating expenses
Research and development. Research and development expense increased to
$3.6 million, or 18.4% of net sales, for the nine months ended March 31, 1996
from $2.7 million, or 18.2% of net sales, for the nine months ended March 31,
1995. These increases were primarily attributable to the costs of personnel for
the development of new products and enhancement of existing products, which
increased to approximately $2.3 million from approximately $1.6 million during
the preceding comparable period. While the actual amount expended will depend
upon a variety of factors, the Company anticipates increasing research and
development expenses in the near term.
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 costs of personnel for
the development of new products and enhancement of existing products, which
increased to approximately $1.7 million from approximately $1.0 during the
preceding comparable period; payments to third party developers, which increased
to $0.3 million from zero 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.
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<PAGE> 21
Research and development expense increased to $2.0 million, or 15.5% of net
sales, for fiscal 1994 from $1.5 million, or 24.2% of net sales, for fiscal
1993. This dollar increase in expense levels was primarily attributable to the
addition of personnel for the development of new products and enhancement of
existing products and payments to third party developers. The decrease as a
percentage of net sales was due to a more rapid increase in net sales than these
expenses.
Sales and marketing. Sales and marketing expense increased to $5.1
million, or 26.3% of net sales, for the nine months ended March 31, 1996 from
$3.4 million, or 22.8% of net sales, for the nine months ended March 31, 1995.
This dollar increase was primarily attributable to the addition of personnel and
increased marketing activities. 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.
Sales and marketing expense increased to $2.9 million, or 23.3% of net
sales, for fiscal 1994 from $1.8 million, or 28.6% of net sales, for fiscal
1993. This dollar increase was primarily attributable to the addition of sales
personnel and increased marketing activities. The decrease as a percentage of
net sales was due to a more rapid increase in net sales than these expenses.
General and administrative. General and administrative expense increased
to $2.3 million, or 12.0% of net sales, for the nine months ended March 31, 1996
from $1.3 million, or 8.7% of net sales, for the nine months ended March 31,
1995. This increase in expense levels was primarily attributable to the addition
of administrative personnel and additional expenses incurred as a result of
being a public company. 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.
General and administrative expense increased to $1.3 million, or 10.5% of
net sales, for fiscal 1994 from $1.2 million, or 18.7% of net sales, for fiscal
1993. This dollar increase in expense levels remained relatively constant
between these periods. 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 approximately $0.9 million for the nine months
period ended March 31, 1996 compared to net interest expense of approximately
$0.1 million in the corresponding period in 1995. Net interest income was
approximately $68,400 for fiscal 1995 compared to net interest income of
approximately $8,800 for the fiscal 1994. These changes were primarily
attributable to interest received on the proceeds from the Company's public
offering in May 1995. The Company incurred net interest expense of approximately
$18,000 in fiscal 1993.
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<PAGE> 22
Income taxes
There was no provision for income taxes for the nine month periods ended
March 31, 1995, and the provision for March 31, 1996 totaled $0.1 million. 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, 1995 subject to certain limitations, the Company
has approximately $301,000 and $196,000 of research and development tax credit
carryforwards and approximately $1,673,000 in federal net operating loss
carryforwards, a portion of which it expects to apply against its income tax
liability for 1996.
There was no provision for income taxes for either fiscal 1994 or 1993, 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. See Note 3 to
Notes to Financial Statements.
The Company adopted the provisions of the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," effective July 1, 1993. The
adoption of this statement did not have a material effect on the Company's
financial position or results of operations.
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<PAGE> 23
QUARTERLY RESULTS
The following table presents selected quarterly financial information for
each of the seven quarters through March 31, 1996. This information is
unaudited, but in the opinion of the Company's management, reflects all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of this information in accordance
with generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------
SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER MARCH
1994 1994 1995 1995 1995 1995 1996
--------- -------- ------ ------ --------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................................. $ 4,411 $4,877 $5,535 $5,743 $ 5,102 $ 6,167 $8,030
Cost of goods sold......................... 1,996 2,151 2,445 2,652 2,642 3,691 3,687
------ ------ ------ ------ ------ ------
Gross profit............................. 2,415 2,726 3,090 3,091 2,460 2,476 4,343
Operating expenses:
Research and development................. 787 936 973 890 1,037 1,241 1,271
Sales and marketing...................... 1,026 1,051 1,306 1,402 1,406 1,753 1,910
General and administrative............... 419 461 412 444 600 807 904
Acquired in-process research and
development............................ -- -- -- -- -- 5,600 --
------ ------ ------ ------ ------ ------
Total operating expenses................... 2,232 2,448 2,691 2,736 3,043 9,401 4,085
------ ------ ------ ------ ------ ------
Income (loss) from operations.............. 183 278 399 355 (584) (6,925 ) 258
Net interest and other income (expense).... (12) (48) (82 ) 211 374 308 230
------ ------ ------ ------ ------ ------
Income (loss) before taxes................. 171 230 317 566 (211) (6,617 ) 488
Provision for income taxes................. -- 14 -- 8 -- 39 94
------ ------ ------ ------ ------ ------
Net income (loss).......................... $ 171 $ 216 $ 317 $ 558 $ (211) $(6,656 ) $ 395
====== ====== ====== ====== ====== ======
Net income (loss) per share................ $ 0.04 $ 0.05 $0.07 $ 0.09 $ (0.03) $ (0.92 ) $0.05
====== ====== ====== ====== ====== ======
Shares used in per share calculations...... 4,517 4,752 4,818 6,340 7,735 7,206 7,991
====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF NET SALES
--------
Net sales.................................. 100.0% 100.0% 100.0 % 100.0% 100.0% 100.0 % 100.0 %
Cost of goods sold......................... 45.3 44.1 44.2 46.2 51.8 59.9 45.9
------ ------ ------ ------ ------ ------
Gross profit............................. 54.7 55.9 55.8 53.8 48.2 40.1 54.1
Operating expenses:
Research and development................. 17.8 19.2 17.6 15.5 20.3 20.1 15.8
Sales and marketing...................... 23.3 21.5 23.6 24.4 27.6 28.4 23.8
General and administrative............... 9.4 9.5 7.4 7.7 11.8 13.1 11.3
Acquired in-process research and
development............................ -- -- -- -- -- 90.8 --
------ ------ ------ ------ ------ ------
Total operating expenses................... 50.5 50.2 48.6 47.6 59.6 152.4 50.9
------ ------ ------ ------ ------ ------
Income (loss) from operations.............. 4.2 5.7 7.2 6.2 (11.5) (112.3 ) 3.2
Net interest and other income (expense).... (0.3) (1.0) (1.5 ) 3.7 7.3 5.0 2.9
------ ------ ------ ------ ------ ------
Income (loss) before taxes................. 3.9 4.7 5.7 9.9 (4.2) (107.3 ) 6.1
Provision for income taxes................. -- 0.3 -- 0.1 -- 0.6 1.2
------ ------ ------ ------ ------ ------
Net income (loss).......................... 3.9% 4.4% 5.7 % 9.7% (4.2)% (107.9 )% 4.9 %
====== ====== ====== ====== ====== ======
</TABLE>
In the quarter ended September 30, 1995, the Company experienced a faster
than anticipated decline in the demand for certain point-to-point products,
which reduced net sales relative to the Company's expectations and resulted in a
$0.7 million write-down of point-to-point inventory, recorded in cost of goods
sold in the quarter ended December 31, 1995. In the quarter ended December 31,
1995, the Company recorded a $5.6 million in-process research and development
expense in connection with the Presticom acquisition. Net sales in that quarter
and in the quarter ended March 31, 1996 were positively impacted by increased
sales of the Company's Frame Relay and OEM products, as well as by the inclusion
of Presticom's operations with the Company's.
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<PAGE> 24
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 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. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from the sale of stock,
borrowings from investors and borrowings under a bank facility. Proceeds, net of
offering costs, from sales of preferred stock were $2.6 million and $2.1 million
for the fiscal years ended June 30, 1993 and 1994, respectively. Net proceeds
from the sale of Common Stock in the Company's initial public offering in May
1995 were $33.8 million. For the nine months ended March 31, 1996, the Company's
operating activities used cash of approximately $5.6 million. At March 31, 1996,
the Company had approximately $30.5 million in working capital, including $10.3
million in cash.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, computer software and leasehold improvements amounted
to approximately $1.4 million for the nine months ended March 31, 1996. The
Company currently has no material commitments for capital expenditures. However,
the Company anticipates spending between $2.0 million and $3.0 million during
the next 12 months to acquire test equipment, computer equipment, office
furniture, tooling and leasehold improvements.
The Company has loan agreements (the "Loan Agreements") with Silicon Valley
Bank (the "Bank"), which provide for two revolving credit facilities and a term
loan secured by a blanket lien on all of the Company's assets. Under the two
revolving credit facilities, the Company may borrow up to the lesser of $1.5
million or a total of (i) 90% of the net amount of the Company's approved
accounts receivable owing from customers outside the United States plus (ii) 70%
of the value of the Company's inventory held for export outside the United
States, provided that such borrowings are guaranteed by the Export-Import Bank
of the United States. Alternatively, borrowings under the facilities may be made
up to the lesser of $3.0 million or 75% of the net amount of the Company's
accounts receivable from customers within the United States. The Bank may also
issue up to $500,000 in letters of credit for the account of the Company. The
amount available for borrowing under the revolving credit facilities is reduced
by the aggregate amount of such Letters of Credit outstanding from time to time.
In no
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<PAGE> 25
event may the aggregate outstanding principal balance of all loans made to the
Company under the Loan Agreements exceed $3.0 million.
The Loan Agreements also require the Company to maintain certain financial
ratios and limit the Company's ability to incur additional debt, to repurchase
the Company's stock and to pay dividends. The Company is currently in compliance
with all such financial ratios and covenants. As of March 31, 1996, the Company
had no outstanding balance under its revolving credit facilities and under its
term loan. As of March 31, 1996, an aggregate of $3.0 million was available
under the Loan Agreements. The Company believes that available cash, together
with amounts available under its credit facilities, cash flow from operations
and the net proceeds of this offering, will be sufficient to meet its normal
operating and capital requirements for at least the next twelve months.
25
<PAGE> 26
BUSINESS
ACT Networks, Inc. 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.
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
26
<PAGE> 27
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 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).
COMPANY STRATEGY
The Company's strategy is to be a leading worldwide provider of Frame Relay
access solutions. The Company intends to implement this strategy by pursuing the
following initiatives:
- Maintain Leadership in Voice Over Frame Relay. The Company believes it
was the first to offer products commercially which allow the transmission
of toll-quality, compressed voice over Frame Relay networks. The Company
believes its technical capabilities in switching, signaling, echo
cancellation, congestion management, telephony interfaces and other areas
have resulted in the Company being a leader in voice over Frame Relay.
Expanding commercial applications demand a variety of new functions which
the Company believes it is uniquely positioned to develop due to its
technological expertise. The Company intends to maintain its leadership
position by building on its existing technology and developing or
acquiring new technologies to enhance the functions and features of the
Company's products. See "-- Product Development."
- Penetrate Integrated Frame Relay Market. The Company believes it is a
pioneer in the market for integrated Frame Relay access products and
intends to increase its penetration of this market. The Company
identified enhanced data capabilities, a satellite based solution and
additional sales resources as important to the Company's success in this
market. In response, during the last year the Company acquired data
expertise and products through its acquisition of Presticom, developed
and recently released its SkyFrame product family, and doubled the
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<PAGE> 28
size of its direct sales force. The Company intends to leverage these additional
resources, while continuing to develop product capabilities and build its sales
force, to continue to address this growing market.
- Capitalize on Voice Over Frame Relay Opportunities. To date, Frame Relay
service providers have not included voice as a integral component of
their Frame Relay service offering to end-users. The Company believes,
however, that the bandwidth requirements of voice combined with the
bandwidth efficiencies of Frame Relay make voice over Frame Relay an
attractive service offering. Data-only providers can complement their
existing services by adding cost effective Frame Relay voice services.
Service providers that offer both voice and data may use Frame Relay to
decrease the cost of their voice services. However, end users in this
market will demand superior voice quality and extensive telephony
features. The Company believes that, due to its leadership in voice over
Frame Relay, the Company is well positioned to offer products designed to
meet the evolving needs of this market.
- Address Data Over Frame Relay Market. While the Company has historically
focused primarily on voice applications, it has also developed and
acquired expertise in data over Frame Relay applications. In particular,
the Company's unique cell-based prioritization technology developed by
Presticom provides it with a foundation to develop products to support
multiple legacy data protocols such as SNA as well as token ring and
Ethernet LAN applications. However, the Company does not believe its
current products or marketing channels are adequate to effectively
compete in the data market. The Company believes that a data solution is
critical to the penetration of the domestic market. The Company intends
to engage in strategic alliances and selective acquisitions to enhance
its capabilities in this market.
- Leverage Distribution Through Strategic Alliances. The Company believes
there are a broad range of applications for its Frame Relay technologies.
In order to more rapidly capitalize on the demand for products
incorporating such technologies, the Company has established strategic
distribution and OEM relationships with several telecommunications
equipment manufacturers, including StrataCom, Scientific Atlanta and
Infonet Services Corporation. The Company intends to expand its existing
relationships and form new strategic alliances with additional
telecommunications companies.
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 IFRADs to build an integrated private
frame relay network connecting approximately 350 sites. This network
provides switched voice and fax connectivity among these locations and
concurrently supports both SNA and LAN data applications.
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<PAGE> 29
- 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 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, fax 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.
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<PAGE> 30
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.
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
NAME 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
- -----------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
NAME 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
- -----------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
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.
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
NAME 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
- -----------------------------------------------------------------------------------
</TABLE>
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, StrataCom, IMPSAT and Scientific Atlanta accounted for 8%,
14% and 7% of the Company's net sales for the fiscal year ended June 30, 1995,
and 8%, 12% and 20% for the nine months ended March 31, 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:
DOMESTIC END-USERS
- ------------------
Bonnecker & Leigh
First Chicago Bank
Idaho National Guard
Intelsat
National Semiconductor
Pyrodyne
South East Frozen Food
Worldex
ALTERNATIVE SERVICE PROVIDERS
- -----------------------------
AT&T Wireless
Department of Telecom, India
Entel-Chile
IMPSAT
Infonet Services Corporation
Philippine Long Distance Company
Russtel, Russia
Telefonica de Espana
Telefonica de Peru
Teleport Europe, Germany
Victori
INTERNATIONAL END-USERS
- -----------------------
American Express, Argentina
Bank of Brazil
Cheietsee, Japan
Duty-Free, Australia
Industrial Bank of Korea
Memorex Telex, Australia
RadioCel/Biper, Mexico
Samsung, Korea
Ssangyong, Korea
TAM, Brazil
OEMS AND PRIVATE LABEL RESELLERS
- --------------------------------
Daimler-Benz
IS Networks
LNR Communications
Scientific Atlanta
StrataCom
Vitacom (Cable & Wireless)
31
<PAGE> 32
SALES AND MARKETING
The Company markets and sells its products primarily through a worldwide
network of approximately 120 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 March 31, 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.
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-
32
<PAGE> 33
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 March 31, 1996, the Company employed 48 persons in engineering, 32 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.
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.
Unlike the Company, many competitors of the Company are ISO-9000 certified.
Many telecommunications firms will not purchase products from suppliers that do
not meet ISO-9000 specifications. Accordingly, until it has obtained ISO-9000
certification, the Company may be precluded from selling its products to such
organizations and its ability to compete with other suppliers of network
communications equipment may be adversely affected, resulting in loss of sales,
loss of market share and lack of acceptance of the Company's products.
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
33
<PAGE> 34
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.
The principal competitive factors in the markets for the Company's products
are price, conformance to industry standards, 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 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.
The Company is not currently certified as an ISO-9000 supplier meeting the
manufacturing and testing requirements established by the Industry Standards
Organization. ISO-9000 is an internationally recognized quality assurance
certification. The Company intends to implement procedures to bring it fully
within the parameters for ISO-9000 certification and to seek such certification
in the near future. There can be no assurance as to when, or if, the Company
will obtain such certification.
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
34
<PAGE> 35
must subject its products before they can be marketed in such countries is time
consuming and expensive, taking from six to twelve months and costing from
$30,000 to $50,000 per product.
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.
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.
35
<PAGE> 36
EMPLOYEES
As of March 31, 1996, the Company employed 145 full-time persons, including
36 in operations, 32 in sales and marketing, 11 in customer service, 48 in
engineering and 18 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.
FACILITIES
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.
LEGAL PROCEEDINGS
The Company has no material pending legal proceedings.
36
<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company as of April 30, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Martin Shum................ 47 Chairman of the Board of Directors, President and Chief
Executive Officer
Suresh Nihalani............ 43 Vice President, Product Marketing
Shaun Manesh............... 40 Vice President, Manufacturing
John W. Tucker............. 50 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.............. 50 Vice President, Worldwide Sales
Jean-Guy Lacombe........... 39 Vice President, Operations
Brig. Gen. Harold R.
Johnson(1)............... 72 Director
Dr. Michael Feuer(2)....... 53 Director
Carlos M. Siffert(2)....... 58 Director
William Ambrose(1)......... 38 Director
Archie J. McGill(1)(2)..... 64 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.
37
<PAGE> 38
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.
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.
38
<PAGE> 39
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.
39
<PAGE> 40
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May 15, 1996, and as
adjusted to reflect the sale by the Company and the Selling Stockholders of the
shares of Common Stock offered hereby, 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 Selling Stockholders, (iii) each of the Company's directors, (iv)
each of the executive officers and (v) all directors and executive officers of
the Company as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
DIRECTORS, FIVE PERCENT STOCKHOLDERS, NAMED OWNED NUMBER OF OWNED
EXECUTIVE PRIOR TO OFFERING(1) SHARES AFTER OFFERING(1)(2)
OFFICERS AND DIRECTORS AND OFFICERS AS A -------------------- BEING --------------------
GROUP NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Promon Ltda................................. 1,494,768 19.9% 710,000 784,768 8.7%
AVE Pres. Juscelino Kubitschek, 1830
04543-900 Sao Paulo-SP, Brazil(3)
Pacific Technology Fund..................... 1,238,751 16.5 600,000 638,751 7.1
P.O. Box 1704
Palo Alto, CA 94302-1704
Ardsley Advisory Partners................... 374,500 5.0 -- 374,500 4.2
646 Steamboat Road
Greenwich, CT 06836(4)
Pyramid Research, Inc....................... 55,155 * 30,000 25,155 *
14 Arrow Street
Cambridge, MA 02138
Martin Shum(5).............................. 504,024 6.4 60,000 444,024 4.7
William W. Ambrose(6)....................... 55,155 * -- 25,155 *
Dr. Michael Feuer(7)........................ 1,238,751 16.5 -- 638,751 7.1
Brig. Gen. H. R. Johnson.................... 38,716 * -- 38,716 *
Carlos M. Siffert(8)........................ 1,494,768 19.9 -- 784,768 8.7
Archie J. McGill(9)......................... 42,857 * 10,000 32,857 *
Melvin L. Flowers(10)....................... 105,857 1.4 17,000 88,857 1.0
Suresh Nihalani(11)......................... 98,275 1.3 18,000 80,275 *
John Tucker(12)............................. 116,820 1.5 18,000 98,820 1.1
Andre de Fusco(13).......................... 88,000 1.2 6,000 82,000 *
Shaun Manesh(14)............................ 85,748 1.1 8,000 77,784 *
Peter Staab(15)............................. 80,000 1.1 6,000 74,000 *
Linda Carlson(16)........................... 49,643 * 7,000 42,643 *
Jean-Guy Lacombe(17)........................ 138,372 1.8 -- 138,372 1.5
All directors and executive officers as a
group (14 persons)(18).................... 4,136,986 48.4 1,490,000 2,646,986 26.4
</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) Assumes that the Underwriters' over-allotment option is not exercised.
(3) The shares are owned beneficially and of record by FIQ-Trading, Marketing,
Servicos e Consultores Lda. ("FIQ"), a company controlled by Promon. As
such, Promon may be deemed to have beneficial ownership of such shares.
(4) Based upon information contained in a Statement on Schedule 13G, dated
February 12, 1996, filed with the SEC by Ardsley Advisory Partners and Mr.
Philip J. Hempleman. The Schedule 13G
40
<PAGE> 41
states that Mr. Hempleman is deemed to have beneficial ownership of 374,500
shares of Common Stock as of February 12, 1996.
(5) Includes 38,576 shares held by members of Mr. Shum's family and 35,106
shares held by Helen Shum and Martin Shum as Trustees of the Shum Trust,
dated April 15, 1994. Also includes 430,347 shares issuable upon exercise
of immediately exercisable options (including 1,704 shares issuable upon
exercise of options held by Mr. Shum's spouse) of which 190,367 shares will
be vested within 60 days from May 15, 1996.
(6) Includes 55,155 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.
(7) Includes 1,238,751 shares (638,751 shares after the offering) 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.
(8) Includes 1,494,468 shares (784,765 shares after the offering) beneficially
owned by Promon and FIQ. Mr. Siffert, as Director of Promon, may be deemed
to have beneficial ownership of these shares. Mr. Siffert disclaims
beneficial ownership of these shares.
(9) Includes 42,857 shares issuable upon exercise of options.
(10) Includes 74,286 shares issuable upon exercise of immediately exercisable
options of which 7,503 shares will be vested within 60 days from May 15,
1996.
(11) Includes 2,143 shares held by members of Mr. Nihalani's family. Also
includes 57,828 shares issuable upon exercise of immediately exercisable
options (including 1,418 shares issuable upon exercise of options held by
Mr. Nihalani's spouse) of which 5,761 shares will be vested within 60 days
from May 15, 1996.
(12) Includes 104,500 shares issuable upon exercise of immediately exercisable
options of which 38,312 shares will be vested within 60 days from May 15,
1996. Excludes shares beneficially owned by Mr. Tucker's spouse, Linda
Carlson, an executive officer of the Company.
(13) Includes 87,000 shares issuable upon exercise of immediately exercisable
options of which 33,583 shares will be vested within 60 days from May 15,
1996.
(14) Includes 53,857 shares issuable upon exercise of immediately exercisable
options of which 7,817 shares will be vested within 60 days from May 15,
1996.
(15) Includes 80,000 shares issuable upon exercise of immediately exercisable
options of which 6,500 shares will be vested within 60 days from May 15,
1996.
(16) Includes 49,643 shares issuable upon exercise of immediately exercisable
options of which 11,900 shares will be vested within 60 days from May 16,
1996. Excludes shares beneficially owned by Ms. Carlson's spouse, 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.
(18) Includes 55,155 (25,155 shares after the offering) shares owned by Pyramid
Research, Inc., 1,238,751 shares (638,751 shares after the offering) owned
by Pacific Technology Fund and 1,494,768 shares (784,768 shares after the
offering) owned by Promon. Also includes an aggregate of 1,041,736 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 344,600 shares will be vested within 60 days
from May 15, 1996.
41
<PAGE> 42
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement,
Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C., have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC........................................... 1,500,000
Wessels, Arnold & Henderson, L.L.C. ............................ 1,500,000
---------
Total........................................................... 3,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, the Selling
Stockholders and the Company's counsel and independent auditors. The nature of
the Underwriters' obligations is such that they are committed to purchase all
shares of Common Stock offered hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the offering price set forth on the cover of this Prospectus and
to certain dealers at such price less a concession not in excess of $1.05 per
share. The Underwriters may allow and such dealers may reallow a concession not
in excess of $0.10 per share to certain other brokers and dealers. After the
public offering of the shares, the offering price and other selling terms may be
changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent the Underwriters exercise such option, each of the Underwriters have a
firm commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the table above
bears to the total number of shares of Common Stock offered hereby. The Company
will be obligated, pursuant to the option, to sell shares to the Underwriters to
the extent the option is exercised. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of shares of
Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and is subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments which the Underwriters may be required to make in respect thereof.
The Underwriters have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate approximately 2,000,000 shares of
Common Stock after this offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose
of any shares of Common Stock, options, rights or warrants to acquire shares of
Common Stock, or securities exchangeable for or convertible into shares of
Common Stock, other than shares of Common Stock purchased by such persons
pursuant to the Company's Employee Stock Purchase Plan, owned by them during the
90-day period commencing on the date of this Prospectus. The Company has agreed
that it will not, without the Representatives' prior written consent, offer,
sell or otherwise dispose of any shares of Common Stock, options, rights or
warrants to acquire shares of
42
<PAGE> 43
Common Stock, or securities exchangeable for or convertible into shares of
Common Stock, during such 90-day period except that the Company may grant
additional options under its stock option plans and issue shares of Common Stock
under its Employee Stock Purchase Plan or pursuant to the exercise of
outstanding options and warrants.
In connection with this offering, the Underwriters and certain selling
group members may engage in passive market making transactions in the Company's
Common Stock on the Nasdaq National Market immediately prior to the commencement
of the sale of the shares in this offering, in accordance with Rule 10b-6A under
the Exchange Act. Passive market making consists of displaying bids on the
Nasdaq National Market limited by the bid prices of market makers not connected
with this offering and making purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited in amount to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period prior
to the filing of this Prospectus with the Commission and must be discontinued
when such limit is reached. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
43
<PAGE> 44
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Common Stock offered hereby will be passed upon for the Company and the Selling
Stockholders by Brobeck, Phleger & Harrison LLP, Newport Beach, California. As
of May 15, 1996, members of Brobeck, Phleger & Harrison LLP beneficially owned
8,400 shares of the Company's Common Stock. Certain legal matters relating to
the offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich
& Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of the Company at June 30, 1995 and 1994 and for
each of the three years in the period ended June 30, 1995 included in this
Prospectus and the Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as stated in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), omits certain of the information set forth in the
Registration Statement in accordance with the rules and regulations of the
Commission. Reference is hereby made to the Registration Statement and to the
exhibits thereto for further information with respect to the Company and the
securities offered hereby. Copies of the Registration Statement and the exhibits
thereto are on file at the offices of the Commission and may be obtained upon
payment of the prescribed fee or may be examined without charge at the public
reference facilities of the Commission described below.
The Company is subject to the informational requirements of the Exchange
Act of 1934, as amended, and in accordance therewith files reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facility maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and the following regional offices of the Commission: New York
Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, IL 60661-2511. Copies of such material can also be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed rates. The Company's Common
Stock is quoted on the Nasdaq National Market. Reports, proxy statements and
other information concerning the Company may be inspected at the offices of
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available quarterly reports for the first three quarters of each fiscal
year following the end of each such fiscal quarter.
44
<PAGE> 45
GLOSSARY OF TECHNICAL TERMS
Asynchronous Transfer Mode
("ATM").................. A fast packet data communications service that uses
fixed-length cells for the switching and
transmission of voice, video and data. ATM
typically operates at speeds of 45 Mbps and higher
and can be implemented as a private or public
network service. ATM networking services are
generally faster than Frame Relay services but
require greater bandwidth utilization.
Data communications
services................. The movement of computer-encoded information from
one point to another by means of an electrical
transmission system.
E1......................... Standard digital transmission facilities
transmitting information at 2.048 Mbps.
Frame...................... A packet of digitally encoded information
consisting of three parts: a header that identifies
the sender, the destination, the type of
information contained in the frame and the size of
the frame; the actual information; and a trailer
indicating the end of the frame.
Frame Relay................ A fast packet data communications service that uses
variable-length frames for the switching and
transmission of voice, video and data. Frame Relay
typically operates at speeds ranging from 64Kbps to
T1, or 1.544Mbps, and can be implemented as a
private or public network service.
Kbps....................... Thousand bits per second. A measure of the rate of
data transmission.
Local Area Network
("LAN").................. A high-speed data communications network that is
located in a small geographic area, such as an
office or campus. These networks typically do not
use public carrier service.
Mbps....................... Million bits per second. A measure of the rate of
data transmission.
Packet..................... A self-contained block of data containing control
and user information that is switched and
transmitted across a network.
Protocol................... A set of rules governing communication (and the
exchange of data) between two entities or systems.
SNA........................ Systems Network Architecture. A protocol designed
for communication with IBM computer networks.
Switching.................. The process of interconnecting two devices with a
logical connection across a network, using shared
resources.
T1......................... Standard digital transmission facilities
transmitting information at 1.544 Mbps.
Time Division
Multiplexing............... The sharing of a high-speed line by successively
assigning a given channel to different users at
different times.
X.25....................... A packet switching protocol.
Wide Area Network
("WAN").................. A network spanning a large geographical area with
nodes that span city, state, or national
boundaries. These networks often use public carrier
services.
45
<PAGE> 46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Balance Sheets at June 30, 1994 and 1995 and at March 31, 1996 (unaudited)............ F-3
Statements of Operations for the years ended June 30, 1993, 1994 and 1995 and for the
nine months ended March 31, 1995 and 1996 (unaudited)............................... F-4
Statements of Stockholders' Equity for the years ended June 30, 1993, 1994 and 1995
and for the nine months ended March 31, 1996 (unaudited)............................ F-5
Statements of Cash Flows for the years ended June 30, 1993, 1994 and 1995 and for the
nine months ended March 31, 1995 and 1996 (unaudited)............................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
Board of Directors
ACT Networks, Inc.
We have audited the accompanying balance sheets of ACT Networks, Inc. as of
June 30, 1994 and 1995, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1995. 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 financial position of ACT Networks, Inc. at June
30, 1994 and 1995, and the results of its operations and its cash flows each of
the three years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Woodland Hills, California
August 15, 1995
F-2
<PAGE> 48
ACT NETWORKS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents......................... $ 796,476 $30,546,278 $10,327,767
Short-term investments............................ -- -- 7,076,470
Accounts receivable, less allowances of $57,000,
$63,000 and $65,000, respectively.............. 2,655,768 4,529,210 7,983,417
Accounts receivable from stockholders............. -- 669,160 446,244
Inventory......................................... 1,800,363 4,677,190 7,268,784
Prepaid expenses.................................. 146,409 244,315 496,699
Deposits.......................................... 75,113 68,100 89,000
Deferred income taxes............................. -- 82,176 82,176
Tax credits and grants receivable................. -- -- 514,250
---------- ---------- ----------
Total current assets...................... 5,474,129 40,816,429 34,284,807
Plant, equipment and other improvements:
Machinery and equipment........................... 970,112 1,696,257 2,627,750
Furniture and fixtures............................ 171,428 359,500 361,349
Computer software................................. 242.513 411,438 720,389
Leasehold improvements............................ -- 284,659 543,667
---------- ---------- ----------
1,384,053 2,751,854 4,253,155
Accumulated depreciation and amortization........... 649,273 1,233,003 1,927,736
---------- ---------- ----------
734,780 1,518,851 2,325,419
Goodwill............................................ -- -- 1,955,797
Other assets........................................ 189,296 561,498 464,486
---------- ---------- ----------
Total assets.............................. $6,398,205 $42,896,778 $39,030,509
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 972,116 $1,475,020 $2,649,490
Accrued expenses.................................. 295,268 625,627 320,985
Accrued vacation.................................. 191,628 239,888 281,078
Accrued commissions............................... 92,361 153,656 46,522
Income taxes payable.............................. -- 86,958 270,089
Note payable...................................... -- -- 187,547
---------- ---------- ----------
Total current liabilities................. 1,551,373 2,581,149 3,755,711
Commitments
Stockholders' equity:
Preferred stock, $.01 par value
Authorized shares -- 45,000,000 in 1994 and
1995
Issued and outstanding -- 17,351,666 in 1994
and none in 1995............................. 7,931,000 -- --
Common stock, $.001 par value
Authorized shares -- 40,000,000
Issued and outstanding -- 1,210,767 in 1994,
7,149,830 in 1995 and 7,456,830 at March 31,
1996........................................... 1,211 7,150 7,457
Common stock paid-in capital in excess of par
value.......................................... 785,259 42,662,121 44,058,220
Promon secured deposit............................ (300,000) (45,000) --
Accumulated deficit............................... (3,570,638) (2,308,642) (8,780,876)
Accumulated translation adjustment................ -- -- (10,003)
---------- ---------- ----------
Total stockholders' equity................ 4,846,832 40,315,629 35,274,798
---------- ---------- ----------
Total liabilities and stockholders'
equity.................................. $6,398,205 $42,896,778 $39,030,509
========== ========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 49
ACT NETWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ $6,207,138 $12,653,782 $20,566,247 $14,823,421 $19,299,372
Expenses:
Cost of goods sold..................... 3,184,777 5,939,497 9,244,460 6,592,050 10,020,685
Research and development............... 1,503,774 1,955,260 3,586,230 2,696,181 3,550,015
Sales and marketing.................... 1,777,422 2,942,734 4,784,467 3,382,907 5,068,552
General and administrative............. 1,158,444 1,334,641 1,735,759 1,291,741 2,311,262
Acquired in-process research and
development......................... -- -- -- -- 5,600,000
---------- ---------- ---------- ---------- ----------
7,624,417 12,172,132 19,350,916 13,962,879 26,550,514
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............ (1,417,279) 481,650 1,215,331 860,542 (7,251,142)
Other:
Interest and other income (expense).... 8,356 29,498 252,172 (9,233) 951,250
Interest expense....................... (25,921) (20,747) (183,725) (132,957) (39,345)
Loss due to earthquake................. -- (281,203) -- -- --
---------- ---------- ---------- ---------- ----------
(17,565) (272,452) 68,447 (142,190) 911,905
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes........ (1,434,844) 209,198 1,283,778 718,352 (6,339,237)
Provision for income taxes............... -- -- 21,782 14,000 132,997
---------- ---------- ---------- ---------- ----------
Net income (loss)........................ $(1,434,844) $ 209,198 $1,261,996 $ 704,352 $(6,472,234)
========== ========== ========== ========== ==========
Net income (loss) per share.............. $ (0.52) $ 0.05 $ 0.24 $ 0.15 $ (0.89)
========== ========== ========== ========== ==========
Shares used in computing net income
(loss) per share....................... 2,739,232 3,851,964 5,210,910 4,726,124 7,233,789
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 50
ACT NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK
PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL PROMON ACCUMULATED
------------------------ ------------------ IN EXCESS OF SECURED ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT PAR VALUE DEPOSIT DEFICIT ADJUSTMENT TOTAL
----------- ---------- -------- ------- --------------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
July 1,
1992...... 5,800,000 $3,100,000 1,116,867 $ 1,117 $ 718,623 $ -- $(2,344,992) $ -- $1,474,748
Issuance
of
Series
C
convertible
preferred
stock... 1,666,666 500,000 -- -- -- -- -- -- 500,000
Issuance
of
Series
D
convertible
preferred
stock... 5,315,000 2,126,000 -- -- -- -- -- -- 2,126,000
Exercise
of
options
to
purchase
common
stock... -- -- 3,500 3 2,447 -- -- -- 2,450
Issuance
of
warrants
to
purchase
common
stock.. -- -- -- -- 71,000 -- -- -- 71,000
Net
loss... -- -- -- -- -- -- (1,434,844 ) -- (1,434,844)
----------- ---------- -------- ------- --------------- --------- ----------- ----------- ----------
Balance at
June 30,
1993..... 12,781,666 5,726,000 1,120,367 1,120 792,070 -- (3,779,836 ) -- 2,739,354
Issuance
of
Series
E
convertible
preferred
stock... 4,570,000 2,205,000 -- -- (70,000) -- -- -- 2,135,000
Deposit
secured
by
Series
E
preferred
stock.. -- -- -- -- -- (300,000) -- -- (300,000)
Exercise
of
options
to
purchase
common
stock.. -- -- 81,829 82 57,198 -- -- -- 57,280
Exercise
of
warrants
to
purchase
common
stock.. -- -- 8,571 9 5,991 -- -- -- 6,000
Net
income... -- -- -- -- -- -- 209,198 -- 209,198
----------- ---------- -------- ------- --------------- --------- ----------- ----------- ----------
Balance at
June 30,
1994..... 17,351,666 7,931,000 1,210,767 1,211 785,259 (300,000) (3,570,638 ) -- 4,846,832
Amortization
of deposit
secured
by
Series
E
preferred
stock... -- -- -- -- -- 255,000 -- -- 255,000
Exercise
of
options
to
purchase
common
stock... -- -- 167,740 168 117,512 -- -- -- 117,680
Exercise
of
warrants
to
purchase
common
stock.. -- -- 144,907 145 33,255 -- -- -- 33,400
Conversion
of
convertible
preferred
stock
to
common
stock... (17,351,666) (7,931,000) 2,721,416 2,721 7,928,279 -- -- -- --
Initial
public
offering... -- -- 2,905,000 2,905 33,797,816 -- -- -- 33,800,721
Net
income... -- -- -- -- -- -- 1,261,996 -- 1,261,996
----------- ---------- -------- ------- --------------- --------- ----------- ----------- ----------
Balance at
June 30,
1995..... -- -- 7,149,830 7,150 42,662,121 (45,000) (2,308,642 ) -- 40,315,629
Exercise
of
options
and
warrants
to
purchase
common
stock... -- -- 130,635 131 115,424 -- -- -- 115,555
Issuance
of
stock
for
purchase
of
Presticom
Inc.... -- -- 176,365 176 1,280,675 -- -- -- 1,280,851
Amortization
of deposit
secured
by
Series
E
preferred
stock... -- -- -- -- -- 45,000 -- -- 45,000
Translation
adjustment... -- -- -- -- -- -- -- (10,003) (10,003)
Net
loss... -- -- -- -- -- -- (6,472,234 ) -- (6,472,234)
----------- ---------- -------- ------- --------------- --------- ----------- ----------- ----------
Balance
at
March
31,
1996 -- $ -- 7,456,830 $ 7,457 $44,058,220 $ -- $(8,780,876) $ (10,003) $35,274,798
=========== ========== ======== ======= ============== ========= ============ ============ ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 51
ACT NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $(1,434,844) $ 209,198 $ 1,261,996 $ 704,352 $(6,472,233)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization.................... 195,204 269,979 583,730 421,415 792,797
Write-off of in-process research and
development.................................... -- -- -- -- 5,600,000
Provision for allowances on accounts
receivable..................................... 241,770 27,193 6,492 -- --
Provision (benefit) for deferred taxes........... -- -- (82,176) -- --
Loss on equipment disposals...................... -- 37,853 -- -- --
Amortization of shareholder research and
development deposit............................ -- -- 255,000 225,000 45,000
Changes in operating assets and liabilities:
Accounts receivable............................ (833,526) (982,110) (2,549,094) (1,175,376) (2,201,182)
Inventory...................................... (388,934) (789,338) (2,876,827) (2,172,820) (2,240,628)
Prepaid expenses............................... 71,401 (129,917) (97,906) (18,109) (776,803)
Deposits....................................... 17,254 (54,109) 7,013 46,440 --
Accounts payable and accrued expenses.......... 131,928 481,397 1,029,776 720,532 (263,982)
---------- ---------- ------------ ----------- ----------
Net cash used in operations........................ (1,999,747) (929,854) (2,461,996) (1,248,566) (5,517,031)
INVESTING ACTIVITIES
Increase in short-term investments................. -- -- -- -- (6,596,398)
Purchase of plant, equipment and other fixed
assets........................................... (215,572) (610,601) (1,367,801) (1,025,662) (1,388,199)
Acquisition of Presticom Inc. net of cash
acquired......................................... -- -- -- -- (6,880,470)
Proceeds from sale of equipment and other.......... 1,000 -- -- -- --
Other assets....................................... -- (156,067) (372,202) (633,251) 97,012
---------- ---------- ------------ ----------- ----------
Net cash used in investing activities.............. (214,572) (766,668) (1,740,003) (1,658,913) (14,768,055)
FINANCING ACTIVITIES
Stock warrants and options....................... 73,450 63,280 151,080 128,319 115,801
Issuance of preferred stock, net of offering
costs............................................ 2,626,000 2,135,000 -- -- --
Shareholder secured research and development
deposit.......................................... -- (300,000) -- -- --
Borrowings on line of credit....................... -- -- 2,850,000 3,250,000 75,675
Repayments on line of credit....................... -- -- (2,850,000) (2,150,000) --
Proceeds from note payable......................... 400,000 -- -- 1,100,000 --
Repayment of note payable.......................... (581,978) -- -- -- (124,900)
Principal payments on capital lease................ (22,189) (27,424) -- -- --
Net proceeds from stock offerings.................. -- -- 33,800,721 -- --
---------- ---------- ------------ ----------- ----------
Net cash provided by financing activities.......... 2,495,283 1,870,856 33,951,801 2,328,319 66,576
---------- ---------- ------------ ----------- ----------
Net increase (decrease) in cash.................... 280,964 174,334 29,749,802 (579,160) (20,218,510)
Cash and cash equivalents at beginning of year..... 341,178 622,142 796,476 796,476 30,546,278
---------- ---------- ------------ ----------- ----------
Cash and cash equivalents at end of year........... $ 622,142 $ 796,476 $ 30,546,278 $ 217,316 $10,327,768
============ ============ ============= ============ ============
Cash and cash equivalents paid during the year for:
Interest......................................... $ 72,659 $ 20,747 $ 183,725 $ 141,031 $ 7,575
Income taxes..................................... $ 800 $ -- $ 17,000 $ 14,000 $ 12,012
Non-cash investing and financing activities:
Acquisition of Presticom Inc.
Fair market value of assets (including
goodwill) acquired........................... $ -- $ -- $ -- $ -- $3,856,115
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.................................. -- -- -- -- (407,025)
---------- ---------- ------------ ----------- ----------
Cash paid for acquisition of Presticom,
Inc..................................... $ -- $ -- $ -- $ -- $6,880,470
============ ============ ============= ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 52
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
ACT Networks, Inc. (formerly Advanced Compression Technology, Inc.) (the
Company) was incorporated on May 15, 1987. The Company develops, manufactures
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. Intercompany accounts and transactions have
been eliminated.
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 could differ from those estimates.
Cash Equivalents and Short Term Investments
Short-term investments that are part of the Company's cash management
portfolio are classified as cash equivalents and are carried at amortized cost.
These investments are highly liquid, are of limited credit risk and have
original maturities of three months or less. The carrying amount of cash
equivalents approximates market. Short term investments consist primarily of
commercial paper and corporate notes and are considered available for sale under
Statement of Financial Accounting Standards No. 115. The investments generally
mature within six months and are carried at cost which approximates fair value.
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, 1994, 1995 and March 31, 1996 is $1,712,973, $3,256,939
and $4,659,715, 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.
The three largest accounts receivable from individual customers represented
50.2%, 8.1% and 6.3% at June 30, 1994, 18.1%, 12.7% and 8.2% at June 30, 1995
and 16.8%, 16.8% and 6.6% at March 31, 1996 of total accounts receivable,
respectively.
Sales includes amounts to certain individual customers that exceed 10% of
total sales. Sales to two customers represented 15.4% and 12.9% of total sales
for 1993, sales to one customer represented 23% of total sales for 1994, sales
to one customer represented 14% of total sales for 1995, sales to two customers
represented 17.5% and 10.2% of total sales for the nine months ended March 31,
1995 and sales to two customers represented 19.9% and 11.7% of total sales for
the nine months ended March 31, 1996.
F-7
<PAGE> 53
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
The Company's sales by geographic area are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
North America............... $2,191,478 $3,841,546 $6,907,360 $4,818,097 $8,467,067
Latin America............... 1,765,900 4,397,680 5,317,735 3,613,017 5,174,230
Europe...................... 655,326 1,073,218 2,404,614 1,680,852 2,220,866
Asia Pacific................ 1,594,434 3,341,338 5,936,538 4,711,455 3,437,209
--------- ---------- ---------- ---------- ----------
Total....................... $6,207,138 $12,653,782 $20,566,247 $14,823,421 $19,299,372
========= ========== ========== ========== ==========
</TABLE>
Revenue Recognition
The Company recognizes revenue 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.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market and consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Purchased parts.............................. $ 543,602 $ 2,177,590 $ 1,879,420
Sub-assemblies and finished goods............ 1,256,761 2,499,600 5,389,364
----------- ----------- -----------
$ 1,800,363 $ 4,677,190 $ 7,268,784
========= ========= =========
</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
Effective July 1, 1993 the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards (SFAS)
No. 109, 'Accounting for Income Taxes'. Under this method, 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. The adoption of SFAS No. 109 had no material effect on the Company.
Prior to the adoption of SFAS No. 109, income tax expense was determined using
the deferred method.
F-8
<PAGE> 54
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
Credits and Grants
The Company receives foreign credits and grants from Canada and the
Province of Quebec related to research and development expenditures made by its
Canadian subsidiary. These amounts are reflected as a reduction of research and
development expense in the Company's Statement of Operations. Amounts receivable
as of March 31, 1996 of such credits and grants amounted to $514,250. For the
nine months ended March 31, 1996, $78,400 of these credits and grants were
reflected as a reduction of research and development expense in the accompanying
statement of operations.
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 initial public offering.
Net income (loss) per share for the years ended June 30, 1993, 1994 and
1995 under "Accounting Principles Bulletin No. 15" (APB No. 15) which excludes
the cheap stock adjustment pursuant to the SEC Staff Accounting Bulletins and
excluding the convertible preferred stock for the year ended June 30, 1993
because it is anti-dilutive are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) per share......................... $ (1.27) $ .06 $ .24
========= ========== ==========
Shares used in computing net income (loss) per
share............................................. 1,128,284 3,620,767 5,303,417
========= ========= =========
</TABLE>
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 footnote 9) 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. The Company had no such
debt
F-9
<PAGE> 55
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
during the year ended June 30, 1994, therefore supplemental calculations of
earnings per share are not applicable.
Reclassification
Certain prior year balances have been reclassified to conform with the
current year presentation.
Interim Financial Data
The unaudited financial statements for the nine months ended March 31, 1995
and 1996 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to state fairly the
financial information set forth therein, in accordance with generally accepted
accounting principles. Income taxes for the nine months ended March 31, 1995 and
1996 are based on the estimated effective annual rate applicable for the full
year.
The results of operations for the nine months ended March 31, 1996 are not
necessarily indicative of results to be expected for the full fiscal year.
2. LINE OF CREDIT AND NOTES PAYABLE
The Company has two loan and security agreements with a bank which provide
for aggregate borrowings from the bank up to a maximum of $3,000,000. Under one
agreement, the Company may borrow up to the lesser of $3,000,000 or 75% of
eligible accounts receivable from customers within the United States (the
revolving line of credit). Under the second agreement the Company may borrow up
to the lesser of $1,500,000 or 90% of eligible accounts receivable from
customers outside the United States, plus 70% of eligible inventory provided
these borrowings are guaranteed by the Export-Import Bank of the United States
(Exim Bank) pursuant to the guarantee agreement between the bank and the Exim
Bank (the Exim line of credit). However, the total amount outstanding under the
revolving line of credit and Exim line of credit is limited to $3,000,000. The
revolving line of credit and Exim line of credit expire on November 5, 1995. At
June 30, 1995, there were no outstanding balances under any of the lines of
credit. Interest is payable monthly at a rate equal to the bank's prime rate (9%
at June 30, 1995) plus 1.0% on the Exim line of credit, the bank's prime rate
plus 1.5% on the revolving line of credit.
The loan and security agreement provide 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, 1995, no letters of credit were outstanding.
The loan and security agreements 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.
F-10
<PAGE> 56
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
3. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $ 91,307
State............................................ -- -- 18,659
-------- -------- --------
-- 109,966
Deferred:
Federal.......................................... -- -- (88,184)
State............................................ -- -- --
-------- -------- --------
-- (88,184)
-------- -------- --------
$ -- $ -- $ 21,782
======== ======== ========
</TABLE>
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,
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate............................. (34 )% 34 % 34 %
Net operating loss not benefitted............................. 34 -- --
Change in valuation allowance................................. -- (34 ) (39 )
State income taxes............................................ -- -- 5
Other......................................................... -- -- 2
---- ---- ----
0 % 0 % 2 %
==== ==== ====
</TABLE>
There is no tax provision in 1993 because the Company incurred a loss for
the year. 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.
F-11
<PAGE> 57
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
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,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Technology deposit.............................. $ -- $ 110,415
Allowance for losses on receivables............. 24,489 24,219
Vacation accruals............................... 76,319 83,088
Depreciation.................................... 22,508 76,507
Inventory valuation allowance................... 83,569 39,986
Net operating loss carryforwards................ 1,130,345 568,845
Research and development credits................ 538,890 497,331
AMT credits..................................... -- 82,176
Rent holiday.................................... -- 25,980
Other........................................... 23,938 31,658
----------- -----------
Total deferred tax assets............... 1,900,058 1,540,205
Deferred tax liabilities:
Software development costs...................... -- (30,459)
----------- -----------
Net deferred tax assets........................... 1,900,058 1,509,746
Valuation allowance............................... (1,900,058) (1,427,570)
----------- -----------
$ -- $ 82,176
=========== ===========
</TABLE>
The valuation allowance increased by $400,000 during the year ended June
30, 1994. At June 30, 1995, the Company has net operating loss carryforwards for
federal tax and state tax purposes of approximately $1,673,000 and $-0-,
respectively, which expire in 2002 through 2009. The Company has research and
development credit carryforwards of $301,000 and $196,000 federal and state tax
purposes, respectively, that expire through 2009. As a result of certain changes
in ownership of the Company under IRC section 382, the use of certain net
operating loss carryforwards and research and development carryforwards are
limited annually to approximately $1,200,000 and $400,000, respectively.
4. STOCK OPTIONS
At June 30, 1995, the Company has a 1987 stock option plan and a 1993 stock
option plan which provide for granting stock options to key employees,
directors, outside consultants and independent contractors. At June 30, 1995,
the Company has authorized a total of 1,478,571 shares for issuance under the
1987 and 1993 stock option plans, of which 510,243 shares remain available for
grant at June 30, 1995.
Options granted under the 1987 and 1993 stock option plans carry an
exercise price of not less than 85% of the 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, in general,
the shares underlying the options become vested at 24% of the total grant after
the completion of the first 12 full months of employment and 2% per month
thereafter.
F-12
<PAGE> 58
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
In October 1994, the Company adopted the 1995 stock option bonus program
(the program). The program provided for granting specific option awards to
certain individuals based on the achievement of certain Company performance
goals for the year ended June 30, 1995. Options to purchase an aggregate maximum
of 63,989 shares of common stock were granted under the program.
The following is a summary of all stock option activity for the three years
ended June 30, 1995 and the six months ended March 31, 1996:
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER OF
PER SHARE SHARES
-------------- ---------
<S> <C> <C>
Outstanding at July 1, 1992................................ $ .07-.70 579,857
Granted.................................................. .70 82,143
Canceled................................................. .70 (31,500)
Exercised................................................ .70 (3,500)
---------
Outstanding at June 30, 1993............................... .07-.70 627,000
Granted.................................................. .70-1.05 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.................................................. .70-17.25 972,308
Canceled................................................. .70-17.25 (21,535)
Exercised................................................ .70-16.50 (128,485)
---------
Outstanding at March 31, 1996.............................. $.07-17.25 1,472,173
=========
</TABLE>
At June 30, 1993, 1994 and 1995, options for 526,191, 579,928 and 649,885
shares were exercisable, respectively. At June 30, 1995, 1,160,128 shares are
reserved for issuance upon the exercise of outstanding options and options
available for grant. 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. At March 31,
1996, the Company has authorized a total of 1,780,844 shares of common stock for
issuance under the 1995 Plan and 150,000 shares of common stock under the
employee stock purchase plan. At March 31, 1996 approximately 180,186 shares
remain available for grant and 1,652,359 are reserved for issuance upon the
exercise of outstanding options and options available for grant under the 1995
Plan.
5. 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
F-13
<PAGE> 59
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
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 are exercisable for a five year period. On April 5, 1991, warrants
to purchase 270,000 shares of common stock were exercised. During the year ended
June 30, 1995, warrants to purchase 144,907 shares of common stock were
exercised and the remaining warrants were canceled in consideration of the
exercise.
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 warrant expires on October 19, 1997.
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 shares. These warrants expire in
March 1998.
The following table summarizes the Company's common stock reserved for
issuance upon the exercise of the warrants outstanding at June 30, 1995 and
March 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------
JUNE
EXERCISE EXPIRATION 30, MARCH 31,
WARRANT DATE: PRICE DATE 1995 1996
------------ -------- ------------- ------- ---------
<S> <C> <C> <C> <C>
March 23, 1993.............. $ 3.50 October 1997 4,286 4,286
March 31, 1993.............. 7.00 March 1998 14,286 --
------ -----
18,572 4,286
====== =====
</TABLE>
6. PRODUCT DEVELOPMENT AGREEMENT
In connection with the exercise of warrants to purchase 4,570,000 shares of
Series E preferred stock in 1994, the Company executed a product development
agreement with Promon Technical Services, Inc. (PTS) a company under the control
of Promon International, Inc., the warrant holder and a significant stockholder.
Under the terms of the agreement, the Company made a deposit for future
development funding of a new product. This deposit is fully refundable should
the Company not approve the related product development design specifications or
should PTS fail to develop the product according to approved design
specifications. The deposit is secured by shares of the Company's stock owned by
Promon International, Inc. held in escrow. The payment was made from the
proceeds of the issuance of 4,570,000 shares of Series E preferred stock to
Promon International, Inc. upon the exercise of certain warrants. The deemed
fair value of the contracted development effort was estimated to be
approximately $350,000. Of the total $500,000 payment, $350,000 was for the
development contract and $150,000 was a reduction of the proceeds received from
the preferred stock issuance as an inducement for exercising the warrants. 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 $225,000 of the $300,000 to research and development
expense based on the efforts expended in that period.
F-14
<PAGE> 60
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
7. 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 as of June 30, 1995 are as follows:
<TABLE>
<CAPTION>
JUNE 30,
FISCAL YEAR ENDED JUNE 30, 1995
-------------------------- ----------
<S> <C>
1996............................................................. $ 476,232
1997............................................................. 406,885
1998............................................................. 396,396
1999............................................................. 396,396
2000............................................................. --
----------
$1,675,909
==========
</TABLE>
Rental expense under operating leases was $219,000, $240,000, and $537,000
for the years ended June 30, 1993, 1994 and 1995 respectively.
8. 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 employees contribution, at its discretion, subject to certain
limitations. The Company made no contributions to the Plan during the years
ended June 30, 1994 and 1995.
9. STOCKHOLDERS' EQUITY
In March 1995, the Board approved the Company's "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 this offering all previously outstanding preferred
stock was automatically converted into common stock based on the appropriate
conversion ratios. At March 31, 1996, the Company does not have authorized
preferred stock.
F-15
<PAGE> 61
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
10. 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, 1995
Net sales..................................... $4,411 $4,877 $5,535 $5,743
Gross profit.................................. 2,415 2,726 3,090 3,091
Net income.................................... 171 216 317 558
Net income per share.................. $ 0.04 $ 0.05 $ 0.07 $ 0.09
Year ended
June 30, 1994
Net sales..................................... $2,471 $2,816 $3,460 $3,907
Gross profit.................................. 1,276 1,523 1,832 2,084
Net income (loss)............................. 17 172 (76) 97
Net income (loss) per share........... $ 0.01 $ 0.05 $(0.02) $ 0.02
</TABLE>
11. BUSINESS ACQUISITION
On November 30 1995, ACT Networks, Inc. and Canada Inc., a wholly-owned
subsidiary of the Company, acquired (the "Acquisition") all the issued and
outstanding shares of Presticom Inc., a Canadian corporation ("Presticom").
Presticom is a developer of multiprotocol frame relay access devices with
expertise in the SNA environment. The aggregate purchase price (excluding
acquisition costs of approximately $600,000) paid by the Company was
approximately $8,568,346 consisting of $7,287,495 paid in cash and the issuance
of 176,365 shares of common stock of the Company with an estimated fair market
value of $1,280,851, representing a discount from the quoted market price at the
date of acquisition due to certain trading restrictions placed on the stock
pursuant to the agreement
The acquisition was accounted for as a purchase and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of acquisition. The purchase price plus costs directly
attributable to the completion of the acquisition have been allocated to the
assets and liabilities acquired. Approximately $5,600,000 of the total purchase
price represented the value of in-process research and development that had not
yet reached technological feasibility and was charged to the Company's
operations.
The Company's consolidated results of operations include the operating
results of Presticom from the acquisition date. The following unaudited pro
forma information combines the consolidated results of operations of the Company
and Presticom as if the acquisition had occurred on July 1, 1995 and 1994.
Adjustments have been made to reflect the amortization of goodwill identified in
the purchase price allocation, the reduction in interest income earned or
increase in interest expense incurred due to the decrease in cash position or
increased borrowings resulting from the cash used as part of the acquisition
consideration, and the issuance of common stock as part of the acquisition
consideration. The pro forma information is presented for illustrative purposes
only, and is not necessarily indicative
F-16
<PAGE> 62
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
of what the actual results of operations would have been during such periods or
representative of future operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 JUNE 30, 1995
----------------- -----------------
<S> <C> <C>
Net sales........................................ $20,177,453 $22,567,115
Net income (loss)................................ (1,534,523) 303,278
Net income (loss) per share...................... (0.21) 0.06
</TABLE>
The pro forma information presented above does not reflect the write off of
in-process research and development costs of $5,600,000 which was included in
the actual operating results for the nine months ended March 31, 1996.
The following unaudited pro forma condensed combining balance sheet as of
September 30, 1995, and the unaudited pro forma condensed combining statements
of operations of the Company and Presticom Inc. (Presticom) for the year ended
June 30, 1995, and the three months ended September 30, 1995, have been prepared
to illustrate the effect of the Acquisition, which is being accounted for as a
purchase, as though the Acquisition had occurred on September 30, 1995, for
purposes of the pro forma balance sheet and as of July 1, 1994, and July 1,
1995, for purposes of the pro forma statements of operations. The pro forma
adjustments and the assumptions on which they are based are described in the
accompanying Notes to the Unaudited Pro Forma Condensed Combining Financial
Statements.
The pro forma condensed combining financial statements are presented for
illustrative purposes only and are not necessarily indicative of the
consolidated financial position or consolidated results of operations of the
Company that would have been reported had the Acquisition occurred on the dates
indicated, nor do they represent a forecast of the consolidated financial
position of the Company at any future date or the consolidated results of
operations of the Company for any future period. Furthermore, no effect has been
given in the unaudited pro forma condensed combining statements of operations
for operating and synergistic benefits that may be realized by virtue of the
Acquisition. Amounts allocated to the Presticom assets and liabilities, as
reflected in the accompanying pro forma financial statements, are preliminary.
The unaudited pro forma condensed combining financial statements, including the
Notes thereto should be read in conjunction with the historical consolidated
financial statements of the Company and Presticom, which are, respectively,
incorporated herein by reference.
F-17
<PAGE> 63
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
PRO FORMA CONDENSED COMBINING BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ACT PRO FORMA PRO FORMA
NETWORKS PRESTICOM ADJUSTMENTS CONSOLIDATED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $27,361,793 $ 666,235(1) $(7,887,495) $20,140,533
Accounts receivable................ 5,695,239 1,210,897(2) (20,000) 6,886,136
Accounts receivable from
stockholder..................... 669,160 -- -- 669,160
Inventory.......................... 6,756,863 345,431(2) (40,000) 7,062,294
Prepaid expense and deposits....... 475,841 18,349 -- 494,190
Deferred tax asset................. 82,176 -- -- 82,176
----------- ---------- ----------- -----------
Total current assets....... 41,041,072 2,240,912 (7,947,495) 35,334,489
Net property, plant and equipment.... 1,932,766 107,188 -- 2,039,954
Other assets......................... 511,347 -- -- 511,347
Acquired in-process research and
development........................ -- --(2) 5,600,000 --
-- --(3) (5,600,000) --
Goodwill............................. -- --(2) 1,920,567 1,920,567
----------- ---------- ----------- -----------
Total assets............... $43,485,185 $2,348,100 $(6,026,928) $39,806,357
=========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................... $ 2,374,136 $ 264,427 $ $ 2,638,563
Accrued expenses................... 908,833 --(2) 40,000 948,833
Income taxes payable............... 86,958 94,516 -- 181,474
----------- ---------- ----------- -----------
Total current
liabilities.............. 3,369,927 358,943 40,000 3,768,870
Long-term debt....................... -- 241,378 -- 241,378
Stockholders' equity:
Contributed capital................ 42,679,403 1,205,584(1) 1,280,851 43,960,254
-- --(2) (1,205,584) --
Promon secured capital............. (45,000) -- -- (45,000)
Accumulated deficit................ (2,519,145) 542,195(3) (5,600,000) (8,119,145)
-- --(2) (542,195) --
Total stockholders'
equity................... 40,115,258 1,747,779 (6,066,928) 35,796,109
----------- ---------- ----------- -----------
Total liabilities and
stockholders' equity..... $43,485,185 $2,348,100 $(6,026,928) $39,806,357
=========== ========== =========== ===========
</TABLE>
See accompanying notes and adjustments to pro forma financial statements.
F-18
<PAGE> 64
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
PRO FORMA ADJUSTMENTS TO CONDENSED COMBINING PRO FORMA BALANCE SHEET
1) Reflects the reductions in cash and issuance of common stock for the
purchase of all the outstanding shares of Presticom Inc.
<TABLE>
<S> <C>
Cash............................................................. $7,287,495
Common stock..................................................... 1,280,851
----------
Total purchase price............................................. 8,568,346
Cash paid for acquisition costs.................................. 600,000
----------
$9,168,346
==========
</TABLE>
2) Reflects the preliminary allocation of the purchase price, based on
estimated fair values, to the historical Presticom Inc. balance sheet as
follows:
<TABLE>
<S> <C>
Acquired in-process research and development..................... $5,600,000
Goodwill......................................................... 1,920,567
Carrying amount of inventory..................................... (40,000)
Carrying amount of allowance for bad debt........................ (20,000)
Accrued liabilities.............................................. (40,000)
Assets and liabilities at book value which approximates market... 1,747,779
----------
$9,168,346
==========
</TABLE>
3) Reflects the one-time write-off of $5,600,000 of acquired in-process
research and development identified in the purchase price allocation.
F-19
<PAGE> 65
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
ACT PRO FORMA PRO FORMA
NETWORKS PRESTICOM ADJUSTMENTS CONSOLIDATED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues and sales..................... $20,566,247 $2,000,868 -- $22,567,115
Cost and expenses:
Cost of goods sold................... 9,244,460 677,382 -- 9,921,842
Research and development............. 3,586,230 242,784 -- 3,829,014
Sales and marketing.................. 4,784,467 795,064 -- 5,579,531
General and administrative........... 1,735,759 233,892(1) $ 274,367 2,244,018
----------- ---------- ----------- -----------
19,350,916 1,949,122 274,367 21,574,405
Income (loss) from continuing
operations........................... 1,215,331 51,746 (274,367) 992,710
----------- ---------- ----------- -----------
Other:
Interest & other income.............. 252,170 22,733(2) (73,617) 201,286
Interest expense..................... (183,727) --(2) (657,291) (841,018)
----------- ---------- ----------- -----------
Income (loss) before taxes............. 1,283,774 74,479 (1,005,275) 352,978
Provision for income taxes............. 21,782 27,918 -- 49,700
----------- ---------- ----------- -----------
Net income (loss)...................... $ 1,261,992 $ 46,561 $(1,005,275) $ 303,278
=========== ========== =========== ===========
Net earnings (loss) per share.......... $ 0.24 $ -- $ -- $ 0.06
Average shares outstanding............. 5,210,910 (3) 176,365 5,387,275
</TABLE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ACT PRO FORMA PRO FORMA
NETWORKS PRESTICOM ADJUSTMENTS CONSOLIDATED
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues and sales......................... $5,101,782 $ 471,632 $ -- $5,573,414
Costs and expenses:
Cost of good sold........................ 2,642,331 169,427 -- 2,811,758
Research and development................. 1,037,496 26,227 -- 1,063,723
Sales and marketing...................... 1,406,039 129,836 -- 1,535,875
General and administrative............... 600,218 63,330(1) 68,592 732,140
---------- --------- ----------- ------------
5,686,084 388,820 68,592 6,143,496
Income (loss) from continuing operations... (584,302) 82,812 (68,592) (570,082)
---------- --------- ----------- ------------
Other:
Interest and other income 373,800 4,966(2) (110,425) 268,341
---------- --------- ----------- ------------
Income (loss) before taxes............... (210,502) 87,778 (179,017) (301,741)
Provision for income taxes............... -- (17,446) -- (17,446)
---------- --------- ----------- ------------
Net income (loss).......................... $ (210,502) $ 105,224 $(179,017) $ (284,295)
========= ======== ========= ==========
Net loss per share......................... $ (0.03) $ -- $ -- $ (0.04)
Average shares outstanding................. 7,734,957 (3) 176,365 7,911,322
</TABLE>
See accompanying notes and adjustments to pro forma financial statements.
F-20
<PAGE> 66
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
PRO FORMA ADJUSTMENTS TO CONDENSED COMBINING
PRO FORMA INCOME STATEMENT
1) Reflects the amortization of goodwill identified in the purchase price
allocation.
2) Reflects lower interest income earned and/or increased interest expense
due to change in cash position as a result of the Acquisition.
3) Reflects the issuance of additional common stock to purchase Presticom
Inc.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS
The unaudited pro forma combining financial statements and related notes
give effect to the Acquisition as a purchase. The unaudited combined pro forma
balance sheet assumes that the Acquisition was completed as of September 30,
1995, and the unaudited pro forma combined statements of operations assume that
the Acquisition was completed on July 1, 1994, for the year ended June 30, 1995,
and July 1, 1995, for the three months ended September 30, 1995.
All interim financial data of the Company and Presticom Inc. (Presticom),
respectively, used to develop the unaudited pro forma combining balance sheet
and restatements of operations is unaudited, but in the opinions of the Company
and Presticom, respectively, reflect all adjustments necessary (consisting only
of normal recurring entries) for a fair presentation thereof. However, it should
be understood that accounting measurements at interim dates may be less precise
than at year end.
The unaudited pro forma combined statements of operations are not
necessarily indicative of operating results which would have been achieved had
the Acquisition been consummated as of July 1, 1994, or July 1, 1995, and should
not be construed as representative of future operations.
The preliminary allocation of the purchase price among identifiable
tangible and intangible assets, as reflected in the accompanying pro forma
financial statements, was based on an analysis of the estimated fair value of
those assets. Specifically, acquired in-process research and development was
analyzed through interviews and analysis of data concerning each Presticom
project in development. Expected future cash flows of the developmental projects
were discounted to present value taking into account risks associated with the
inherent difficulties and uncertainties in completing the projects, and thereby
achieving technological feasibility, and the risks related to the viability of
the potential changes in future target markets. The Company's expected
post-acquisition business strategies were considered as they relate to
Presticom's current products and projects in development. Presticom's primary
project in development, BCX Netperformer Series, represents a starting point of
continued development for the combined company, which will require substantial
efforts to attain the functionality and reliability of the underlying products
to ultimately reach its intended target market.
The above analysis resulted in approximately $5,600,000 for acquired
in-process research and development. Under generally accepted accounting
principles, acquired in-process research and development will be expensed
immediately after the Acquisition is completed.
F-21
<PAGE> 67
ACT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
Using the same methodology, developed technology was analyzed. Expected
future cash flows of the developed technology were discounted taking into
account risks related to the characteristics and application of each product,
existing and future markets, and assessments of the life cycle stage of each
product. This analysis resulted in an estimated value of $590,000 of developed
technology, which has reached technological feasibility and therefore is
capitalizable. This amount has been included in Goodwill. The amount of purchase
price allocated to developed technology resulted is a smaller amount than that
allocated to acquired in-process research and development due to the relatively
shorter life remaining in those products.
Goodwill was also identified in this process. The Goodwill will be
amortized over seven years.
For the purposes of the Unaudited Pro Forma Condensed Combining Financial
Statements, a purchase price of $8,568,399 was allocated to Presticom's
September 30, 1995, balance sheet. The purchase price assumes (i) the payment of
$7,287,495 in cash and (ii) the issuance of 176,365 shares of the Company's
Common Stock with an estimated fair market value of $1,280,851, all in exchange
for all outstanding Presticom Capital Stock. The estimated fair market value of
the Company's common stock represents the quoted market price of $10.375
discounted 30% due to certain restrictions on trading such stock pursuant to the
Acquisition Agreement. The purchase price allocation assumes the payment of
approximately $600,000 in fees and expenses related to the Acquisition.
The Unaudited Pro Forma Condensed Combining statements of operations for
the year ended June 30, 1995, and for the three months ended September 30, 1995,
do not include the estimated $5,600,000 write-off of acquired in-process
research and development as it is a material non-recurring charge. The write-off
of purchased in-process research and development will be included in the actual
consolidated statement of operations of the Company in the fiscal quarter ending
December 31, 1995.
F-22
<PAGE> 68
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 5
The Company........................... 14
Use of Proceeds....................... 14
Price Range of Common Stock........... 15
Dividend Policy....................... 15
Capitalization........................ 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 26
Management............................ 37
Principal and Selling Stockholders.... 40
Underwriting.......................... 42
Legal Matters......................... 44
Experts............................... 44
Additional Information................ 44
Glossary of Technical Terms........... 45
Index to Financial Statements......... F-1
</TABLE>
UNTIL JULY 7, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,000,000 SHARES
LOGO
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
WESSELS, ARNOLD
& HENDERSON
JUNE 12, 1996
- ------------------------------------------------------
- ------------------------------------------------------
