<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25740
ACT NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0396887
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
188 CAMINO RUIZ, CAMARILLO, CALIFORNIA 93012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 388-2474
FORMER NAME, FORMER ADDRESS AND FORMER THREE MONTHS,
IF CHANGED SINCE LAST REPORT: Not Applicable
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATED BY A CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13, OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
AS OF NOVEMBER 8, 1996, THERE WERE 9,141,065 SHARES OF COMMON STOCK OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1996 and June 30, 1996...................... 3
Condensed Consolidated Statements of Operations
for the Three Month Periods Ended
September 30, 1996 and 1995............................... 4
Condensed Consolidated Statements
of Cash Flows for the Three Month Periods Ended
September 30, 1996 and 1995............................... 5
Notes to Condensed Consolidated
Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 7
PART II. OTHER INFORMATION
Item 1 Legal Proceedings................................................. 11
Item 2 Changes in Securities............................................. 11
Item 3 Defaults upon Senior Securities................................... 11
Item 4 Submission of Matters to a Vote of Securityholders................ 11
Item 5 Other Information. Risk Factors.................................. 11
Item 6. Exhibits and Reports on Form 8-K.................................. 18
SIGNATURE................................................................................. 21
EXHIBIT INDEX............................................................................. 22
</TABLE>
2
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACT NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
--------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 73,098,232 $ 70,374,310
Accounts receivable, less allowances of $287,000
in September and June 9,351,958 9,656,679
Accounts receivable from stockholder 208,995 205,274
Inventory 8,302,441 7,409,459
Prepaid expenses 844,091 599,765
Deposits 73,629 65,659
--------------------------------
Total current assets 91,879,346 88,311,146
Plant, equipment and other improvements:
Machinery and equipment 3,559,090 3,017,720
Furniture and fixtures 380,464 379,386
Computer software 871,384 801,643
Leasehold improvements 533,959 528,527
--------------------------------
5,344,897 4,727,276
Accumulated depreciation and amortization 2,559,665 2,248,926
--------------------------------
2,785,232 2,478,350
Goodwill 1,809,112 1,882,455
Other assets 1,078,370 1,178,565
--------------------------------
Total assets $ 97,552,060 $ 93,850,516
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,113,469 $ 2,121,933
Accrued expenses 785,026 639,746
Accrued vacation 353,599 334,635
Accrued commissions 126,255 143,243
Income taxes payable 1,516,752 245,241
Deferred income taxes 79,641 78,803
--------------------------------
Total current liabilities 5,974,742 3,563,601
Long-term debt 53,160 147,294
Stockholders' equity:
Common stock and additional paid-in capital;
$.001 par value:
Authorized - 40,000,000
Issued and outstanding - 9,130,516 in September
and 9,117,329 in June 98,228,717 98,175,394
Accumulated deficit (6,704,559) (8,035,773)
--------------------------------
Total stockholders' equity 91,524,158 90,139,621
--------------------------------
Total liabilities and stockholders' equity $ 97,552,060 $ 93,850,516
================================
</TABLE>
See accompanying notes.
3
<PAGE> 4
ACT Networks, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1996 1995
-----------------------------
<S> <C> <C>
Net sales $10,168,945 $ 5,101,782
Expenses:
Cost of goods sold 4,450,943 2,642,331
Research and development 1,545,949 1,037,496
Sales and marketing 2,223,280 1,406,039
General and administrative 995,714 600,218
-----------------------------
9,215,886 5,686,084
-----------------------------
Income (loss) from operations 953,059 (584,302)
Other:
Interest and other income, net 841,290 373,800
-----------------------------
Income (loss) before income taxes 1,794,349 (210,502)
Provision for income taxes 503,724 --
-----------------------------
Net income (loss) $ 1,290,625 $ (210,502)
=============================
Net income (loss) per share $ 0.13 $ (0.03)
=============================
Shares used in computing net income (loss)
per share 9,983,377 7,734,957
=============================
</TABLE>
See accompanying notes
4
<PAGE> 5
ACT Networks, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,290,625 $ (210,502)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 401,777 192,829
Changes in operating assets and liabilities:
Accounts receivable 301,000 (1,166,029)
Inventory (892,982) (2,079,673)
Prepaid expenses and deposits (252,326) (163,426)
Accounts payable, accrued expenses and
income taxes payable 2,411,170 788,778
--------------------------------
Net cash provided by (used in) operations 3,259,264 (2,638,023)
INVESTING ACTIVITIES
Purchase of plant, equipment and other fixed assets (617,620) (606,744)
Other assets 82,500 50,151
--------------------------------
Net cash used in investing activities (535,120) (556,593)
FINANCING ACTIVITIES
Stock warrants and options 53,323 10,132
Repayment of notes payable (94,134) --
------------------------------------
Net cash (used in) provided by financing activities (40,811) 10,132
Translation adjustment 40,589
-------------------------------------
Net increase (decrease) in cash 2,723,922 (3,184,484)
Cash and cash equivalents at beginning of the period 70,374,310 30,546,278
-------------------------------------
Cash and cash equivalents at end of the period $ 73,098,232 $ 27,361,794
====================================
</TABLE>
See accompanying notes
5
<PAGE> 6
ACT NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1997. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended June 30, 1996.
The balance sheet at June 30, 1996 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Certain June 30, 1996 Balance Sheet items have been
reclassified to conform with the September 30, 1996 presentation.
2. INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
<S> <C> <C>
Purchased parts ............................ $4,066,880 $3,629,460
Sub-assemblies; finished goods.............. 4,235,561 3,779,999
---------- ----------
$8,302,441 $7,409,459
---------- ----------
</TABLE>
3. 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.
4. INCOME TAXES
The provision for income taxes for the three months ended September 30, 1996
totaled approximately $504,000. There was no provision for income taxes for the
three months ended September 30, 1995. The provision for income taxes differs
from the federal statutory rate due primarily to the foreign income taxes
related to the Company's Canadian subsidiary and to reductions in the valuation
allowance attributable to the use of federal and state net operating losses
carried forward from previous periods.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report contains forward-looking statements that involve a number
of risks and uncertainties including, without limitation, those set forth in the
"Risk Factors" section under "Other Information". The Company's actual results
may differ materially from any future performance discussed in the
forward-looking statements and 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 the first quarter of 1989, the Company
shipped its first integrated product, a point-to-point multiplexed designed for
use on a voice-band analog circuit. In the first quarter of 1991, the Company
began shipping a point-to-point integrated multiplexed designed for use over
digital leased lines. In the first quarter of 1993, the Company introduced its
integrated Frame Relay access product.
In November 1995 the Company acquired all the outstanding shares of
Presticom, a developer of multiprotocol Frame Relay access devices. The Company
recorded an acquisition cost of approximately $9.1 million, of which
approximately $7.3 million in cash and 176,365 shares of Common Stock
represented the consideration paid to Presticom's shareholders and of which
approximately $0.6 million represented transaction expenses. As a result of the
acquisition, the Company expensed approximately $5.6 million in the quarter
ended December 31, 1995 as acquired in-process research and development and is
amortizing approximately $2.1 million of goodwill over seven years.
The Company's future operating results will be dependent upon the
development and growth of the public and private wide area network
communications market for its Frame Relay access products. This market and
product applications within this market are currently emerging and may not
continue to develop, whether as a result of competition, technological change,
market forces or otherwise.
The Company anticipates that, in general, the average sales price for
its products will decrease over time due to competition and other factors. In
addition, the Company has from time to time introduced new products which are
less expensive alternatives to the Company's older products. In such instances,
the Company must sell more units to maintain the same level of aggregate net
sales. Price erosion of existing products and the Company's introduction of less
expensive networking alternatives could adversely affect the Company's margins
and results of operations.
Sales to customers outside of North America accounted for approximately
70%, 66% and 63% of the Company's net sales for the fiscal years ended June 30,
1994, 1995 and 1996, respectively, and approximately 78% for the three months
ended September 30, 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 North America represent sales of products which are used or
resold in markets outside of North America. International sales are subject to
certain inherent risks, including unexpected changes in regulatory requirements
and tariffs, problems and delays in collecting accounts receivable and economic
downturns in foreign markets. A significant number of the Company's products are
sold or installed in countries, including several in South America, where
political or economic issues could adversely affect the purchasing decision of
the customer. In addition, fluctuations in currency exchange rates could cause
the Company's products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
country.
A small number of customers have historically accounted for a
substantial portion of the Company's net sales. The Company's five largest
customers accounted for 43% and 46% of net sales for the fiscal years ended June
30, 1995 and 1996, respectively, and 39% for the three months ended September
30, 1996. Any reduction, delay or change in orders from such customers could
have a material adverse effect on the
7
<PAGE> 8
Company's business.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated, the percentages
of net sales represented by each item in the Company's statement of operations.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales ........................ 100.0% 100.0%
Cost of goods sold ............... 43.8 51.7
------ ------
Gross profit ..................... 56.2 48.3
Operating expenses:
Research and development ...... 15.2 20.3
Sales and marketing ........... 21.9 27.6
General and administrative..... 9.8 11.8
------ ------
Total operating expenses ......... 46.9 59.7
------ ------
Income (loss) from operations..... 9.4 (11.4)
Net interest and other income..... 8.3 7.3
------ ------
Income (loss) before taxes ....... 17.6 (4.1)
Provision for income taxes ....... 5.0 --
------ ------
Net income (loss) ................ 12.7 (4.1)
------ ------
</TABLE>
Net sales
Net sales increased 99.3% to $10.2 million for the three months ended
September 30, 1996 from $5.1 million for the three months ended September 30,
1995. The increase was primarily due to increased sales of the Company's Frame
Relay products. In addition, products produced by the Company's Canadian
subsidiary accounted for $1.8 million, or 35.6%, of the increase in net sales.
Net sales of Frame Relay products were $9.3 million and $3.0 million for the
three months ended September 30, 1996 and September 30, 1995, respectively. Net
sales of point-to-point products increased to $0.7 million for the three months
ended September 30, 1996 from $0.4 million for the three months ended September
30, 1995. While the Company anticipates that point-to-point products will be a
declining portion of its product mix, during the current period, a significant
and non-recurring order for point-to-point equipment was delivered and future
potential sales of large point-to-point networks, if any, could continue to
contribute to variability in net sales from quarter to quarter. Net sales of OEM
products decreased to $0.1 million for the three months ended September 30, 1996
from $1.7 million for the three months ended September 30, 1995. The decrease in
OEM shipments was primarily due to unusually large orders received from
Scientific Atlanta in the prior year period. The Company did not ship any OEM
voice cards to Scientific Atlanta in the three months ended September 30, 1996
and is currently in discussions with Scientific Atlanta to change its
relationship from that of a product supplier to that of a technology licensor.
As such, the Company believes revenues from Scientific Atlanta will be
significantly lower in fiscal 1997 than those in fiscal 1996.
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 $5.7 million, or 56.2% of net sales,
for the three months ended September 30, 1996 compared to $2.5 million, or 48.3%
of net sales, for the three months ended September 30, 1995. This increase in
gross profit as a percentage of sales was primarily attributable to an increase
in Frame Relay product sales and a decrease in sales of OEM products which
typically sell at a lower gross margin. In the future, gross profit may be
affected by price
8
<PAGE> 9
competition and discounts, product mix, product configuration, changes in unit
volume, cost of components and manufacturing and other factors.
Operating Expenses
Research and development. Research and development expense increased to $1.5
million, or 15.2% of net sales, for the three months ended September 30, 1996
from $1.0 million, or 20.3% of net sales, for the three months ended September
30, 1995. These increases were primarily attributable to the cost of personnel
for the development of new products and enhancement of existing products, which
increased to approximately $1.0 million from approximately $0.7 million during
the preceding comparable period. Other material components of the increase in
research and development expense were consultant fees, the cost of materials and
depreciation expense. While the actual amount expended will depend upon a
variety of factors, the Company anticipates increasing research and development
expenses in the near term.
Sales and marketing. Sales and marketing expense increased to $2.2 million, or
21.9% of net sales, for the three months ended September 30, 1996 from $1.4
million, or 27.6% of net sales, for the three months ended September 30, 1995.
This dollar increase was primarily attributable to the addition of personnel and
increased marketing activities. The Company anticipates continuing to add sales
personnel and increasing sales and marketing expenses in the near term.
General and administrative. General and administrative expense increased to $1.0
million, or 9.8% of net sales, for the three months ended September 30, 1996
from $0.6 million, or 11.8% of net sales, for the three months ended September
30, 1995. While the dollar amount of general and administrative expense
increased, the Company was able to reduce expense as a percentage of sales due
primarily to an increase in net sales without a commensurate increase in general
and administrative expense. General and administrative expense 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.
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 $841,290 for the three months ended September
30,1996 compared to net interest income of $373,800 for the three months ended
September 30, 1995. This change was primarily attributable to interest received
on the proceeds from the Company's secondary public offering in June 1996.
Income Taxes
The provision for income taxes for the three months ended September 30,
1996 totaled approximately $504,000. There was no provision for income taxes for
the three months ended September 30, 1995. The provision for income taxes
differs from the federal statutory rate due primarily to the foreign income
taxes related to the Company's Canadian subsidiary and to reductions in the
valuation allowance attributable to the use of federal and state net operating
losses carried forward from previous periods. A portion of future reductions in
the valuation allowance attributed to tax deductions related to the exercise of
stock options will be recorded in equity and will not be reflected as a
reduction in the tax provision. Subject to certain limitations, the Company has
a research and development tax credit carryforward and federal and state
operating loss carryforwards, a portion of which it expects to apply against its
tax liability for fiscal 1997. If the Company generates profits, the net
operating loss carryforwards and research and development tax credit
carryforward will be utilized and the Company's effective tax rates will
increase.
9
<PAGE> 10
Inflation/Accounting Pronouncements
Although management cannot accurately anticipate the effect of
inflation on its operations, to date inflation has not had a material effect on
product sales or results of operations. There are no recently issued accounting
pronouncements that management believes will have a significant impact on
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from the sale of stock,
borrowings from investors, borrowings under a bank facility and sales of the
Company's products. Net proceeds from the sale of Common Stock in the Company's
secondary offering in June 1996 were approximately $53.7 million. For the three
months ended September 30, 1996, the Company's operating activities provided
cash of approximately $3.2 million. At September 30, 1996, the Company had
approximately $85.9 million in working capital, including $73.1 million in cash
and cash equivalents.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, computer software and leasehold improvements amounted
to approximately $0.6 million for the three months ended September 30, 1996. The
Company currently has no material commitments for capital expenditures. However,
the Company anticipates spending between $2.0 million and $3.0 million during
the next 12 months to acquire test equipment, computer equipment, and tooling.
The Company has a loan and security agreement (the "Loan Agreement")
with Silicon Valley Bank (the "Bank"), which provides for aggregate borrowings
up to a maximum of $3,000,000. Under the Loan Agreement, the Company may borrow
up to the lesser of $3,000,000 or 75% of eligible accounts receivable (the "Line
of Credit"). The Line of Credit expires July 5, 1997. At September 30, 1996
there was no outstanding balances under the Line of Credit. Interest on the Line
of Credit is payable monthly at a rate equal to the Bank's prime rate, which was
8.25 % at September 30, 1996, plus 1.5%. The Loan Agreement provides for the
issuance of letters of credit in an aggregate amount outstanding up to $500,000.
Letters of credit outstanding reduce the amount available under the Line of
Credit. At September 30, 1996 and September 30, 1995, no letters of credit were
outstanding.
The Loan Agreement contains certain covenants that, among other things,
require the Company to maintain certain financial ratios and limit the Company's
ability to obtain certain forms of additional debt to repurchase the Company's
stock and pay dividends. The Company believes that available cash, together with
amounts available under its credit facilities and internally generated cash
flow, will be adequate to satisfy its capital requirements for at least the next
twelve months.
10
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. NONE.
ITEM 2. CHANGES IN SECURITIES. NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. NONE.
ITEM 5. OTHER INFORMATION.
RISK FACTORS
The following Risk Factors should be considered carefully in addition to the
other information contained in this Report:
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
11
<PAGE> 12
Common Stock. In addition, sales of networking products fluctuate from time to
time based on numerous factors, including capital spending levels and general
economic and market conditions. Future declines in networking product sales, as
a result of general economic conditions or for any other reason, could have a
material adverse effect on the Company's business, operating results and
financial condition.
Limited History of Operations and Profitability. The Company was
organized in May 1987 and commenced shipments of its first product in October
1988. While the Company first achieved profitability in the fourth calendar
quarter of 1990, it incurred losses in periods subsequent to that time. Due to
the Company's limited history of profitable operations, there can be no
assurance that it will be profitable in future periods. The Company plans to
continue to expand its level of operations, resulting in increased fixed costs
and operating expenses. The Company's operating results and net income will be
adversely affected to the extent that net sales and gross profits do not
increase sufficiently to offset such increased expenses. There can be no
assurance that the Company will be able to maintain or increase net sales or
gross profits. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Technological Change, Changing Markets and New Products. The market
for the Company's products is characterized by rapid technological advances,
evolving industry standards, frequent new product introductions and
enhancements, and significant price competition. The introduction of products
involving superior or alternative technologies, the emergence of new industry
standards, governmental regulation or changes in a market's pricing structure
could render the Company's existing products, as well as products currently
under development, obsolete and unmarketable in one or more markets which could
adversely affect the Company's business, operating results and financial
condition. The Company has experienced instances where one or more of those
factors resulted in a significant decrease in sales of the Company's products in
particular markets. For example, a rapid decline in the market for certain
point-to-point products resulted in reduced sales and an inventory write-down in
the quarter ended December 31, 1995.
The market for Frame Relay products, especially access devices such as
those produced by the Company, is currently emerging and may not continue to
develop, whether as a result of competition, technological change, market forces
or otherwise. In addition, the transmission of voice over a Frame Relay network
is a new application that has not received widespread acceptance. The Company's
future operating results and ability to implement its strategy successfully will
be dependent in part upon the development and growth of the public Frame Relay
services market for voice, data and integrated applications. Public carriers
such as AT&T and MCI offer services which may adversely affect the adoption of
services and products based on Frame Relay technologies. For example, the
availability of inexpensive voice communications services in the United States
may reduce or eliminate the cost advantages of voice over Frame Relay services
in the United States. If the costs of telecommunications services in the United
States and other markets decline, the market for the Company's products may
either not materialize or could be adversely affected. There can be no assurance
that such markets will develop. Even if such markets develop, the Company's
success will depend, in part, on the viability of the Company's products in such
markets, and the ability of the Company to develop effective distribution
channels to address these markets. There can be no assurance that the Company's
products will be widely accepted in this market. In addition, the widespread
acceptance of Asynchronous Transfer Mode ("ATM"), an alternative fast packet
technology, could have a material adverse effect on the Company's ability to
obtain market acceptance of its Frame Relay products. Failure of the Company's
products to achieve market acceptance could have a material adverse effect on
the Company's business, operating results and financial condition.
The Company believes its future success will depend, in part, upon its
ability to expand and enhance the features of its existing products and to
develop or acquire and introduce new products designed to meet changing customer
needs on a cost-effective and timely basis. Failure by the Company to respond on
a timely basis to technological developments, changes in industry standards or
customer requirements, or any significant delay in product development or
introduction, could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will respond effectively to technological changes or new product
announcements by others or that the Company will be able to successfully develop
and market new products or product enhancements and that any new product or
product enhancement will gain market acceptance. The Company expects that the
average sales prices of its products will decline in the future primarily due to
increased competition and the introduction of new technologies. Accordingly, the
Company's ability to maintain or increase net sales and gross margins will
depend in part upon its ability to reduce its cost of sales, to increase unit
sales volumes of existing products and to introduce and sell new products. There
can be no assurance that the Company will be able to reduce its cost of sales in
the future to respond effectively to declining sales prices.
12
<PAGE> 13
The Company budgets research and development expenditures based on
planned product introductions and enhancements; however, actual expenditures may
significantly differ from budgeted expenditures. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced products and product enhancements is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will successfully identify, develop or introduce new products or
product enhancements. Products such as those offered by the Company may contain
undetected or unresolved software errors when they are first introduced or as
new versions are released. There can be no assurance that, despite extensive
testing by the Company, software errors will not be found in new products or
upgrades after commencement of commercial shipments, resulting in delay in or
loss of market acceptance. Future delays in the introduction or shipment of new
or enhanced products, the inability of such products to gain market acceptance
or problems associated with new product transitions could adversely affect the
Company's operating results, particularly on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Substantial Competition. The market for the Company's products is
highly competitive. The Company competes directly domestically and
internationally with a variety of companies offering Frame Relay access products
including FastComm, Memotec, MICOM, Motorola, Sync and other companies. The
Company anticipates competition from manufacturers of Frame Relay switches, such
as Cascade and StrataCom, who are also suppliers to, or customers of, the
Company.
The Company expects substantial additional competition from existing
competitors and from a number of other companies which may enter the Company's
existing or future markets. Many of the Company's current and potential
competitors have substantially greater name recognition and financial,
marketing, technical and other resources than the Company. Many of these
companies sell directly to end-users, which the Company believes may provide a
competitive edge over the Company when marketing either similar products or
alternative networking solutions. Consolidations in the industry, such as the
acquisition 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.
Integration of Presticom; Future Acquisitions. A component of the
Company's strategy is to acquire complementary technologies and businesses. Such
acquisitions involve significant risks. The Company acquired Presticom, Inc., a
Canadian corporation, in November 1995. To obtain benefits from this
acquisition, the Company must successfully integrate Presticom's and the
Company's sales, research and development and administrative functions. In
addition, the Company also must integrate Presticom's technology, which is
primarily based on the transmission of data using Frame Relay, into the
Company's products, which emphasize voice transmission using Frame Relay, and
must also integrate the Company's technology into Presticom's products.
Developing Presticom's business as a part of the Company will also require the
use of cash resources. Due in part to consolidation in the Company's industry,
the Company may in the future pursue acquisitions of related businesses,
products or technologies. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt, and the creation and amortization of goodwill and the
incurrence of acquisition related expenses, all of which could adversely affect
the Company's profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, the diversion of management's attention from
other business concerns, risks associated with the Company's entering markets in
which it has no or limited direct prior experience and the potential loss of key
employees of the acquired company. In the event that an acquisition does occur,
no assurances can be given as to the effect thereof on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Customer Concentration. A small number of customers have historically
accounted for a substantial portion of the Company's net sales. In particular,
Scientific Atlanta accounted for approximately 17% and 0% of the Company's net
sales for the fiscal year ended June 30, 1996 and the three months ended
September 30, 1996, respectively. In addition, Stratacom and Impsat accounted
for 7% and 10% of the Company's net sales for the fiscal year ended June 30,
1996 and 3% and 5% for the three months ended September 30, 1996, respectively.
The Company's five largest customers accounted for 46% and 39% of the Company's
net sales for the fiscal year ended June 30, 1996 and the quarter ended
13
<PAGE> 14
September 30, 1996, respectively. 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 of North America accounted for
approximately 66% and 63% of the Company's net sales for the fiscal years ended
June 30, 1995 and June 30, 1996, respectively, and 78% for the three months
ended September 30, 1996. In addition, the Company believes that a majority of
its sales to customers inside North America represent sales of products which
are used or resold in markets outside of North America. The Company expects that
international sales will continue to account for a significant portion of the
Company's net sales in future periods. International sales are subject to
certain inherent risks, including unexpected changes in regulatory requirements
and tariffs, difficulties in staffing and managing foreign operations,
potentially adverse tax consequences and problems in collecting accounts
receivable. A significant number of the Company's products are sold or installed
in countries, including several in South America, where political or economic
issues could adversely affect the purchasing decision of the customer. Although
the Company's sales are currently denominated in U.S. dollars, fluctuations in
currency exchange rates could cause the Company's products to become relatively
more expensive to customers in a particular country, leading to a reduction in
sales or profitability in that country. Furthermore, future international
activity may result in foreign currency denominated sales and, in such event,
gains and losses on the conversion to U.S. dollars of accounts receivable and
accounts payable arising from international operations may contribute to
fluctuations in the Company's results of operations. The financial stability of
foreign markets could also affect the Company's international sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"
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.
14
<PAGE> 15
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.
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.
Reliance on Indirect Distribution. The Company markets and sells
products domestically and internationally primarily through resellers, such as
distributors, value-added resellers and system integrators. The number of
qualified resellers in certain countries is limited. Resellers typically are not
effective at selling the Company's products until they have been trained and
have successfully completed several sales. The Company's performance depends in
part on attracting, retaining and motivating such resellers. Certain of the
Company's resellers also act as resellers for competitors of the Company and
could devote greater effort and resources to marketing competitive products. The
Company's resellers are generally provided discounts and, occasionally, are
entitled to special pricing or distribution arrangements, the effect of which is
to decrease the Company's gross margins. While the Company has contractual
relationships with many of its resellers, these agreements do not require the
resellers to purchase the Company's products and can generally be terminated on
short notice by the reseller. Resellers in many countries have title to the
governmental authorizations and certifications necessary to market the Company's
products in such country, and there is no assurance that, in the event a
reseller ceased marketing the Company's products, the reseller would transfer
such authorization or certification to the Company or that the expense and delay
associated with obtaining a new authorization or certification would not
adversely affect the Company's business and operations in such country. There
can be no assurance that resellers will continue to market the Company's
products or devote the resources necessary to provide effective sales and
marketing support to the Company. In addition, the Company is dependent on the
continued viability and financial stability of its resellers, many of which are
small organizations with limited capital. In the first fiscal quarter of 1993,
one of the Company's European resellers filed for bankruptcy, ceased operations,
and was subsequently replaced by a number of nonexclusive resellers. The
Company's inability to collect a significant sum from the reseller, the time
involved in reestablishing a new distribution channel in that market and the
difficulties in having certain regulatory approvals transferred to the Company
all adversely affected the Company's business. The loss of any key reseller
could adversely affect the Company's business.
The Company's sales through OEMs who purchased custom products for the
fiscal years ended June 30, 1995 and 1996 accounted for approximately 9.0% and
17.7%, respectively, of the Company's net sales and 1.5% for the three months
ended September 30, 1996. The Company does not classify private label sales of
standard products as OEM sales. In fiscal 1995 and 1996, virtually all of the
Company's OEM sales were generated by sales of custom voice cards to Scientific
Atlanta for use in its satellite based communication system. The Company
believes its OEM voice card sales will continue to be significantly lower in
fiscal year 1997. None of the OEMs have contracts with the Company which require
the OEMs to purchase any products. The Company's OEM and private label business
is subject to risks such as contract termination, products developed by a third
party or by the third party's internal development team, change in corporate
ownership, business direction or product mix by the third party, and assumption
of manufacturing rights by the third party. There can be no assurance that these
factors will not adversely affect the Company's business, operating results and
financial condition.
15
<PAGE> 16
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.
Since patent applications in the United States are not publicly
disclosed until the patent is issued, applications may have been filed which, if
issued as patents, would relate to the Company's products. In addition, the
Company has never conducted a comprehensive patent search relating to the
technology used in its products. Accordingly, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such claims,
regardless of the merits of such claims. Parties making such claims may be able
to obtain injunctive or other equitable relief which could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a successful
claim of infringement, the Company, its customers and end-users may be required
to obtain one or more licenses from third parties. The Company has in the past,
and may in the future, pay significant sums to obtain licenses from third
parties to avoid the costs and uncertainties associated with defending a
potential claim. There can be no assurance that the Company or its customers
could obtain necessary licenses from third parties at a reasonable cost or at
all. The defense of any lawsuit could result in time consuming and expensive
litigation, damages, license fees, royalty payments and restrictions on the
Company's ability to sell its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Key Personnel. The success of the Company is dependent
in large part on its ability to retain its executive officers, the loss of one
or more of whom could adversely affect the Company's business. The Company is
also dependent on other members of management and its sales and technical
personnel. The Company believes that its future success will depend in large
part upon its continued ability to attract, retain and motivate highly skilled
employees, who are in great demand. There can be no assurance that the Company
will be able to do so.
Future Capital Needs; Uncertainty of Additional Funding. The Company
anticipates that available cash together with amounts available under its credit
facilities and cash flow from operations, will be adequate to satisfy its
capital requirements through at least the next 12 months. The Company's future
capital requirements will depend on many factors including, but not limited to,
the cost of acquisitions of businesses, products and technologies, the levels at
which the Company maintains inventory, the market acceptance of the Company's
products, the levels of promotion and advertising required to launch such
products and attain a competitive position in the marketplace, and the extent to
which the Company invests in new technology and improvements to its existing
technology. To the extent that existing resources and future earnings are
insufficient to fund the Company's activities, the Company may need to raise
additional funds through public or private financings including equity
financings. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the Company
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. No
assurance can be given that additional financing will be available or that, if
available, it can be obtained on terms favorable to the Company and its
stockholders. The Company's lack of authorized Preferred Stock could hinder the
Company's ability to obtain financing. If adequate funds are not 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."
16
<PAGE> 17
Volatility of Stock Price. The trading price of the Common Stock has
undergone significant fluctuations and is expected to continue to be subject to
significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant contracts, changes in management,
announcements of technological innovations or new products by the Company or its
competitors, legislative or regulatory changes, general trends in the industry
and other events or factors. In addition, the stock market has experienced
extreme price and volume fluctuations which have particularly affected the
market price for many high technology companies and which have often been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Potential Effect of Anti-Takeover Provisions. The Company's
Certificate of Incorporation provides for a Board of Directors with staggered
terms which may discourage or prevent certain types of transactions involving an
actual or potential change in control of the Company, including transactions in
which the stockholders might otherwise receive a premium for their shares over
then current market prices. Certain provisions of Delaware law applicable to the
Company, including Section 203 of the Delaware General Corporation Law, could
have the effect of delaying, deferring or preventing a change of control of the
Company. It is possible that the staggered board and Section 203 of the Delaware
General Corporation Law may have the effect of delaying, deferring or preventing
a change of control of the Company, may discourage bids for the Company's Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price of the Common Stock.
Forward-Looking Statements. This Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements include the Company's projections of the product mix of future
revenues; increase in the level of expenses; and the sufficiency of capital
resources under "Management's Discussion and Analysis of Financial Condition and
Results of Operations." These statements are only predictions and actual events
or results may differ materially as a result of the risk factors discussed above
and the risks associated with: the possibility that the market for Frame Relay
products will not continue to develop or that the Company's products and
capabilities will not address emerging market needs; the effect of increased
competition; changing technologies and new product developments; integration of
products and technologies; product obsolescence; the loss of significant
customers; and changes in revenues and expenses resulting in fluctuations in
quarterly results.
Lack of Dividends. The Company has never paid cash dividends on shares
of its capital stock. The Company currently intends to retain any future
earnings in its business and does not anticipate paying any cash dividends in
the future. Furthermore the Company's agreement with its lender currently limits
the Company's ability to pay cash dividends.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
.(a) EXHIBITS:
Exhibit No.
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-90394.
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1, Registration No.
33-90394
4.1 Specimen certificate representing shares of Common Stock of the
Company. Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.1 Standard Industrial/Commercial Multi-Tenant Lease-Modified Net
dated May 23, 1994 by and between Herman Bennett and the Company.
Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.2 Master Lease Agreement dated January 11, 1994 by and between the
Company and Leasetec Corporation, as amended and supplemented.
Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.3 Loan and Security Agreement dated March 23, 1993, as amended,
between Silicon Valley Bank and the Company and related agreements
and documents. Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.4 Loan and Security Agreement (Exim) dated May 11, 1994, as amended,
between Silicon Valley Bank and the Company and related agreements
and documents. Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.5 Form of Indemnification Agreement. Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.6 1987 Stock Option Plan (the "1987 Plan"). Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement
on Form S-1, Registration No. 33-90394.
10.7 1993 Stock Option Plan as amended (the "1993 Plan"). Incorporated
by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
10.8 Form of Notice of Grant of Stock Option generally used in
connection with the 1993 Plan. Incorporated by reference to
Exhibit 10.12 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.9 Form of 1993 Stock Option Agreement generally used in connection
with the 1993 Plan. Incorporated by reference to Exhibit 10.13 to
the Company's Registration Statement on Form S-1, Registration
No. 33-90394.
10.10 Form of 1993 Stock Purchase Agreement generally used in
connection with the 1993 Plan. Incorporated by reference to
Exhibit 10.14 to the Company's Registration Statement on Form
S-1, Registration No. 33-90394.
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<PAGE> 19
10.11* Cooperation and Supply Agreement dated as of November 19, 1993 by
and between StrataCom, Inc. and the Company. Incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement
on Form S-1, Registration No. 33-90394.
10.12 Technical Information Escrow Agreement dated July 18, 1994 by and
between StrataCom, Inc., the Indianapolis Vault Company and the
Company. Incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.13 Memorandum of Agreement dated January 19, 1995 by and between the
Company, Promon International, Inc. and Pacific Technology Fund.
Incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.14 Shareholder Rights Agreement dated as of April 23, 1992, as
amended by Amendment No. 1 to Shareholder Rights Agreement dated
as of August 11, 1992, Amendment No. 2 to Shareholder Rights
Agreement dated as of October 19, 1992, Amendment No. 3 to
Shareholder Rights Agreement dated as of December 18, 1992,
Amendment No. 4 to Shareholder Rights Agreement dated as of March
15, 1993, Amendment No. 5 to Shareholder Rights Agreement dated as
of November 16, 1993, and Amendment No. 6 to Shareholder Rights
Agreement dated as of December 15, 1994. Incorporated by reference
to Exhibit 10.18 to the Company's Registration Statement on Form
S-1, Registration No. 33-90394.
10.15 Virtual DAMA Agreement dated December 31, 1993, by and between the
Company and Promon Technical Services, Inc., as amended.
Incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.16 1995 Stock Option/Stock Issuance Plan (the "1995 Plan").
Incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.17 Form of Stock Option Agreement generally used in connection with
the Discretionary Option Grant Program of the 1995 Plan.
Incorporated by reference to Exhibit 99.3 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.18 Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Right). Incorporated by reference to Exhibit 99.4 to
the Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.19 Form of Addendum to Stock Option Agreement (Involuntary
Termination Following Change of Control). Incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement
on Form S-8, Registration No. 33-80007.
10.20 Form of Addendum to Stock Option Agreement (Special Tax
Elections). Incorporated by reference to Exhibit 99.6 to the
Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.21 Form of Automatic Stock Option Agreement. Incorporated by
reference to Exhibit 99.9 to the Company's Registration Statement
on Form S-8, Registration No. 33-80007.
10.22 Form of Stock Issuance Agreement generally used in connection with
the Discretionary Option Grant Program of the 1995 Plan.
Incorporated by reference to Exhibit 99.10 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.23 Form of Addendum to Stock Issuance Agreement (Involuntary
Termination Following Change of Control). Incorporated by
reference to Exhibit 99.11 to the Company's Registration Statement
on Form S-8, Registration No. 33-80007.
19
<PAGE> 20
10.24 Form of Addendum to Stock Issuance Agreement (Special Tax
Elections). Incorporated by reference to Exhibit 99.12 to the
Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.25 Employee Stock Purchase Plan. Incorporated by reference to Exhibit
99.13 to the Company's Registration Statement on Form S-8,
Registration No. 33-80007.
10.26 The Share Purchase Agreement By and Among the Company, Canada Inc.
and Certain Presticom Stockholders, dated as of November 24, 1995.
Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, dated November 30, 1995.
10.27 License Agreement dated May 8, 1996, by and between the Company
and SkyData, Inc. Incorporated by reference to Exhibit 10.32 to
the Company's Registration Statement on Form S-3, Registration No.
333-04183.
11.1 Statement Regarding Computation of Earnings Per Share.
27.1 Financial Data Schedule.
* The Company has received confidential treatment for portions of this document
previously filed with the Commission.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1996
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized
Date: November 13, 1996 ACT NETWORKS, INC.
/s/ Melvin L Flowers
--------------------
Melvin L. Flowers
Vice President, Finance and Administration,
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
EXHIBIT NO.
11.1 Statement Regarding Computation of Earnings Per Share.
27.1 Financial Data Schedule.
22
<PAGE> 1
Exhibit 11.1 Statement Re: Computation of Per-Share Earnings EXHIBIT 11.1
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Primary
Average common shares outstanding 9,123,096 7,153,770
Net effect of dilutive options and warrants-
based on treasury stock method (or modified treasury
method if applicable) using average market price 860,281 581,187
----------- -----------
9,983,377 7,734,957
----------- -----------
Net Income (loss) $ 1,290,625 $ (210,502)
----------- -----------
Per Share amount $ 0.13 $ (0.03)
----------- -----------
Fully Diluted
Average common shares outstanding 9,123,096 7,153,770
Net effect of dilutive options and warrants-
based on treasury stock method (or modified treasury
method if applicable) using year-end market price .. 884,305 581,187
----------- -----------
10,007,401 7,734,957
----------- -----------
Net (Loss) Income $ 1,290,625 $ (210,502)
----------- -----------
Per Share amount $ 0.13 $ (0.03)
----------- -----------
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 55,739,280
<SECURITIES> 17,358,952
<RECEIVABLES> 9,847,935
<ALLOWANCES> 286,982
<INVENTORY> 8,302,441
<CURRENT-ASSETS> 91,879,346
<PP&E> 5,344,897
<DEPRECIATION> 2,559,665
<TOTAL-ASSETS> 97,552,060
<CURRENT-LIABILITIES> 5,974,742
<BONDS> 53,160
0
0
<COMMON> 9,130
<OTHER-SE> 91,515,028
<TOTAL-LIABILITY-AND-EQUITY> 97,552,060
<SALES> 10,168,945
<TOTAL-REVENUES> 10,168,945
<CGS> 4,450,953
<TOTAL-COSTS> 9,215,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (841,290)
<INCOME-PRETAX> 1,794,349
<INCOME-TAX> 503,724
<INCOME-CONTINUING> 1,290,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,290,625
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
