<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 77-0152144
(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:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13, OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES NO
----------- -----------
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
AS OF NOVEMBER 7, 1997, THERE WERE 9,206,470 SHARES OF COMMON STOCK OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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<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, 1997 and June 30, 1997.............................3
Condensed Consolidated Statements of Operations
for the Three Month Periods Ended
September 30, 1997 and 1996......................................4
Condensed Consolidated Statements
of Cash Flows for the Three Month Periods Ended
September 30, 1997 and 1996......................................5
Notes to Condensed Consolidated
Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................8
PART II. OTHER INFORMATION
Item 1 Legal Proceedings...................................................14
Item 2 Changes in Securities and Use of Proceeds...........................14
Item 3 Defaults upon Senior Securities.....................................14
Item 4 Submission of Matters to a Vote of Securityholders..................14
Item 5 Other Information. Risk Factors....................................14
Item 6. Exhibits and Reports on Form 8-K....................................20
SIGNATURE................................................................................23
EXHIBIT INDEX............................................................................24
</TABLE>
2
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACT NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,231,632 $ 50,948,294
Short-term investments 12,059,622 10,591,665
Accounts receivable, less allowances of $486,000
in September and $411,000 in June 18,101,472 14,792,162
Inventory 15,014,286 12,262,663
Prepaid expenses 963,530 501,717
Deposits 88,762 43,595
------------- -------------
Total current assets 79,459,304 89,140,096
Plant, equipment and other improvements:
Machinery and equipment 6,458,727 6,032,790
Furniture and fixtures 755,488 481,725
Computer software 1,579,498 1,416,511
Leasehold improvements 881,035 675,097
------------- -------------
9,674,748 8,606,123
Accumulated depreciation and amortization 4,366,132 3,846,797
------------- -------------
5,308,616 4,759,326
Goodwill and other intangibles 5,722,075 4,675,847
Other assets 2,103,761 2,120,588
------------- -------------
Total assets $ 92,593,756 $ 100,695,857
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 5,774,929 $ 3,113,503
Accrued expenses 1,674,097 1,530,315
Accrued vacation 410,137 514,116
Accrued commissions 282,022 333,514
Income taxes payable 782,736 1,579,353
Deferred income taxes 81,430 87,260
------------- -------------
Total current liabilities 9,005,351 7,158,061
Long-term debt
Stockholders' equity:
Common stock and additional paid-in capital;
$.001 par value:
Authorized - 40,000,000
Issued and outstanding - 9,303,986
and 9,203,986 in September and
9,270,949 in June 100,387,467 100,088,339
Treasury stock at cost (1,304,375)
Accumulated deficit (15,494,687) (6,550,543)
------------- -------------
Total stockholders' equity 83,588,405 93,537,796
------------- -------------
Total liabilities and stockholders' equity $ 92,593,756 $ 100,695,857
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
ACT Networks, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Net sales $ 13,020,587 $10,168,945
Expenses:
Cost of goods sold 5,698,845 4,450,943
Research and development 3,822,002 1,545,949
Sales and marketing 3,589,926 2,223,280
General and administrative 2,095,360 995,714
In-process research and development 6,750,000 --
------------ -----------
21,956,133 9,215,886
------------ -----------
Income (loss) from operations (8,935,546) 953,059
Other:
Interest and other income, net 468,375 841,290
------------ -----------
Income (loss) before income taxes (8,467,171) 1,794,349
Provision for income taxes 478,971 503,724
------------ -----------
Net income (loss) $ (8,946,142) $ 1,290,625
============ ===========
Net income (loss) per share $ (0.97) $ 0.13
============ ===========
Shares used in computing net income
(loss) per share 9,234,828 9,983,377
============ ===========
</TABLE>
See accompanying notes
4
<PAGE> 5
ACT Networks, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (8,946,142) $ 1,290,625
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 773,107 401,777
Provision for allowances on accounts
receivable 75,000
Write-off of in-process research and
development 6,750,000
Changes in operating assets and
liabilities:
Accounts receivable (3,384,310) 301,000
Inventory (2,451,623) (892,982)
Prepaid expenses and deposits (506,980) (252,326)
Accounts payable, accrued expenses
and income taxes payable 1,847,290 2,411,170
------------ ------------
Net cash provided by (used in) operations (5,843,658) 3,259,264
INVESTING ACTIVITIES
Purchase of short-term investments (1,306,218) --
Purchase of plant, equipment and other fixed
assets (818,625) (617,620)
Acquisition of Sourcecom assets (8,600,000) --
Other assets 16,827 82,500
------------ ------------
Net cash used in investing activities (10,708,016) (535,120)
FINANCING ACTIVITIES
Stock warrants and options 139,387 53,323
Purchase of treasury stock (1,304,375) --
Repayment of notes payable -- (94,134)
------------ ------------
Net cash used in financing activities (1,164,988) (40,811)
Net increase (decrease) in cash (17,716,662) 2,723,922
Cash and cash equivalents at beginning of
the period 50,948,294 70,374,310
------------ ------------
Cash and cash equivalents at end of the
period $ 33,231,632 $ 73,098,232
============ ============
</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, 1997
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1998. 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, 1997.
The balance sheet at June 30, 1997 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.
2. BUSINESS ACQUISITION
On August 11, 1997, the Company acquired the assets of Sourcecom, Inc., a
developer of high performance broadband access devices. The cash purchase price
paid by the Company was approximately $8,000,000. The Company recorded
transaction costs of $600,000.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the acquired assets 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 acquired. Of the total purchase price, $6,750,000 represented the value
of in-process research and development that had not yet reached technological
feasibility and was charged to the Company's operations. Other intangible assets
acquired were developed technology valued at $1,050,000 and assembled work force
valued at $250,000 which will be amortized over 5 years. The fair market value
of the in-process research and development and other intangibles was determined
by an independent appraiser. Developed technology represents technology which
has reached technological feasibility and relates to products which have been
generating revenues. Pro forma financial information is not presented because
the pro forma effect of the transaction is not considered material to the
Consolidated Statements of Operations.
3. INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
------------------ -------------
<S> <C> <C>
Purchased parts................................. $ 6,947,156 $ 5,673,972
Sub-assemblies; finished goods.................. 8,067,130 6,588,691
------------- -------------
$ 15,014,286 $ 12,262,663
------------- -------------
</TABLE>
6
<PAGE> 7
ACT NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS(CONTINUED)
(Unaudited)
4. TREASURY STOCK
During August 1997, the Company purchased 100,000 shares of its own Common Stock
in the open market at an average price of $13.04 per share. The purchases were
recorded at cost as a reduction of Stockholders' Equity.
5. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and warrants (using the treasury stock method) have been included in the
computation when dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share (SFAS 128), which is required to be adopted on June 30,
1998. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements, primary and fully diluted earnings per share will be replaced
with basic and diluted earnings per share. Basic earnings per share excludes the
dilutive effect of stock options and will therefore be higher than primary
earnings per share. Diluted earnings per share under the new standard is
expected to be essentially the same as primary earnings per share amounts
calculated under principles currently used. The impact of the adoption of SFAS
128 on earnings per share calculations for the quarters ended September 30, 1997
and 1996 is not expected to be material.
6. INCOME TAXES
The provision for income taxes for the three months ended September 30, 1997
totaled approximately $479,000. The provision for income taxes for the three
months ended September 30, 1996 was approximately $504,000. 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.
7
<PAGE> 8
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. In the third quarter of fiscal 1989, the Company
shipped its first integrated product, a point-to-point multiplexer designed for
use on a voice-band analog circuit. In the third quarter of fiscal 1991, the
Company began shipping a point-to-point integrated multiplexer designed for use
over digital leased lines. In the third quarter of fiscal 1993, the Company
introduced its first integrated Frame Relay access product line (ACTNet). The
Company introduced its wireless Frame Relay access product line (SkyFrame) in
the first quarter of fiscal 1996. The Company's multiprotocol data line of
products was acquired in the second quarter of fiscal 1996 with the acquisition
of Presticom. In the third quarter of fiscal 1997, the Company acquired a
multi-service access switch connectivity line of products with the acquisition
of the DynaStar product family from Dynatech. In the first quarter of fiscal
1998, the Company acquired certain assets of Sourcecom, Inc., a developer of
high performance broadband access devices.
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 existing and proposed 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
63% and 75% of the Company's net sales for the fiscal years ended June 30, 1996
and 1997, respectively, and approximately 79% for the three months ended
September 30, 1997. 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 and Asia,
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. In particular, Comsat Brazil
accounted for approximately 11.5% of the Company's net sales for the fiscal year
ended June 30, 1997 and approximately 6.2% for the three months ended September
30, 1997. In addition, IMPSAT accounted for approximately 10% and 8.3% of net
sales for the fiscal years ended June 30, 1996 and June 30, 1997, respectively,
and approximately 13.2% for the three months ended September 30, 1997. During
those periods the Company's five largest customers accounted for 43% and 36% and
26%,
8
<PAGE> 9
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.
ACQUISITIONS
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.
In December 1996, the Company acquired all the outstanding shares of
DeltaComm Corporation, a developer of bandwidth-efficient modems with expertise
in the satellite communications industry. The aggregate purchase price paid by
the Company was approximately $797,000 consisting of $158,000 paid in cash and
the issuance of 22,858 shares of Common Stock of the Company with an estimated
fair market value of $640,000. The Company recorded transaction expenses of
approximately $104,000. As a result of the acquisition, the Company expensed
approximately $701,000 in the quarter ended December 31, 1996 as acquired
in-process research and development and is amortizing approximately $236,000 of
goodwill over seven years.
In March 1997, the Company acquired the DynaStar family of products
from Dynatech Communications, Inc. The DynaStar product line is a family of
compact, flexible, integrated multi-service access switch connectivity products
that support extensive multi protocol WAN connections including TCP/IP, PPP,
Frame Relay, X.25 and ATM. The cash purchase price paid by the Company was $6.4
million. The Company assumed approximately $274,000 of debt and recorded
transaction expenses of approximately $350,000. As a result of the acquisition,
the Company expensed approximately $2.7 million in the quarter ended March 31,
1997 as acquired in-process research and development and will amortize other
acquired intangibles of approximately $2.2 million over five to seven years.
In August 1997, the Company acquired certain assets of Sourcecom, Inc.
a developer of high performance broadband access devices. The cash purchase
price paid by the Company was approximately $8.0 million and the Company
incurred approximately $0.6 million in acquisition costs. As a result of the
acquisition, the Company expensed approximately $6.7 million in the quarter
ended September 30, 1997 as acquired in-process research and development and
will amortize other acquired intangibles of approximately $1.3 million over five
years. In connection with this acquisition, the Company hired approximately 30
employees, principally in engineering. The Company intends to spend resources
converting certain Sourcecom products to create a family of gateway service
devices. There can be no assurance as to the results of this product
development.
9
<PAGE> 10
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,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Net sales ................................................. 100.0% 100.0%
Cost of goods sold.......................................... 43.8 43.8
----- -----
Gross profit................................................ 56.2 56.2
Operating expenses:
Research and development................................. 29.3 15.2
Sales and marketing...................................... 27.6 21.9
General and administrative............................... 16.1 9.8
In-process research and development...................... 51.8
----- -----
Total operating expenses.................................... 124.8 46.9
----- -----
Income (loss) from operations............................... (68.6) 9.3
Net interest and other income............................... 3.6 8.3
----- -----
Income (loss) before taxes.................................. (65.0) 17.6
Provision for income taxes.................................. 3.7 4.9
----- -----
Net income (loss)........................................... (68.7) 12.7
----- -----
</TABLE>
Net Sales
Net sales increased 28.0% to $13.0 million for the quarter ended
September 30, 1997 from $10.2 million for the quarter ended September 30, 1996
due to increased unit sales of the Company's Frame Relay access products. The
Company's customers may be divided into two categories: enterprise and carrier.
Carrier customers would include inter-exchange carriers, competitive access
providers, international record carriers, satellite service providers, Frame
Relay service providers and regional Bell operating companies. For the quarter
ended September 30, 1997, sales to enterprise customers were approximately $9.5
million, or 72.7% of net sales, and sales to carrier customers were
approximately $3.5 million, or 27.3% of net sales. For the quarter ended
September 30, 1996, sales to enterprise customers were approximately $9.2
million, or 91.0% of net sales, and sales to carrier customers were
approximately $0.9 million, or 9.0% of net sales.
The two categories of customers operate either terrestrial or wireless
networks. For the quarter ended September 30, 1997, sales of products into
terrestrial and wireless networks were approximately $8.4 million, or 64.3% of
net sales, and $4.6 million, or 35.7% of net sales, respectively. For the
quarter ended September 30, 1996, sales of products into terrestrial and
wireless networks were approximately $7.2 million, or 70.9% of net sales, and
$3.0 million, or 29.1% of net sales, respectively. Sales to enterprise customers
operating terrestrial Frame Relay access systems continue to be the cornerstone
of the Company's sales with carrier customer and wireless system sales
representing an increasing percentage of total 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 and OEM products represented a decreasing
percentage of net sales.
10
<PAGE> 11
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 $7.3 million, or 56.2% of net sales,
for the three months ended September 30, 1997 compared to $5.7 million, or 56.2%
of net sales, for the three months ended September 30, 1996. Gross profit
increased due to increased product sales, but remained constant as a percentage
of net sales.
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. The increase in gross
profit as a percentage of net 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 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 $3.8
million, or 29.3% of net sales, for the three months ended September 30, 1997
from $1.5 million, or 15.2% of net sales, for the three months ended September
30, 1996. Approximately $1.6 million of the increase was attributable to the
cost of personnel for the development of new products and enhancement of
existing products, primarily as a result of the development of products acquired
in the Dynatech and Sourcecom acquisitions, while the remainder of the increase
was primarily attributable to consultant fees, the cost of materials and
depreciation expense.
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. This increase
was 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.
While the actual amount expended will depend upon a variety of factors,
the Company anticipates increasing research and development expenses in the near
term. In particular, the Company anticipates increasing research and development
expenses related to the development of gateway service products acquired in the
Sourcecom acquisition..
Sales and marketing. Sales and marketing expense increased to $3.6 million, or
27.6% of net sales, for the three months ended September 30, 1997 from $2.2
million, or 21.9% of net sales, for the three months ended September 30, 1996.
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. These increases were
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 $2.1
million, or 16.1% of net sales, for the three months ended September 30, 1997
from $1.0 million, or 9.8% of net sales, for the three months ended September
30, 1996. The acquisitions of Dynatech and Sourcecom contributed significantly
to an increase in general and administrative expense without a commensurate
increase in sales.
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. General
and administrative expense will be impacted by approximately $260,000 per year
for five years commencing October 1, 1997, $424,000 per year for five to seven
years commencing March 11, 1997 and by $300,000 per year for seven years
commencing November 30, 1995 due to amortization of goodwill and other
intangibles associated with the acquisitions of the Sourcecom assets, the
Dynastar product
11
<PAGE> 12
family and Presticom, respectively. Amortization expense relating to
acquisitions was approximately $181,000 and $75,000 during the quarters ended
September 30, 1997 and September 30, 1996, respectively.
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 $468,000 for the three months
ended September 30,1997 compared to net interest income of approximately
$841,000 for the three months ended September 30, 1996. This decrease was
primarily attributable to the decrease in invested funds due to acquisitions in
fiscal 1997 and the first quarter of fiscal 1998.
Income Taxes
The provision for income taxes for the three months ended September 30,
1997 totaled approximately $479,000. The provision for income taxes for the
three months ended September 30, 1996 was approximately $504,000. 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 1998. 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.
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. In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, Earnings per Share (SFAS
128), which is required to be adopted on June 30, 1998. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements, primary
and fully diluted earnings per share will be replaced with basic and diluted
earnings per share. Basic earnings per share excludes the dilutive effect of
stock options and will therefore be higher than primary earnings per share.
Diluted earnings per share under the new standard is expected to be essentially
the same as primary earnings per share amounts calculated under principles
currently used. The impact of the adoption of SFAS 128 on earnings per share
calculations for the quarters ended September 30, 1997 and 1996 is not expected
to be material.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from the sale of stock
and sales of the Company's products. For the three months ended September 30,
1997, the Company's operating activities used cash of approximately $5.8
million. At September 30, 1997, the Company had approximately $70.5 million in
working capital, including $33.2 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 $0.8 million for the three months ended September 30, 1997. The
Company currently has no material commitments for capital expenditures.
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However, the Company anticipates spending between $3.5 million and $5.0 million
during the next 12 months to acquire test equipment, computer equipment, office
furniture, leasehold improvements 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, 1998. At September 30, 1997
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
8.5 % at September 30, 1997, 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, 1997 and September 30, 1996, 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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. NONE.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The effective date of the Company's first registration statement
(the "Registration Statement") filed on Form S-1 (Registration No. 33-90394)
under the Securities Act of 1933, as amended, was May 2, 1995. The class of
securities registered was Common Stock. The offering commenced on May 2, 1995
and all securities were sold in the offering. The managing underwriters for the
offering were Hambrecht & Quist, LLC and Wessels, Arnold & Henderson, LLC.
Pursuant to the Registration Statement, the Company registered
2,905,000 shares of Common Stock for its account at an aggregate price of
$37,765,000 and sold all 2,905,000 shares for an aggregate offering price of
$37,765,000, and registered 200,000 shares of Common Stock for the account of
certain selling stockholders at an aggregate price of $2,600,000 and sold all
200,000 shares for an aggregate offering price of $2,600,000.
The Company incurred expenses of $3,938,813, of which $2,643,550
represented underwriting discounts and commissions and $1,295,263 represented
other expenses. All such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after total expenses was $33,826,187,
Of the net proceeds from the offering, $3,147,812 was used for the
purchase and installation of machinery and equipment, $18,758,101 was used for
the acquisition of other businesses, $2,660,361 was used for the repayment of
indebtedness, $6,243,038 was used for working capital, $129,375 was used for
directors and officers insurance, $750,000 was used to license software and
$2,137,500 was invested in Netspeak, Corp. All of the above uses of net proceeds
represented direct or indirect payments to others.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. NONE.
ITEM 5. OTHER INFORMATION.
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 below. The Company's actual results may differ materially from
any future performance discussed in forward-looking statements.
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 and may
in the future experience significant fluctuations in net sales 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
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<PAGE> 15
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, in certain quarters the Company's operating
results have been, and 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 has been and
in the future could be materially adversely affected. For example, in quarters
in both fiscal 1996 and 1997 and in the first quarter of fiscal 1998, the
Company's net sales decreased when compared to the preceding quarter and, as a
result, the Company's results of operations and the price of the Company's
Common Stock were 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 growth in net sales or profitability on a
quarterly or annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's sales are primarily through resellers and are typically
characterized by several large orders and a large number of small orders.
Resellers typically do not stock a supply of the Company's products and place
orders with the Company only after they have received orders from their
customers. In addition, the Company's backlog at the beginning of a quarter is
generally insufficient to achieve expected net sales for the quarter. While it
is difficult for the Company to accurately forecast the timing and quantity of
orders on a quarter to quarter basis, the Company intends to increase expenses
with the expectation of future sales. The failure of the Company to accurately
forecast the timing and volume of orders for a quarter would adversely affect
the results of operations for such quarter and, potentially, for future periods.
Fluctuations in quarterly results may result in significant volatility in the
market price of the Company's Common Stock. In addition, sales of networking
products fluctuate from time to time based on numerous factors, including
capital spending levels and general economic and market conditions. Future
declines in networking product sales, as a result of general economic conditions
or for any other reason, could have a material adverse effect on the Company's
business, operating results and financial condition.
Limited History of Operations and Profitability. The Company was
organized in May 1987 and commenced shipments of its first product in October
1988. While the Company first achieved profitability in the fourth calendar
quarter of 1990, it incurred losses in periods subsequent to that time. Due to
the Company's limited history of profitable operations, there can be no
assurance that it will be profitable in future periods. The Company plans to
continue to expand its level of operations, resulting in increased fixed costs
and operating expenses. The Company's operating results and net income will be
adversely affected to the extent that net sales and gross profits do not
increase sufficiently to offset such increased expenses. There can be no
assurance that the Company will be able to maintain or increase net sales or
gross profits. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Technological Change, Changing Markets and New Products. The market
for the Company's products is characterized by rapid technological advances,
evolving industry standards, frequent new product introductions and
enhancements, and significant price competition. The introduction of products
involving superior or alternative technologies, the emergence of new industry
standards, governmental regulations, changes in a market's pricing structure and
other factors could render the Company's existing products, as well as products
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 or resulted in new products becoming obsolete or
unmarketable. 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 markets for the Company's existing and proposed products are
emerging or developing. These markets may not continue to develop, whether as a
result of competition, technological change, market forces or otherwise. The
Company's future operating results will be dependent in part upon the
development and growth of these markets. 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. 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
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<PAGE> 16
primarily due to increased competition and the introduction of new technologies.
Accordingly, the Company's ability to maintain or increase net sales and gross
margins will depend in part upon its ability to reduce its cost of sales, to
increase unit sales volumes of existing products and to introduce and sell new
products. There can be no assurance that the Company will be able to reduce its
cost of sales in the future to respond effectively to declining sales prices.
The Company budgets research and development expenditures based on
planned product introductions and enhancements; however, actual expenditures may
significantly differ from budgeted expenditures. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced products and product enhancements is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will successfully identify, develop or introduce new products or
product enhancements. Products such as those offered by the Company may contain
undetected or unresolved software errors when they are first introduced or as
new versions are released. There can be no assurance that, despite extensive
testing by the Company, software errors will not be found in new products or
upgrades after commencement of commercial shipments, resulting in delay in or
loss of market acceptance. Future delays in the introduction or shipment of new
or enhanced products, the inability of such products to gain market acceptance
or problems associated with new product transitions could adversely affect the
Company's operating results, particularly on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Substantial Competition. The market for the Company's products is
highly competitive. The Company competes directly domestically and
internationally with a variety of companies offering fast packet access and
gateway products including Cisco, FastComm, Memotec, MICOM, Motorola, Sync and
other companies. 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 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 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,
DeltaComm Corporation in December 1996, the DynaStar product family in March
1997 and the assets of Sourcecom, Inc. in August 1997. To obtain benefits from
these acquisitions, the Company must successfully integrate the acquired
companies with the Company. Due in part to consolidation in the Company's
industry, the Company may in the future pursue acquisitions of related
businesses, products or technologies. Acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt, the creation and amortization of goodwill and the incurrence of
acquisition related expenses, all of which could adversely affect the Company's
results of operations. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired businesses; 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. Comsat Brazil
accounted for 11.5% of the Company's net sales for fiscal 1997 and 6.2% for the
three months ended September 30, 1997. The Company's five largest customers
accounted for 42% and 36% of the Company's net sales for the fiscal years ended
June 30, 1996 and 1997, respectively, and 26% for the three months ended
September 30, 1997. 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. For
example, Scientific Atlanta accounted for approximately 17% and less than 1% of
the Company's net sales in fiscal years ended June 30, 1996 and 1997,
respectively. 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 acquisitions. 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
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<PAGE> 17
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 63% and 75% of the Company's net sales for the fiscal years ended
June 30, 1996 and 1997, respectively, and 79% for the three months ended
September 30, 1997. 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 and Asia, where political or
economic issues could adversely affect the purchasing decision of customers.
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 and potentially leading
to an extension of payment terms. 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.
The Company's products must also be certified by domestic telecommunications
carriers. In foreign countries, the Company's products are subject to a wide
variety of governmental review and certification requirements. From time to
time, foreign governments have altered certification or regulatory requirements
which has adversely impacted the Company's ability to sell products in such
markets. Any future inability to obtain on a timely basis or retain domestic
certificate or foreign regulatory approvals could have a material adverse effect
on the Company's business, operating results and financial condition.
Reliance on Third Party Suppliers. The Company relies on third party
suppliers who supply the components used in the Company's products. 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
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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. The loss of any key reseller could
adversely affect the Company's business.
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."
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Volatility of Stock Price. The trading price of the Company's 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.
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.
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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.
4.2 Form of Warrant of the Company. Incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.1 Standard Industrial/Commercial Multi-Tenant Lease-Modified Net
dated May 23, 1994 by and between Herman Bennett and the Company.
Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.2 Master Lease Agreement dated January 11, 1994 by and between the
Company and Leasetec Corporation, as amended and supplemented.
Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.3 Loan and Security Agreement dated March 23, 1993, as amended,
between Silicon Valley Bank and the Company and related agreements
and documents. Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.4 Loan and Security Agreement (Exim) dated May 11, 1994, as amended,
between Silicon Valley Bank and the Company and related agreements
and documents. Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.5 Executive Employment Agreement dated December 23, 1992, by and
between the Company and Martin Shum. Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.6 Form of Indemnification Agreement. Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.7 1987 Stock Option Plan (the "1987 Plan"). Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on Form
S-1, Registration No. 33-90394.
10.8 Form of Amended Notice of Grant of Stock Option with respect to
holders of installment incentive stock options granted under the
1987 Plan. Incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.9 Form of 1987 Installment Incentive Stock Option Agreement,
Immediately Exercisable Stock Option Agreement and Immediately
Exercisable Non-Qualified Stock Option Agreement generally used in
connection with the 1987 Plan. Incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.10 Form of 1987 Stock Purchase Agreement generally used in connection
with the 1987 Plan. Incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.11 1993 Stock Option Plan as amended (the "1993 Plan"). Incorporated
by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
20
<PAGE> 21
10.12 Form of Notice of Grant of Stock Option generally used in
connection with the 1993 Plan. Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.13 Form of 1993 Stock Option Agreement generally used in connection
with the 1993 Plan. Incorporated by reference to Exhibit 10.13 to
the Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.14 Form of 1993 Stock Purchase Agreement generally used in connection
with the 1993 Plan. Incorporated by reference to Exhibit 10.14 to
the Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.15* Cooperation and Supply Agreement dated as of November 19, 1993 by
and between StrataCom, Inc. and the Company. Incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement
on Form S-1, Registration No. 33-90394.
10.16 Technical Information Escrow Agreement dated July 18, 1994 by and
between StrataCom, Inc., the Indianapolis Vault Company and the
Company. Incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.17 Memorandum of Agreement dated January 19, 1995 by and between the
Company, Promon International, Inc. and Pacific Technology Fund.
Incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.18 Shareholder Rights Agreement dated as of April 23, 1992, as amended
by Amendment No. 1 to Shareholder Rights Agreement dated as of
August 11, 1992, Amendment No. 2 to Shareholder Rights Agreement
dated as of October 19, 1992, Amendment No. 3 to Shareholder Rights
Agreement dated as of December 18, 1992, Amendment No. 4 to
Shareholder Rights Agreement dated as of March 15, 1993, Amendment
No. 5 to Shareholder Rights Agreement dated as of November 16,
1993, and Amendment No. 6 to Shareholder Rights Agreement dated as
of December 15, 1994. Incorporated by reference to Exhibit 10.18 to
the Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.19 Virtual DAMA Agreement dated December 31, 1993, by and between the
Company and Promon Technical Services, Inc., as amended.
Incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394.
10.20 1995 Stock Option/Stock Issuance Plan (the "1995 Plan").
Incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.22 Form of Stock Option Agreement generally used in connection with
the Discretionary Option Grant Program of the 1995 Plan.
Incorporated by reference to Exhibit 99.3 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.21 Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Right). Incorporated by reference to Exhibit 99.4 to
the Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.24 Form of Addendum to Stock Option Agreement (Involuntary Termination
Following Change of Control). Incorporated by reference to Exhibit
99.5 to the Company's Registration Statement on Form S-8,
Registration No. 33-80007.
10.25 Form of Addendum to Stock Option Agreement (Special Tax Elections).
Incorporated by reference to Exhibit 99.6 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.26 Form of Automatic Stock Option Agreement. Incorporated by reference
to Exhibit 99.9 to the Company's Registration Statement on Form
S-8, Registration No. 33-80007.
10.27 Form of Stock Issuance Agreement generally used in connection with
the Discretionary Option Grant Program of the 1995 Plan.
Incorporated by reference to Exhibit 99.10 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.28 Form of Addendum to Stock Issuance Agreement (Involuntary
Termination Following Change of Control). Incorporated by reference
to Exhibit 99.11 to the Company's Registration Statement on Form
S-8, Registration No. 33-80007.
21
<PAGE> 22
10.29 Form of Addendum to Stock Issuance Agreement (Special Tax
Elections). Incorporated by reference to Exhibit 99.12 to the
Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.30 Employee Stock Purchase Plan. Incorporated by reference to Exhibit
99.13 to the Company's Registration Statement on Form S-8,
Registration No. 33-80007.
10.31 The Share Purchase Agreement By and Among the Company, Canada Inc.
and Certain Presticom Stockholders, dated as of November 24, 1995.
Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, dated November 30, 1995.
10.32 License Agreement dated May 8, 1996, by and between the Company and
SkyData, Inc. Incorporated by reference to Exhibit 10.32 to the
Company's Registration Statement on Form S-3, Registration No.
333-04183.
10.33 1997 Non-Executive Officer Stock Option/Stock Issuance Plan.
Incorporated by reference to Exhibit 10.28 to the Company's
Quarterly Report for the period ended March 31, 1997.
10.34 Form of Notice of Grant of Stock Option generally used in
connection with 1997 Plan. Incorporated by reference to Exhibit
10.29 to the Company's Quarterly Report for the period ended March
31, 1997.
10.35 Form of Stock Option Agreement generally used in connection with
1997 Plan Incorporated by reference to Exhibit 10.30 to the
Company's Quarterly Report for the period ended March 31, 1997.
10.36 Form of Addendum to Stock Option Agreement. Incorporated by
reference to Exhibit 10.31 to the Company's Quarterly Report for
the period ended March 31, 1997.
10.37 The Asset Purchase Agreement by and between the Company and
Sourcecom, Inc. dated as of July 16, 1997. Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K dated August 11, 1997.
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 List of Subsidiaries of the Company. Incorporated by reference to
Exhibit 23.1 to the Company's Annual Report on form 10K for the
period ended June 30, 1997.
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:
--------------------
A Current Report on Form 8-K dated August 11, 1997 was filed in
the quarter ended September 30. 1997 with respect to the Sourcecom acquisition.
An amended Current Report on Form 8-K was filed on November 11, 1997.
22
<PAGE> 23
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 14, 1997 ACT NETWORKS, INC.
/s/ Melvin L Flowers
Melvin L. Flowers
Vice President, Finance and
Administration,
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
11.1 Statement Regarding Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
24
<PAGE> 1
Exhibit 11.1 Statement Re: Computation of Per-Share Earnings EXHIBIT 11.1
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Primary
Average common shares outstanding 9,234,828 9,123,096
Net effect of dilutive options and warrants-
based on treasury stock method (or modified
treasury method if applicable) using average
market price -- 860,281
------------ -----------
9,234,828 9,983,377
------------ -----------
Net Income (loss) $ (8,946,142) $ 1,290,625
------------ -----------
Per Share amount $ (0.97) $ 0.13
------------ -----------
Fully Diluted
Average common shares outstanding 9,234,828 9,123,096
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
------------ -----------
9,234,828 10,007,401
------------ -----------
Net (Loss) Income $ (8,946,142) $ 1,290,625
------------ -----------
Per Share amount $ (0.97) $ 0.13
------------ -----------
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,816,196
<SECURITIES> 27,475,058
<RECEIVABLES> 18,587,472
<ALLOWANCES> 486,000
<INVENTORY> 15,014,286
<CURRENT-ASSETS> 79,459,304
<PP&E> 9,674,748
<DEPRECIATION> 4,366,132
<TOTAL-ASSETS> 92,593,756
<CURRENT-LIABILITIES> 9,005,351
<BONDS> 0
0
0
<COMMON> 9,304
<OTHER-SE> 83,579,101
<TOTAL-LIABILITY-AND-EQUITY> 92,593,756
<SALES> 13,020,587
<TOTAL-REVENUES> 13,020,587
<CGS> 5,698,845
<TOTAL-COSTS> 9,507,288
<OTHER-EXPENSES> 6,750,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (468,375)
<INCOME-PRETAX> (8,467,171)
<INCOME-TAX> 478,971
<INCOME-CONTINUING> (8,946,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,946,142)
<EPS-PRIMARY> (0.97)
<EPS-DILUTED> (0.97)
</TABLE>
