<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 DECEMBER 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
COMMISSION FILE NUMBER 0-25740
ACT NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------
DELAWARE 77-0396887
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
188 CAMINO RUIZ, CAMARILLO, CALIFORNIA 93012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 388-2474
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER SIX 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 FEBRUARY 10, 1997, THERE WERE 9,192,027 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
Consolidated Balance Sheets as of
December 31, 1996 and June 30, 1996...................................3
Consolidated Statements of Operations
for the Six Month Periods Ended
December 31, 1996 and 1995............................................4
Consolidated Statements
of Cash Flows for the Six Month Periods Ended
December 31, 1996 and 1995............................................5
Notes to Condensed Consolidated
Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................8
PART II. OTHER INFORMATION
Item 1 Legal Proceedings............................................................13
Item 2 Changes in Securities........................................................13
Item 3 Defaults upon Senior Securities..............................................13
Item 4 Submission of Matters to a Vote of Securityholders...........................13
Item 5 Other Information. Risk Factors.............................................14
Item 6. Exhibits and Reports on Form 8-K.............................................21
SIGNATURE........................................................................................................24
EXHIBIT INDEX....................................................................................................25
</TABLE>
2
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACT NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 70,869,413 $ 70,374,310
Accounts receivable, less allowances of $287,000
in December and June 12,308,744 9,861,953
Inventory 8,335,963 7,409,459
Prepaid expenses 883,759 599,765
Deposits 214,764 65,659
------------------------------------
Total current assets 92,612,643 88,311,146
Plant, equipment and other improvements:
Machinery and equipment 4,488,479 3,017,720
Furniture and fixtures 446,122 379,386
Computer software 1,046,025 801,643
Leasehold improvements 533,649 528,527
------------------------------------
6,514,275 4,727,276
Accumulated depreciation and amortization 2,957,835 2,248,926
------------------------------------
3,556,440 2,478,350
Goodwill 1,970,883 1,882,455
Other assets 979,161 1,178,565
------------------------------------
Total assets $ 99,119,127 $ 93,850,516
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,982,534 $ 2,121,933
Accrued expenses 1,958,908 639,746
Accrued vacation 353,599 334,635
Accrued commissions 132,734 143,243
Income taxes payable 1,078,805 245,241
Deferred income taxes 78,406 78,803
------------------------------------
Total current liabilities 5,584,986 3,563,601
Long-term debt 147,294
Stockholders' equity:
Common stock and additional paid-in capital; $.001 par value:
Authorized - 40,000,000
Issued and outstanding 9,151,822 in December
and 9,117,329 in June 99,119,242 98,175,394
Accumulated deficit (5,585,101) (8,035,773)
------------------------------------
Total stockholders' equity 93,534,141 90,139,621
------------------------------------
Total liabilities and stockholders' equity $ 99,119,127 $ 93,850,516
====================================
</TABLE>
See accompanying notes.
3
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ACT Networks, Inc.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------------ ----------------------------------
1996 1995 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 11,904,123 $ 6,167,103 $ 22,073,068 $ 11,268,885
Expenses:
Cost of goods sold 5,213,846 3,691,219 9,664,789 6,333,550
Research and development 1,767,243 1,241,465 3,313,192 2,278,961
Sales and marketing 2,319,393 1,752,413 4,542,673 3,158,452
General and administrative 1,165,946 806,818 2,161,660 1,407,036
In-process research and
development 700,746 5,600,000 700,746 5,600,000
----------------------------------------------------------------------------
11,167,174 13,091,915 20,383,060 18,777,999
----------------------------------------------------------------------------
Income (loss) from operations 736,949 (6,924,812) 1,690,008 (7,509,114)
Other:
Interest and other income, net 838,297 307,918 1,679,587 681,718
----------------------------------------------------------------------------
Income (loss) before income taxes 1,575,246 (6,616,894) 3,369,595 (6,827,396)
Provision for income taxes 460,466 39,430 964,190 39,430
============================================================================
Net income (loss) $ 1,114,780 $ (6,656,324) $ 2,405,405 $ (6,866,826)
============================================================================
Net income (loss) per share $ 0.11 $ (0.92) $ 0.24 $ (0.96)
============================================================================
Shares used in computing net income
(loss) per share 10,052,069 7,206,296 10,022,022 7,164,184
============================================================================
</TABLE>
See accompanying notes
4
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ACT Networks, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
--------------------------------------
1996 1995
--------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,405,405 $ (6,866,825)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 865,362 455,163
Write-off of in-process research and
development 700,746 5,600,000
Changes in operating assets and liabilities:
Accounts receivable (2,442,917) (1,402,738)
Inventory (859,268) (1,407,598)
Prepaid expenses and deposits (425,875) (194,389)
Accounts payable, accrued
expenses and income taxes payable 2,013,270 (634,166)
--------------------------------------
Net cash (used in) provided by operations 2,256,723 (4,450,553)
INVESTING ACTIVITIES
Increase in short-term investments (6,923,887)
Purchase of fixed assets (1,758,413) (1,076,840)
Acquisition of DeltaComm Corporation (219,033)
Acquisition of Presticom, Inc. (6,880,470)
Other assets 164,005 59,316
--------------------------------------
Net cash used in investing activities (1,813,441) (14,821,881)
FINANCING ACTIVITIES
Stock warrants and options 303,848 37,526
Repayment of notes payable (297,294) (533)
Research & development deposit 45,000
--------------------------------------
Net cash provided by financing activities 6,554 81,993
Translation adjustment 45,267 (3,644)
--------------------------------------
Net (decrease) increase in cash 495,103 (19,194,086)
Cash and equivalents at beginning of the period 70,374,310 30,546,278
======================================
Cash and equivalents at end of the period $ 70,869,413 $ 11,352,192
======================================
</TABLE>
Non-cash equity transaction: The Company issued 22,858 shares of Common Stock
with an estimated fair market value of $640,000 as part of the acquisition of
DeltaComm Corporation.
See accompanying notes
5
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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 six-month period ended December 31, 1996 are
not necessarily indicative of the results that may be expected for future
periods. 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 December 31, 1996 presentation.
2. BUSINESS ACQUISITION
On December 16, 1996, the Company acquired all the issued and outstanding shares
of DeltaComm Corporation, an Arizona corporation ("DeltaComm"). DeltaComm is a
developer of bandwidth-efficient modems with expertise in the satellite
communication 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. Transaction expenses were approximately $61,000.
The acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market values at
the date of acquisition. The purchase price plus costs directly attributable to
the completion of the acquisition have been allocated to the assets and
liabilities acquired. Approximately $701,000 of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and was charged to the Company's operations.
3. INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C>
Purchased parts ...................... $ 4,083,300 $ 3,629,460
Sub-assemblies; finished goods.......... 4,252,663 3,779,999
------------ ------------
$ 8,335,963 $ 7,409,459
------------ ------------
</TABLE>
6
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ACT NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS(CONTINUED)
(Unaudited)
4. 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.
5. INCOME TAXES
The provision for income taxes for the six months ended December 31, 1996
totaled approximately $964,000. There was no provision for income taxes for the
six months ended December 31, 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.
7
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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 first quarter of 1989, the Company shipped its
first integrated product, a point-to-point multiplexer 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 first
integrated Frame Relay access product line (ACTNet). The company introduced its
wireless Frame Relay access product line (SkyFrame) in the third quarter of
1995. The multiprotocol data line of products (Netperformer) was acquired in the
fourth quarter of 1995 with the acquisition of Presticom.
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
66% and 63% of the Company's net sales for the fiscal years ended June 30, 1995
and 1996, respectively, and approximately 76% for the six months ended December
31, 1996. The Company expects that international sales will continue to account
for a significant portion of the Company's net sales in future periods. In
addition, the Company believes that a majority of its sales to customers inside
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 37% for the six months ended December 31,
1996. 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
8
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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 $61,000. 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.
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 December 31, Six Months Ended December 31,
-----------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 43.8% 59.9% 43.8% 56.2%
---------------------------------------------------------------
Gross profit................................................ 56.2% 40.1% 56.2% 43.8%
Operating expenses:
Research and development................................. 14.8% 20.1% 15.0% 20.2%
Sales and marketing...................................... 19.5% 28.4% 20.6% 28.0%
General and administrative............................... 9.8% 13.1% 9.8% 12.5%
In-process research and development...................... 5.9% 90.8% 3.2% 49.7%
---------------------------------------------------------------
Total operating expenses.................................... 50.0% 152.4% 48.6% 110.4%
Income (loss) from operations............................... 6.2% (112.3)% 7.7% (66.6)%
Net interest and other income............................... 7.0% 5.0% 7.6% 6.0%
---------------------------------------------------------------
Income (loss) before taxes.................................. 13.2% (107.3)% 15.3% (60.6)%
Provision for income taxes.................................. 3.8% 0.6% 4.4% 0.3%
---------------------------------------------------------------
Net income (loss)........................................... 9.4% (107.9)% 10.9% (60.9)%
===============================================================
</TABLE>
Net sales
Net sales increased 92% to $11.9 million for the three months ended
December 31, 1996 from $6.2 million for the three months ended December 31,
1995. The increase was primarily due to increased sales of the Company's Frame
Relay products. Net sales of Frame Relay products were $11.1 million and $4.3
million for the three months ended December 31, 1996 and December 31, 1995,
respectively. In addition, products produced by the Company's Canadian
subsidiary accounted for 30% of the increase in net sales.
Net sales increased 96% to $22.1 million for the six months ended
December 31, 1996 from $11.3 million for the six months ended December 31, 1995.
Products produced by the Company's Canadian subsidiary accounted for 30%, of the
increase in net sales. Net sales of Frame Relay products were $20.4 million and
$7.0 million for the six months ended December 31, 1996 and December 31, 1995,
respectively. Net sales of point-to-point products were level at $1.6 million
over the two periods. The Company anticipates that point-to-point products will
continue to be a declining portion of its product mix. During the current six
month 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 six months
ended December 31, 1996 from $2.7 million for the six months ended December 31,
1995. The Company did not ship any OEM voice cards to Scientific Atlanta in the
six months ended December 31, 1996 and has changed 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.
The Company's customers may be divided into two categories, enterprise
and carrier. Carrier customers may include inter-exchange carriers, regional
Bell operating companies, competitive access providers, international record
carriers, satellite service providers, and Frame Relay service providers. For
the six months ended December 31, 1996, sales to enterprise and carrier
customers were approximately $20 million, or 90.5%, and $2.1 million, or 9.5%,
respectively. These customers operate either terrestial or wireless networks.
For the same six month period, sales of products into terrestial and wireless
networks were approximately $16 million, or 72.5%, and $6.1 million, or 27.5%,
respectively.
Gross Profit
Gross profit represents net sales less the cost of goods sold, which
includes cost of materials, manufacturing overhead costs and direct labor
expenses. The Company's gross profit was $6.7 million, or
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56.2% of net sales, for the three months ended December 31, 1996 compared to
$2.5 million, or 40.1% of net sales, for the three months ended December 31,
1995.
The Company's gross profit was $12.4 million, or 56.2% of net sales,
for the six months ended December 31, 1996 compared to $4.9 million, or 43.8% of
net sales, for the six months ended December 31, 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 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 $1.8
million, or 14.8% of net sales, for the three months ended December 31, 1996
from $ 1.2 million, or 20.1% of net sales, for the three months ended December
31, 1995. Research and development expense increased to $3.3 million, or 15% of
net sales, for the six months ended December 31, 1996 from $2.3 million, or
20.2% of net sales, for the six months ended December 31, 1995. These dollar
increases were primarily attributable to the cost of personnel for the
development of new products and enhancement of existing products. Other material
components of the increases 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 $2.3 million, or
19.5% of net sales, for the three months ended December 31, 1996 from $1.8
million, or 28.4% of net sales, for the three months ended December 31, 1995.
Sales and marketing expense increased to $4.5 million, or 20.6% of net sales,
for the six months ended December 31, 1996 from $3.2 million, or 28.0% of net
sales, for the six months ended December 31, 1995. These dollar 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 $1.2
million, or 9.8% of net sales, for the three months ended December 31, 1996 from
$0.8 million, or 13.1% of net sales, for the three months ended December 31,
1995. General and administrative expense increased to $2.2 million, or 9.8% of
net sales, for the six months ended December 31, 1996 from $1.4 million, or
12.5% of net sales, for the six months ended December 31, 1995. While the dollar
amounts of general and administrative expense increased, the Company was able to
reduce expense as a percentage of sales due primarily to an increase in 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.
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Net interest and other income (expense)
Net interest income was $838,297 for the three months ended December
31,1996 compared to net interest income of $ 307,918 for the three months ended
December 31, 1995 Net interest income was $1,679,587 for the six months ended
December 31,1996 compared to net interest income of $681,718 for the six months
ended December 31, 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 six months ended December 31,
1996 totaled approximately $964,000. There was no provision for income taxes for
the six months ended December 31, 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.
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
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 six months ended December 31, 1996, the Company's operating
11
<PAGE> 12
activities provided cash of approximately $2.2 million. At December 31, 1996,
the Company had approximately $87 million in working capital, including $70.9
million in cash and cash equivalents.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, and computer software amounted to approximately $1.8
million for the six months ended December 31, 1996. The Company currently has no
material commitments for capital expenditures. However, the Company anticipates
spending between $2.0 million and $3.0 million during the next 12 months to
acquire test equipment, computer equipment, and tooling.
The acquisition of DeltaComm used cash of approximately $158,000 for
the purchase and $61,000 for transaction expenses.
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 December 31, 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 December 31, 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 December 31, 1996 and December 31, 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.
12
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. NONE.
ITEM 2. CHANGES IN SECURITIES. NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
At the Company's 1995 Annual Meeting of Stockholders held on
November 4, 1996 and November 29, 1996, (the "Meeting") the
following matters were submitted and voted on by securityholders
and were adopted:
A. The approval of an amendment to the 1995 Stock Option/Stock
Issuance Plan (the "1995 Plan"), pursuant to which (i) the
Company increased its share reserve by 500,000 shares; (ii)
decreased the maximum discount available under the 1995 Plan
from 50% to 15% of the fair market value on the grant date,
(iii) allowed Compensation Committee members to participate
in the Discretionary Option Grant and Stock Issuance
Programs and (iv) effected certain other administrative
changes.
The results of the vote are as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C> <C>
3,204,229 2,418,300 12,663 1,526,125
</TABLE>
B. The election of Martin Shum and Brig. Gen. Harold R. Johnson
as directors of the Company to serve until the 1999 Meeting
of Stockholders and until their respective successors have
been elected and qualified was carried.
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C> <C>
Martin Shum 7,144,155 17,162
Brig. Gen. Harold R. Johnson 7,144,155 17,162
</TABLE>
C. The ratification of Ernst & Young, LLP as independent
auditors of the Company for the fiscal year ending June 30,
1996.
The results of the vote are as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
7,159,281 950 1086
</TABLE>
The following matters were submitted at the meeting but not
approved by the securityholders:
A. The approval of an amendment to the Company's Certificate of
Incorporation to authorize 5,000,000 shares of a class of
undesignated preferred stock.
The results of the vote are as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C> <C>
2,699,944 2,954,506 4,962 1,533,026
</TABLE>
13
<PAGE> 14
B. The approval of an amendment to the Company's Certificate of
Incorporation to grant the Board of Directors the power to
amend the Company's Bylaws.
The results of the vote are as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
3,000,400 2,646,509 12,503 1,533,026
</TABLE>
C. The approval of an amendment to the Certificate of
Incorporation and Bylaws eliminating stockholders' right to
call special meetings of stockholders.
The results of the vote are as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
2,618,012 3,023,781 17,619 1,533,026
</TABLE>
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 experienced
two quarterly operating losses in the fiscal year ended June 30, 1996. 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 December 31, 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."
14
<PAGE> 15
The Company's sales are primarily through resellers and are typically
characterized by several large orders and a large number of small orders.
Resellers typically do not stock a supply of the Company's products and place
orders with the Company only after they have received orders from their
customers. In addition, the Company's backlog at the beginning of a quarter is
generally insufficient to achieve expected net sales for the quarter. While it
is difficult for the Company to accurately forecast the timing and quantity of
orders on a quarter to quarter basis, the Company intends to increase expenses
with the expectation of future sales. The failure of the Company to accurately
forecast the timing and volume of orders for a quarter would adversely affect
the results of operations for such quarter and, potentially, for future periods.
Fluctuations in quarterly results may result in significant volatility in the
market price of the Company's Common Stock. In addition, sales of networking
products fluctuate from time to time based on numerous factors, including
capital spending levels and general economic and market conditions. Future
declines in networking product sales, as a result of general economic conditions
or for any other reason, could have a material adverse effect on the Company's
business, operating results and financial condition.
Limited History of Operations and Profitability. The Company was
organized in May 1987 and commenced shipments of its first product in October
1988. While the Company first achieved profitability in the fourth calendar
quarter of 1990, it incurred losses in periods subsequent to that time. Due to
the Company's limited history of profitable operations, there can be no
assurance that it will be profitable in future periods. The Company plans to
continue to expand its level of operations, resulting in increased fixed costs
and operating expenses. The Company's operating results and net income will be
adversely affected to the extent that net sales and gross profits do not
increase sufficiently to offset such increased expenses. There can be no
assurance that the Company will be able to maintain or increase net sales or
gross profits. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Technological Change, Changing Markets and New Products. The market
for the Company's products is characterized by rapid technological advances,
evolving industry standards, frequent new product introductions and
enhancements, and significant price competition. The introduction of products
involving superior or alternative technologies, the emergence of new industry
standards, governmental regulation or changes in a market's pricing structure
could render the Company's existing products, as well as products currently
under development, obsolete and unmarketable in one or more markets which could
adversely affect the Company's business, operating results and financial
condition. The Company has experienced instances where one or more of those
factors resulted in a significant decrease in sales of the Company's products in
particular markets. For example, a rapid decline in the market for certain
point-to-point products resulted in reduced sales and an inventory write-down in
the quarter ended December 31, 1995.
The market for Frame Relay products, especially access devices such as
those produced by the Company, is currently emerging and may not continue to
develop, whether as a result of competition, technological change, market forces
or otherwise. In addition, the transmission of voice over a Frame Relay network
is a new application that has not received widespread acceptance. The Company's
future operating results and ability to implement its strategy successfully will
be dependent in part upon the development and growth of the public Frame Relay
services market for voice, data and integrated applications. Public carriers
such as AT&T and MCI offer services which may adversely affect the adoption of
services and products based on Frame Relay technologies. For example, the
availability of inexpensive voice communications services in the United States
may reduce or eliminate the cost 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
15
<PAGE> 16
technological developments, changes in industry standards or
customer requirements, or any significant delay in product development or
introduction, could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will respond effectively to technological changes or new product
announcements by others or that the Company will be able to successfully develop
and market new products or product enhancements and that any new product or
product enhancement will gain market acceptance. The Company expects that the
average sales prices of its products will decline in the future primarily due to
increased competition and the introduction of new technologies. Accordingly, the
Company's ability to maintain or increase net sales and gross margins will
depend in part upon its ability to reduce its cost of sales, to increase unit
sales volumes of existing products and to introduce and sell new products. There
can be no assurance that the Company will be able to reduce its cost of sales in
the future to respond effectively to declining sales prices.
The Company budgets research and development expenditures based on
planned product introductions and enhancements; however, actual expenditures may
significantly differ from budgeted expenditures. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced products and product enhancements is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will successfully identify, develop or introduce new products or
product enhancements. Products such as those offered by the Company may contain
undetected or unresolved software errors when they are first introduced or as
new versions are released. There can be no assurance that, despite extensive
testing by the Company, software errors will not be found in new products or
upgrades after commencement of commercial shipments, resulting in delay in or
loss of market acceptance. Future delays in the introduction or shipment of new
or enhanced products, the inability of such products to gain market acceptance
or problems associated with new product transitions could adversely affect the
Company's operating results, particularly on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Substantial Competition. The market for the Company's products is
highly competitive. The Company competes directly domestically and
internationally with a variety of companies offering Frame Relay access products
including FastComm, Memotec, MICOM, Motorola, Sync and other companies. The
Company anticipates competition from manufacturers of Frame Relay switches, such
as Cascade and StrataCom, who are also suppliers to, or customers of, the
Company.
The Company expects substantial additional competition from existing
competitors and from a number of other companies which may enter the Company's
existing or future markets. Many of the Company's current and potential
competitors have substantially greater name recognition and financial,
marketing, technical and other resources than the Company. Many of these
companies sell directly to end-users, which the Company believes may provide a
competitive edge over the Company when marketing either similar products or
alternative networking solutions. Consolidations in the industry, such as the
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 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 and
DeltaComm Corporation in December 1996. To obtain benefits from these
acquisitions, the Company must successfully integrate the acquired company 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 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
16
<PAGE> 17
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. The Company's
five largest customers accounted for 46% and 37% of the Company's net sales for
the fiscal year ended June 30, 1996 and the six months ended December 31, 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 76% for the six months ended
December 31, 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
17
<PAGE> 18
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
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.
The Company's sales through OEMs who purchase custom products
decreased from 17.7% for the fiscal year ended June 30, 1995 to 0.7% for the six
months ended December 31, 1996. The Company does not classify private label
sales of standard products as OEM sales. In fiscal 1996, virtually all of the
Company's OEM sales were generated by sales of custom voice cards to Scientific
Atlanta for use in its satellite based communication system. The Company does
not believe it will sell additional OEM voice cards to Scientific Atlanta. 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.
18
<PAGE> 19
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."
19
<PAGE> 20
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.
20
<PAGE> 21
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.
21
<PAGE> 22
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.
22
<PAGE> 23
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
December 31, 1996
23
<PAGE> 24
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: February 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)
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
11.1 Statement Regarding Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
25
<PAGE> 1
EXHIBIT 11.1
Exhibit 11.1 Statement Re: Computation of Per-Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary
Average common shares outstanding 9,138,653 7,206,296 9,134,560 7,164,184
Net effect of dilutive options and warrants-
based on treasury stock method (or modified
treasury method if applicable) using average
market price 913,416 887,462
-------------- --------------- --------------- ---------------
10,052,069 7,206,296 10,022,022 7,164,184
-------------- --------------- --------------- ---------------
Net Income (loss) $ 1,114,780 $ (6,656,322) $ 2,405,405 $ (6,866,825)
-------------- --------------- --------------- ---------------
Per Share amount $ 0.11 $ (0.92) $ 0.24 $ (0.96)
-------------- --------------- --------------- ---------------
Fully Diluted
Average common shares outstanding 9,138,653 7,206,296 9,134,560 7,164,184
Net effect of dilutive options and warrants-
based on treasury stock method (or modified
treasury method if applicable) using
year-end market price 1,042,769 1,034,102
-------------- --------------- --------------- ---------------
10,181,422 7,206,296 10,168,662 7,164,184
-------------- --------------- --------------- ---------------
Net (Loss) Income $ 1,114,780 $ (6,656,322) $ 2,405,405 $ (6,866,825)
-------------- --------------- --------------- ---------------
Per Share amount $ 0.11 $ (0.92) $ 0.24 $ (0.96)
-------------- --------------- --------------- ---------------
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 53,273,491
<SECURITIES> 17,595,922
<RECEIVABLES> 12,595,726
<ALLOWANCES> 286,982
<INVENTORY> 8,335,963
<CURRENT-ASSETS> 92,612,643
<PP&E> 6,514,275
<DEPRECIATION> 2,957,835
<TOTAL-ASSETS> 99,119,127
<CURRENT-LIABILITIES> 5,584,986
<BONDS> 0
0
0
<COMMON> 9,152
<OTHER-SE> 93,524,989
<TOTAL-LIABILITY-AND-EQUITY> 99,119,127
<SALES> 22,073,068
<TOTAL-REVENUES> 22,073,068
<CGS> 9,664,789
<TOTAL-COSTS> 19,682,314
<OTHER-EXPENSES> 700,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,679,587)
<INCOME-PRETAX> 3,369,595
<INCOME-TAX> 964,190
<INCOME-CONTINUING> 2,405,405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,405,405
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
