<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 MARCH 31, 1998
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 [X] 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 MAY 8, 1998, THERE WERE 9,159,780 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> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997.........................3
Condensed Consolidated Statements of Operations
for the Nine Month Periods Ended
March 31, 1998 and 1997..................................4
Condensed Consolidated Statements
of Cash Flows for the Nine Month Periods Ended
March 31, 1998 and 1997..................................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...............................19
SIGNATURE...................................................................................23
EXHIBIT INDEX...............................................................................24
</TABLE>
2
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACT NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,016 $ 50,948
Short-term investments 6,012 10,592
Accounts receivable, less allowances of $636
in March and $411 in June 20,011 14,792
Inventory 13,340 12,263
Prepaid expenses 1,321 502
Deposits 84 43
--------- ---------
Total current assets 80,784 89,140
Plant, equipment and other improvements:
Machinery and equipment 7,293 6,033
Furniture and fixtures 1,023 482
Computer software 1,771 1,416
Leasehold improvements 810 675
--------- ---------
10,897 8,606
Accumulated depreciation and amortization 5,508 3,847
--------- ---------
5,389 4,759
Goodwill and other intangibles 5,084 4,676
Other assets 120 2,121
--------- ---------
Total assets $ 91,377 $ 100,696
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,894 $ 3,114
Accrued expenses 1,054 1,665
Accrued vacation 614 514
Accrued legal expense 306 199
Income taxes payable -- 1,579
Deferred income taxes 58 87
--------- ---------
Total current liabilities 5,926 7,158
Stockholders' equity:
Common stock and additional paid-in
capital; $.001 par value:
Authorized - 40,000,000
Issued and outstanding - 9,370,430
and 9,155,930 in March and 9,270,949
in June 100,836 100,088
Treasury stock at cost (2,402) --
Accumulated deficit (12,983) (6,550)
--------- ---------
Total stockholders' equity 85,451 93,538
--------- ---------
Total liabilities and stockholders' equity $ 91,377 $ 100,696
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
ACT Networks, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 13,007 $ 13,652 $ 41,338 $ 35,725
Expenses:
Cost of goods sold 5,720 5,815 18,157 15,480
Research and development 3,996 2,223 11,669 5,537
Sales and marketing 3,820 2,901 11,619 7,444
General and administrative 1,660 1,249 5,444 3,410
In-process research and development -- 2,715 6,750 3,416
-------- -------- -------- --------
15,196 14,903 53,639 35,287
-------- -------- -------- --------
(Loss) income from operations (2,189) (1,251) (12,301) 438
Other:
Gain on sale of investment 4,704 -- 4,704 --
Interest income, net 427 773 1,522 2,453
-------- -------- -------- --------
Income (Loss) before income taxes 2,942 (478) (6,075) 2,891
(Benefit) provision for income taxes (206) 558 207 1,522
-------- -------- -------- --------
Net income (loss) $ 3,148 $ (1,036) $ (6,282) $ 1,369
======== ======== ======== ========
Net income (loss) per share $ 0.34 $ (0.11) $ (0.68) $ 0.15
======== ======== ======== ========
Net income (loss) per share - diluted $ 0.33 $ (0.11) $ (0.68) $ 0.14
======== ======== ======== ========
Shares used in computing net income (loss) per
share 9,139 9,194 9,172 9,159
======== ======== ======== ========
Shares used in computing net income (loss) per
share - diluted 9,511 9,194 9,172 10,132
======== ======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE> 5
ACT Networks, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (6,282) $ 1,369
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 2,552 1,376
Write-off of in-process research and
development 6,750 3,416
Provision for accounts receivable 225 --
Gain on sale of investment (4,704) --
Changes in operating assets and liabilities:
Accounts receivable (5,594) (5,441)
Inventory (777) (1,922)
Prepaid expenses and deposits (859) 66
Accounts payable, accrued
expenses and income taxes payable (926) 3,321
-------- --------
Net cash (used in) provided by operations (9,615) 2,185
INVESTING ACTIVITIES
Net sale of short term securities 4,966 --
Proceeds from sale of stock investment 6,699 --
Purchase of fixed assets (2,041) (2,468)
Acquisition of Sourcecom assets (8,600) --
Acquisition of DeltaComm Corporation -- (219)
Acquisition of Dynastar assets -- (6,794)
Other assets 5 215
-------- --------
Net cash provided by (used in) investing activities 1,029 (9,266)
FINANCING ACTIVITIES
Stock warrants and options 56 1,031
Repayment of notes payable -- (297)
Purchase of treasury stock (2,402) --
-------- --------
Net cash (used in) provided by financing activities (2,346) 734
-------- --------
Net decrease in cash (10,932) (6,347)
Cash and equivalents at beginning of the period 50,948 70,374
-------- --------
Cash and equivalents at end of the period $ 40,016 $ 64,027
======== ========
Non-cash transaction: The Company recorded $386,000 in unrealized gains on
short-term investments during the nine months ended March 31, 1998. The gains
were recorded in Stockholders' Equity.
</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 and nine-month periods ended March 31,
1998 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. Certain June 30, 1997 Balance Sheet items have been
reclassified to conform with the March 31, 1998 presentation.
2. INVENTORIES
The components of inventory consist of the following:
(in thousands)
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
Purchased parts .............. $ 2,474 $ 5,674
Sub-assemblies; finished goods 10,866 6,589
------- -------
$13,340 $12,263
------- -------
</TABLE>
3. TREASURY STOCK
During the first quarter of fiscal 1998, the Company purchased 100,000 shares of
its Common Stock in the open market at an average price of $13.04 per share.
During the second quarter of fiscal 1998, the Company purchased 114,500 shares
of its own Common Stock in the open market at an average price of $9.59 per
share. The purchases were recorded at cost as a reduction of Stockholders'
Equity.
6
<PAGE> 7
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 treasury stock method) have been included in the diluted
earnings per share computation when dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share (SFAS 128), which the Company adopted in the quarter
ended December 31, 1997. Under the new requirements, primary and fully diluted
earnings per share have been replaced with basic and diluted earnings per share.
Basic earnings per share excludes the dilutive effect of stock options. Earnings
per share for the three months and nine months ended March 31, 1997 have been
restated using the new standard. Basic earnings per share increased $0.00 and
$0.01 from previous primary earnings per share amounts for the three months and
nine months ended March 31, 1997, respectively. There was no change in diluted
earnings per share from fully diluted earnings per share in the prior year
periods.
5. INCOME TAXES
The provision for income taxes for the nine months ended March 31, 1998 totaled
$207,000. The provision for income taxes for the nine months ended March 31,
1997 was approximately $1,522,000. 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 net operating losses not benefited.
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 Networks, Inc. develops, manufactures and markets Frame Relay
wide-area network access products which support a broad range of voice, data and
integrated network applications. The Company is focused on three strategic
markets: enterprise networks (ACTnet and NetPerformer), satellite networks
(Skyframe) and carrier networks (FrameXchange and DynaStar). End users and
service providers worldwide use the Company's products to build cost-effective,
bandwidth efficient, easy-to-manage wide area networks (WANs). The Company's
products incorporate advance voice and data compression algorithms, switching
capabilities and proprietary integration technologies.
The Company's future operating results will be dependent upon the
development and growth of public and private wide area network communications
markets for its existing and proposed products. These markets and product
applications within these markets 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 68% for the nine months
ended March 31, 1998. 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 significant portion 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 have, and may in the future,
adversely affect the purchasing decision of the customer. In addition,
fluctuations in currency exchange rates have caused, and may in the future
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. The Company believes that recent events in Asia will adversely
impact the Company's net sales in that region in the near term.
A small number of customers have historically accounted for a
substantial portion of the Company's net sales. In particular, KDC Corporation
accounted for approximately 2.1% of the Company's net sales for the fiscal year
ended June 30, 1997 and approximately 10.6% for the nine months ended March 31,
1998. KDC is the Company's Korean distributor and the Company anticipates sales
to KDC will decrease substantially in the near term. In addition, Interexchange
accounted for approximately 1.0% of net sales for the fiscal year June 30, 1997
and approximately 10.7% for the nine months ended March 31, 1998. During the
fiscal years ended June 30, 1996 and June 30, 1997 and the nine months ended
March 31, 1998, the Company's five largest customers collectively accounted for
43% , 36% and 38%, 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.
8
<PAGE> 9
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 periods indicated, the
percentages of net sales represented by each item in the Company's statement of
operations.
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine months Ended March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales ............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................... 44.0% 42.6% 44.0% 43.3%
------ ------ ------ ------
Gross profit .......................... 56.0% 57.4% 56.0% 56.7%
Operating expenses:
Research and development .......... 30.7% 16.3% 28.2% 15.5%
Sales and marketing ............... 29.4% 21.3% 28.1% 20.8%
General and administrative ........ 12.7% 9.1% 13.2% 9.6%
In-process research and development 19.9% 16.3% 9.6%
------ ------ ------ ------
Total operating expenses .............. 72.8% 66.6% 85.8% 55.5%
(Loss) income from operations ......... (16.8)% (9.2)% (29.8)% 1.2%
Net interest and other income ......... 39.4% 5.7% 15.1% 6.9%
------ ------ ------ ------
Income (loss) before taxes ............ 22.6% (3.5)% (14.7)% 8.1%
Provision for income taxes ............ (1.6)% 4.1% 0.5% 4.3%
------ ------ ------ ------
Net income (loss) ..................... 24.2% (7.6)% (15.2)% 3.8%
====== ====== ====== ======
</TABLE>
Net Sales
Net sales decreased 4.7% to $13.0 million for the three months ended
March 31, 1998 from $13.6 million for the three months ended March 31, 1997.
This decrease in net sales was primarily attributable to a decrease in sales to
international markets, primarily South America and Asia Pacific, which more than
offset an increase in domestic sales. Net sales decreased 15.0% to $13.0 million
for the quarter ended March 31, 1998 from $15.3 million for the quarter ended
December 31, 1997. The decrease was primarily the result of a decrease in sales
to international markets, particularly to Asia Pacific, which more than offset
gains in domestic sales. The following table sets forth, for the three month
periods indicated, the percentages of total net sales represented by domestic
and international sales.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 December 31, 1997 March 31, 1997
-------------- ------------------- --------------
<S> <C> <C> <C>
Domestic Sales 45.7% 31.2% 26.3%
International Sales 54.3% 68.8% 73.7%
----- ----- -----
100.0% 100.0% 100.0%
</TABLE>
Net sales increased 15.7% to $41.3 million for the nine months ended
March 31, 1998 from $35.7 million for the nine months ended March 31, 1997. The
increase for the nine month period was primarily as a result of increased
domestic sales of the Company's products. Increases in sales to Europe and the
Asia Pacific region were offset by decreases in sales to South America. Sales to
the Asia Pacific region decreased substantially from the second quarter to the
third quarter of the current fiscal year ending June 30, 1998. The following
table sets forth, for the nine month periods indicated, the percentages of total
net sales represented by domestic and international sales.
10
<PAGE> 11
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Domestic Sales 32.1% 24.2%
International Sales 67.9% 75.8%
----- -----
100.0% 100.0%
</TABLE>
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.
Sales to enterprise customers were approximately $8.1 million, or 62.6% of net
sales, and $10.5 million, or 77.2 % of net sales, for the three months ended
March 31, 1998 and March 31, 1997, respectively. Sales to carrier customers were
approximately $4.9 million, or 37.4% of net sales, and $3.1 million, or 22.8% of
net sales, for the three months ended March 31, 1998 and March 31, 1997,
respectively.
The two categories of customers operate either terrestrial or
wireless networks. Sales of products into terrestrial networks were
approximately $10.8 million, or 82.8% of net sales, and $8.9 million, or 65.2%
of net sales, for the three months ended March 31, 1998 and March 31, 1997,
respectively. Sales of products into wireless networks were approximately $2.2
million, or 17.2% of net sales, and $4.7 million, or 34.8% of net sales for the
three months ended March 31, 1998 and March 31, 1997, respectively. Sales to
enterprise customers operating terrestrial Frame Relay access systems continue
to be the cornerstone of the Company's sales with sales of terrestrial systems
to carrier customers representing an increasing percentage of total net sales.
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 56.0% of net sales,
for the three months ended March 31, 1998 compared to $7.8 million, or 57.4% of
net sales, for the three months ended March 31, 1997. The Company's gross profit
was $23.2 million, or 56.0% of net sales, for the nine months ended March 31,
1998 compared to $20.2 million, or 56.7% of net sales, for the nine months ended
March 31, 1997. The decrease in gross profit as a percentage of sales for the
three month and nine month periods was primarily due to a change in product mix.
The dollar decrease in gross profit for the three and nine month
periods was primarily due to the decreased product sales as discussed above in
"Net Sales".
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 $4.0
million, or 30.7% of net sales, for the three months ended March 31, 1998 from
$2.2 million, or 16.3% of net sales, for the three months ended March 31, 1997.
Research and development expense increased to $11.6 million, or 28.2% of net
sales, for the nine months ended March 31, 1998 from $5.5 million, or 15.5% of
net sales, for the nine months ended March 31, 1997. The majority of each of
these increases 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 increases was primarily attributable to consultant
fees, the cost of material and depreciation expense.
Sales and marketing. Sales and marketing expense increased to $3.8 million, or
29.4% of net sales, for the three months ended March 31, 1998 from $2.9 million,
or 21.3% of net sales, for the three months ended March 31, 1997. Sales and
marketing expense increased to $11.6 million, or 28.1% of net sales, for the
nine months ended March 31,
11
<PAGE> 12
1998 from $7.4 million, or 20.8% of net sales, for the nine months ended March
31, 1997. These increases were primarily attributable to the addition of
personnel and increased marketing activities.
General and administrative. General and administrative expense increased to $1.7
million, or 12.7% of net sales, for the three months ended March 31, 1998 from
$1.2 million, or 9.1% of net sales, for the three months ended March 31, 1997.
General and administrative expense increased to $5.4 million, or 13.2% of net
sales, for the nine months ended March 31, 1998 from $3.4 million, or 9.6% of
net sales, for the nine months ended March 31, 1997. 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 will be impacted by approximately
$260,000 per year for five years commencing October 1, 1997, $350,000 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 family and Presticom, respectively. Amortization expense
relating to acquisitions was approximately $640,000 and $310,000 during nine
months ended March 31, 1998 and March 31, 1997, respectively.
There was a small decrease in operating expenses for the three months
ended March 31, 1998 as compared to the three months ended December 31, 1997.
For the same comparable periods, operating expenses increased as a percentage of
sales reflecting the Company's lower than anticipated total net sales in the
current three month period. The Company anticipates that operating expenses, as
a whole, will decrease as a percentage of sales in the near term. However, there
can be no assurance that operating expenses will not continue to increase as a
percentage of sales which would adversely affect the Company's results of
operations.
Net interest and other income (expense)
Net interest income was $427,000 for the three months ended March 31,
1998 compared to net interest income of $773,000 for the three months ended
March 31, 1997. Net interest income was $1,523,000 for the nine months ended
March 31, 1998 compared to net interest income of $2,453,000 for the nine months
ended March 31, 1997. This decrease was primarily attributable to the decrease
in invested funds due to acquisitions in fiscal 1997 and the first quarter of
fiscal 1998 and working capital requirements.
Gain on sale of investment
In March 1998, the Company sold 228,000 shares of Common Stock of
Netspeak Corporation for a gain of $4,703,875. The Company purchased the shares
in June 1997 for $1,995,000.
Income Taxes
The provision for income taxes for the nine months ended March 31,
1998 totaled $207,000. The provision for income taxes for the nine months ended
March 31, 1997 was $1,522,000. The decrease in the provision for income taxes in
the current nine month period is attributable to lower income before taxes for
the Company's Canadian operation in the current period. 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 net operating
losses not benefited. 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 the Company adopted in the quarter ended December 31, 1997 (See
"Notes to Consolidated Financial Statements").
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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 nine months ended March 31,
1998, the Company's operating activities used cash of approximately $9.6
million. At March 31, 1998, the Company had approximately $74.9 million in
working capital, including $40.0 million in cash and cash equivalents and $6.0
million in short term investments.
Capital expenditures relating primarily to the purchase of tooling,
computer equipment, test equipment, computer software and office furniture
amounted to approximately $2.0 million for the nine months ended March 31, 1998.
The Company currently has no material commitments for capital expenditures.
However, the Company anticipates spending between $3.0 million and $3.5 million
during the next 12 months to acquire fixed assets.
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 March 31, 1998 there
were 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 March 31, 1998, 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 March 31, 1998 and March 31, 1997, 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 incur certain additional debt and to repurchase the
Company's stock and pay dividends.
The Company believes that available cash, together with amounts
available under its credit facilities, 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. NONE.
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 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, 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, on several
occasions over the last few years, the Company's net sales decreased when
compared to the preceding quarter and, as a result, the Company's results of
operations and, in certain instances, 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 may 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
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<PAGE> 15
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 may 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 certain of 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 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 Systems, Inc., FastComm Communications, Corp.,
Memotec Communications, Inc., MICOM Communications Corp., Motorola, Inc., Sync
Research, Inc. 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.
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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. In particular,
KDC Corporation accounted for approximately 2.1% of the Company's net sales for
the fiscal year ended June 30, 1997 and approximately 10.6% for the nine months
ended March 31, 1998. KDC is the Company's Korean distributor and the Company
anticipates sales to KDC will decrease substantially in the near term. In
addition, Interexchange accounted for approximately 1.0% of net sales for the
fiscal year June 30, 1997 and approximately 10.7% for the nine months ended
March 31, 1998. During the fiscal years ended June 30, 1996 and June 30, 1997
and the nine months ended March 31, 1998, the Company's five largest customers
collectively accounted for 43% , 36% and 38%, respectively, of net sales. There
can be no assurance that a major customer will not reduce or delay the amount of
products ordered from the Company or significantly change the terms upon which
the Company and such customer do business. For a variety of reasons, the Company
has experienced situations where a major customer has significantly decreased
orders from period to period and it is likely that this will occur in the
future. 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 from time to time 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 may 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, 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 63% and 75% of the Company's net sales for the fiscal years ended
June 30, 1996 and 1997, respectively, and 68% for the nine months ended March
31, 1998. 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 have, and may in the future, adversely affect the purchasing
decision of customers. The Company believes that recent events in Asia will
adversely impact the Company's net sales in that region in the near term.
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
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<PAGE> 17
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
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
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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.
Year 2000. Many computer and networking systems experience problems
handling dates beyond the year 1999. Therefore, some computer and networking
hardware, software and firmware will need to be modified prior to the year 2000
in order to remain functional. The Company is assessing both the internal
readiness of its computer and networking systems and the compliance of its
products and software sold to customers for handling the year 2000. The Company
expects to implement successfully any systems and programming changes required
to address year 2000 issues, if any, and does not believe that the cost of such
actions, if any, will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes could have a material adverse effect on future results of operations.
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."
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.
19
<PAGE> 20
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.
20
<PAGE> 21
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.
10.38 1997 Stock Incentive Plan. Incorporated by reference to Exhibit 99.1 to
the Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.39 Form of Notice of Grant of Stock Option - Installment Option.
Incorporated by reference to Exhibit 99.2 to the Company's Registration
Statement on Form S-8, Registration No. 333-44087.
10.40 Form of Stock Option Agreement - Installment Option. Incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on
Form S-8, Registration No. 333-44087.
10.41 Notice of Grant of Stock Option - Immediately Exercisable Option.
Incorporated by reference to Exhibit 99.4 to the Company's Registration
Statement on Form S-8, Registration No. 333-44087.
10.42 Stock Option Agreement - Immediately Exercisable Option. Incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on
Form S-8, Registration No. 333-44087.
10.43 Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
Rights). Incorporated by reference to Exhibit 99.6 to the Company's
Registration Statement on Form S-8, Registration No. 333-44087.
10.44 Form of Addendum to Stock Option Agreement (Involuntary Termination
following Change in Control). Incorporated by reference to Exhibit 99.7
to the Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.45 Stock Purchase Agreement. Incorporated by reference to Exhibit 99.8 to
the Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.46 Addendum to Stock Purchase Agreement (Involuntary Termination following
Change in Control). Incorporated by reference to Exhibit 99.9 to the
Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.47 Automatic Notice of Initial Grant. Incorporated by reference to Exhibit
99.10 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
10.48 Automatic Notice of Annual Grant. Incorporated by reference to Exhibit
99.11 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
21
<PAGE> 22
10.49 Automatic Stock Option Agreement. Incorporated by reference to Exhibit
99.12 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
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:
No reports on Form 8-K were filed during the quarter ended March 31, 1998.
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: May 15, 1998 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
EXHIBIT NO.
11.1 Statement Regarding Computation of Earnings Per Share.
27.1 Financial Data Schedule.
24
<PAGE> 1
Exhibit 11.1 Statement Re: Computation of Per-Share Earnings EXHIBIT 11.1
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic
Average common shares outstanding 9,138,897 9,194,308 9,171,920 9,159,335
------------ ------------ ------------ ------------
Net Income (Loss) $ 3,147,655 $ (1,035,984) $ (6,281,538) $ 1,369,421
------------ ------------ ------------ ------------
Per Share amount $ 0.34 $ (0.11) $ (0.68) $ 0.15
------------ ------------ ------------ ------------
Diluted
Average common shares outstanding 9,138,897 9,194,308 9,171,920 9,159,335
Net effect of dilutive options and warrants-
based on treasury stock method using average
market price 372,332 -- -- 872,653
------------ ------------ ------------ ------------
9,511,229 9,194,308 9,171,920 10,131,988
------------ ------------ ------------ ------------
Net (Loss) income $ 3,147,655 $ (1,035,984) $ (6,281,538) $ 1,369,421
------------ ------------ ------------ ------------
Per Share amount $ 0.33 $ (0.11) $ (0.68) $ 0.14
------------ ------------ ------------ ------------
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 18,480,024
<SECURITIES> 27,547,973
<RECEIVABLES> 20,646,939
<ALLOWANCES> 636,454
<INVENTORY> 13,340,068
<CURRENT-ASSETS> 80,783,593
<PP&E> 10,897,039
<DEPRECIATION> 5,507,841
<TOTAL-ASSETS> 91,377,492
<CURRENT-LIABILITIES> 5,926,460
<BONDS> 0
0
0
<COMMON> 9,000
<OTHER-SE> 85,442,032
<TOTAL-LIABILITY-AND-EQUITY> 91,377,492
<SALES> 41,338,127
<TOTAL-REVENUES> 41,338,127
<CGS> 18,157,321
<TOTAL-COSTS> 46,889,112
<OTHER-EXPENSES> 6,750,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,226,514)
<INCOME-PRETAX> (6,074,471)
<INCOME-TAX> 207,067
<INCOME-CONTINUING> (6,281,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,281,538)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
