<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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.)
26707 WEST AGOURA ROAD, CALABASAS, CALIFORNIA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 871-6400
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER THREE MONTHS, IF CHANGED
SINCE LAST REPORT: Not Applicable
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13, OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES ____ NO ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF
NOVEMBER 1, 1999 WAS 10,249,452.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and June 30, 1999............................3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Three-Month Periods Ended
September 30, 1999 and 1998.....................................4
Condensed Consolidated Statements
of Cash Flows for the Three-Month Periods Ended
September 30, 1999 and 1998.....................................5
Notes to Condensed Consolidated
Financial Statements............................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................7
Item 3. Quantitative and Qualitative Disclosures About Market Risks....11
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..............................................11
Item 2 Changes in Securities and Use of Proceeds......................11
Item 3 Defaults upon Senior Securities................................11
Item 4 Submission of Matters to a Vote of Security Holders............11
Item 5 Other Information; Risk Factors................................12
Item 6. Exhibits and Reports on Form 8-K...............................18
SIGNATURE...................................................................19
EXHIBIT INDEX...............................................................20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACT NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,112 $ 33,850
Marketable securities - available for sale 26,626 17,613
Accounts receivable, less allowances of $3,022
in September and $2,440 in June 14,187 18,309
Inventory 12,667 9,613
Prepaids and other current assets 881 582
-------- --------
Total current assets 74,473 79,967
Plant, equipment and other improvements:
Machinery and equipment 8,045 7,696
Furniture and fixtures 899 1,318
Computer software 2,733 2,145
Leasehold improvements 191 787
-------- --------
11,868 11,946
Accumulated depreciation and amortization 7,783 8,310
-------- --------
4,085 3,636
Goodwill and other intangibles 1,674 1,769
Other assets 290 269
-------- --------
Total assets $ 80,522 $ 85,641
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,685 $ 6,898
Accrued payroll and related benefits 916 1,192
Other accrued liabilities 1,112 567
Income taxes payable 60 --
Deferred income taxes 65 65
-------- --------
Total current liabilities 5,838 8,722
Stockholders' equity:
Common stock and additional paid-in capital 108,991 108,680
Treasury stock, at cost (2,402) (2,402)
Accumulated deficit (31,596) (29,059)
Accumulated other comprehensive loss (309) (300)
-------- --------
Total stockholders' equity 74,684 76,919
-------- --------
Total liabilities and stockholders' equity $ 80,522 $ 85,641
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
ACT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
------- -------
<S> <C> <C>
Net sales $12,398 $13,936
Cost of goods sold 5,907 6,005
------- -------
Gross profit 6,491 7,931
------- -------
Operating expenses:
Research and development 3,062 3,323
Sales and marketing 4,194 3,459
General and administrative 2,290 1,881
Impairment and restructuring -- 607
------- -------
Total operating expenses 9,546 9,270
------- -------
Loss from operations (3,055) (1,339)
Other:
Interest and other income, net 641 551
------- -------
Loss before income taxes (2,414) (788)
Provision for income taxes 122 178
------- -------
Net loss (2,536) (966)
Other comprehensive loss:
Foreign currency translation adjustments (10) (153)
------- -------
Comprehensive loss $(2,546) $(1,119)
======= =======
Loss per share
Basic $ (0.25) $ (0.10)
Diluted $ (0.25) $ (0.10)
======= =======
Shares used in computing net loss per share
Basic 10,219 9,300
Diluted 10,219 9,300
======= =======
</TABLE>
See accompanying notes
4
<PAGE> 5
ACT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,536) $ (966)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 611 753
Loss on disposal of assets 93 --
Non-cash charges for warrants and stock options -- 43
Provision for allowances on accounts receivable 531 (71)
Impairment and restructuring charges -- 607
Changes in operating assets and liabilities:
Accounts receivable 3,584 (2,360)
Inventory (3,082) 2,524
Prepaid expenses and other current assets (299) 168
Accounts payable, accrued expenses and
income taxes payable (2,884) (2,265)
-------- --------
Net cash used in operations (3,982) (1,567)
INVESTING ACTIVITIES
Purchase of marketable securities (10,017) (4,038)
Maturities of marketable securities 1,004 3,130
Purchase of plant, equipment and other fixed assets (1,088) (404)
Decrease (increase) in other assets (21) 117
Proceeds from sale of assets 65 --
-------- --------
Net cash used in investing activities (10,057) (1,195)
FINANCING ACTIVITIES
Proceeds from exercise of stock warrants and options 311 267
-------- --------
Net cash provided by financing activities 311 267
Net impact of foreign exchange rate changes on cash (10) (153)
-------- --------
Net decrease in cash (13,738) (2,648)
Cash and cash equivalents at beginning of the period 33,850 35,018
======== ========
Cash and cash equivalents at end of the period $ 20,112 $ 32,370
======== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
ACT NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
full fiscal year or for any future period. For further information, refer to the
financial statements and footnotes thereto included in the Company's most recent
annual report on Form 10-K.
The balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
2. INVENTORIES
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
<S> <C> <C>
Purchased parts $ 2,306 $2,076
Sub-assemblies and finished goods 10,361 7,537
------- ------
$12,667 $9,613
======= ======
</TABLE>
3. NET LOSS PER SHARE
"Basic earnings per share" is based upon the weighted average number of common
shares outstanding. "Diluted earnings per share" is based upon the weighted
average number of common shares and dilutive potential common shares
outstanding. Potential common shares are outstanding stock options under the
Company's stock option plans, which are included under the treasury stock
method, when dilutive. For the periods presented, potential common shares are
excluded from the calculation of diluted loss per share because their effect is
antidilutive.
4. RESTRUCTURING CHARGES
In July 1998, the Company announced a major restructuring program designed to
streamline operations and focus on key markets. As part of the restructuring
program, the Company concentrated its resources on the NetPerformer and
ServiceXchange product lines. The Company significantly reduced its workforce,
eliminating its business unit matrix structure in favor of a functional
organization and de-emphasizing engineering, sales and marketing efforts for
non-strategic products.
Included in the Company's September 30, 1998 net loss were certain restructuring
charges of $607,000, primarily as a result of severance-related expenses.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
Financial Statements and related Notes thereto contained elsewhere in this
Report. 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 in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. The Company undertakes no
obligation to update the information, including the forward-looking statements,
if any, in this Report on Form 10-Q.
GENERAL
ACT develops, manufactures and markets multi-service access products
that enable the convergence of voice, video and data onto one managed network.
Service providers and enterprise customers use the Company's products to build
converged networks that are bandwidth efficient, cost-effective and easy to
manage. The Company's award-winning NetPerformer product incorporates advanced
voice and data compression algorithms, enhanced switching and traffic management
capabilities, and state-of-the-art hardware and software integration
technologies.
The Company is migrating toward two principal product families,
NetPerformer and ServiceXchange, which share a common technology foundation but
are targeted at different market segments. NetPerformer is a family of
multi-service access products targeted at enterprise customers who need to
integrate and transport voice, fax, LAN and SNA data over private or public
Frame Relay, IP or ATM networks. ServiceXchange addresses the needs of service
providers who are especially focused on transporting large volumes of voice
traffic cost effectively over Frame Relay or IP backbones. Within each family,
both chassis-based and stand-alone configurations will be offered to serve
specific customer requirements for price, performance, density and feature set.
The Company's future results will be dependent upon a variety of factors
including, without limitation, the Company's ability to develop and release new
products in a timely manner and within anticipated budgets. While the Company
anticipates the release of new products in fiscal 2000, there can be no
assurance that such products will be released when anticipated or that such
products will achieve market acceptance.
The Company anticipates that, in general, the average sales price for
its products will decrease over time due to competition and other factors. The
Company is currently focusing on developing existing and new OEM or similar
relationships with third parties, which may result in significant pricing
discounts and lower gross margins. In addition, the Company has from time to
time introduced new products that 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, significant discounting 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 58% of the Company's net sales for the three months ended September 30,
1999 and 1998, respectively. 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, 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 adversely affected, 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.
A small number of customers have historically accounted for a
substantial portion of the Company's net sales. During the three months ended
September 30, 1999 and 1998, the Company's five largest customers
7
<PAGE> 8
collectively accounted for 47% and 33%, respectively, of net product sales, and
10% customers accounted for 31% and 25%, respectively, of net product sales. Any
reduction, delay or change in orders from significant customers, such as the
Company has experienced in the past, could have a material adverse effect on the
Company's business.
ACQUISITIONS
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. 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 multiprotocol WAN
connections including TCP/IP, PPP, Frame Relay, X.25 and ATM. In August 1997,
the Company acquired out of bankruptcy certain assets of Sourcecom, Inc., a
developer of high performance broadband access devices. In connection with these
acquisitions, the Company expensed a portion of the purchase prices as
in-process research and development. The products and technologies acquired in
the Dynatech Communications, Inc. and DeltaComm Corporation acquisitions are
being either de-emphasized or discontinued.
RESTRUCTURING PROGRAM
In July 1998, the Company announced a major restructuring program
designed to streamline operations and focus on key markets. As part of the
restructuring program, the Company concentrated its resources on the
NetPerformer and ServiceXchange product lines. The Company significantly reduced
its workforce, eliminating its business unit matrix structure in favor of a
functional organization and de-emphasizing engineering, sales and marketing
efforts for non-strategic products. As the Company does not intend to actively
promote many of its former products which have, historically, accounted for a
majority of the Company's net sales, the Company's net sales may be adversely
impacted in the near term. The Company has in the past, and may in the future,
encounter decreased sales as a result of product transitions.
Included in the Company's September 30, 1998 net loss were certain
restructuring charges of $607,000 related to employee terminations.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of net sales represented by each item in the Company's statement of
operations.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
----------------------------
1999 1998
----- -----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 47.6 43.1
Gross profit 52.4 56.9
Operating expenses:
Research and development 24.7 23.8
Sales and marketing 33.8 24.8
General and administrative 18.5 13.5
Impairment and restructuring -- 4.4
----- -----
Total operating expenses 77.0 66.5
Loss from operations (24.6) (9.6)
Net interest and other income 5.2 4.0
----- -----
Income (loss) before taxes (19.4) (5.6)
Provision for income taxes 1.0 1.3
----- -----
Net income (loss) (20.4)% (6.9)%
===== =====
</TABLE>
8
<PAGE> 9
Net sales
Net sales for the first quarter of fiscal year 2000 declined 11% from
the comparable period in fiscal year 1999 due primarily to a decline in average
selling prices, partially offset by $750,000 in nonrecurring royalty revenue.
Dollar volume was higher in Asia Pacific but lower in other geographic regions
compared with the first quarter of the prior fiscal year.
The Company classifies its sales as either international or domestic.
International sales are, in general, shipments to locations outside the United
States, regardless of the end-user's or the customer's location. Domestic sales
are, in general, shipments to locations within the United States, even if the
end-user or customer is located outside the United States. As the Company sells
primarily through resellers, the Company does not know with certainty the
location of the end-user. The Company believes that a significant portion of
sales that it classifies as domestic is shipped to end users outside the United
States.
The following tables set forth the percentages of domestic and
international sales for the first quarter of fiscal years 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1999 1998
----- -----
<S> <C> <C>
Domestic Sales 38.3% 41.9%
International Sales 61.7 58.1
----- -----
100.0% 100.0%
===== =====
</TABLE>
The Company also classifies its sales by customer. In general, the end
users of the Company's products are either enterprise customers, who acquire the
Company's products for use in their own networks, or service providers, who use
the Company's products to provide telecommunications services to third parties.
Service providers include alternate service providers (such as wholesale long
distance carriers and call back operators), value added network services
providers, CLECs, ILECs, CAPs, ISPs and IXCs.
The following table sets forth the percentages of enterprise and service
provider sales for the first quarter of fiscal years 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1999 1998
----- ------
<S> <C> <C>
Enterprise Sales 76.3% 51.7%
Service Provider Sales 23.7 48.3
----- ------
100.0% 100.0%
-==== ======
</TABLE>
Gross Profit
Gross profit represents net sales less the cost of goods sold, which
includes costs of materials, manufacturing overhead, direct labor expenses and
contract manufacturing services. Gross profit on product sales (excluding
nonrecurring royalty revenue) for the three months ended September 30, 1999 and
1998 were 49.3% and 56.9 % of net sales, respectively. Gross profit for the
first quarter of fiscal year 2000 was negatively impacted primarily by lower
average selling prices and by lower sales volume over which to absorb
manufacturing overhead costs. Management anticipates continued downward pressure
on gross profit as a percentage of sales, particularly as the Company pursues
OEM opportunities that typically produce lower gross margins.
9
<PAGE> 10
Operating Expenses
Research and development. Research and development expense for the first
quarter of fiscal year 2000 decreased approximately 8% from the comparable
period in the prior year due primarily to a reduced headcount in connection with
the restructuring program. The development of new products and features involves
a number of risks and uncertainties. There can be no assurance that the
Company's research and development expenses will not increase either in actual
dollars or as a percentage of sales in future periods.
Sales and marketing. Sales and marketing expense for the first quarter of fiscal
year 2000 increased approximately 21% over the comparable period in the prior
year due primarily to increased headcount in connection with the rebuilding of
the sales force following the restructuring program.
General and administrative. General and administrative expense for the
first quarter of fiscal year 2000 increased approximately 22% over the
comparable period in the prior year due primarily to an increased allowance for
doubtful accounts receivable.
Net Interest and Other Income (Expense)
Net interest income increased approximately 16% for the first quarter of
fiscal year 2000 from the comparable period of the prior fiscal year due to
higher average yields on investments and higher average cash and short-term
investment balances.
Income Taxes
The provision for income taxes relates primarily to the Company's
foreign subsidiaries. For the first quarter of fiscal year 2000 it declined 32%
from the comparable period of fiscal year 1999 due primarily to reduced sales
activity in the Company's Canadian subsidiary. In general, the difference
between the U.S. federal statutory rate and the effective U.S. tax rate is due
primarily to operating loss and tax credit carryforwards for which no benefit
has been recognized in the financial statements.
Inflation
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.
Foreign currency transactions
Because of its operations in foreign countries, especially in Canada,
the Company faces exposure to changes in foreign currency exchange rates. The
Company maintains engineering and other technical operations in its office in
Quebec, Canada, which operations are funded from the Unites States. Should the
exchange rate between the United States dollar and the Canadian dollar
fluctuate, the Company's reported expenses would also fluctuate.
Year 2000
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year; accordingly,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal activities.
10
<PAGE> 11
The Company's primary internal information systems currently operate
with application software and an operating system represented by the respective
suppliers as Year 2000 compliant. Costs incurred by the Company to upgrade to
compliant versions of such software have not been material.
Based on internal testing of its products, to date, the Company believes
that its products are substantially Year 2000 compliant. The Company has not,
and has no present intention to, have its products tested by an independent lab.
The Company does not expect that the costs to continue the testing program
related to the Year 2000 will have a material impact on operations or financial
results. However, the inability of any of the Company's products to process year
2000 data accurately could result in increased costs and liabilities which could
have a material adverse effect upon the Company's operations and financial
condition.
The Company has surveyed specific major suppliers to assess the
potential impact, if any, of Year 2000 non-compliance on the part of such
suppliers. None of the vendors responding indicate any expected difficulty in
carrying on their business with the Company due to the Year 2000 issue. The
Company has not conducted a comprehensive survey of its major customers
regarding Year 2000 compliance. The Company believes that there are two
predominant sources of third party risk for the Company with respect to the Year
2000 issue. The Company depends on turnkey manufacturers of components for its
manufacturing process and disruption of operations at such a supplier, whether
due to Year 2000 non compliance or not, could negatively impact the Company's
shipment schedule. In the event that the systems of significant suppliers are
not converted or modified in a timely manner to make them Year 2000 compliant,
there could be a material adverse effect on the Company's business and financial
results. The Company has a number of large customers which include end-users,
resellers and the Company's OEM partners. Year 2000 noncompliance at such
customers' sites could negatively impact sales to such customers by disrupting
the networks of such customers or their customers, in the case of OEM partners
and resellers. The Company does not have a contingency plan in place to address
such events and does not presently intend to create one.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from the sales of the
Company's products and the sale of stock. For the three months ended September
30, 1999, the Company's operating activities used cash of approximately $4
million, due primarily to the net loss for the period, increased inventory and
the reduction of current liabilities. Partially offsetting these factors was
collection on accounts receivable in excess of sales for the period. At
September 30, 1999, the Company had approximately $69 million in working
capital, including approximately $47 million in cash and cash equivalents and
short-term investments.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment and computer software amounted to approximately $1.1
million for the first quarter of fiscal year 2000. The Company currently has no
material commitments for capital expenditures. However, the Company anticipates
spending between $2 million and $3 million during the next twelve months to
acquire test equipment, computer equipment, office furniture, tooling and
leasehold improvements.
The Company believes that available cash, cash equivalents and
short-term investments together with internally generated cash flow, will be
adequate to satisfy its capital requirements for at least the next twelve
months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company maintains investment portfolio holdings consisting primarily
of short-term commercial paper. At September 30, 1999, the average maturity of
the Company's investments was less than one year. The Company has structured its
investment portfolio in such a manner that various securities mature
periodically, but not less often than quarterly. The Company believes that the
value of the maturing securities will be sufficient to meet any reasonably
foreseeable cash requirements that may arise. As a result, the Company believes
that it is
11
<PAGE> 12
unlikely that any change in interest rates or other market factors would have a
material effect on its financial position, results of operations or cash flow.
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.
RISK FACTORS
This report may contain forward-looking statements that involve a number
of risks and uncertainties. Certain results that could cause actual results to
differ are discussed below. The Company's actual results may differ materially
from any future performance discussed in forward-looking statements. The
following risks should be considered carefully, in addition to the other
information contained in this Report, before trading in the shares of the
Company's Common Stock.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced and may
in the future experience significant fluctuations in net sales and operating
results as a result of a number of factors including, without limitation, the
volume and timing of orders from, and shipments to, major customers,
particularly Lucent; market acceptance of the Company's products; the Company's
ability to support its current and new products; the ability of the Company's
customers, particularly international customers, to obtain financing for the
purchase of the Company's products; economic issues in international markets;
changes in the Company's strategies; 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 Company's ability to expand and
implement its sales and marketing programs; 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; intellectual property disputes;
the development of public telecommunications infrastructures, particularly in
international markets; currency fluctuations; and general economic conditions.
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 OEM partners and resellers and
are typically characterized by several large orders and a large number of small
orders. The Company's revenue in any period is highly dependent on the sales
efforts
12
<PAGE> 13
and success of the Company's OEM partners (including Lucent and FORE) and other
resellers, which are not under the Company's control. The Company's 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. The
Company has limited information as to the sell-through of its products to OEM
partners. There is no assurance that even if an OEM partner does purchase
products in a quarter, that the partner will sell such products to its
customers. Any reduction or delay in sales of the Company's products by its OEM
partners could have a material adverse effect on the Company's business,
operating results and financial condition. The Company generally realizes a
lower gross margin on sales through its OEM partners. Accordingly, if the
Company's OEM partners were to account for an increased portion of the Company's
net sales, gross margins would decline. In addition, the Company's backlog at
the beginning of a quarter is generally insufficient to achieve expected net
sales for the quarter. To achieve its revenue objectives, the Company is
dependent upon obtaining orders in a quarter for shipment in that 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 PROFITABILITY; UNCERTAIN FUTURE PROFITABILITY. The Company
has incurred losses in recent quarters. There can be no assurance that the
Company will be profitable in future periods. In the past, the Company has
expanded its level of operations, resulting in increased fixed costs and
operating expenses, with the expectation of increased sales and gross profits.
The Company's operating results and net income were adversely impacted as net
sales and gross profits did not increase sufficiently to offset such increased
expenses. The Company commenced a restructuring program in July 1998 to decrease
expenses. The Company completed its restructuring in its second fiscal quarter
of 1999. Since then, the Company has increased its investments in sales and
marketing and related infrastructures. As the Company increases its operating
expenses, the Company's operating results will be adversely affected if revenue
and gross profits do not also increase. 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 and subject to frequent product introductions with improved price or
performance characteristics, significant price reductions, rapid technological
change and continued emergence of new industry standards. The Company competes
directly domestically and internationally with a variety of companies offering
multi-service access products including Cisco, Nortel, Memotec, Motorola, Lucent
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, sales, technical and other resources, as well as a larger installed
customer base, 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. In addition, many of these companies offer a more comprehensive
networking solutions to their customers than the Company. Consolidations in the
industry could enhance the capabilities of the Company's competitors.
Furthermore, the Company's OEM partners may in the future develop competitive
products and may then decide to terminate their relationships with the Company.
There can be no assurance that the Company will be able to compete successfully
against either current or potential competitors or that competition will not
have a material adverse effect on the Company's business, operating results and
financial condition.
CUSTOMER CONCENTRATION; DEPENDENCE ON PARTNERS. A small number of customers have
historically accounted for a substantial portion of the Company's net sales.
During the fiscal year ended June 30, 1999 and the three months ended September
30, 1999, the Company's five largest customers collectively accounted for 44%
and 47%, respectively, of net sales. In many instances, the Company's major
customers in any given period have ordered significantly fewer products in
future periods. The Company believes that this has been due, in part, to
customers who make large, one-time purchases to set up their communications
infrastructure, after which such customers do not require further significant
purchases. In addition, the Company believes this may be due to a variety of
other factors, including, without limitation, the economic conditions in various
countries, particularly those in Asia and South America. Therefore, the Company
expects that its major customers will fluctuate from period to period. 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.
The Company's sales and marketing strategy is to focus on developing
distribution channels with major communications companies. The Company has
entered into reseller agreements with Lucent and FORE and is allocating
significant resources to these relationships. The reseller agreements do not
require minimum purchases. There is no assurance that Lucent or FORE will become
or will continue to be significant customers of the Company. There is no
assurance that
13
<PAGE> 14
Lucent or Impsat will continue to purchase the Company's products. Any reduction
or delay in sales of the Company's products to significant customers could have
a material adverse effect on the Company's business, operating results and
financial condition. Furthermore, there can be no assurance that the Company
will retain its current OEM partners or that it will be able to establish
relationships with new partners or replace its current partners. The loss of one
or more of the Company's OEM partners could have a material adverse effect on
the Company's business, operating results and financial condition. The Company
generally realizes a lower gross margin on sales to its OEM partners.
Accordingly, if the Company's OEM partners were to account for an increased
portion of the Company's revenue, its gross margins would decline.
DEPENDENCE ON CONTRACT MANUFACTURING. The Company's operational strategy is to
further rely on outsourcing of its manufacturing. The Company also intends to
streamline its manufacturing operations by focusing on a small number of
manufacturing contractors. Accordingly, the risks associated with reliance on
sole sources are expected to increase. Any interruption or delay by the
Company's contract manufacturers could have a material adverse effect upon the
Company's business, operating results and financial condition. The Company may
experience problems with its contract manufacturers, such as inferior quality,
insufficient quantities and late delivery of product. While such problems have
not resulted in any material liabilities from the Company to its customers and
end-users to date, there can be no assurance that such problems will not
generate material liabilities for the Company or adversely impact the Company's
relations with customers and end-users in the future.
DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT. The Company's success is dependent
in large part on its executive officers, senior management and sales and
technical personnel. Since July 1998, the Company has undergone numerous
personnel changes in all levels of the organization as a result of a
restructuring and other factors. The failure of new management and other
personnel to fully integrate into the Company's operations and to execute the
Company's strategy, and the failure of the Company to retain such management and
other personnel, could have a material adverse effect on the Company's business.
The Company's success will be dependent on 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.
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. The Company's success will depend, in part, on the viability of
the Company's products in its 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. In particular, the completion of the
development and successful commercial release of the ServiceXchange family of
products is critical to the Company's strategies. 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 (particularly the ServiceXchange products), 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.
Inherent in the product development process is 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. The Company
allocates research and development expenditures based on planned product
introductions and enhancements; however, actual expenditures may significantly
differ from allocated expenditures. 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
14
<PAGE> 15
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."
INTEGRATION OF ACQUISITIONS. The Company has acquired, and may in the future
acquire, complementary technologies and businesses. 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. The
Company has engaged in several acquisitions in the past which resulted in
increased expenses without a commensurate increase in net sales. These
acquisitions have also adversely impacted the Company's results of operations
due to in-process research and development expenses, the write down of tangible
and intangible assets and other factors. In the event the Company engages in
additional acquisitions, 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."
MANAGEMENT OF GROWTH. The Company has from time to time experienced growth in
its operations, both internally and as a result of acquisitions. 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. 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 51%
and 62% of the Company's net sales for the fiscal year ended June 30, 1999 and
the three months ended September 30, 1999, respectively. 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 adversely affected, and may in the future adversely affect,
the purchasing decision of customers. The Company believes that recent events in
Asia and Latin America have adversely impacted, and will continue to adversely
impact, the Company's net sales in these regions in the near term. Although the
Company's sales are currently denominated in U.S. dollars, fluctuations in
currency exchange rates have in the past caused, and could 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 and potentially leading to an extension of payment terms. Furthermore,
future international activity may result in foreign currency denominated sales
and, in such event, gains and losses on the conversion to U.S. dollars of
accounts receivable and accounts payable arising from international operations
may contribute to fluctuations in the Company's results of operations. The
financial stability of foreign markets could also affect the Company's
international sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Rates for telecommunications services are governed by tariffs of
licensed carriers that are subject to regulatory approval. Future changes in
these tariffs could have a material adverse effect on the Company's business.
For example, should tariffs for public switched digital services increase in the
future relative to tariffs for private leased services, the cost-effectiveness
of certain of the Company's products would be reduced, and its business and
results of operations could be adversely affected. In addition, the Company's
products must meet standards and receive certification for connection with the
public telecommunications networks of a country prior to their sale in such
country. In the United States, for example, the Company's products must comply
with certain regulations promulgated by the Federal Communications Commission.
Domestic telecommunications carriers must also certify the Company's products.
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 custom designed components
for the Company, could result in delays in the shipment of the Company's
products as well as additional expenses associated
15
<PAGE> 16
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 Ascend (now Lucent). 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, operating results and
financial condition.
RELIANCE ON INDIRECT DISTRIBUTION. The Company markets and sells products
domestically and internationally primarily through its OEM partners and
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 OEM partners and 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 its OEM
partners and many of its resellers, these agreements do not require the OEM
partners or resellers to purchase the Company's products and can generally be
terminated on short notice. 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 the Company's OEM partners or 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 partner or reseller could adversely affect the Company's business,
operating results and financial condition.
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 SkyPerformer 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.
YEAR 2000. The Year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the applicable year;
accordingly, computer programs that have time-sensitive software or firmware may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing
16
<PAGE> 17
disruptions of operations including, among other things, an inability to process
transactions, send invoices or engage in similar normal activities.
The Company's primary internal information systems currently operate
with application software and an operating system represented by the respective
suppliers as Year 2000 compliant. Costs incurred by the Company to upgrade to
compliant versions of such software have not been material. The Company has
performed internal testing of each of its products and expects to continue such
testing for developing products. Based on its testing to date, the Company
believes that its current products are substantially Year 2000 compliant. The
Company has not had, and has no present intention to have, its products tested
by an independent lab. The Company does not expect that the costs to continue
the testing program related to the Year 2000 will have a material impact on
operations or financial results. However, the inability of any of the Company's
products to process year 2000 data accurately could result in increased costs
and liabilities which could have a material adverse effect upon the Company's
operations and financial condition. The Company believes that there are two
predominant sources of third party risk for the Company with respect to the Year
2000 issue. The Company depends on turnkey manufacturers of components for its
manufacturing process and disruption of operations at such a supplier, whether
due to Year 2000 non-compliance or not, could negatively impact the Company's
shipment schedule and operations. In the event that the systems of significant
suppliers are not converted or modified in a timely manner to make the Year 2000
compliant, there could be material adverse effect on the Company's business and
financial results. The Company also has a number of large customers which
include end-users, resellers and the Company's OEM partners. The Company's top
five customers generated 47% of net sales in the first quarter of fiscal year
2000. Year 2000 non-compliance at such customers' sites could negatively impact
sales to such customers by disrupting the networks of such customers or their
customers, in the case of resellers. The Company has surveyed specific major
suppliers to assess the potential impact, if any, of Year 2000 non-compliance on
the part of such suppliers. None of the vendors responding indicate any expected
difficulty in carrying on their business with the Company due to the Year 2000
issue. The Company has not conducted a comprehensive survey of major customers
to assess the potential impact, if any, of Year 2000 non-compliance. Any failure
of the Company's suppliers and customers to resolve their Year 2000 problems in
a timely manner could result in a material disruption of the Company's business.
Any such disruption could have a material adverse effect upon the business and
financial results of the Company. In the event that the Company's internal
system or systems of significant outside vendors are not converted or modified
in a timely manner to make them Year 2000 compliant, there could be a material
adverse effect upon the business and financial results of the Company. The
Company does not have a contingency plan in place to address such an event and
does not presently intend to create one.
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."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company anticipates
that available cash and cash flow from operations will be adequate to satisfy
its capital requirements through at least the next twelve 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 financing including equity
financing. 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."
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
17
<PAGE> 18
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.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
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 Speciment 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.
27.1 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1999.
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: November 11, 1999 ACT NETWORKS, INC.
/s/ Martin A. Woll
--------------------------------------
Martin A. Woll
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
/s/ Robert J. Faulk
--------------------------------------
Robert J. Faulk
Controller
(Duly Authorized Accounting Officer)
20
<PAGE> 21
EXHIBIT INDEX
EXHIBIT NO.
- -----------
27.1 Financial Data Schedule.
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,112,000
<SECURITIES> 26,626,000
<RECEIVABLES> 17,209,000
<ALLOWANCES> 3,022,000
<INVENTORY> 12,667,000
<CURRENT-ASSETS> 74,473,000
<PP&E> 11,868,000
<DEPRECIATION> 7,783,000
<TOTAL-ASSETS> 80,522,000
<CURRENT-LIABILITIES> 5,838,000
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 74,674,000
<TOTAL-LIABILITY-AND-EQUITY> 80,522,000
<SALES> 11,648,000
<TOTAL-REVENUES> 12,398,000
<CGS> 5,907,000
<TOTAL-COSTS> 9,546,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 531,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,414,000)
<INCOME-TAX> 122,000
<INCOME-CONTINUING> (2,536,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,536,000)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
