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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, 2000
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
MAY 8, 2000 WAS 10,505.793.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2000 and June 30, 1999..................................................3
Condensed Consolidated Statements of Operations and Comprehensive Loss
for the Three- and Nine-Month Periods Ended March 31, 2000 and 1999...............4
Condensed Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended March 31, 2000 and 1999..........................5
Notes to Condensed Consolidated Financial Statements..............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risks......................12
PART II. OTHER INFORMATION
Item 1 Legal Proceedings................................................................13
Item 2 Changes in Securities and Use of Proceeds........................................13
Item 3 Defaults upon Senior Securities..................................................13
Item 4 Submission of Matters to a Vote of Security Holders..............................13
Item 5 Other Information; Risk Factors..................................................14
Item 6. Exhibits and Reports on Form 8-K.................................................21
SIGNATURE..................................................................................22
EXHIBIT INDEX..............................................................................23
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACT NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,543 $ 33,850
Marketable securities - available for sale 22,839 17,613
Accounts receivable, less allowances of $3,542
in March and $2,440 in June 13,379 18,309
Inventory 10,012 9,613
Prepaids and other current assets 1,853 582
--------- ---------
Total current assets 71,626 79,967
Plant, equipment and other improvements:
Machinery and equipment 8,426 7,696
Furniture and fixtures 913 1,318
Computer software 1,967 2,145
Leasehold improvements 231 787
--------- ---------
11,537 11,946
Accumulated depreciation and amortization 7,751 8,310
--------- ---------
3,786 3,636
Goodwill and other intangibles 1,241 1,769
Other assets 154 269
--------- ---------
Total assets $ 76,807 $ 85,641
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,882 $ 6,898
Accrued payroll and related benefits 987 1,192
Other accrued liabilities 1,205 567
Income Taxes Payable 601 --
Deferred income taxes 65 65
--------- ---------
Total current liabilities 4,740 8,722
Stockholders' equity:
Common stock and additional paid-in capital 108,152 106,278
Accumulated deficit (35,918) (29,059)
Accumulated other comprehensive loss (167) (300)
--------- ---------
Total stockholders' equity 72,067 76,919
--------- ---------
Total liabilities and stockholders' equity $ 76,807 $ 85,641
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
ACT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 12,644 $ 15,103 $ 34,809 $ 41,113
Cost of goods sold 5,883 6,294 17,913 17,168
-------- -------- -------- --------
Gross profit 6,761 8,809 16,896 23,945
-------- -------- -------- --------
Operating expenses:
Research and development 2,410 3,150 8,096 9,716
Sales and marketing 3,596 3,894 11,643 10,185
General and administrative 1,692 1,847 5,661 5,258
Impairment and restructuring -- -- -- 607
-------- -------- -------- --------
Total operating expenses 7,698 8,891 25,400 25,766
-------- -------- -------- --------
Loss from operations (937) (82) (8,504) (1,821)
Other:
Interest and other income, net 595 660 1,838 1,836
-------- -------- -------- --------
Income (loss) before income taxes (342) 578 (6,666) 15
Provision for (benefit from) income taxes 123 (34) 193 144
-------- -------- -------- --------
Net income (loss) (465) 612 (6,859) (129)
Other comprehensive income (loss):
Foreign currency translation adjustments 54 94 133 (66)
-------- -------- -------- --------
Comprehensive income (loss) $ (411) $ 706 $ (6,726) $ (195)
======== ======== ======== ========
Net earnings (loss) per share
Basic $ (0.04) $ .06 $ (0.67) $ (0.01)
Diluted $ (0.04) $ .06 $ (0.67) $ (0.01)
======== ======== ======== ========
Shares used in computing net earnings (loss)
per share
Basic 10,383 9,757 10,285 9,494
Diluted 10,383 10,603 10,285 9,494
======== ======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE> 5
ACT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,859) $ (129)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,164 2,228
Loss on disposal of assets 24 --
Non-cash charges for warrants and stock options -- 43
Provision for allowances on accounts receivable 1,126 713
Impairment and restructuring charges -- 607
Changes in operating assets and liabilities:
Accounts receivable 3,804 (3,648)
Inventory (399) 3,010
Prepaid expenses and other current assets (1,271) 825
Accounts payable, accrued expenses and
income taxes payable (3,982) (2,738)
-------- --------
Net cash provided by (used in) operations (5,393) 911
INVESTING ACTIVITIES
Purchase of marketable securities (26,797) (14,686)
Maturities of marketable securities 21,571 13,003
Purchase of plant, equipment and other fixed assets (2,227) (1,269)
Decrease in other assets 116 60
Proceeds from sale of assets 416 --
-------- --------
Net cash used in investing activities (6,921) (2,892)
FINANCING ACTIVITIES
Proceeds from exercise of stock warrants and options 1,874 4,733
-------- --------
Net cash provided by financing activities 1,874 4,733
Net impact of foreign exchange rate changes on cash 133 (66)
-------- --------
Net increase (decrease) in cash (10,307) 2,686
Cash and cash equivalents at beginning of the period 33,850 35,018
-------- --------
Cash and cash equivalents at end of the period $ 23,543 $ 37,704
======== ========
</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 considered
necessary for a fair presentation have been included. Operating results for the
three and nine-month periods ended March 31, 2000 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>
MARCH 31, 2000 JUNE 30, 1999
<S> <C> <C>
Purchased parts $ 2,214 $2,076
Sub-assemblies and finished goods 7,888 7,537
------- ------
$10,012 $9,613
======= ======
</TABLE>
3. NET LOSS PER SHARE
"Basic earnings (loss) per share" is based upon the weighted average number of
common shares outstanding during the period. "Diluted earnings (loss) per share"
is based upon the weighted average number of common shares and dilutive
potential common shares outstanding during the period. 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 three months
ended March 31,2000 and the nine months ended March 31, 2000 and 1999, potential
common shares are excluded from the calculation of diluted loss per share
because their effect would be 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,
eliminated its business unit matrix structure in favor of a functional
organization and de-emphasized engineering, sales and marketing efforts for
non-strategic products.
Included in the Company's net loss for the nine month period ended March 31,
1999 were certain restructuring charges of $607,000, taken in the first quarter
primarily as a result of severance-related expenses.
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<PAGE> 7
5. INCOME TAXES
The provision for income taxes differs from the federal statutory rate due
primarily to foreign income taxes related to the Company's Canadian subsidiary
and to net operating losses not benefited.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 ("SFAS 133"). "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Management does not believe this will have a
material effect on the Company's results of operations or financial position.
Implementation of this standard has recently been delayed by the FASB for a
twelve-month period. The Company will now be required to adopt SFAS 133 for its
first quarterly filing of fiscal 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company is required to adopt SAB 101 in
the first quarter of fiscal 2001. Management does not expect the adoption of SAB
101 to have a material effect on the Company's results of operations or
financial position.
7. SUBSEQUENT EVENT
Pursuant to an Agreement and Plan of Merger and Reorganization dated as of May
1, 2000, (the "Merger Agreement"), by and among Clarent Corporation ("Clarent"),
Copper Acquisition Sub, Inc. ("Merger Sub") and the Company, Merger Sub will
merge with and into the Company, with the separate corporate existence of Merger
Sub ceasing and the Company continuing as the surviving corporation and a
wholly-owned subsidiary of Clarent. At the effective time of the Merger (the
"Effective Time"), each share of the Company's common stock issued and
outstanding immediately prior to the Effective Time will be converted
automatically into the right to receive 0.2546 (the "Exchange Ratio") shares of
Clarent's common stock. The Exchange Ratio will be subject to a "collar"
providing for a maximum and minimum value of Clarent common stock to be
exchanged for each share of the Company's common stock of $18.00 and $14.00
respectively, based on the closing price of Clarent's common stock on the day
preceding the Effective Time. The value of the transaction based on the closing
price of Clarent's common stock on the date of the Merger Agreement is
approximately $189 million.
The consummation of the Merger is subject to various closing conditions,
including approval by the Company's stockholders and expiration of or early
termination of the waiting period required under the Hart-Scott Rodino
Antitrust Improvements Act of 1976, as amended.
The Company has granted Clarent an option to acquire up to 19.9% of the
outstanding shares of Company common stock at an exercise price of $16 per
share, exercisable upon the occurrence of certain events. The Company has agreed
to pay Clarent a fee of $5.5 million if the Merger is not consummated and
certain events have occurred. In addition, stockholders of the Company holding
an aggregate of approximately 1% of the outstanding shares of the Company common
stock have agreed to vote for the adoption of the Merger Agreement.
7
<PAGE> 8
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 Customer Premise
Equipment (CPE) access products, which support a broad range of integrated
voice, video and data networking applications. 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 and ServiceXchange product lines incorporate advanced
voice and data compression algorithms, enhanced switching and traffic management
capabilities, and state-of-the-art telephony integration technologies that
provide the highest voice quality for voice-over-packet and data solutions.
The Company's two principal product families, NetPerformer and
ServiceXchange 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 are 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 has released new products in fiscal 2000, there can be no assurance
that such products will achieve market acceptance. Additionally, the Company
anticipates releasing new products in the future. 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
52% and 51% of the Company's net sales for the three month period ended March
31, 2000 and the fiscal year ended June 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, 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 quarters ended March
31, 2000 and 1999, the Company's five largest customers collectively
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<PAGE> 9
accounted for 57% and 68%, respectively, of net product sales, and ten percent
customers accounted for 45% and 48%, respectively, of net product sales. One
customer accounted for approximately 36% of the Company's net sales in the
quarter ended March 31, 1999. 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.
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, eliminated its business unit matrix structure in favor of a
functional organization and de-emphasized 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 net loss for the nine month period ended
March 31, 1999 were certain restructuring charges of $607,000, primarily related
to severance expenses.
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 Nine Months Ended
Mar. 31, Mar. 31,
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................ 46.5 41.7 51.5 41.8
Gross profit.............................. 53.5 58.3 48.5 58.2
Operating expenses:
Research and development............... 19.1 20.8 23.3 23.6
Sales and marketing.................... 28.4 25.8 33.4 24.8
General and administrative............. 13.4 12.2 16.3 12.8
Impairment and restructuring........... -- -- -- 1.5
----- ----- ----- -----
Total operating expenses.................. 60.9 58.8 73.0 62.7
Loss from operations...................... (7.4) (0.5) (24.5) (4.5)
Net interest and other income............. 4.7 4.3 5.3 4.5
----- ----- ----- -----
Income (loss) before taxes................ (2.7) 3.8 (19.2) 0.0
Provision for (benefit from) income taxes. 1.0 (0.2) 0.6 0.3
----- ----- ----- -----
Net income (loss)......................... (3.7)% 4.0% (19.8)% (0.3)%
===== ===== ===== =====
</TABLE>
Net sales
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.
Net sales decreased 16% and 15% for the three and nine months ended
March 31, 2000, respectively, from the comparable periods in the previous year.
The decrease from quarter to quarter was due to lower unit volumes, partially
offset by higher average selling prices. The higher average selling prices in
the quarter ended March 31, 2000, is primarily due to product mix. The Company
anticipates that, in general, the average sales price for its products will
decrease over time due to competition and other factors. Also, one customer
accounted for approximately 36% of the Company's net sales in the quarter ended
March 31, 1999. The largest customer in the quarter ended March 31, 2000,
accounted for approximately 18% of the Company's net sales. The decrease for the
nine month period
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<PAGE> 10
was due to lower volume and average selling prices, partially offset by $750,000
of non-recurring royalty revenue recognized in the quarter ended September 30,
1999. For the quarter ended March 31, 2000, increased sales in Asia Pacific
and Latin America were more than offset by a decrease in domestic sales.
The following table sets forth the percentages of domestic and
international sales for the three and nine month periods of fiscal years 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Domestic Sales 47.8% 68.6% 41.7% 54.7%
International Sales 52.2 31.4 58.3 45.3
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
The Company also classifies its sales by customer type. In general, the
Company's end users 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 three and nine month periods of fiscal years 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Enterprise Sales 54.9% 60.6% 64.1% 53.9%
Service Provider Sales 45.3 39.4 35.9 46.1
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Gross Profit
Gross profit represents net sales less cost of goods sold, which
includes costs of materials, manufacturing overhead, direct labor expenses and
contract manufacturing services. Gross profit was 53.5% and 58.3% of net sales
for the quarters ended March 31, 2000 and 1999, respectively, and 48.5% and
58.2% of net sales for the nine months ended March 31, 2000 and 1999,
respectively. Gross profit percentage for the quarter ended March 31, 2000 was
lower than the comparable quarter of the prior fiscal year primarily due to
sales in the prior year of inventory for amounts greater than the estimated net
realizable value to which such inventory had been previously written down. Gross
profit for the nine months ended March 31, 2000 was negatively impacted by the
same factor, an inventory writedown of $1,184,000 which resulted primarily from
a decrease in sales of products being discontinued, and lower sales volume over
which to absorb manufacturing overhead expenses. These factors were partially
offset by $750,000 of non-recurring royalty revenue recognized in the quarter
ended September 30, 1999. Management anticipates downward pressure on gross
profit as a percentage of sales, particularly as the Company pursues OEM
opportunities with strategic partners that typically produce lower gross
margins.
Operating Expenses
Research and development. Research and development expense for the
three and nine month periods ended March 31, 2000 decreased approximately 24%
and 17%, respectively, from the comparable periods in the prior fiscal year due
primarily to consolidation of the Company's California engineering locations
completion of the new NetPerformer products development cycle, and the closing
of an engineering facility in Connecticut The development of new products and
features involves a number of risks and uncertainties. There can be no assurance
10
<PAGE> 11
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 three months
ended March 31, 2000 decreased approximately 8% from the comparable period in
the prior fiscal year, and for the nine months ended March 31, 2000 such
expenses increased approximately 14%, from the comparable periods in the prior
fiscal year. The decrease in expenses for the three month period ended March 31,
2000 was due primarily to lower personnel costs and commission expense. The
increase in expenses for the nine month period ended March 31, 2000 was due
primarily to increased headcount and an increase in expenses related to the
Company's in Australian subsidiary acquired in January 1999, and the costs
associated with opening and staffing an additional office in Europe.
General and administrative. General and administrative expense for the
three and nine month periods ended March 31, 2000 decreased approximately 8% and
increased approximately 8%, respectively, from the comparable periods in the
prior fiscal year. The decrease in expenses for the three month period ended
March 31, 2000 was due primarily to decreased bad debt expense, partially offset
by increased personnel costs. The increase in expenses for the nine month period
ended March 31, 2000 was due primarily to personnel costs partially offset by
reductions in various other expenses.
Net Interest and Other Income (Expense)
Net interest income for the quarter ended March 31, 2000 decreased
approximately 10% from the comparable period in the prior fiscal year due to a
lower average investment in interest earning securities. Net interest income for
the nine months ended March 31, 2000 remained approximately the same as the
comparable period in the prior fiscal year.
Income Taxes
The provision for income taxes relates primarily to the Company's
foreign subsidiaries. The provision for income taxes for the quarter ended March
31, 2000 is primarily due to an adjustment in the amount of income taxes the
Company expects to pay in Canada. For the nine months ended March 31, 2000,
income tax expense increased approximately 34% from the comparable period in the
prior year, primarily due to higher taxable income 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 United 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
To date, the Company has not experienced any significant problems
related to the Year 2000 issue. Based on the work done to date, the Company has
not incurred material costs to address the year 2000 readiness of its systems
and products. There can be no assurances that the cost estimates associated with
the Year 2000 or Leap Year date issues will not have a material adverse effect
upon the Company's operations and financial condition.
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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 nine months ended March 31,
2000, the Company's operating activities used cash of approximately $5.4
million, due primarily to the net loss for the period and the reduction of
current liabilities, partially offset by collections of accounts receivable in
excess of revenue for the period. At March 31, 2000, the Company had
approximately $66.9 million in working capital, including approximately $46.4
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 $2.2
million for the first nine months of fiscal year 2000. The Company currently has
commitments of approximately $500,000 for capital expenditures associated with
the implementation of its ERP system in the first quarter of fiscal 2001. 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.
SUBSEQUENT EVENTS
The Company entered into an Agreement and Plan of Merger and
Reorganization, dated as of May 1, 2000, by and among Clarent, Merger Sub and
the Company. The agreement provides for the merger of Merger Sub with and into
the Company, with the separate corporate existence of Merger Sub ceasing and the
Company continuing as the surviving corporation and a wholly-owned subsidiary of
Clarent. At the effective time of the Merger, each share of the Company's common
stock issued and outstanding immediately prior to the Effective Time will be
converted automatically into the right to receive 0.2546 shares of Clarent's
common stock. The Exchange Ratio will be subject to a "collar" providing for a
maximum and minimum value of Clarent common stock to be exchanged for each share
of the Company's common stock of $18.00 and $14.00 respectively, based on the
closing price of Clarent's common stock on the day preceding the Effect Time.
The value of the transaction based on the closing price of Clarent's common
stock on the date of the Merger Agreement was approximately $189 million.
The consummation of the Merger is subject to various closing
conditions, including approval by the Company's stockholders and expiration of
early termination of the waiting period required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
The Company has granted Clarent an option to acquire up to 19.9% of the
outstanding shares of Company common stock at an exercise price of $16 per
share, exercisable upon the occurrence of certain events. The Company has agreed
to pay Clarent a fee of $5.5 million if the Merger is not consummated and
certain events have occurred. In addition, stockholders of the Company holding
an aggregate of approximately 1% of the outstanding shares of the Company common
stock have agreed to vote for the adoption of the Merger Agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company maintains investment portfolio holdings consisting
primarily of short-term commercial paper. At March 31, 2000, 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 unlikely that any change in interest rates or other
market factors would have a material adverse effect on its financial position,
results of operations or cash flow.
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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.
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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.
ACQUISITION. On May 1, 2000 the Company announced that it had entered into the
merger agreement with Clarent. Under the terms of the merger agreement, Merger
Sub will be merged with and into the Company and the Company will survive the
merger as a subsidiary of Clarent. The merger is subject to a number of
contingencies, including approval by the Company's stockholders and other
closing conditions. As a result, there can be no assurance that the merger will
be completed. If the Company's stockholders were to vote against the proposals
at the special meeting or if the merger is not completed for any other reason,
the trading price of the Company's common stock may be adversely impacted.
Additionally, even if the merger is completed, there is no assurance that the
merger will be beneficial to the Company's stockholders. If the merger with
Clarent is not completed for any reason, the Company may be subject to a number
of material risks, including the following: (i) the Company may be required to
pay Clarent a breakup fee of $5.5 million, (ii) the option granted to Clarent by
the Company may become exercisable, under certain circumstances, and (iii) costs
related to the merger, such as legal, accounting and financial advisor fees,
must be paid even if the merger is not completed. In addition, the Company's
customers may, in response to the announcement of the merger, delay or defer
purchasing decisions. Any delay or deferral in purchasing decisions by the
Company's customers could have a material adverse effect on the Company's
business, regardless of whether or not the merger is ultimately completed.
Similarly, current and prospective employees of the Company may experience
uncertainty about their future role with Clarent until Clarent's strategies with
regard to the Company are announced and executed. This may adversely affect the
Company's ability to attract and retain key management, sales, marketing and
technical personnel. Further, if the merger is terminated and the Company's
board of directors determines to seek another merger or business combination,
there can be no assurance that it will be able to find a partner willing to pay
an equivalent or more attractive price than that which would be paid in the
merger. In addition, while the merger agreement is in effect and subject to
certain limited exceptions, the Company is prohibited from soliciting,
initiating or encouraging or entering into certain extraordinary transactions,
such as merger, sale of assets or other business combination, with any party
other than Clarent.
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; 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 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 and resellers. There is no assurance that even if
an OEM partner or a reseller does purchase products in a quarter, that
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the partner will sell such products to its customers. Any reduction or delay in
sales of the Company's products by its OEM partners and resellers 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 and resellers were
to account for an increased portion of the Company's net sales, gross margins
would decline. Gross margins may also be adversely affected by increases in
material or labor costs, heightened price competition, and changes in the mix of
products sold. The Company has recently introduced several new products. If
product or related warranty costs associated with these new products are greater
than historically experienced, gross margins may be adversely affected. Our
gross margins may also be impacted by geographic mix, as well as the mix of
configurations within each product group. 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 margins do not also increase. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Fluctuations in
Quarterly Operating Results."
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 Systems, Inc., Nortel Telecom,
Motorola Information Systems Group, Lucent Technologies, Inc. ("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 March 31,
2000, the Company's five largest customers collectively accounted for 44% and
57%, respectively, of net sales. In many instances, the Company's major
customers in any given period have ordered
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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/OEM agreements with Lucent and FORE and is allocating
significant resources to these relationships. The reseller/OEM 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 significant customers 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 or resellers
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.
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 with obtaining and qualifying
a new supplier. For example, in the three month period ended December 31, 1999,
the Company experienced delays in the introduction of its new NetPerformer
products as a result of defective central processing units from a key 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'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.
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. For example, in the three
month period ended December 31, 1999, the Company experienced delays in the
introduction of its new NetPerformer products as a result of a key contract
manufacturer's internal transition issues. 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
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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. 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.
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 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."
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.
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
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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.
INTERNATIONAL SALES, TARIFF AND REGULATORY MATTERS. Sales of the Company's
products to customers outside of North America accounted for approximately 51%
and 52% of the Company's net sales for the fiscal year ended June 30, 1999 and
the three month period ended March 31, 2000, 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. 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.
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.
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
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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.
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.
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.
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.
19
<PAGE> 20
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.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization, dated as of May 1, 2000, by and among Clarent, Merger
Sub and the Company. Incorporated by reference to Exhibit 2.1 to the Company's current report on Form
8-K, dated May 1, 2000, File No. 0-25740
3.1 Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-90394
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1, Registration No. 33-90394
4.1 Specimen certificate representing shares of Common Stock of the Company. Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1. Registration No. 33-90394.
10.1 Executive Bonus Plan.
27.1 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K:
The Company filed a report on Form 8-K on May 1, 2000. The Company
announced that it had entered into the merger agreement with Clarent and Merger
Sub. Under the terms of the merger agreement, Merger Sub will be merged with and
into the Company and the Company will survive the merger as a subsidiary of
Clarent.
21
<PAGE> 22
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 12, 2000 ACT NETWORKS, INC.
By: /s/ Robert J. Faulk
--------------------------------------
Robert J. Faulk
Chief Financial Officer and
Vice President, Finance
(Duly Authorized Officer and Principal
Financial Officer)
By: /s/ William W. Frederick
--------------------------------------
William W. Frederick
Corporate Controller
(Duly Authorized Accounting Officer)
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT NO.
10.1 Executive Bonus Plan
27.1 Financial Data Schedule.
23
<PAGE> 1
EXHIBIT 10.1
Executive Bonus Plan
The Executive Bonus Plan for calendar year 2000 is designed to reward ACT's
executive staff for their contributions to the achievement of the company's
FY2000 six month financial objectives of Revenue and pre-tax Income/(Loss),
measured as a weighted achievement against goals, and the first six months of
FY01.
Payout for the second six months of the Plan is contingent upon the Company
achieving operating income of at least $190K in the fourth quarter of calendar
2000- if this is not achieved, second six month bonuses are not payable.
The bonus drivers are weighted 60% on revenues and 40% on pre-tax Income/
(Loss) - on a post-bonus basis. At weighted achievement against plan of 85%,
participants receive 5% of their base salary. At weighted achievement against
plan of 100%, participants receive between 20% and 30% of their base salary
(depending upon the particulars of their participation in the plan).
The plan provides for straight line achievement between the floor (at 85%
weighted achievement against goals) and 100% weighted achievement, with the same
rate beyond 100% weighted achievement.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 23,543,000
<SECURITIES> 22,839,000
<RECEIVABLES> 13,379,000
<ALLOWANCES> 3,542,000
<INVENTORY> 10,012,000
<CURRENT-ASSETS> 71,626,000
<PP&E> 11,537,000
<DEPRECIATION> 7,751,000
<TOTAL-ASSETS> 76,807,000
<CURRENT-LIABILITIES> 4,740,000
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 72,057,000
<TOTAL-LIABILITY-AND-EQUITY> 76,807,000
<SALES> 34,059,000
<TOTAL-REVENUES> 34,809,000
<CGS> 17,913,000
<TOTAL-COSTS> 25,400,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,126,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,666,000)
<INCOME-TAX> 193,000
<INCOME-CONTINUING> (6,859,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,859,000)
<EPS-BASIC> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
