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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM
--------------- TO
--------------- .
COMMISSION FILE NUMBER: 0-28734
ADVANCED FIBRE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0277743
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE WILLOW BROOK COURT
PETALUMA, CALIFORNIA 94954
(707) 794-7700
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 9, 1998, 73,837,502 shares of Advanced Fibre Communications,
Inc. Common Stock, $.01 par value, were outstanding, and the aggregate market
price of the shares held by non-affiliates was $1,827,634,350. (Solely for the
purposes of calculating the preceding amount, all directors and officers of the
registrant are deemed to be affiliates.)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated by reference in Parts II and IV of this
report.
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ADVANCED FIBRE COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6. Selected Consolidated Financial Data........................ 20
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 20
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants and Financial
Disclosure.................................................. 20
PART III
Item 10. Directors, Executive Officers and Key Employees of the
Registrant.................................................. 21
Item 11. Executive Compensation...................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 28
Item 13. Certain Relationships and Related Transactions.............. 29
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 31
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PART I.
Except for the historical financial information contained herein, the
following discussion may contain "forward-looking statements" that have been
made pursuant to the provisions of the Private Securities Litigation Reform Act
of 1995. Such statements include declarations regarding the intent, belief or
current expectations of the Company and its management. Any such forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties. Actual results could differ materially from those
indicated by such forward-looking statements. Among the important factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements are those set forth below in "Certain Factors That
Might Affect Future Operating Results," as well as those noted in the documents
incorporated herein by reference. Unless required by law, the Company undertakes
no obligations to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. However, readers should
carefully review the risk factors set forth in other reports or documents the
Company files from time to time with the Securities and Exchange Commission,
particularly the Quarterly Reports on Form 10-Q and any current reports on Form
8-K.
ITEM 1. BUSINESS
OVERVIEW
Advanced Fibre Communications, Inc. ("the Company") designs, develops,
manufactures, markets and supports the Universal Modular Carrier 1000(TM) (the
"UMC system"), a cost-effective, multi-feature digital loop carrier system
developed to serve small line-size markets. The Company's UMC system is designed
to enable telephone companies and other service providers to connect subscribers
to the central office switch for voice and data communications over copper wire,
fiber optic cable and analog radio networks. The UMC system meets the service
needs of domestic and international subscribers, including analog services such
as plain old telephone service ("POTS"), universal voice grade service ("UVG"),
high speed digital data service, and integrated services digital network
("ISDN") compatibility.
The UMC system is easily scalable from six to 672 lines through the
addition of plug-in components. Utilizing a single platform and a variety of
line cards supporting specific services, the UMC system is capable of providing
a range of voice and data services. In addition, the UMC system can be installed
in a variety of network configurations to support the varying geographic
distribution of subscriber bases. The Company has designed the UMC system to
require a minimum number of common control units to support transmission over a
variety of media and the delivery of more advanced services and features by
telephone companies. Thus, the UMC system offers a cost-effective solution to
the small line-size market with a wide variety of features and advanced
services.
The UMC system has been sold to more than 600 independent telephone
companies in the United States. The UMC system is currently deployed by
Ameritech, Pacific Bell, Sprint and GTE. The Company has also sold the UMC
system to telephone companies in China, Brazil, France, Mexico, Canada, South
Africa, Hong Kong, Panama, Venezuela and the Philippines. The UMC system is
distributed and serviced worldwide through a direct sales force in the United
States and through direct sales, distributors and agents in international
markets.
The Company was incorporated in California in May 1992 and reincorporated
in Delaware in September 1995. The Company's principal executive offices are
located at One Willow Brook Court, Petaluma, California 94954, and the telephone
number at that address is (707) 794-7700.
The Company operates on a 13-week fiscal quarter, comprised of four, four
and five week months ending on the last Saturday of the last week of the
five-week month. For presentation purposes only, the Company has shown its first
three fiscal quarters as ending on March 31, June 30, and September 30, and its
fourth fiscal quarter and fiscal year as ending on December 31.
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INDUSTRY BACKGROUND
Much of the existing local loop, which connects the subscriber to the
central office switch, was designed to provide analog voice communications, or
POTS, over copper. As a transmission medium, copper suffers from significant
signal degradation, particularly when transmitting signals beyond 10,000 feet.
In addition, the traditional copper infrastructure was designed to support low
speed telecommunications services and offers relatively poor transmission
quality, especially in data communications applications. Before the 1970s,
various solutions were implemented to address these concerns; however, these
solutions were generally costly to maintain and resulted in complex
architectures. In the early 1970s, to decrease the cost and complexity of
extending service beyond 10,000 feet from the central office, telephone
companies began to deploy digital loop carriers ("DLCs"), which convert analog
signals into digital bit streams for transmission to and from the central
office. The resulting improved signal quality enabled telephone companies to
increase transmission distances from the central office to the customer.
Advancements in digital technology have enabled central office switches to
increase by tenfold the number of lines served. While these advancements have
permitted greater centralization of switch resources, they have also resulted in
increased distances between the central office and the subscribers. Rapid
deployment of DLCs was necessary to effectively transmit signals over these
greater distances. However, the copper infrastructures supported by traditional
DLCs lacked the bandwidth for additional lines and the transmission quality for
high speed telecommunications. In response to these limitations as well as the
deterioration of the existing copper infrastructure, telephone companies began
installing fiber in high density urban markets in the late 1980s. Next
generation DLCs ("NGDLCs") were designed and introduced to the market in the
early 1990s to support telecommunications services over fiber-only networks in
densely populated urban markets with 600 to 2,000 lines within the serviceable
area of the NGDLC (i.e., large line-size markets). NGDLCs address certain of the
limitations inherent in DLCs. However, NGDLCs have high installation costs and
complex, support-intensive characteristics and are optimized for fiber-only
networks and large line-size markets.
THE AFC SOLUTION
The Company has developed the UMC system to provide cost-effective,
multi-feature local loop systems for the small line-size market, incorporating a
modular architecture that supports copper, fiber and wireless and the evolution
from one transmission media to another. The Company believes that the UMC system
is optimized to operate simultaneously and economically over a variety of
transmission media and line sizes. The UMC system is easily scalable from six to
672 lines through the addition of plug-in components. Utilizing a single
platform and a variety of line cards supporting specific services, the UMC
system is capable of providing a range of voice and data services. In addition,
the UMC system can be installed in a variety of network configurations to
support the varying geographic distribution of subscriber bases. The Company has
designed the UMC system to require a minimum number of common control units to
support transmission over a variety of media and the delivery of more advanced
services and features by telephone companies. Thus, the UMC system offers a
cost-effective solution for the small line-size market with a wide variety of
features and advanced services.
RECENT DEVELOPMENTS
In May 1997, the Company introduced the UMC 1000 Third Generation Digital
Loop Carrier(TM) ("3GDLC"). This enhanced version of the UMC is designed to
accommodate the bandwidth and connectivity requirements of current and future
local loop applications. The 3GDLC has the capability to connect simultaneously
to time division multiplexing ("TDM"), cell (asynchronous transfer mode ("ATM")
and frame), and high speed serial (SONET) network architectures, delivering
voice or data access from 64 Kbps to 155 Mbps to any subscriber from a single
channel bank assembly ("CBA"). The Company has designed the 3GDLC to support 6.2
Gbps bandwidth, making it capable of delivering broadband and narrowband
technology and services anywhere in the local loop from a single platform. The
GR-303 interface capability has been added to the 3GDLC and allows a remote DLC
terminal to connect directly to a telephone company
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switch. The concentration feature in a fully configured 3GDLC system allows the
switch to concentrate subscriber access in ratios of up to 4:1.
The Company seeks to enhance its products and technology by forming
alliances with companies whose products are complimentary with and integrate
into the UMC system. The Company has entered into agreements with 3Com
Corporation and Aware, Inc. concentrating on asymmetric digital subscriber line
("ADSL") technology, and has entered into agreements with ADTRAN, Inc. and
Pairgain Technologies, Inc. to collaborate on high speed digital subscriber line
("HDSL") transport.
MARKETS AND CUSTOMERS
To date, the UMC system has been deployed primarily in the U. S. rural and
suburban markets served by independent telephone companies. The Company
continues to pursue customers in the U. S. small line-size market as well as
other markets including regional full service communications providers,
international telecommunications service providers and competitive local
exchange carriers.
Domestic Small Line-Size Markets. The domestic small line-size markets for
telecommunications services are generally located in rural and suburban areas
and are served by approximately 1,200 independent telephone companies and the
five Regional Bell Operating Companies ("RBOCs"). The independent telephone
companies range from rural companies with as few as 125 subscribers to GTE with
approximately 20 million subscribers. The Company's current RBOC customers,
Ameritech and Pacific Bell, have approximately 20 million and 16 million
customers, respectively. The Company has segmented the domestic telephone
company market into the following: (i) small independents that use consulting
engineering firms to provide network design for service expansion and
modernization; (ii) medium-size independents that perform the network design
internally; (iii) large independents, such as Sprint and GTE, that have
engineering committees that approve equipment for standardization and may
require testing and equipment modifications to meet their specific network
requirements, and (iv) RBOCs requiring cost-effective solutions to their small
line-size requirements. The Company has targeted each of these segments as
sources of potential customers and to date over 600 independents have purchased
the Company's products.
The RBOCs, formed by the 1984 breakup of AT&T, are large corporations
providing communications services over sophisticated networks. The Company has
increased its efforts to expand its presence in the RBOC market by reorganizing
its sales force and aligning itself with the RBOCs. The reorganized sales force
includes experienced RBOC-trained representatives proficient in developing and
managing strategic relationships with the RBOCs. Product and technology
alliances formed with companies such as 3Com, Efficient Networks, Pairgain and
ADTRAN help the Company to provide a total solution for the RBOCs for such
applications as high speed services.
International Markets. The international telephone market is segmented into
developing countries requiring basic telecommunication services, or POTS, and
developed countries which, in addition to POTS, have requirements for more
advanced telecommunication services and which have barriers to entry in the form
of standards or unique domestic network specifications. In most of these
international markets, a single telephone company, which is typically highly
regulated and government-owned, provides service throughout the country.
Typically, these companies are striving to install technology that offers the
opportunity in the future for advanced services, with ease of installation and
servicing at an attractive price. In addition, these companies are striving to
optimize existing facilities, which typically consist of copper, for a growing
subscriber base. The Company is pursuing selected opportunities to develop these
markets primarily through its direct sales force, local distributors and
strategic relationships.
In 1997, the Company's international revenues grew 162%. The UMC system is
currently undergoing lab testing and field trials in Japan and the Philippines.
In 1996, the Company was awarded contracts with France Telecom and Hong Kong
Telecommunications Limited, and the Company continued to supply product under
these contracts in 1997. The Company was also awarded contracts with South
Africa, Panama, Venezuela and Brazil during 1997.
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SALES, MARKETING AND CUSTOMER SUPPORT
The Company markets the UMC system worldwide directly to telephone
companies and indirectly through original equipment manufacturers, distributors,
sales representatives, and joint ventures to accommodate specific markets and
customer support requirements. The Company's sales force consists of two groups,
one focusing on U.S. and Canadian telephone companies, and the other group
focusing on international markets.
The Company's North American sales force focuses on developing
relationships with independent telephone companies, regional full service
providers and the RBOCs in the U.S. and Canada, and on understanding their
network deployment strategies and cost requirements. As of December 31, 1997,
the Company's domestic sales organization consisted of 30 direct salespeople,
one domestic sales vice president, one sales and marketing vice president and
technical support personnel. The RBOCs make up the largest segment of the U.S.
telecommunications equipment market and serve over 80% of all U.S. telephone
customers, primarily in urban areas. To date, Ameritech and Pacific Bell have
purchased the UMC system and currently deploy the system in their networks.
The Company also has sales personnel dedicated to specific customer
accounts, such as Ameritech, Pacific Bell, GTE and Sprint. In addition to direct
calls on telephone companies, sales to customers often involve marketing through
consulting engineers who are retained by small independent telephone companies
for engineering, specifications and installation services.
In international markets, the Company employs a direct sales force
consisting of five salespersons and one vice president. The primary tasks of the
international sales force include marketing the UMC system directly to
international telephone companies and selecting, training and managing local
distributors. Sales to international customers are primarily fulfilled through
the Company's distributors and agents. The Company currently has offices in Hong
Kong and Shanghai, China. In 1997, the Company expanded its international
organizational infrastructure to add dedicated international business
development, product management, and customer support personnel. In doing so,
the Company significantly increased the number of employees dedicated to
international markets and added new distribution channels in all major
international regions.
The domestic and international sales organizations receive support from the
Company's marketing department, which is responsible for, among other things,
product marketing, advertising and marketing communications. The marketing
department works closely with telephone companies' planning and engineering
departments in order to provide product proposals that are optimal in terms of
both performance and cost for specific network configurations.
The Company's customer support organization is responsible for servicing
the Company's products and assisting the Company's sales personnel. In addition
to its own field technical service engineers, the Company uses Point To Point
Communications, Inc., a third-party support organization, which provides
around-the-clock first-line support for the Company's customers through a
toll-free number and provides installation services on a subcontract basis for
the Company. The Company maintains a training organization dedicated to
developing training curriculums and materials that are made available to the
customer either through student training or train-the-trainer programs. The
Company provides international customer support either directly, or through
authorized distributors or joint venture partners. The Company's products
generally have a warranty period of 24 months.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts have been focused on
developing local loop products with advanced features for small line-size and
large line-size markets. The Company has developed a modular software and
hardware platform that can be configured and adapted to particular customer
requirements. In addition, development efforts include extensive attention to
ease of installation and use by the customer as evidenced in the menu driven
software approach as well as the compact and efficient hardware design
demonstrated in its printed circuit board assemblies ("PCBAs"). The Company's
research and development personnel work closely with sales and marketing
personnel to ensure development efforts are targeted at
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customer needs. The Company's development efforts have focused on developing
enhancements to the UMC system, such as a higher bandwidth backplane, new line
cards, and spread spectrum radio ("SSR").
The industry in which the Company operates is characterized by rapidly
changing technological and market conditions which may shorten product life
cycles. The Company's future competitive position will depend not only upon
successful production and sales of the UMC system, but also upon its ability to
develop and produce, on a timely basis, new features and services to meet
existing and anticipated industry demands. The Company is currently engaged in
the development of several new features for the UMC system. During the product
development process, the Company invests a substantial amount of resources in
products which often require extensive field testing and evaluation prior to
introduction to market.
The Company's research and development costs charged to expense were $25.7
million, $14.4 million and $5.7 million for 1997, 1996, and 1995, respectively.
As a percentage of total revenues, research and development costs represented
9.6% in 1997, 11.1% in 1996 and 10.6% in 1995. The Company considers its
research and development efforts vital to its future success and anticipates
that research and development expenditures as a percentage of revenues will
remain significant for the foreseeable future. As of December 31, 1997, the
Company's research and development staff consisted of 176 employees as compared
with 124 employees in 1996.
MANUFACTURING
Manufacturing, system integration and certain testing operations are
performed at the Company's headquarters in Petaluma, California. The Company's
manufacturing operations consist primarily of the final assembly and testing of
product, primarily printed circuit boards purchased from third parties, and
cabinets assembled internally. The Company monitors quality at each stage of the
production process, including the selection of component suppliers, warehouse
procedures, the assembly of finished goods and final testing, packaging and
shipping. The Company also performs functional, environmental and systems
testing and other quality assurance related activities on the subassemblies
incorporated into the UMC system.
The Company relies on a limited number of independent contractors to
manufacture subassemblies to the Company's specifications for use in the UMC
system. In particular, the Company relies on: (i) Flextronics International
Ltd., Solectron, Inc., Tanon Manufacturing, Inc. (a division of Electronic
Associates, Inc.), and Shanghai Lucent Technologies Transmission Equipment Co.,
Ltd., to manufacture the Company's PCBAs, (ii) Paragon, Inc. and Tyco Printed
Circuit Group Inc. to manufacture backplanes and CBAs, (iii) AMI American
Microsystems, Inc. for application specific integrated circuits ("ASICs") and
(iv) Sonoma Metal Products, Inc. and Cowden Metal San Jose, Inc. to manufacture
external housing cabinets. The Company believes that it has good relations with
each of its suppliers. As the demand for the UMC system has increased, the
Company has begun a program to identify, and potentially qualify at a future
date, additional suppliers to manufacture key product subassemblies. While the
Company believes that the subassemblies manufactured by any of the suppliers
could be procured from alternate suppliers, in the event that the Company's
subcontractors were to experience financial, operational, production, or quality
assurance difficulties that resulted in a reduction or interruption in supply to
the Company or otherwise failed to meet the Company's manufacturing
requirements, the Company's business, financial condition and results of
operations would be adversely affected until the Company established sufficient
manufacturing supply from alternative sources. There can be no assurance that
the Company's current or alternative manufacturers will be able to meet the
Company's future requirements or that such manufacturing services will continue
to be available to the Company at favorable prices.
Certain components used in the Company's products, including the Company's
proprietary ASICs, codec components, certain surface mount technology components
and other components, are only available from a single source or limited number
of suppliers. Some of the Company's sole-source suppliers are companies which
from time to time allocate parts to telephone equipment manufacturers due to
market demand for telecommunication components and equipment. Many of the
Company's competitors are much larger and may be able to obtain priority
allocations from these shared suppliers, thereby limiting or making unreliable
the sources of supply for these components. The Company has encountered supply
delays for codecs
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in the past, which resulted in delayed shipments of the UMC system, and there
can be no assurance that similar shortages will not occur in the future or will
not result in the Company having to pay a higher price for components. If the
Company is unable to obtain sufficient quantities of these or any other
components, delays or reductions in manufacturing or product shipments could
occur which would have a material adverse effect on the Company's business,
financial condition and results of operations.
In February 1998, the Company moved its domestic manufacturing and
distribution operations into a new facility to accommodate growth, double
capacity and increase efficiency. Although the Company attempted to move its
operations in an orderly manner, there can be no assurance that there will not
be an interruption of business, or that any such interruption will not have a
material adverse effect on the Company's business, manufacturing and
distribution functions.
COMPETITION
The market for equipment for local telecommunications networks is extremely
competitive. The Company's competitors range from small companies, both domestic
and international, to large multinational corporations. The Company's
competitors include: Alcatel Alsthom Compagnie Generale d'Electricite, DSC
Communications Corporation, ECI Telecom, Ltd., E/O Networks, Fujitsu America,
Inc., Hitron Technology, Inc., Lucent Technologies, Inc., NEC America, Inc.,
Northern Telecom Ltd., Opnet Technologies Co. Ltd., RELTEC Corporation, Seiscor
Technologies Inc., Siemens Corporation, Teledata Communications, Ltd., UT
Starcom and Vidar SMS Co. Ltd. Many of these competitors have more extensive
financial, marketing and technical resources than the Company and enjoy superior
name recognition in the market. In addition, the Company has entered into
agreements with the Industrial Technology Research Institute ("ITRI") to jointly
develop products based on the UMC system. ITRI is a Taiwanese
government-sponsored research and development organization in the
telecommunications field. Such agreements grant ITRI and certain of its member
companies certain rights to manufacture and sell the European Telecommunications
Standards Institute ("ETSI") version of the UMC system outside of North America.
Such entities currently compete with the Company in international markets,
primarily in China. In addition, upon termination of the agreements with ITRI in
2002, ITRI will have a worldwide, non-exclusive, royalty-free, irrevocable
license to use the ETSI version of the UMC technology and, consequently, such
member companies will be able to compete with the Company worldwide at such
time. There is an ongoing dispute subject to litigation between the Company and
ITRI and such member companies as to whether, among other things, ITRI possesses
the right to grant such rights to manufacture and sell the ETSI version of the
UMC system to new member companies. See "Item 3 -- Legal Proceedings" in this
Annual Report on Form 10-K.
Depending upon the outcome of this dispute, the Company may face
competition from new member companies for the ETSI version of the UMC system.
Such companies may possess substantially greater financial, marketing and
technical resources than the Company. The Company may also face competition from
new market entrants. The principal competitive factors in the segment of the
telecommunications equipment industry in which the Company operates are total
cost of solution, product quality and performance, scalability, flexibility of
configuration and range of system capabilities available. The Company believes
that it competes favorably with respect to these factors, and that the ability
of the UMC system to offer voice and data communications over a variety of
transmission media in a cost-effective package provides a competitive advantage
in the small line-size market. There can be no assurance that the Company will
be able to compete successfully in the future.
COMPLIANCE WITH REGULATORY AND INDUSTRY STANDARDS
The UMC system is required to comply with a large number of voice and data
regulations and standards, which vary between domestic and international
markets, and may vary by the specific international regional carriers to which
the Company sells its products. The standards in the U.S. are determined by the
Federal Communications Commission ("FCC"), Underwriters Laboratories, Bell
Communications Research ("Bellcore"), other independent third-party testing
organizations, and by independent telephone companies. The UMC technology is
certified by Underwriters Laboratories. In international markets, the Company's
products must comply with recommendations issued by the Consultative Committee
on International
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Telegraph and Telephony and individual regional carriers' network operating
system requirements and specifications. The Company's products must also comply
with standards issued by the European Telecommunications Standards Institute.
These standards are implemented and enforced by the Telecommunications
Regulatory Authority of each European nation. Standards for new services
continue to evolve, and the Company will be required to modify its products or
develop and support new versions of its products to meet these standards. These
risks are discussed in "Certain Factors That Might Affect Future Operating
Results" set forth below in this Annual Report on Form 10-K. In addition, the
Company will need to ensure that its products are easily integrated with the
carriers' network management systems. The RBOCs, representing a large segment of
the U.S. telecommunications market, in many cases require that equipment
integrated into their networks to be tested by Bellcore, indicating that the
products are interoperable with the operations, administration, maintenance and
provisioning systems used by the RBOCs in managing their networks. Bellcore
testing requires significant investments in resources to achieve compliance.
These risks are discussed in "Certain Factors That Might Affect Future Operating
Results" set forth below in this Annual Report on Form 10-K.
The Company has successfully completed the Bellcore Operations Systems
Modifications for the Integration of Network Elements ("OSMINE") process on
LFACS, TIRKS, SWITCH, and NMA interoperability. LFACS and TIRKS are operational
support systems ("OSS") which allow RBOCs' operating systems to identify the
UMC's bandwidth and equipment type and capabilities. SWITCH is an OSS designed
to inventory and assign telecommunications equipment. NMA adds the ability to
retrieve UMC alarms through the RBOCs' operating systems and generate trouble
tickets online. The Company has also completed switch compliance testing on
GR-303 with Lucent Technologies on the Lucent 5ESS switch, and with Northern
Telecom on the DMS-100 switch. GR-303 compliance testing with Bellcore is
currently in process. Integration with OPS/INE to allow through provisioning of
the UMC through Bellcore operating systems is currently in process with
Bellcore.
In October 1997, Underwriters Laboratories officially registered the
Company as ISO 9001, ANSI/ ASQC Q9001, compliant which assures quality in
design, development, production, installation and servicing. The ISO 9001
international standard consists of all elements which define a quality system
aimed primarily at achieving customer satisfaction by preventing nonconformity
at all stages from design through servicing.
The U.S. Congress recently passed new regulations that affect
telecommunications services, including changes to pricing, access by competitive
suppliers and many other broad changes to the data and telecommunications
networks and services. These changes will have a major impact on the pricing of
existing services, and may affect the deployment of future services. These risks
are discussed in "Certain Factors That Might Affect Future Operating Results"
set forth below in this Annual Report on Form 10-K.
ENVIRONMENTAL MATTERS
The Company's operations and manufacturing processes are subject to certain
federal, state, local and foreign environmental protection laws and regulations.
These laws and regulations relate to the Company's use, handling, storage,
discharge and disposal of certain hazardous materials and wastes, the
pre-treatment and discharge of process waste waters and the control of process
air pollutants. The Company believes that it is in compliance in all material
respects with applicable environmental regulations. Such laws and regulations,
however, may become more stringent over time and there can be no assurances that
the Company's failure to comply with either present or future regulations would
not subject the Company to significant compliance expenses, production
suspensions or delay, restrictions on expansion at its present locations or the
acquisition of costly equipment.
PROPRIETARY RIGHTS AND LICENSES
The Company attempts to protect its technology through a combination of
copyrights, trade secret laws, contractual obligations and patents. The Company
does not presently hold any patents for its existing products but has one patent
application pending. There can be no assurance that the Company's intellectual
property protection measures will be sufficient to prevent misappropriation of
the Company's technology or that the
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Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. In addition,
the laws of many foreign countries do not protect the Company's intellectual
property rights to the same extent as the laws of the U.S. These risks are
discussed in "Certain Factors That Might Affect Future Operating Results" set
forth below in this Annual Report on Form 10-K.
The increasing dependence of the telecommunications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. In 1996, the Company
settled litigation with DSC Communications Corporation ("DSC") under which DSC
had claimed proprietary rights in the UMC technology. See "Note 10 of Notes to
Consolidated Financial Statements" on page 37 through 38 of the Company's 1997
Annual Report to Stockholders, which information is incorporated herein by
reference and is filed herewith as Exhibit 13.3. In addition, DSC filed a
lawsuit on January 22, 1998, that includes allegations of patent infringement by
the Company. This pending litigation with DSC is discussed in "Item 3 -- Legal
Proceedings" included in this Annual Report on Form 10-K. In the future the
Company may be subject to additional litigation to defend against claimed
infringements of the rights of others or to determine the scope and validity of
the proprietary rights of others. Future litigation also may be necessary to
enforce and protect trade secrets and other intellectual property rights owned
by the Company. Any such litigation could be costly and cause diversion of
management's attention, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determination in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties, or prevent the Company from
manufacturing or selling its products, any one of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that any necessary licenses
will be available on reasonable terms.
In 1992, the Company entered into agreements (the "ITRI Agreements") with
ITRI to jointly develop products based on the ETSI version of the UMC system.
Under the ITRI Agreements, ITRI has the exclusive right in Taiwan to use and
develop the ETSI version of the UMC technology, and to manufacture and sell such
version of the UMC system through certain of ITRI's member companies (the
"Member Companies"), but does not have the right to manufacture and sell the
Company's proprietary application specific integrated circuits ("ASICs") except
in circumstances where the Company has failed to provide the ASICs as required.
The ASIC designs were placed in escrow in order to be available to ITRI and the
Member Companies should the right to manufacture ASICs become effective. ITRI
and the Member Companies also have a non-exclusive right to sell or lease the
ETSI version of the UMC system in all countries outside of North America. The
ITRI Agreements require ITRI to pay the Company a royalty on sales or leases of
the UMC system made through September 2002, at which time the license becomes
fully paid, and ITRI will have a worldwide, non-exclusive, royalty free,
irrevocable license to use the ETSI version of the UMC technology. ITRI's Member
Companies currently compete with the Company in international markets, primarily
in China. The Company is currently involved in litigation with ITRI and certain
of its Member Companies arising out of disputes over, among other things,
payment of royalties and the supply of ASICs. See "Certain Factors That Might
Affect Future Operating Results -- Competition" and "Item 3 -- Legal Proceedings
- - ITRI".
EMPLOYEES
As of December 31, 1997, the Company employed 660 people. None of the
Company's employees are covered by collective bargaining agreements, and the
Company has never experienced a work stoppage, strike or labor dispute. The
Company believes relations with its employees are good.
CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
In addition to the other information in this Annual Report on Form 10-K,
the following are important factors that should be considered in evaluating the
Company and its business.
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Limited History of Operations and Profitability. The Company was
incorporated in May 1992 and was in the initial startup and development phase
through December 1993. The Company began shipping the UMC system in January 1994
and, accordingly, has a limited operating history. The Company has incurred
substantial expenditures related to the development, manufacturing startup and
marketing of the UMC system. Although the Company first achieved profitability
in the second quarter of 1995, it recorded a net loss in the second quarter of
1996 due to charges associated with the settlement of litigation with DSC. There
can be no assurance that the Company will sustain or increase its profitability
in the future.
Potential Fluctuations in Future Operating Results and Seasonality. The
Company's operating results have been, and will continue to be, affected by a
wide variety of factors, some of which are outside of the Company's control,
that could have a material adverse effect on revenues and results of operations
during any particular period. These factors include: the mix between domestic
and international sales; the customer mix; the timing and size of orders which
are received and can be shipped in a quarter; the availability of adequate
supplies of key components and assemblies and the adequacy of manufacturing
capacity; the Company's ability to introduce new products and technologies on a
timely basis; the timing of new product introductions or announcements by the
Company or its competitors; price competition; and unit volume.
The UMC system is sold primarily to telephone companies that install the
UMC system as part of their access networks. Additions to those networks
represent complex engineering projects which can require from three to twelve
months from project conceptualization to completion. The UMC system typically
represents only a portion of a given project and, therefore, the timing of
product shipment and revenue recognition is often difficult to forecast. In
developing countries, delays and reductions in the planned project deployment
can be caused by additional factors, including reductions in capital
availability due to declines in the local economy, currency fluctuations,
priority changes in the government's budget and delays in receiving government
approval for deployment of the UMC system in the local loop.
The Company's customers normally install a portion of the UMC system in
outdoor locations. Shipments of the UMC system are subject to the effects of
seasonality, with fewer installation projects scheduled for the winter months.
Accordingly, the Company believes that over time this seasonality will cause its
revenues in the quarter ended March 31 to be lower than revenues in the
preceding quarter ended December 31. In particular, the Company currently
believes that revenues for the quarter ended March 31, 1998, may be lower than
the revenues in the quarter ended December 31, 1997.
The Company's expenditures for research and development, marketing and
sales, and general and administrative functions are based in part on future
revenue projections and in the near term are relatively fixed. The Company may
be unable to adjust spending in a timely manner in response to any unanticipated
declines in revenues. Accordingly, any significant decline in demand for the UMC
system relative to planned levels could have a material adverse effect on the
Company's business, financial condition and results of operations in that
quarter or subsequent quarters.
All of the above factors are difficult to forecast, and these or other
factors could materially adversely affect the Company's business, financial
condition and results of operations. As a result, the Company believes that
period-to-period comparisons are not necessarily meaningful and should not be
relied upon as indications of future performance. Fluctuations in the Company's
operating results may cause volatility in the price of the Company's Common
Stock. Further, it is likely that in some future quarter the Company's revenues
or operating results will be below the expectations of public market analysts or
investors. In such event, the market price of the Company's Common Stock would
likely be materially adversely affected.
Dependence on Telecommunications Industry and Small Line-Size Market. The
Company's customers are concentrated in the public carrier telecommunications
industry. Accordingly, the Company's future success depends upon the capital
spending patterns of such customers and the continued demand by such customers
for the UMC system. The target markets for the UMC system are the small
line-size markets of the U.S. and developing countries.
Historically, these markets have had little access to the advanced services
that can be made available through the UMC system and, accordingly, there can be
no assurance that potential customers will consider
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the near term value of these advanced services to be sufficient to influence
their purchase decisions. Furthermore, there can be no assurance that the UMC
system will find widespread acceptance among the telephone companies and other
potential customers in small line-size markets or that such customers and
potential customers will not adopt alternative architectures or technologies
that are incompatible with the UMC technology, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that telephone companies,
foreign governments or other customers will pursue infrastructure upgrades that
will necessitate the implementation of advanced products such as the UMC system.
Infrastructure improvements requiring the Company's or similar technology may be
delayed or prevented by a variety of factors, including cost, regulatory
obstacles, the lack of consumer demand for advanced telecommunications services
and alternative approaches to service delivery.
Concentrated Product Line, New Products and Rapid Technological Change. The
Company currently derives substantially all of its revenues from the UMC system
and expects that this concentration will continue in the foreseeable future. As
a result, any decrease in the overall level of sales of, or the prices for, the
UMC system due to product enhancements, introductions or announcements by the
Company's competitors, a decline in the demand for the UMC system, product
obsolescence or any other reason could have a material adverse effect on the
Company's business, financial condition and results of operations.
The telecommunications equipment market is characterized by rapidly
changing technology, evolving industry standards, changes in end-user
requirements, and frequent new product introductions and enhancements. The
introduction of products embodying new technologies or the emergence of new
industry standards can render existing products obsolete or unmarketable. The
Company's success will depend upon its ability to enhance the UMC technology and
to develop and introduce, on a timely basis, new products and feature
enhancements that keep pace with technological developments and emerging
industry standards and address changing customer requirements in a
cost-effective manner. There can be no assurance that the Company will be
successful in identifying, developing, manufacturing, and marketing product
enhancements or new products that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance. Furthermore,
from time to time, the Company may announce new products or product
enhancements, services or technologies that have the potential to replace or
shorten the life cycle of the UMC system and that may cause customers to defer
purchasing the UMC system. There can be no assurance that future technological
advances in the telecommunications industry will not diminish market acceptance
of the UMC system or render the UMC system obsolete and, thereby, materially
adversely affect the Company's business, financial condition and results of
operations.
The Company has experienced delays in completing development and
introduction of new products, product variations and feature enhancements, and
there can be no assurance that such delays will not continue or recur in the
future. Furthermore, the UMC system contains a significant amount of complex
hardware and software that may contain undetected or unresolved errors as
products are introduced or as new versions are released. The Company has in the
past discovered technical difficulties in certain UMC system installations.
There can be no assurance that despite significant testing by the Company,
hardware or software errors will not be found in the UMC system after
commencement of shipments, resulting in delays in, or cancellation of, customer
orders or in the loss of market acceptance, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Sole-Source and Other Key Suppliers. Certain components used
in the Company's products, including the Company's proprietary application
specific integrated circuits ("ASICs"), codec components, certain surface mount
technology components and other components, are only available from a single
source or limited number of suppliers. Some of the Company's sole-source
suppliers are companies which from time to time allocate parts to telephone
equipment manufacturers due to market demand for telecommunications components
and equipment. Many of the Company's competitors are much larger and may be able
to obtain priority allocations from these shared suppliers, thereby limiting or
making unreliable the sources of supply for these components. The Company
encountered supply delays for codecs in the second
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quarter of 1994 which resulted in delayed shipments of the UMC system, and there
can be no assurance that similar shortages will not occur in the future or will
not result in the Company having to pay a higher price for components. If the
Company is unable to obtain sufficient quantities of these or any other
components, delays or reductions in manufacturing or product shipments could
occur which would have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Limited Number of Third Party Manufacturers and Support
Organizations. The Company relies on a limited number of independent contractors
to manufacture the subassemblies to the Company's specifications for use in the
Company's products. In particular, the Company relies on: (i) Flextronics
International Ltd., Solectron Inc., Tanon Manufacturing, Inc. (a division of
Electronic Associates, Inc.), and Shanghai Lucent Technologies Transmission
Equipment Co., Ltd., to manufacture the Company's PCBAs, (ii) Paragon, Inc., and
Tyco Printed Circuit Group Inc. to manufacture backplanes and CBAs, (iii) AMI
American Microsystems, Inc. for ASICs and (iv) Sonoma Metal Products, Inc., and
Cowden Metal San Jose, Inc., to manufacture the external housing cabinets. In
the event that the Company's subcontractors were to experience financial,
operational, production, or quality assurance difficulties that resulted in a
reduction or interruption in supply to the Company or otherwise failed to meet
the Company's manufacturing requirements, the Company's business, financial
condition and results of operations would be adversely affected until the
Company established sufficient manufacturing supply from alternative sources.
There can be no assurance that the Company's current or alternative
manufacturers will be able to meet the Company's future requirements or that
such manufacturing services will continue to be available to the Company at
favorable prices, or at all.
The Company also relies on Point To Point Communications, Inc. ("Point To
Point"), a third-party support organization, to provide first line technical
assistance and post-sales support to the Company's customers. There can be no
assurance that Point To Point will be able to provide the level of customer
support demanded by the Company's existing or potential customers. The Company
is in the process of bringing its 24-hour on-line technical support services in
house to improve quality and responsiveness of service, while Point To Point
will continue to provide field support. There can be no assurance that this
transition will not adversely affect current technical and post sales support
functions.
Competition. The market for equipment for local telecommunications networks
is extremely competitive. The Company's competitors range from small companies,
both domestic and international, to large multinational corporations. The
Company's competitors include Alcatel Alsthom Compagnie Generale d'Electricite,
DSC Communication Corporation, ECI Telecom, Inc., E/O Networks, Fujitsu America,
Inc., Hitron Technology, Inc., Lucent Technologies, Inc., NEC America, Inc.,
Northern Telecom Ltd., Opnet Technologies Co. Ltd., RELTEC Corporation, Seiscor
Technologies Inc., Siemens Corporation, Teledata Communications Ltd., UT
Starcom, Inc. and Vidar-SMS Co. Ltd. Many of these competitors have more
extensive financial, marketing and technical resources than the Company and
enjoy superior name recognition in the market. In addition, the Company has
entered into agreements with the Industrial Technology Research Institute
("ITRI") to jointly develop products based on the UMC system. ITRI is a
Taiwanese government-sponsored research and development organization in the
telecommunications field. Such agreements grant ITRI and certain of its member
companies certain rights to manufacture and sell the European Telecommunications
Standards Institute ("ETSI") version of the UMC system outside of North America.
Such entities currently compete with the Company in international markets,
primarily in China. In addition, upon termination of the agreements with ITRI in
2002, ITRI will have a worldwide, non-exclusive, royalty-free, irrevocable
license to use the ETSI version of the UMC technology and, consequently, such
member companies will be able to compete with the Company worldwide at such
time. There is an ongoing dispute subject to litigation between the Company and
ITRI and such member companies as to, among other things, whether ITRI possesses
the right to grant such rights to manufacture and sell the ETSI version of the
UMC system to new member companies and whether the Company has terminated or may
terminate such agreements and the rights, if any, of the member companies
thereunder. Depending on the outcome of this dispute, the Company may face
competition from new member companies for the ETSI version of the UMC system.
Such companies may possess substantially greater financial, marketing and
technical resources than
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the Company. The Company may also face competition from new market entrants.
There can be no assurance that the Company will be able to compete successfully
in the future.
Risks Associated with Pending Litigation. The Company is a party to certain
legal proceedings as described in "Item 3 -- Legal Proceedings." The Company is
unable to predict the ultimate outcome of these proceedings or determine the
total expense or possible loss, if any, that may ultimately be incurred in the
resolution of these proceedings. Regardless of the ultimate outcome of these
proceedings, they could result in significant diversion of time by the Company's
management. See "Item 3 -- Legal Proceedings".
Limited Protection of Proprietary Technology; Risk of Third-Party Claims of
Infringement. The Company attempts to protect its technology through a
combination of copyrights, trade secret laws, contractual obligations and
patents. The Company does not presently hold any patents for its existing
products but has one patent application pending. There can be no assurance that
the Company's intellectual property protection measures will be sufficient to
prevent misappropriation of the Company's technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In addition, the laws of
many foreign countries do not protect the Company's intellectual property rights
to the same extent as the laws of the U.S. The failure of the Company to protect
its proprietary information could have a material adverse effect on the
Company's business, financial condition and results of operations.
The increasing dependence of the telecommunications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. In June 1996, the
Company settled litigation with DSC under which DSC had claimed proprietary
rights to the UMC technology. In January 1998, DSC filed a lawsuit against the
Company alleging, among other things, that the Company's 3GDLC product infringes
a DSC patent. See "Item 3 -- Legal Proceedings." In the future, the Company may
be subject to additional litigation to defend against claimed infringements of
the rights of others or to determine the scope and validity of the proprietary
rights of others. Future litigation also may be necessary to enforce and protect
trade secrets and other intellectual property rights owned by the Company. Any
such litigation could be costly and cause diversion of management's attention,
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties, or prevent the Company from manufacturing or selling its
products, any one of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, there can
be no assurance that any necessary licenses will be available on reasonable
terms.
Risk of Failure to Manage Expanding Operations. The Company has experienced
a period of rapid growth, which has placed and could continue to place, a
significant strain on the Company's management, operational, financial and other
resources. The members of the Company's management team have limited experience
in the management of rapidly growing companies. To effectively manage the recent
growth as well as any future growth, the Company will need to recruit, train,
assimilate, motivate and retain qualified managers and employees. Management of
potential future growth required the Company to implement a new management and
accounting system. Management evaluated and purchased a new management and
accounting system and implemented the system effective November 1997.
Information systems expansion or replacement can be a complex, costly and
time-consuming process, and there can be no assurance that the Company's system
transition and further implementation can be accomplished without disruption of
the Company's business. Any business disruption or other system transition
difficulties could have a material adverse effect on the Company's business,
financial condition and results of operations. The failure of the Company to
effectively manage its domestic and international operations or any current or
future growth could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's results of
operations will be adversely affected if revenues do not increase sufficiently
to compensate for the increase in operating expenses resulting from any
expansion.
Expanding Operations. Effective February 1998, the Company moved its
domestic manufacturing and distribution operations into a new facility to
accommodate growth, double capacity and increase efficiency.
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Although the Company attempted to move its operations in an orderly manner,
there can be no assurance there will not be an interruption of business, or that
such interruption will not have a material adverse effect on the Company's
business, manufacturing and distribution functions.
Year 2000. Many computer operating systems and software applications in use
today were designed and developed using two-digit fields to identify the year.
Such systems and applications will recognize the year 2000 as "00", or 1900,
causing failures in the systems and/or applications or creating erroneous
results by or in the year 2000. The Company believes that it has adequately
addressed the year 2000 issue by utilizing operating systems and software
applications that were designed and developed to properly reflect the year 2000
and subsequent years' data. Although the Company believes that its products and
systems are year 2000 compliant, the Company's manufacturing suppliers may
utilize equipment or software that is not year 2000 compliant. The failure on
the part of any supplier to adequately address its own year 2000 compliance
issues could lead to delays on the part of the supplier in the delivery of
subassemblies for use in the Company's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Customer Concentration. For the year ended December 31, 1997, approximately
19% of the Company's revenues were derived from sales to GTE Communication
Systems Corporation. No other customer accounted for 10% or more of revenues in
1997. No single customer accounted for 10% or more of revenues in 1996. For the
years ended December 31, 1997 and 1996, the Company's five largest customers
accounted for approximately 38% and 28% of revenues, respectively. Although the
Company's largest customers have varied from period to period, the Company
anticipates that its results of operations in any given period will continue to
depend to a significant extent upon sales to a small number of customers. None
of the Company's customers has entered into an agreement requiring it to
purchase a minimum amount of product from the Company. There can be no assurance
that the Company's principal customers will continue to purchase product from
the Company at current levels, if at all. The loss of one or more major
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Associated with International Markets. International sales
constituted 27% and 21% of the Company's total revenues for the years ended
December 31, 1997 and 1996, respectively. International sales have fluctuated in
absolute dollars and as a percentage of revenues, and are expected to continue
to fluctuate in future periods. The Company relies on a number of third-party
distributors and agents to market and sell the UMC system outside of North
America. There can be no assurance that such distributors or agents will provide
the support and effort necessary to service international markets effectively.
The Company intends to expand its existing international operations and enter
new international markets, which will demand significant management attention
and financial commitment. The Company's management has limited experience in
international operations, and there can be no assurance that the Company will
successfully expand its international operations. In addition, a successful
expansion by the Company of its international operations and sales in certain
markets may depend on the Company's ability to establish and maintain productive
strategic relationships. To date, the Company has formed three joint ventures to
pursue international markets, two of which have been or are in the process of
being terminated or liquidated due to differences with the joint venture
partners. There can be no assurance that the Company will be able to identify
suitable parties for joint ventures or strategic relationships or, even if such
parties are identified, that successful joint ventures or strategic
relationships will result. Moreover, there can be no assurance that the Company
will be able to increase international sales of the UMC system through strategic
relationships or joint ventures. The failure to do so could significantly limit
the Company's ability to expand its international operations and could adversely
affect the Company's business, financial condition and results of operations.
International telephone companies are in many cases owned or strictly
regulated by local authorities. Access to such markets is often difficult due to
the established relationships between a government owned or controlled telephone
company and its traditional indigenous suppliers of telecommunications
equipment. In addition, the Company's bids for business in certain international
markets typically will require the Company to post bid and performance bonds and
to incur contract penalties should the Company fail to meet production and
delivery time schedules on large orders. The failure of the Company to meet
these schedules could result in the loss of collateral posted for the bonds or
financial penalties which could adversely affect the Company's business,
financial condition and results of operations.
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Currently, the Company's international sales are primarily U.S.
dollar-denominated. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products less
competitive in international markets. For example, increases in the value of the
U.S. dollar relative to the Mexican peso in late 1994 resulted in a significant
decrease in sales of the UMC system to Telefonos de Mexico for 1995.
Additionally, the Asia Pacific region's economy has deteriorated recently
resulting in the devaluation of currencies in certain of the countries of this
region. As a result of the Company's U.S. dollar-denominated contracts, the
economic downturn in the Asia Pacific region has not had a material effect to
date on the Company's financial condition. Furthermore, operating in
international markets subjects the Company to certain additional risks,
including unexpected changes in regulatory requirements, political and economic
conditions, tariffs or other barriers, difficulties in staffing and managing
international operations, exchange rate fluctuations, potential exchange and
repatriation controls on foreign earnings, potentially negative tax
consequences, longer sales and payment cycles and difficulty in accounts
receivable collection. In addition, any inability to obtain local regulatory
approval could delay or prevent entrance into international markets, which could
materially impact the Company's business, financial condition and results of
operations. In order to compete in international markets, the Company will need
to comply with various regulations and standards.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon key technical and management employees. The loss of the services of
any of these key employees of the Company could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company does not have employment agreements with, or key person life insurance
for, any of its employees. Competition for highly qualified employees is intense
and the process of locating key technical and management personnel with the
combination of skills and attributes required to execute the Company's strategy
is often lengthy. There can be no assurance that the Company will be successful
in retaining its existing key personnel or in attracting and retaining the
additional employees it may require.
Compliance with Regulations and Industry Standards. The UMC system is
required to comply with a large number of voice and data regulations and
standards, which vary between domestic and international markets, and may vary
by the specific international market into which the Company sells its products.
Standards setting and compliance verification in the U.S. are determined by the
Federal Communications Commission ("FCC"), Underwriters Laboratories, Bell
Communications Research ("Bellcore"), other independent third-party testing
organizations, and by independent telephone companies. In international markets,
the Company's products must comply with recommendations issued by the
Consultative Committee on International Telegraph and Telephony and individual
regional carriers' network operating system requirements and specifications. In
addition, the Company's products must comply with standards issued by the
European Telecommunications Standards Institute and implemented and enforced by
the Telecommunications Regulatory Authority of each European nation. Standards
for new services continue to evolve, and the Company will be required to modify
its products or develop and support new versions of its products to meet these
standards. The failure of the Company's products to comply, or delays in meeting
compliance, with the evolving standards both in its domestic and international
markets could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the Company will need to ensure that its products are easily
integrated with the carriers' network management systems. The Regional Bell
Operating Companies ("RBOCs"), which represent a large segment of the U.S.
telecommunications market, in many cases require equipment integrated into their
networks to be tested by Bellcore, indicating that the products are
interoperable with the operations, administration, maintenance and provisioning
systems used by the RBOCs to manage their networks. Bellcore testing requires
significant investments in resources to achieve compliance. The failure to
maintain such compliance or to obtain it on new features released in the future
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In October 1997, Underwriters Laboratories officially registered the
Company to ISO 9001, ANSI/ASQC Q9001 which assures quality in design,
development production, installation and servicing. The ISO 9001 international
standard consists of all elements which define a quality system aimed primarily
at achieving customer satisfaction by preventing nonconformity at all stages
from design through servicing. There can be no assurance that the Company will
maintain such certification. The failure to maintain such
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certification may preclude the Company from selling the UMC system in certain
markets and could materially adversely affect the Company's ability to compete
with other suppliers of telecommunications equipment.
The U.S. Congress recently passed new regulations that affect
telecommunications services, including changes to pricing, access by competitive
suppliers and many other broad changes to the data and telecommunications
networks and services. These changes will have a major impact on the pricing of
existing services, and may affect the deployment of future services. These
changes could cause greater consolidation in the telecommunications industry,
which in turn could disrupt existing customer relationships and have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that any regulatory changes will not have
a material adverse effect on the demand for the UMC system. Uncertainty
regarding future policies combined with emerging new competition may also affect
the demand for telecommunications products such as the UMC system.
ITEM 2. PROPERTIES
The Company's administrative, sales and marketing, and product development
headquarters are located in Petaluma, California, where the Company leases six
buildings. In addition to its headquarters, the Company leases property at the
following locations: Petaluma, California (manufacturing and distribution),
Fremont, California (research and design), Buffalo Grove, Illinois and Shanghai,
China (engineering and marketing), and Hong Kong, China (sales). The Company
believes its facilities are adequate for its current needs and for its needs in
the foreseeable future.
The Company believes that each building is suitable to its operational use,
and its facilities, other than its new Manufacturing and Distribution facility
in Petaluma, are fully utilized. The Company believes its new Manufacturing and
Distribution facility is 65% utilized as of February 1998.
ITEM 3. LEGAL PROCEEDINGS
ITRI. In September 1992, the Company entered into agreements (the "ITRI
Agreements") with the Industrial Technology Research Institute ("ITRI"), a
Taiwanese government-sponsored research and development organization, that
granted to ITRI certain license rights to the European Telecommunications
Standards Institute ("ETSI") version of the UMC system. In 1995, a dispute arose
among the Company, ITRI, and certain of ITRI's member companies (the "Member
Companies") in which the Company claimed that ITRI and the Member Companies
were, among other things, failing to pay royalties when due under the ITRI
Agreements. In reliance upon certain provisions of the ITRI Agreements, in April
1996, the Company ceased delivering to the Member Companies certain proprietary
application specific integrated circuits ("ASICs") used in manufacturing the UMC
system.
Pursuant to agreements with ITRI reached in 1994, the design documentation
for these ASICs are held in a trust account, with directions that the designs
can be made available to ITRI on the occurrence of specified conditions. On July
9, 1996, the trustee-custodian of the ASIC designs filed suit against the
Company in the United States District Court, Eastern District of New York,
alleging that the Company had not supplied all required documentation to the
trustee, and wrongfully discontinued the sale of the ASICs to the Member
Companies. Among other things, the complaint seeks unspecified damages on behalf
of the trustee, and a determination that the trustee can release the ASIC
designs to ITRI. On July 31, 1996, the Company filed a counterclaim against the
trustee claiming, among other things, that the trustee improperly disclosed the
design documentation to third parties. Discovery in the case commenced in
October 1996, and was ongoing into December 1997. At a hearing held December 15,
1997, the court stayed the case pending resolution of the arbitration
proceedings described on the following page.
On July 30, 1996, the Company filed suit against ITRI and others in the
United States District Court, Northern District of California, for breach of the
ITRI Agreements, breach of covenants of good faith, trade secret
misappropriation, tortious interference, and related claims. The complaint
alleges that ITRI breached the ITRI Agreements, among other things, by failing
to collect royalties owed to the Company, by developing UMC-based products not
shared with the Company, by transferring UMC technology to an unauthorized
company, and by misappropriating the Company's trade secrets and that the ITRI
Agreements have been
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terminated. The Company seeks recovery for lost profits and unjust enrichment,
punitive damages, and declaratory and injunctive relief. On September 13, 1996,
ITRI filed a demand for arbitration of the dispute and claimed, among other
things, that the Company had breached the ITRI Agreements and is liable for
unspecified royalties and punitive damages, and claiming proprietary rights in
certain UMC technology. On September 30, 1996, the Company amended the complaint
in its suit against ITRI to add the Member Companies and Taiwan-based Acer
Netxus, Inc. as parties to the suit.
On August 27, 1996, the Member Companies filed suit against the Company in
United States District Court, Northern District of California, alleging breach
of contract and unfair competition based on the Company's discontinuation of
ASICs sales and alleged failure to provide certain other UMC technology to the
Member Companies. The complaint filed by the Member Companies alleges that the
Company lacked justification to discontinue the sale of ASICs and that its
failure to sell ASICs to the Member Companies constituted unfair competition.
The complaint seeks court-ordered arbitration, unspecified damages, punitive
damages and an injunction requiring further sales of the ASICs to the Member
Companies. On September 6, 1996, the court granted a temporary restraining order
pursuant to which the Company was required to supply the Member Companies with a
specified number of ASICs during the ensuing two month period on the terms and
conditions set forth in the ITRI Agreements. The court's order was granted as an
interim measure to preserve the status quo pending adjudication on the merits.
The Company believes that compliance with the court's order will not have a
material adverse effect on the Company's business, financial condition and
results of operations. On September 16, 1996, the Company filed counterclaims
seeking declaratory and injunctive relief and damages against Member Companies
for, among other things, breach of contract, fraud and misappropriation of trade
secrets. On September 23, 1996, the Member Companies filed a demand for
arbitration of the dispute and claimed, among other things, actual damages in
excess of $60 million, legal fees and expenses and punitive damages.
A hearing on ITRI's motion for a preliminary injunction to require the
Company to continue supplying ASICs and ITRI's motion to compel arbitration was
held on November 22, 1996. On January 23, 1997, the court granted the ITRI
parties' motion to compel arbitration, and granted, in part, the Member
Companies' motion for a preliminary injunction. Under the court's order, the
case was directed to arbitration under the auspices of the American Arbitration
Association, the litigation was stayed, and the Company was directed to continue
supplying ASICs to the Member Companies as under the prior temporary restraining
order.
On or about April 8, 1997, ITRI and the Member Companies filed amended
demands for arbitration with the American Arbitration Association. On April 28,
1997, the Company filed an answer and counterclaim in the arbitration proceeding
against ITRI, the Member Companies, and Acer Netxus, Inc., to which ITRI
purportedly assigned member company rights under the ITRI Agreements without the
Company's consent.
During January 1998, the Company, ITRI, the Member Companies and the
trustee agreed to a tentative settlement that, if finalized, will resolve all
claims among the Company, ITRI, the Member Companies and the trustee. The
tentative settlement does not affect the Company's claims against Acer Netxus,
Inc. The Company is currently working to finalize the settlement; however, there
can be no assurances that the settlement will be finalized.
The Company believes that it has meritorious defenses to the claims
asserted by the trustee, ITRI and the Member Companies and, if the settlement is
not finalized, the Company intends to continue to defend the litigation and to
prosecute its affirmative claims vigorously. Moreover, the Company believes that
the damages claims of the trustee, ITRI, and the Member Companies are without
merit. The Company further believes that its claims against Acer Netxus, Inc.
are meritorious and intends to pursue these claims vigorously. However, due to
the nature of the claims, the Company cannot determine the total expense or
possible loss, if any, that may ultimately be incurred either in the context of
a trial, arbitration or as a result of a negotiated settlement. Regardless of
the ultimate outcome of the proceedings, it could result in significant
diversion of time by the Company's management. After consideration of the nature
of the claims and the facts relating to the proceedings, the Company believes
that the resolution of these matters will not have a material adverse effect on
the Company's business, financial condition and results of operations; however,
the results of these proceedings, including any potential settlement, are
uncertain and there can be no assurance to that effect.
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DSC. On December 22, 1997, the Company filed a lawsuit in Sonoma County
Superior Court in California against DSC Communications Corporation ("DSC")
related to its hiring of a former employee of DSC, to become the Company's Vice
President, Product Planning. The Company's complaint seeks a declaratory
judgement that its hiring of the former DSC employee was lawful.
On January 22, 1998, DSC filed a lawsuit against the Company and the former
DSC employee in the United States District Court, Eastern District of Texas,
alleging "inevitable" trade secret misappropriation and related claims. DSC also
asserted a separate claim against the Company for patent infringement alleging
that the Company's 3GDLC product infringes a DSC patent. DSC's complaint seeks
unspecified damages, injunctions relating to the alleged misappropriation and
patent infringement, attorneys' fees and other relief. On February 5, 1998, the
United States District Court, Eastern District of Texas granted the Company's
motion to dismiss all non-patent claims in this lawsuit.
On February 18, 1998, DSC filed a motion in the lawsuit filed by the
Company in Sonoma County Superior Court to allege the "inevitable" trade secret
misappropriation and related claims, seeking unspecified damages, injunctions
relating to the alleged misappropriation, attorneys' fees and other relief. A
hearing is set for June 22, 1998.
The Company believes that all of DSC's misappropriation and other claims
related to the hiring of the former DSC employee are without merit, and the
Company intends to defend the lawsuit vigorously. Based on the Company's
preliminary review of the patent claim, the Company believes that the Company's
3GDLC product does not infringe the DSC patent, and that the Company has
meritorious defenses to such claim. The Company intends to vigorously defend the
litigation against DSC and prosecute its declaratory judgement action. However,
the Company cannot predict the ultimate outcome of these lawsuits. In addition,
patent litigation is highly complex and can extend for a protracted period of
time, which can divert the attention of the Company's management and technical
personnel and require the Company to incur substantial costs and expenses. If
the patent claim were to be resolved against the Company, this could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RELTEC Corporation. On November 26, 1997, the Company filed a lawsuit in
Sonoma County Superior Court in California against RELTEC Corporation, alleging
trade secret misappropriation, tortious interference with a contract, and
related claims. The case involves RELTEC's acquisition of the Company's
technology through the Company's Taiwan-based licensee, Vidar-SMS Co., Ltd. On
January 21, 1998, the Company filed for and obtained an order to show cause, and
a preliminary injunction hearing is scheduled for April 8, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matters were submitted to a vote of
security holders through the solicitation of proxies or otherwise.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market using
the symbol "AFCI". The Company's Common Stock prices are listed daily in the
Wall Street Journal and other publications under the Nasdaq National Market
listing with the abbreviation "AdvFibComm".
In September 1997, the Company's stockholders approved an increase in the
number of authorized shares of common stock from 100,000,000 to 200,000,000. On
September 22, 1997, the Company effected a two-for-one stock split to
stockholders of record as of August 29, 1997. All share, per share and common
stock amounts herein have been restated to reflect the effect of this split.
The following table lists the high and low closing sales prices for the
Company's Common Stock as reported by the Nasdaq National Market for each full
quarterly period beginning with October 1, 1996, the date of the Company's
initial public offering :
HIGH LOW
------- -------
FISCAL 1996:
Fourth Quarter (through December 28)...................... $ 30.63 $ 22.25
HIGH LOW
------- -------
FISCAL 1997:
First Quarter (through March 29).......................... $ 27.81 $ 14.50
Second Quarter (through June 28).......................... 30.44 14.50
Third Quarter (through September 27)...................... 38.00 29.88
Fourth Quarter (through December 27)...................... 42.50 23.88
On March 9, 1998, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $30.00 per share. As of December 31,
1997, there were approximately 293 stockholders of record of the Company's
Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to utilize all of its earnings, if any, for use in
its business and does not anticipate the payment of cash dividends in the
foreseeable future. In addition, the Company's revolving line of credit
agreement requires consent from the bank prior to payment of dividends.
ISSUANCE OF UNREGISTERED SECURITIES
Between October 1, 1997 and December 31, 1997, the Company issued and sold
the following securities which were not registered under the Securities Act of
1933 ("Securities Act"): the Company issued and sold an aggregate of 114,947
shares of common stock upon the net exercise of warrants to three persons or
entities for aggregate consideration of 357 shares of common stock.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, or Regulation D promulgated thereunder,
or Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensations
as provided under Rule 701.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
The Company completed its initial public offering in October 1996, in which
it issued and sold 10,350,000 shares of Common Stock for aggregate proceeds to
the Company of $120.3 million. The Registration Statement Commission File No.
333-8921 for the offering was effective for October 1, 1996. The
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offering closed on October 4, 1996. The Managing underwriters for the offering
were: Morgan Stanley & Co. Incorporated, Merrill Lynch & Co., Cowen & Company
and Hambrecht & Quist. Of the aggregate proceeds received in the offering, $2.2
million was used to defray costs and expenses related to the offering, resulting
in net proceeds of approximately $118.1 million. Of the net proceeds, $14.8
million was used to reduce debt. The remainder is invested in cash equivalents
and marketable securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item is set forth on page 17 of the
Company's 1997 Annual Report to Stockholders, which information is incorporated
herein by reference and is filed herewith as Exhibit 13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is set forth in the text on pages 18
through 23 of the Company's 1997 Annual Report to Stockholders, which
information is incorporated herein by reference and is filed herewith as Exhibit
13.2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the text on pages 24
through 39 of the Company's 1997 Annual Report to Stockholders, which
information is incorporated herein by reference and is filed herewith as Exhibit
13.3.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
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PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
Executive officers are selected annually and serve at the discretion of the
Board of Directors. No family relationships exist between any of the executive
officers or directors of the Company. The following table sets forth certain
information with respect to each person who is an executive officer, key
employee or director of the Company.
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS
Donald Green................................. 66 Chairman of the Board
Carl J. Grivner.............................. 44 President, Chief Executive Officer and
Director
Peter A. Darbee.............................. 45 Vice President, Chief Financial
Officer, Treasurer and Secretary
Karen L. Godfrey............................. 43 Vice President, Corporate Controller
and Assistant Secretary
Glenn Lillich................................ 50 Vice President, Sales and Marketing
KEY EMPLOYEES
James Hoeck.................................. 36 Vice President, Corporate Technologist
John Webley.................................. 39 Vice President, Corporate Technologist
David Arnold................................. 47 Vice President, Development Engineering
Catherine Millet............................. 45 Vice President, Product Planning
Gregory Peters............................... 36 Vice President, International
Operations
Greg Steele.................................. 36 Vice President, Operations
Rich Stanfield............................... 41 Vice President, Domestic Sales
OUTSIDE DIRECTORS
B.J. Cassin(1)............................... 64 Director
Clifford H. Higgerson(1)(2).................. 58 Director
Dan Rasdal(2)................................ 64 Director
Alex Sozonoff................................ 58 Director
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
DONALD GREEN was a co-founder of the Company and has been the Company's
Chairman of the Board since May 1992. From May 1992 to June 1997, he was also
the Company's Chief Executive Officer. Mr. Green founded Optilink Corporation in
1987, where he was the President and Chief Executive Officer, until its
acquisition by DSC in 1990. From 1990 until the founding of the Company, Mr.
Green was Vice President and General Manager of the Access Products division of
DSC Communications Corporation.
CARL J. GRIVNER has been the Company's President since December 1995 and
its Chief Executive Officer since June 1997. From July 1995 to June 1997 he was
the Company's Chief Operating Officer, and he has been a Director since May
1996. Prior to joining the Company, Mr. Grivner was President of Enhanced
Business Services of Ameritech, an RBOC, from September 1994 to July 1995. From
1986 to September 1994, Mr. Grivner held various management positions at
Ameritech, including President of Ameritech's Advertising Services Unit.
PETER A. DARBEE has been the Company's Vice President, Chief Financial
Officer, Treasurer and Secretary since June 1997. Prior to joining the Company,
Mr. Darbee was the Vice President, Chief Financial Officer and Controller of
Pacific Bell, an RBOC, from 1994 through June 1997. From 1989 through 1994, he
was Vice President and co-head of Goldman Sachs' Global Energy and
Telecommunications Group.
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KAREN L. GODFREY has been the Company's Corporate Controller since May 1994
and its Assistant Secretary since February 1995. Ms. Godfrey was made a Vice
President of the Company in May 1997. From September 1992 to May 1994, Ms.
Godfrey was self-employed as a financial management consultant. Ms. Godfrey was
the Chief Financial Officer of Fortune's Almanac, Inc., a catalog company, from
September 1991 to September 1992 and the Chief Financial Officer and Vice
President of Operations of Paracomp, Inc., a software company, from 1989 to
September 1991.
GLENN LILLICH has been the Company's Vice President, Sales and Marketing
since June 1996. From February 1993 to June 1996, Mr. Lillich was the Company's
Vice President, Sales. Prior to joining the Company, Mr. Lillich served as the
Western Region Director of Sales for the Telecom Division of Stratus Computer,
Inc., a manufacturer of computer systems, from January 1992 to February 1993.
JAMES HOECK was a co-founder of the Company and has served as Vice
President, Corporate Technologist since November 1997. From May 1992 through
January 1995, he served as Vice President, Engineering. From February 1995
through October 1997, he served as Vice President, Advanced Development.
JOHN WEBLEY was a co-founder of the Company and has served as Vice
President, Corporate Technologist since November 1997. From May 1992 through
January 1995, he served as Vice President, Engineering. From February 1995
through October 1997, he served as Vice President, Advanced Development.
DAVID ARNOLD has been the Company's Vice President, Development Engineering
since April 1996. Prior to joining the Company, Mr. Arnold was the Senior
Director of Telephony Products Research at Ericsson Raynet, a provider of
telecommunications equipment, from November 1993 to November 1995. From 1989 to
November 1993, Mr. Arnold served as Engineering Director at Alcatel Network
Systems, a provider of telecommunications equipment.
CATHERINE MILLET has been the Company's Vice President, Product Planning
since December 1997. Prior to joining the Company, Ms. Millet was Vice
President, Advanced Planning and Senior Director, Systems Engineering with DSC
Communications Corporation from September 1994 to December 1997. From 1993
through August 1994, Ms. Millet was the Senior Director, Engineering with
Alcatel Network Systems.
GREGORY PETERS has been the Company's Vice President, International
Operations since June 1997. Prior to joining the Company, Mr. Peters was the
Vice President, International Operations of ADTRAN, Inc., a company that designs
and develops digital modem and HDSL equipment, from 1996 to June 1997. From
January 1993 to 1996, he served as Executive Vice President of Connell
Communications Company, a company that invests in international
telecommunications projects. Mr. Peters participated in the Management
Development Program with AT&T's Network Systems Division from 1986 through 1992.
GREG STEELE has been the Company's Vice President, Operations since April
1995. From November 1994 to March 1995, Mr. Steele was the Company's Director of
Operations. Prior to joining the Company, from 1990 to November 1994, Mr. Steele
held various positions at DSC Communications Corporation, including Director of
Account Marketing and Senior Manager of Manufacturing.
RICH STANFIELD has been the Company's Vice President, Domestic Sales since
December 1994. Prior to joining the Company, from 1986 through December 1994,
Mr. Stanfield held various management positions with Stratus Computer, Inc.,
including Western Region Director of Sales.
B.J. CASSIN has been a Director of the Company since January 1993. Since
1979, he has been a private venture capitalist. Mr. Cassin is also a Director of
Cerus Corporation, Symphonix Devices, Inc. and six private companies.
CLIFFORD H. HIGGERSON has been a Director of the Company since January
1993. Mr. Higgerson has been a general partner of Vanguard Venture Partners, a
venture capital firm and a stockholder of the Company, since July 1991 and
managing partner of Communications Ventures, a venture capital firm since 1987.
Mr. Higgerson is also a Director of Digital Microwave Corporation, Ciena
Corporation and nine private companies.
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DAN RASDAL has been a Director of the Company since February 1993. Mr.
Rasdal has been Chairman of the Board of SymmetriComm, Inc., a
telecommunications company, since July 1989, and the President and Chief
Executive Officer of SymmetriComm since 1985. Mr. Rasdal is also a director of
Celeritek, Inc., a semiconductor manufacturer.
ALEX SOZONOFF has been a Director of the Company since October 1997. Mr.
Sozonoff has been Vice President of Hewlett-Packard Company, an electronics
equipment and computer company, and General Manager of the Marketing and
Operations Group for Hewlett-Packard's Computer Organization since 1997. From
1994 to 1997 he was the Sales and Marketing General Manager for
Hewlett-Packard's Computer Organization and was elected Vice President in 1995.
In 1994 he was named General Manager of Hewlett-Packard's Computer Products
Sales and Distribution Organization in Europe. From 1990 to 1994 he was
Hewlett-Packard's European Business Unit Manager for Personal Computers and
Personal Peripherals.
The current directors, other than Messrs. Grivner, Higgerson, and Sozonoff,
were elected pursuant to the terms of the Company's certificate of incorporation
and a voting agreement among certain stockholders of the Company, whereby
holders of the Company's Series A and Series B Preferred Stock had the right to
elect three directors in the aggregate and the parties to the voting agreement
agreed to vote for a director designated in accordance with the voting
agreement. Such arrangements terminated and all such shares of Preferred Stock
converted into shares of Common Stock, upon closing of the initial public
offering of the Company's Common Stock in October 1996. The Company's
certificate of incorporation provides for a classified Board of Directors
composed of seven directors. Accordingly, the terms of the office of the Board
of Directors are divided into three classes. Class I will expire at the annual
meeting of the stockholders to be held in 2000; Class II will expire at the
annual meeting of the stockholders to be held in 1998; and Class III will expire
at the annual meeting of the stockholders to be held in 1999. At each annual
meeting of the stockholders, the successors to directors whose terms will then
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election and until their successors
have been duly elected and qualified, or until their earlier resignation or
removal, if any. Carl Grivner, Clifford Higgerson and Alex Sozonoff have been
designated Class I directors. B.J. Cassin has been designated as a Class II
director. Donald Green and Dan Rasdal have been designated as Class III
directors. Brian Jackman, who resigned from the Board effective February 19,
1998, was a Class II director. To the extent there is an increase in the number
of directors, additional directorships resulting therefrom will be distributed
among the three classes so that, as nearly as possible, each class will consist
of an equal number of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Executive officers, directors and greater than ten percent
stockholders are required by Securities and Exchange Commission regulations to
furnish the Company with copies of all Section 16(a) reports they file.
Based solely upon review of the copies of Section 16(a) reports received by
the Company and written representations that no other reports were required, the
Company believes that there was compliance for the 1997 fiscal year with all
Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten percent stockholders except that (i) Mr. Grivner
inadvertently filed one Form 4 late reporting one transaction; (ii) Mr. Green
inadvertently filed one Form 4 late reporting seven transactions and (iii) Mr.
Cassin inadvertently filed one Form 4 late reporting eight transactions.
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ITEM 11. EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation. The following table sets forth the
compensation earned by (i) the Company's former Chief Executive Officer, (ii)
the Company's Chief Executive Officer, (iii) the other three most highly
compensated executive officers of the Company serving as such as of the end of
the last fiscal year, and (iv) one former executive officer of the Company (the
"Named Executive Officers"), each of whose total salary and bonus for the year
ended December 31, 1997 was in excess of $100,000 for services rendered in all
capacities to the Company for such fiscal year.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION
--------------------------- ------ -------- -------- ------------ ------------ ------------
Donald Green(1)................ 1997 $295,769 $225,993 $ -- 63,200 $ --
Chairman of the Board and 1996 275,000 138,903 -- 369,804 --
former Chief Executive 1995 185,000 115,625 -- 50,000 --
Officer
Carl J. Grivner(2)............. 1997 284,231 208,296 73,583(3) 302,310 --
President, Chief Executive 1996 235,000 106,349 74,080(3) -- --
Officer and Director 1995 102,115 48,894 -- 424,000 --
Glenn Lillich.................. 1997 177,028 101,116 -- 72,450 --
Vice President, 1996 170,000 51,868 -- -- --
Sales and Marketing 1995 160,000 54,400 -- 24,000 --
Peter A. Darbee(4)............. 1997 125,000 71,827 -- 300,000 --
Vice President, 1996 -- -- -- -- --
Chief Financial Officer, 1995 -- -- -- -- --
Treasurer and Secretary
Karen L. Godfrey............... 1997 115,500 63,383 -- 8,630 --
Vice President, Corporate 1996 105,000 25,077 -- -- --
Controller and Assistant 1995 101,016 28,935 -- 20,400 --
Secretary
Dan E. Steimle(5).............. 1997 148,605 60,460 -- 21,300 50,346(6)
former Vice President, 1996 170,000 51,868 -- -- --
Chief Financial Officer, 1995 160,000 54,400 -- 24,000 --
Treasurer and Secretary
- ---------------
(1) Mr. Green served as Chief Executive Officer until June 1997.
(2) Mr. Grivner joined the Company in July 1995 and became Chief Executive
Officer in June 1997.
(3) Represents relocation expenses paid by the Company for 1997: $36,003; and
for 1996: $34,377. Also includes forgiveness of principal and interest on a
note payable to the Company for 1997: $37,580; and for 1996: $39,703. See
"Item 13 -- Certain Relationships and Related Transactions".
(4) Mr. Darbee joined the Company on June 30, 1997.
(5) Mr. Steimle resigned as Chief Financial Officer on June 30, 1997, and
resigned from the Company on September 30, 1997.
(6) Represents payments pursuant to a termination agreement between Mr. Steimle
and the Company.
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Stock Option Grants to Named Executives. The following table sets forth
certain information regarding stock option grants made to each of the Named
Executive Officers in 1997. No stock appreciation rights were granted to the
Named Executive Officers during such year.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
--------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR SHARE(3) DATE 5% 10%
---- ---------- ------------- --------- ---------- ------------ -------------
Donald Green............... 63,200 1.8% $26.50 01/17/07 $1,053,273 $ 2,669,200
Carl J. Grivner............ 102,310 2.9 26.50 01/17/07 1,705,068 4,320,978
200,000 5.6 33.00 07/24/07 4,150,705 10,518,700
Glenn Lillich.............. 22,450 0.6 26.50 01/17/07 374,145 948,157
50,000 1.4 35.25 09/19/07 1,108,427 2,808,971
Peter A. Darbee............ 300,000 8.4 22.50 05/19/07 4,245,039 10,757,762
Karen L. Godfrey........... 8,630 0.2 26.50 01/17/07 143,825 364,481
Dan E. Steimle............. 21,300 0.6 26.50 12/31/97 26,877 53,695
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(1) In general, twenty five percent of the option shares shown in this table
vest upon optionee's completion of one year of service measured from the
vesting date, and the balance vests in successive equal monthly installments
over the next 36 months of service thereafter. All such option shares will
immediately vest in the event the Company is acquired by merger or asset
sale, unless the options are assumed by the acquiring entity.
(2) Realizable values are reported net of the option exercise price. The dollar
amounts under these columns are the result of calculations based upon stock
price appreciation at the assumed 5% and 10% compounded annual rates (as
applied to the estimated fair market value of the option shares on the date
of grant, not the current fair market value of those shares) and are not
intended to forecast any actual or potential future appreciation, if any, in
the value of the Company's stock price. Actual gains, if any, on stock
option exercises will be dependent upon the future performance of the Common
Stock as well as the option holder's continued employment through the
vesting period. The potential realizable value calculation assumes that the
option holder waits until the end of the option term to exercise the option.
(3) The exercise price for the shares of Common Stock subject to option grants
made under the Company's 1996 Stock Incentive Plan may be paid in cash or in
shares of Common Stock valued at fair market value on the exercise date. The
option may also be exercised through a same-day sale program without any
cash outlay by the optionee. In addition, the Plan Administrator may provide
financial assistance to one or more optionees in the exercise of their
outstanding options by allowing such individuals to deliver a full-
recourse, interest-bearing promissory note in payment of the exercise price
and any associated withholding taxes incurred in connection with such
exercise.
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Option Exercises and Holdings. The following table sets forth certain
information with respect to the Named Executive Officers concerning their option
exercises during 1997 and their option holdings as of December 27, 1997. None of
the Named Executive Officers held any stock appreciation rights at the end of
that fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES OPTIONS AS OF THE-MONEY OPTIONS AS OF
ACQUIRED DECEMBER 27, 1997(2)(3) DECEMBER 27, 1997(4)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ------------- ----------- -------------
Donald Green............ -- $ -- 459,237 183,767 $9,239,205 $2,760,169
Carl J. Grivner......... 66,000 2,207,367 88,410 478,568 1,061,299 5,396,025
Glenn Lillich........... 202,000 5,901,305 226,835 139,615 5,381,925 1,855,950
Peter A. Darbee......... -- -- 60,000 240,000 135,000 540,000
Karen L. Godfrey........ 90,000 2,340,556 23,082 45,948 515,215 963,235
Dan E. Steimle.......... 104,000 1,957,517 3,766 4,709 -- --
- ---------------
(1) Based upon the difference between the exercise price and the fair market
value of the Company's Common Stock on the date of exercise.
(2) Certain of these options were granted under the Company's 1996 Stock
Incentive Plan ("the 1996 Plan"). In general, twenty five percent of such
option shares vest upon optionee's completion of one year of service
measured from the vesting date, and the balance vests in successive equal
monthly installments over the next 36 months of service thereafter. All such
option shares will immediately vest in the event the Company is acquired by
merger or asset sale, unless the options are assumed by the acquiring
entity. Accordingly, the table reflects such vested option shares in the
"exercisable" column as follows: Mr. Green -- 15,217; Mr. Grivner -- 44,809;
Mr. Lillich -- 8,569; Mr. Darbee -- 60,000; Ms. Godfrey -- 2,122 and Mr.
Steimle -- 3,766. In addition, the table reflects such unvested option
shares in the "unexercisable" column as follows: Mr. Green -- 47,983; Mr.
Grivner -- 257,501; Mr. Lillich -- 63,881; Mr. Darbee -- 240,000; Ms.
Godfrey -- 6,508 and Mr. Steimle -- 4,709.
(3) Certain of these options were granted under the predecessor equity incentive
plan to the 1996 Plan (the "Predecessor Plan"). The terms of these options
provide that each option is immediately exercisable for all the option
shares, but any shares purchased under the options are subject to repurchase
by the Company, at the exercise price paid per share, in the event the
optionee terminates employment prior to vesting in those shares. Twenty
percent of such option shares vest upon optionee's completion of one year of
service measured from the vesting date, and the balance vests in successive
equal monthly installments over the next 48 months of service thereafter
(other than Mr. Green's options granted under the Predecessor Plan which
vest in successive equal monthly installments over 24 months measured from
the date of grant). All such options will immediately vest in the event the
Company is acquired by merger or asset sale, unless the options are assumed
by the acquiring entity. Accordingly, the table reflects such vested option
shares for which the rights of repurchase have lapsed in the "exercisable"
column as follows: Mr. Green -- 444,020; Mr. Grivner -- 43,601; Mr.
Lillich -- 218,266; Mr. Darbee -- 0; Ms. Godfrey -- 20,960 and Mr.
Steimle -- 0. In addition, the table reflects such unvested option shares
for which the right of repurchase has not lapsed in the "unexercisable"
column as follows: Mr. Green -- 135,784; Mr. Grivner -- 221,067; Mr.
Lillich -- 75,734; Mr. Darbee -- 0; Ms. Godfrey -- 39,440 and Mr.
Steimle -- 0.
(4) Based on the last reported sale price of the Company's Common Stock on
December 26, 1997 ($24.75 per share) less the exercise price payable for
such shares.
Director Compensation. Non-employee Board members do not receive any cash
fees for their service on the Board or any Board committee, but they are
entitled to reimbursement of all reasonable out-of-pocket expenses incurred in
connection with their attendance at Board and Board committee meetings. In
addition,
26
28
non-employee Board members receive stock options pursuant to the Automatic
Option Grant Program in effect under the 1996 Plan.
Under the Automatic Option Grant Program, each individual who first joins
the Board after June 30, 1996 as a non-employee Board member will receive a
non-qualified stock option grant for 40,000 shares of Common Stock at the time
of his or her commencement of board service, provided such individual has not
otherwise been in the prior employ of the Company. In addition, at each annual
meeting of stockholders, each individual who is to continue to serve as a
non-employee Board member will receive a non-qualified stock option grant to
purchase 12,000 shares of Common Stock, whether or not such individual has been
in the prior employ of the Company and whether or not such individual first
joined the Board after June 30, 1996, provided that such individual has served
as a non-employee Board member for at least six months. Messrs. Cassin,
Higgerson and Jackman each waived their right to receive such options at the
1997 Annual Meeting of Stockholders.
Each automatic grant will have an exercise price equal to the fair market
value per share of Common Stock on the grant date and will have a maximum term
of 10 years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable;
however, any shares purchased upon exercise of the option will be subject to
repurchase, at the option exercise price paid per share, should the optionee's
service as a non-employee Board member cease prior to vesting in the shares.
Each automatic option grant will vest in a series of installments over the
optionee's period of Board service as follows: one-third of the option shares
upon completion of one year of Board service, and the balance in twenty-four
(24) successive equal monthly installments upon the optionee's completion of
each additional month of Board service thereafter. However, each outstanding
option will immediately vest upon (i) certain changes in the ownership or
control of the Company or (ii) the death or disability of the optionee while
serving as a Board member.
Employment Contracts, Termination of Employment and Changes in Control
Agreements. The Compensation Committee as Plan Administrator of the 1996 Plan
has the authority to provide for the accelerated vesting of the shares of Common
Stock subject to outstanding options held by the Chief Executive Officer and the
Company's other executive officers or any unvested shares actually held by those
individuals under the 1996 Plan or the Predecessor Plan, in the event the
Company is acquired by merger or asset sale or there is a hostile change in
control effected by a successful tender or exchange offer for more than 50% of
the Company's outstanding voting securities or a change in the majority of the
Board as a result of one or more contested elections for board membership.
Alternatively, the Compensation Committee may condition such accelerated vesting
upon the individual's termination of service within a designated period
following the acquisition or hostile change in control.
Dan E. Steimle, the Company's former Vice President, Chief Financial
Officer, Treasurer and Secretary resigned from the Company effective September
30, 1997. In connection with his resignation, Mr. Steimle and the Company
entered into a Termination Agreement and General Release, pursuant to which the
Company agreed to pay Mr. Steimle (i) bi-weekly payments of $7,192.30 through
July 20, 1998 for an aggregate total of $155,353.68, less applicable taxes and
withholding and (ii) the pro-rata portion of his year-end bonus, as determined
by the Board of Directors, based upon services rendered from January 1, 1997
through July 20, 1997.
The Company and Mr. Steimle also entered into a Consulting Agreement
pursuant to which (i) Mr. Steimle agreed to assist with the orderly transition
of his responsibilities to the Company's new Vice President and Chief Financial
Officer for the period commencing October 1, 1997 through July 20, 1998 and (ii)
the Company agreed to continue to vest a total of 4,709 Nonqualified Stock
Options through July 20, 1998 and permit Mr. Steimle to exercise such vested
stock options during the period beginning on July 20, 1998 through October 17,
1998. In the event Mr. Steimle breaks any terms of the Termination Agreement and
General Release or Consulting Agreement, the bi-weekly payments will cease and
the additional vesting of Mr. Steimle's options will be cancelled.
Compensation Committee Interlocks and Insider Participation. The Board of
Directors established a Compensation Committee in May 1994. The Compensation
Committee consists of Messrs. Higgerson and
27
29
Rasdal. Mr. Rasdal replaced Mr. Jackman as a member of the Compensation
Committee in May 1997. None of these individuals has served at any time as an
officer or employee of the Company. Prior to the establishment of the
Compensation Committee, all decisions relating to executive compensation were
made by the Company's Board of Directors. No executive officer of the Company
serves as a member of the board of directors or compensation committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership. The following table sets forth certain information
regarding the beneficial ownership of the Company's Common Stock as of March 2,
1998 by: (i) each person (or group of affiliated persons) who is known by the
Company to own beneficially more than five percent of the outstanding shares of
the Common Stock of the Company; (ii) each director of the Company; (iii) each
executive officer of the Company (including the Named Executive Officers); and
(iv) all directors and executive officers of the Company as a group.
SHARES BENEFICIALLY
OWNED AS OF
MARCH 2, 1998(1)
------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE
------------------------ ---------- ----------
FMR Corporation(2)................................... 8,877,500 12.0%
82 Devonshire Street
Boston, MA 02109
Tellabs, Inc.(3)..................................... 6,340,234 8.5
4951 Indiana Avenue
Lisle, IL 60532
B.J. Cassin(4)....................................... 1,699,106 2.3
Donald Green(5)...................................... 2,524,621 3.4
Carl J. Grivner(6)................................... 352,643 *
Clifford H. Higgerson................................ 343,446 *
Dan Rasdal(7)........................................ 126,000 *
Alex Sozonoff........................................ 400 *
David Arnold(8)...................................... 113,297 *
Peter A. Darbee(9)................................... 65,551 *
Karen Godfrey(10).................................... 120,597 *
James Hoeck(11)...................................... 1,991,198 2.7
Glenn Lillich(12).................................... 352,635 *
Gregory Peters....................................... 2,691 *
Richard Stanfield(13)................................ 121,128 *
Greg Steele(14)...................................... 115,149 *
John Webley(15)...................................... 1,243,750 1.7
Dan E. Steimle(16)................................... 475,399 *
All executive officers and directors as a group (16
persons)(17)....................................... 15,554,378 20.3%
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options and warrants currently exercisable within 60 days are deemed to
be outstanding for computing the percentage of the person holding such
options or warrants but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
28
30
(2) Based on a Schedule 13G filed on January 10, 1998 by FMR Corporation.
(3) Includes 600,000 shares which may be acquired upon exercise of a warrant.
(4) Includes 174,106 shares held in trust by the Robert S. Cassin Charitable
Trust. Also includes 100,000 shares held in trust by The Cassin Foundation
and 125,000 shares held in trust by the Cassin 1997 Charitable Trust UTA
dated 1/28/97. The remaining shares are held in trust by B.J. Cassin and
Isabel B. Cassin, Trustees of the Cassin Family Trust U/D/T, dated January
31, 1996.
(5) Includes 603,054 shares issuable upon exercise of options held by Mr.
Green, 542,903 of which shares will be vested as of 60 days from March 2,
1998. Also includes 50,000 shares held by the Donald and Maureen Green
Foundation.
(6) Includes 307,362 shares issuable upon exercise of options held by Mr.
Grivner, 114,562 of which shares will be vested as of 60 days from March 2,
1998.
(7) Includes 126,000 shares issuable upon exercise of options held by Mr.
Rasdal, 107,500 of which shares will be vested as of 60 days from March 2,
1998.
(8) Includes 66,650 shares issuable upon exercise of options held by Mr.
Arnold, 10,650 of which shares will be vested as of 60 days from March 2,
1998. Also includes 11,250 shares subject to a right of repurchase by the
Company, and 716 shares held by Mr. Arnold's spouse.
(9) Includes 60,000 shares issuable upon exercise of options held by Mr.
Darbee, all of which shares will be vested as of 60 days from March 2,
1998.
(10) Includes 24,820 shares issuable upon exercise of options held by Ms.
Godfrey, 5,273 of which shares will be vested as of 60 days from March 2,
1998. Also includes 6,675 shares subject to a right of repurchase by the
Company.
(11) Includes 187,683 shares issuable upon exercise of options held by Mr.
Hoeck, 174,349 of which shares will be vested as of 60 days from March 2,
1998.
(12) Includes 259,589 shares issuable upon exercise of options held by Mr.
Lillich, 206,256 of which shares will be vested as of 60 days from March 2,
1998.
(13) Includes 87,355 shares issuable upon exercise of options held by Mr.
Stanfield, 16,421 of which shares will be vested as of 60 days from March
2, 1998.
(14) Includes 107,825 shares issuable upon exercise of options held by Mr.
Steele, 45,425 of which shares will be vested as of 60 days from March 2,
1998.
(15) Includes 187,683 shares issuable upon exercise of options held by Mr.
Webley, 174,349 of which shares will be vested as of 60 days from March 2,
1998. Also includes 190,000 shares held by Mr. Webley's spouse.
(16) Includes 8,000 shares held by Mr. Steimle's spouse.
(17) Includes 18,195 shares subject to a right of repurchase by the Company.
Also includes 2,018,021 shares issuable upon exercise of options, 1,457,688
of which shares will be vested as of 60 days from March 2, 1998, and
620,000 shares which may be acquired upon exercise of warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, the Company loaned Carl Grivner, the Company's President
and Chief Executive Officer, the sum of $100,000 to assist him in relocating to
Northern California. Such loan bears interest at the rate of 6.37% per annum,
with accrued interest due and payable annually on July 19 of each year, and the
principal of such loan due and payable in three equal installments on July 19 of
1996, 1997 and 1998. In August 1996, the Company forgave one-third of the
principal balance and interest accrued through July 19, 1996. In August 1997,
the Company forgave one-third of the principal balance and interest accrued
through July 19, 1997. As of December 27, 1997, one-third of the principal
balance of this loan remained outstanding.
In June 1997, the Company issued 4,968 shares of restricted Common Stock at
$30.1875 per share to Peter Darbee, the Company's Vice President, Chief
Financial Officer, Treasurer and Secretary in connection with Mr. Darbee's
commencement of employment. Mr. Darbee issued a note payable to the Company in
the
29
31
amount of $149,972 as consideration for the shares. The note is secured by
shares of Common Stock owned by Mr. Darbee. Such note bears interest at the rate
of 6.8% per annum with the entire principal balance of the note, together with
all accrued or unpaid interest, due and payable on July 1, 2002.
The Company and Tellabs Operations, Inc. ("Tellabs Operations"), a
subsidiary of Tellabs, Inc., a stockholder of the Company entered into a License
and Marketing Agreement and an OEM Agreement on December 23, 1996. Under the
License and Marketing Agreement, the Company granted to Tellabs Operations a
license to use the UMC technology in the development, manufacture, and
distribution of coaxial systems for specified markets. In return, the Company
will receive royalties from the sale of these systems. Under the OEM Agreement,
the Company agreed to manufacture the UMC products for Tellabs Operations. The
License and Marketing Agreement was terminated on February 20, 1998.
The Company has granted options to certain of its directors and executive
officers. See "Item 11 -- Executive Compensation" and "Item 12 -- Security
Ownership of Certain Beneficial Owners and Management."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company intends that all future transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors, and be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
30
32
PART IV.
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
The following is a list of the consolidated financial statements and the
financial statement schedules which are included in this Form 10-K or which are
incorporated herein by reference:
1. FINANCIAL STATEMENTS:
As of December 31, 1997 and 1996:
-- Consolidated Balance Sheets
For the Years Ended December 31, 1997, 1996, and 1995:
-- Consolidated Statements of Operations
-- Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit)
-- Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Results of Operations (Unaudited)
2. FINANCIAL STATEMENT SCHEDULE:
-- Schedule II -- Valuation Accounts
All other financial statements and financial statement schedules have been
omitted because they are not applicable, or the required information is included
in the consolidated financial statements or notes thereto.
3(A). EXHIBITS:
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
3.3.1 Fifth Amended and Restated Certificate of Incorporation of
the Registrant.(4)
3.5 Amended and Restated Bylaws of the Registrant.(3)
4.1 Specimen Certificate of Common Stock.(1)
4.2 Series E Preferred Stock Purchase Agreement, dated September
29, 1995, between the Registrant and certain purchasers of
the Registrant's Series E Preferred Stock.(1)
4.3 Certificate of Incorporation of the Registrant (included in
Exhibit 3.3.1).
10.1 Form of Warrant Issued In Connection with the Sale of the
Registrant's Series A Preferred Stock on January 6, 1993.(1)
10.2 Form of Warrant Issued In Connection with the Sale of the
Registrant's Series B Preferred Stock on October 5, 1993.(1)
10.3 Form of Warrant Issued in Connection with the Sale of the
Registrant's Series C Preferred Stock on March 16, 1994.(1)
10.4 Form of Performance Warrant Issued in Connection with the
Sale of the Registrant's Series C Preferred Stock on March
16, 1994 and May 4, 1994.(1)
10.4.1 Form of Amendment to Warrants and Performance Warrants.(1)
10.5 Warrant Issued in Connection with the Sale of the
Registrant's Series E Preferred Stock on September 29,
1995.(1)
10.6 Restricted Stock Issuance Agreement, dated May 19, 1995,
between the Registrant, Donald Green and Maureen Green.(1)
10.7 Compensation Agreement, dated May 19, 1995, between the
Registrant and Donald Green.(1)
10.8 Promissory Note Secured by Pledge Agreement, dated May 31,
1995, by Donald Green in favor of the Registrant.(1)
10.9 Stock Pledge Agreement, dated June 16, 1995, between the
Registrant and Donald Green.(1)
31
33
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
10.10 Promissory Note issued by Carl Grivner, dated October 5,
1995, in favor of the Registrant.(1)
10.11 Shareholder and Joint Venture Agreement, dated December 28,
1995, between the Registrant and Harris Corporation, acting
for the purposes of the agreement through its Digital
Telephone Systems Division.(1)+
10.13 License, Joint Development, Supply and Authorized
Manufacturing Agreement, dated September 25, 1992, between
the Registrant and Industrial Technology Research Institute
of the Republic of China.(1)+
10.14 Hangzhou Aftek Communication Registrant Ltd. Contract, dated
June 18, 1994, between Advanced Fibre Technology
Communication (Hong Kong) Limited and Hangzhou Communication
Equipment Factory of the MPT., HuaTong Branch.(1)+
10.15 1445 & 1455 McDowell Boulevard North Net Lease, dated
February 1, 1993, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at 1445
McDowell Boulevard North.(1)
10.16 Redwood Business Park Net Lease, dated July 9, 1995, between
the Registrant and G & W/ Redwood Associates Joint Venture,
for the premises located at 1455 McDowell Boulevard
North.(1)
10.17 Redwood Business Park Net Lease, dated July 10, 1995,
between the Registrant and G & W/ Redwood Associates Joint
Venture, for the premises located at 1440 McDowell Boulevard
North.(1)
10.18 Redwood Business Park Net Lease, dated June 3, 1996, between
the Registrant and G & W/ Redwood Associates Joint Venture,
for the premises located at Buildings 1 & 9 of Willow Brook
Court.(1)
10.19 Second Amended and Restated Loan and Security Agreement,
dated December 7, 1995, between the Registrant and Bank of
the West.(1)
10.20 Form of Indemnification Agreement for Executive Officers and
Directors of the Registrant.(1)
10.21 The Registrant's 1993 Stock Option/Stock Issuance Plan, as
amended (the "1993 Plan").(1)
10.22 Form of Stock Option Agreement pertaining to the 1993
Plan.(1)
10.23 Form of Notice of Grant of Stock Option pertaining to the
1993 Plan.(1)
10.24 Form of Stock Purchase Agreement pertaining to the 1993
Plan.(1)
10.25 The Registrant's 1996 Stock Incentive Plan (the "1996
Plan").(1)
10.26 Form of Stock Option Agreement pertaining to the 1996
Plan.(1)
10.26.1 Form of Automatic Stock Option Agreement pertaining to the
1996 Plan.(1)
10.27 Form of Notice of Grant of Stock Option pertaining to the
1996 Plan.(1)
10.27.1 Form of Notice of Grant of Non-Employee Director Automatic
Stock Option pertaining to the 1996 Plan.(1)
10.28 Form of Stock Issuance Agreement pertaining to the 1996
Plan.(1)
10.29 The Registrant's Employee Stock Purchase Plan.(1)
10.30 Termination Agreement of Joint Venture and Partnership
Agreement, dated December 23, 1996, between the Registrant
and Tellabs Operations, Inc.(2)
10.31 License and Marketing Agreement, dated December 23, 1996,
between the Registrant and Tellabs Operations, Inc.(2)
10.32 OEM Agreement, dated December 23, 1996, between the
Registrant and Tellabs Operations, Inc.(2)
10.33 Stock Issuance Agreement, dated June 30, 1997, between the
Registrant and Peter A. Darbee.(3)
10.34 Note secured by Stock Pledge Agreement, dated June 30, 1997,
by Peter A. Darbee in favor of the Registrant.(3)
10.35 Stock Pledge Agreement, dated June 30, 1997, between the
Registrant and Peter A. Darbee.(3)
10.36 Consulting Agreement, dated May 19, 1997, between the
Registrant and Peter A. Darbee.(3)
10.37 Cypress Center Net Lease, dated October 9, 1997, between the
Registrant and RNM Lakeville L.P., for the premises located
at 2210 South McDowell Boulevard.
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34
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
10.38 Termination Agreement and General Release, dated December
22, 1997, between the Registrant and Dan E. Steimle.
10.39 Consulting Agreement, dated December 22, 1997, between the
Registrant and Dan E. Steimle.
13.1 Five Year Summary of Selected Consolidated Financial Data
from the 1997 Annual Report to Stockholders (for EDGAR
filing purposes only).
13.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations from the 1997 Annual Report to
Stockholders (for EDGAR filing purposes only).
13.3 Financial Statements and Supplementary Data from the 1997
Annual Report to Stockholders (for EDGAR filing purposes
only).
21.1 Subsidiaries of the Registrant.(1)
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
27.1 Financial data schedule.
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-8921) filed with the Securities and Exchange Commission on
July 26, 1996, as amended, and declared effective September 30, 1996.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-20369) filed with the Securities and Exchange Commission
on January 24, 1997, as amended, and declared effective February 12, 1997.
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, filed with the Securities and
Exchange Commission on August 8, 1997.
(4) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed with the Securities and
Exchange Commission on November 7, 1997.
+ Portions of this Exhibit have been granted Confidential Treatment.
3(B). REPORTS ON FORM 8-K
None.
33
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADVANCED FIBRE COMMUNICATIONS, INC.
(Registrant)
By: /s/ CARL J. GRIVNER
------------------------------------
Carl J. Grivner
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ DONALD GREEN March 23, 1998
- --------------------------------------------------
Donald Green
Chairman of the Board
/s/ CARL J. GRIVNER March 23, 1998
- --------------------------------------------------
Carl J. Grivner
President, Chief Executive Officer and Director
/s/ B. J. CASSIN March 23, 1998
- --------------------------------------------------
B. J. Cassin
Director
/s/ CLIFFORD H. HIGGERSON March 23, 1998
- --------------------------------------------------
Clifford H. Higgerson
Director
/s/ DAN RASDAL March 23, 1998
- --------------------------------------------------
Dan Rasdal
Director
/s/ ALEX SOZONOFF March 23, 1998
- --------------------------------------------------
Alex Sozonoff
Director
/s/ PETER A. DARBEE March 23, 1998
- --------------------------------------------------
Peter A. Darbee
Vice President, Chief Financial Officer,
Treasurer and Secretary (Principal Financial
Officer)
/s/ KAREN L. GODFREY March 23, 1998
- --------------------------------------------------
Karen L. Godfrey
Vice President, Corporate Controller and
Assistant Secretary
(Principal Accounting Officer)
34
36
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
3.3.1 Fifth Amended and Restated Certificate of Incorporation of
the Registrant.(4)
3.5 Amended and Restated Bylaws of the Registrant.(3)
4.1 Specimen Certificate of Common Stock.(1)
4.2 Series E Preferred Stock Purchase Agreement, dated September
29, 1995, between the Registrant and certain purchasers of
the Registrant's Series E Preferred Stock.(1)
4.3 Certificate of Incorporation of the Registrant (included in
Exhibit 3.3.1).
10.1 Form of Warrant Issued In Connection with the Sale of the
Registrant's Series A Preferred Stock on January 6, 1993.(1)
10.2 Form of Warrant Issued In Connection with the Sale of the
Registrant's Series B Preferred Stock on October 5, 1993.(1)
10.3 Form of Warrant Issued in Connection with the Sale of the
Registrant's Series C Preferred Stock on March 16, 1994.(1)
10.4 Form of Performance Warrant Issued in Connection with the
Sale of the Registrant's Series C Preferred Stock on March
16, 1994 and May 4, 1994.(1)
10.4.1 Form of Amendment to Warrants and Performance Warrants.(1)
10.5 Warrant Issued in Connection with the Sale of the
Registrant's Series E Preferred Stock on September 29,
1995.(1)
10.6 Restricted Stock Issuance Agreement, dated May 19, 1995,
between the Registrant, Donald Green and Maureen Green.(1)
10.7 Compensation Agreement, dated May 19, 1995, between the
Registrant and Donald Green.(1)
10.8 Promissory Note Secured by Pledge Agreement, dated May 31,
1995, by Donald Green in favor of the Registrant.(1)
10.9 Stock Pledge Agreement, dated June 16, 1995, between the
Registrant and Donald Green.(1)
10.10 Promissory Note issued by Carl Grivner, dated October 5,
1995, in favor of the Registrant.(1)
10.11 Shareholder and Joint Venture Agreement, dated December 28,
1995, between the Registrant and Harris Corporation, acting
for the purposes of the agreement through its Digital
Telephone Systems Division.(1)+
10.13 License, Joint Development, Supply and Authorized
Manufacturing Agreement, dated September 25, 1992, between
the Registrant and Industrial Technology Research Institute
of the Republic of China.(1)+
10.14 Hangzhou Aftek Communication Registrant Ltd. Contract, dated
June 18, 1994, between Advanced Fibre Technology
Communication (Hong Kong) Limited and Hangzhou Communication
Equipment Factory of the MPT., HuaTong Branch.(1)+
10.15 1445 & 1455 McDowell Boulevard North Net Lease, dated
February 1, 1993, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at 1445
McDowell Boulevard North.(1)
10.16 Redwood Business Park Net Lease, dated July 9, 1995, between
the Registrant and G & W/ Redwood Associates Joint Venture,
for the premises located at 1455 McDowell Boulevard
North.(1)
10.17 Redwood Business Park Net Lease, dated July 10, 1995,
between the Registrant and G & W/ Redwood Associates Joint
Venture, for the premises located at 1440 McDowell Boulevard
North.(1)
10.18 Redwood Business Park Net Lease, dated June 3, 1996, between
the Registrant and G & W/ Redwood Associates Joint Venture,
for the premises located at Buildings 1 & 9 of Willow Brook
Court.(1)
10.19 Second Amended and Restated Loan and Security Agreement,
dated December 7, 1995, between the Registrant and Bank of
the West.(1)
10.20 Form of Indemnification Agreement for Executive Officers and
Directors of the Registrant.(1)
10.21 The Registrant's 1993 Stock Option/Stock Issuance Plan, as
amended (the "1993 Plan").(1)
37
EXHIBIT INDEX (Continued)
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
10.22 Form of Stock Option Agreement pertaining to the 1993
Plan.(1)
10.23 Form of Notice of Grant of Stock Option pertaining to the
1993 Plan.(1)
10.24 Form of Stock Purchase Agreement pertaining to the 1993
Plan.(1)
10.25 The Registrant's 1996 Stock Incentive Plan (the "1996
Plan").(1)
10.26 Form of Stock Option Agreement pertaining to the 1996
Plan.(1)
10.26.1 Form of Automatic Stock Option Agreement pertaining to the
1996 Plan.(1)
10.27 Form of Notice of Grant of Stock Option pertaining to the
1996 Plan.(1)
10.27.1 Form of Notice of Grant of Non-Employee Director Automatic
Stock Option pertaining to the 1996 Plan.(1)
10.28 Form of Stock Issuance Agreement pertaining to the 1996
Plan.(1)
10.29 The Registrant's Employee Stock Purchase Plan.(1)
10.30 Termination Agreement of Joint Venture and Partnership
Agreement, dated December 23, 1996, between the Registrant
and Tellabs Operations, Inc.(2)
10.31 License and Marketing Agreement, dated December 23, 1996,
between the Registrant and Tellabs Operations, Inc.(2)
10.32 OEM Agreement, dated December 23, 1996, between the
Registrant and Tellabs Operations, Inc.(2)
10.33 Stock Issuance Agreement, dated June 30, 1997, between the
Registrant and Peter A. Darbee.(3)
10.34 Note secured by Stock Pledge Agreement, dated June 30, 1997,
by Peter A. Darbee in favor of the Registrant.(3)
10.35 Stock Pledge Agreement, dated June 30, 1997, between the
Registrant and Peter A. Darbee.(3)
10.36 Consulting Agreement, dated May 19, 1997, between the
Registrant and Peter A. Darbee.(3)
10.37 Cypress Center Net Lease, dated October 9, 1997, between the
Registrant and RNM Lakeville L.P., for the premises located
at 2210 South McDowell Boulevard.
10.38 Termination Agreement and General Release, dated December
22, 1997, between the Registrant and Dan E. Steimle.
10.39 Consulting Agreement, dated December 22, 1997, between the
Registrant and Dan E. Steimle.
13.1 Five Year Summary of Selected Consolidated Financial Data
from the 1997 Annual Report to Stockholders (for EDGAR
filing purposes only).
13.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations from the 1997 Annual Report to
Stockholders (for EDGAR filing purposes only).
13.3 Financial Statements and Supplementary Data from the 1997
Annual Report to Stockholders (for EDGAR filing purposes
only).
21.1 Subsidiaries of the Registrant.(1)
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
27.1 Financial data schedule.
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-8921) filed with the Securities and Exchange Commission on
July 26, 1996, as amended, and declared effective September 30, 1996.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-20369) filed with the Securities and Exchange Commission
on January 24, 1997, as amended, and declared effective February 12, 1997.
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, filed with the Securities and
Exchange Commission on August 8, 1997.
(4) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed with the Securities and
Exchange Commission on November 7, 1997.
+ Portions of this Exhibit have been granted Confidential Treatment.