Exhibit 99.4
EXCEL SWITCHING CORPORATION
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 27, 1997 AND DECEMBER 31, 1998
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
To Excel Switching Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
Excel Switching Corporation (a Massachusetts corporation) and subsidiaries as of
December 27, 1997 and December 31, 1998, and the related supplemental
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows for each of the three years in the period then ended. The
supplemental consolidated financial statements give retroactive effect to the
merger with RAScom, Inc. and subsidiary (RAScom) on May 10, 1999, which has been
accounted for as a pooling of interests, as described in Note 1. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the supplemental financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the supplemental financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Excel
Switching Corporation and subsidiaries as of December 27, 1997 and December 31,
1998, and the results of their operations and their cash flows for each of the
three years in the period then ended, after giving retroactive effect to the
merger with RAScom, as described in Note 1, all in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 24, 1999
F-1
EXCEL SWITCHING CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
DECEMBER 27, DECEMBER 31, MARCH 31,
1997 1998 1999
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 55,499 $ 64,877 $ 59,447
Marketable securities 66,929 55,579 66,965
Accounts receivable, net of reserves of $1,420, $2,228 and
$2,728 in 1997, 1998 and 1999, respectively 14,454 31,425 36,608
Inventories 5,285 6,800 10,565
Prepaid taxes 122 -- --
Deferred tax asset 6,141 8,534 8,503
Other current assets 1,402 2,325 4,576
--------- --------- ---------
Total current assets 149,832 169,540 186,664
PROPERTY AND EQUIPMENT, NET 11,063 19,753 21,997
DEFERRED TAX ASSET 2,926 7,642 11,221
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION -- 9,702 9,360
OTHER ASSETS -- 766 1,480
--------- --------- ---------
$ 163,821 $ 207,403 $ 230,722
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 4,412 $ 3,408 $ 4,262
Accounts payable 4,881 4,922 9,969
Accrued expenses 12,758 20,135 17,401
Accrued income taxes 3,606 6,052 8,223
Deferred revenue -- 1,047 1,481
Recourse obligation related to lease financing program -- -- 8,495
--------- --------- ---------
Total current liabilities 25,657 35,564 49,831
DEFERRED INCOME TAXES -- -- --
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 307 4,858 3,958
COMMITMENTS (Note 13)
REDEEMABLE CONVERTIBLE PREFERRED STOCK, AT REDEMPTION VALUE-
Authorized--10,696,402 shares
Issued and outstanding--10,696,402 shares at December 27,
1997, December 31, 1998 and March 31, 1999 18,797 20,315 20,719
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized--10,000,000 shares; no shares issued and
outstanding -- -- --
Common stock, $.01 par value-
Authorized--100,000,000 shares
Issued and outstanding--32,777,698, 34,218,309 and
34,665,766 shares at December 27, 1997, December 31, 1998
and March 31, 1999, respectively 328 342 347
Additional paid-in capital 88,154 102,165 106,750
Deferred compensation (491) (747) (700)
Accumulated other comprehensive income (38) 143 (12)
Retained earnings 31,107 44,763 49,829
--------- --------- ---------
Total stockholders' equity 119,060 146,666 156,214
--------- --------- ---------
$ 163,821 $ 207,403 $ 230,722
--------- --------- ---------
--------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS.
F-2
EXCEL SWITCHING CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
FISCAL YEARS ENDED THREE MONTHS ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 31, MARCH 28, MARCH 31,
1996 1997 1998 1998 1999
(UNAUDITED)
REVENUES $ 62,265 $ 91,623 $ 129,339 $ 27,105 $ 37,340
COST OF REVENUES 24,552 29,043 41,754 9,122 12,217
--------- --------- --------- --------- ---------
Gross profit 37,713 62,580 87,585 17,983 25,123
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Engineering, research and
development 12,346 16,061 26,363 5,540 8,522
Selling and marketing 7,939 14,797 20,872 5,041 5,696
General and administrative 6,967 9,139 12,755 2,908 3,508
Acquired in-process research
and development -- -- 7,459 -- --
--------- --------- --------- --------- ---------
Total operating expenses 27,252 39,997 67,449 13,489 17,726
--------- --------- --------- --------- ---------
Income from operations 10,461 22,583 20,136 4,494 7,397
OTHER INCOME (EXPENSE):
Interest income and other
expense, net 223 2,040 6,576 1,728 1,342
Interest expense (517) (464) (324) (11) (134)
--------- --------- --------- --------- ---------
Total other income
(expense) (294) 1,576 6,252 1,717 1,208
--------- --------- --------- --------- ---------
Income before provision
for income taxes 10,167 24,159 26,388 6,211 8,605
PROVISION FOR INCOME TAXES 4,077 9,425 11,214 2,341 3,135
--------- --------- --------- --------- ---------
NET INCOME $ 6,090 $ 14,734 $ 15,174 $ 3,870 $ 5,470
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PREFERRED STOCK DIVIDENDS $ 263 $ 903 $ 1,518 $ 379 $ 404
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 5,827 $ 13,831 $ 13,656 $ 3,491 $ 5,066
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BASIC EARNINGS PER SHARE $ .21 $ .48 $ .41 $ .11 $ .15
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DILUTED EARNINGS PER SHARE $ .18 $ .42 $ .38 $ .10 $ .13
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 28,253 28,939 33,406 32,832 34,476
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 33,025 35,101 40,313 39,983 41,118
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
EXCEL SWITCHING CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share data)
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
NUMBER OF REDEMPTION NUMBER OF $.01 PAR PAID-IN
SHARES AMOUNT SHARES VALUE CAPITAL
BALANCE, DECEMBER 31, 1995 -- $ -- 28,089,600 $281 $ 667
Issuance of common stock -- -- 178,000 2 2
Issuance of preferred stock, net of issuance
costs of approximately $99 5,740,287 7,676 -- -- --
Compensation expense associated with stock
options -- -- -- -- --
Forfeiture of stock options with deferred
compensation -- -- -- -- (20)
Accretion of preferred stock dividends -- 263 -- -- --
Net income -- -- -- -- --
---------- ------ ---------- ---- --------
Comprehensive income--1996
BALANCE, DECEMBER 28, 1996 5,740,287 7,939 28,267,600 283 649
Compensation expense associated with stock
options -- -- -- -- 424
Exercise of stock options -- -- 10,098 -- 20
Proceeds of initial public offering of common
stock, net of approximately $7,394 in issuance
costs -- -- 4,500,000 45 87,061
Issuance of preferred stock, net of issuance
costs of approximately $44 4,956,115 9,955 -- -- --
Accretion of preferred stock dividends -- 903 -- -- --
Unrealized loss on investments, net of $33 of
taxes -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Net income -- -- -- -- --
---------- ------ ---------- ---- --------
Comprehensive income--1997
BALANCE, DECEMBER 27, 1997 10,696,402 18,797 32,777,698 328 88,154
Compensation expense associated with stock
options -- -- -- -- 466
Exercise of stock options -- -- 1,420,373 14 1,558
Issuance of common stock under employee stock
purchase plan -- -- 20,238 -- 361
Tax benefit from exercise of stock options -- -- -- -- 11,626
Accretion of preferred stock dividends -- 1,518 -- -- --
Foreign currency translation adjustment -- -- -- -- --
Unrealized gain on investments, net of $51 of
taxes -- -- -- -- --
Net income -- -- -- -- --
---------- ------ ---------- ---- --------
Comprehensive income--1998
BALANCE, DECEMBER 31, 1998 10,696,402 20,315 34,218,309 342 102,165
Compensation expense associated with stock
options -- -- -- -- 51
Exercise of stock options -- -- 437,400 5 480
Issuance of common stock under employee stock
purchase plan -- -- 10,057 -- 214
Tax benefit from exercise of stock options -- -- -- -- 3,840
Accretion of preferred stock dividends -- 404 -- -- --
Foreign currency translation adjustment -- -- -- -- --
Unrealized gain on investments, net of $93 of
taxes -- -- -- -- --
Net income -- -- -- -- --
---------- ------ ---------- ---- --------
Comprehensive income--March 31, 1999
BALANCE, MARCH 31, 1999 (UNAUDITED) 10,696,402 $20,719 34,665,766 $347 $106,750
---------- ------ ---------- ---- --------
---------- ------ ---------- ---- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
EXCEL SWITCHING CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share data)
(Continued)
ACCUMULATED
OTHER
DEFERRED COMPREHENSIVE RETAINED COMPREHENSIVE
COMPENSATION INCOME EARNINGS TOTAL INCOME
BALANCE, DECEMBER 31, 1995 $(272) $ -- $11,449 $ 12,125 $ --
Issuance of common stock -- -- -- 4 --
Issuance of preferred stock, net of issuance
costs of approximately $99 -- -- -- -- --
Compensation expense associated with stock
options 73 -- -- 73 --
Forfeiture of stock options with deferred
compensation 7 -- -- (13) --
Accretion of preferred stock dividends -- -- (263) (263) --
Net income -- -- 6,090 6,090 6,090
----- ------ ------- ------- -------
Comprehensive income--1996 $ 6,090
-------
-------
BALANCE, DECEMBER 28, 1996 (192) -- 17,276 18,016
Compensation expense associated with stock
options (299) -- -- 125 --
Exercise of stock options -- -- -- 20 --
Proceeds of initial public offering of common
stock, net of approximately $7,394 in issuance
costs -- -- -- 87,106 --
Issuance of preferred stock, net of issuance
costs of approximately $44 -- -- -- -- --
Accretion of preferred stock dividends -- -- (903) (903) --
Unrealized loss on investments, net of $33 of
taxes -- (20) -- (20) (20)
Foreign currency translation adjustment -- (18) -- (18) (18)
Net income -- -- 14,734 14,734 14,734
----- ------ ------- ------- -------
Comprehensive income--1997 $14,696
-------
-------
BALANCE, DECEMBER 27, 1997 (491) (38) 31,107 119,060
Compensation expense associated with stock
options (256) -- -- 210 --
Exercise of stock options -- -- -- 1,572 --
Issuance of common stock under employee stock
purchase plan -- -- -- 361 --
Tax benefit from exercise of stock options -- -- -- 11,626 --
Accretion of preferred stock dividends -- -- (1,518) (1,518) --
Foreign currency translation adjustment -- 54 -- 54 54
Unrealized gain on investments, net of $51 of
taxes -- 127 -- 127 127
Net income -- -- 15,174 15,174 15,174
----- ------ ------- ------- -------
Comprehensive income--1998 $15,355
-------
-------
BALANCE, DECEMBER 31, 1998 (747) 143 44,763 146,666
Compensation expense associated with stock
options 47 -- -- 98 --
Exercise of stock options -- -- -- 485 --
Issuance of common stock under employee stock
purchase plan -- -- -- 214 --
Tax benefit from exercise of stock options -- -- -- 3,840 --
Accretion of preferred stock dividends -- -- (404) (404) --
Foreign currency translation adjustment -- (99) -- (99) (99)
Unrealized gain on investments, net of $93 of
taxes -- (56) -- (56) (56)
Net income -- -- 5,470 5,470 5,470
----- ------ ------- ------- -------
Comprehensive income--March 31, 1999 $ 5,315
-------
-------
BALANCE, MARCH 31, 1999 (UNAUDITED) $(700) $(12) $49,829 $ 156,214
----- ------ ------- -------
----- ------ ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
EXCEL SWITCHING CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FISCAL YEARS ENDED THREE MONTHS ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 31, MARCH 28, MARCH 31,
1996 1997 1998 1998 1999
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,090 $ 14,734 $ 15,174 $ 3,870 $ 5,470
Adjustments to reconcile net income to net cash
provided by operating activities-
Acquired in-process research and development -- -- 7,459
Depreciation and amortization 1,251 2,543 4,261 815 1,272
Unrealized (loss) gain on investments -- (20) 127 18 (56)
Deferred income taxes (4,463) (4,098) (7,553) (1,339) (3,548)
Deferred revenue -- -- 1,000 -- 434
Compensation expense associated with stock
options 60 125 210 39 98
Changes in assets and liabilities, net of
acquisitions-
Accounts receivable (2,210) (3,935) (16,639) (1,163) (5,183)
Inventories (409) 2,180 (1,394) (947) (3,765)
Prepaid taxes 401 (122) 122 122 --
Other current assets (259) (1,089) (925) (619) (2,251)
Accounts payable (2,163) 2,676 (702) 786 5,047
Accrued expenses 4,129 6,536 6,020 2,377 (2,734)
Accrued income taxes 2,350 959 13,792 1,005 6,011
-------- -------- -------- -------- --------
Net cash provided by operating activities 4,777 20,489 20,952 4,964 795
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (4,520) (4,260) (12,109) (3,028) (3,174)
Purchases of marketable securities, net -- (66,929) 11,350 (430) (11,386)
Change in other assets (8) 8 (754) -- (714)
Cash paid for acquisitions, net of cash acquired -- -- (7,437) -- --
-------- -------- -------- -------- --------
Net cash used in investing activities (4,528) (71,181) (8,950) (3,458) (15,274)
-------- -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
EXCEL SWITCHING CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
FISCAL YEARS ENDED THREE MONTHS ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 31, MARCH 28, MARCH 31,
1996 1997 1998 1998 1999
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Lease program recourse obligation -- -- -- -- 8,495
Proceeds from issuance of long-term obligations 1,246 459 -- -- --
Payments on long-term obligations (601) (674) (4,611) (3,229) (46)
Proceeds from issuance of preferred stock 7,676 9,955 -- -- --
Proceeds from issuance of common stock 4 87,106 -- -- --
Proceeds from exercise of stock options -- 20 1,572 70 485
Issuance of common stock under employee stock
purchase plan -- -- 361 -- 214
------ ------- ------- ------- ------
Net cash provided by financing activities 8,325 96,866 (2,678) (3,159) 9,148
------ ------- ------- ------- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS -- (18) 54 21 (99)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,574 46,156 9,378 (1,632) (5,430)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 770 9,343 55,499 55,499 64,877
------ ------- ------- ------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $9,344 $55,499 $64,877 $53,867 $59,447
------ ------- ------- ------- ------
------ ------- ------- ------- ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 490 $ 424 $ 324 $ 31 $ 356
------ ------- ------- ------- ------
------ ------- ------- ------- ------
Taxes $5,951 $13,271 $ 4,131 $ 2,545 $ 612
------ ------- ------- ------- ------
------ ------- ------- ------- ------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Accretion of preferred stock dividends $ 263 $ 903 $ 1,518 $ 379 $ 404
------ ------- ------- ------- ------
------ ------- ------- ------- ------
Acquisition of property and equipment under
capital lease obligations $ 489 $ -- $ -- $ -- $ --
------ ------- ------- ------- ------
------ ------- ------- ------- ------
During 1998, the Company acquired Quantum
Telecom Solutions, Inc. and XNT Systems,
Inc., as described in Note 2. These
acquisitions are summarized as follows:
Fair value of assets acquired, excluding cash $18,470
Cash paid, net of cash acquired (7,437)
-------
Liabilities assumed and promissory notes
issued $11,033
-------
-------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS.
F-7
EXCEL SWITCHING CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Excel Switching Corporation (Excel) is a leading provider of open
switching platforms for telecommunications networks worldwide. Excel
develops, manufactures, markets and supports a family of open,
programmable, carrier-class switches that address the complex enhanced
services and wireless and wireline infrastructure needs of network
providers. Excel sells to a variety of customers in the worldwide
telecommunications market, including applications developers, original
equipment manufacturers (OEMs), system integrators and network service
providers.
On May 10, 1999, Excel acquired RAScom, Inc. and subsidiary (RAScom), a
company that develops, manufactures, markets and supports a comprehensive
line of open system, remote access servers. Excel exchanged 1,021,187
shares of common stock of all the outstanding shares of RAScom common
stock, and exchanged options to purchase 78,753 shares of Excel for all
the outstanding options of RAScom; 102,122 of the shares issued were
placed into escrow as security for indemnification obligations of RAScom
relating to representations, warranties and tax matters. This merger will
be accounted for as a pooling of interests. Generally accepted accounting
principles do not allow for restatement of historical financial
statements for a pooling of interests transaction until results that
include post-merger activity have been issued. These accompanying
supplemental financial statements have been retroactively restated to
reflect the transaction as if Excel and RAScom (the Company) had operated
as one entity since inception. The Company has incurred approximately
$1.8 million of merger-related costs, which will be included in the 1999
consolidated statement of income during the period in which the merger
was completed.
The accompanying supplemental consolidated financial statements reflect
the application of certain accounting policies, as described below and
elsewhere in these notes to supplemental consolidated financial
statements.
(a) PRINCIPLES OF CONSOLIDATION
These supplemental consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated in
consolidation.
(b) INTERIM FINANCIAL STATEMENTS
The accompanying supplemental consolidated financial statements as
of March 31, 1999 and for the three months ended March 28, 1998
and March 31, 1999 are unaudited, but in the opinion of
management, include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of results
for the interim periods. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally
F-8
accepted accounting principles have been omitted with respect to
these unaudited financial statements, although the Company
believes that the disclosures included are adequate to make the
information presented not misleading. Results for the three months
ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999.
(c) CHANGE IN FISCAL YEAR-END
During 1998, the Company elected to change its fiscal year-end
from the last Saturday in December to December 31 to better
synchronize its fiscal periods with the majority of its customers
and suppliers. RAScom's fiscal year has always ended on December
31. In the accompanying supplemental consolidated financial
statements, 1996 refers to the fiscal year ended December 28, 1996
for Excel and December 31, 1996 for RAScom; 1997 refers to the
fiscal year ended December 27, 1997 for Excel and December 31,
1997 for RAScom; and 1998 refers to the fiscal year ended December
31, 1998 for both Excel and RAScom.
(d) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes.
The market for telecommunications equipment in which the Company
operates can be characterized as rapidly changing because of
several factors including technological advancements, the
introduction of new products and services by the Company and its
competitors, and the increasing demands placed on equipment in
worldwide telecommunications networks. Significant assets and
liabilities with reported amounts based on estimates include
accounts receivable, inventory, intangible assets and accrued
expenses for post sale support costs, warranty costs and sales
returns and allowances. While the Company believes its estimates
are adequate, actual results could differ from those estimates.
(e) REVENUE RECOGNITION
Revenue is generally recognized when all significant contractual
obligations have been satisfied and collection of the resulting
receivable is reasonably assured. Revenue from product sales is
recognized at time of delivery and acceptance, and after
consideration of all the terms and conditions of the customer
contract. Revenue from sales-type leases is recognized at the date
of shipment, net of reserves for uncollectable amounts. Revenue
from operating leases or leases for which the collection of the
lease payments is not predicable is recognized ratably over the
lease term, and the related equipment is depreciated using the
straight-line method over its estimated useful life (see Note 6).
Revenue from providing services and post-sale support are
recognized at time of performance. The Company provides for
anticipated product returns and warranty costs at the time of
revenue recognition.
F-9
(f) SOURCES OF SUPPLY AND THIRD-PARTY MANUFACTURING RELATIONSHIPS
Certain components used in the manufacture of the Company's
products are currently available only from single- or sole-source
suppliers. In addition, the Company relies on a limited number of
third parties to manufacture certain other components and
subassemblies. Shortages resulting from a change in arrangements
with these suppliers and manufacturers could cause delays in
manufacturing and product shipments and possible deferral or
cancellation of customer orders.
(g) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs have been charged to operations as
incurred. The Company believes its current process for developing
software is essentially completed concurrently with the
establishment of technological feasibility. Accordingly, no
software development costs have been capitalized to date.
(h) CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to significant
concentrations of credit risk consist primarily of cash, cash
equivalents, marketable securities and trade accounts receivable.
The Company's investments are in financial instruments of high
quality. Concentration of credit risk with respect to trade
accounts receivable is limited to customers to whom the Company
makes significant sales. Two customers accounted for approximately
14% and 12%, respectively, of accounts receivable at December 27,
1997. Another customer accounted for approximately 11% of accounts
receivable at December 31, 1998 (see Note 12). To control credit
risk, the Company performs regular credit evaluations of its
customers' financial condition and maintains allowances for
potential credit losses.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash and cash equivalents,
marketable securities, accounts receivable and accounts payable
approximate fair value because of the short-term nature of these
instruments. Based on the borrowing rates currently available to
the Company, the carrying amounts of debt issued during 1998 in
connection with acquisitions approximate fair value.
(j) EARNINGS PER SHARE
Basic earnings per share was determined by dividing net income by
the weighted average common shares outstanding during the period.
Diluted earnings per share was determined by dividing net income
by diluted weighted average shares outstanding. Diluted weighted
shares outstanding reflects the dilutive effect, if any, of common
stock options based on the treasury stock method and Redeemable
Convertible Preferred Stock on an as-if-converted basis. The
calculations of diluted weighted average shares outstanding
exclude 459,800 and 141,600 common stock options in 1997 and 1998,
respectively, and 126,400 and 27,700 common stock options for the
three months ended March 28, 1998 and March 31, 1999,
respectively, as their effect would be antidilutive. There were no
antidilutive common stock options in 1996.
F-10
The calculations of basic and diluted weighted average shares
outstanding are as follows (in thousands):
FISCAL YEARS THREE MONTHS
1996 1997 1998 1998 1999
(UNAUDITED)
Basic weighted average common shares
outstanding 28,253 28,939 33,406 32,832 34,476
Weighted average common equivalent
shares from stock options 4,607 5,619 6,085 6,329 5,820
Weighted average common equivalent
shares from preferred stock 165 543 822 822 822
------ ------ ------ ------ ------
Diluted weighted average shares
outstanding 33,025 35,101 40,313 39,983 41,118
------ ------ ------ ------ ------
------ ------ ------ ------ ------
(k) COMPREHENSIVE INCOME
Comprehensive income represents the change in equity of a business
enterprise resulting from transactions and other events and
circumstances from nonowner sources. For fiscal years 1997 and
1998, and for the three months ended March 28, 1998 and March 31,
1999, the only differences between comprehensive income and net
income relate to unrealized gains and losses on marketable
securities, net of the related tax effect, and foreign currency
translation adjustments.
The following is a rollforward of accumulated comprehensive income
to March 31, 1999 (unaudited):
ACCUMULATED
FOREIGN UNREALIZED OTHER
CURRENCY GAINS ON COMPREHENSIVE
TRANSLATION INVESTMENTS INCOME
Beginning balance $ 36 $ 107 $ 143
Current-period change (99) (56) (155)
------- ------- ---------
Ending balance $ (63) $ 51 $ (12)
------- ------- ---------
------- ------- ---------
(2) ACQUISITIONS
On September 30, 1998 the Company acquired all of the outstanding capital
stock of Quantum Telecom Solutions, Inc. (Quantum), a New Jersey based
provider of switch-configuration software. The total consideration of
$8.9 million consisted of approximately $5.4 million of cash plus the
issuance of promissory notes totaling $3.5 million. On September 30,
1998, the Company also acquired all of the outstanding capital stock of
XNT Systems, Inc. (XNT), a supplier of intelligent switch control and
comprehensive call-processing and control software based in New
Hampshire. The total consideration
F-11
of $8.8 million consisted of cash payments of approximately $2.3 million
plus the issuance of promissory notes totaling $4.7 million and the
assumption of certain liabilities of XNT totaling approximately $1.8
million.
These acquisitions were accounted for under the purchase method of
accounting, and accordingly, the results of operations from the date of
acquisition are included in the Company's supplemental consolidated
statements of income. The fair market value of assets acquired and
liabilities assumed was based on an independent appraisal. The portion of
the purchase price allocated to in-process research and development was
based on a risk-adjusted cash flow appraisal method and represents
projects that had not yet reached technological feasibility and had no
alternative future use. This portion of the purchase price was expensed
upon consummation of the acquisitions.
Based on the independent appraisal, the Company has allocated a portion
of the purchase price to certain intangible assets. Intangible assets
consist of the following at December 31, 1998 (in thousands):
ESTIMATED
USEFUL LIFE
Developed technology 4 years $ 2,190
Assembled workforce 5 years 350
Goodwill 10 years 7,519
-----------
10,059
Less--accumulated amortization 357
-----------
$ 9,702
-----------
-----------
The Company periodically reviews the realizability of its intangible
assets and has not recorded any impairment of these assets to date. The
following unaudited pro forma summary information presents the combined
results of operations of the Company, Quantum and XNT as if the
acquisitions had occurred at the beginning of 1997. This unaudited pro
forma financial information is presented for informational purposes only
and may not be indicative of the results of operations as they would have
been if the Company, Quantum and XNT had been a single entity, nor is it
necessarily indicative of the results of operations that may be expected
in the future. Anticipated efficiencies from the consolidation of the
Company, Quantum and XNT and the effects of the acquired in process
research and development have been excluded from the amounts presented
below (in thousands, except per share data).
FISCAL YEARS THREE MONTHS
1997 1998 1998 1999
(UNAUDITED)
Revenues $ 96,370 $ 132,403 $ 27,998 $ 37,340
Net income 15,612 21,495 3,410 5,882
Earnings per share-
Basic $ 0.51 $ 0.60 $ .09 $ .16
Diluted 0.44 0.53 .09 .14
F-12
(3) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents are highly liquid investments with original maturities
of three months or less. Marketable securities are highly liquid
investment grade securities with original maturities of greater than
three months. Investments purchased to be held for indefinite periods of
time and not intended at the time of purchase to be held-to-maturity are
classified as available-for-sale and reported at fair market value. At
December 27, 1997, December 31, 1998 and March 31, 1999, the Company has
classified all investments as available-for-sale. The unrealized gain on
available-for-sale securities at December 31, 1998 was approximately
$107,000, which has been recorded as other comprehensive income in
stockholders' equity. During fiscal years 1997 and 1998, and during the
three months ended March 28, 1998 and March 31, 1999, the Company
realized net gains of $55,000, $3,000, $0 and $0, respectively, using the
specific-identification method. No gains were realized during 1996. The
Company's investments include time deposits, commercial paper, bankers'
acceptances and corporate, state municipality and U.S.
government debt and equity securities.
Cash, cash equivalents and marketable securities consist of the following
(in thousands):
DECEMBER 27, DECEMBER 31, MARCH 31,
1997 1998 1999
(UNAUDITED)
Cash and cash equivalents-
Cash $ 2,286 $ 2,532 $ 13,157
Money markets 16,691 15,189 9,520
Time deposits 1,459 - -
Corporate debt securities - 4,000 2,700
Commercial paper 32,071 38,156 26,570
State/municipal securities - - 2,500
Bankers' acceptance 2,992 - -
Corporate equity securities - 5,000 5,000
--------- ----------- -----------
Total cash and cash equivalents $ 55,499 $ 64,877 $ 59,447
--------- ----------- -----------
--------- ----------- -----------
Marketable securities-
Corporate debt securities $ 26,935 $ 23,334 $ 34,710
Time deposits 2,004 - -
U.S. government and agency debt securities 31,090 505 503
Municipality debt securities 2,000 27,134 1,548
Commercial paper 4,900 4,606 30,204
--------- ----------- -----------
Total marketable securities $ 66,929 $ 55,579 $ 66,965
--------- ----------- -----------
--------- ----------- -----------
The following table summarizes the remaining maturity of the Company's
investments in debt securities as of December 31, 1998 (in thousands):
One year or less $ 46,761
One to five years 25,648
Variable maturity 25,326
---------
$ 97,735
---------
---------
F-13
(4) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods consist of materials, labor
and manufacturing overhead. Inventories consist of the following (in
thousands):
DECEMBER 27, DECEMBER 31, MARCH 31,
1997 1998 1999
(UNAUDITED)
Raw materials $ 708 $ 3,373 $ 4,966
Work-in-process 3,780 2,291 4,528
Finished goods 797 1,136 1,071
---------- ---------- ---------
$ 5,285 $ 6,800 $ 10,565
---------- ---------- ---------
---------- ---------- ---------
(5) PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization using both
straight-line and accelerated methods by charges to operations in amounts
that allocate the cost of the assets over their estimated useful lives.
Property and equipment consists of the following (in thousands):
DECEMBER 27, DECEMBER 31, MARCH 31, ESTIMATED USEFUL
1997 1998 1999 LIVES
(UNAUDITED)
Land $ 576 $ 1,250 $ 2,409 N/A
Test equipment 4,561 8,776 9,668 2-5 years
Office equipment, furniture and
fixtures 4,077 8,045 8,323 2-7 years
Buildings 3,991 7,763 7,414 40 years
Building improvements 573 680 1,029 7-40 years
Assets under capital lease 489 489 489 3 years
Construction in progress (Note 13) 1,179 1,037 1,882 N/A
---------- ----------- -----------
15,446 28,040 31,214
Less--Accumulated depreciation and
amortization 4,383 8,287 9,217
---------- ----------- -----------
$ 11,063 $ 19,753 $ 21,997
---------- ----------- -----------
---------- ----------- -----------
(6) LEASE FINANCING PROGRAM
In March 1999, the Company entered into an arrangement with a leasing
company to enable the Company's customers to finance the purchase of
Excel equipment. Under the terms of this arrangement, as amended, the
Company has a recourse obligation in the amount of the greater of
$1,000,000 or 20% of the aggregate net book value of annual equipment
sales financed. In addition,
F-14
the Company has a 100% recourse obligation for contracts funded for
customers with certain credit ratings, as determined by the leasing
company.
During the first quarter of 1999, the Company sold approximately $7.9
million of equipment under this agreement to the leasing company. The
leasing company leased this equipment to certain customers. In addition,
the Company sold the leasing company an existing receivable of
approximately $1.0 million. The Company's recourse obligation at March
31, 1999 is approximately $8.5 million, for which it has recorded a
reserve of $8.5 million. Because of the credit ratings of certain of
these customers and the related recourse obligations, the Company
determined it would record the related $7.5 million of revenue ratably as
the lease payments are received for the term of the lease or until such
time as collection of the underlying lease payments can be reasonably
assured.
(7) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
DECEMBER 27, DECEMBER 31, MARCH 31,
1997 1998 1999
(UNAUDITED)
Promissory notes payable--XNT $ - $ 4,702 $ 4,702
Promissory notes payable--Quantum - 3,456 3,456
Mortgage and Security Agreement 2,386 - -
Capital lease obligation--Building 926 - -
Real Estate Promissory Note 460 - -
Promissory note payable to a bank 670 - -
Other 277 108 62
--------- ----------- ----------
4,719 8,266 8,220
Less--Current maturities 4,412 3,408 4,262
--------- ----------- ----------
$ 307 $ 4,858 $ 3,958
--------- ----------- ----------
--------- ----------- ----------
In connection with the 1998 acquisition of XNT (see Note 2), the Company
issued promissory notes in the amount of $4.7 million. Interest at a rate
of 10% per annum is payable annually in arrears. The notes mature as
follows: $1.5 million in September 1999 and $1.6 million each in
September 2000 and 2001. Upon the occurrence of certain events, as
defined, the maturity of principal amounts outstanding under the notes
may be accelerated or decelerated.
In connection with the 1998 acquisition of Quantum (see Note 2), the
Company issued promissory notes in the amount of $3.5 million. Interest
at a rate of 10% per annum is payable quarterly in arrears. The notes
mature as follows: $1.8 million in September 1999, $900,000 in March 2000
and $756,000 in September 2000. Upon the occurrence of certain events, as
defined, the maturity of principal amounts outstanding under the notes
may be accelerated or decelerated.
In 1995, the Company entered into a building capital lease obligation
that included a purchase option exercisable beginning in August 1998 for
$875,000. During 1998, the Company exercised this option.
F-15
In January 1998, the Company repaid all outstanding obligations under the
Mortgage and Security Agreement, promissory note payable and the Real
Estate Promissory Note. Accordingly, all outstanding balances as of
December 27, 1997 have been reflected as current liabilities in the
accompanying December 27, 1997 supplemental consolidated balance sheet.
Future maturities of the remaining long-term obligations as of December
31, 1998 are as follows (in thousands):
1999 $ 3,408
2000 3,257
2001 1,601
----------
$ 8,266
----------
----------
(8) LINE-OF-CREDIT ARRANGEMENT
The Company has an unsecured line-of-credit arrangement with a bank to
provide up to $15.0 million in financing. Borrowings under this line bear
interest at either the bank's base rate (7.75% at December 31, 1998) or
the Eurodollar rate (5.07% at December 31, 1998) plus 1.75%. The Company
is required to maintain certain restrictive covenants under this
agreement. This agreement expires September 30, 1999. There have been no
borrowings outstanding under this agreement since the fiscal year ended
1996.
(9) INCOME TAXES
Deferred tax assets or liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities,
as measured by the enacted tax rates expected to be in effect when the
differences reverse. The provision for income tax is based on pretax
financial income.
The components of the provision for income taxes are as follows (in thousands):
FISCAL YEAR
1996 1997 1998
Current-
Federal $ 6,731 $ 11,249 $ 15,397
State 1,971 2,274 3,370
----------- ------------ -----------
8,702 13,523 18,767
----------- ------------ -----------
Deferred (prepaid)-
Federal (4,112) (3,788) (6,059)
State (513) (310) (1,494)
----------- ------------ -----------
(4,625) (4,098) (7,553)
----------- ------------ -----------
Total provision $ 4,077 $ 9,425 $ 11,214
----------- ------------ -----------
----------- ------------ -----------
F-16
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
FISCAL YEAR ENDED
1996 1997 1998
Income tax provision at federal statutory rate 34 % 35 % 35 %
Increase (decrease) in tax resulting from-
State tax provision, net of federal benefit 6 5 3
Research and development tax credits - (2) (3)
Nondeductible acquired in-process research and
development - - 4
Other - 1 3
-- -- --
Effective tax rate 40 % 39 % 42 %
-- -- --
-- -- --
The approximate income tax effect of each type of temporary difference
composing the net deferred tax asset at December 27, 1997 and December
31, 1998 is as follows (in thousands):
DECEMBER 27, DECEMBER 31,
1997 1998
Difference in inventory accounting method $ (778) $ (512)
Nondeductible reserves 4,035 4,268
Nondeductible accruals 2,401 3,372
Depreciation and amortization - 1,392
Credit carryforwards 126 995
Net operating loss carryforwards 3,319 6,526
Other temporary differences (36) 135
----------- -----------
Net deferred tax asset $ 9,067 $ 16,176
----------- -----------
----------- -----------
At December 31, 1998, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $17,034,000.
The net operating loss carryforwards expire through 2018 and are subject
to review and possible adjustment by the Internal Revenue Service (IRS).
The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss carryforwards available to be used in any given year in
the event of significant changes in ownership interest, as defined.
(10) STOCKHOLDERS' EQUITY
(a) COMMON STOCK
The Company has authorized 100,000,000 shares of common stock, par
value of $.01 per share. At December 31, 1998, there were
13,155,674 shares of common stock reserved for future issuance
under the Company's stock plans.
In November 1997, the Company completed an initial public offering
of 4,500,000 shares of common stock at a per share price of $21.
The Company received proceeds of approximately $87.1 million, net
of underwriting discounts and commissions and offering expenses of
approximately $7.4 million.
F-17
(b) PREFERRED STOCK
The Company has 10,000,000 shares of $.01 par value preferred
stock authorized. The Board of Directors has the authority to
issue such shares in one or more series and to fix the relative
rights and preferences without further vote or action by the
stockholders. Currently, the Board of Directors has no plans to
issue any shares of preferred stock.
(c) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Prior to the merger between the two companies, RAScom had
10,696,402 shares of redeemable convertible preferred stock
authorized and outstanding, of which 2,892,744 shares were
designated Series A Redeemable Convertible Preferred Stock (Series
A), 2,847,543 shares were designated Series B Redeemable
Convertible Preferred Stock (Series B) and 4,956,115 shares were
designated Series C Redeemable Convertible Preferred Stock (Series
C). The Series A, B and C preferred stock are entitled to certain
rights and preferences, including voting, cumulative dividends,
liquidation, redemption and conversion, as defined in the Amended
and Restated Articles of Incorporation of RAScom. Upon approval of
the merger on May 10, 1999, all outstanding shares of redeemable
convertible preferred stock plus cumulative dividends were
converted to approximately 822,000 shares of Excel common stock.
(11) STOCK OPTION PLANS
Stock options are generally exercisable within 10 years of the original
date of grant and vest over a period of up to five years from the date of
grant. In some instances, options have been granted at exercise prices
below the fair market value on the date of grant. The difference, if any,
between the fair market value of shares of the Company's common stock and
the exercise price of the option is recognized as compensation expense
over the vesting term. During fiscal years 1996, 1997 and 1998, and
during the three months ended March 28, 1998 and March 31, 1999, the
Company recognized net compensation expense of approximately $60,000,
$125,000, $189,000, $39,000 and $97,000, respectively.
The Company has the following stock option and stock purchase plans:
(a) STOCK OPTION PROGRAM
The Company has granted nonqualified stock options to purchase
shares of its common stock at exercise prices generally determined
to be at fair market value by the Company's Board of Directors on
the date of grant. In November 1997, this program was terminated.
There are 9,472,545 options outstanding under this program as of
December 31, 1998.
(b) 1997 STOCK OPTION PLAN
Under the terms of the 1997 Stock Option Plan (1997 Plan),
incentive and nonqualified stock options may be granted to
employees consultants and directors to purchase an aggregate of
5,000,000 shares of common stock. During 1998, the Company granted
1,567,200 options under the 1997 Plan, of which 1,557,800 options
were outstanding at December 31, 1998.
F-18
(c) DIRECTOR OPTION PLAN
The Company's Non-Employee Director Stock Option Plan (Director
Option Plan) provides for the grant of options to purchase an
aggregate 225,000 shares of common stock to nonemployee directors
of the Company. Each such director will be granted an option to
purchase 30,000 shares upon election to the Board of Directors. In
addition, each such director will be automatically granted an
option to purchase 15,000 shares in each of the two years
following the date such person becomes a director. These options
will vest 1/3 on grant date, 1/3 one year from grant date and 1/3
two years from grant date. The Plan was amended in May 1999 to
terminate the initial grant of options to purchase 30,000 shares
and the grant of 15,000 additional shares at each of the next two
anniversary dates. Commencing January 1, 2000, each nonemployee
director will be automatically granted fully vested options to
purchase 1,250 shares of common stock once each quarter provided
that the director has been a member of the Board for at least one
year. During 1997 and 1998, the Company granted a total of 120,000
options under the Director Option Plan, of which 100,000 options
were outstanding at December 31, 1998.
(d) 1996 RASCOM STOCK OPTION PLAN
In connection with the merger of RAScom and Excel, the Company
adopted RAScom's 1996 Stock Option Plan. Under the terms of the
Company's 1996 Stock Option Plan (1996 Plan), incentive stock
options were granted to employees of RAScom, Inc. During 1997 and
1998 and the three month ended March 31, 1999, the Company granted
45,159, 47,250 and 39,920 options, respectively, of which 90,203
options were outstanding as of December 31, 1998. The Company does
not intend to issue additional grants under this Plan.
(e) STOCK OPTION ACTIVITY
Stock option activity under all option plans for the three years
in the period ended December 31, 1998 and for the three months
ended March 31, 1999 is as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
Outstanding, December 31, 1995 7,890,840 $ 0.084
Granted 2,042,659 4.211
Forfeited (33,025) 0.508
----------
Outstanding, December 28, 1996 9,900,474 0.934
Granted 1,621,350 9.313
Exercised (10,098) 1.951
Forfeited (131,239) 3.987
----------
Outstanding, December 27, 1997 11,380,487 2.093
Granted 1,637,120 19.470
Exercised (1,420,372) 1.107
Forfeited (376,690) 8.270
----------
Outstanding, December 31, 1998 11,220,545 4.544
Granted 84,295 23.392
Exercised (437,400) 1.110
Forfeited (90,799) 10.386
----------
Outstanding, March 31, 1999 (unaudited) 10,776,641 $ 4.786
---------- ----------
---------- ----------
F-19
The following table summarizes information about stock options outstanding at
December 31, 1998:
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISABLE PRICE
$ 0.002 - $0.002 4,814,005 5.2 4,814,005 $ 0.002
0.167 - 0.167 562,770 5.9 471,570 0.167
0.333 - 0.333 1,201,250 6.7 795,050 0.333
1.000 - 2.340 333,085 7.5 124,279 2.326
4.500 - 6.000 1,984,177 7.8 416,267 4.978
6.706 - 10.500 387,798 8.4 61,647 7.351
11.500 - 17.250 314,760 8.8 55,980 14.192
18.000 - 27.000 1,598,000 9.7 54,440 20.986
38.000 - 38.000 24,700 10.0 - -
---------- --------- ---------
11,220,545 6,793,238 $ 0.752
---------- --------- ---------
---------- --------- ---------
Exercisable, December 27, 1997 7,189,808 $ 0.310
--------- ---------
--------- ---------
Exercisable, December 28, 1996 6,356,940 $ 0.046
--------- ---------
--------- ---------
(f) FAIR VALUE OF STOCK OPTIONS
Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED Compensation, requires the measurement
of the fair value of stock options to be included in the statement
of income or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and elect the disclosure-only alternative under SFAS No. 123.
Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates, as
prescribed in SFAS No. 123, the Company's net income would have
been as follows:
1996 1997 1998
Net income (in thousands)-
As reported $ 6,090 $ 14,734 $ 15,174
Pro forma 5,635 12,802 12,588
Diluted earnings per share-
As reported $ .18 $ .42 $ .38
Pro forma .17 .36 .31
F-20
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions used for grants during the applicable
period:
1996 1997 1998
Dividend yield - - -
Volatility 56.6% 56.6% 70.5%
Risk-free interest rate 5.9%-6.8% 5.0%-6.6% 4.5%-5.6%
Expected option term 7.5 years 5.0 years 5.0 years
Weighted average fair value per
share of options granted $ 5.53 $ 5.17 $12.41
(g) 1998 EMPLOYEE STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan provides for the sale of up
to 400,000 shares of common stock to participating employees
semiannually. The purchase price is equal to 85% of the fair
market value at either the beginning or the end of the semiannual
period, as defined. During 1998, 20,238 shares of common stock
were issued under this plan.
(12) SEGMENT AND ENTERPRISE-WIDE REPORTING
The Company currently operates in one operating segment as a provider of
programmable switches. This segment derives its revenues from the sale
and support of a family of open, programmable, carrier-class switches
that address the complex enhanced services and wireless and wireline
infrastructure needs of network providers.
The Company derives substantially all of its revenue from the sale and
support of one group of similar products and services. Substantially all
of the Company's assets are located within the United States. During
fiscal years 1996, 1997 and 1998 and during the three months ended March
28, 1998 and March 31, 1999, the Company derived its revenues from the
following geographic regions (in thousands):
FISCAL YEARS THREE MONTHS ENDED
1996 1997 1998 1998 1999
(UNAUDITED)
United States $ 60,423 $ 84,420 $ 114,870 $ 24,981 $ 25,809
Other 1,842 7,203 14,469 2,124 11,531
$ 62,265 $ 91,623 $ 129,339 $ 27,105 $ 37,340
------------ ---------- ----------- ---------- -----------
------------ ---------- ----------- ---------- -----------
F-21
During fiscal years 1996, 1997 and 1998 and during the three months ended
March 28, 1998 and March 31, 1999, the Company derived a portion of its
revenues from sales to single customers that exceeded 10% of total
revenues, as follows:
FISCAL YEARS THREE MONTHS ENDED
1996 1997 1998 1998 1999
(UNAUDITED)
Significant customer A * 10% 19% 21% *
Significant customer B 37% 25% * * *
*Revenue derived from this customer was less than 10% of the Company's total
revenue during the period.
(13) COMMITMENTS
(a) LEASE OBLIGATION
The Company leases certain equipment and office facilities under
noncancelable operating leases, which expire at various dates
through November 2001. Future minimum lease payments required
under these leases at December 31, 1998 are approximately as
follows (in thousands):
FISCAL YEAR AMOUNT
1999 $ 1,504
2000 866
2001 687
2002 321
----------
$ 3,378
----------
----------
Total rent expense under these agreements for fiscal years 1996,
1997 and 1998 was approximately $1.1 million, $1.4 million and
$1.4 million, respectively.
During 1998, the Company began construction of a $7.0 million
building addition. As of December 31, 1998, the Company had
incurred approximately $1.0 million of land acquisition and
construction costs related to this building addition.
(b) PURCHASE COMMITMENTS
In the normal course of business, the Company routinely enters
into purchase commitments for the purchase of inventory. During
the quarter ended March 31, 1999, the Company identified a
purchase commitment in excess of the anticipated inventory usage
and recorded a change of approximately $650,000 against cost of
sales.
F-22
(14) EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) retirement savings plan covering all
employees. Under this plan, participants may elect to defer a portion of
their compensation, subject to certain limitations. In addition, the
Company, at the discretion of the Board of Directors, may make profit
sharing contributions into the plan. For fiscal years 1996, 1997 and
1998, the Company made contributions of approximately $534,000, $898,000
and $1,180,000, respectively.
(15) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 27, DECEMBER 31, MARCH 31,
1997 1998 1999
(UNAUDITED)
Accrued sales returns and allowances $ 4,846 $ 4,821 $ 4,601
Accrued payroll and benefits 2,637 7,479 5,532
Accrued post-sales support and warranty 1,938 2,925 2,598
Accrued marketing 1,215 743 1,060
Accrued purchase commitments - - 650
Accrued professional fees 796 1,006 591
Accrued other 1,326 3,161 2,369
----------- --------- ----------
$ 12,758 $ 20,135 $ 17,401
----------- --------- ----------
----------- --------- ----------
F-23