-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SXwnsF0cFNm5oPbryF29v5ndKxMZGzRc7AV9W+nyxM44CZuoxqJkQfoMe8Nd3JtR DZtyS4f2NubjmKZYWzXxLg== 0000927016-98-001979.txt : 19980513 0000927016-98-001979.hdr.sgml : 19980513 ACCESSION NUMBER: 0000927016-98-001979 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980328 FILED AS OF DATE: 19980512 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCEL SWITCHING CORP CENTRAL INDEX KEY: 0001036261 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 042992806 STATE OF INCORPORATION: MA FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-35791 FILM NUMBER: 98616284 BUSINESS ADDRESS: STREET 1: 255 INDEPENDENCE DR CITY: HYANNIS STATE: MA ZIP: 02601 BUSINESS PHONE: 5088623000 MAIL ADDRESS: STREET 1: 255 INDEPENDENCE DR CITY: HYANNIS STATE: MA ZIP: 02601 FORMER COMPANY: FORMER CONFORMED NAME: EXCEL INC DATE OF NAME CHANGE: 19970325 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 1998 [ ] 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 0-23263 EXCEL SWITCHING CORPORATION --------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2992806 ------------- ---------- (State or other jurisdiction of Employer (I.R.S. Identification incorporation or organization) Number) 255 Independence Drive ---------------------- HYANNIS, MASSACHUSETTS 02601 ---------------------------- (Address of principal executive offices) (Zip code) (508) 862-3000 -------------- (Registrant's telephone number, including area code) 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: [ ] As of May 5, 1998, there were 32,729,400 shares of the Registrant's Common Stock, $.01 par value, outstanding. 1 EXCEL SWITCHING CORPORATION FORM 10-Q TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION PAGE ITEM 1. Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets as of December 27, 1997 and March 28, 1998 3 Consolidated Condensed Statements of Income for the three months ended March 29, 1997 and March 28, 1998 4 Consolidated Condensed Statements of Cash Flows for the three months ended March 29, 1997 and March 28, 1998 5 Notes to Consolidated Condensed Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 17 ITEM 2. Changes in Securities and Use of Proceeds 17 ITEM 3. Defaults Upon Senior Securities 18 ITEM 4. Submission of Matters to a Vote of Security Holders 18 ITEM 5. Other Information 18 ITEM 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 EXHIBIT INDEX 20
2 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
DECEMBER 27, MARCH 28, 1997 1998 CURRENT ASSETS: Cash and cash equivalents $ 47,968 $ 48,226 Marketable securities 66,929 67,359 Accounts receivable, net of reserves of $1,350 12,843 14,048 Inventories 4,740 5,609 Prepaid taxes 122 - Deferred tax asset 5,626 6,044 Other current assets 1,298 1,877 -------- -------- Total current assets 139,526 143,163 PROPERTY AND EQUIPMENT, NET 10,168 12,296 -------- -------- $149,694 $155,459 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations $ 4,213 $ 1,078 Accounts payable 4,177 4,312 Accrued expenses 11,156 13,543 Accrued income taxes 3,606 3,654 -------- -------- Total current liabilities 23,152 22,587 -------- -------- DEFERRED INCOME TAXES 519 467 -------- -------- LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 108 64 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value authorized--10,000,000 shares; no shares outstanding - - Common stock, $.01 par value--authorized--100,000,000 shares issued and outstanding32,592,000 and 32,722,200 shares at December 27, 1997 and March 28, 1998, respectively 326 327 Additional paid-in capital 88,134 89,376 Deferred compensation (491) (676) Unrealized loss on investments (20) (2) Retained earnings 37,966 43,316 -------- -------- Total stockholders' equity 125,915 132,341 -------- -------- $149,694 $155,459 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 29, MARCH 28, 1997 1998 Revenues $18,518 $25,556 Cost of Revenues 5,860 7,580 ------- ------- Gross profit 12,658 17,976 ------- ------- Operating Expenses: Engineering, research and development 2,942 4,726 Selling and marketing 2,297 3,920 General and administrative 1,959 2,418 ------- ------- Total operating expenses 7,198 11,064 ------- ------- Income from operations 5,460 6,912 Other Income, net 44 1,648 ------- ------- Income before provision for income taxes 5,504 8,560 Provision for Income Taxes 2,201 3,210 ------- ------- Net Income $ 3,303 $ 5,350 ======= ======= Basic Earnings per Share $.12 $.16 ======= ======= Diluted Earnings per Share $.10 $.14 ======= ======= Basic Weighted Average Shares Outstanding 28,090 32,645 Diluted Weighted Average Shares Outstanding 33,202 38,936
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 29, MARCH 28, 1997 1998 Cash Flows from Operating Activities: Net income $3,303 $ 5,350 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 461 725 Unrealized gain on investments - 18 Deferred income taxes (513) (470) Compensation expense associated with the grant of stock options, net of forfeitures 17 40 Changes in assets and liabilities Accounts receivable (416) (1,205) Inventories 956 (869) Prepaid taxes - 122 Other current assets 18 (579) Accounts payable 740 135 Accrued expenses 974 2,386 Accrued income taxes (448) 1,013 ------ ------- Net cash provided by operating activities 5,092 6,666 ------ ------- Cash Flows from Investing Activities: Purchases of property and equipment (585) (2,853) Purchases of marketable securities, net - (430) ------ ------- Net cash used in investing activities (585) (3,283) ------ ------- Cash Flows from Financing Activities: Payments on long-term obligations (122) (3,179) Proceeds from the exercise of stock options - 54 ------ ------- Net cash used in financing activities (122) (3,125) ------ ------- Net Increase in Cash and Cash Equivalents 4,385 258 Cash and Cash Equivalents, beginning of period 4,069 47,968 ------ ------- Cash and Cash Equivalents, end of period $8,454 $48,226 ====== ======= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for Interest $ 87 $ 22 ====== ======= Taxes $6,738 $ 2,545 ====== =======
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1 - Interim Consolidated Condensed Financial Statements The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes of Excel Switching Corporation (the "Company") for the year ended December 27, 1997 as reported in the Company's Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The consolidated condensed balance sheet presented as of December 27, 1997 has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The results of operations for the three months ended March 28, 1998 may not be indicative of the results that may be expected for the year ended December 26, 1998, or for any other period. Note 2 - Earnings Per Share In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings Per Share. This statement established standards for computing and presenting earnings per share and applies to entities with publicly traded common stock or potential common stock. This statement is effective for fiscal years ending after December 15, 1997. In February 1998, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 98. This bulletin revises the SEC's guidance for calculating earnings per share with respect to equity security issuances before an initial public offering (IPO) and is effective for fiscal years ending after December 15, 1997. The prior period's earnings per share have been retroactively restated to reflect the adoption of SFAS No. 128 and SAB No. 98. 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 average shares reflect the dilutive effect, if any, of common stock options based on the treasury stock method. The calculations of basic and diluted weighted average shares outstanding are as follows (in thousands): 6
THREE MONTHS ENDED -------------------------------- MARCH 29, 1997 MARCH 28, 1998 -------------- -------------- Basic weighted average common shares outstanding 28,090 32,645 Weighted average common equivalent shares 5,112 6,291 ------ ------ Diluted weighted average shares outstanding 33,202 38,936 ====== ======
Note 3 Comprehensive Income Comprehensive income for the three month period ended March 28, 1998 is approximately $5,361,000. The difference between comprehensive income and net income relates to unrealized gains on marketable securities. There were no differences between comprehensive income and net income for the three month period ended March 29, 1997. Note 4 - Significant Customers Sales to significant customers as a percentage of the Company's total revenues were as follows:
THREE MONTHS ENDED -------------------------------- MARCH 29, 1997 MARCH 28, 1998 -------------- -------------- Significant Customer A * 22.2% Significant Customer B 36.4% 10.2% Significant Customer C * 10.2%
* Sales derived from these customers were less than 10% of the Company's total revenues for the period. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussions contain statements which may be "forward- looking" statements and are subject to risks and uncertainties that could cause actual results to differ significantly from expectations. In particular, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are not historical facts, including, but not limited to, statements regarding the anticipated adequacy of cash resources to meet the Company's working capital requirements and statements regarding the anticipated proportion of revenues to be derived from a limited number of customers, may constitute forward-looking statements. Factors that might cause such a difference include those relating to: fluctuations in quarterly results of operations; dependence on and concentration of relationships with application developers, original equipment manufacturers (OEMs) and systems integrators; length of sales cycle; concentration of customers; dependence on single and sole source suppliers; dependence on third- party manufacturers; and management of growth and hiring of additional personnel. Other factors may include, but are not limited to, those relating to the evolving market for telecommunication services; concentrated product family; risk of new product introductions; rapid technological change; dependence on key personnel; highly competitive market; and compliance with regulations and evolving industry standards; dependence on proprietary rights; risks associated with international sales; and other risks identified in the Company's Securities and Exchange Commission filings including those risks identified in the section entitled "Risk Factors" of the Company's Annual Report for the fiscal year ended December 27, 1997 on Form 10-K. OVERVIEW Excel Switching Corporation (the "Company"), is a leading provider of open switching platforms for telecommunications networks worldwide. The Company 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's products offer network providers the flexibility to address multiple market applications and the scalability to deploy a variety of system capacities. The Company's programmable switching platforms enable network providers to deliver improved networking functionality at a lower cost than purchasing, upgrading or reprogramming traditional, closed, central office switches. The Company sells to a variety of customers in the worldwide telecommunications market, including application developers, original equipment manufacturers ("OEMs") and systems integrators. Excel offers a family of programmable switching platforms that are designed with distributed architecture and open software to maximize performance and provide multiple levels of programmability and redundancy. Excel's open switching platforms integrate with a wide variety of host computer systems, operating systems and application development environments. The Company's product family scales from approximately 100 to 30,720 ports. Using Excel's patented Programmable Protocol Language ("PPL"), application developers can customize the 8 switching software to their unique requirements, allowing them to introduce new services and applications rapidly. As customer requirements evolve, the Excel platform can be upgraded without requiring extensive and complex programming changes to the underlying software. The Company sells to a variety of customers in the worldwide telecommunications market, including application developers, OEMs and system integrators. Excel's customers integrate the Company's open, programmable switching platforms with their product offerings to address a variety of market applications for network providers, ranging from enhanced services such as voice messaging, one number services and prepaid debit cards, to wireless and wireline infrastructure services such as tandem switching, mobile switching centers and intelligent base station controllers. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenues represented by certain items reflected in the Company's Consolidated Condensed Statements of Income:
THREE MONTHS ENDED --------------------------- MARCH 29, MARCH 28, 1997 1998 -------- -------- Revenues........................ 100.0% 100.0% Cost of revenues................ 31.6 29.7 ----- ----- Gross profit................. 68.4 70.3 ----- ----- Operating expenses: Engineering, research and development................ 15.9 18.5 Selling and marketing........ 12.4 15.3 General and administrative... 10.6 9.5 ----- ----- Total operating expenses... 38.9 43.3 ----- ----- Income from operations....... 29.5 27.0 Other income, net............... .2 6.5 Income before provision for income taxes............... 29.7 33.5 Provision for income taxes...... 11.9 12.6 ----- ----- Net income...................... 17.8% 20.9% ===== =====
THREE MONTHS ENDED MARCH 29, 1997 AND MARCH 28, 1998 Revenues. The Company's revenues consist of sales, primarily in the United States, of its open, programmable switching platforms and related components. Revenues increased 38% from $18.5 million in the three months ended March 29, 1997 to $25.6 million for the 9 comparable period in 1998. This increase resulted from the introduction of new or expanded offerings by existing customers incorporating the Company's products, the expansion of customers' existing markets and the introduction of applications by new and existing customers. In addition, revenues increased due to increased market penetration resulting from the efforts of the Company's expanded selling and marketing organizations. Revenues from the Company's five largest customers represented approximately 57.2% and 55.6% of the Company's revenues for the first quarters of 1997 and 1998, respectively. During the 1998 period the following customers represented greater than 10% of the Company's revenue: Qualcomm Incorporated represented approximately 22.2%; Comverse Network Systems (Comverse) (formerly Boston Technology, Inc.) represented approximately 10.2%; and Brite Voice Systems, Inc. represented approximately 10.2%. During the 1997 period Comverse was the only significant customer and represented approximately 36.4% of the Company's revenue. Although the Company's largest customers have varied from period to period, the Company believes that revenues derived from current and potential large customers will continue to represent a significant portion of revenues, and that its results of operations in any given period will continue to depend to a significant extent upon sales to a limited number of customers. There can be no assurance that the Company's principal customers will continue to purchase products at current levels, if at all. Gross Profit. Cost of revenues consists primarily of the cost of purchased components and subassemblies, contract manufacturing costs, labor and overhead relating to material procurement, final assembly, testing and quality control, and warranty and post sale support costs. Cost of revenues increased 29.4% from $5.9 million in the three months ended March 29, 1997 to $7.6 million for the comparable period in 1998. Gross margin increased from 68.4% in the first quarter of 1997 to 70.3% in the comparable period of 1998. The increase in gross margins is primarily attributable to lower component prices and changes in product mix. Engineering, Research and Development. Engineering, research and development costs consist primarily of compensation and related costs of engineering and development personnel, materials and supplies consumed in prototype development and related facility and equipment costs. Engineering, research and development costs increased 60.6% from $2.9 million in the first quarter of 1997 to $4.7 million for the comparable period in 1998. As a percentage of revenues, these costs were 15.9% and 18.5%, respectively, in such periods. The increase in engineering, research and development costs in absolute dollars was primarily attributable to an increase in engineering and research personnel. Selling and Marketing. Selling and marketing costs consist primarily of compensation and related costs for sales, marketing and customer support personnel, travel and advertising, trade show and other promotional activities. Selling and marketing costs increased 70.7% from $2.3 million in the first quarter of 1997 to $3.9 million for the comparable period of 1998. As a percentage of revenues, these costs were 12.4% and 15.3%, respectively, in such periods. The increase in selling and marketing costs in absolute dollars was primarily attributable to an increase in sales, marketing and customer support personnel as well as trade show and promotional activities during 1998. 10 General and Administrative. General and administrative costs include compensation and related costs of management, finance and administrative personnel, professional services, costs to implement and maintain manufacturing and management information systems and other general corporate expenses. General and administrative costs increased 23.4% from $2.0 million in the first quarter of 1997 to $2.4 million for the comparable period in 1998. As a percentage of revenues, these costs were 10.6% and 9.5%, respectively, in such periods. The increase in general and administrative costs in absolute dollars was primarily attributable to increases in administrative, finance and information technology personnel. Other Income. Other income is primarily composed of interest income. Other income increased from $44,000 in the first quarter of 1997 to $1.6 million for the comparable period in 1998. This increase was primarily attributable to the interest income derived from the net proceeds of approximately $87.1 million received from the Company's initial public offering in November 1997. Provision For Income Taxes. The Company's effective rate for Federal and state income taxes was approximately 40.0% and 37.5% for the first quarters of 1997 and 1998. The decrease is effective tax rates is primarily attributable to a decrease in the effective state income tax rate and the utilization of certain tax credits. LIQUIDITY AND CAPITAL RESOURCES At March 28, 1998, the Company's principal sources of liquidity consisted of cash, cash equivalents and marketable securities of approximately $115.6 million, working capital of approximately $120.6 million and $15.0 million of funds available under a bank line of credit. At December 27, 1997, the Company had $114.9 million invested in cash, cash equivalents and marketable securities. In January 1998, the Company repaid all outstanding bank obligations totaling approximately $3.1 million under the Mortgage and Security Agreement, promissory note payable and the Real Estate Promissory Note. In January 1998, the Company executed a Purchase and Sale Agreement to purchase approximately 108,000 square feet of land for approximately $324,000 and also completed an agreement providing Excel with an option to purchase up to an additional 274,000 square feet of land at a total cost of approximately $821,000. This option does not expire until January 2000 subject to an annual, non-refundable payment of $71,000. The total cost of the land acquisition will be funded by existing cash resources. The Company believes that available cash and investments and cash funds generated from operations will be sufficient to meet the Company's anticipated cash requirements for working capital and capital expenditures for at least the next twelve months. 11 FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Statements contained in this Quarterly Report on Form 10-Q that are not historical fact may constitute forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results of operations and financial condition may in the future vary significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks, uncertainties and other information discussed within this Quarterly Report on Form 10-Q and other risks identified in the Company's Securities and Exchange Commission filings, including those risks identified in the Company's Annual Report for the fiscal year ended December 27, 1997 on Form 10-K. The following discussion of the Company's risk factors should be read in conjunction with the consolidated financial statements and related notes thereto set forth elsewhere in this report and in the Company's Annual Report for the fiscal year ended December 27, 1997 on Form 10-K. The following factors, among others, could cause actual results to differ materially from those set forth in forward-looking statements contained or incorporated by reference in this report and presented by management from time to time. Such factors, among others, may have a material adverse effect upon the Company's business, results of operations and financial condition: Fluctuations in Results of Operations. The Company's results of operations have varied significantly in the past and may vary significantly in the future, on a quarterly and annual basis, as a result of a variety of factors, many of which are outside the Company's control. These factors include, without limitation: (i) the timing and size of orders which are received and can be shipped in any particular period; (ii) the commercial success of the Company's products; (iii) delays in the introduction of products or product enhancements by the Company and the Company's ability to introduce new products and technologies on a timely basis; (iv) the financial stability of the Company's major customers; (v) the timing of new product introductions or announcements by the Company or its competitors; (vi) the availability of adequate supplies of key components and assemblies and the adequacy of third- party manufacturing capabilities; (vii) the seasonality of the placement of customer orders; (viii) the timing and nature of selling and marketing expenses such as tradeshows and advertising campaigns; (ix) the timing of development expenditures and personnel changes; (x) the publications of opinions about the Company and its products, or its competitors or their products, by industry analysts; (xi) customer order deferrals in anticipation of product enhancements or new product offerings by the Company or its competitors; and (xii) customer cancellation of orders and the gain or loss of significant customers, including those due to industry combinations. Moreover, any downturn in general economic conditions could precipitate significant reductions in corporate spending for telecommunications infrastructure, which could result in delays or cancellations of orders for the Company's products. The Company's expense levels have been relatively fixed and are based, in significant part, on expectations of future revenues. Consequently, if revenue levels are below expectations, expense levels could be disproportionately high as a percentage of revenues, and the Company's business, financial condition and results of operations would be materially adversely affected. The Company has 12 historically operated with little backlog because its products are generally shipped within 60 days of acceptance of an order. As a result, revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and on sales by the Company's customers to end users. The Company also believes that the purchase of its own products generally involves a significant commitment of a customer's capital resources. Therefore, any downturn in any customer's business could have a material adverse effect on the Company's revenues, business, financial condition and quarterly results of operations. In addition, the Company historically has recognized a large portion of its revenues from sales booked and shipped in the last month of a quarter such that the magnitude of quarterly fluctuations may not become evident until late in, or at the end of, a particular quarter. Because a number of the Company's individual orders are for significant amounts, the failure to ship a significant order in a particular quarter could materially adversely affect revenues and results of operations for such quarter. To the extent that significant sales occur earlier than expected, results of operations for subsequent quarters may be materially adversely affected. Due to these and other factors, the Company's quarterly revenues, expenses and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. There can be no assurance that the Company will be able to increase its revenues in future periods or be able to sustain its level of revenues or its rate of growth on a quarterly or annual basis. Due to all the foregoing factors, it is possible that in some future quarter, the Company's results of operations will be below the expectations of public market analysts and investors. In such event, the market price of the Company's Common Stock would likely be materially adversely affected. Dependence on Relationships with Application Developers, OEMs and Systems Integrators. The Company sells substantially all of its products to, and maintains strategic relationships with, application developers, original equipment manufacturers ("OEMs") and systems integrators which incorporate the Company's products into their service and product offerings. As a result, sales of the Company's products are dependent upon the continued market acceptance of the service and product offerings of the Company's customers. Although the Company maintains contractual relationships with a substantial number of its customers, such contracts do not provide for minimum purchase requirements, nor do they contain provisions requiring the exclusive purchase of the Company's products. The development of an application or service for the telecommunications market can involve a substantial amount of time and expense. The delay or failure of a customer's application development program incorporating the Company's products could delay or prevent expected sales of the Company's products. The inability or cessation of customers to integrate the Company's products into their service and product offerings, product development delays by application developers and other customers, lack of market acceptance of the service and product offerings of the Company's customers or a customer's decision to market products manufactured by a competitor of the Company, or the manufacture of such products themselves, would have a material adverse effect on the Company's business, financial condition and results of operations. 13 Additionally, selling through indirect channels may limit the Company's information concerning the volume of products sold by the Company's customers to end users and the Company's contact with its end users. As a result, the Company's ability to forecast revenues accurately (notwithstanding the forecasts of its customers), elevate end-user satisfaction and recognize emerging end-user requirements may be hindered. Length of Sales Cycle. The time between the date of initial contact with a potential customer and large-scale commercialization of a new customer application or system based on the Company's products is often lengthy, typically ranging from 12 to 24 months or more, and is subject to delays over which the Company has little or no control, including customers' budgetary constraints, acceptance reviews, and the possibility of cancellation of projects by customers. Although the Company attempts to develop its products with the goal of shortening the time to market of its customers' products, the timing of the commercialization of a new customer application or service based on the Company's products is primarily dependent on the success and timing of a customer's own internal development program. Delays can also be caused by late deliveries by other vendors, changes in implementation priorities and slower than anticipated growth in demand for services that the Company's products support. A delay in, or cancellation of, the sale of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations and cause the Company's results of operation to vary significantly from quarter to quarter. Concentration of Customers. During the three months ended March 28, 1998 the following customers represented greater than 10% of the Company's revenue: Qualcomm Incorporated represented approximately 22.2%; Comverse Network Systems (Comverse) (formerly Boston Technology, Inc.) represented approximately 10.2%; and Brite Voice Systems, Inc. represented approximately 10.2%. In this same period, the Company's five largest customers accounted for approximately 55.6% of the Company's revenues. 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 a long-term supply agreement requiring any of them 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, or that the Company will be able to replace such purchases with sales to other customers. 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. Dependence on Single and Sole Source Suppliers. The Company purchases many critical components from single or sole source vendors. The inability to develop alternative sources for these components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments which could materially adversely affect the Company's business, financial condition and results of operations. In the event of a reduction or interruption of supply, a significant amount of time, in some cases as much as three to four months, could be required before the Company would begin receiving adequate supplies from such alternative suppliers. Further, in such event, the Company's business, financial condition 14 and results of operations would be materially adversely affected. In addition, the manufacture of certain of these single or sole source components is extremely complex, and the Company's reliance on the suppliers of these components exposes the Company to potential production difficulties and quality variations, which could negatively impact cost and timely delivery of the Company's products. Certain components are available from only one supplier, for which there is no substitute at this time. If supply of these components should cease, the Company would be required to redesign its products. No assurance can be given that supply problems will not occur or, if such problems do occur, that satisfactory solutions would be available. The Company does not have long-term contracts with its suppliers and there can be no assurance that these suppliers will continue to be able to produce these components or to meet the Company's requirements. Any significant interruption in the supply, or degradation in the quality, of any such component could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company generally requires its customers to submit quarterly forecasts of their needs, the Company's customers frequently require rapid delivery after placement of a purchase order. Because the Company does not maintain significant component inventories, a delay in shipment by a supplier could lead to lost sales. Lead times for materials and components may vary significantly and depend on factors such as specific supplier performance, contract terms and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components. While the Company has not experienced shortages and allocations of these components to date, any shortages in the future, including those occasioned by increased sales, could result in delays in fulfillment of customer orders. Such delays, shortages and allocations could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Third-Party Manufacturers. The Company relies on a limited number of independent manufacturers, some of which are small, privately held companies, to provide certain components and assemblies made to the Company's specifications. These manufacturers substantially complete production of the Company's products, which are then shipped to the Company for final assembly and quality control. In the event that any of the Company's subcontractors were to experience financial, operational, production or quality assurance difficulties or a catastrophic event that resulted in a reduction or interruption in supply to the Company, the Company's business, financial condition and results of operations would be materially adversely affected until the Company was able to establish sufficient manufacturing capabilities from alternative sources. There can be no assurance that alternative manufacturing sources will be able to meet the Company's future requirements or that existing or alternative sources will continue to be available to the Company at favorable prices. Management Growth and Hiring of Additional Personnel. The Company has experienced growth in revenues and expansion of its operations which have placed significant demands on the Company's management, engineering and administration staff and facilities. The Company has recently hired additional engineering, sales and other personnel. The Company is also implementing additional financial and management procedures which the Company believes will address increasing demands on resources. However, the Company 15 believes that further improvements in management and operational controls are needed, and will continue to be needed, to manage any future growth. Continued growth will also require the Company to hire more engineering, selling and marketing and administrative personnel, expand customer support capabilities, expand management information systems and improve its inventory management practices. The Company has at times experienced, and continues to experience, difficulty in recruiting qualified personnel. Recruiting qualified personnel is an intensely competitive and time-consuming process. There can be no assurance that the Company will be able to attract and retain the necessary personnel to accomplish its growth strategies or that it will not experience constraints that will adversely affect its ability to satisfy customer demand in a timely fashion or to support satisfactorily its customers and operations. If the Company's management is unable to manage growth effectively, the Company's business, financial condition and results of operations could be materially adversely affected. While the Company believes its current and planned facilities are adequate to meet its needs through the next 12 months, future growth may require the Company to obtain additional or alternative facilities. Due to the limited supply of suitable additional or alternative office and manufacturing space in the Cape Cod, Massachusetts area, there can be no assurance that such space can be leased or acquired without substantial required renovations. Relocation of any segment of the Company's operations may disrupt business and have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the local permitting and variance procedures for the renovation of buildings or new construction in the Cape Cod area is more onerous than found in metropolitan areas. Accordingly, there can be no assurance that the Company will not be required in the future to devote significant resources to the permitting and renovation of additional facilities or in relocating some or all of the Company's facilities. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Recent Sales of Unregistered Securities The following information is furnished with regard to all securities issued by the Registrant during the period ended March 28, 1998 that were not registered under the Securities Act of 1993, as amended (the "Securities Act"). During the three months ended March 28, 1998 options granted to employees of the Company under the Registrant's Stock Option Program were exercised for common stock, $.01 par value per share, as follows:
Number of Exercise Aggregate Purchase Date Shares Price Price - --------------------- ------------- ------------ ----------------------- December 29, 1997 600 $ 0.33 $ 200.01 February 4, 1998 25,200 $ 0.33 $ 8,400.41 February 4, 1998 5,000 $0.002 $ 8.25 February 5, 1998 18,200 $ 0.33 $ 6,066.97 February 9, 1998 300 $ 0.33 $ 100.01 February 10, 1998 2,500 $ 0.33 $ 833.38 February 13, 1998 2,000 $ 0.33 $ 666.70 February 17, 1998 400 $ 0.33 $ 133.34 February 23, 1998 4,000 $ 0.33 $ 1,333.40 February 25, 1998 1,000 $ 0.33 $ 333.35 February 26, 1998 2,000 $ 0.33 $ 666.70 March 3, 1998 66,000 $ 0.33 $22,001.10 March 3, 1998 3,000 $ 4.50 $13,500.00 ------- ---------- 130,200 $54,243.62 ======= ==========
All such issuances were made in reliance upon Rule 701 promulgated under the Securities Act 17 (d) Use of Proceeds The Company has invested the net proceeds from the initial public offering in November 1997 in investment grade, interest-bearing securities. To date, the Company has utilized the net proceeds from the initial public offering as follows: Net offering proceeds $87,106,000 Purchases of property and equipment (2,853,000) Payments on long term obligations (3,179,000) ----------- Remaining offering proceeds, March 28, 1998 $81,074,000 =========== None of the net proceeds from the IPO were used to pay, directly or indirectly, directors, officers, persons owning ten percent or more of the Company's equity securities, or affiliates of the Company. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Excel Switching Corporation (Registrant) Dated: May 11, 1998 /s/ Robert P. Madonna --------------------- Robert P. Madonna President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Dated: May 11, 1998 /s/ Stephen S. Galliker ----------------------- Stephen S. Galliker Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 19 EXHIBIT INDEX ------------- Exhibit No. Description ----------- ----------- 27 Financial Data Schedule (EDGAR) EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 28, 1998 CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-26-1998 DEC-28-1997 MAR-28-1998 48,226 67,359 14,048 1,350 5,609 143,163 12,296 0 155,459 22,587 0 0 0 327 132,014 155,459 25,556 25,556 7,580 7,580 11,064 0 (1,648) 8,560 3,210 5,350 0 0 0 5,350 .16 .14
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