-----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, FjPCBLMU/vsMNJFzY95r2W6vDN6aJx/Cp5p3JA6ex5+j9n7LeBBU2Iho5hAeLBpB FX2gSG7hMlt/CDgq+esjLg== 0001047469-99-032430.txt : 19990817 0001047469-99-032430.hdr.sgml : 19990817 ACCESSION NUMBER: 0001047469-99-032430 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23263 FILM NUMBER: 99692440 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 June 30, 1999 [ ] 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 (I.R.S. Employer incorporation or organization) Identification 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 August 11, 1999, there were 36,797,516 shares of the Registrant's Common Stock, $.01 par value, outstanding. 1 EXCEL SWITCHING CORPORATION FORM 10-Q TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets 3 Consolidated Condensed Statements of Income 4 Consolidated Condensed Statements of Cash Flows 6 Notes to Consolidated Condensed Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 31 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 32 ITEM 2. Changes in Securities and Use of Proceeds 32 ITEM 3. Defaults Upon Senior Securities 33 ITEM 4. Submission of Matters to a Vote of Security Holders 33 ITEM 5. Other Information 34 ITEM 6. Exhibits and Reports on Form 8-K 34 SIGNATURES 37 EXHIBIT INDEX 38
2 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except share and per share data)
DECEMBER 31, JUNE 30, 1998 1999 ------------ ------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 64,877 $ 32,940 Marketable securities 55,579 81,716 Accounts receivable, net of reserves of $2,228 and $2,728 31,425 47,749 Inventories 6,800 12,822 Deferred tax asset 8,534 7,608 Other current assets 2,325 5,004 ------- ------- Total current assets 169,540 187,839 PROPERTY AND EQUIPMENT, NET 19,753 24,747 DEFERRED TAX ASSET 7,642 7,781 INTANGIBLE ASSETS, NET 9,702 8,992 OTHER ASSETS 766 1,223 ------- ------- $ 207,403 $ 230,582 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations $ 3,408 $ 4,213 Accounts payable 4,922 8,187 Accrued expenses 20,135 17,361 Accrued income taxes 6,052 5,160 Deferred revenue 1,047 2,174 Recourse obligation -- 5,771 ------- ------- Total current liabilities 35,564 42,866 ------- ------- LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 4,858 3 ,958 ------- ------- REDEEMABLE CONVERTIBLE PREFERRED STOCK, AT REDEMPTION VALUE- Issued and outstanding--10,696,402 and no shares at December 31, 1998 and June 30, 1999, respectively 20,315 -- ------- ------- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value-none issued -- -- Common stock, $.01 par value- Issued and outstanding--34,218,309 and 36,642,704 shares at December 31, 1998 and June 30, 1999, respectively 342 366 Additional paid-in capital 102,165 130,097 Deferred compensation (747) (654) Accumulated other comprehensive income 143 (18) Retained earnings 44,763 53,967 ------- ------- Total stockholders' equity 146,666 183,758 ------- ------- $ 207,403 $ 230,582 ------- ------- ------- -------
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 JUNE 27, JUNE 30, 1998 1999 ------- ------- REVENUES $30,807 $43,218 COST OF REVENUES 9,881 13,689 ------- ------- Gross profit 20,926 29,529 ------- ------- OPERATING EXPENSES: Engineering, research and development 5,904 9,590 Selling and marketing 4,923 6,398 General and administrative 2,949 4,791 Merger related costs -- 2,075 ------- ------- Total operating expenses 13,776 22,854 ------- ------- Income from operations 7,150 6,675 OTHER INCOME, NET 1,482 1,306 ------- ------- Income before provision for income taxes 8,632 7,981 PROVISION FOR INCOME TAXES 3,246 3,661 ------- ------- NET INCOME $ 5,386 $ 4,320 ------- ------- ------- ------- PREFERRED STOCK DIVIDENDS $ 379 $ 182 ------- ------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 5,007 $ 4,138 ------- ------- ------- ------- BASIC EARNINGS PER SHARE $ .15 $ .12 ------- ------- ------- ------- DILUTED EARNINGS PER SHARE $ .13 $ .10 ------- ------- ------- ------- BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 33,178 35,620 DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 40,139 41,202
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 4 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited)
SIX MONTHS ENDED JUNE 27, JUNE 30, 1998 1999 -------- -------- REVENUES $57,912 $80,558 COST OF REVENUES 19,003 25,906 ------- ------- Gross profit 38,909 54,652 ------- ------- OPERATING EXPENSES: Engineering, research and development 11,444 18,112 Selling and marketing 9,964 12,094 General and administrative 5,857 8,299 Merger related costs -- 2,075 ------- ------- Total operating expenses 27,265 40,580 ------- ------- Income from operations 11,644 14,072 OTHER INCOME, NET 3,199 2,514 ------- ------- Income before provision for income taxes 14,843 16,586 PROVISION FOR INCOME TAXES 5,587 6,796 ------- ------- NET INCOME $ 9,256 $ 9,790 ------- ------- ------- ------- PREFERRED STOCK DIVIDENDS $ 758 $ 586 ------- ------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 8,498 $ 9,204 ------- ------- ------- ------- BASIC EARNINGS PER SHARE $ .26 $ .26 ------- ------- ------- ------- DILUTED EARNINGS PER SHARE $ .23 $ .24 ------- ------- ------- ------- BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 33,005 35,454 DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 40,151 41,158
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 5 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
SIX MONTHS ENDED JUNE 27, JUNE 30, 1998 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,256 $ 9,790 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 1,335 2,875 Unrealized gain (loss) on investments 27 (161) Deferred income taxes (2,404) 787 Compensation expense associated with the grant of stock options, net of forfeitures 89 144 Changes in assets and liabilities- Accounts receivable (4,235) (16,324) Inventories (1,329) (6,022) Prepaid taxes 122 -- Other current assets (770) (2,679) Accounts payable 1,320 3,265 Accrued expenses 5,113 (2,549) Accrued income taxes 2,961 5,004 Deferred revenue -- 1,127 Recourse obligation -- 5,546 -------- -------- Net cash provided by operating activities 11,485 803 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (7,045) (7,159) Purchases of marketable securities, net 22,468 (26,137) Increase in other assets -- (457) -------- -------- Net cash provided by (used in) investing activities 15,423 (33,753) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term obligations (3,342) (95) Issuance of stock under employee stock purchase plan -- 214 Proceeds from the exercise of stock options 218 894 -------- -------- Net cash provided by (used in) financing activities (3,124) 1,013 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 23,784 (31,937) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 55,499 64,877 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 79,283 $ 32,940 -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for- Interest $ 45 $ 225 -------- -------- -------- -------- Taxes $ 4,908 $ 737 -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 6 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1 - Interim Consolidated Condensed Financial Statements On May 10, 1999, the Company acquired all of the outstanding capital stock and options of RAScom, Inc. in exchange for 1,099,940 shares of Common Stock. The Company has accounted for the acquisition under the "pooling-of-interests" accounting method. Accordingly, the financial statements for the periods ending June 27, 1998 have been restated as if the two entities had operated as one entity since inception. During the second quarter of 1999, the Company recorded a one-time charge for acquisition related expenses of approximately $2.1 million. 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 31, 1998 as reported in the Company's Form 8-K/A filed with the Commission on July 23, 1999. 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 31, 1998 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 June 30, 1999 may not be indicative of the results that may be expected for the year ended December 31, 1999, or for any other period. Note 2 - 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 average shares reflect 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 basic and diluted weighted average shares outstanding are as follows (in thousands): 7
THREE MONTHS ENDED ---------------------------- JUNE 27, 1998 JUNE 30, 1999 ------------- ------------- Basic weighted average common shares outstanding 33,178 35,620 Weighted average common equivalent shares from stock options 6,139 5,117 Weighted average common equivalent shares from preferred stock 822 465 ------ ------ Diluted weighted average shares outstanding 40,139 41,202 ------ ------ ------ ------
SIX MONTHS ENDED ---------------------------- JUNE 27, 1998 JUNE 30, 1999 ------------- ------------- Basic weighted average common shares outstanding 33,005 35,454 Weighted average common equivalent shares from stock options 6,324 5,470 Weighted average common equivalent shares from preferred stock 822 234 ------ ------ Diluted weighted average shares outstanding 40,151 41,158 ------ ------ ------ ------
Note 3 - Comprehensive Income Comprehensive income for the three and six month periods ended June 30, 1999 does not significantly differ from reported net income. The differences between comprehensive income and net income relates to unrealized gains and losses on marketable securities, net of the related tax effect, and foreign currency translation adjustments. There was a net period decrease in accumulated comprehensive income for the three and six month periods ended June 30, 1999 of approximately $6,000 and $161,000, respectively. Note 4 - Significant Customers Sales to significant customers as a percentage of the Company's total revenues were as follows:
THREE MONTHS ENDED ------------- ------------- JUNE 27, 1998 JUNE 30, 1999 ------------- ------------- Significant Customer A * 13% Significant Customer B * 12% Significant Customer C 30% *
8
SIX MONTHS ENDED ------------- ------------- JUNE 27, 1998 JUNE 30, 1999 ------------- ------------- Significant Customer A * * Significant Customer B * * Significant Customer C 25% *
* Sales derived from this customer represented less than 10% of the Company's total revenue for the period. Note 5 - Vendor Lease 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 equipment sales financed. In addition, the Company has a 100% recourse obligation for contracts funded for customers with certain credit ratings, as determined by the leasing company. The Company defers revenue recognition on sales involving recourse obligation until such time as the obligation is eliminated. During the second quarter of 1999, approximately $1.2 million of equipment sales were financed through this program. The Company's total recourse obligation at June 30, 1999 is approximately $5.8 million. During the quarter, the leasing company sold an existing 100% recourse lease contract that originated in the first quarter of 1999 to another leasing company. As a result of this transaction, Company's recourse obligation was eliminated. Accordingly, the Company recognized approximately $2.7 million of net revenue. Note 6 - Recent Acquisition In July 1999, the Company completed the acquisition of certain technology and assets. This technology included host-computer based software applications for the Excel programmable switching platforms. Consideration included cash payments of approximately $4.0 million, the issuance of promissory notes totaling approximately $7.4 million and the assumption of certain liabilities. Such notes bear interest of 8% per annum and are payable at various dates through January 2001. The Company will account for this acquisition as a purchase transaction and, accordingly, will allocate the purchase price to the fair value of assets acquired and liabilities assumed. Principal assets acquired include contract rights, property and equipment, existing technology and in-process research and development for which the Company will record a one-time charge in the third quarter. The Company is in the process of completing a valuation of the assets acquired in this transaction for purposes of purchase accounting with the assistance of an independent valuation consultant. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains statements that are "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 "Management's Discussion and Analysis of Supplemental Consolidated 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; anticipated requirements for the accrual for sales returns and allowances; anticipated payment terms relating to account receivables; the anticipated proportion of revenues to be derived from a limited number of customers; anticipated expenditures and completion dates with respect to research and development and the expansion of marketing and selling efforts; statements regarding the Company's recourse obligation under its lease program; unanticipated costs and difficulties associated with integrating the operations, products and personnel of acquired businesses, including RAScom; anticipated extension of the bank line of credit agreement; and statements regarding the Company's readiness for Y2K are forward looking statements. Factors that could cause or contribute to such differences include, among others, those relating to fluctuations in results of operations, dependence on and concentration of relationships with application developers, OEMs and systems integrators, risks relating to acquisitions and the integration of RAScom and other risks identified in the Company's SEC filings including those contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, the Company's quarterly report on Form 10-Q for the three months ended March 31, 1999, the Company's report on Form 8-K, dated May 10, 1999 and filed with the Commission on May 25, 1999 and as amended by the Company's Report on Form 8-K/A, dated May 10, 1999 and filed with the Commission on July 23, 1999. 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. 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 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. 10 The Company sells to a variety of customers in the worldwide telecommunications market. 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, end-office, mobile switching centers, intelligent base station controllers and wireless local loop. Excel's products and technology are contained within the framework of Open Network Expansion Architecture ("ONE Architecture-TM-"). ONE Architecture is Excel's concept that its switching systems provide an open, scalable and cost-effective solution for the telecommunication needs of network providers. ONE Architecture encompasses a family of switching products and related embedded software technologies. RECENT ACQUISITIONS On May 10, 1999, the Company completed an acquisition of RAScom, Inc., a provider of open remote access server technology. Management anticipates that the acquisition of RAScom will expand Excel's addressable market by adding data capabilities to the EXS product line. Under terms of the agreement, Excel acquired all outstanding capital stock and options of RAScom in exchange for the right to receive up to 1,099,940 shares of Excel common stock. The transaction has been accounted for under the pooling-of-interests method. Accordingly, the Company's financial statements for the period ended June 30, 1999 reflect the combined results of both entities. In addition, financial results for previous periods have been restated to reflect the combined operations for both entities since inception. During the second quarter of 1999, the Company recorded a one-time charge for acquisition related expenses of approximately $2.1 million. In July 1999, the Company completed the acquisition of certain technology and assets. This technology included host-computer based software applications for the Excel programmable switching platforms. Consideration included cash payments of approximately $4.0 million, the issuance of promissory notes totaling approximately $7.4 million and the assumption of certain liabilities. Such notes bear interest of 8% per annum and are payable at various dates through January 2001. The Company will account for this acquisition as a purchase transaction and, accordingly, will allocate the purchase price to the fair value of assets acquired and liabilities assumed. Principal assets acquired include contract rights, property and equipment, existing technology and in-process research and development for which the Company will record a one-time charge in the third quarter. The Company is in the process of completing a valuation of the assets acquired in this transaction for purposes of purchase accounting with the assistance of an independent valuation consultant. 11 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 SIX MONTHS ENDED ------------------ ---------------- JUNE 27, JUNE 30, JUNE 27, JUNE 30, 1998 1999 1998 1999 -------- -------- -------- -------- Revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 32.1 31.7 32.8 32.2 ----- ----- ----- ----- Gross profit 67.9 68.3 67.2 67.8 ----- ----- ----- ----- Operating expenses: Engineering, research and development 19.1 22.2 19.8 22.4 Selling and marketing 16.0 14.8 17.2 15.0 General and administrative 9.6 11.1 10.1 10.3 Merger related costs -- 4.8 -- 2.6 ----- ----- ----- ----- Total operating expenses 44.7 52.9 47.1 50.3 ----- ----- ----- ----- Income from operations 23.2 15.4 20.1 17.5 Other income, net 4.8 3.0 5.5 3.1 ----- ----- ----- ----- Income before provision for income taxes 28.0 18.5 25.6 20.6 Provision for income taxes 10.5 8.5 9.6 8.4 ----- ----- ----- ----- Net income 17.5% 10.0% 16.0% 12.2% ----- ----- ----- ----- ----- ----- ----- -----
THREE MONTHS ENDED JUNE 28, 1998 AND JUNE 30, 1999 REVENUES. The Company's revenues consist of sales of its open, programmable switching platforms and related components. Revenues increased 40% from $30.8 million in the three months ended June 27, 1998 to $43.2 million for the comparable period in 1999. The Company believes that the increase resulted from a number of factors. The Company's efforts to enhance the scalability, performance, capacity and functionality of its products has contributed to an increased interest in Excel's programmable switching platforms as a means of addressing the evolving needs of the telecommunications industry. This includes enhancements in the areas of switch management, PPL and SS7 as well as in infrastructure solution offerings. Over the past several years, the Company's customer base has also broadened, resulting in increased sales from a larger number of sources. The introduction of new or enhanced offerings by this growing customer base as well as the expansion of their markets resulted in an increased demand for Excel's products. Excel also increased its efforts to assist customers with designing, planning and testing of new customer applications. The Company expanded or established relationships with a growing number of network service providers, resulting in an increased amount of direct sales to end-users. Revenues also benefited by the expansion of the selling and marketing organizations, including the establishment of two international sales offices in 1998 and one in late 1997. Revenues from the Company's five largest customers represented approximately 49% and 32% of the Company's revenues for the second quarters of 1998 and 1999, respectively. In 12 the second quarter of 1999 Comverse Network Systems represented 13% and Cignal Global Communications, Inc. represented 12%, including amounts financed through third party lessors on behalf of Cignal. During the comparable 1998 period, Qualcomm Incorporated represented approximately 30% of the Company's total revenue. Although the Company's largest customers have varied from period to period and the customer base continues to broaden, the Company believes that revenues derived from current and potential large customers will continue to represent a significant proportion 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. The volume of future purchases, if any, by the Company's principal customers cannot be estimated based upon historical purchasing trends. Revenues from the Company's largest customers may significantly fluctuate period to period on both an absolute dollar basis and as a percentage of sales. 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 39% from $9.9 million in the three months ended June 27, 1998 to $13.7 million for the comparable period in 1999. Gross margin increased from 67.9% in the second quarter of 1998 to 68.3% in the comparable period of 1999. The increase in cost of revenues and gross margin is primarily attributable to the increase in sales volume. ENGINEERING, RESEARCH AND DEVELOPMENT. Engineering, research and development costs consist primarily of compensation and benefit 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 62% from $5.9 million in the second quarter of 1998 to $9.6 million for the comparable period in 1999. As a percentage of revenues, these costs were 19.1% and 22.2%, 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 and, to a lesser extent, by increases in the consumption of supplies and materials used in development activities. SELLING AND MARKETING. Selling and marketing costs consist primarily of compensation and benefit related costs for sales, marketing and customer support personnel; travel, advertising, trade show and other promotional activities; and related facility and office costs. Selling and marketing costs increased 30% from $4.9 million in the second quarter of 1998 to $6.4 million for the comparable period of 1999. As a percentage of revenues, these costs were 16.0% and 14.8%, respectively, in such periods. The increase in selling and marketing costs in absolute dollars was primarily attributable to promotional activities and costs related to the international offices established in 1998 and 1997. GENERAL AND ADMINISTRATIVE. General and administrative costs include compensation and benefit related costs of management, finance, information technology and administrative personnel; legal, accounting and other professional services; costs to maintain manufacturing and management information systems; goodwill amortization; and other general corporate expenses. General and administrative costs increased 62% from $2.9 million in the second quarter of 1998 to $4.8 million for the comparable period in 1999. As a percentage of revenues, these costs were 9.6% and 11.1%, respectively, in such periods. The increase in general and administrative costs in absolute dollars was primarily attributable to an increase of approximately $1.0 million in expenses related to the Company's patent infringement lawsuit against Cisco Systems, Inc. (See 13 Part II, Item 1, Legal Proceedings). In addition, the increase resulted from expenses related to bad debt expense and amortization of goodwill, as well as professional fees associated with recruiting and acquisition activities. MERGER RELATED COSTS. During the second quarter of 1999, the Company incurred one-time charges for merger related costs of approximately $2.1 million in connection with the acquisition of RAScom, Inc. Merger related costs primarily relate to professional services expenses incurred in connection with the acquisition including approximately $1.0 million for investment banking advisory services and approximately $730,000 for legal and accounting fees. OTHER INCOME. Other income is primarily composed of interest income, offset by interest expense. Other income decreased 12% from $1.5 million in the second quarter of 1998 to $1.3 million for the comparable period in 1999. This decrease was primarily attributable to the interest expense associated with $8.2 million of acquisition-related, debt obligations issued in the fourth quarter 1998. In addition, interest income decreased from the prior period as a result of decreases in the prevailing market interest rates available for the Company's invested cash and securities. PROVISION FOR INCOME TAXES. The Company's effective rate for Federal and state income taxes was approximately 37.6% and 45.9% for the second quarters of 1998 and 1999, respectively. The increase in effective tax rates is primarily attributable to non-deductible merger related costs of approximately $2.1 million incurred during the quarter. SIX MONTHS ENDED JUNE 27, 1998 AND JUNE 30, 1999 REVENUES. Revenues increased 39% from $57.9 million in the six months ended June 27, 1998 to $80.6 million for the comparable period in 1999. The Company believes that the increase resulted from a number of factors. The Company's efforts to enhance the scalability, performance, capacity and functionality of its products has contributed to an increased interest in Excel's programmable switching platforms as a means of addressing the evolving needs of the telecommunications industry. This includes enhancements in the areas of switch management, PPL and SS7 as well as in infrastructure solution offerings. Over the past several years, the Company's customer base has also broadened, resulting in increased sales from a larger number of sources. The introduction of new or enhanced offerings by this growing customer base as well as the expansion of their markets resulted in an increased demand for Excel's products. Excel also increased its efforts to assist customers with designing, planning and testing of new customer applications. The Company expanded or established relationships with a growing number of network service providers, resulting in an increased amount of direct sales to end-users. Revenues also benefited by the expansion of the selling and marketing organizations, including the establishment of two international sales offices in 1998 and one in late 1997. Revenues from the Company's five largest customers represented approximately 53% and 26% of the Company's revenues for the first half of 1998 and 1999, respectively. In the second quarter of 1999, no single customer represented greater than 10% of the Company's total revenue. During the comparable 1998 period, Qualcomm Incorporated represented approximately 25% of the Company's total revenue. Although the Company's largest customers have varied from period to period and the customer base continues to broaden, the Company believes that revenues derived from current and potential large customers will continue to represent a significant proportion of revenues, and that its results of operations in any given 14 period will continue to depend to a significant extent upon sales to a limited number of customers. The volume of future purchases, if any, by the Company's principal customers cannot be estimated based upon historical purchasing trends. Revenues from the Company's largest customers may significantly fluctuate period to period on both an absolute dollar basis and as a percentage of sales. GROSS PROFIT. Cost of revenues increased 36% from $19.0 million in the six months ended June 27, 1998 to $25.9 million for the comparable period in 1999. Gross margin increased from 67.2% in the first half of 1998 to 67.8% in the comparable period of 1999. The increase in cost of revenues is attributable to the increase in sales volume. ENGINEERING, RESEARCH AND DEVELOPMENT. Engineering, research and development costs increased 58% from $11.4 million in the first half of 1998 to $18.1 million for the comparable period in 1999. As a percentage of revenues, these costs were 19.8% and 22.4%, 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 and, to a lessor extent, by increases in the consumption of prototype supplies and materials. SELLING AND MARKETING. Selling and marketing costs increased 21% from $10.0 million in the first half of 1998 to $12.1 million for the comparable period of 1999. As a percentage of revenues, these costs were 17.2% and 15.0%, respectively, in such periods. The increase in selling and marketing costs in absolute dollars was primarily attributable to increases in sales, marketing and customer support personnel, promotional activities and facility and office costs related to the international offices established in 1998 and 1997. GENERAL AND ADMINISTRATIVE. General and administrative costs increased 42% from $5.9 million in the first half of 1998 to $8.3 million for the comparable period in 1999. As a percentage of revenues, these costs were 10.1% and 10.3%, respectively, in such periods. The increase in general and administrative costs in absolute dollars was primarily attributable to an increase of approximately $1.0 million in expenses related to the Company's patent infringement lawsuit against Cisco Systems, Inc. (See Part II, Item 1, Legal Proceedings). In addition the increase resulted from expenses related to bad debt expense and amortization of goodwill as well as professional fees associated with recruiting and acquisition activities MERGER RELATED COSTS. During the second quarter of 1999, the Company incurred one-time charges for merger related costs of approximately $2.1 million in connection with the acquisition of RAScom, Inc. Merger related costs primarily relate to professional services expenses incurred in connection with the acquisition including approximately $1.0 million for investment banking advisory services and approximately $730,000 for legal and accounting fees. OTHER INCOME. Other income decreased 21% from $3.2 million in the first half of 1998 to $2.5 million for the comparable period in 1999. This decrease was primarily attributable to the interest expense associated with $8.2 million of acquisition-related debt issued in 1998. In addition, interest income decreased from the prior period as a result of decreases in the previous market interest rates available for the Company's invested cash and securities. PROVISION FOR INCOME TAXES. The Company's effective rate for Federal and State income taxes was approximately 37.6 % and 41.0 % for the first half of 1998 and 1999, respectively. 15 The increase is effective tax rates is primarily attributable to non-deductible merger related costs incurred during the quarter. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, the Company's principal sources of liquidity consisted its working capital of approximately $145.0 million, including cash, cash equivalents and marketable securities of approximately $114.7 million, and $15.0 million of funds available under a bank line of credit. At March 31, 1999, the Company had working capital of approximately $136.8 million and $126.4 million invested in cash, cash equivalents and marketable securities. Net cash provided by operations for the six months ended June 27, 1998 and June 30, 1999 totaled $11.5 million and $803,000, respectively. The decrease in 1999 was primarily the result of increases in accounts receivable and inventories. This decrease was offset by increases in profitability and the tax benefits associated with the exercise of non-qualified stock options. During the first half of 1999, the Company's accounts receivable increased $16.3 million from December 31, 1998. Management believes this increase is due to a number of factors including an increasing quarterly sales volume; the timing of order placements and shipments within the quarter; and an increase in sales to international customers and to network providers and other end-users. Sales to such customers typically require longer payment terms than the Company historically has extended to its established customer base. During the first six months of 1999, the Company introduced several component cards and began providing additional peripheral host-computer equipment which necessitated an increase in required inventory levels. In addition, the timing of the purchase and receipts of materials to meet expected demand contributed to this increase. The Company expects these trends to continue as it seeks to increase revenues and further expand its business internationally and with network service providers. Net cash provided by investing activities totaled $15.4 million for the six months ended June 27, 1998 as compared to a net use of $33.8 million for the six months ended June 30, 1999. The decrease primarily relates to an increase in the dollar amount of investments purchased in 1999 with maturity dates of ninety-one days or greater. In July 1999, the Company completed the acquisition of certain technology and assets. This technology included host-computer based software applications for the Excel programmable switching platforms. Consideration included cash payments of approximately $4.0 million, the issuance of promissory notes totaling approximately $7.4 million and the assumption of certain liabilities. Such notes bear interest of 8% per annum and are payable at various dates through January 2001. The Company will account for this acquisition as a purchase transaction and, accordingly, will allocate the purchase price to the fair value of assets acquired and liabilities assumed. Principal assets acquired include contract rights, property and equipment, existing technology and in-process research and development for which the Company will record a one-time charge in the third quarter. The Company is in the process of completing a valuation of the assets acquired in this transaction for purposes of purchase accounting with the assistance of an independent valuation consultant. The Company's existing unsecured bank line of credit arrangement was amended to extend the expiration date by 90 days to September 30, 1999. Prior to its expiration, 16 management anticipates entering into a similar new or amended agreement. Management is presently negotiating a possible extension of this agreement and believes that such an extension will be finalized prior to the expiration of the credit agreement. 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 eighteen months. YEAR 2000 READINESS DISCLOSURE STATEMENT Many currently installed computer systems and software products are designed to accept only two-digit entries in the date code field. As a result, they may have problems properly recognizing 1/1/00 as January 1, 2000. In less than a year, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" or "Y2K" requirements. Significant uncertainty exists in the computer software, hardware and telecommunications industries concerning the potential effects associated with the Year 2000 issue. The Company has instituted a program to review the Y2K compliance status of the Company's product offerings and the software and systems used in its internal business processes. Suppliers of the components that make up Excel's products, as well as service providers, are being contacted as part of the Company's Y2K assessment. In July 1998, Excel received ITAA*2000 certification from the Information Technology Association of America ("ITAA"). ITAA's review examined eleven discrete process areas deemed necessary for a successful Y2K conversion. ITAA's certification indicates that Excel meets the information technology's best software development practices for addressing the Year 2000 issue. The Company has integrated Y2K testing into the development process for all of its products. The Company has reviewed its entire EXS family of products. The Company believes that its entire EXS family of products is generally Y2K compliant. Accordingly, the use or occurrence of dates on or after January 1, 2000 and the occurrence of leap years will not affect the performance of the Company's products with respect to the ability of such products to correctly create, store, process and output information related to such date data. The Company found no discrepancies with Y2K or leap year date processing during its internal testing. Excel also believes that the PCX product line will also function properly with a host computer using DOS version 6.22 and beyond. This belief is based on an engineering review and internal test results of the PCX product line. The Company has also reviewed the product offerings resulting from the acquisitions of XNT and Quantum for Y2K compliance and believes they are generally Y2K compliant. Prior to being acquired by Excel, both XNT and Quantum performed their own Y2K assessment. Quantum's products use a 4-digit date code and, therefore, have no known Y2K problems. Excel received test reports from XNT indicating that XNT's NT-based ADS software (from version 5.14.98 forward) had passed their internal Y2K testing. The testing of DOS-based ADS software 17 was completed during the second quarter of 1999. Minor issues were identified and communicated to affected customers. DOS-based ADS customers have been encouraged to migrate to the NT-based version of ADS. Prior to the RAScom acquisition, an internal assessment at RAScom identified that the majority of their products have no calendar or date functions and therefore have no Y2K exposure. The remaining RAScom products represent the integration of third party components. RAScom has received Y2K compliance statements for all but the high-density digital modems, which, to the best of RAScom's knowledge, have no date or calendar functions. RAScom has also run Y2K BIOS check programs against their RAServer 2100 and 2600 products, and again identified no Y2K issues. RAScom products and their related product development processes are currently being integrated into Excel's existing, ITAA-approved process for the development, test and release of products. Excel's programmable switches are controlled by a host computer and are typically integrated into telecommunication applications by application developers, original equipment manufacturers and system integrators or other third parties. Excel makes no representation regarding the Y2K compliance of any host equipment or application not provided by Excel. Through discussions with suppliers and or reviews of publicly disclosed information, Excel also believes that its primary internal information systems used to support its operations (specifically, its ERP system and common office applications) are Y2K compatible. A Norton Y2K utility has been purchased and is being used to verify that all common office and desktop applications are Y2K complaint. The Company is in the process of upgrading non-Y2K compliant servers and workstations. This upgrade process is expected to be completed during the third quarter of 1999. The Company is in the process of contacting its major customers and critical suppliers of components, equipment and services to determine whether products and services obtained by the Company from such vendors or sold by the customer to third parties are Y2K compliant. The Company's suppliers and customers are under no contractual obligation to provide such information to the Company. The Company intends to continue its efforts to monitor the Y2K compliance of suppliers and major customers. Based on the information available to date, the Company believes it will be able to complete its Y2K compliance review and make modifications, if necessary, prior to the end of 1999. The Company is prioritizing its efforts to focus on Y2K discrepancies that would significantly impact operations. Nevertheless, to the extent the Company is relying on vendors or suppliers to notify Excel or resolve Y2K issues within their own products, the Company may experience delays in implementing such changes. If key systems, or a significant number of systems were to fail as a result of Y2K problems, the Company could incur substantial costs and disruption of its business, which would potentially have a material adverse effect on the Company's business and results of operations. In addition, because the Company purchases many critical components from single or sole-source suppliers, failure of any such supplier to adequately address issues relating to the Y2K problem in its own products or internal systems may have a material adverse effect on the Company's business, financial condition and results of operations. Because a majority of the Company's products have been sold through application developers, original equipment manufacturers and system integrators or other third parties, users of the Company's products may experience Y2K problems as a result of the integration of the Company's Y2K compliant products with non-compliant Y2K products of third party suppliers. In certain circumstances, the Company has warranted to customers that the use or occurrence of dates on or after January 1, 2000 will not adversely affect the performance of the Company's products with respect to the ability to create, store, process and output information related to such 18 date data. If any of these customers experience Y2K problems, such customers could assert claims for damages against the Company. To date, the Company has not required a complete and separate budget for investigating and remedying issues related to Y2K compliance of the Company's own products or the software underlying systems used in its internal operations. The costs of Excel's Y2K initiative have been incorporated into existing workloads and budgets within the quality, engineering and information technology departments, and are not expected to be material to the Company's results of operations or financial position. Management will develop a contingency plan in the third quarter of 1999 based upon the results of Excel's supplier and customer readiness reviews. To the extent the Company has not adequately assessed its Y2K compliance, additional or significant Company resources may be spent on investigating and remedying Y2K issues and the expenditure of such resources may have a material adverse effect on the Company's business, financial condition and results of operations in the future. 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 31, 1998 on Form 10-K, the Company's quarterly report on Form 10-Q for the three months ended March 31, 1999, the Company's report on Form 8-K, dated May 10, 1999 and filed with the Commission on May 25, 1999 and as amended by the Company's Report on Form 8-K/A, dated May 10, 1999 and filed with the Commission on July 23, 1999, and as further amended by the Company's Report on Form 8-K/A dated May 10, 1999 and filed with the Commission on July 29, 1999. 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 Report on Form 8-K/A, dated May 10, 1999 and filed with the Commission on July 23, 1999 and as further amended by the Company's Report on Form 8-K/A dated May 10, 1999 and filed with the Commission on July 29, 1999. 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 19 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 publication 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 are 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 historically operated with little backlog because the Company generally ships its products 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 has experienced significant fluctuations in revenues, expenses and results from operations from quarter to quarter, and such fluctuations are likely to continue. The Company typically receives more product orders and generates greater revenues in the fourth quarter. During the last several years, revenues in the first quarter have typically been lower than those recorded in the preceding fourth quarter. The Company believes that this concentration of order placements in specific quarterly periods is due to customers' buying patterns and budgeting cycles. A significant portion of the Company's revenues have been generated from a limited number of customers and it is difficult to predict the timing of future orders and shipments to these and other customers. 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. The Company also believes that the purchase of its 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. The Company's ability to increase its revenues in future periods, sustain its level of revenues in future periods or sustain its rate of revenue growth on a quarterly or annual basis cannot be assured. 20 Due to all of 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. RISKS RELATING TO ACQUISITIONS. In July 1999, Excel acquired certain technology and assets. In May 1999, the Company acquired RAScom, Inc. During the fourth quarter of 1998, the Company acquired Quantum Telecom Solutions, Inc. and XNT Systems, Inc. The Company may also, from time to time, pursue the acquisition of other companies, assets, products and technologies. Acquisitions involve a number of operating risks that could materially adversely affect the Company's results of operations, including the diversion of management's attention to assimilate the operations, products and personnel of the acquired companies, the acquired company's existing customer and support obligations, the amortization of acquired intangible assets and the potential loss of key employees of the acquired companies. Furthermore, acquisitions may involve businesses in which the Company lacks experience. Because management and the Company have limited experience in acquisitions and integrating acquired companies or technologies into its operations, it is not certain that the Company will be able to manage present and future acquisitions successfully, or that the Company will be able to integrate the operations, products or personnel gained through any such acquisitions without a material adverse effect on the Company's business, financial condition and results of operations. DIFFICULTY OF INTEGRATING TWO COMPANIES. In connection with the Company's recent acquisition of RAScom, Inc., the successful integration of the operations, personnel and product lines of the two companies is important to the future financial performance of the combined enterprise. The anticipated benefits of the acquisition may not be achieved unless, among other things, the operations of RAScom are successfully combined with those of the Company in a timely manner. The diversion of the attention of management, and any difficulties encountered in the transition process, could have an adverse impact on the revenues, financial condition and results of operations of the combined enterprise. Excel may not be able to successfully integrate RAScom and its services and products into the Company's operations. The inability of management to successfully integrate the operations of the companies could have a material adverse effect upon the business, financial condition and results of operations of the Company. DIFFICULTY OF INTEGRATING RASCOM PRODUCT LINES. As part of its product plans following the acquisition of RAScom, Excel expects to be integrating RAScom's remote access technology with Excel's programmable switching technology for the enhanced services and wireless and infrastructure markets, as well as for small- and medium-sized Internet Service Providers. The integration by Excel of RAScom's product offerings may be costly, and result in unanticipated delays or difficulties with product integration, and require further development expenses and further expenditures for sales and marketing campaigns associated with advertising the new, complementary product offerings. There is no assurance that the RAScom research and development team can be successfully assimilated with Excel's engineering personnel, or that the RAScom engineering personnel will continue to remain at Excel following the acquisition. Excel has no assurance that its existing customers will purchase the new RAScom product lines, once integrated, or that Excel will be able to attract new customers with the added RAScom product capabilities. While management believes that RAScom's technology enhances Excel's existing product offerings and expands its addressable markets, delays or difficulties associated with this product integration or the loss of RAScom engineering personnel could have a material adverse effect on Excel's business, financial condition and results of operations. 21 UNCERTAINTIES RELATING TO INTEGRATION OF OPERATIONS. The Company believes that the acquisition of RAScom will result in long-term strategic benefits. However, the realization of these benefits will depend on whether management can integrate the operations of the Company and RAScom in an efficient and effective manner. Among other things, the Company must integrate the respective companies' products, technologies, distribution channels and key personnel. Furthermore, the Company must coordinate the sales, marketing and engineering, research and development efforts of RAScom. The difficulties of integrating RAScom may be increased by the need to coordinate organizations with distinct cultures and widely dispersed operations. The effective integration of the various operations will depend on the ability of the Company to attract and retain key management, sales, marketing and engineering, research and development personnel. The integration of operations following the acquisition will require significant attention of management and thus may distract attention from other day-to-day operations of the Company. NEED TO INTEGRATE AND RETAIN KEY EMPLOYEES OF RASCOM. The successful integration of RAScom, Inc. is dependent on the retention and integration of the key management, sales, marketing, engineering and other technical employees of RAScom. Competition for qualified personnel in the industries in which the Company and RAScom compete is very intense, and competitors may use aggressive tactics to recruit key employees of the Company and RAScom during the integration phase following the acquisition which could result in the loss of key employees. The loss of these key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL TO REPLACE THE ATTRITION OF RASCOM PERSONNEL. In the period since the completion of the RAScom acquisition, some key personnel of RAScom have left. The successful integration of RAScom and its products and services depends in part on the Company's ability to attract and retain qualified individuals to replace such personnel. Competition for qualified personnel in the industries in which the Company and RAScom compete is very intense. Competitors can offer compensation packages that include equity compensation and other incentives that make it difficult for the Company to compete in hiring and retaining qualified replacement personnel. There can be no guarantee that the Company will be able to compete successfully in hiring and retaining qualified replacement personnel that will allow for the successful integration of the products, services and personnel of the two companies. Failure to hire and retain such qualified replacement personnel could have a material adverse effect on the Company's business, financial condition and results of operations. CONCENTRATION OF CUSTOMERS. During the three and six months ended June 30, 1999, the Company's five largest customers accounted for approximately 32% and 26%, respectively, of the Company's revenues. Although the Company's largest customers have varied from period to period and the customer base continues to broaden, 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 have entered into a long-term supply agreement requiring any of them to purchase a minimum amount of product from the Company. Revenues from the Company's largest customers may significantly fluctuate period to period on both an absolute dollar basis and as a percentage of sales. It is unknown whether the Company's principal customers will continue to purchase product from the Company at current levels, if at all, or whether the Company will be able to replace such purchases with sales to other 22 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. HIGHLY COMPETITIVE MARKET. The market for telecommunications products is highly competitive and subject to rapid technological change. The telecom industry has also been subject to rapid consolidation of equipment and suppliers by larger telecom and data network service providers. The Company competes or may compete directly or indirectly with the following categories of companies: (i) other manufacturers of programmable switches such as Cisco Systems, Inc. (primarily through its recent acquisition of Summa Four, Inc.), Redcom Laboratories, Inc. and Harris Corporation; (ii) large, well-established switch and telecommunications equipment manufacturers such as Alcatel Alsthom Compagnie Generale d'Electricite SA, Lucent Technologies Inc., Northern Telecom Limited, Siemens AG and Telefonaktiebolaget LM Ericsson; and (iii) to a lesser degree, systems integrators and application developers whose switches are based on PC card-level products manufactured by companies such as Aculab Inc., Dialogic Corporation and Natural MicroSystems Corporation. In addition, the Company may be subject to competition from several smaller companies that have begun to manufacture programmable switching platforms as well as from emerging data communications equipment manufacturers. Due to the rapidly evolving markets in which the Company competes, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter those markets, thereby further intensifying competition. Additionally, one or more of the Company's application developers may begin to develop or market products in competition with the Company. Increased competition could result in price reductions and loss of market share which would materially adversely affect the Company's business, financial condition and results of operations. Many of the Company's current and potential competitors have significantly greater financial, selling and marketing, technical, manufacturing and other resources than the Company. Some of the Company's competitors currently offer financing alternatives to their customers. The Company has recently established a relationship with an independent leasing company to offer a financing alternative to some or all of Excel's customers. It is not certain that financing alternative provided by this relationship will be on terms that are competitive with the financial offerings of the Company's competitors. It is not certain the Company will continue to offer such financing alternatives in the future. Moreover, the Company's competitors may also foresee the course of market developments more accurately than the Company. Although the Company believes it has certain technological and other advantages over its competitors, realizing and maintaining such advantages will require a continued high level of investment by the Company in research and product development, marketing and customer service and support. It is not certain that the Company will have sufficient resources to continue to make such investments or that the Company will be able to make the technological advances necessary to compete successfully with its existing competitors or with new competitors. YEAR 2000 COMPLIANCE. The Company has implemented a Year 2000 compliance program designed to ensure that the Company's computer systems and applications will function properly beyond 1999. The Company believes that adequate resources have been allocated for this purpose and expects the Company's Year 2000 date conversion programs to be completed on a timely basis. The Company does not expect to incur significant expenditures to address this issue. However, there can be no assurance that the Company will identify all Year 2000 problems in its computer and other systems in advance of their occurrence or that the Company will be able to successfully remedy any problems that are discovered. The expenses of the 23 Company's efforts to address such problems, or the expenses or liabilities to which the Company may become subject as a result of such problems, could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the revenue stream and financial stability of existing customers may be adversely impacted by Year 2000 problems, which could cause fluctuations in the Company's revenues and operating profitability and which could have a material adverse effect on the Company's business, results of operations and financial condition. If key systems, or a significant number of systems were to fail as a result of Y2K problems, the Company could incur substantial costs and disruption of its business, which would potentially have a material adverse effect on the Company's business and results of operations. In addition, because the Company purchases many critical components from single or sole-source suppliers, failure of any such supplier to adequately address issues relating to the Y2K problem in its own products or internal systems may have a material adverse effect on the Company's business, financial condition and results of operations. In certain circumstances, the Company has warranted to customers that the use or occurrence of dates on or after January 1, 2000 will not adversely affect the performance of the Company's products with respect to the ability to create, store, process and output information related to such date data. If any of these customers experience Y2K problems, such customers could assert claims for damages against the Company. To the extent the Company has not adequately assessed its Y2K compliance, additional or significant Company resources may be spent on investigating and remedying Y2K issues and the expenditure of such resources may have a material adverse effect on the Company's business, financial condition and results of operations in the future. DEPENDENCE ON RELATIONSHIPS WITH APPLICATION DEVELOPERS, OEMS AND SYSTEMS INTEGRATORS. The Company sells a significant amount of its products to, and maintains strategic relationships with, application developers, original equipment manufacturers 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 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. 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), evaluate end-user satisfaction and recognize emerging end-user requirements may be hindered. 24 RISKS RELATED TO LEASE FINANCING. 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, the Company has a 100% recourse obligation for contracts funded for customers with certain credit ratings, as determined by the leasing company. It is not certain that the financing alternative provided by this relationship will be on terms that are competitive with the financial offerings of the Company's competitors. It is not certain the Company will continue to offer such financing alternatives in the future. Since Excel is obligated to guarantee certain payments to the leasing company, the default by one or more customers of their payment obligations to the leasing company under this program may have a material adverse impact on the Company's business, financial condition and results of operations. In addition, such default may have an adverse impact on the Company's ability to continue to offer such alternative financing to its customers. DEPENDENCE ON SINGLE AND SOLE SOURCE SUPPLIERS AND THIRD-PARTY MANUFACTURERS. The Company purchases many critical component from single or sole source vendors and relies upon 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. In addition, from time to time Company relies upon certain third-party software application vendors to supply certain software applications used with the Company's switching products. The inability to develop alternative sources for these products or to obtain sufficient quantities of these products 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 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 and applications 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 or stop providing such applications with its products. It is not certain 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 therefore it is not certain 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 25 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. EVOLVING MARKET FOR TELECOMMUNICATIONS SERVICES AND RAPID TECHNOLOGICAL CHANGE. The Company's future success will depend on continued growth in the market for telecommunications services. The global telecommunications marketplace is evolving and it is difficult to predict its potential size or future growth rate. It is not known whether deregulation and continued improvements and expansions of infrastructure will continue to cause this market to grow or that increased regulation will not present barriers to the sales of existing or future products. In addition, telecommunications applications and infrastructure needs may emerge for which the Company's products are not designed. If this market fails to grow or grows more slowly or in a different direction than the Company currently anticipates, the Company's business, financial condition and results of operations could be materially adversely affected. The telecommunications equipment market is also subject to rapid technological change, evolving industry standards and frequent new product introductions and enhancements that may render existing products obsolete. As a result, the Company's position in this market could erode rapidly due to unforeseen changes in product features and functions of competing products. The Company's growth and future results of operations will depend in part on its ability to respond to these changes by enhancing its existing products and developing and introducing, on a timely and cost-effective basis, new products and features to meet or exceed technological advances in the marketplace. The failure of the Company to respond to rapidly changing technologies could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS RELATED TO SALES TO END-USERS. The Company intends to increase the volume of sales to end-users over the next several periods. Although the Company's products have been distributed through indirect channels to end-users, the Company has limited experience in distributing directly to and directly supporting end-users. Sales to end-users are subject to a variety of risks, including increased costs to promote and market the products; to install and integrate products and support the customer base; increased warranty obligations and a longer sales cycle. Sales to end-users may also involve significant acceptance, performance and other milestone criteria, which may impact the timing of the revenue recognition. The installation of a complete system involves the integration of the Company's product with various third-party equipment and applications. Difficulties or delays in integration may result in delays in market acceptance and sales, diversion of development and management resources, injury to the Company's reputation or increased service and warranty costs, any of which could have a material adverse affect on the Company's business, financial condition and results of operations. Sales to end-users may require the Company to provide additional third-party components and software applications. The inability to obtain sufficient supplies of these components and applications 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 order to meet the needs of network providers, the Company may be required to further develop or enhance its existing product offerings or acquire additional products and technologies from third parties. Such new products or enhancements may require the Company to obtain additional technical certification in telecom networks. Delays in product development and certification 26 could materially adversely affect the Company's business, financial condition and results of operations. CONCENTRATED PRODUCT FAMILY AND RISK OF NEW PRODUCT INTRODUCTIONS. The Company currently derives substantially all of its revenues from its family of open, programmable switching platforms and expects that this concentration will continue in the foreseeable future. As a result, any decrease in the overall level of sales of, or the prices for, open, programmable switching platforms due to product enhancements, introductions or announcements by the Company's competitors, a decline in the demand for open, programmable switches, product obsolescence, price competition, technological change or any other reason could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company intends to continue to invest in product and technology development, including increasing port capacity and performance, the development of additional related software applications and tools, the improvement of third-party application integration and the continued provision of updated product features and enhancements. The Company may experience difficulties that could delay or prevent the successful development, introduction or marketing of such new products and enhancements. It is not known whether the Company's new products and enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Announcements of currently planned or other new product offerings by the Company or its competitors may cause customers to defer or cancel the purchase of existing Company products. The Company's inability to develop on a timely basis new products or enhancements to existing products, or the failure of such new products or enhancements to achieve market acceptance, could have a material adverse effect on the Company's business, financial condition and results of operations. The development of new, technologically advanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends. The introduction of new or enhanced products also requires the Company to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. It is not certain that the Company will successfully develop, introduce or manage the transition to new products. Furthermore, products such as those offered by the Company may contain undetected or unresolved errors when they are first introduced or as new versions are released. Despite extensive testing by the Company, errors may be found in new products or upgrades after commencement of commercial shipments, resulting in delays in or loss of market acceptance and sales, diversion of development resources, injury to the Company's reputation or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. MANAGEMENT OF GROWTH, HIRING OF ADDITIONAL PERSONNEL AND DEPENDENCE ON KEY PERSONNEL. The Company has experienced growth in revenues and expansion of its operations. During the previous eighteen months, the Company has established operations internationally and has completed four acquisitions of existing companies and/or assets. During this time, the number of the Company personnel has significantly increased. All of these activities have placed significant demands on the Company's management, engineering and administrative staff and facilities. The Company continues to implement additional financial and management procedures that the Company believes will address increasing demands on resources. However, the Company believes that further improvements in management and operational controls are 27 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 the infrastructure of its international operations, 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. It is not certain whether 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 or construction of buildings in the Cape Cod area is more onerous than found in metropolitan areas. Accordingly, the Company may be required to devote significant resources in the future to the permitting and renovation of additional facilities or in relocating some or all of the Company's facilities. The Company's success depends to a significant degree upon the continued contributions of its President, Chief Executive Officer and principal stockholder, Robert P. Madonna, and its key management, engineering, selling and marketing and manufacturing personnel, many of whom would be difficult to replace. The Company does not have employment contracts with its key personnel. The loss of the services of any key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly software engineers, could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH INTERNATIONAL SALES. During 1999, direct sales to customers located outside of the United States accounted for approximately 10% to 30% of the Company's quarterly revenues. However, the Company sells a significant amount of its products to application developers, OEMs and systems integrators located within the United States which market products and services based on the Company's products worldwide. The Company intends to further expand its operations outside the United States and enter additional international markets, which will require significant management attention and financial resources. International sales are subject to a variety of risks, including difficulties in establishing and managing international distribution channels, in servicing and supporting products sold outside the United States and in translating products and related materials into foreign languages. International operations are also subject to difficulties in collecting accounts receivable, staffing and managing personnel and enforcing intellectual property rights. Other factors that can adversely affect international operations include fluctuations in the value of foreign currencies and currency exchange rates, changes in import/export duties and quotas, introduction of tariff or non-tariff barriers and economic or political changes in international 28 markets. Any inability to obtain foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. If the Company's international sales increase, its revenues may also be affected to a greater extent by seasonal fluctuations resulting from lower levels of sales which typically occur during the summer months in Europe and other parts of the world. It is not certain that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH LITIGATION. The Company is currently involved in litigation with Cisco Systems, Inc. ("Cisco") where the Company has alleged infringement of certain of its patents and Cisco has filed counterclaims alleging breach of a certain confidentiality agreement and infringement of one of its patents. The litigation is in the early stages of discovery. There can be no assurance that this litigation will ultimately be resolved in favor of the Company or on terms that are favorable to the Company. The Company could incur substantial costs, product shipment delays or restrictions, and diversion of management resources in defending, pursuing and resolving these claims and counterclaims. Cisco has substantially greater financial resources to underwrite the cost of litigation and is in a better position to underwrite protracted litigation. The Company might also be subject to injunctive or other equitable relief preventing it from selling or delivering its product, or it might be required to pay substantial damages awards or enter into licensing or royalty arrangements to resolve these claims and counterclaims. Any of the foregoing could have a material adverse effect on the Company's business, results of operations and financial condition. 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, customers' internal acceptance reviews, the success and continued internal support of customers' own development efforts, 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 the 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 operations to vary significantly from quarter to quarter. DEPENDENCE ON PROPRIETARY RIGHTS. The Company's success and its ability to compete are dependent, in part, upon its proprietary rights. The Company relies primarily on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions to establish and protect its proprietary rights. It is not known whether such measures will be adequate to protect the Company's proprietary rights. Further, the Company may be subject to additional risks as it enters into transactions in countries where intellectual property laws are not well developed or are difficult to enforce. Legal protections of the Company's proprietary rights may be ineffective in such countries. Litigation to defend and enforce the Company's intellectual property rights could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial 29 condition and results of operations, regardless of the final outcome of such litigation. Despite the Company's efforts to safeguard and maintain its proprietary rights both in the United States and abroad, it is not known whether the Company will be successful in doing so or that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology or to prevent an unauthorized third party from copying or otherwise obtaining and using the Company's products or technology. There also can be no guarantees that others will not independently develop similar technologies or duplicate any technology developed by the Company. Any such events could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has entered into agreements with a small number of its customers requiring the Company to deposit its source code and, on occasion, manufacturing blueprints, tooling diagrams and production specifications, in escrow with a third party. These escrow agreements typically provide that these customers have a non-exclusive, limited right to use such code and other materials in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to conduct business or if the Company defaults on its support obligations. The use of such agreements may increase the likelihood of misappropriation by third parties. As the number of entrants to the Company's markets increases and the functionality of the Company's products increases and overlaps with the products of other companies, the Company may become subject to claims of infringement or misappropriation of the intellectual property rights of others. In its distribution agreements, the Company agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In certain limited instances, the amount of such indemnities may be greater than the revenues the Company may have received from the customer. There can be no guarantee that third parties will not assert infringement or misappropriation claims against the Company in the future with respect to current or future products. Any claims or litigation, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company changed its name from Excel Inc. to Excel Switching Corporation in September 1997. Searches performed on the term Excel have revealed several registrations and numerous uses of that term, and terms substantially similar to it, alone and in combination with other terms and designs. Accordingly, there can be no guarantee that third parties will not assert trademark infringement claims relating to the name Excel in the future. COMPLIANCE WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS. The market for the Company's products is characterized by the need to meet a significant number of communications regulations and standards, some of which are evolving as new technologies are deployed. In the United States, the Company's products must comply with various regulations including those promulgated by the Federal Communications Commission and standards established by Underwriters Laboratories and Bell Communications Research. Furthermore, there are regulations and standards imposed by various foreign countries where the Company's products are installed. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could delay the introduction of the Company's products. Moreover, the enactment by federal, state or foreign governments of new laws or regulations, changes in the interpretation of existing laws or 30 regulations or a reversal of the trend toward deregulation in the telecommunications industry could materially adversely affect the Company's customers, and thereby materially adversely affect the Company's business, financial condition and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Reference is also being made to the disclosure in Part II, Item 7A, entitled QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. The Company, in the normal course of business, is subject to the risks associated with fluctuations in interest rates and changes in foreign currency exchange rates. INTEREST AND MARKET RISK. The Company maintains a portfolio of marketable, primarily fixed income, available-for-sale securities of various issuers, types and maturities. The Company has not used derivative financial instruments in its investment portfolio. The Company attempts to limits its exposure to interest rate and credit risk by placing its investments with high-quality financial institutions and has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidation. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates decline. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The fair market value of investment securities held at June 30, 1999 was $112.0 million, including unrealized losses of approximately $53,000. The Company's investment portfolio has not changed significantly since December 31, 1998. The weighted average interest rate of the investment portfolio at December 31, 1998 and June 30, 1999 was approximately 5.1%. The Company's existing debt obligations are at fixed interest rates and therefore will not be affected by changes in market interest rates. Under the Company's line-of-credit arrangement with a bank, borrowings may bear interest at either the bank's base rate or the Eurodollar rate plus 1.75%. At June 30, 1998, no amounts were outstanding under this line. Any interest which may in the future become payable on the line-of-credit will be based upon variable interest rates and will therefore be affected by changes in market interest rates. FOREIGN CURRENCY RISK. To date, the Company's exposure to foreign currency fluctuations has been minimal. Significantly all sales transactions are denominated in US dollars. Letters of credit are utilized when warranted. The Company funds its international operations from US dollar bank accounts on an as-needed basis and, accordingly, does not maintain a significant amount of funds in foreign currencies. Presently, the Company does not hedge foreign currency exposure for its non-US dollar denominated operating expenses as such amounts have not been material in relation to the Company's domestic operating expenses. 31 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See the disclosure contained in Part II, Item 1 entitled "Legal Proceedings" in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 as filed with the Commission on May 18, 1999. ITEM 3. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None. (b) None. (c) On May 10, 1999, the Company acquired all of the outstanding capital stock of RAScom, Inc., a Delaware corporation. In connection with this acquisition, an aggregate of 1,099,940 shares of Excel's common stock, $.01 par value, (the "Common Stock") were issued in exchange for all of the outstanding capital stock and options to purchase capital stock of RAScom. The shareholders of RAScom received, in the aggregate, 1,021,187 shares of Excel's Common Stock (the "Shares") in exchange for their shares of RAScom capital stock. In addition, the option holders of RAScom received, in the aggregate, options to purchase 78,753 shares of Excel's Common Stock (the "Option Shares") in exchange for their options to purchase capital stock of RAScom. The Shares were issued in reliance upon an exemption from the registration provisions of the Securities Act of 1933, as amended (the "Act"), set forth in Section 4(2) thereof and Rule 506 of Regulation D of the General Rules and Regulations under the Act promulgated by the Securities and Exchange Commission ("Regulation D"). After distribution and review of an investor questionnaire, the Company reasonably believes that there were less than 35 purchasers of the Shares calculated in accordance with Rules 501(e) and 502(a) of Regulation D. In connection with the issuances of the Shares, the former stockholders of RAScom made certain representations to the Company as to their investment intent and possessed a sufficient level of sophistication and access to information. The Shares are subject to restrictions on transfer absent registration under the Act or exemption therefrom. The Company received no proceeds from the issuance of the Shares. Option Shares amounting to, in the aggregate, 68,501 were registered with the Commission pursuant to a Form S-8 filed with the Commission on May 24, 1999 and a Form S-8 filed with the Commission on July 23, 1999. For the three month period ended June 30, 1999, Option Shares amounting to, in the aggregate, 4,759 were exercised prior to their registration. Net proceeds to the Company from such exercise, amounted to, in the aggregate approximately $17,683. The exercise price for the Option Shares ranged from $2.24 to $6.74 per share of Common Stock. The Company intends on registering these shares on a Form S-3. The remaining Option Shares are unregistered, and unless cancelled, upon their exercise will be converted into unregistered stock of the Registrant. 32 (d) None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On May 14, 1999, the Company held its 1999 Annual Meeting of Stockholders. (b) At such meeting, the following nominees and current board members, Robert P. Madonna, Christopher Stavros, Edward L. Breslow and John Loughlin, were re-elected to the Board of Directors to hold office until the next Annual Meeting of Stockholders and until their successors have been duly elected and qualified or until their earlier resignation or removal. (c) At the meeting, the stockholders of the Company voted: (1) To fix the number of directors at four (4) and to elect a Board of Directors to serve for the ensuing year or until their respective successors are elected and qualified or until their earlier resignation or removal. The votes cast were as follows:
BROKER VOTES VOTES VOTES VOTES NON- FOR AGAINST WITHHELD ABSTAINED VOTES ----- ------- -------- --------- ------ Edward L. Breslow 33,950,459 N/A 30,239 N/A N/A John Loughlin 33,951,059 N/A 29,639 N/A N/A Robert P. Madonna 33,925,959 N/A 54,739 N/A N/A Christopher Stavros 33,925,659 N/A 55,039 N/A N/A
(2) To approve and ratify the Company's Amended and Restated 1997 Stock Option Plan (the "1997 Plan") which, among other things, (a) increases the number of shares of Common Stock available under the 1997 Plan from 3,000,000 to 5,000,000 shares, and (b) provides the opportunity for non-employee directors to participate in the 1997 Plan. The votes cast were as follows:
BROKER VOTES VOTES VOTES VOTES NON- FOR AGAINST WITHHELD ABSTAINED VOTES ----- ------- -------- --------- ------ Amended and Restated 1997 Stock Option Plan 28,184,590 5,085,734 N/A 9,060 701,314 Ratification
(3) To approve and ratify the Company's Amended and Restated 1997 Non-Employee Director Stock Option Plan (the "Director Plan") which, among other things, (a) provides 33 for the immediate termination of both the initial grant of options to purchase 30,000 shares of Common Stock upon joining the Board of Directors and the automatic grant of options to purchase an additional 15,000 shares of Common Stock on each of the following two anniversary dates thereof, and (b) commencing January 1, 2000, provides for the automatic grant to each non-employee director of fully vested options to purchase 1,250 shares of Common Stock once each quarter provided that such director has been a member of the Board for at least one year. The votes cast were as follows:
BROKER VOTES VOTES VOTES VOTES NON- FOR AGAINST WITHHELD ABSTAINED VOTES ----- ------- -------- --------- ------ Amended and Restated 1997 Non-Employee Director Stock Option 33,696,420 272,708 N/A 11,570 N/A Plan Ratification
(4) To ratify the selection of Arthur Andersen LLP, as independent auditors for the fiscal year ending December 31, 1999. The votes cast were as follows:
BROKER VOTES VOTES VOTES VOTES NON- FOR AGAINST WITHHELD ABSTAINED VOTES ----- ------- -------- --------- ------ Arthur Andersen LLP 33,965,677 11,651 N/A 3,370 N/A Ratification
(d) N/A ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits No. Description --- ----------- 2.1 Agreement and Plan of Merger and Reorganization dated as of April 15, 1999, by and among Excel Switching Corporation, Racepoint Acquisition Corp., RAScom, Inc., the shareholders of RAScom, Inc. and Mark B. Galvin as Indemnification Representative (filed as Exhibit 2.1 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 34 2.2 Amendment No. 1 to the Agreement and Plan of Merger and Reorganization dated as of May 7, 1999, by and among Excel Switching Corporation, Racepoint Acquisition Corp., RAScom, Inc., those shareholders of RAScom, Inc. that are signatories thereto, and Mark B. Galvin as Indemnification Representative (filed as Exhibit 2.2 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 3.1 Restated Articles of Organization of the Registrant (previously filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-35791) and incorporated herein by reference). 3.2 Restated By-Laws of the Registrant (previously filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference). 4.1 Escrow Agreement dated as of May 10, 1999, by and among Excel Switching Corporation, Racepoint Acquisition Corp., RAScom, Inc., State Street Bank and Trust Company, the shareholders of RAScom, Inc. and Mark B. Galvin as Indemnification Representative (previously filed as Exhibit 4.1 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 4.2 Side Letter Agreement dated as of May 10, 1999 by and among Excel Switching Corporation, Racepoint Acquisition Corp., RAScom, Inc., State Street Bank and Trust Company and Mark B. Galvin as Indemnification Representative (previously filed as Exhibit 4.2 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 4.3 Registration Rights Agreement, dated as of May 10, 1999, between the shareholders of RAScom that are signatories thereto and Excel Switching Corporation (previously filed as Exhibit 4.3 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 10.9 Amendment No. 2 to Loan Agreement with BankBoston, N.A. dated June 29, 1999 (filed herewith). 10.10 Amendment No. 1 dated as of July 9, 1999 to Vendor Program Agreement dated as of March 30, 1999 with NationsCredit Commercial Corporation (filed herewith). 27 Financial Data Schedule (EDGAR) (filed herewith). 35 (b) Reports on Form 8-K 1) Current Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 which details the acquisition of RAScom, Inc. completed on May 10, 1999. 2) Amendment No. 1 to the Current Report on Form 8-K dated May 10, 1999 and filed with the Commission on Form 8-K/A on July 23, 1999. This report contains the Consolidated Financial Statements of RAScom, Inc. and Subsidiary as of December 31, 1998; the unaudited the Consolidated Financial Statements of RAScom, Inc. and Subsidiary as of March 31, 1999; the Supplemental Consolidated Financial Statements of Excel Switching Corporation as of December 27, 1997 and December 31, 1998; and the unaudited Supplemental Consolidated Financial Statements of Excel Switching Corporation as of March 31, 1999. These Supplemental Consolidated Financial Statements of Excel reflect the combined operations of Excel and RAScom as if the two entities had operated as one since inception. 3) Amendment No. 2 to the Current Report on Form 8-K dated May 10, 1999 and filed with the Commission on Form 8-K/A on July 29, 1999. This report contains the Unaudited Supplemental Quarterly Consolidated Statements of Income for Excel Switching Corporation for each of the four fiscal quarters for the fiscal year ended December 31, 1998. These unaudited Quarterly Consolidated Statements of Income reflect the combined operations of Excel and RAScom as if the two entities had operated as one since inception. 36 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: August 16, 1999 /S/ ROBERT P. MADONNA --------------------- Robert P. Madonna President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Dated: August 16, 1999 /S/ STEPHEN S. GALLIKER ----------------------- Stephen S. Galliker Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 37 EXHIBIT INDEX No. Description --- ----------- 2.1 Agreement and Plan of Merger and Reorganization dated as of April 15, 1999, by and among Excel Switching Corporation, Racepoint Acquisition Corp., RAScom, Inc., the shareholders of RAScom, Inc. and Mark B. Galvin as Indemnification Representative (filed as Exhibit 2.1 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 2.2 Amendment No. 1 to the Agreement and Plan of Merger and Reorganization dated as of May 7, 1999, by and among Excel Switching Corporation, Racepoint Acquisition Corp., RAScom, Inc., those shareholders of RAScom, Inc. that are signatories thereto, and Mark B. Galvin as Indemnification Representative (filed as Exhibit 2.2 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 3.1 Restated Articles of Organization of the Registrant (previously filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-35791) and incorporated herein by reference). 3.2 Restated By-Laws of the Registrant (previously filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference). 4.1 Escrow Agreement dated as of May 10, 1999, by and among Excel Switching Corporation, Racepoint Acquisition Corp., RAScom, Inc., State Street Bank and Trust Company, the shareholders of RAScom, Inc. and Mark B. Galvin as Indemnification Representative (previously filed as Exhibit 4.1 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 4.2 Side Letter Agreement dated as of May 10, 1999 by and among Excel Switching Corporation, Racepoint Acquisition Corp., RAScom, Inc., State Street Bank and Trust Company and Mark B. Galvin as Indemnification Representative (previously filed as Exhibit 4.2 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 4.3 Registration Rights Agreement, dated as of May 10, 1999, between the shareholders of RAScom that are signatories thereto and Excel Switching Corporation (previously filed as Exhibit 4.3 to the original Report on Form 8-K dated May 10, 1999 and filed with the Commission on May 25, 1999 and hereby incorporated by reference). 10.9 Amendment No. 2 to Loan Agreement with BankBoston, N.A. dated June 29, 1999 (filed herewith). 10.10 Amendment No. 1 dated as of July 9, 1999 to Vendor Program Agreement dated as of March 30, 1999 with NationsCredit Commercial Corporation (filed herewith). 27 Financial Data Schedule (EDGAR) (filed herewith). 38 EX-10.9 2 EXHIBIT 10.9 Exhibit 10.9 EXCEL SWITCHING CORPORATION (f/k/a Excel, Inc.) 255 Independence Drive Hyannis, Massachusetts 02601 Dated as of: June 29, 1999 BankBoston, N.A., (f/k/a The First National Bank of Boston) 100 Federal Street Boston, Massachusetts 02110 Re: AMENDMENT NO. 2 TO LOAN AGREEMENT Ladies and Gentlemen: We refer to the Loan Agreement, dated as of December 21, 1995 (as amended, the "Agreement"), between Excel Switching Corporation (f/k/a Excel, Inc.), a Massachusetts corporation (the "Borrower"), and BankBoston, N.A. (f/k/a The First National Bank of Boston), a national banking association (the "Lender"). Terms used in this letter of agreement (this "Amendment") which are not defined herein, but which are defined in the Agreement, shall have the same respective meanings herein as therein. We have requested that you make certain amendments to the Agreement. You have advised us that you are prepared and would be pleased to make the amendments so requested by us on the condition that we join with you in this Amendment. Accordingly, in consideration of these premises, the promises, mutual covenants and agreements contained in this Amendment, and fully intending to be legally bound by this Amendment, we hereby agree with you as follows: ARTICLE I AMENDMENTS TO AGREEMENT Effective June 29, 1999, the Agreement is amended as follows: (a) The definition of "Revolving Credit Termination Date" in Section 1.1 of the Agreement is amended to read in its entirety as follows: -1- "Revolving Credit Termination Date: September 30, 1999". (b) Section 2.4(a) of the Agreement is amended by deleting the reference to "June 30, 1999" contained therein, and by inserting in place thereof the following: "September 30, 1999". (c) Section 2.3 of the Agreement is amended to read in its entirety as follows: "2.3 FACILITY FEE. The Company shall pay to the Bank during the Revolving Credit Period an annual facility fee, payable quarterly in advance on the first Business Day of each quarter, equal to 1/5% per annum of the Commitment Amount then in effect." ARTICLE II AMENDMENT TO NOTE Effective June 29, 1999, the Note is amended by deleting each reference to the maturity date of "June 30, 1999" contained therein and by inserting a reference to "September 30, 1999" in place thereof. ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to you as follows: (a) REPRESENTATIONS IN AGREEMENT. Each of the representations and warranties made by the Borrower to you in the Agreement was true, correct and complete when made and is true, correct and complete on and as of the date hereof with the same full force and effect as if each of such representations and warranties had been made by the Borrower on the date hereof and in this Amendment. (b) NO DEFAULTS OR EVENTS OF DEFAULT. No default or Event of Default exists on the date of this Amendment (after giving effect to all of the arrangements and transactions contemplated by this Amendment). (c) BINDING EFFECT OF DOCUMENTS. This Amendment has been duly authorized, executed and delivered to you by the Borrower and is in full force and effect as of the date hereof, and the agreements and obligations of the Borrower contained herein constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with its terms. -2- ARTICLE IV MISCELLANEOUS This Amendment may be executed in any number of counterparts, each of which when executed and delivered shall be deemed an original, but all of which together shall constitute one instrument. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Except to the extent specifically amended and supplemented hereby, all of the terms, conditions and the provisions of the Agreement, the Note and each of the other documents and agreements executed in connection therewith shall remain unmodified, and the Agreement, the Note and each of the other documents, as amended and supplemented by this Amendment, are confirmed as being in full force and effect. If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this Amendment and return such counterpart to the undersigned, whereupon this Amendment, as so accepted by you, shall become a binding agreement between you and the undersigned. Very truly yours, EXCEL SWITCHING CORPORATION (f/k/a EXCEL, INC.) By: /S/ CHRISTOPHER STAVROS ----------------------- Title: Vice President/General Counsel The foregoing Amendment is hereby accepted by the undersigned as of June 29, 1999. BANKBOSTON, N.A., (f/k/a THE FIRST NATIONAL BANK OF BOSTON) By: /S/BRADFORD P. EGAN ------------------- Title: Vice President -3- EX-10.10 3 EXHIBIT 10.10 EXHIBIT 10.10 AMENDMENT NO.1 TO VENDOR PROGRAM AGREEMENT (EXCEL) This AMENDMENT NO. 1 ("Amendment") TO VENDOR PROGRAM AGREEMENT dated as of March 30, 1999 is entered into as of July 9, 1999 between NATIONSCREDIT COMMERCIAL CORPORATION ("NCC"), a Delaware corporation with its principal office at 1355 Windward Concourse, Alpharetta, Georgia 30005, and EXCEL SWITCHING CORPORATION ("Client"), a Delaware corporation, with its principal office at 255 Independence Drive, Hyannis, Massachusetts 03601. RECITALS A. Client and NCC executed and delivered a certain Vendor Program Agreement dated as of March ___, 1999 hereinafter referred to as the "Program Agreement", which provides for the financing by NCC of certain Contracts, Equipment and Payments upon the terms and conditions contained therein. B. Client has requested that NCC amend the Program Agreement to clarify certain sections of the Program Agreement dealing with loss pools, repurchase of equipment and remarketing]. C. Client and NCC each desire to amend the Program Agreement as provided herein. NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereby agree as follows: ARTICLE 1 - AMENDMENTS The Program Agreement is hereby amended as follows: 1.1 Add a new definition to the Definitions Section of the Program Agreement as follows: "FULL RECOURSE CONTRACT" has the meaning set forth in Section 8(e). 1.2 Section 8 of the Program Agreement is hereby amended and restated to read in full as follows: 8. ULTIMATE NET. LOSS LIMIT; FULL RECOURSE CONTRACTS. (a) The aggregate Net Loss incurred by Client pursuant to Section 7 with respect to Contracts funded by NCC on any date of calculation shall not exceed an amount ("Ultimate Net Loss Limit") equal to the greater of (A) $1,000,000 or (B) 20% of the aggregate outstanding Net Book Value of all other Contracts funded by NCC through such date, excluding from such calculations, however, any Contracts designated as Full Recourse Contras as defined in Section 8(e) below. (b) As used herein, "NET LOSS" means, with respect to any Contract, the sum of (i) all payments made by Client to NCC to repurchase such Contract, plus (ii) any cure payments made by Client to NCC with respect to such Contract, minus (iii) the total amount realized by Client (net of reasonable expenses) upon the liquidation or disposition of such Contract and the related Equipment, including recoveries from any Customer and from the sale, lease or other disposition of the Equipment. In computing Net Loss, amounts paid by Client with respect to a Contract may only be included if Client shall have Remarketed the related Equipment within 180 days following the date on which NCC requested repurchase of the Contract. (c) Client shall keep records with respect to each Contract that it repurchases from NCC, showing amounts paid by Client to NCC with respect to such Contract, amounts realized by it from the liquidation of Equipment, amounts otherwise recovered and costs of recovery. Upon request, Client will furnish a written report to NCC, within 10 days after the request, showing such amounts for any or all Contracts. NCC shall be entitled, on reasonable notice and at reasonable times, to audit such records of Client. (d) Client may not, without the prior written consent of NCC (which shall not be unreasonably withheld and subject to Section 10(e) hereof), sell any Equipment for a price less than the Net Book Value of such Contract, or compromise or settle the amount owing on any repurchased Contract for an amount less than the Net Book Value thereof. (e) Certain Contracts proposed for funding under this Agreement which do not meet NCC's credit criteria may nevertheless be approved by NCC if so requested by Client in an Application, and if so designated by NCC in its sole discretion in its approval of the Application, with full recourse to Client ("Full Recourse Contracts"); provided that the total aggregate Funded Amount for all Full Recourse Contracts outstanding at any one time shall not exceed $___________. NCC and Client agree that NCC will periodically review this amount and that NCC may change such limit effective upon notice to Client. If a Full Recourse Contract sustains any default or event of default, Client agrees to pay NCC its Net Book Value applicable to such Contract within 10 Business Days after NCC makes demand therefor. 1.2 Section 9 of the Program Agreement is hereby amended and restated to read in full as follows: (c) If (i) Client breaches any representation, warranty or covenant or fails to perform its obligations in this Agreement, or any related instrument or agreement, (ii) any Customer returns or fails to accept any Equipment for any reason, (iii) any Customer fails to make its first rental payment following NCC's funding of a Contract, or (iv) any Customer fails to make payments under any Contract alleging action or inaction (including breach of any agreement or warranty) on the part of Client, then NCC may require that Client repurchase the affected Contract(s) and NCC's rights respecting the applicable Equipment for the Net Book Value thereof; PROVIDED THAT if a Customer claims a breach of warranty by Client, Client will notify NCC of such claim, Client and NCC will investigate such claim for a period not to exceed 90 days to determine whether in fact a breach of warranty has occurred and NCC will not make a demand for repurchase on such grounds until the earlier of the expiration of the 90-day period or the date on which the investigation is completed and determines that such claim is justified. Subject to the proviso in the previous sentence, any repurchase under this shall occur within 10 Business Days after NCC makes demand therefor. 1.3 Section 10(a) of the Program Agreement is hereby amended and restated to read in full as follows: (a) Client will, at the request of NCC, assist NCC in Remarketing any Equipment returned to or repossessed by NCC, whether due to expiration of a Lease, default under a Contract, early or scheduled termination of a Lease, voluntary return of Equipment, or otherwise (such Equipment being "OFF-LEASE"). Remarketing shall be performed as provided below. Client shall not discriminate against (but shall not be required to give priority to) Equipment being Remarketed hereunder in favor or to the detriment of any other used equipment owned, managed, sold or remarketed by Client. 1.4 Section 10(e) of the Program Agreement is hereby amended and restated to read in full as follows: (e) In establishing rental or sales rates for the Remarketing of any Equipment, Client shall apply rates that, in its best commercial judgment, are the most favorable rates obtainable for equipment of such types. Client shall not offer credits or discounts without NCC's prior approval. Client will promptly identify to NCC any prospective lessees or purchasers of any Equipment, and will promptly transmit any proposed lease, renewal, extension or sales contract relating to Equipment and any related materials. Client shall use its best efforts to provide NCC with such credit information as NCC may request with respect to any prospective lessee or purchaser, but it is understood that such information is provided without warranty by Client as to accuracy or completeness. NCC may approve the Customer, price, terms and conditions of any Remarketing transaction in NCC's sole discretion, and Client will not consummate any transaction unless it is approved; PROVIDED THAT after Client has presented and NCC has rejected two bona fide offers to purchase particular Equipment, NCC may not thereafter unreasonably withhold its approval of any subsequent bona fide offers to purchase such Equipment. "Bona fide offer" as used in this subsection (e) means any offer in writing from a third party unaffiliated with Client consistent with past sales of like kind equipment, if any. If NCC approves of a transaction it will notify Client in writing of the approval. NCC's failure to notify Client of approval within five Business Days after receipt of complete credit and other information will constitute rejection. NCC will, concurrently, use its reasonable efforts to remarket any Off-Lease Equipment. ARTICLE 2 - REPRESENTATIONS AND WARRANTIES 2.1 Client and NCC each hereby represent and warrant to one another that the execution and delivery of this Amendment and compliance by Client and NCC, respectively, with all of the provisions of this Amendment (a) are within the powers and purposes of such corporation; (b) have been duly authorized or approved by such corporation; and (c) when executed and delivered by or on behalf of Client and NCC, respectively, will constitute valid and binding obligations of each, enforceable in accordance with its terms. Client and NCC each reaffirms all of its obligations under the Program Agreement, amended to date and by this Amendment. ARTICLE 3 - GENERAL PROVISIONS 3.1 Except as specifically modified by this Amendment, all terms and provisions of the Program Agreement shall remain unmodified and in full force and effect. Nothing contained in this Amendment shall in any way impair the validity or enforceability of the Program Agreement, as modified hereby, or alter, waive, annul, vary, affect, or impair any provision, condition, or covenant therein or any rights, power, or remedy granted therein. 3.2 Each party hereto has cooperated in the drafting and preparation of this Amendment, and, as a result, this Amendment shall not be construed against any party. This Amendment may be amended or modified only by a written agreement signed by the parties hereto. This Amendment may be executed in counterparts. 3.3 Unless specifically defined herein, all capitalized terms shall be defined in accordance with the Program Agreement. 3.4 To the extent that any provision of this Amendment is not enforceable under applicable law, such provision shall be deemed null and void and shall have no effect on the remaining portions of the Amendment or Program Agreement. 3.5 This Amendment, and all other agreements referred to herein or delivered in connection herewith, shall constitute the entire agreement between the parties relating to the subject matter hereof, and shall rescind all prior agreements and understandings between the parties hereto relating to the subject matters hereof. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. EXCEL SWITCHING CORPORATION NATIONSCREDIT COMMERCIAL CORPORATION By /s/ Stephen S. Galliker By /s/ William P. Gmaz ---------------------------- ---------------------------- Its Chief Financial Officer Its Senior Vice President EX-27 4 EXHIBIT 27
5 This schedule contains summary financial information extracted from the Excel Switching Corporation's Consolidated Condensed Financial Statements for the periods ending June 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-30-1999 32940 0 81716 0 47749 0 (2728) 0 12822 0 187839 0 24747 0 0 0 230582 0 42866 0 3958 0 0 0 0 0 366 0 183392 0 230752 0 43218 80558 43218 80558 13689 25906 13689 25906 22854 40580 0 0 (1306) (2514) 7981 14072 3661 6796 4320 9790 0 0 0 0 0 0 4320 9790 .12 .26 .10 .24
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