<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
[_] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________.
Commission file number: 000-24597
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CARRIER ACCESS CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1208770
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(State or other jurisdiction of incorporation (I.R.S. EMPLOYER
or organization) identification no.)
5395 Pearl Parkway, Boulder, CO 80301
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(Address of principal executive offices)
(Zip Code)
(303) 442-5455
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(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
--- ---
The number of shares outstanding of the issuer's common stock, par value
$0.001, as of June 30, 1999 was 23,925,987 shares.
<PAGE>
CARRIER ACCESS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................................... 2
Condensed Balance Sheets -- June 30, 1999 (unaudited) and December 31, 1998....... 2
Condensed Statements of Operations (unaudited) -- Three and Six Months Ended June
30, 1999 and 1998.................................................................. 3
Condensed Statements of Cash Flows (unaudited) -- Six Months Ended June 30, 1999
and 1998........................................................................... 4
Notes to Condensed Financial Statements (unaudited)................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 18
Item 2. Changes in Securities and Use of Proceeds.......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................................ 18
Item 6. Exhibits and Reports on Form 8-K................................................... 18
Signature.......................................................................... 19
</TABLE>
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARRIER ACCESS CORPORATION
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $34,840 $31,201
Marketable securities available for sale 27,144 22,777
Accounts receivable, net 13,827 8,493
Inventory, net 5,527 5,053
Deferred income taxes 1,292 1,198
Prepaid expenses and other current assets 1,437 804
------- -------
Total current assets 84,067 69,526
Property and equipment, net 3,486 2,599
Deferred income taxes 118 118
Other assets 87 70
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Total assets $87,758 $72,313
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,348 $ 6,913
Income taxes payable 1,706 2,000
Other current liabilities --- 42
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Total current liabilities 11,054 8,955
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Stockholders' equity:
Common stock and additional paid-in-capital 62,890 59,983
Deferred stock option compensation (1,968) (2,377)
Retained earnings 15,782 5,752
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Total stockholders' equity 76,704 63,358
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Total liabilities and stockholders' equity $87,758 $72,313
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 2
<PAGE>
CARRIER ACCESS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net revenue $25,288 $ 9,049 $46,972 $16,292
Cost of goods sold 11,088 4,513 19,972 8,281
------- ------- ------- -------
Gross profit 14,200 4,536 27,000 8,011
------- ------- ------- -------
Operating expenses:
Research and development 2,893 1,150 5,216 1,993
Sales and marketing 2,630 1,020 4,909 1,995
General and administrative 1,084 789 2,015 1,320
Amortization of deferred stock compensation 205 175 409 279
------- ------- ------- -------
Total operating expenses 6,812 3,134 12,549 5,587
------- ------- ------- -------
Income from operations 7,388 1,402 14,451 2,424
Other income, net 543 140 1,099 308
------- ------- ------- -------
Income before income taxes 7,931 1,542 15,550 2,732
Income tax expense 2,814 607 5,520 1,057
------- ------- ------- -------
Net income 5,117 935 10,030 1,675
Preferred stock dividend requirement --- (658) --- (1,316)
------- ------- ------- -------
Net income available to common stockholders $ 5,117 $ 277 $10,030 $ 359
======= ======= ======= =======
Net income per share:
Basic $ 0.21 $ 0.02 $ 0.42 $ 0.02
Diluted $ 0.20 $ 0.02 $ 0.40 $ 0.02
Weighted average common shares:
Basic 23,920 14,434 23,812 14,379
Diluted 25,285 15,521 25,231 15,273
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 3
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CARRIER ACCESS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $10,030 $ 1,675
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization expense 404 183
Provision for doubtful accounts and returns 349 308
Provision for inventory obsolescence, net 216 210
Tax benefit relating to exercise of stock options 2,552 -------
Compensation expense related to stock
options issued at less than fair value 409 279
Deferred income tax benefit (94) (226)
Changes in operating assets and liabilities:
Accounts receivable (5,683) (678)
Inventory (691) (84)
Prepaid expenses and other (650) (39)
Accounts payable and accrued expenses 2,393 (1,048)
Income taxes payable (294) 379
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Net cash provided by operating activities 8,941 959
------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,293) (821)
Purchases of securities available for sale (4,367) (731)
Other 2 (12)
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Net cash used by investing activities (5,658) (1,564)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 356 50
------- -------
Net increase (decrease) in cash and cash equivalents 3,639 (555)
Cash and cash equivalents at beginning of period 31,201 6,104
------- -------
Cash and cash equivalents at end of period $34,840 $ 5,549
======= =======
Supplemental cash flow disclosures:
Cash paid for income taxes $ 2,421 $ 886
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 4
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CARRIER ACCESS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Business and Basis of Presentation
Carrier Access Corporation (the "Company") is a leading provider of multi-
service digital access ("MDA") equipment to competitive telecommunications
carriers, including competitive local exchange carriers ("CLECs"), internet
service providers ("ISPs") and wireless carriers. Carrier Access's MDA
equipment is used by competitive carriers to provide enhanced voice and high-
speed internet services to end users such as small- and medium-sized businesses
and government and educational institutions. Carrier Access's MDA equipment
solutions are used by carriers primarily to provide access to end users in the
last-mile of service delivery. Carrier Access sells its products through
distribution and other direct purchase agreements.
The accompanying unaudited financial statements of Carrier Access have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, such statements
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of interim period results. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in Carrier Access's Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("SEC") on March 31, 1999.
The results of operations for the interim periods are not necessarily
indicative of results to be expected for the entire year or for other future
interim periods.
Note 2. Inventory
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
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<S> <C> <C>
Raw materials $3,713 $3,327
Work-in-process 11 93
Finished goods 2,595 2,209
------ ------
Total 6,319 5,629
Less: reserve for obsolescence (792) (576)
------ ------
Total inventory, net $5,527 $5,053
====== ======
</TABLE>
Note 3. Stockholders' Equity and Redeemable Preferred Stock
On August 5, 1998, Carrier Access completed its initial public offering
("IPO") of 3,000,000 shares of Common Stock, and on August 11, 1998 completed
the 450,000 share over-allotment purchase by the underwriters, both at the IPO
price of $12.00 per share. The IPO resulted in net proceeds of approximately
$37.6 million. Aggregate offering costs were approximately $3.8 million.
On August 5, 1998, in conjunction with Carrier Access's IPO, 1,210,861 shares
of Series A preferred stock and 2,517,894 shares of Series B preferred stock
with a liquidation value of $2.86 and $4.99 per share, respectively, were
converted into Common Stock. The conversion gave effect to a three-for-two
forward stock split, resulting in the issuance of 5,593,133 shares of Common
Stock to the preferred stockholders.
As a result of Carrier Access's IPO, exercise of the over-allotment option,
the conversion of the Redeemable Preferred Stock and the exercise of certain
stock options by employees, Carrier Access had 23,925,987 shares of Common Stock
outstanding at June 30, 1999.
Page 5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Notice Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that
have been made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on current
expectations, estimates and projections about Carrier Access's industry,
management's beliefs, and assumptions made by management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results and outcomes may differ
materially from what is expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth herein under
"Risk Factors." Particular attention should be paid to the cautionary language
in "Risk Factors" under the headings "Significant Fluctuations in Results of
Operations," "Dependence on Emerging Competitive Carriers," "Intense
Competition," "Dependence on Distribution Channels," "Competitive Carrier
Customer Concentration," "Possible Decline in Prices," and "Risks Associated
with Manufacturing." Unless required by law, Carrier Access undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Results of Operations
Summary
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net revenue 25,288 9,049 46,972 16,292
Gross profit 14,200 4,536 27,000 8,011
Income from operations 7,388 1,402 14,451 2,424
Net income available to common stockholders 5,117 277 10,030 359
Net income per share (diluted) $ 0.20 $ 0.02 $ 0.40 $ 0.02
</TABLE>
For the three months ended June 30, 1999 Carrier Access's net income and
operating income increased to $5.1 million and $7.4 million respectively,
compared to $277,000 and $1.4 million for the three months ended June 30, 1998.
For the six months ended June 30, 1999, Carrier Access's net income available to
Common Stockholders and operating income increased to $10.0 million and $14.5
million, respectively, compared to $359,000 and $2.4 million for the six months
ended June 30, 1998. These increases were due primarily to a significant
increase in the sales of Carrier Access products, reflecting the introduction of
the Access Navigator, enhancements to existing products, and increased sales of
existing products. Carrier Access's gross margin on net revenue was 57% for the
six months ended June 30, 1999, compared to 49% for the six months ended June
30, 1998. Also, contributing to higher net income for 1999 was a substantial
increase in other income, primarily reflecting interest income.
Net Revenue and Cost of Goods Sold
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net revenue 25,288 9,049 46,972 16,292
Cost of goods sold 11,088 4,513 19,972 8,281
</TABLE>
Net revenue for the three and six months ended June 30, 1999 increased to
$25.3 million and $47.0 million, respectively, compared to $9.0 million and
$16.3 million for the same periods of 1998. These increases were attributable
to the introduction and sale of new products such as the Access Navigator
product family and enhancements in the Wide Bank product family including, but
not limited to NEBS, MSO and STS1 options, along with increases in the sales of
existing company products to distributors and direct customers. Net revenue was
partially affected by decreases in the average selling price of the Access Bank
product family during the last two months. Carrier Access anticipates that
sales for the Wide Bank and Access Navigator product families will increase at a
greater rate than the Access Bank product family as we believe evaluations of
product trials will convert into customer sales. The timing and quantities of
orders for company products may vary from quarter to quarter in the future due
to factors such as demand for the products, ordering patterns of distributors,
and the introduction and sale of competing products. A significant portion of
our net revenue has been derived from a limited number of large orders, and we
believe that this trend will continue in the future, especially if the
percentage of direct sales to end users increases as we anticipate. The timing
of these orders and our ability to fulfill them can cause material fluctuations
in our operating results, and we anticipate that such fluctuations will occur.
page 6
<PAGE>
During the six month period ended June 30, 1999, most of the sales of Carrier
Access's products were made through distributors, and Carrier Access's success
depends in part on the continued sales and customer support efforts of its
network of distributors. In the first six months of 1999, Walker & Associates
("Walker"), Phillips Communications and Equipment ("Phillips"), and ADC
Telecommunications ("ADC") accounted for 37%, 13%, and 10%, respectively, of net
revenue. Carrier Access expects that the sale of its products will continue to
be made to a small number of distributors and other direct customers.
Accordingly, the loss of, or a reduction in sales to, any of Carrier Access's
key distributors and direct customers could have a material adverse effect on
Carrier Access's business, financial condition or results of operations. In
addition to being dependent on a small number of distributors for a majority of
its net revenue, Carrier Access believes that its products are distributed to a
limited number of competitive carrier customers who are primarily CLECs. In the
six months ended June 30, 1999, Carrier Access believes that two of these
competitive carrier end user customers each accounted for more than 10% of its
net revenue.
Cost of goods sold increased to $11.1 million for the three months ended June
30, 1999 compared to $4.5 million for the corresponding three month period of
1998. Costs of goods sold increased to $20.0 million for the six months ended
June 30, 1999 compared to $8.3 million for the corresponding six-month period of
1998. These increases were primarily attributable to increased product shipments
that were partially offset by cost reductions in existing product platforms.
Gross Margins
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Gross margin 56% 50% 57% 49%
</TABLE>
The increases in Carrier Access's gross margin in the three and six months
ended June 30, 1999 compared to the same periods of 1998 were primarily due to
cost reductions in existing product platforms and the introduction of the Access
Navigator in the first six months of 1999. Carrier Access believes that gross
margin will decline if pricing declines occur in its Access Bank product
families at a greater rate than anticipated cost reductions. However, this
decline could be partially offset by a higher percentage of sales in the Access
Navigator product families which have higher gross margins.
Carrier Access believes that average selling prices and gross margins for its
products will decline as such products mature, as volume price discounts in
distributor contracts and direct sales relationships take effect and as
competition intensifies, among other factors. In addition, discounts to
distributors vary among product lines and are based on volume shipments, both of
which affect gross margins. Carrier Access's gross margin for its Access
Navigator product family is currently higher than the gross margin for its Wide
Bank product family and Access Bank product families. Carrier Access believes
that its gross margins are likely to fluctuate in the future based on product
mix and channel mix. Margins will also likely be adversely effected from time
to time by new product introductions by Carrier Access and its competitors.
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Research and development expenses 2,893 1,150 5,216 1,993
Percentage of net revenue 11% 13% 11% 12%
</TABLE>
Research and development expenses increased to $2.9 million and $5.2 million
in the three and six months ended June 30, 1999 compared to $1.1 million and
$2.0 million for the same periods in 1998. This increase in both periods was
primarily due to an increase in the number of personnel engaged in the
development of new products, including the Access Navigator. Carrier Access
expects the amount of research and development expense will increase at a faster
rate in third and fourth quarters of 1999 to fund the development of new product
platforms, enhancements to existing product families, and the addition of new
research and development facilities.
Sales, Marketing and General and Administrative Expenses and Deferred Stock
Compensation
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Sales and marketing expenses 2,630 1,020 4,909 1,995
General and administrative expenses 1,084 789 2,015 1,320
Amortization of deferred stock compensation 205 175 409 279
--------- --------- --------- ----------
Total selling, general and administrative expenses
and deferred stock compensation
</TABLE>
Page 7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
3,919 1,984 7,333 3,594
As a percentage of net revenue 15% 22% 16% 22%
</TABLE>
Selling, general and administrative expenses (including deferred stock
compensation) increased to $3.9 million and $7.3 million for the three and six
months ended June 30, 1999 from $2.0 million and $3.6 million for the same
periods of 1998. The increase in sales and marketing expenses in each period
was the result of Carrier Access's expanded sales and marketing activities and
an increase in the size of the sales force and a corresponding increase in sales
salaries and commissions. The increase in general and administrative expenses
in the three and six months ended June 30, 1999 compared with the same periods
of 1998 was due to the addition of personnel and facilities costs necessary to
support the expansion of Carrier Access's business. Carrier Access has hired and
intends to continue to hire additional sales and marketing personnel and to
continue to aggressively pursue sales and marketing campaigns, and therefore
expects these expenses to increase in absolute dollars in the future. Carrier
Access also expects general and administrative expenses to increase in absolute
dollars as Carrier Access continues to add personnel and incurs additional costs
related to the expansion of its business and operation as a public company and
incurs increased costs in connection with the administration of multiple
facilities.
Other Income
Interest and other income increased to $543,000 and $1.1 million for the three
and six months ended June 30, 1999 compared to $140,000 and $308,000 for the
same periods in 1998, due to interest earned on higher cash balances.
Income Taxes
For the three and six months ended June 30, 1999, Carrier Access's effective
combined federal and state income tax rate was 35.5% and 35.5%, compared to
39.4% and 38.7% for the three and six months ended June 30, 1998. Carrier
Access's annual effective tax rate decreased due to the research and development
tax credit and non-taxable interest income on tax exempt marketable securities.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1999 1998
------------ --------------
<S> <C> <C>
Working capital 73,013 60,571
Cash, cash equivalents and marketable securities 61,984 53,978
Total assets 87,758 72,313
Six Months Ended
June 30, December 31,
(In thousands) 1999 1998
------------ --------------
<S> <C> <C>
Operating activities 8,941 959
Investing activities (5,658) (1,564)
Financing activities 356 50
</TABLE>
Net cash provided by operating activities for the six months ended June 30,
1999 totaled approximately $8.9 million. Cash provided by operating activities
was primarily due to net income, the tax benefit relating to the exercise of
stock options and an increase in accounts payable, partially offset by increases
in accounts receivable, inventory and prepaid expenses. Carrier Access
anticipates that increased sales to direct customers could increase Days Sales
Outstanding and therefore accounts receivables balances will increase in future
quarters.
Cash used by investing activities was approximately $5.7 million for the six
months ended June 30, 1999. Cash used by investing activities of $4.4 million
was primarily a result of purchasing U.S. Government Agency and Corporate bonds
with maturities greater than six months. Carrier Access's capital expenditures
for the six months ended June 30, 1999 were $1.3 million for additions to
facilities and equipment to support its research, development and manufacturing
activities. Carrier Access believes its current facilities and equipment are
sufficient to meet its current and anticipated manufacturing requirements for
the next 18 months. However, Carrier Access is currently expanding its
facilities capacity to support the addition of new employees engaged in research
and development, sales, marketing and customer support. Carrier Access
anticipates the expansion to be completed in 1999. Other capital expenditures
during the remainder of 1999 are expected to continue to increase over 1998
levels.
Cash provided by financing activities was approximately $356,000 for the six
months ended June 30, 1999, due to the exercise of stock options.
Carrier Access's net inventory levels increased approximately $474,000 to $5.5
million at June 30, 1999 from $5.1 million at December 31, 1998, due primarily
to increases in raw materials and finished goods inventory. Carrier Access
anticipates that inventory levels will increase to provide fulfillment of
product orders as sales increase.
page 8
<PAGE>
Carrier Access believes that its existing cash and investment balances are
adequate to fund its projected working capital and capital expenditure
requirements for at least the next 12 months. Although operating activities may
provide cash in certain periods, to the extent Carrier Access experiences growth
in the future, it anticipates that its operating and investing activities may
use cash. Should the need arise, Carrier Access believes it would be able to
borrow additional funds or otherwise raise additional capital; however, there
can be no assurance that additional funds or capital will be available in
adequate amounts and on terms reasonably acceptable to Carrier Access. Carrier
Access may consider using its capital to make strategic investments or to
acquire or license technology or products.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. This statement will be effective for
all annual and interim periods beginning after June 15, 1999.
Carrier Access's management does not believe the adoption of this standard
will have a material effect on its financial statements.
The Year 2000 Issue
As is true for most companies, the Year 2000 problem creates a risk for us.
If our systems or the systems of third parties do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
our operations. The risk exists primarily in five areas:
. potential warranty or other claims from our customers;
. systems we use to run our business;
. ordering systems used by our distributors and direct customers;
. systems used by our suppliers and manufacturers; and
. the potential for failures of our products, particularly our central
office-based Wide Bank and Access Navigator Platforms, due to Year 2000
problems associated with products manufactured by other equipment vendors
used in conjunction with our products.
We are currently evaluating our exposure in all of these areas.
We are in the process of conducting a comprehensive inventory and evaluation
of the information systems used to run our business. Systems that are
identified as non-compliant will be upgraded or replaced. For the Year 2000
non-compliance issues identified to date, the cost of remediation is not
expected to be material to our operating results. However, if implementation of
replacement systems is delayed, or if significant new non-compliance issues are
identified, our business, financial condition or results of operations could be
materially adversely affected.
We have contacted our critical suppliers and independent manufacturers to
determine whether their operations and the products and services they provide
are Year 2000 compliant. Where practicable, we will attempt to mitigate our
risks with respect to the failure of our suppliers and independent manufacturers
to be prepared for any Year 2000 problems. However, such failures remain a
possibility and could have a material adverse impact on our business, financial
condition or results of operations.
Although we believe our products are Year 2000 compliant, because all customer
situations cannot be anticipated, we may see an increase in warranty and other
claims as a result of the Year 2000 transition. In addition, litigation
regarding Year 2000 compliance issues is expected to escalate. For these
reasons, the impact of customer claims could have a material adverse impact on
our business, financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of Carrier Access due to adverse
changes in financial and commodity market prices and rates. Historically, and
as of June 30, 1999, Carrier Access has had little or no exposure to market risk
in the area of changes in foreign currency exchange rates as measured against
the United States dollar. Historically, and as of June 30, 1999, Carrier Access
has not used derivative instruments or engaged in hedging activities.
page 9
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in Carrier Access. The risks and uncertainties described
below are not the only risks that we face.
If any of the following risks actually occur, our business, financial
condition or results of future operations could be materially adversely
affected. In such case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
We Have a Limited Operating History.
We have a limited operating history. We did not begin commercial deployment
of our MDA equipment until the summer of 1995. Prior to 1997, we recorded only
nominal product revenue, and we have been profitable on an annual basis for only
two years. Accordingly, an investor in our common stock must evaluate the
risks, uncertainties and difficulties frequently encountered by early stage
companies in rapidly evolving markets such as the telecommunications equipment
industry. Some of these risks, in addition to those risks disclosed elsewhere
in this "Risk Factors" section, include:
. significant fluctuations in quarterly operating results;
. past losses and potential of future losses;
. the intensely competitive market for telecommunications equipment;
. the expenses and challenges encountered in expanding our sales, marketing
and research and development infrastructure;
. the risks related to our timely introduction of new products and product
enhancements; and
. the risks associated with increased business development and expansion of
our operations.
Due to our limited operating history and experience with respect to these
issues, we may not successfully implement any of our strategies or successfully
address these risks and uncertainties.
Our Quarterly Results Fluctuate Significantly, and We May Not be Able to
Maintain Our Existing Growth Rates.
Although our revenues have grown significantly in recent quarters, such growth
rates may not be sustainable, and you should not use these past results to
predict future revenue or operating results. Our quarterly and annual operating
results have fluctuated in the past and may vary significantly in the future.
Our future operating results will depend on many factors, many of which are
outside of our control, including the following:
. the size of the orders for our products, and the timing of such orders;
. the commercial success of our products, and our ability to ship enough
products to meet customer demand in any particular period;
. changes in the financial stability of our distributors, customers or
suppliers;
. changes in our pricing policies or the pricing policies of our competitors;
. fluctuations in ordering due to the move to direct sales
. potential bad debt due to increased direct sales;
. seasonal fluctuations in the placement of orders;
. changes in our distribution channels;
. potential delays or deferrals in our product implementation at customer
sites;
. technical problems in customizing or integrating our products with end
users' systems, and potential product failures or errors;
. certain government regulations; and
. general economic conditions as well as those specific to the
telecommunications equipment industry.
A significant portion of our net revenue has been derived from a limited
number of large orders, and we believe that this trend will continue in the
future, especially if the percentage of direct sales to end users increases as
we anticipate. The timing of these orders and our ability to fulfill them can
cause material fluctuations in our operating results, and we anticipate that
such fluctuations will occur. Also, our distribution and purchase agreements
generally allow our distributors and direct customers to postpone or cancel
orders without penalty until a relatively short period of time prior to
shipment. In the past, we have occasionally experienced cancellations and
delays of orders, and we expect to continue to experience order cancellations
and delays from time to time in the future. Any shortfall in orders would
adversely affect our operating income for a quarter or series of quarters,
especially since operating expenses in a quarter are relatively fixed, and these
fluctuations could affect the market price of our common stock.
Because most all of our sales are through indirect distribution channels, our
ability to judge the timing and size of individual orders is more limited than
for manufacturers selling directly to the end users of their products.
Moreover, any downturn in general
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economic conditions could lead to significant reductions in customer spending
for telecommunications equipment, which could result in delays or cancellations
of orders for our products. Our operating expenses are based on our expectations
of future revenues and are relatively fixed in the short term. Due to these and
other factors, if our quarterly or annual revenues fall below the expectations
of securities analysts and investors, the trading price our common stock could
significantly decline.
We Depend on Emerging Telecommunications Service Providers for Substantially All
of Our Business.
Up to now, our customers have consisted primarily of CLECs and, to a lesser
extent, long distance carriers ("IXCs"), ISPs and wireless carriers. The market
for the services provided by the majority of these competitive carriers has only
begun to emerge since the passage of the Telecommunications Act of 1996 (the
"1996 Act"), and many competitive carriers are still building their
infrastructure and rolling out their services. These competitive carriers
require substantial capital for the development, construction and expansion of
their networks and the introduction of their services. The ability of these
emerging competitive carriers to fund such expenditures often depends on their
ability to obtain sufficient financing. Such financing may not be available to
many of these emerging competitive carriers on favorable terms, if at all. If
our current or potential emerging competitive carrier customers cannot
successfully raise needed funds, or if they experience any other trends
adversely affecting their operating results or profitability, these carriers'
capital spending programs may be adversely impacted. If our current or
potential competitive carrier customers are forced to defer or curtail their
capital spending programs, our sales and operating results will likely be
adversely affected.
In addition, many of the industries in which the competitive carriers operate
have recently experienced consolidation. In particular, many telecommunication
carriers have recently acquired, been acquired or merged with ISPs. The loss of
one or more of our competitive carrier customers, through industry consolidation
or otherwise, could have a material adverse effect on our sales and operating
results.
Our Customers are Subject to Heavy Government Regulation in the
Telecommunications Industry, and Regulatory Uncertainty May Have a Material
Adverse Effect on Our Business.
Competitive carriers are allowed to compete with ILECs in the provisioning of
local exchange services primarily as a result of the adoption of regulations
under the 1996 Act that impose new duties on ILECs to open their local telephone
markets to competition. Although the 1996 Act was designed to expand
competition in the telecommunications industry, the realization of the
objectives of the 1996 Act is subject to many uncertainties. Such uncertainties
include judicial and administrative proceedings designed to define rights and
obligations pursuant to the 1996 Act, actions or inactions by ILECs or other
carriers that affect the pace at which changes contemplated by the 1996 Act
occur, resolution of questions concerning which parties will finance such
changes, and other regulatory, economic and political factors. Any changes to
the 1996 Act or the regulations adopted thereunder, the adoption of new
regulations by federal or state regulatory authorities under the 1996 Act or any
legal challenges to the 1996 Act could have a material adverse impact upon the
market for our products.
We are aware of certain litigation challenging the validity of the 1996 Act
and local telephone competition rules adopted by the Federal Communications
Commission ("FCC") for the purpose of implementing the 1996 Act. Furthermore,
Congress has indicated that it may hold hearings to gauge the competitive impact
of the 1996 Act, and we cannot assure you that Congress will not propose changes
to the Act. This litigation and potential regulatory changes may delay further
implementation of the 1996 Act, which could hurt demand for our products.
Moreover, our distributors or competitive carrier customers may require that we
modify our products to address actual or anticipated changes in the regulatory
environment. Further, we may decide to modify our products to meet these
anticipated changes. Our inability to modify our products in a timely manner or
address such regulatory changes could have a material adverse impact on our
business, financial condition or results of operations.
Our Markets are Highly Competitive and Have Many More Established Competitors.
The market for our products is intensely competitive, with a large number of
equipment suppliers providing a variety of products to diverse market segments
within the telecommunications industry. Our existing and potential competitors
include many large domestic and international companies, including certain
companies that have substantially greater financial, manufacturing,
technological, sales and marketing, distribution and other resources. Our
principal competitors for our Access Bank product family include Adtran, General
Datacom, Lucent, NEC, Newbridge, Nortel, Pairgain, Paradyne, Premisys, Pulsecom,
World Access and other small private companies. Our principal competitors for
our Wide Bank product family include Alcatel, NEC and World Access. Our
principal competitors for our Access Navigator product family include AFC,
Alcatel, DSC, Lucent, Nortel, Premisys, Reltec, Telect, Tellabs and other small
private companies. We expect that many of our competitors who currently offer
products competitive with only one of our product lines will eventually offer
products competitive with all of our product lines. In addition, many start-up
companies have recently begun to manufacture products similar to ours. Due to
the rapidly evolving markets in which we compete, additional competitors with
significant market presence and financial resources, including large
telecommunications equipment manufacturers and computer hardware and software
companies, may enter these markets through acquisition, thereby further
intensifying competition. Additionally, one of our distributors is currently
competing with us, and additional distributors may begin to develop or market
products that compete with our products.
Many of our current and potential competitors are substantially larger than us
and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, such competitors
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may be able to respond more rapidly to new or emerging technologies and changes
in customer requirements, or to devote greater resources than we can devote to
the development, promotion and sale of their products. Such competitors may
enter our existing or future markets with solutions which may be less costly,
provide higher performance or additional features or be introduced earlier than
our solutions. Many telecommunications companies have large internal development
organizations which develop software solutions and provide services similar to
our products and services. We expect our competitors to continue to improve the
performance of their current products and to introduce new products or
technologies that provide added functionality and other features. Successful new
product introductions or enhancements by our competitors could cause a
significant decline in sales or loss of market acceptance of our products.
Competitive products may also cause continued intense price competition or
render our products or technologies obsolete or noncompetitive.
To be competitive, we will have to continue to invest significant resources in
research and development and sales and marketing. We cannot assure you that we
will have sufficient resources to make such investments or that we will be able
to make the technological advances necessary to be competitive. In addition,
our current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of our prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which would have a material adverse effect on our business,
financial condition and results of operations.
We Are Substantially Dependent on Our Distribution Channels.
To date, the substantial majority of the sales of our products have been made
through distributors. Carrier Access's distributors are responsible for
warehousing product and fulfilling product orders as well as servicing potential
competitive carrier customers and, in some cases, customizing and integrating
Carrier Access's products at end users' sites. As a result, our success depends
on maintaining good relations with our distributors. Sales of our products
historically have been made to a limited number of distributors and other direct
customers, as follows:
. In 1997, Walker, ADC and Phillips accounted for 36%, 20% and 14% of net
revenue, respectively.
. In 1998, Walker, Phillips and Telsource accounted for 40%, 17% and 15% of
net revenue, respectively.
. In the six months ended June 30, 1999, Walker, Phillips, and ADC accounted
for 37%, 13% and 10% of net revenue, respectively.
We expect that sales of our products will continue to be made to a small
number of distributors. Accordingly, if we lose any of our key distributors, or
experience reduced sales to such distributors, our business, financial condition
or results of operations would likely be adversely affected.
We have limited knowledge of the financial condition of certain of our
distributors; however, we are aware that some of our distributors have limited
financial and other resources which could impair their ability to pay us,
although the financial instability of these distributors has not limited any
distributor's ability to pay us for our products to date. We cannot assure you
that any bad debts that we incur will not exceed our reserves or that the
financial instability of one or more of our distributors will not materially
adversely affect our business, financial condition or results of operations.
We generally provide our distributors with limited stock rotation and price
protection rights. Other than limited stock rotation rights, we do not provide
our distributors with general product return rights. We have limited knowledge
of the inventory levels of our products carried by our OEMs and distributors,
and our OEMs and distributors have in the past reduced planned purchases of our
products due to overstocking. Such reductions in purchases due to overstocking
may occur again in the future. Moreover, distributors who have overstocked our
products have in the past reduced their inventories of our products by selling
such products at significantly reduced prices, and this may occur again in the
future. Any reduction in planned purchases or sales at reduced prices by
distributors or OEMs in the future could reduce the demand for our products,
create conflicts with other distributors or otherwise adversely affect our
business, financial condition and results of operations. In addition, three
times a year certain distributors are allowed to return a maximum of fifteen
percent of our unsold products for an equal dollar amount of new equipment. The
products must have been held in stock by such distributor and have been
purchased within the four month period prior to the return date. While to date
these returns have not had a material impact on our results of operations, we
cannot assure you that we will not experience significant returns in the future
or that we will make adequate allowances to offset such returns. Carrier Access
believes it has made adequate allowances for such returns.
We are generally required to give our distributors a 60-day notice of price
changes. Orders entered by distributors within the 60-day period are filled at
the lower product price. In addition, we grant certain of our distributors
"most favored customer" terms, pursuant to which we have agreed to not knowingly
grant another distributor the right to resell our products on terms more
favorable than those granted to the existing distributor, without offering the
more favorable terms to the existing distributor. It is possible that these
price protection and "most favored customer" clauses could cause a material
decrease in the average selling prices and gross margins of our products, which
could in turn have a material adverse effect on distributor inventories, our
business, financial condition or results of operations.
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In addition to being dependent on a small number of distributors for a
majority of our net revenue, we believe our products are distributed to a
limited number of competitive carrier customers who are primarily CLECs. None of
these competitive carrier customers has any obligation to purchase additional
products. Accordingly, we cannot assure you that present or future competitive
carrier customers will not terminate their purchasing arrangements with Carrier
Access or our distributors, or that they will not significantly reduce or delay
the amount of our products that they order. Any such termination, change,
reduction or delay in orders could have a material adverse effect on our
business, financial condition and results of operations.
Our Growth is Dependent upon Successfully Maintaining and Expanding Our
Distribution Channels and Direct Sales.
Our future net revenue growth will depend in large part on the following
factors:
. our success in maintaining our current distributor relationships;
. diversifying our distribution channels by selling to new distributors; and
Most of our existing distributors currently distribute the product lines of
our competitors. Some of our existing distributors may in the future distribute
other competitive product lines. There can be no assurance that we will be able
to attract and retain a sufficient number of our existing or future distributors
or that our distributors will recommend, or continue to recommend, our products
or that our distributors will devote sufficient resources to market and provide
the necessary customer support for such products. In the event that any of our
current distributors reduce their purchases of our products, or that we fail to
obtain future distributors, our business, financial condition or results of
operations could be materially and adversely affected.
In addition, it is possible that our distributors will give a higher priority
to the marketing and customer support of competitive products or alternative
solutions than to our products. Further, we cannot assure you that our
distributors will continue to offer our products. Our distributor relationships
are established through formal agreements that generally (1) do not grant
exclusivity, (2) do not prevent the distributor from carrying competing product
lines and (3) do not require the distributor to purchase any minimum dollar
amount of our products. Additionally, our distribution agreements do not
attempt to allocate certain territories for our products among our distributors.
To the extent that different distributors target the same end users of our
products, distributors may come into conflict with one another, which could
damage our relationship with, and sales to, such distributors.
Our Operating Results are Substantially Dependent on Sole and Single Source
Suppliers.
Although we generally use standard parts and components for our products, many
key parts and components are purchased from sole source vendors for which
alternative sources are not currently available. We currently purchase over 50
key components from vendors for which there is currently no substitute, and we
purchase over 25 key components from single vendors. In addition, we rely on
several independent manufacturers to provide certain PCBs, chassis and
subassemblies for our products. Our inability to obtain sufficient quantities
of these components has in the past resulted in, and may in the future result
in, delays or reductions in product shipments, which could materially adversely
affect our business, financial condition or results of operations. In the event
of a reduction or interruption of supply, we may need as much as six months
before we would begin receiving adequate supplies from alternative suppliers, if
any. We cannot assure you that any such source would become available to us or
that any such source would be in a position to satisfy our production
requirements on a timely basis, if at all. In such event, our business,
financial condition and results of operations would be materially adversely
affected.
In addition, manufacturing certain of these single or sole source components
is extremely complex, and our reliance on the suppliers of these components,
especially for newly designed components, exposes us to potential production
difficulties and quality variations that they experience, which has negatively
impacted cost and timely delivery of our products. Any significant interruption
in the supply, or degradation in the quality, of any such component could have a
material adverse effect on our business, financial condition or results of
operations.
Our Ability to Meet Customer Demand Depends on the Availability of Our
Components to Our Distributors.
Our distributors and direct customers frequently require rapid delivery after
placing an order. Because we do not maintain significant component inventories,
a delay in shipment by one of our suppliers could lead to our losing sales.
Lead times for materials and components vary significantly and depend on many
factors, some of which are beyond our control, such as specific supplier
performance, contract terms and general market demand for components. If
distributor orders vary significantly from forecasts, we may not have enough
inventory of certain materials and components to fill orders. Any shortages in
the future, including those occasioned by increased sales, could result in
delays in fulfillment of customer orders. Such delays could have a material
adverse effect on our business, financial condition or results of operations.
We Have Limited Manufacturing Experience, and Our Dependence on Independent
Manufacturers Could Result in Product Delivery Delays.
We currently use several independent manufacturers to provide certain
components, PCBs, chassis and subassemblies. Our reliance on independent
manufacturers involves a number of risks, including the potential for inadequate
capacity, the unavailability of or interruptions in access to certain process
technologies, and reduced control over delivery schedules, manufacturing yields
and costs. Some of our manufacturers and suppliers are undercapitalized, and
such manufacturers or suppliers may be unable in the future
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to continue to provide manufacturing services or components to us. If these
manufacturers are unable to manufacture our components in required volumes, we
will have to identify and qualify acceptable additional or alternative
manufacturers, which could take in excess of six months. We cannot assure you
that any such source would become available to us or that any such source would
be in a position to satisfy our production requirements on a timely basis, if
available. Any significant interruption in our supply of these components would
result in delays or in the allocation of products to customers, which in turn
could have a material adverse effect on our business, financial condition or
results of operations. Moreover, since all of our final assembly and test
operations are performed in one location, any fire or other disaster at our
assembly facility would have a material adverse effect on our business,
financial condition and results of operations.
Our Executive Officers and Certain Key Personnel Are Critical to Our Business,
and These Officers and Key Personnel May Not Remain With Us in the Future.
Our success depends to a significant degree upon the continued contributions
of our Chief Executive Officer, Chief Financial Officer and our key management,
sales, engineering, customer support and product development personnel, many of
whom would be difficult to replace. In particular, the loss of either Roger
Koenig, President and Chief Executive Officer, or Nancy Pierce, Chief Financial
Officer, both of whom co-founded our Company, could materially and adversely
affect us. We believe that our future success will depend in large part upon
our ability to attract and retain highly-skilled managerial, sales, customer
support and product development personnel. Competition for qualified personnel
in our industry and geographic location is intense, and we cannot assure you
that we will be successful in attracting and retaining such personnel. We do
not have employment contracts with any of our key personnel. The loss of the
services of any such persons, the inability to attract or retain qualified
personnel in the future or delays in hiring required personnel, particularly
engineering personnel and qualified sales personnel, could have a material
adverse effect on our business, financial condition or results of operations.
Our Ability to Manage Our Growth Will Affect Our Business.
We have experienced rapid growth in net revenue and expansion of our
operations, and we anticipate that further significant expansion will be
required to address potential growth in our customer base and market
opportunities. Such growth continues to place significant strain on our
management, information systems, operations and resources. For example, in the
past we have experienced minor shipping errors primarily as a result of training
new personnel in the face of a period of rapid growth. Our ability to manage
any future growth will continue to depend upon the successful expansion of our
sales, marketing, research and development, customer support, manufacturing and
administrative infrastructure and the ongoing implementation and improvement of
a variety of internal management systems, procedures and controls. Continued
growth will also require us to hire more engineering, sales and marketing and
administrative personnel, expand customer support capabilities, expand
management information systems and improve our inventory management practices.
Recruiting qualified personnel is an intensely competitive and time-consuming
process. We cannot assure you that we will be able to attract and retain the
necessary personnel to accomplish our growth strategies or that we will not
experience constraints that will adversely affect our ability to satisfy
customer demand in a timely fashion or to support satisfactorily our customers
and operations. We cannot assure you that we will not experience significant
problems with respect to any infrastructure expansion or the attempted
implementation of systems, procedures and controls. If our management is unable
to manage growth effectively, our business, financial condition or results of
operations could be materially adversely affected.
Our Growth is Dependent on Our Introduction of New Products and Enhancements to
Existing Products, and any Delay in Customers' Transition to Our New Products
Could Adversely Affect Our Business.
Our success depends on our ability to enhance our existing products and to
timely and cost-effectively develop new products and features that meet changing
end user requirements and emerging industry standards. However, we cannot
assure you that we will be successful in identifying, developing, manufacturing,
and marketing product enhancements or new products that will respond to
technological change or evolving industry standards. We intend to continue to
invest significantly in product and technology development. We have in the
recent past experienced delays in the development and commencement of commercial
shipment of new products and enhancements, resulting in distributor and end user
frustration and delay or loss of net revenue. It is possible that we will
experience similar or other difficulties in the future that could delay or
prevent the successful development, production or shipment of such new products
or enhancements, or that our new products and enhancements will not adequately
meet the requirements of the marketplace and achieve market acceptance.
Announcements of currently planned or other new product offerings by us or our
competitors have in the past caused, and may in the future cause, distributors
or end users to defer or cancel the purchase of our existing products. Our
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 our business, financial
condition or results of operations.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. Our introduction of new or
enhanced products will also require us 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 customer demand. We have historically
reworked certain of our products previously sold in order to add new features
which were included in
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subsequent release of such product. We can give no assurance that these
historical practices will not occur in the future and cause us to record lower
revenue or negatively affect our gross margins.
We believe that average selling prices and gross margins for our products will
decline as such products mature and as competition intensifies. To offset
declining selling prices, we believe that we must successfully reduce the costs
of production of our existing products and introduce and sell new products and
product enhancements on a timely basis at a lower cost or sell products and
product enhancements that incorporate features that enable them to be sold at
higher average selling prices. We may not be able to achieve the desired cost
savings. To the extent that we are unable to reduce costs sufficiently to
offset any declining average selling prices or we are unable to introduce
enhanced products with higher selling prices, our gross margins will decline,
and such decline would have a material adverse effect on our business, financial
condition and results of operations.
Our Products May Suffer from Defects or Errors Which May Subject Us to Product
Returns and Product Liability Claims.
Our products have in the past contained, and may in the future contain,
undetected or unresolved errors when first introduced or as new versions are
released. Despite our extensive testing, errors, defects or failures are
possible in our current or future products or enhancements. If such defects
occur after commencement of commercial shipments, the following may happen:
. delay in or loss of market acceptance and sales;
. product returns;
. diversion of development resources;
. injury to our reputation; or
. increased service and warranty costs.
Any of these results could have a material adverse effect on our business,
financial condition and results of operations. Significant delays in meeting
deadlines for announced product introductions or enhancements or performance
problems with such products could result in an undermining of customer
confidence in our products, which would materially and adversely affect our
customer relationships as well.
Although we have not experienced any product liability claims to date, the
sale and support of our products entails the risk of such claims, and it is
possible that we will be subject to such claims in the future. A successful
product liability claim brought against us could have a material adverse effect
on our business, financial condition or results of operations. Our agreements
with our distributors typically contain provisions designed to limit our
exposure to potential product liability claims. However, it is possible that
the limitation of liability provisions contained in our agreements may not be
effective under the laws of certain jurisdictions.
A Longer Than Expected Sales Cycle May Affect Our Revenues and Operating
Results.
The sale of our MDA products averages approximately four to six months in the
case of competitive carriers, but can take significantly longer in the case of
Incumbent Local Exchange Carriers ("ILECs") and other end users. This process
is often subject to delays over which we have little or no control, including
(1) a distributor's or a competitive carrier's budgetary constraints, (2)
distributor or competitive carrier internal acceptance reviews, (3) the success
and continued internal support of competitive carrier's own development efforts,
and (4) the possibility of cancellation or delay of projects by distributors or
competitive carriers. In addition, as competitive carriers have matured and
grown larger, their purchase process may become more institutionalized, and it
will become increasingly difficult, and requires more of our time and effort, to
gain the initial acceptance and final adoption of our products by these end
users. Although we attempt to develop our products with the goal of
facilitating the time to market of our competitive carrier's products, the
timing of the commercialization of a new distributor or competitive carrier's
application or service based on our products is primarily dependent on the
success and timing of a competitive carrier's own internal deployment program.
Delays in purchases of our products can also be caused by late deliveries by
other vendors, changes in implementation priorities and slower than anticipated
growth in demand for our products. A delay in, or a cancellation of, the sale
of our products could have a material adverse effect on our business, financial
condition and results of operations and cause our results of operations to vary
significantly from quarter to quarter.
We Must Keep Pace with Rapid Technological Change to Remain Competitive.
The telecommunications and data communications market is characterized by (1)
rapidly changing technology, (2) evolving industry standards, (3) changes in end
user requirements and (4) frequent new product introductions and enhancements
that may render our existing products obsolete. We expect that new technologies
will emerge as competition in the telecommunications and data communications
industry increases and the need for higher volume and more cost efficient
transmission equipment expands. Industry standards for MDA equipment and
technology are still evolving. The introduction of products embodying new
technologies or the emergence of new industry standards can render existing
products obsolete or unmarketable. For example, if the business market were to
broadly adopt telecommunications equipment based on cable modems or cable
telephony, sales of our existing or future products could be significantly
diminished. As standards and technologies evolve, we will be required to modify
our products or develop and support new versions of our products. The failure
of our products to comply, or delays in achieving compliance, with
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the various existing and evolving industry standards could adversely affect
sales of our current products or delay introduction of our future products.
Failure to Meet Future Capital Needs May Adversely Affect Our Business.
We require substantial working capital to fund our business. As of June 30,
1999, we had approximately $62 million in cash and short term investments. We
believe that such cash and cash equivalents, together with cash generated by
operations, if any, will be sufficient to meet our capital requirements for at
least the next twelve months. However, our capital requirements depend on
several factors, including the rate of market acceptance of our products, the
ability to expand our client base, the growth of sales and marketing and other
factors. If capital requirements vary materially from those currently planned,
we may require additional financing sooner than anticipated. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to those of the holders of our common stock. Additional
financing may not be available when needed on terms favorable to us or at all.
If adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our services, take advantage of future
opportunities or respond to competitive pressures, which could materially
adversely affect our business, financial condition or results of operations.
Continued Expansion of the Market for Communications Services is Necessary for
Our Future Growth.
Our success will also depend on continued growth in the market for
telecommunications and data communications services. The global communications
marketplace is evolving, and it is difficult to predict its potential size or
future growth rate. We cannot assure you that this market will continue to
grow. Moreover, increased regulation may present barriers to the sales of
existing or future products. If this market fails to grow or grows more slowly
or in a different direction than we currently anticipate, our business,
financial condition and results of operations would be materially and adversely
affected.
Our Failure to Adequately Protect Our Proprietary Rights May Adversely Affect
Us.
We rely primarily on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality procedures and contractual restrictions,
to establish and protect our proprietary rights. As of June 30, 1999, we have
been issued a total of five U.S. patents, we have three additional patents that
are pending issuance, of which one is allowable. We also have three U.S.
registered trademarks and two U.S. trademark application pending. We have also
entered into confidentiality agreements with all of our employees and
consultants and entered into non-disclosure agreements with our suppliers and
distributors in order to limit access to and disclosure of our proprietary
information. However, such measures may not be adequate to deter and prevent
misappropriation of our technologies or independent third-party development of
similar technologies.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary. Further, we may be subject
to additional risks as we enter into transactions in foreign countries where
intellectual property laws do not protect our proprietary rights as fully as do
the laws of the U.S. We cannot assure you that our competitors will not
independently develop similar or superior technologies or duplicate any
technology that we have. Any such events could have a material adverse effect
on our business, financial condition or results of operations.
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants in our markets increases and the
functionality of our products is enhanced and overlaps with the products of
other companies, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. From time to
time, third-parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to us. We have
no assurance that any future claims, if determined adversely to us, would not
have a material adverse effect on our business, financial condition or results
of operations. In our distribution agreements, we agree to indemnify
distributors and competitive carrier 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 net revenue we may have received from the distributor.
In the event litigation is required to determine the validity of any third-
party claims, such litigation, whether or not determined in our favor, could
result in significant expense to us, divert the efforts of our technical and
management personnel or cause product shipment delays. In the event of an
adverse ruling in any litigation, we might be required to discontinue the use
and sale of infringing products, expend significant resources to develop non-
infringing technology or obtain licenses from third-parties. In the event of a
claim or litigation against or by us or our failure to develop or license a
substitute technology on commercially reasonable terms, our business, financial
condition or results of operations could be materially adversely affected.
Our Stock Price Has Been Highly Volatile.
The market price of our common stock has been and is likely to continue to be
subject to fluctuations in response to variations in operating results,
announcements of technological innovations or new products by us or our
competitors, changes in financial estimates or recommendations by securities
analysts, regulatory developments and other events or factors. In addition, the
stock market in general and the market prices of equity securities of many high
technology companies in particular, have experienced
Page 16
<PAGE>
extreme price fluctuations, which often have been unrelated to the operating
performance of such companies. These broad market fluctuations may materially
adversely affect the market price of our common stock.
Our Company is Controlled by a Small Number of Stockholders.
Members of the Board of Directors and the executive officers of our Company,
together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 68% of our outstanding shares of common stock. In particular, Mr.
Koenig and Ms. Pierce, our Chief Executive Officer and Chief Financial Officer,
respectively, are married and beneficially own approximately 58% of our
outstanding shares of common stock. Accordingly, these stockholders are able to
elect all members of our Board of Directors and determine the outcome of all
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership by such persons and entities may delay,
defer or prevent a change in control of our Company and may adversely affect the
voting and other rights of other holders of our common stock.
Page 17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Carrier Access is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the registration statement for Carrier Access's IPO,
filed on Form S-1 under the Securities Act of 1933 (File No. 333-53947), was
July 30, 1998. The class of securities registered was Common Stock. The
Offering commenced on July 31, 1998 and all securities were sold in the
offering. The managing underwriters for the offering were Credit Suisse First
Boston, Hambrecht & Quist and Warburg Dillon read LLC.
Pursuant to the IPO Registration Statement, Carrier Access sold 3,450,000
shares of its Common Stock for aggregate gross proceeds of $41.4 million.
Carrier Access incurred expenses of approximately $3.8 million of which
approximately $2.9 million represented underwriting discounts and commissions
and approximately $900,000 represented other expenses related to the IPO. The
net IPO proceeds to Carrier Access after total expenses were approximately $37.6
million.
Carrier Access has used approximately $37.6 million of the proceeds from the
IPO as follows: approximately $15.5 million for working capital; approximately
$8.4 million for product development; approximately $2.1 million for capital
expenditures; and approximately $11.6 million for general corporate purposes.
The use of the proceeds from the offering does not represent a material change
in the use of proceeds described in the prospectus.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 27, 1999. Proxies of the
meeting were solicited by management; there was no solicitation in opposition to
management's nominees for Directors set forth in the Proxy Statement and all
such nominees were elected. The stockholders also approved management's proposal
to ratify the selection of KPMG LLP as independent accountants of the Company
for the fiscal year ending December 31, 1999. Each holder of record of Common
Stock was entitled to one vote per share.
a) The following details the voting results with respect to each nominee for
office:
<TABLE>
<CAPTION>
Nominee For Withhold Total Voted
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nancy Pierce 17,821,676 3,000 17,824,676
- -----------------------------------------------------------------------------------------------------------------------------
Roger L. Koenig 17,824,676 0 17,824,676
- -----------------------------------------------------------------------------------------------------------------------------
Ryal Poppa 17,747,163 77,513 17,824,676
- -----------------------------------------------------------------------------------------------------------------------------
Joeseph Graziano 17,824,591 85 17,824,676
- -----------------------------------------------------------------------------------------------------------------------------
Douglas Carlisle 17,822,511 2,165 17,824,676
- -----------------------------------------------------------------------------------------------------------------------------
John W. Barnett, Jr, 17,824,676 0 17,824,676
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
b) The following details the voting results with respect to ratifying the
selection of KPMG LLP as independent accountants for the fiscal year ending
December 31, 1999:
<TABLE>
<CAPTION>
For Withhold Total Voted
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
17,816,991 7,685 17,824,676
- ------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
27.1 Financial Data Schedule
(b) Form 8-K Reports
Carrier Access filed no reports on Form 8-K during the three months ended
June 30, 1999.
June 18
<PAGE>
Signature
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, thereunto duly authorized.
CARRIER ACCESS CORPORATION
(Registrant)
By: /s/ Nancy Pierce
-------------------------------------------------------
August 12, 1999 Nancy Pierce
Vice President, Finance, and Chief Financial Officer
(Principal Accounting Officer and Authorized Signatory)
Page 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 34,840
<SECURITIES> 27,144
<RECEIVABLES> 14,818
<ALLOWANCES> 991
<INVENTORY> 5,527
<CURRENT-ASSETS> 84,067
<PP&E> 4,735
<DEPRECIATION> 1,249
<TOTAL-ASSETS> 87,758
<CURRENT-LIABILITIES> 11,054
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 76,675
<TOTAL-LIABILITY-AND-EQUITY> 87,758
<SALES> 25,288
<TOTAL-REVENUES> 25,288
<CGS> 11,088
<TOTAL-COSTS> 6,812
<OTHER-EXPENSES> (543)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,931
<INCOME-TAX> 2,814
<INCOME-CONTINUING> 5,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,117
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.20
</TABLE>
