<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 September 30, 1999
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
---------
CARRIER ACCESS CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1208770
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
</TABLE>
5395 Pearl Parkway, Boulder, CO 80301
--------------------------------------
(Address of principal executive offices)
(Zip Code)
(303) 442-5455
--------------
(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 September 30, 1999 was 24,081,573 shares.
<PAGE>
CARRIER ACCESS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................................... 2
Condensed Balance Sheets - September 30, 1999 (unaudited) and December 31, 1998.... 2
Condensed Statements of Operations (unaudited) - Three and Nine Months Ended
September 30, 1999 and 1998........................................................ 3
Condensed Statements of Cash Flows (unaudited) -- Nine Months Ended September 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......................... 10
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>
September 30,
1999 December 31,
(unaudited) 1998
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $42,733 $31,201
Marketable securities available for sale 20,473 22,777
Accounts receivable, net 16,374 8,493
Inventory, net 10,205 5,053
Deferred income taxes 1,292 1,198
Prepaid expenses and other current assets 1,517 804
------------------- ------------------
Total current assets 92,594 69,526
Property and equipment, net 4,436 2,599
Deferred income taxes 118 118
Other assets 96 70
------------------- ------------------
Total assets $97,244 $72,313
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $10,018 $ 6,803
Income taxes payable 3,456 2,000
Other current liabilities 118 152
------------------- -------------------
Total current liabilities 13,592 8,955
------------------- -------------------
Stockholders' equity:
Common stock and additional paid-in-capital 63,391 59,983
Deferred stock option compensation (1,763) (2,377)
Retained earnings 22,024 5,752
Total stockholders' equity 83,652 63,358
------------------- -------------------
Total liabilities and stockholders' equity $97,244 $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 Nine Months Ended
---------------------------------------- --------------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------------- ------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net revenue $28,730 $13,675 75,702 $29,967
Cost of goods sold 11,808 6,748 31,780 15,029
------------ --------------- ------------------ ----------------
Gross profit 16,922 6,927 43,922 14,938
------------ --------------- ------------------ ----------------
Operating expenses:
Research and development 4,061 1,510 9,277 3,555
Sales and marketing 2,584 1,708 7,493 3,703
General and administrative 1,360 876 3,375 2,145
Amortization of deferred stock compensation 204 205 614 484
------------ --------------- ------------------ --------------
Total operating expenses 8,209 4,299 20,759 9,887
------------ --------------- ------------------ --------------
Income from operations 8,713 2,628 23,163 5,051
Other income, net 606 399 1,705 707
------------ --------------- ------------------ --------------
Income before income taxes 9,319 3,027 24,868 5,758
Income tax expense 3,075 1,150 8,595 2,207
------------ --------------- ------------------ --------------
Net income 6,244 1,877 16,273 3,551
Preferred stock dividend requirement --- (270) --- (1,586)
------------ --------------- ------------------ --------------
Net income available to common stockholders $ 6,244 $ 1,607 $16,273 $ 1,965
============ =============== ================== ==============
Net income per share:
Basic $ 0.26 $ 0.08 $ 0.68 $ 0.12
Diluted $ 0.25 $ 0.07 $ 0.64 $ 0.11
Weighted average common shares:
Basic 24,005 20,605 23,879 16,597
Diluted 25,221 21,806 25,233 17,280
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 3
<PAGE>
CARRIER ACCESS CORPORATION
CONDENSED StatementS of Cash Flows (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $16,273 $ 3,551
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization expense 676 316
Provision for doubtful accounts and returns 532 149
Provision for inventory obsolescence, net 114 160
Tax benefit relating to exercise of stock options 2,553 ---
Compensation expense related to stock
options issued at less than fair value 614 484
Deferred income tax benefit (94) (226)
Changes in operating assets and liabilities:
Accounts receivable (8,412) (2,715)
Inventory (5,266) 448
Prepaid expenses and other (742) (608)
Accounts payable and accrued expenses 3,180 1,934
Income taxes payable 1,456 679
------------------- ------------------
Net cash provided by operating activities 10,884 4,172
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (2,512) (1,343)
Sales (purchases) of securities available for sale 2,304 (14,219)
------------------- ------------------
Net cash used by investing activities (208) (15,562)
------------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock --- 37,662
Proceeds from exercise of stock options 856 ---
------------------- ------------------
Net increase in cash and cash equivalents 11,532 26,272
Cash and cash equivalents at beginning of period 31,201 6,104
------------------
Cash and cash equivalents at end of period $42,733 $ 32,376
=================== ==================
Supplemental cash flow disclosures:
Cash paid for income taxes $ 1,325 $ 1,703
Conversion of preferred stock to common stock $ --- $ 18,944
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 4
<PAGE>
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") solutions to competitive voice and data
communications carriers, including competitive local exchange carriers
("CLECs"), internet service providers ("ISPs") and wireless carriers. The
Company'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. The
Company's MDA equipment solutions are used by carriers primarily to provide
access to end users in the last-mile of service delivery. The Company sells its
products through distribution and other direct purchase agreements.
The accompanying unaudited financial statements of the Company 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 the Company'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>
September 30, December 31,
1999 1998
---------------- ---------------
<S> <C> <C>
Raw materials $ 6,577 $ 3,327
Work-in-process 15 93
Finished goods 4,302 2,209
---------------- ---------------
Total 10,894 5,629
Less: reserve for obsolescence (689) (576)
---------------- ---------------
Total inventory, net $ 10,205 $ 5,053
================ ===============
</TABLE>
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 the Company'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 and Direct Sales Channels,"
"Competitive Carrier Customer Concentration," "Possible Decline in Prices," and
"Risks Associated with Manufacturing." Unless required by law, the Company
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 Nine Months Ended
(In thousands, except per share amounts) September 30, September 30,
1999 1998 1999 1998
----- ---- ------ ----
<S> <C> <C> <C> <C>
Net revenue 28,730 13,675 75,702 29,967
Gross profit 16,922 6,927 43,922 14,938
Income from operations 8,713 2,628 23,163 5,051
Net income available to common stockholders 6,244 1,607 16,273 1,965
Net income per share (diluted) $ 0.25 $ 0.07 $ 0.64 $ 0.11
</TABLE>
For the three months ended September 30, 1999 the Company's net income and
operating income increased to $6.2 million and $8.7 million respectively,
compared to $1.9 and $2.6 million for the three months ended September 30, 1998.
For the nine months ended September 30, 1999, the Company's net income available
to common stockholders and operating income increased to $16.3 million and $23.2
million, respectively, compared to $2.0 and $5.1 million for the nine months
ended September 30, 1998. These increases were due primarily to a significant
increase in the sales of the Company products, reflecting the introduction of
the Access Navigator, enhancements to existing products, and increased
acceptance of the Wide Bank product family, partially offset by declining sales
in Access Banks. The Company's gross margin on net revenue was 58% for the nine
months ended September 30, 1999, compared to 50% for the nine months ended
September 30, 1998. Also, contributing to higher net income for 1999 was a
substantial increase in other income, primarily consisting of interest income on
cash and cash equivalent balances.
Net Revenue and Cost of Goods Sold
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 28,730 13,675 75,702 29,967
Cost of goods sold 11,808 6,748 31,780 15,029
</TABLE>
Net revenue for the three and nine months ended September 30, 1999 increased
to $28.7 million and $75.7 million, respectively, compared to $13.7 million and
$30.0 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, partially
offset by a decline in Access Bank sales. The Company anticipates that sales
for the Wide Bank and Access Navigator product families will increase at a
greater rate than the Access Bank product family. These products are more
current technologically, and we believe trial and evaluations of these products
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. The timing of these orders and our ability
to fulfill them can cause material fluctuations in our operating results; we
anticipate that such fluctuations will occur.
Page 6
<PAGE>
During the nine month period ended September 30, 1999, most of the sales of
the Company's products were made through distributors. The Company's success
depends in part on the continued sales and customer support efforts of its
network of distributors and increasing it's sales to its direct customers. In
the first nine months of 1999, Walker & Associates ("Walker"), Phillips
Communications and Equipment ("Phillips"), and ADC Telecommunications ("ADC")
accounted for 34%, 12%, and 10%, respectively, of net revenue. The Company
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 the Company's key distributors and direct
customers could have a material adverse effect on the Company'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, the Company
believes that its products are distributed to a limited number of competitive
carrier customers who are primarily CLECs. In the nine months ended September
30, 1999, the Company believes that two of these competitive carrier end user
customers' purchases were in excess of 10% of the Company's net revenue.
Cost of goods sold increased to $11.8 million for the three months ended
September 30, 1999 compared to $6.7 million for the corresponding three month
period of 1998. Costs of goods sold increased to $31.8 million for the nine
months ended September 30, 1999 compared to $15.0 million for the corresponding
nine-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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross margin 59% 51% 58% 50%
</TABLE>
The increases in the Company's gross margin in the three and nine months ended
September 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 product family in the first nine months of 1999. The Company believes
that gross margins 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 family and other products that have higher gross
margins.
The Company 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. The Company's gross margins vary dramatically
between product families.. As a result, the Company 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 affected from time to time by new
product introductions by the Company and its competitors.
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Research and development expenses 4,061 1,510 9,277 3,555
Percentage of net revenue 14% 11% 12% 12%
</TABLE>
Research and development expenses increased to $4.1 million and $9.3 million
in the three and nine months ended September 30, 1999 compared to $1.5 million
and $3.6 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 and other products
under development. Adding to the increase in research and development expenses
was the addition of a research and development facility in Tulsa, Oklahoma in
the third quarter of 1999. The Company expects the amount of research and
development expense will increase in fourth quarter of 1999 and first quarter of
2000 to fund the development of new product platforms, enhancements to existing
product families, and the possible addition of new research and development
facilities.
Page 7
<PAGE>
Sales, Marketing and General and Administrative Expenses and Deferred Stock
Compensation
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and marketing expenses 2,584 1,708 7,493 3,703
General and administrative expenses 1,360 876 3,375 2,145
Amortization of deferred stock compensation 204 205 614 484
----- ----- ------ -----
Total selling, general and administrative expenses 4,148 2,789 11,482 6,332
and deferred stock compensation
As a percentage of net revenue 14% 20% 15% 21%
</TABLE>
Selling, general and administrative expenses (including deferred stock
compensation) increased to $4.1 million and $11.5 million for the three and nine
months ended September 30, 1999 from $2.8 million and $6.3 million for the same
periods of 1998. The increase in sales and marketing expenses in each period was
the result of the Company'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 nine months ended September 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 the Company's business including the
addition of the general and administrative expenses associated with the research
and development facility in Tulsa, Oklahoma. The Company 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. The Company also expects
general and administrative expenses to increase in absolute dollars as the
Company continues to add personnel and incurs additional costs related to the
expansion of its business and operation and incurs increased costs in connection
with the administration of multiple facilities.
Other Income
Interest and other income increased to $606,000 and $1.7 million for the three
and nine months ended September 30, 1999 compared to $399,000 and $707,000 for
the same periods in 1998, due to interest earned on higher cash and cash
equivalent balances.
Income Taxes
For the three and nine months ended September 30, 1999, the Company's
effective combined federal and state income tax rate was 33% and 34%, compared
to 38% for both the three and nine months ended September 30, 1998. The
Company's annual effective tax rate decreased due to the research and
development tax credit in the first six months of 1999 and non-taxable interest
income on tax-exempt marketable securities throughout 1999. Income taxes in the
three months ended September 30, 1999 reflect the expiration of the research and
development tax credit as of June 30, 1999.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1999 1998
------------ -----------
<S> <C> <C>
Working capital 79,002 60,571
Cash, cash equivalents and marketable securities 63,206 53,978
Total assets 97,244 72,313
Nine Months Ended
(In thousands) September 30, December 31,
Net cash provided (used) by: 1999 1998
------------ -----------
Operating activities 10,884 959
Investing activities (208) (1,564)
Financing activities 856 50
</TABLE>
Net cash provided by operating activities for the nine months ended September
30, 1999 totaled approximately $10.9 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. The Company
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 $208,000 for the nine
months ended September 30, 1999. Cash provided by investing activities of $2.3
million was primarily a result of selling U.S. Government Agency and Corporate
bonds with maturities
Page 8
<PAGE>
greater than nine months. The Company's capital expenditures for the nine months
ended September 30, 1999 were $2.5 million for additions to facilities and
equipment to support its research, development and manufacturing activities. The
Company believes its current facilities are sufficient to meet its current and
anticipated manufacturing requirements for the next twelve months. The Company
completed its expansion of 22,000 square feet and anticipates that it will need
to expand its facilities in its current and other locations to accommodate
hiring additional personnel throughout the year 2000 to support ongoing
operations. Other capital expenditures during the next twelve are expected to
continue to increase over 1998 levels.
Cash provided by financing activities was approximately $856,000 for the nine
months ended September 30, 1999, due to the exercise of stock options.
The Company's net inventory levels increased approximately $5.2 million to
$10.2 million at September 30, 1999 from $5.1 million at December 31, 1998, due
primarily to increases in raw materials and finished goods inventory. This
increase reflects the Company's commitment to certain customers to carry minimum
inventory levels, as well as a desire to be able to rapidly fulfill ,
unanticipated customer orders, in addition to inventory related to the
production of a new product.
The Company believes that its existing cash, investment balances and it's line
of credit are adequate to fund its projected working capital and capital
expenditure requirements for at least the next twelve months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, it anticipates that its operating and
investing activities may use cash. Should the need arise, the Company 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 the
Company. The Company may consider using its capital to make strategic
investments or to acquire or license technology or products.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective, as amended, for all fiscal quarters
of fiscal years beginning after June 15, 2000. This statement establishes
accounting and reporting standards for derivative instruments, including some
derivative instruments embedded in other contracts, and for hedging securities.
To the extent we begin to enter into these transactions in the future, we will
adopt the statement's disclosure requirements in our financial statements for
the year ending December 31, 2000.
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" and the American Institute of Certified Public
Accountants issued Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities. The adoption of these pronouncements is not expected to
impact us.
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.
Page 9
<PAGE>
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 the Company due to adverse
changes in financial and commodity market prices and rates. Historically, and as
of September 30, 1999, the Company 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 September 30, 1999, the
Company has not used derivative instruments or engaged in hedging activities.
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in the Company. 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, as is evidenced by our Access Bank revenue, 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;
. 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 increased direct sales to customers;
. 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.
Page 10
<PAGE>
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 have historically been through indirect
distribution channels, our ability to judge the timing and size of individual
orders is more limited than for manufacturers who have been selling directly to
the end users of their products for longer periods of time. Moreover, any
downturn in general 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 or other
carriers. 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
Page 11
<PAGE>
companies. Our principal competitors for our Wide Bank product family include
Alcatel, Fujitsu, 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 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, a large portion of the sales of our products have been made through
distributors. The Company'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 the Company'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 nine months ended September 30, 1999, Walker, Phillips, and ADC
accounted for 34 %, 12 % and 10 % of net revenue, respectively.
We expect that a significant portion of 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
Page 12
<PAGE>
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. The Company believes it
has made adequate allowances for such returns to date.
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.
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 the
Company 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.
We are Substantially Dependant on our Direct Sales and Direct Customers.
Currently, a significant portion of the sales of our products are being made
through direct sales. As a result, our continued success depends on building and
maintaining good relations with our direct customers.
We have limited knowledge of the financial condition of certain of our direct
customers; however, we are aware that some of our direct customers have limited
financial and other resources which could impair their ability to pay us,
although the financial instability of these direct customers has not limited any
direct customer'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 direct customers will not materially
adversely affect our business, financial condition or results of operations.
Any reduction in planned purchases by direct customers in the future could
adversely affect our business, financial condition and results of operations. In
addition, we grant certain of our direct customers "most favored customer"
terms, pursuant to which we have agreed to not knowingly provide another direct
customer with similar terms and conditions a better price than those provided
to the existing direct customer, without offering the more favorable prices to
the existing direct customer. 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 our business, financial condition or results of
operations.
Currently, our direct customers do not have any obligation to purchase
additional products. Accordingly, we cannot assure you that present or future
direct customers will not terminate their purchasing arrangements with the
Company, 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 and direct
relationships;
. diversifying our distribution channels by selling to new distributors and
to new direct customers; and
Most of our existing distributors currently distribute and use the product
lines of our competitors. Some of our existing distributors may in the future
distribute or use 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 and direct customers or that they will recommend, or
continue to use, 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 or direct customers
reduce their purchases of our products, or that we fail to obtain future
distributors or direct customers, 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.
Page 13
<PAGE>
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 25
key components from vendors for which there is currently no substitute, and we
purchase over 125 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 and 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.
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 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 nine 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 Roger Koenig,
President and Chief Executive Officer, who 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
Page 14
<PAGE>
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 satisfactorily support 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 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.
Page 15
<PAGE>
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 and direct customers 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 or adequate 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 nine 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 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 September
30, 1999, we had approximately $63.2 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 November 1, 1999, we have
been issued a total of five
Page 16
<PAGE>
U.S. patents, we have six additional patent 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 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 66% 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 57% 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
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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
The Company filed no reports on Form 8-K during the three months ended
September 30, 1999.
Page 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
November 11, 1999 --------------------------
Nancy Pierce
Chief Financial Officer
(Principal Accounting Officer and Authorized Signatory)
Page 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 42,733
<SECURITIES> 20,473
<RECEIVABLES> 17,547
<ALLOWANCES> 1,173
<INVENTORY> 10,205
<CURRENT-ASSETS> 92,594
<PP&E> 5,960
<DEPRECIATION> 1,523
<TOTAL-ASSETS> 97,244
<CURRENT-LIABILITIES> 13,592
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 83,623
<TOTAL-LIABILITY-AND-EQUITY> 97,244
<SALES> 28,731
<TOTAL-REVENUES> 28,731
<CGS> 11,808
<TOTAL-COSTS> 8,209
<OTHER-EXPENSES> (606)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,319
<INCOME-TAX> 3,075
<INCOME-CONTINUING> 6,244
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,244
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.25
</TABLE>
