<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1998
OR
[_] TRANSACTION REPORT PURSUANT TO 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)
DELAWARE 84-1208770
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5395 Pearl Parkway, Boulder, CO 80301
(Address of principal executive offices) (Zip Code)
(303) 442-5455
(Registrant's telephone number, including area code)
--------------------------------------------------------------
Securities registered pursuant to 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 1999, there were 23,815,898 shares of the Registrant's common
stock outstanding, and the aggregate market value of such shares held by non-
affiliates of the Registrant (based upon the closing sale price of such shares
on the Nasdaq National Market on March 1, 1999) was approximately $342,482,932.
Shares of the Registrant's common stock held by each executive officer and
director and by each entity that owns 10% or more of the Registrant's
outstanding common stock have been excluded in that such persons or entities may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders are incorporated by reference in Part III of this
Form 10-K to the extent stated herein.
<PAGE>
CARRIER ACCESS CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1998
<TABLE>
<CAPTION>
Page No.
-----------
<S> <C> <C>
PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 19
Item 3. Legal Proceedings........................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......................................... 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 20
Item 6. Selected Financial Data..................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 26
Item 8. Financial Statements and Supplementary Data................................................. 28
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........ 40
PART III
Item 10. Executive Officers of the Registrant........................................................ 41
Item 11. Executive Compensation...................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 41
Item 13. Certain Relationships and Related Transactions.............................................. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 42
</TABLE>
<PAGE>
The information contained in this report includes forward-looking statements.
When used in this report, the words "anticipates," "believes," "expects,"
"intends," "will," "forecasts," "plans," "future," "strategy," or words of
similar import are intended to identify forward-looking statements. Other
statements of the company's plans and objectives may also be considered to be
forward-looking statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements, including those set forth herein
under the caption "Business-Risk Factors". Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The company undertakes no obligation to publish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers are urged to
carefully review and consider the various disclosures made by the company, to
advise interested parties of certain risks and other factors that may affect the
company's business and operating results, including the disclosures made under
the caption "Business-Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and results of operations" in this report, as well as the
company's other periodic reports on form 10-Q filed with the Securities and
Exchange Commission.
Unless otherwise indicated, references herein to specific years and quarters
are to the Company's fiscal year and fiscal quarters.
The Company was incorporated in Colorado in September 1992 and was
reincorporated in Delaware in June 1998. The Company's principal executive
offices are located at 5395 Pearl Parkway, Boulder, Colorado 80301; its
telephone number is (303) 442-5455 and its web site is
http://www.carrieraccess.com. The information on the web site is not
incorporated in this report.
PART I.
ITEM 1. BUSINESS
General
The Company is a leading provider of Multi-service Digital Access ("MDA")
equipment to competitive telecommunications carriers, including competitive
local exchange carriers ("CLECs"), wireless carriers, Internet service providers
("ISPs") and other carriers. The Company's MDA equipment provides a "last mile"
solution for the voice and data connectivity needs of competitive carriers and
end users throughout the United States.
Mass deployment of digital last mile connectivity from end user to carrier
networks is enabled by leasing T1 and T3 digital access lines from Local
Exchange Carriers (LECs) combined with the installation of the Company's cost-
effective, compact, scaleable and easily installed customer premises and central
office telecommunications equipment. The Company's products allow competitive
carriers to leverage their existing digital infrastructure to cost-effectively
connect end users to their networks. The Company's MDA products utilize high
bandwidth digital deployment targeted at end users requiring between six and 768
telephone line equivalents of bandwidth. Based on information from its
distributors, the Company believes that over 150 competitive carriers have
purchased the Company's products directly or through its distributors.
Products
The Company's MDA products currently include the Access Bank, the Wide Bank
and the Access Navigator product families. The Access Bank I offers digital
connectivity for local and long distance carrier voice service, and converts a
single T1 digital network access line into 24 telephone circuits for voice,
facsimile and modem connections. The Access Bank II expands on the voice
functions of the Access Bank I and adds high-speed data ports for computer
connectivity and dual T1 line interfaces for increasing data speeds and
connecting digital phone systems. The Access Exchange is a customer-located
access switch that enables long distance carriers to offer local services from
their embedded base switching equipment. The Wide Bank 28 is a highly-
integrated M1-3 standard multiplexer designed to connect T1 equipment to high-
bandwidth T3 digital circuits, providing up to 28 T1 connections for enhanced
voice and high-speed data services. The Access Navigator/DCS Service Manager
provides a complete solution for managing four to 32 access connections in a
highly integrated package. With the functions of a 1/0 digital cross connect
system, plus demarcation testing, carriers are able to decrease maintenance
costs and labor while increasing service availability. The Access
Navigator/GR-303 offers a highly integrated solution for combining multi-line
local voice and data services on customer T1 access lines. In addition to the
concentration and management of CLASS(R) voice services, the Access
Navigator/GR-303 grooms and optionally concentrates fractional T1 data
connections from customer locations. The Company differentiates its products on
their ability to enable multiple service offerings, facilitate the rapid
deployment of new services, reduce cost of ownership, provide programmable
software-based
<PAGE>
functionality, scale cost-effectively at carrier and end user locations, and
satisfy the safety and regulatory requirements of carriers and end users. The
retail list prices of the Company's Access Bank family of products range from
$3,495 to $7,000, depending upon configuration, and the retail list prices of
the Company's Wide Bank family of products range from $3,000 to $9,000,
depending upon configuration and the retail list prices of the Company's Access
Navigator family of products range from $8,000 to $20,000, depending upon
configuration.
The Access Bank Family of Products
Access Bank I-Released: June 1995
The Company's Access Bank I provides an economical, compact, and reliable
solution for converting T1 digital access services from Incumbent Local Exchange
Carriers ("ILECs ") and CLECs to 12 or 24 individual analog telephone circuits
at end user locations. The T1 Channel Service Unit ("CSU"), ringing generator,
power converters, ringback tone generator, and channel bank controller are all
integrated into a Line Interface Unit ("LIU"). The design of the Access Bank I
incorporates an integrated CSU, which allows customers to plug in a T1 line
without having to connect other peripheral devices or customized circuit cards
to address specific network requirements. Five different types of 12-channel
telephone line interface circuit cards provide popular voice service delivery
options. Interface circuit cards allow for the delivery of enhanced local
services such as Caller ID and distinctive ringing. The Access Bank I operates
with a variety of high-speed modems, and automatically adjusts matching
characteristics to different modems and line conditions in order to provide a
clean, high-quality transmission path. The Access Bank I is principally used by
competitive carriers for economical local service delivery, long distance
service delivery using T1 access, digital voice networking equipment
connectivity, ISP modem pool connections to T1, branch office connectivity to
T1, and rapid deployment of temporary telephone services. Systems integrators
use Access Bank I to convert T1 connections to a variety of analog service
connections for applications such as remote access router interfaces, frame
relay and IP voice telephone system connectivity, and computer telephony
interfaces.
Access Bank I TR-08-Released: November 1996
The Access Bank I TR-08 provides a Bellcore Standard TR-08 digital loop
carrier software protocol for T1 connections directly to the line side T1 ports
of local switches. Local exchange carriers use the Access Bank I TR-08 for
economical local service delivery and expansion by competitive carriers of line
capacity for local switches. The Access Bank I TR-08 provides low-cost,
compact, wiring closet deployment of carrier-class enhanced voice features such
as Caller ID and distinctive ringing to competitive carriers utilizing Nortel,
Lucent, Siemens and other local exchange switches. Access Bank I TR-08 enables
inexpensive carrier provisioning of physically separate single shelf groups for
12 or 24 managed telephone lines from a T1.
Access Bank II-Released: November 1996
The Access Bank II enables carriers to provide multi-line voice and data over
one or two T1 access lines. Carriers use the Access Bank II for multi-line
voice plus high-speed data services, branch office voice and data connectivity,
the protection of mission critical voice and data, and the integration of fax,
modem, and high-speed data on digital PBX T1s. The Access Bank II includes two
T1 network interfaces with fully integrated CSU and Data Service Units ("DSU"),
offering up to 3.0 Mbps of total throughput. Dual T1 interfaces can accommodate
future bandwidth requirements and integration of fax, modem and high-speed data
on digital PBX T1s, and can provide protection for end users' mission critical
voice and data applications. The two built-in data interfaces offer
connectivity for high-speed Internet routers, frame relay devices, video and
other high-speed data applications. By combining digital data with voice over
one or two T1 lines, bandwidth can be utilized more efficiently, saving on
communication access costs. The Access Bank II also includes sophisticated
management capabilities such as an optional Ethernet SNMP LAN management
connection for configuration and monitoring.
Access Bank II/HDSL-Released: May 1998
The Access Bank II HDSL (sold by ADC as EZT1/D1/HDSL) is used by competitive
carriers to provide multi-line voice and high-speed data services over carriers'
existing copper infrastructure. Access Bank II HDSL represents the integration
of ADC's HDSL technology into the Access Bank II, creating an end-to-end digital
deployment solution for competitive carriers from wiring centers to customer
locations. This solution enables competitive carriers to decrease their monthly
access costs while providing T1 quality digital service delivery over low-cost
unbundled copper access loops.
Access Exchange-Released: April 1998. The Access Exchange, released in April
1998, performs the functions of the Access Bank II and includes software for
automatic call routing and number translation on a call-by-call basis. This
product allows long distance carriers to combine local voice services with long
distance and high-speed data services on their existing switch infrastructure.
Wide Bank Family of Products
Wide Bank 28-Released: November 1997
<PAGE>
The Wide Bank 28 connects a high bandwidth digital T3 access line to four to
28 T1 service connections. The Wide Bank 28 allows competitive carriers to
consolidate multiple T1s into T3 services to reduce monthly access costs for
ISPs, CLECs, wireless carriers and end users; provide redundant T3 service
distribution from digital radio connections; provide T1 service expansion from
fiber multiplexers; and connect T3 LEC services to ISP remote access servers.
The Company's Wide Bank 28 is used by wireless carriers to provide T3 to 28 T1
conversion, T1 circuit grooming, network protection, and remote management of
their high-bandwidth digital wireline and digital radio connections. These
connections typically provide the backbone links between mobile radio (cellular
or PCS) transmission sites. Up to seven quad Digital Signal Cross-Connect Level
1 (T1) interface cards support up to 28 T1 connections. Cards can therefore be
quickly and easily added to meet bandwidth requirements. An identical spare
quad T1 provides software-controlled redundancy. The Wide Bank 28 also
incorporates T1 Network Interface Unit ("NIU") functionality to eliminate
additional equipment and installation labor costs for carriers. Redundancy
options on the Wide Bank 28 include programmable T1 and T3 software-based
functionality and electronics protection through the use of an additional quad
T1 card or T3 controller card, respectively. The unit incorporates solid-state
fuseless protection, hot-swappable cards, multiple T1 and T3 line tests for
fault isolation and built-in bit error rate testing. The Wide Bank 28 is housed
in a compact, single rack-unit case. Twenty-one Wide Bank 28 multiplexers can
be mounted in a standard rack for high channel density, or wall-mounted for
lower density applications.
Wide Bank 28 NEBS-Released: May 1998
The Wide Bank 28 NEBS offers the features and performance of the standard
version of the Wide Bank 28 in compliance with Network Equipment Building
Standards ("NEBS") criteria. Wide Bank 28 NEBS allows carriers to install the
Wide Bank 28 in central office locations where the product is designed to
operate under electrical and physical environmental stresses such as
electromagnetic interference, high and low temperatures and earthquake and
vibration conditions.
Access Navigator Family of Products.
Access Navigator/DCS Service Manager-Released: January 1999
The Access Navigator DCS Service Manager provides a complete solution for
managing four to 32 T1 access connections in a highly integrated package. With
the functions of a 1/0 digital cross connect system, plus demarcation testing,
carriers are able to decrease maintenance costs and labor, while increasing
service availability.
Access Navigator/GR-303-Released: January 1999
The Access Navigator GR-303 offers a highly integrated solution for combining
multi-line local voice and data services on customer T1 access lines. In
addition to the concentration and management of CLASS(R) voice services, the
Access Navigator/GR-303 grooms, and optionally concentrates, fractional T1 data
connections from customer locations. Fractional voice and data services from
multiple customers and applications are combined by the Access Navigator to save
recurring transmission costs, and capital costs on switch or router ports.
With both NEBS and customer premises certifications, the Access Navigator can
be located in carrier racks or on customer walls. The power of a 32 port
digital cross connect system and remotely managed demarcation occupies only one
and one half rack units. Integrated testing and optional common equipment
redundancy ensure carrier-class service availability. Space, power and
installation labor are significantly reduced in comparison to old generation
digital cross connect and CSU or NIU shelves. Additional Quad T1 Cards can be
installed while the Access Navigator is in service to provide from four to 32
T1/CSU connection ports.
Access Navigators provide management access via Ethernet SNMP, Telnet CLI,
and RS-232 CLI. Flow-through provisioning and testing control over ESF T1
connections, from the Access Navigator to the Company's Access Bank II units,
reduce truck rolls and improve voice and data service availability at customer
locations.
<PAGE>
Customers
The Company primarily sells its products through third-party distributors to
competitive carriers such as CLECs, ISPs, utilities and wireless carriers who
provide enhanced voice and high-speed data services to end users such as small
and medium-sized businesses. Set forth below is a list of the Company's third-
party distributors, as well as a partial list of competitive carriers and end
users who the Company believes have each purchased the Company's products based
on information from its distributors and product sales. The Company believes
that all of these competitive carrier customers and end users are currently
using the Company's products and are representative of the Company's overall
competitive carrier customers and end users.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
Distributors
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
ADC Telecommunications, Inc. (OEM) Solunet, Inc.
Advantage Telcom Somera Communications, Inc.
ALLTEL Supply, Inc. Sprint North Supply
C&L Communications Telsource Corporation
Graybar Electric Company, Inc. Walker & Associates
MicroAge Inc. Williams Telecommunications Systems, Inc.
Phillips Communications and Equipment Co.
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Competitive Carrier Customers
- - -------------------------------------------------------------------------------------------------------------------------------
ALS (formerly Teleport Communications Group, Inc.) Frontier Communications NEXTLINK Communications, Inc.
ACC Long Distance GST Telecommunications, Inc. NHT Partnership PECO
Allegiance Telecom, Inc. GTE Pacific Bell
ALLTEL Affiliates Hyperion Telecom PECO
Bell Atlantic ICG Telecom Group, Inc. PSINet, Inc.
BTI Telecommunications Services Intermedia Communications, Inc. QWEST Communications
Cellular One Group Logix Communications, Inc. Sprint
Cablevision Systems Corp. MCI Worldcom, Inc. STAR Telecommunications, Inc.
Choice Com MediaOne Teligent
CODETEL Metrocom Thrifty Call, Inc.
Commonwealth Telecom Services, Inc. MGC Communications, Inc. US LEC Corp
e.spire Communications, Inc. (formerly ACSI) National Telecommunications US WEST, Inc
Extreme Technologies, Inc. Nextel Communications, Inc. WinStar Communications, Inc.
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's customer base is concentrated and a small number of
distributors have historically accounted for a majority of the Company's net
revenue. For year ended December 31, 1998, Walker & Associates, Phillips
Communications and Equipment and Telsource Corporation accounted for 40%, 17%
and 15%, respectively, of net revenue. In 1997, Walker & Associates, ADC
Telecommunications and Phillips Communications and Equipment accounted for 37%,
20% and 14%, respectively, of net revenue. In addition to being dependent on a
small number of distributors for a majority of its net revenue, the Company
believes its products are distributed to a limited number of competitive carrier
customers who are primarily CLECs. The Company believes that in 1997, twenty-two
(22) competitive carrier customers were the end users of approximately 75% of
its net revenue and that in 1998, thirty-five (35) competitive carrier
customers were the end users of approximately 83% of its net revenue.
Sales, Marketing and Customer Support
Sales. The Company employs a leveraged sales model currently consisting of a
direct sales force and a regional sales engineering support group, which works
with its 13 third-party distributors to identify potential customers and provide
pre- and post-sales support to its competitive carrier customers and end users.
Sales from third-party distributors accounted for substantially all of the
Company's revenues for the years ended December 31, 1997 and December 31, 1998.
Third-Party Distributors. The Company's distributors are responsible for
fulfilling product orders and warehousing product as well as identifying
potential competitive carrier customers. The Company establishes relationships
with distributors through written agreements which provide prices, discounts and
other material terms and conditions under which the distributor is eligible to
purchase the Company's products for resale. Such agreements generally do not
grant exclusivity to the distributors, do not prevent the distributors from
carrying competing product lines, and do not require the distributors to sell
any particular dollar amount of the Company's products, although the contracts
may be terminated at the election of the Company if specified sales targets and
end user satisfaction goals are not attained. The Company generally provides
its distributors with limited stock rotation and price protection rights. Other
than limited stock rotation rights, the Company does
<PAGE>
not provide its distributors with general product return rights. The Company has
limited knowledge of the financial condition of certain of its distributors;
however, it is aware that some of its distributors have limited financial and
other resources which could impair their ability to pay the Company. Although
the financial instability of these distributors has not limited any
distributor's ability to pay the Company for its products to date, there can be
no assurance that any bad debt incurred by the Company will not exceed the
Company's reserves therefor or that the financial instability of one or more of
the Company's distributors will not materially adversely affect the Company's
business, financial condition or results of operations. The Company has limited
knowledge of the inventory levels of its products carried by its OEMs and
distributors, and the Company's OEMs and distributors have in the past reduced,
and may in the future reduce, planned purchases of the Company's products due to
overstocking. Moreover, distributors who have overstocked the Company's products
have in the past reduced, and may in the future reduce, their inventories of the
Company's products by selling such products at significantly reduced prices. Any
such reduction in planned purchases or sales at reduced prices by distributors
or OEMs in the future could reduce the demand for the Company's products, create
conflicts with other distributors or materially adversely affect the Company's
business, financial condition and results of operations. In addition, three
times a year, some of the company's distributors are allowed to return a maximum
of fifteen percent of the Company's unsold products held in stock by such
distributor, which were purchased within the four month period prior to such
return date, for an equal dollar amount of new equipment.
While to date these returns have not had a material impact on the Company's
results of operations, there can be no assurance that these returns through
stock rotation will not have a material adverse effect on future operations. The
Company believes it has made adequate allowances to provide for such returns.
The Company is generally required to give its distributors a 60-day notice of
price increases or decreases. In addition, the Company grants certain of its
distributors "most favored customer" terms, pursuant to which the Company has
agreed to not knowingly grant another distributor the right to resell the
Company's products on terms more favorable than those granted to the existing
distributor, without offering the more favorable terms to the existing
distributor. There can be no assurance that these price protection and "most
favored customer" clauses will not cause a material decrease in the average
selling prices and gross margins of the Company's products. Although, the
Company believes that price protection will not have a material adverse effect
on the Company's business, financial condition and results of operations there
can be no assurance that price protection will not have such a material adverse
affect on our business in the future.
Sales Engineering Support. The Company's sales engineering support group is
responsible for platform configuration, evaluation and telephone sales support
activities. The Company's sales support and sales engineering strategy focuses
on assisting carriers and end users in rapidly integrating the Company's
products into their networks. The sales engineering support group identifies
carrier and end user leads and, based on initial presentations, provides
evaluation units for trial in carrier and end user networks. After successful
trial and approval, the carrier or end user is provided with product
installation and maintenance training. The sale of the Company's products
averages between four and six months in the case of competitive carriers, but
can take significantly longer in the case of ILECs and certain distributors and
end users. Initially, the Company's sales engineering support group is involved
in educating carriers and end users on the functionality and benefits which may
be derived from using the Company's products. Subsequently, members of both the
Company's sales engineering and research and development organizations are
involved in providing the carrier or end user with the required training and
technical support to integrate the Company's products into a new application or
service.
Marketing. The Company's marketing organization develops strategies for
product lines and, along with the Company's sales force, develops key account
strategies and defines product and service functions and features. Marketing is
responsible for sales support, request for proposals ("RFPs") and request for
quotes ("RFQs"), in-depth product presentations, interfacing with operations,
setting price levels to achieve targeted margins, developing new
services/business opportunities and writing proposals in response to customer
requests for information or quotations. In order to create awareness, market
demand and sales opportunities, the Company engages in a number of marketing
activities which include exhibiting products and customer applications at
industry trade shows, advertising in selected publications aimed at targeted
markets, public relations activities with trade and business press, publication
of technical articles and the distribution of sales literature, technical
specifications and documentation.
Customer Service and Support. Based on customer support calls, the Company
believes that ongoing customer support is critical to maintaining and enhancing
relationships with carriers, end users and distributors. The carrier and end
user support group has five functions: (i) new product development, which
provides for product ideas and enhancements based on customer requirements
through the pre- and post-sales support effort, (ii) inbound technical support,
which focuses on pre- and post-sales calls made to the Company from its
customers, (iii) outbound application support and response to RFPs and RFQs,
(iv) training, including installation and application development training for
customers, sales engineers and employees and (v) reporting and analysis based on
the automated trouble ticket and returned material systems.
Competition
The market for telecommunications equipment is characterized by intense
competition, with a large number of suppliers providing a variety of products to
diverse market segments within the telecommunications industry. Management
believes that
<PAGE>
the principal competitive factors in the Company's markets include
performance and reliability; flexibility, scalability and ease-of-use; breadth
of features and benefits; end-to-end solutions and management systems, and
initial and lifetime cost. The Company believes that it competes favorably with
respect to each of these factors.
The Company's 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. The Company's principal competitors for its
Access Bank product family include Advanced Fibre Communications, Inc. ("AFC"),
Cisco Systems, Inc. ("Cisco"), DSC Communications Corporation ("DSC"), General
DataCom Industries, Inc. ("General DataCom"), Lucent Technologies, Inc.
("Lucent"), NEC USA, Inc. ("NEC"), Newbridge Networks Corporation ("Newbridge"),
Northern Telecom Limited ("Nortel"), PairGain Technologies, Inc. ("Pairgain"),
Paradyne Corporation ("Paradyne"), Premisys Communications, Inc. ("Premisys"),
Pulse Communications, Inc. ("PulseCom"), RELTEC Corporation ("Reltec"), Telco
Systems, a division of World Access ("Telco") and other small private companies.
The Company's principal competitors for its Wide Bank product family include
Alcatel Alsthom Compagnie Generale d'Electricite ("Alcatel"), NEC, Nortel, Telco
and other small private companies. The Company's principal competitors for our
Access Navigator product family include Advanced Fibre Communications, Inc.
("AFC"), Adtran, Inc. ("Adtran"), Alcatel Alsthom Compagnie Generale
d'Electricite ("Alcatel"), DSC Communications Corporation ("DSC"), Lucent
Technologies, Inc. ("Lucent"), Newbridge Networks Corporation ("Newbridge"),
Northern Telecom Limited ("Nortel"), Premisys Communications, Inc. ("Premisys"),
RELTEC Corporation ("Reltec"), Telect, Inc. ("Telect"), Tellabs, Inc.
("Tellabs") and other small private companies. The Company expects that many of
its competitors who currently offer products competitive with only one of the
Company's product lines will eventually offer products competitive with all of
the Company's product lines. In addition, several start-up companies have
recently begun to manufacture products similar to those offered by the Company.
Due to the rapidly evolving markets in which the Company competes, additional
competitors with significant market presence and financial resources, including
large telecommunications equipment manufacturers and computer hardware and
software companies, may enter those markets, thereby further intensifying
competition. Additionally, one of the Company's distributors is currently
competing with the Company, and there can be no assurance that additional
distributors will not begin to develop or market products in competition with
the Company.
Many of the Company's current and potential competitors are substantially
larger than the Company 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 to the development, promotion and
sale of their products than the Company. Such competitors may enter the
Company's existing or future markets with solutions which may be less costly,
provide higher performance or additional features or be introduced earlier than
the Company's solutions. Many telecommunications companies have large internal
development organizations which develop software solutions and provide services
similar to the Company's products and services. Some of the Company's
competitors currently offer financing alternatives to their customers, a service
that the Company does not provide at this time. Although the Company is
currently investigating financing alternatives for it's competitive carrier
customers, there can be no assurance that the Company will be able to secure
financing. The Company expects its 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 the Company's competitors could cause a
significant decline in sales or loss of market acceptance of the Company's
products and services, which could result in continued intense price competition
or could make the Company's products and services or technologies obsolete or
noncompetitive. To be competitive, the Company will be required to continue
investing significant resources in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that the Company will be able to make the
technological advances necessary to be competitive. In addition, 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 the Company's 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 the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Manufacturing
The Company's manufacturing operations consist of materials planning and
procurement, final assembly, product assurance testing, quality control, and
packaging and shipping. The Company currently uses several independent
manufacturers to provide certain PCBs, chassis and subassemblies. The Company
has developed a manufacturing process that enables it to configure its products
to be adapted to different customer hardware and software applications at the
final assembly stage. This flexibility is designed to reduce both the Company's
manufacturing cycle time and the Company's need to maintain a large
<PAGE>
inventory of finished goods. The Company believes that the efficiency of its
manufacturing process to date is largely due to the Company's product
architecture and the Company's commitment to manufacturing process design.
The Company spends significant engineering resources producing customized
software and hardware to assure consistently high product quality. The Company
tests its products both during and after the assembly process using internally-
developed product assurance testing procedures. These procedures consist of
automated board and automated system testing as well as environmental testing.
Through December 31, 1998, the Company had experienced a return rate for
defective products of less than 1%. Although the Company generally uses
standard parts and components for its products, many key components are
purchased from sole or single source vendors for which alternative sources are
not currently available. There can be no assurance that the Company will not
experience supply problems in the future from any of its manufacturers or
vendors. Any such difficulties could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Research and Product Development
The Company focuses its development efforts on providing enhanced
functionality to its existing products, including total network solutions and
performance and the development of additional software-based features and
functionality. Extensive product development input is obtained from customers
and the Company's monitoring of end user needs and changes in the marketplace.
The Company's current product development focus has been on developing MDA
access solutions and completing new products such as the recently introduced
Access Exchange and Access Navigator product family. Management believes that
the Company's success will depend, in part, on its ability to develop and
introduce in a timely fashion new products and enhancements to its existing
products. The Company has in the past made, and intends to continue to make,
significant investments in product and technological development. The Company's
engineering, research and development expenditures totaled approximately
$874,000, $2.8 million and $5.6 million in 1996, 1997 and 1998, respectively.
The Company performs its research and product development activities at its
principal offices in Boulder, Colorado. The Company's inability to develop on a
timely basis new products or enhancements to existing products, or the failure
of such new products or enhancements to achieve market acceptance, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Patents, Licenses and Proprietary Information
The Company relies upon a combination of patent, copyright and trademark and
trade secret laws as well as confidentiality procedures and contractual
restrictions to establish and protect its proprietary rights. The Company has
also entered into confidentiality agreements with its employees and consultants
and enters into non-disclosure agreements with its suppliers and distributors so
as to limit access to and disclosure of its proprietary information. There can
be no assurance such measures will be adequate to deter and prevent
misappropriation of the Company's technologies or independent third-party
development of similar technologies. The laws of certain foreign countries in
which the Company's products are or may be developed, manufactured or sold may
not protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely.
As of March 1, 1999, a total of four U.S. patents had been issued to the
Company, one additional patent has been allowed and a total of three U.S. patent
applications were pending. The issued patents cover various aspects of: (i)
voice and data circuits, (ii) switching technologies and (iii) redundancy. The
U.S. patents begin to expire commencing in the year 2015. The Company also has
one U.S. trademark application pending and three trademarks registered. The
telecommunications industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert patent, copyright, trademark and
other intellectual property rights to technologies that are important to the
Company. Although the Company has not received communications from third
parties asserting that the Company's products infringe or may infringe
proprietary rights of third parties, the Company has no assurance any future
claims, if determined adversely to the Company, would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
Employees
At March 31, 1999, the Company employed 194 full-time employees in sixteen
states. Additionally, the Company employs a number of engineering and other
employees on a part-time basis. No employees are covered by any collective
bargaining agreements. The Company believes that its relationships with its
employees are good. The loss of any of the key management or technical
personnel could have a material adverse effect on the Company.
Many of the Company's employees are highly skilled, and the Company's
continued success depends in part upon its ability to attract and retain such
employees. In an effort to attract and retain such employees, the Company
continues to offer employee benefit programs which it believes are at least
equivalent to those offered by its competitors. Despite these programs, the
Company has, along with most of its competitors, experienced difficulties at
times in hiring and retaining certain skilled personnel. In critical areas, the
Company has utilized consultants and contract personnel to fill these needs
until full-time
<PAGE>
employees could be recruited. The Company has never experienced a work stoppage,
none of its domestic employees are represented by a labor organization, and the
Company considers its employee relations to be good.
There are no family relationships between any of the executive officers,
other than that between Mr. Koenig and Ms. Pierce.
<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 very 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;
- - - the risks associated with increased business development and expansion of our
operations.
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;
- - - 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;
- - - 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. 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 may continue. Also, our distribution agreements generally allow
our distributors 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, and these fluctuations could affect the market price of our
common stock.
<PAGE>
Because substantially 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 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 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 may 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 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
legal requirements, 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 they 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 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
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, AFC, Cisco, DSC, General Datacom,
Lucent, NEC, Newbridge, Nortel, Pairgain, Paradyne, Premisys, Pulsecom, Reltec,
World Access and other small private companies. Our principal competitors for
our Wide Bank product family include Alcatel, NEC, Nortel and World Access. Our
principal competitors for our Access Navigator product family include AFC,
Adtran, Alcatel, DSC, Lucent, Newbridge, 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, several start-up companies have
<PAGE>
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. Some of
our competitors currently offer lucrative financing alternatives to their
customers, a service that we do not provide at this time. 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, substantially all 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 identifying
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, as
follows:
. In 1996, Telco, Phillips, Telsource and C&L accounted for 47%, 18%, 18%
and 11% of net revenue, respectively.
. In 1997, Walker & Associates ("Walker"), ADC Telecommunications ("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.
We expect that the sale 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 also 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 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
<PAGE>
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. The Company
believes it has made adequate allowances to provide 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.
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. We
believe that in 1997, twenty-two (22) competitive carrier customers indirectly
were the end users of approximately 75% of its net revenue and that in 1998,
thirty-five (35) competitive carrier customers indirectly were the end users of
approximately 83% of its net revenue. In addition, we believe that three
competitive carrier end users each accounted for more than 10% of units sold in
1998. 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.
Our Growth is Dependent upon Successfully Maintaining and Expanding Our
Distribution Channels.
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
. maintaining and expanding our current competitive carrier customer base.
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 43 key
components from vendors for which there is currently no substitute, and we
purchase an additional 49 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.
<PAGE>
In addition, manufacturing certain of these single or sole source components
is extremely complex, and our reliance on the suppliers of these components
exposes us to potential production difficulties and quality variations that they
experience, which could negatively impact 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 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 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
and 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 made 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 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 our
limited resources 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
<PAGE>
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 and 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.
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 and results of operations. Our agreements
with our distributors typically contain provisions designed to limit our
exposure to potential product liability
<PAGE>
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
ILECs and certain distributors and 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 has become more institutionalized, and it has become
increasingly difficult, and required more of our time and effort, to gain the
initial acceptance and 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 December
31, 1998, we had approximately $54 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 March 1, 1999, we have
been issued a total of four U.S. patents, we have three additional patents that
are pending issuance of which one is allowable. We
<PAGE>
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 enter 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 and 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 and 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 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 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.
Year 2000 Risks May Have a Material Adverse Effect on Our Business.
As is true for most companies, the Year 2000 problem creates a risk for us.
If systems 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 four areas:
- - - potential warranty or other claims from our customers;
- - - systems we use to run our business;
- - - systems used by our suppliers; and
<PAGE>
- - - the potential for failures of our products, particularly our central office-
based Wide Bank systems, 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 2. PROPERTIES
The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 38,000 square feet
of office space in Boulder, Colorado. The Company occupies these premises under
a lease expiring December 31, 2009. As of December 31, 1998, the annual base
rent for this facility was approximately $400,000. The Company has planned an
expansion of approximately 26,000 square feet of office space at this location
scheduled for completion in late 1999.
The Company's principal manufacturing facility consists of approximately
39,000 square feet of space in Boulder, Colorado. The Company occupies these
premises under a lease expiring November 13, 2005. As of December 31, 1998, the
annual base rent for this facility was approximately $310,000.
In addition to its principal office space in Boulder, Colorado, the Company
leases approximately 9,550 square feet of additional office space in Boulder,
which is currently subleased. The Company also leases facilities and offices in
Tulsa, OK and Greensboro, NC, for its field sales and support organization. The
Company believes that its current facilities and planned expansions are adequate
to meet its needs through the next 12 months. See "Business Risk Factors" Our
Quarterly Results Fluctuate Significantly and We May Not be Able to Maintain Our
Existing Growth Rates and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
Executive Officers of the Registrant
The names, ages and positions of all the executive officers of the Company as of
March 1, 1999 are listed below, followed by a brief account of their business
experience during the past five years. Executive officers are normally
appointed annually by the Board of Directors at a meeting of the directors
immediately following the Annual Meeting of the Stockholders. There are no
family relationships among these officers, other than between Mr. Koenig and Ms.
Pierce, nor any arrangements or understandings between any officer and any other
person pursuant to which an officer was selected.
<TABLE>
<CAPTION>
Name Age Position
- - ---------------------------- ---------- --------------------------------------------------
<S> <C> <C>
Roger L. Koenig............. 44 President and Chief Executive Officer
Nancy Pierce................ 41 Vice President-Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
Shrichand B. Dodani......... 41 Vice President, Engineering
J. Randy Shipley............ 44 Vice President, Sales
John W. Stahura............. 44 Vice President, Operations
</TABLE>
<PAGE>
Roger L. Koenig. Mr. Koenig has served as President, Chief Executive Officer
and Chairman of the Board of Directors of the Company since its inception in
September 1992. Prior to co-founding the Company, Mr. Koenig served as the
President and Chief Executive Officer of Koenig Communications, an equipment
systems integration and consulting firm. Prior to founding Koenig
Communications, Mr. Koenig held a number of positions with IBM/ROLM Europe, a
telecommunications equipment manufacturer, including Engineering Section Manager
for Europe. Mr. Koenig received a B.S. in Electrical Engineering from Michigan
State University and an M.S. in Engineering Management from Stanford University.
Nancy Pierce. Ms. Pierce has served as Vice President-Finance and
Administration, Chief Financial Officer, Treasurer, Secretary and Director of
the Company since its inception in September 1992. Prior to co-founding the
Company, Ms. Pierce served as the Controller of Koenig Communications, an
equipment systems integration and consulting firm. Prior to joining Koenig
Communications, Ms. Pierce was a systems analyst at IBM Corporation and an
internal auditor at ROLM Corporation. Ms. Pierce received a B.S. in
Communication Disorders from Colorado State University and a M.B.A. from
California State University, Chico.
Shrichand B. Dodani. Mr. Dodani has served as Vice President, Engineering
since April 1998, after having served as Vice President, Manufacturing and
Engineering from August 1997 through April 1998. Mr. Dodani served as Vice
President, Engineering and Sales of Aztek Engineering from March 1996 through
August 1997. From August 1993 through March 1996, Mr. Dodani served as a Vice
President for Nortel Asia Pacific and as director for Nortel European
Transmission System, both of which are subsidiaries of Nortel. From August 1988
through August 1993, Mr. Dodani served as Segment Manager (Director of Product
Management) in Europe and the U.S. for Alcatel Network Systems. Mr. Dodani
received a B.S. in Physics and Math from Gujarat University, India and a M.B.A.
and M. S. in Computer Science from the University of Texas.
J. Randy Shipley. Mr. Shipley has served as Vice President, Sales of the
Company since April 1998. From April 1997 to April 1998, Mr. Shipley served as
Senior Vice President, National Distribution for e.spire, a CLEC. From September
1986 to April 1997, Mr. Shipley served in several capacities, the final position
being Vice President, Data Network Systems Integration, for Williams
Telecommunications Systems, Inc., a diversified telecommunications company.
John W. Stahura. Mr. Stahura has served as Vice President, Operations of the
Company since April 1998. From July 1996 to April 1998, Mr. Stahura served as
President of Vaner, Inc., an electronics power conversion company. From May 1990
to May 1996, Mr. Stahura served as Vice President, Operations for Solidstate
Controls, Inc., a power conversion company. From January 1984 to May 1990, Mr.
Stahura served as Director of Operations for Keltec Florida Manufacturing, an
electronics manufacturing company. Mr. Stahura received a B.S. in Mathematics
from the U.S. Naval Academy.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price of and Dividends on the Registrant's Common Equity.
The Company made its initial public offering on July 30, 1998 at a price of
$12.00 per share. The Company's common stock is listed on the Nasdaq National
Market under the symbol "CACS." The table below sets forth the high and the low
closing sales prices per share as reported on the Nasdaq National Market for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 High Low
- - ------------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Third quarter ended September 30, 1998 (beginning August 1, 1998)........................ $ 23.25 $13.375
Fourth quarter ended December 31, 1998.................................................... $36.375 $13.375
</TABLE>
On March 1, 1999, the last reported sale price of the Registrant's common
stock was $39.50 per share. As of March 1, 1999, there were 247 record holders
of the Company's common stock. Because many of the Company's shares of common
stock are held by brokers and other institutions on behalf of stockholders, the
Company is unable to estimate the total number of stockholders represented by
these record holders. The Company has never declared cash dividends on its
common stock. The Company currently intends to retain any earnings for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future.
(b) Recent Sales of Securities
The effective date of the registration statement for the Company's initial
public offering of common stock 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.
<PAGE>
Pursuant to the initial public offering Registration Statement, the Company
sold 3,450,000 shares of its Common Stock for aggregate gross proceeds of $41.4
million.
The Company 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 initial
public offering. The net initial public offering proceeds to the Company after
total expenses was approximately $37.6 million.
The Company has used approximately $18.8 million of the proceeds from the
initial public offering as follows: approximately $9.2 million for working
capital; approximately $3.2 million for product development; approximately
$815,000 for capital expenditures; and approximately $5.6 million for general
corporate purposes. Approximately $20.3 million of the proceeds have been used
to purchase securities available for sale. The remaining net proceeds are cash
and cash equivalents. The use of the proceeds from the offering does not
represent a material change in the use of proceeds described in the prospectus.
In reliance on Rule 701 promulgated under the Securities Act of 1933, during
the year ended December 31, 1998, the Company issued 298,856 shares of common
stock pursuant to the exercise of stock option grants under the Company's 1995
Stock Option Plan.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the years ended December 31, 1996, 1997 and
1998 have been derived from the audited financial statements of the Company,
included herein. The selected financial data for the years ended December 31,
1994 and 1995 have been derived from other audited financial statements of the
Company. The information set forth below should be read in connection with the
Company's audited financial statements and the notes thereto and "Management's
Discussion and Analysis of the Financial Condition and Results of Operations"
included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
Financial Highlights
As of or for the Years Ended
December 31
-----------------------------------------------------
(in thousands, except per share and employee data)
1994 1995 1996 1997 1998
--------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenue, net................................... $ 741 $2,058 $5,809 $18,719 $48,133
Gross profit................................... 362 771 2,525 9,250 25,066
Operating income (loss)........................ (24) 135 (100) 2,346 9,437
Net income (loss) (1) $ 5 $ 181 $ (76) $ 1,735 $ 6,949
Net income (loss) available
to common stockholders....................... $ 5 $ 181 $ (361) $ 614 $ 5,363
Earnings (loss) per share:
Basic........................................ $0.00 $ 0.01 $(0.03) $ 0.04 $ 0.29
Diluted...................................... $0.00 $ 0.01 $(0.03) $ 0.04 $ 0.28
Working capital................................ $ 14 $ 121 $2,941 $16,615 $60,571
Total assets................................... $ 243 $1,045 $4,822 $21,680 $72,313
Redeemable preferred stock..................... $ - $ - $3,722 $17,358 $ -
Stockholders' equity........................... $ 42 $ 222 (158) 560 63,358
</TABLE>
(1) The Company was a Subchapter S Corporation for income tax purposes prior to
January 1, 1996 and accordingly, taxable income was reported in the
individual returns of the stockholders. Pro forma net income, calculated
as if the Company had been a taxable entity during 1994 and 1995 would have
been $3,000 and $113,000 respectively.
(2) No cash dividends were paid for any of the years presented. The Company
paid distributions to shareholders while a Subchapter S Corporation
totaling $25,000 and $48,000 in 1995 and 1996, respectively.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS NOTICE CONCERNING FORWARD-LOOKING STATEMENTS
Notice Concerning Forward-Looking Statements
This Management's Discussion and Analysis 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
Item 1 - "Business-Risk Factors." Particular attention should be paid to the
cautionary language in Item 1 - "Business-Risk Factors" under the headings "Our
Quarterly Results Fluctuate Significantly, and We May Not Be Able to Maintain
Our Existing Growth Rates," "We Depend on Emerging Telecommunications Service
Providers for Substantially All of Our Business," "Our Markets are Highly
Competitive and Have Many More Established Competitors," "We are Substantially
Dependent on Our Distribution Channels," and "Our Dependence on Independent
Manufacturers Could Result in Product Delivery Delays". 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.
Overview
The Company is a leading provider of Multi-service Digital Access equipment
to competitive carriers for the provisioning of enhanced voice and high-speed
data services to end users such as small and medium-sized businesses and
government and educational institutions. The Company was incorporated in
September 1992 as a successor company to Koenig Communications, an equipment
systems integration and consulting company which had been in operation since
1986. In the summer of 1995, the Company ceased its systems integration and
consulting business and commenced its main product sales with the introduction
of the Access Bank Product Family. In the fourth quarter of 1997, the Company
began commercial deployment of its Wide Bank Product Family and in January of
1999 the Company began commercial deployment of its Access Navigator product
family. Accordingly, the Company has only a limited operating history on which
to base an evaluation of its business and prospects. The Company and its
prospects must be considered in light of the risks, uncertainties and
difficulties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets.
The Company's net revenue is derived from the sales of MDA equipment and
accessories. The Company recognizes revenue upon shipment of product from the
Company's factory to its distributors' warehouses and direct customers. In
1997, the Company's Access Bank product family and the Wide Bank product family
accounted for approximately 80% and 16%, respectively, of the Company's net
revenue. In 1998, the Company's Access Bank product family and Wide Bank
product family accounted for approximately 68% and 27%, respectively, of the
Company's net revenue. See Note 1 of Notes to Financial Statements.
Most of the sales of the Company's products are through distributors. The
Company's distributors are responsible for warehousing product and fulfilling
product orders as well as identifying potential competitive carrier customers
and, in some cases, customizing and integrating the Company's products at end
users' sites. As a result, the Company's success depends on maintaining good
relations with its distributors. Sales of our products historically have been
made to a limited number of distributors. In 1996, Telco, Phillips, Telsource
and C&L accounted for 47%, 18%, 18% and 11% of net revenue, respectively. In
1997, Walker, ADC and Phillips accounted for 37%, 20% and 14% of net revenue,
respectively. In 1998, Walker, Phillips and Telsource accounted for 43%, 15%
and 13% of net revenue, respectively. The Company expects that sales of its
products will continue to be made to a small number of key distributors.
Accordingly, the loss of, or reduction in sales to, any of the Company's key
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations. See Note 8 of Notes to Financial
Statements.
In addition to being dependent on a small number of distributors for a
majority of its net revenue, the Company believes its products are distributed
to a limited number of competitive carrier customers who are primarily CLECs.
The Company believes that in 1997, twenty-two (22) competitive carrier
customers, indirectly, accounted for 75% of its net revenue and that in 1998,
approximately thirty-five (35) competitive carrier customers, indirectly,
accounted for 83% of its net revenue. In particular, the Company believes that
three of these competitive carrier customers each accounted for more than 10% of
the Company's net revenue in 1998. None of these competitive carrier customers
has any obligation to purchase additional products or services. Accordingly,
there can be no assurance that present or future competitive carrier customers
will not terminate their purchasing arrangements with the Company's distributors
or significantly reduce or delay the amount of the
<PAGE>
Company's products that they order. Any such termination, change, reduction or
delay in orders could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company generally provides
its distributors with limited stock rotation and price protection rights, and
the Company has granted certain of its distributors "most favored customer"
terms. There can be no assurance that these stock rotation rights, price
protection rights or most favored customer provisions will not have a material
adverse effect on the Company's business, operating results or financial
condition.
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 take effect and as competition intensifies, among other
factors. In 1998, the Company reduced the price of one of its Access Bank
products, and the Company expects to make further price reductions in 1999 with
respect to certain Access Bank and Wide Bank products. 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 for its Access Bank
product family and Access Navigator product family are higher than the gross
margin for its Wide Bank product family. The Company believes its gross margins
are likely to fluctuate based on product mix and channel mix. Margins will also
likely be adversely affected from time to time by new product introductions.
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
(In thousands, except percentages and per share amounts) 1996 1997 1998
----------------- ---------------- -----------------
<S> <C> <C> <C>
Net revenue....................................................... $5,809 $18,719 $48,133
Gross Margin as a percentage of revenue........................... 43% 49% 52%
Net income (loss)available to common stockholders................. (361) 614 5,363
Income (loss) per share (diluted)................................. $(0.03) $ 0.04 $ 0.28
</TABLE>
For 1998, the Company's net revenue increased to $48.1 million compared to
$18.7 million and $5.8 million for the years ended December 31, 1997 and 1996
respectively. For 1998, the Company's net income available to common
stockholders increased to $5.3 million from $614,000 and a net loss of $361,000
for the years ended December 31, 1997 and 1996 respectively. These increases in
net revenue and net income available to common stockholders were due primarily
to a significant increase in the sales of Products, reflecting the introduction
of new products and increased sales of existing products. The Company's gross
margin on net revenue was 52%, 49%, and 43% for the years ended December 31,
1998, 1997, and 1996 respectively. Contributing to higher net income for 1998
was a substantial increase in other income, primarily reflecting an increase in
interest income on the proceeds of the initial public offering.
Net Revenue and Cost of Goods Sold
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
(Dollars in thousands) 1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net revenue....................................................... $5,809 $18,719 $48,133
Cost of goods sold................................................ 3,284 9,469 23,067
</TABLE>
Net revenue for 1998 was $48.1 million. This represented an increase of
$29.4 million or 157% from the $18.7 million of net revenue in 1997. The
increase was due to the introduction of new products, primarily the Wide Bank,
Wide Bank NEBS and Access Bank II/HDSL product families in 1998, along with
increases in the sale of existing products to distributors. Net revenue
increased to $18.7 million in 1997 from $5.8 million in 1996, representing an
increase of $12.9 million or 222%. The growth in net revenue was due to new
product introductions for the Access Bank product family as well as increased
distributor sales of the Company's existing products. The timing and quantities
of orders for 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.
Costs of goods sold increased to $23.1 million for 1998 compared to $9.5
million for 1997 and $3.3 million in 1996. In each year, the increase was
primarily attributable to increased product shipments, partially offset by cost
reductions in existing product platforms.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
(Dollars in thousands) 1996 1997 1998
----------------- ---------------- -----------------
<S> <C> <C> <C>
Gross profit................................................... $2,525 $9,250 $25,066
Gross margin................................................... 43% 49% 52%
</TABLE>
The Company's gross profit for 1998 was $25.1 million. This represents an
increase of $15.8 million or 171% from the 1997 gross profit of $9.3 million.
Gross margin increased to 52% in 1998 from 49% in 1997. The increase in gross
margin in dollars and percentage were principally due to cost reductions for the
existing product lines in addition to increases in
<PAGE>
manufacturing efficiencies generated by greater production volumes. Gross profit
was approximately $9.3 million in 1997, an increase from $2.5 million in 1996.
This 267% increase was caused by the increased shipments of the Company's
products and was partially offset by cost reductions. Gross margins for 1997 and
1996 were 49% and 43%, respectively. Gross margin improved as a result of volume
purchase discounts and efficiencies associated with increased manufacturing
volume for new and existing products.
Research and Development Expenses
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
(Dollars in thousands) 1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Research and development expenses................................. $ 874 $2,848 $5,588
As a percentage of net revenue.................................... 15.0% 15.2% 11.6%
</TABLE>
Research and development expenses increased to $5.6 million for 1998 from
$2.8 million for 1997. This increase of $2.7 million or 96% was primarily due
to an increase in the number of personnel engaged in the development of new
products, particularly the Access Navigator. Research and development expenses
increased from $874,000 in 1996 to $2.8 million for 1997. This increase of $1.9
million or 217% was primarily attributable to an increase in the number of
personnel engaged in the development of the Wide Bank product family and other
new products as well as enhancements developed for the existing Access Bank
product family. Expenditures for prototyping and regulatory compliance also
contributed to the increase, although to a much lesser extent. The Company
expects the amount of research and development will increase at a faster rate in
1999, especially the first quarter of 1999, to fund the development of new
products and enhancements for existing product platforms.
Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
(Dollars in thousands) 1996 1997 1998
------------------- ----------------- -----------------
<S> <C> <C> <C>
Sales and marketing expenses...................................... $ 844 $2,395 $6,083
General and administrative expenses............................... 907 1,578 3,270
------------------- ----------------- -----------------
Total selling, general and administrative expenses................ 1,751 3,973 9,353
As a percentage of net revenue.................................... 30.1% 21.2% 19.4%
</TABLE>
Selling, general and administrative expenses increased to $9.4 million in
1998. For 1997 the Company had selling, general and administrative expenses
totaling $4.0 million. This represented an increase of $5.4 million or 135%.
Marketing expense increases reflected increased marketing activity with respect
to the introduction of the Wide Bank and Access Navigator product families,
customer support, advertising and trade shows. The increase in sales and
marketing expenses 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 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, although such costs should continue to decrease as a percent of
this revenue. 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
as a public company, although such costs should continue to decrease as a
percent of this revenue.
Stock-Based Compensation
As discussed in Note 1 to the Financial Statements, the Company accounts for
its stock-based compensation plans in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Since inception, the Company has generally granted stock
options with exercise prices equal to the fair value of the underlying Common
Stock, as determined by the Company's Board of Directors and based on the
Company's other equity transactions. During 1997 and the six months ended June
30, 1998, the Company granted options to employees with exercise prices less
than the fair value per share based upon the Company's previous preferred stock
offerings and the estimated price per share in the initial public offering.
Accordingly, the Company has recorded deferred compensation expense totaling
approximately $3.3 million. Such compensation expense will be recognized pro
rata over the 48 month vesting period of the options. This deferred
compensation expense totaled approximately $83,000 for 1997 and $688,000 for
1998. Related compensation expense will total approximately $818,000 for the
years ended December 31, 1999, 2000 and 2001. It is the intention of the
Company to generally grant future stock options with exercise prices equal to
the fair value of the underlying Common Stock on the date of grant and account
for such grants in accordance with generally accepted accounting principles.
<PAGE>
Interest and Other Income
Interest and other income increased to $1.2 million in 1998 from $180,000
in 1997. This increase of $1.0 million was due to interest income generated from
the investment of the higher cash balances generated by the initial public
offering. Interest and other income increased to $180,000 in 1997 from $24,000
in 1996. The increase was primarily due interest earned on the proceeds of the
issuance of preferred stock in 1997.
Income Taxes
For 1998, the Company's effective combined federal and state income tax
rate was 34.8%, compared to 31.3% for 1997. The Company's 1998 tax rate was
higher since the Company utilized all remaining tax loss carry forwards in 1997.
In both 1998 and 1997 the Company realized research and development tax credits
The Company had no income tax expense in 1996 due to a loss before income taxes.
The Company expects its effective tax rate to increase in the future due to the
expansion of its operations into other states which carry a higher effective tax
rate than Colorado. See Note 5 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash
generated from operations, sales of common and preferred stock and periodic
borrowings under its credit facilities.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------
(In thousands) 1997 1998
------------------- -----------------
<S> <C> <C>
Working capital................................................... $16,615 $ 60,571
Cash, cash equivalents and securities............................. 8,620 53,978
Total assets...................................................... 21,680 72,313
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
(In thousands) 1996 1997 1998
--------------- ----------------- ------------
<S> <C> <C> <C>
Net cash provided (used) by:
Operating activities............................................ $(1,695) $(3,495) $ 9,553
Investing activities............................................ (639) (3,617) (22,063)
Financing activities............................................ 3,135 12,287 37,607
</TABLE>
Cash Flows
Net cash provided by operating activities for 1998 totaled approximately
$9.6 million, while operating activities in 1997 used approximately $3.5 million
of net cash. Cash provided by operating activities in 1998 was mainly due to net
income and increases in accrued liabilities, and was partially offset by
increases in accounts receivable. Cash used by operating activities in 1997 was
primarily due to increases in inventory and accounts receivable, partially
offset by net income and increases in accounts payable. Net cash used by
operating activities for 1996 totaled approximately $1.7 million, and related to
increases in inventory and accounts receivable.
The Company's inventory levels decreased to approximately $5.1 million at
December 31, 1998 from approximately $6.8 million at December 31, 1997. The
decrease was due mostly to the Company's change to turnkey manufacturing for
certain of its components and subassemblies.
Cash used by investing activities was approximately $22.1 million for year
ended December 31, 1998 and approximately $3.6 million for 1997. Cash and cash
equivalents used by investing activities in both years was primarily the result
of purchasing U.S. Government Agency and Corporate bonds with maturities greater
than three months. The Company's capital expenditures for 1998 were $1.8
million for additions to facilities and equipment to support its research,
development and manufacturing activities, compared to $1.1 million for 1997.
The Company has recently secured an additional 39,000 square foot manufacturing
facility to support its future requirements. Cash used by investing activities
was approximately $639,000 for 1996, related primarily to capital expenditures
for additions to facilities and equipment to support its research, development
and manufacturing activities. The Company intends to continue to significantly
increase its capital expenditures in 1999 for additions to facilities and
equipment to support its research, development and manufacturing activities.
Therefore the Company expects these expenses to increase in absolute dollars in
the future.
Cash provided by financing activities was approximately $37.6 million for
1998 and $12.3 million for 1997. Cash provided by financing activities in 1998
was primarily due to net proceeds from the issuance of Common Stock in the
Company's initial public offering. Net proceeds from the issuance of preferred
stock resulted in the cash provided from financing activities in 1997 and 1996.
<PAGE>
Liquidity
At December 31, 1998, the Company's principal sources of liquidity included
cash and marketable securities available for sale of approximately $54 million
and a bank credit facility of $5.0 million, which bears interest at the bank's
prime rate. This working capital line of credit is limited to a borrowing base
determined by the balance of the Company's eligible receivables and inventory.
At December 31, 1998, there were no outstanding borrowings under the working
capital line. See Note 4 of Notes to Financial Statements.
At December 31, 1997, the Company's working capital was approximately $16.6
million and had increased to $60.6 million at December 31, 1998. The Company
has no significant capital spending or purchase commitments other than normal
inventory purchase commitments under facilities leases. See Note 10 of Notes to
Financial Statements.
The Company believes that its existing cash, investment balances, and its
line of credit 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 the Company
experiences growth in the future, it anticipates that its 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. The Company may also enter into strategic
alliances with third parties that could provide access to additional capital.
Any such activities could require the Company to obtain additional financing.
See "Business-Risk Factors--Potential Need for Additional Capital; Risks
Relating to Potential Acquisitions."
Year 2000 Risks May Have a Material Adverse Effect on Our Business.
As is true for most companies, the Year 2000 problem creates a risk for us.
If systems 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 four areas:
- - - potential warranty or other claims from our customers;
- - - systems we use to run our business;
- - - systems used by our suppliers; and
- - - the potential for failures of our products, particularly our central office-
based Wide Bank systems, 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.
Recent Accounting Pronouncements
In June 1998, 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, and is not
expected to have a significant effect on the Company's financial statements.
<PAGE>
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" in 1998. It establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
adoption of SFAS 131 had no effect on the Company's financial statements as the
Company operates in one business segment.
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" in 1997. SFAS establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS 130 had no effect on the Company's
financial statements.
Item 7A. 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 December 3, 1998 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 December 31, 1998, the
Company has not used derivative instruments or engaged in hedging activities.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Consolidated Financial Statements and Financial Statement Schedule
<TABLE>
<CAPTION>
Page(s)
-------------
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report................................................................................... 29
Consolidated Balance Sheets
December 31, 1997 and December 31, 1998...................................................................... 30
Consolidated Statements of Operations
Years ended December 31, 1996, 1997 and 1998................................................................. 31
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1997 and 1998................................................................. 32
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1997 and 1998................................................................. 33
Notes to Consolidated Financial Statements..................................................................... 34
Financial Statement Schedule:
Independent Auditors' Report................................................................................. 43
Schedule II - Valuation and Qualifying Accounts................................................................. 44
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Carrier Access Corporation:
We have audited the accompanying balance sheets of Carrier Access Corporation
as of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Carrier Access Corporation as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Boulder, Colorado
January 20, 1999
<PAGE>
CARRIER ACCESS CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,104 $31,201
Marketable securities available for sale 2,516 22,777
Accounts receivable, net of allowances for doubtful
accounts and returns of $398 and $643 in
1997 and 1998, respectively 4,645 8,493
Inventory, net (note 2) 6,784 5,053
Deferred income taxes (note 5) 237 1,198
Prepaid expenses and other current assets 91 804
----------------- -----------------
Total current assets 20,377 69,526
Property and equipment, net of accumulated depreciation and amortization (note 3)
1,267 2,599
Deferred income taxes --- 118
Other assets 36 70
----------------- -----------------
Total assets $21,680 $72,313
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,685 $ 3,630
Accrued warranty costs payable 286 594
Accrued compensation payable 381 1,838
Cooperative advertising 159 467
Deferred rent concessions (note 10) 217 274
Income taxes payable --- 2,000
Other liabilities 34 152
----------------- -----------------
Total current liabilities 3,762 8,955
----------------- -----------------
Redeemable Series A and B preferred stock, 5,000,000 shares authorized, 3,728,755
shares outstanding in 1997 (note 6) 17,358 ---
----------------- -----------------
Stockholders' equity (note 7):
Common stock, 60,000,000 authorized and 14,299,689
and 23,630,355 shares issued and outstanding for
December 31, 1997 and 1998, respectively 19 28
Additional paid-in-capital 1,296 59,955
Deferred stock option compensation (1,144) (2,377)
Retained earnings 389 5,752
----------------- -----------------
Total stockholders' equity 560 63,358
----------------- -----------------
Commitments (note 10)
Total liabilities and stockholders' equity $21,680 $72,313
================= =================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CARRIER ACCESS CORPORATION
Statements OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1997 1998
------------------ ------------------- -------------------
<S> <C> <C> <C>
Net revenue $ 5,809 $18,719 $48,133
Cost of sales 3,284 9,469 23,067
------------------ ------------------- -------------------
Gross profit 2,525 9,250 25,066
------------------ ------------------- -------------------
Operating expenses:
Sales and marketing 844 2,395 6,083
Research and development 874 2,848 5,588
General and administrative 907 1,578 3,270
Amortization of deferred stock
compensation (note 7) --- 83 688
------------------ ------------------- -------------------
Total operating expenses 2,625 6,904 15,629
------------------ ------------------- -------------------
Income (loss) from operations (100) 2,346 9,437
Interest income 0 174 1,213
Other income, net 24 6 11
------------------ ------------------- -------------------
Income (loss) before income taxes (76) 2,526 10,661
Income tax expense (note 5) --- 791 3,712
------------------ ------------------- -------------------
Net income (loss) (76) 1,735 6,949
Preferred stock dividend requirement
(note 6) (285) (1,121) (1,586)
------------------ ------------------- -------------------
Net income (loss) available to common
stockholders $ (361) $ 614 $ 5,363
================== =================== ===================
Income (loss) per share:
Basic $(0.03) $0.04 $0.29
Diluted $(0.03) $0.04 $0.28
Weighted average common shares
outstanding:
Basic 13,881 14,132 18,253
Diluted 13,881 14,713 19,387
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CARRIER ACCESS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Total
--------------- Paid-in Stock Option Retained Stockholders'
Shares Amount Capital Compensation Earnings Equity (deficit)
------- ------ ----------- ------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 13,875 19 26 -- 178 223
Conversion from subchapter S to C corporation -- -- 178 -- (178) --
Exercise of stock options 150 -- 5 -- -- 5
Preferred stock dividend requirement (note 6) -- -- (209) -- (76) (285)
Distribution to stockholders -- -- -- -- (25) (25)
Net loss -- -- -- -- (76) (76)
------ --- ------- ------- ------- -------
Balances at December 31, 1996 14,025 19 -- -- (177) (158)
Exercise of stock options 275 -- 69 -- -- 69
Deferred stock compensation related to stock
options issued at less than fair value (note 7) -- -- 1,227 (1,227) -- --
Amortization of deferred stock compensation -- -- -- 83 -- 83
(note 7)
Preferred stock dividend requirement (note 6) -- -- -- -- (1,121) (1,121)
Distribution to stockholders -- -- -- -- (48) (48)
Net income -- -- -- -- 1,735 1,735
------ --- ------- ------- ------- -------
Balances at December 31, 1997 14,300 19 1,296 (1,144) 389 560
Exercise of stock options 299 -- 64 -- -- 64
Deferred stock compensation related to stock -- 1,921
options issued at less than fair value (note 7) -- (1,921) -- --
Amortization of deferred stock compensation -- -- -- 688 -- 688
(note 7)
Preferred stock dividend requirement (note 6) -- -- -- -- (1,586) (1,586)
Issuance of common stock in initial public 3,450 3 37,599 -- -- 37,602
offering, net of offering costs (note 6)
Conversion of preferred stock to common stock 5,593 6 18,939 -- -- 18,945
(note 6)
Purchase and retirement of common stock (12) -- (59) -- -- (59)
Tax benefit from exercise of stock options -- -- 195 -- -- 195
(note 5)
Net income -- -- -- -- 6,949 6,949
------ --- ------- ------- ------- -------
Balances at December 31, 1998 23,630 $28 $59,955 $(2,377) $ 5,752 $63,358
====== === ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CARRIER ACCESS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ (76) $ 1,735 $ 6,949
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization expense............................ 120 421 470
Provision for doubtful accounts and returns...................... 20 382 246
Provision for inventory obsolescence............................. -- -- 576
Compensation expense related to stock options issued
at less than fair value.......................................... -- 83 688
Accrued interest payable converted to preferred stock............ 18 -- --
Deferred income tax benefit...................................... -- (237) (1,079)
Tax benefit relating to exercise of stock options................ -- -- 195
Changes in operating assets and liabilities:
Accounts receivable............................................ (912) (4,000) (4,093)
Inventory...................................................... (1,544) (4,573) 1,155
Prepaid expenses and other..................................... (20) (59) (747)
Accounts payable............................................... 364 2,083 945
Accrued warranty costs payable................................. 45 230 308
Accrued compensation payable................................... 148 203 1,457
Cooperative advertising........................................ -- 159 308
Deferred rent concessions...................................... 139 78 57
Income taxes payable........................................... -- -- 2,000
Other liabilities.............................................. 3 -- 118
------- ------- --------
Net cash provided (used) by operating activities............... (1,695) (3,495) 9,553
------- ------- --------
Cash flows from investing activities:
Purchase of equipment............................................ (401) (1,065) (1,802)
Sales (purchases) of securities available for sale, net.......... -- (2,514) (20,261)
Software development costs....................................... (238) -- --
Other............................................................ -- (38) --
------- ------- --------
Net cash used by investing activities.......................... (639) (3,617) (22,063)
------- ------- --------
Cash flows from financing activities:
Cash overdraft................................................... (170) -- --
Proceeds from issuance of preferred stock, net................... 3,049 12,514 --
Proceeds from issuance of common stock, net...................... -- -- 37,602
Proceeds from exercise of stock options.......................... 5 69 64
Purchase and retirement of common stock.......................... -- -- (59)
Distributions to stockholders.................................... (25) (48) --
Proceeds from short-term borrowings.............................. 276 1,900 --
Payments on short-term borrowings................................ -- (2,148) --
------- ------- --------
Net cash provided by financing activities...................... 3,135 12,287 37,607
------- ------- --------
Net increase in cash and cash equivalents...................... 801 5,175 25,097
Cash and cash equivalents at beginning of period.................... 128 929 6,104
------- ------- --------
Cash and cash equivalents at end of period.......................... $ 929 $ 6,104 $ 31,201
======= ======= ========
Supplemental disclosure of cash flow and financing activities
information:
Cash paid for interest........................................... $ 2 $ 22 10
======= ======= ========
Cash paid for income taxes....................................... $ -- $ 948 2,616
======= ======= ========
Conversion of debt and accrued interest payable into preferred $ 88 $ -- $ --
stock........................................................... ======= ======= ========
Conversion of preferred stock to common stock.................... $ -- $ -- $ 18,945
======= ======= ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CARRIER ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
1. Summary of Significant Accounting Policies
a. Business and Basis of Presentation--Carrier Access Corporation ("CAC" or
the "Company") is a leading provider of Multi-service Digital Access ("MDA")
equipment to competitive telecommunications carriers, including competitive
local exchange carriers, Internet service providers and wireless carriers. The
Company's MDA equipment is used for the provisioning of enhanced voice and high-
speed data services by carriers to end users such as small and medium-sized
businesses and government and educational institutions. The Company sells its
products through distributors and directly to end user customers. The Company
operates in one business segment and substantially all of its sales and
operations are domestic.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and disclosures of contingent assets and liabilities and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
b. Cash and Cash Equivalents and Marketable Securities Available for Sale--
Cash and cash equivalents include investments in highly liquid debt securities
with maturities or interest reset dates of three months or less at the time of
purchase.
Marketable securities available for sale represent U.S. Government Agency and
Corporate bonds with maturities of greater than three months and are recorded at
the lower of amortized cost or market value. At December 31, 1997 and 1998,
amortized cost approximates market value. Securities available for sale
consisted of the following as of December 31;
<TABLE>
<CAPTION>
Amortized Cost and Market Value Interest Rates
--------------------------------------------- -------------------
1997 1998 1998
-------------------- ----------------- ------------------
<S> <C> <C> <C>
Medium Term Notes -- $ 1,676,925 6.06% to 6.38%
-------------------- -----------------
Corporate Notes $ 560,837 $ 5,942,743 7.15% to 8.00%
-------------------- -----------------
Municipal Bonds -- $12,257,327 5.00% to 7.50%
-------------------- -----------------
Other $1,955,357 $ 2,900,000 Variable
-------------------- -----------------
Total $2,516,194 $22,776,995
==================== =================
</TABLE>
c. Inventory--Inventory is recorded at the lower of cost or market, using
standard costs, which approximate average cost. Costs includes freight, certain
warehousing costs and other allocable overhead.
d. Property and equipment--Property, equipment and leasehold improvements are
recorded at cost and are depreciated and amortized using the straight-line
method over useful lives ranging from three to thirty years or the lease term.
Depreciation and amortization expense for the years ended December 31, 1996,
1997 and 1998 totaled $114,687, $185,701, $470,359, respectively.
e. Revenue Recognition--Revenue from sales of products is recognized upon
shipment. Reserves for estimated sales returns through stock rotation are
recorded when sales are made to customers with the right of return and are
based on management's estimate of expected returns and historical experience.
The Company provides limited price protection to its distributors, whereby
increases in prices are subject to a 60-day notice period before becoming
effective. In addition, the distributor is also entitled to receive a credit
for subsequent price decreases to the extent of unsold distributor inventory at
the time of the price decrease. The Company also provides its distributors with
limited stock rotation rights, whereby products may be returned for an equal
dollar amount of new or different equipment. Customers are limited to three
exchanges per year and an amount equal to 15% of purchases in the preceding four
month period. Neither of these rights affect the total sales price or payment
obligations of the customer. In addition, the customers' obligation to the
Company is not contingent upon the ultimate resale of the products. The Company
provides for the estimated impact of price protection and stock rotation rights
in its allowance for estimated returns based on historical experience and
management's forecasts of price protection credits and returns.
f. Advertising Costs--In addition to its own advertising activities, the
Company accrues a specified percentage of the previous quarter's sales over
certain contractual minimums to reimburse distributors for a portion of their
advertising costs. Any unused allowance expires if not used during the
following six months. Cooperative advertising expense for the years ended
December 31, 1997 and 1998 totaled $217,687 and $342,442, respectively, and is
included in sales and marketing expenses.
<PAGE>
CARRIER ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
g. Research and Development Costs--Research and development costs are charged
to operations as incurred.
h. Long-Lived Assets--The Company accounts for long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (SFAS 121), which requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss is generally recognized when
estimated undiscounted future cash flows expected to be generated by the asset
is less than its carrying value. Measurement of impairment loss is based on the
fair value of the asset, which is generally determined using valuation
techniques such as the discounted present value of expected future cash flows.
i. Income Taxes --The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109). Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is required to the extent
any deferred tax assets may not be realizable.
j. Income (Loss) Per Share, Common Stock Split and Re-Incorporation--Income
(loss) per share is presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share (SFAS 128). SFAS 128
requires the presentation of basic and diluted EPS. Under SFAS 128, basic EPS
excludes dilution for potential common shares and is computed by dividing income
or loss available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted and resulted in the issuance of common stock. In
1997 and 1998, diluted income per share includes the impact of common stock
options and excludes the impact of redeemable preferred stock, as the effect of
the assumed conversion of the preferred stock and the elimination of the related
dividend requirement would be antidilutive. Due to the loss in 1996, potential
common stock instruments were antidilutive.
On May 28, 1998 the Company's Board of Directors approved a three-for-two
forward split of the Company's Common Stock. In addition, the Board also
approved re-incorporation as a Delaware corporation, which included an increase
to 60 million authorized common shares and a change to a par value of $.001 per
share. All share and per share information included in the accompanying
financial statements and notes thereto have been restated for the stock split.
k. Stock-Based Compensation--The Company accounts for its stock-based employee
compensation plan using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations. As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The Company has provided pro forma
disclosures of net income (loss) and income (loss) per share, as if the fair
value based method of accounting for the plan, as prescribed by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), had been applied.
Stock options issued to consultants and others for services are recorded at
fair value as prescribed by SFAS 123. Charges to operations associated with
these option grants were not significant during the years ended December 31,
1996, 1997 and 1998.
l. Warranty Costs--The Company provides limited warranty protection to
customers for a period of up to five years from the date of sale for parts and
labor. The Company has accrued for its warranty obligations based on historical
experience and management's estimate of future warranty costs to be incurred.
m. Reclassifications--Certain reclassifications have been made to conform
prior year financial statements to the 1998 presentation.
2. Inventory
The components of inventory as of December 31, are summarized as follows (in
thousands):
<PAGE>
CARRIER ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Raw materials............................. $3,320 $3,327
Work-in-process........................... 351 93
Finished goods............................ 3,113 2,209
Reserve for obsolescence.................. -- (576)
------------ ------------
$6,784 $5,053
============ ============
</TABLE>
3. Property and Equipment
Property and equipment as of December 31, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Machinery and software.................... $1,349 $2,706
Real property............................. -- 270
Furniture, fixtures and other............. 160 295
Leasehold improvements.................... 134 174
------------ ------------
1,643 3,445
Less accumulated depreciation............. (376) (846)
------------ ------------
$1,267 $2,599
============ ============
</TABLE>
4. Debt and Related Party Transactions
In May 1998, the Company entered into a credit agreement with a bank which
provides for a $5.0 million revolving line of credit. The revolving line of
credit bears interest at the prime rate (7.75% at December 31, 1998), matures in
1999, and is secured by certain assets of the Company. No borrowings were
outstanding under the revolving line of credit at December 31, 1998.
The above credit agreement contains certain restrictive covenants, including
the maintenance of various financial ratios and does not permit the payment of
any dividends without the prior written consent of the lender.
5. Income Taxes
Income tax expense consists of the following for the years ended December 31,
(in thousands):
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Current....................................... $1,028 $ 4,791
Deferred...................................... (237) (1,079)
------------ ------------
Income tax expense.......................... $ 791 $ 3,712
============ ============
</TABLE>
No tax benefit was recorded for the year ended December 31, 1996 due to the
Company's net loss and the uncertainty relating to the ultimate utilization of
the Company's net operating loss carry forward.
A reconciliation of expected income tax expense (benefit) calculated by
applying the statutory Federal tax rate to actual income tax expense for the
years ended December 31, is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- ------------
<S> <C> <C> <C>
Expected income tax expense (benefit)....................... $ (26) $ 859 $3,631
State income taxes, net of federal tax benefit.............. (2) 64 386
Change in valuation allowance............................... 26 (67) ---
Research and development tax credit......................... --- (112) (286)
Amortization of deferred stock compensation................. --- 32 140
Other, net.................................................. 2 15 (159)
------------- -------------- ------------
Actual income tax expense................................ $ --- $ 791 $3,712
============= ============== ============
</TABLE>
The tax effects of significant temporary differences that result in deferred
tax assets and liabilities at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts....................................... $ 151 $ 241
Inventory reserves.................................................... -- 321
</TABLE>
<PAGE>
CARRIER ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Accrued warranty and co-operative advertising......................... -- 398
Other accrued expenses................................................ 143 111
Compensation accruals, including deferred stock compensation.......... -- 361
Other, net............................................................ -- 55
--------------- --------------
Net deferred tax asset............................................. $ 294 $ 1,487
Deferred tax liabilities:
Property and equipment................................................ (43) (149)
Other, net............................................................ (14) (22)
--------------- --------------
Total deferred tax liabilities..................................... (57) (171)
--------------- --------------
Net deferred tax asset............................................. $ 237 $1,316
=============== ==============
</TABLE>
For the year ended December 31, 1998, the Company recognized $195,010 as a
direct increase to paid-in capital for the income tax benefit resulting from the
exercise of non-qualified stock options by employees.
6. Redeemable Preferred Stock And Initial Public Offering
During 1995, the Company authorized a new class of preferred stock, consisting
of 5,000,000 convertible Series A preferred shares with a par value of $0.10 per
share. The preferred shares were convertible, at the option of the holder, into
shares of common stock which was subject to the three-for-two forward split. The
preferred shares were redeemable at the option of a majority of the preferred
stockholders, any time after four years from the date of issuance, provided that
the Company had not achieved certain financial results or completed a public
offering of common stock, both as defined.
On June 21, 1996, the Company completed a private placement of 1,210,861
shares of Series A preferred stock at a price of $2.86 per share, for net
proceeds of $3,049,406. The private placement included 135,678 preferred shares
issued to noteholders. In the event of the Company's liquidation, or redemption
of the preferred shares, the Series A preferred stockholders were entitled to
$2.86 per share plus unpaid dividends equal to 15% of the liquidation value per
annum.
During 1997, the Company amended its articles of incorporation to authorize a
new class of preferred stock, consisting of 2,725,998 convertible Series B
preferred shares with a par value of $0.10 per share. On September 16, 1997, the
Company completed a private placement of 2,517,894 shares of Series B preferred
stock at a price of $4.99 per share, for net proceeds of $12,514,291. In the
event of the Company's liquidation, or redemption of the preferred shares, the
Series B stockholders were entitled to $4.99 per share plus unpaid dividends
equal to 15% of the liquidation value per annum.
In August 1998, the Company completed its initial public offering of
3,450,000 shares of common stock at $12.00 per share, for net proceeds of
approximately $37.6 million. Aggregate offering costs were approximately $3.8
million.
In connection with the initial public offering, 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 split,
resulting in the issuance of 5,593,133 shares of common stock to the preferred
stockholders.
7. Stock Options
Pursuant to the Company's 1995 stock option plan (the "Plan"), a committee
appointed by the Company's Board of Directors may grant incentive and
nonqualified options to employees, consultants and directors. The Plan, as
amended in 1998, authorizes the grant of options to purchase up to 3,750,000
shares of authorized, but unissued common stock. Incentive stock options have a
ten-year term and non-qualified stock options have a five-year term. A majority
of the stock options vest 25% on the first anniversary date of the grant and
6.25% each quarter thereafter, with the remaining stock options vesting 100%
five years from the grant date. As of December 31, 1998, an aggregate of
3,850,650 options had been granted under the Plan of which 1,211,250 were
incentive stock options and 2,639,400 were non-qualified stock options.
The following summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Weighted Average
Shares Under option Exercise Price
-------------------------- -----------------------
<S> <C> <C>
Options outstanding at January 1, 1996......................... 540,000 0.14
Granted...................................................... 970,500 0.33
Exercised.................................................... (150,000) 0.03
Canceled..................................................... (596,250) 0.33
--------------------------
Options outstanding at December 31, 1996....................... 764,250 0.25
Granted...................................................... 927,675 0.50
</TABLE>
<PAGE>
CARRIER ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Exercised.................................................... (274,689) 0.25
Canceled..................................................... (73,284) 0.33
-------------------- --------------
Options outstanding at December 31, 1997....................... 1,343,952 0.42
Granted...................................................... 1,413,150 8.82
Exercised.................................................... (298,856) 0.22
Canceled..................................................... (658,906) 3.33
-------------------- --------------
Options outstanding at December 31, 1998....................... 1,799,340 $5.99
==================== ==============
Options available for grant at December 31, 1998............... 1,227,115
==================== ==============
</TABLE>
The following summarizes information about outstanding options at December 31,
1998:
<TABLE>
<CAPTION>
Number outstanding Weighted average remaining Number vested
Exercise price at December 31, 1998 contractual life (years) and exercisable
- - ------------------- ---------------------------- ----------------------------- ------------------------
<S> <C> <C> <C>
0.33 466,868 4.3 172,099
0.83 165,372 3.3 42,693
1.73 38,250 4.0 1,500
3.33 124,350 4.2 --
4.00 297,750 4.3 --
4.67 59,250 4.3 --
5.67 74,700 4.4 --
10.00 48,750 4.5 --
11.00 340,950 4.5 --
14.25 60,500 4.7 --
16.88 28,000 4.8 --
24.00 42,600 4.9 --
28.75 30,000 5.0 --
30.25 22,000 5.0 --
</TABLE>
As discussed in Note 1, the Company applies APB 25 and related interpretations
in accounting for stock options issued to employees and directors. As a result,
for options issued with exercise prices below the estimated fair market value on
the date of grant, the Company recorded deferred compensation expense totaling
approximately $1,227,000 for options granted during the year ended December 31,
1997 and $2,046,000 for options granted during the year ended December 31, 1998.
Such deferred compensation expense will be amortized to operations pro rata over
the forty-eight month option vesting period. Such amortization expense totaled
approximately $83,000 and $688,000 for the year ended December 31, 1997 and
1998, respectively.
The weighted average fair values of options granted during 1996, 1997 and 1998
were $0.05 and $0.30 and $6.28 per share, respectively, using the Black-Scholes
option-pricing model with the following assumptions: no expected dividends, no
volatility in 1996 and 1997 and 89.5% volatility in 1998, expected life of the
options of three years in 1996 and 1997 and 4.98 years in 1998 and a risk-free
interest rate of 6% for all years. Had compensation cost for the Company's
stock-based compensation plan been determined based upon the fair value of
options on the grant dates, consistent with the provisions of SFAS 123, the
Company's 1996, 1997 and 1998 pro forma net income (loss) would have been as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1996 1997 1998
-------------- ----------- --------------
<S> <C> <C> <C>
Net income (loss) available to common stockholders:
As reported............................................ $ (361) $ 614 $5,363
Pro forma.............................................. (366) 577 5,039
Income (loss) per common share:
As reported:
Basic............................................... $(0.03) $0.04 $ 0.29
Diluted............................................. (0.03) 0.04 0.28
Pro forma:
Basic............................................... $(0.03) $0.04 $ 0.28
Diluted............................................. (0.03) 0.04 0.26
</TABLE>
<PAGE>
CARRIER ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
8. Significant Customers, Suppliers and Concentration or Credit Risk
The Company's customers are primarily distributors and an OEM, who resell the
Company's products to end users. The Company recognized revenue from the
following significant customers for the years ended December31:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- ------------ -----------
<S> <C> <C> <C>
Company A $6,840 $20,749
Company B 1,027 2,698 7,369
Company C 1,017 1,253 6,360
Company D 3,802 2,337
Company E 631 650 855
Company F 2,756 1,161 --
</TABLE>
Although the Company generally uses standard parts and components for its
products, many key components are purchased from sole or single source vendors
for which alternative sources may not currently be available. The
identification and utilization of new suppliers for such items could adversely
effect the Company's future operating results.
The Company is exposed to potential concentrations of credit risk from its
accounts receivable with its various customers. The Company's receivables are
concentrated in customers in the telecommunications industry. To reduce this
risk, the Company has a policy of assessing the creditworthiness of its
customers and monitors the aging of its accounts receivable for potential
uncollectable accounts.
9. Employee Benefit Plan
In May 1996, the Company adopted a defined contribution employee benefit plan
(the Plan) under Section 401(k) of the Internal Revenue Code which is available
to all employees who meet the Plan's eligibility requirements. Employees may
contribute up to the maximum limits allowed by the Internal Revenue Code. The
Company may make discretionary employer matching contributions to the Plan. The
Company made no contributions to the Plan in 1996, 1997 or 1998.
10. Commitments
The Company leases office space under various noncancelable operating leases
that expire through 2009. Future obligations under these leases are as follows
(in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999........................................ $ 896
2000........................................ 1,076
2001........................................ 1,064
2002........................................ 1,110
2003........................................ 1,159
Thereafter.................................. 5,526
-------
$10,831
=======
</TABLE>
The Company records rent expense under noncancelable operating leases using the
straight-line method after consideration of increases in rental payments over
the lease term, and records the difference between actual payments and rent
expense as deferred rent concessions.
Rent expense for the years ended December 31, 1996, 1997 and 1998 totaled
$549,105, $547,130 and $555,483, respectively.
The Company also subleases office space under various noncancelable operating
leases that expire through 2000. Future rental income under these subleases are
as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999........................................ 142
2000........................................ 75
----
$217
====
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors and
executive officers is incorporated by reference to the information set forth in
the sections entitled "Proposal One--Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders to be filed with the Commission within
120 days after the end of the Company's fiscal year ended December 31, 1999 (the
"1999 Proxy Statement"), except that certain information required by this item
concerning the executive officers of the Company is incorporated by reference to
the information set forth in the section entitled "Executive Officers of the
Company" at the end of Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Proposal One--Election of Directors--Director Compensation" and "Executive
Officer Compensation" in the Company's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding security ownership of certain
beneficial owners and management is incorporated by reference to the information
set forth in the section entitled "Share Ownership of Principal Stockholders and
Management" in the Company's 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Transactions with Management" in the Company's 1999
Proxy Statement.
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial statements of the
Company and the Independent Auditors' Report therein are filed as
part of this Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report...................................... 29
Balance Sheets as of December 31, 1997 and 1998................... 30
Statements of Operations for the years ended December 31, 1996,
1997 and 1998..................................................... 31
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1996, 1997 and 1998.................................. 32
Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.................................. 33
</TABLE>
2. Financial Statement Schedule. The following financial statement
schedule of the Company for the years ended December 31, 1996, 1997,
and 1998 filed as part of this Form 10-K should be read in
conjunction with the Financial Statements, and related notes
thereto, of the Company.
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1996, 1997 and 1998.
Schedules other than those listed above have been omitted
since they are either not required, not applicable, or the
information is otherwise included.
3. Exhibits. The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedule are filed as
part of, or incorporated by reference into, this Form 10-K.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
fourth quarter ended December 31, 1998.
<PAGE>
Independent Auditors' Report
The Board of Directors
Carrier Access Corporation:
Under date of January 20, 1999, we reported on the balance sheets of Carrier
Access Corporation as of December 31, 1997 and 1998, and the related statements
of operations, stockholders' equity (deficit) and cash flows for each of the
years in the three-year period ended December 31, 1998, as contained in the
Company's Annual Report on Form 10-K for 1998. In connection with our audits of
the aforementioned financial statements, we also audited the related financial
statement Schedule II - Valuation and Qualifying Accounts. This financial
statement schedule is the responsibility of the Company management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statements schedule, when considered in
relation to the basic financial statement taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Boulder, Colorado
January 20, 1999
<PAGE>
SCHEDULE II
CARRIER ACCESS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Bad Debt Balance at
---------------- ------------------ -------------------- -----------------
Beginning Charged to Write-offs, and End
Allowance for doubtful accounts and returns: ---------------- ------------------ -------------------- -----------------
of Period Operations (1) Returns (1) of Period
---------------- ------------------ -------------------- -----------------
Year Ended:
<S> <C> <C> <C> <C>
December 31, 1996............................... $ -- $ 20 $ -- $ 20
================ ====== ======= ====
December 31, 1997............................... $ 20 $ 817 $ (439) $398
================ ====== ======= ====
December 31, 1998............................... $398 $2,304 $(2,060) $642
================ ====== ======= ====
Inventory Obsolescence Reserve:
Year Ended:
December 31, 1996............................... $ -- $ -- $ -- $ --
================ ====== ======= ====
December 31, 1997............................... $ -- $ -- $ -- $ --
================ ====== ======= ====
December 31, 1998............................... $ -- $ 805 $ (229) $576
================ ====== ======= ====
</TABLE>
(1) Includes provisions for stock rotations and other sales returns, and actual
returns which were charged against revenue. (See note 1(e) to the Company's
Financial Statements included in Part II of this Annual Report).
See accompanying independent auditors report.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description of Document
Number
<C> <S>
3.1 Registrant's Amended and Restated Certificate of Incorporation as filed with the Secretary of State of
Delaware on August 5, 1998 (which is incorporated herein by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, Reg. No. 333-53947 ("Registrant's 1998 S-1")).
3.2 Registrant's Bylaws (which is incorporated herein by reference to Exhibit 3.2 to the Registrant's
1998 S-1).
4.1 Form of Registrant's Specimen Common Stock Certificate (which is incorporated herein by reference to
Exhibit 4.1 to the Registrant's 1998 S-1).
4.2 Amended and Restated Investor Rights Agreement, among the Registrant and the investors and founders named
therein, dated September 16, 1997 (which is incorporated herein by reference to Exhibit 4.2 to the
Registrant's 1998 S-1).
10.1 Form of Diamond Level Distributor Agreement (which is incorporated herein by reference to Exhibit 10.1 to
the Registrant's 1998 S-1).
10.2 Form of Platinum Level OEM Agreement (which is incorporated herein by reference to Exhibit 10.2 to the
Registrant's 1998 S-1).
10.3 Line of Credit Agreement with Bank One for $5,000,000 dated July 2, 1998 (which is incorporated herein by
reference to Exhibit 10.3 to the Registrant's 1998 S-1).
10.4 Lease Agreement between Carrier Access Corporation and Cottonwood Land and Farms Ltd. for facilities at
5395 Pearl Parkway, Boulder, Colorado, dated June 1, 1995 (which is incorporated herein by reference to
Exhibit 10.4 to the Registrant's 1998 S-1).
10.5 Amendment to Lease Agreement between Carrier Access Corporation and Cottonwood Land and Farms Ltd. Dated
September 20, 1995 (which is incorporated herein by reference to Exhibit 10.5 to the Registrant's 1998 S-1).
10.6 Registrant's 1995 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.6 to the
Registrant's 1998 S-1).
10.7 Registrant's 1998 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 10.7 to the
Registrant's 1998 S-1).
10.8* Amendment to Lease Agreement between Carrier Access Corporation and Cottonwood Land and Farms Ltd. Dated
October 25, 1998.
10.9 Form of Directors' and Officers' Indemnification Agreement (which is incorporated herein by reference to
Exhibit 10.9 to the Registrant's 1998 S-1).
10.10*Lease Agreement between Carrier Access Corporation and TC Boulder Warehouse, LP, a Delaware limited
partnership for facilities at 6837 Winchester Circle, Boulder, Colorado, dated November 13, 1998.
23.1* Consent of KPMG LLP, Independent Certified Public Accountants.
24.1* Power of Attorney. Reference is made to Page 46.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
- - -----------------
* Filed herewith.
<PAGE>
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Boulder, State of
Colorado, on this 31 day of March 1999.
Carrier access corporation
(Registrant)
By: /s/ Nancy Pierce
----------------------------------------------
Nancy Pierce
Vice President-Finance and Administration, and
Chief Financial Officer, Treasurer (Principal
Financial and Accounting Officer), Secretary
and Director
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Nancy Pierce, his or her attorney-in-fact, with
power of substitution in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that the attorney-in-fact or his
or her substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the persons whose signatures appear below, which persons have
signed such report on March 31, 1999 in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
- - ------------------------------------------------------------ -------------------------------------------------------------
<S> <C>
/s/ Roger L. Koenig
- - ----------------------------------
(Roger L. Koenig) President, Chief Executive Officer (Principal Executive
Officer) and Chairman of the Board of Directors
/s/ Nancy Pierce
- - ----------------------------------
(Nancy Pierce) Vice President-Finance and Administration, Chief Financial
Officer, Treasurer (Principal Financial and Accounting
Officer), Secretary and Director
/s/ Douglas Carlisle
- - ----------------------------------
(Douglas Carlisle) Director
/s/ Joseph Graziano
- - ----------------------------------
(Joseph Graziano) Director
/s/ Ryal Poppa
- - ----------------------------------
(Ryal Poppa) Director
/s/ John W. Barnett, Jr.
- - ----------------------------------
(John W. Barnett, Jr.) Director
</TABLE>
<PAGE>
Exhibit 10.8
AMENDMENT TO LEASE AGREEMENT
(Modification of terms and rents)
The purpose of this Amendment, dated October 29, 1998 is to add approximately
26,846 square feet, as noted in Exhibit "A", and as modify the terms of the
Lease as noted below, between Cottonwood Land and Farms, Ltd., "LESSOR," and
Carrier Access Corporation, "LESSEE," for the Premises located at 5395 Pearl
Parkway, Boulder, CO.
This Amendment modifies the term of the Lease Agreement, dated
June 1, 1995 as referenced in Paragraph 2, Amendment to Lease
Agreement dated September 20, 1995 and all other written
Agreements, and provides for the rent schedule1 Paragraph 31, and
terms to be modified.
Lessor has agreed to construct an expansion of the Premises for Lessee, and this
Amendment sets forth modifications to the Lease to account for such expansion
space.
The Lessor hereby leases the expansion Premises (as shown in Exhibit "A") to the
Lessee, and the Lessee hereby leases the expansion Premises from the Lessor, for
a term commencing at 12:01 A.M. on the 1st day of April, 1999 as to the second
floor mezzanine and 12:01 AM. on the ~ day of November, 1999 to the two story
addition and ending at 11:59 P.M. on the 31st day of March, 2009 unless sooner
terminated as herein set forth. The Lessee agrees to pay Lessor as rent, in
addition to the original Rent Schedule outlined in the Amendment to Lease
Agreement dated September 20, 1995, for the expansion premises according to the
terms of the RENT SCHEDULE below:
April 1, 1999 through October 31, 1999 $2,646.00 per month
Nov. 1, 1999 through March 30, 2000 $21,141.00 per month
<PAGE>
April 1, 2000 through March 31, 2001 $22,198.00 per month
April 1, 2001 through March 31, 2002 $23,308.00 per month
April 1, 2002 through March 31, 2003 $24,474.00 per month
April 1, 2003 through March 31, 2004 $25,697.00 per month
April 1, 2004 through March 31, 2005 $26,982.00 per month
April 1, 2005 through March 31, 2006 $28,331.00 per month
April 1, 2006 through March 31, 2007 $29,748.00 per month
April 1, 2007 through March 31, 2008 $31,235.00 per month
April 1, 2008 through March 31, 2009 $32,797.00 per month
Paragraph 10. Additional Rent. Operating multiplier shall continue to be 100%.
It is agreed by both parties that the attached exhibits shall serve as
construction documents to add a two story addition and a second floor mezzanine
to the existing building, at 5395 Pearl Parkway. The Exhibits describe, in
detail, the tenant finishes, HVAC, electrical and other details of the project.
Lessor and Lessee agree if additions are made to the finishes or if changes are
made to the construction described in the attached Exhibits, which result in
additional cost to the project, Lessee shall be responsible to pay Quinlan
Construction directly for the charges. Under no circumstance can the core and
shell nor any landscaping, parking etc. connected with the core and shell
permit, be changed. This paragraph is confined to changes made to the Lessees
finishes i.e. office locations and number of fixed wall offices or walled off
areas, lighting, electrical, HVAC1 etc. It is also agreed by both parties that
if any changes are made to the original scope of the project, as outlined in the
attached exhibits, Lessor must approve those changes in writing and in advance.
See Insert A
Lessee will make available that portion of the existing building necessary to
finish construction on the second floor mezzanine by December31, 1998. Likewise,
Lessee will not interfere or request delays with the start of construction on
April 1, 1999 on the two
<PAGE>
story addition. Time is of the essence in completing both portions of the
project. Loss of the permit due to Lessee non-performance shall constitute
Lessee being liable for all damages Lessor suffers as a result thereof.
Based on a January 1, 1999 start date, occupancy of the second floor mezzanine
shall be April 1, 1999, rent shall start on April 1, 1999. If Lessor can not get
a temporary certificate of occupancy from the City of Boulder on or before April
1, 1999, for the second floor mezzanine, then rent shall start upon obtaining
the certificate. Occupancy of the two story addition shall be November 1,1999,
based on a April 1, 1999 start date, rent for this portion of the project shall
start on November 1, 1999. If Lessor can not get a certificate of occupancy from
the City of Boulder on or before November 1, 1999 then rent shall start upon
obtaining the certificate.
It is agreed by both parties that by mutual written agreement the start of
construction, occupancy and the start of rent, for the mezzanine and/or two
story addition, can be moved forward.
Lessee desires to pay for the tenant improvements on the addition and second
floor mezzanine instead of having such costs amortized over the term of the
Lease. The amount for these improvements is $516,280.00. Lessee agrees to pay
Lessor in three equal installments as follows; $172,093.00 January 1, 1999,
$172,093.00 April 1, 1999, $172,094.00 August 1, 1999. Failure to make these
payments when due shall constitute a default and Lessee shall be liable for
reasonable late fees and at the option of Lessor the rent schedule being
adjusted back to the rent schedule which reflects these charges being included
and amortized over the term of the Lease.
If Lessor obtains additional land, adjacent and which abuts to the Lessee's
premises property in the next 24 months, Lessor agrees to provide Lessee a first
right of offer on any prospective building(s)
<PAGE>
which may be built in the near future. The intent is to construct additional
building(s) on the potential property, which may be leased by Lessee. A first
right of offer on the potential property does not guarantee the ability of the
Lessor to construct a building(s) on the property and Lessor shall bear no
obligations to do so. Simply stated, if the opportunity arises and Lessee is
interested, Lessor will extend a first right of offer to Lessee. Lessee shall
have thirty (30) days in which to respond. Failure by Lessee to accept Lessor's
offer within said time period shall void its "right of offer'1.
Lessee shall have an option to extend the original Lease Agreement dated June 1,
1995 and as amended on September 20, 1995, for the original Premises of
approximately 37,280+1- square feet, through December 2008. Lessee shall notify
Lessor, in writing, at least one (1) year prior to the end of the original Lease
Agreement and Amendment to Lease Agreement of its intent to exercise this option
to extend. Failure to notify Lessor, in said time period, shall void Lessees
rights to extend the Lease. Rent for the option to extend shall be as follows.
Rent Schedule for option:
January 1, 2006 through December 31, 2006 $48,700.00 per month
January 1, 2007 through December 31, 2007 $51,135.00 per month
January 1, 2008 through December 31, 2008 $53,692.00 per month
Force Majeure. In the event that Lessor shall be delayed or hindered in, or
prevented from, the performance of any act required hereunder by reason of
strikes, lock-outs, labor troubles, inability to procure materials, the
inability to obtain building inspections, approvals, or permits, stop work
orders, the inability to obtain a certificate of occupancy, failure of power or
unavailability of utilities, riots, insurrection, war or other reason of like
nature not the fault of Lessor or not within its control, the performance of
such acts shall
<PAGE>
be excused for the period of delay, and the period for the performance of any
such act shall be extended for a period equivalent to the period of such delay
(including extension of both the commencement and termination dates of this
Lease); provided, however, that if Lessee is not in any way responsible for the
delay and does not have use or occupancy of the Premises during the period of
delay, the rent payable hereunder shall be abated for such period of delay.
All other terms and conditions of the original Lease, all Amendments and all
other written agreements are to remain in full force and effect
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals this
date and year above written.
LESSOR: Cottonwood Land and Farms, Ltd.
BY: /s/ Richard L. Hedges
-------------------------------
LESSEE: Carrier Access Corporation
BY: /s/ Nancy Pierce
-------------------------------
ITS: CFO
-------------------------------
<PAGE>
Amendment Summary
Carrier Access Corporation
Total square feet (approximate): 26,846+-
Cost per square foot (first year): $9.45 Triple Net
Yearly escalator: 5%
Length of lease: 10 years
Damage deposit: NA
NNN%: 100%
Occupancy: April 1, 1999 (Mezzanine)
November 1 1999 (2 story Add.)
Utilities: Direct
Commission: NA
Other: Option to extend original Lease for 3 years (37,280+1-).
$/month $/sq. ft. Esc.
Year #1 $21,141 $ 9.45 5%
Year #2 $22,198 $ 9.92 5%
Year #3 $23,308 $10.41 5%
Year #4 $24,474 $10.93 5%
Year #5 $25,697 $11.48 5%
Year #6 $26,982 $12.06 5%
Year #7 $28,331 $12.66 5%
Year #8 $29,748 $13.29 5%
Year #9 $31,235 $13.96 5%
Year #10 $32,797 $14.66 5%
THIS PAGE IS PROVIDED AS A SUMMARY OF THE LEASE AMENDMENT. IF THERE IS ANY
INCONSISTENCY BETWEEN THE LEASE SUMMARY AND THE LEASE AMENDMENT THE LEASE
AMENDMENT SHALL BE THE CONTROLLING DOCUMENT.
THIS PAGE IS NOT PART OF THE LEASE AMANDMENT.
---
<PAGE>
Insert A
Furthermore, Lessor agrees that if finishes are deleted from the final project
or changes are made which result in a reduction of cost to the project, as
described in the attached Exhibits, that those savings can be applied to the
charges made for changes or additions by the Lessee.
/s/ Nancy Pierce
---------------------
/s/ Richard L. Hedges
---------------------
<PAGE>
Exhibit 10.10
TRAMMEL CROW COMPANY
COMMERCIAL LEASE
TC BOULDER WAREHOUSE, LP, a Delaware limited partnership
- - ------------------------------------------------------------------------------
Landlord
AND
Carrier Access Corporation, a Colorado corporation
- - ------------------------------------------------------------------------------
Tenant
Summary of Lease Terms*
Date November 13, 1998
------------------------------------------
Project Gunbarrel Tech Center
------------------------------------------
Square Footage 38,814 Square Feet
------------------------------------------
Address 6837 Winchester Circle
------------------------------------------
Boulder, Colorado 80301
------------------------------------------
Term Eighty four (84) months
------------------------------------------
Base Rental Schedule Year 1: $8.00/Ft/Yr = $25,876.00/mo.
------------------------------------------
Year 2: $8.24/Ft/Yr = $26,652.28/mo.
------------------------------------------
Year 3: $8.49/Ft/Yr = $27,460.91/mo.
------------------------------------------
Year 4: $8.74/Ft/Yr = $28,269.53/mo.
------------------------------------------
Year 5: $9.00/Ft/Yr = $29,110.50/mo.
------------------------------------------
Year 6: $9.27/Ft/Yr = $29,983.82/mo.
------------------------------------------
Year 7: $9.55/Ft/Yr = $30,889.46/mo.
------------------------------------------
Insurance $ .05/Ft/Yr
------------------------------------------
Common Area Maintenance $ .50/Ft/Yr
------------------------------------------
Current Tax Rate $1.32/Ft/Yr
------------------------------------------
Admin. Fee $ .28/Ft/Yr
------------------------------------------
Total Estimated 1998
Operating Expenses $2.15/Ft/Yr
------------------------------------------
Security Deposit Line of Credit/$36,550
------------------------------------------
<PAGE>
*Note: This summary is provided for the Tenant's convenience only. It is not
to be construed as a part of the above-referenced Lease Agreement. In the
event that there is a conflict between this summary of lease terms and the
Lease Agreement, the language in the Lease Agreement shall prevail.
TRAMMELL CROW COMPANY COMMERCIAL LEASE
TABLE OF CONTENTS
-----------------
1. Premises and Term......................................... Page 1
2. Base Rent, Security Deposit & Operating Expense Payments.. Page 1
3. Taxes..................................................... Page 2
4. Landlord's Repairs........................................ Page 2
5. Tenant's Repairs.......................................... Page 3
6. Alterations............................................... Page 3
7. Signs..................................................... Page 3
8. Parking................................................... Page 4
9. Utilities................................................. Page 4
10. Insurance................................................ Page 4
11. Fire and Casualty Damage................................. Page 5
12. Liability and Indemnification............................ Page 5
13. Use...................................................... Page 6
14. Inspection............................................... Page 6
15. Assignment and Subletting................................ Page 6
16. Condemnation............................................. Page 7
17. Holding Over............................................. Page 7
18. Quiet Enjoyment.......................................... Page 7
19. Events of Default........................................ Page 7
20. Remedies................................................. Page 8
21. Mortgages................................................ Page 10
22. Mechanic's Liens......................................... Page 10
23. Miscellaneous............................................ Page 10
24. Security Service......................................... Page 12
25. Notices.................................................. Page 12
26. Landlord's Lien.......................................... Page 12
EXHIBITS
- - --------
Legal Description......................................... Exhibit A
Site Plan................................................. Exhibit A-1
<PAGE>
Plans and Specifications.................................. Exhibit B
Industrial Signage Code................................... Exhibit C
Hazardous Substances...................................... Exhibit D
Building Rules and Regulations............................ Exhibit E
STANDARD LEASE AGREEMENT DATE 11/13/98
----------------
TRAMMELL CROW COMPANY
LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered into by and between TC BOULDER WAREHOUSE,
LP, a Delaware limited partnership, hereinafter referred to as "Landlord", and
CARRIER ACCESS CORPORATION, a Colorado corporation, hereinafter referred to as
"Tenant";
WITNESSETH:
1. PREMISES AND TERM. In consideration of the mutual obligations of
Landlord and Tenant set forth herein, Landlord leases to Tenant, and Tenant
hereby takes from Landlord the Premises situated within the County of Boulder,
State of Colorado, more particularly described on Exhibit "A" and shown on
Exhibit "A-1," attached hereto and incorporated herein by reference (the
"Premises"), together with all rights, privileges, easements, appurtenances,
and amenities belonging to or in any way pertaining to the Premises, to have and
to hold, subject to the terms, covenants and conditions in this Lease. The term
of this Lease shall commence on the commencement date hereinafter set forth and
shall end on the last day of the month that is Eight four (84) months after the
---------------
commencement date. See Paragraph 27 of Addendum.
A. EXISTING BUILDING. If no improvements are to be constructed to the
Premises, the commencement date shall be December 1, 1998. (See Paragraph 28 of
----------------
Addendum.) Tenant acknowledges that (i) it has inspected and accepts the
Premises, (ii) the buildings and improvements comprising the same are suitable
for the purpose for which the Premises are leased, (iii) the Premises are in
good and satisfactory condition, and (iv) no representations as to the repair of
the Premises, nor promises to alter, remodel or improve the Premises have been
made by Landlord (unless otherwise expressly set forth in this Lease).
2. BASE RENT, SECURITY DEPOSIT AND OPERATING EXPENSE PAYMENTS.
A. Tenant agrees to pay to Landlord rent for the Premises, in
advance, without demand, deduction or set off, at the rate of See Paragraph 28
----------------
of Addendum, per month during the term hereof. One such monthly installment,
- - -----------
plus the other monthly charges set forth in Paragraph 2C below shall be due and
payable on the date hereof and a like monthly installment shall be due and
payable on or before the first day of each calendar month succeeding the
commencement date, except that all payments due hereunder for any fractional
calendar month shall be prorated.
B. In addition, Tenant agrees to deposit with Landlord on the date
hereof the sum of See Paragraph 30 of Addendum, which shall be held by Landlord,
----------------------------
without obligation for interest, as security for the performance of Tenant's
obligations under the Lease, it being expressly understood and agreed that this
deposit is not an advance rental deposit or a measure
<PAGE>
of Landlord's damages in case of Tenant's default. Upon each occurrence of an
event of default, Landlord may use all or part of the deposit to pay past due
rent or other payments due Landlord under this Lease, and the cost of any other
damage, injury, expense or liability caused by such event of default without
prejudice to any other remedy provided herein or provided by law. On demand,
Tenant shall pay Landlord the amount that will restore the security deposit to
its original amount. The security deposit shall be deemed the property of
Landlord, but any remaining balance of such deposit shall be returned by
Landlord to Tenant when Tenant's obligations under this Lease have been
fulfilled, less a refurbishment fee equal to fifteen percent (15%) of the total
deposit.
C. Tenant agrees to pay its proportionate share (as defined in
Paragraph 23B below) of operating expenses, which shall include (i) taxes
(hereinafter defined) payable by Landlord pursuant to Paragraph 3A below, (ii)
the cost of utilities that are jointly metered payable pursuant to Paragraph 9
below, (iii) the cost of maintaining insurance payable by Landlord pursuant to
Paragraph 10A below, (iv) the cost of any common area charges payable by Tenant
in accordance with Paragraph 4 below, and an administrative fee equal to fifteen
percent (15%) of the sum of items (i) through (v) above. During each month of
the term of this Lease, on the same day that rent is due hereunder, Tenant shall
pay Landlord an amount equal to 1/12 of the estimated annual cost of its
proportionate share of such items. The initial monthly payments are based upon
the estimated amounts for the year in question, and may be increased or
decreased quarterly to reflect the projected actual cost of all such items. If
the Tenant's total payments are less than Tenant's actual proportionate share of
all such items, Tenant shall pay the difference to Landlord within ten (10) days
after demand. If the total payments of Tenant are more than Tenant's actual
proportionate share of all such items, Landlord shall retain such excess and
credit it against Tenant's next annual payments.
3. TAXES.
A. Landlord agrees to pay all taxes, assessments and governmental
charges of any kind and nature (collectively referred to herein as "Taxes") that
accrue against the Premises, and/or the land and/or improvements of which the
Premises are a part. The Landlord shall have the right to employ a tax
consulting firm to attempt to assure a fair tax burden on the building and
grounds within the applicable taxing jurisdiction. Tenant agrees to pay its
proportionate share of the cost of such consultant.
B. Tenant shall be liable for all taxes levied or assessed against any
personal property or fixtures placed in the Premises. If any such taxes are
levied or assessed against Landlord or Landlord's property and (i) Landlord pays
the same or (ii) the assessed value of Landlord's property is increased by
inclusion of such personal property and fixtures and Landlord pays the increased
taxes, then, upon demand Tenant shall pay to Landlord such taxes.
C. If at any time during the term of this Lease, there shall be
levied, assessed or imposed on Landlord a capital levy or other tax directly or
indirectly upon the rents received therefrom and/or a franchise tax, any excise,
transaction, sales or privilege tax, assessment, levy or charge measured by or
based, in whole or in part, upon such rents from the Premises and/or the land
and improvements of which the Premises are a part, then all such taxes,
assessments, levies or charges, or the part, thereof so measured or based, shall
be payable to Landlord, monthly or upon demand, at the option of the Landlord,
as additional rent.
4. LANDLORD'S REPAIRS.
A. Landlord, at its own cost and expense, shall maintain the
structural soundness of the roof, foundation and exterior walls of the building
of which the Premises are a part in good repair, reasonable wear and tear
excluded. The term "walls" as used herein shall not include windows, glass or
plate glass, doors or overhead doors, special store fronts, dock bumpers, dock
plates or levelers, or office entries. Tenant shall immediately give Landlord
written notice of defect or need for repairs, after which Landlord shall have
reasonable opportunity to repair same or cure such defect.
B. Landlord reserves the right to perform the paving, common area and
landscape replacement and maintenance, exterior painting, common sewage line
plumbing and any other items that are otherwise Tenant's obligations under
Paragraph 5A, all of which are sometimes referred to herein as common area
charges, in which event, Tenant shall be liable for its
2
<PAGE>
proportionate share of the cost and expense of such repair, replacement,
maintenance and other such items.
C. Tenant agrees to pay its proportionate share of the cost of (i)
maintenance and/or landscaping of any property that is a part of the building
and/or project of which the Premises are a part, (ii) maintenance and/or
landscaping of any property that is maintained or landscaped by any property
owner or community owner association that is named in the restrictive covenants
or deed restrictions to which the Premises are subject, and (iii) operating and
maintaining any property, facilities or services provided for the common use of
Tenant and other tenants of any project or building of which the Premises are a
part.
5. TENANT'S REPAIRS.
A. Tenant, at its own cost and expense, shall (i) maintain all parts
of the Premises, landscape and grounds surrounding the Premises (except those
for which Landlord is expressly responsible hereunder) in good condition, (ii)
promptly make all necessary repairs and replacements, (iii) keep the parking
areas, driveways and alleys surrounding the Premises in a clean and sanitary
condition, and (iv) maintain any spur track servicing the Premises. Tenant
agrees to sign a joint maintenance agreement with the railroad company servicing
the Premises if requested by the railroad company. Landlord shall have the
right to coordinate all repairs and maintenance of any rail tracks serving or
intended to serve the Premises and, if Tenant uses such rail tracks, Tenant
shall reimburse Landlord from time to time, upon demand, for its proportionate
share of the costs of such repairs and maintenance and any other sums specified
in any agreement respecting such tracks to which Landlord is a party.
B. Tenant, at its own cost and expense, shall enter into and deliver
to Landlord a regularly scheduled preventive maintenance service contract with a
maintenance contractor approved by Landlord for servicing all hot water, heating
and air conditioning systems and equipment within the Premises. The service
contract must include all services required by the Landlord and must become
effective within thirty (30) days of the date Tenant takes possession of the
Premises. In the event Tenant does not deliver said contract to Landlord within
thirty (30) days of the commencement date, the Landlord has the right to
contract for said service without notice to Tenant, and Tenant shall upon demand
reimburse Landlord for the full cost thereof. Alternatively, Landlord, at the
time and in its sole discretion, reserves the right upon ninety (90) days
written notice to Tenant to enter into a regularly scheduled preventive
maintenance service contract covering the service, repair and/or replacement of
any or all such items for the entire building(s) of which the Premises are a
part, in which event, Tenant shall be liable for its proportionate share of the
cost and expense of said preventive maintenance service contract in accordance
with Paragraph 4 above.
6. ALTERATIONS. Tenant shall not make any alterations, additions or
improvements to the Premises without the prior written consent of Landlord.
Tenant, at its own cost and expense, may erect such shelves, bins, machinery and
trade fixtures as it desires provided that (a) such items do not alter the basic
character of the Premises or the building and/or improvements of which the
Premises are a part; (b) such items do not overload or damage the same; (c) such
items may be removed without injury to the Premises; and (d) the construction,
erection or installation thereof complies with all applicable governmental laws,
ordinances, regulations and with Landlord's specifications and requirements.
All alterations, additions, improvements and partitions erected by Tenant shall
be and remain the property of Tenant during the term of this Lease. All
shelves, bins, machinery and trade fixtures installed by Tenant shall be removed
on or before the earlier to occur of the date of termination of this Lease or
vacating the Premises, at which time Tenant shall restore the Premises to their
original condition. All alterations, installations, removals and restoration
shall be performed in a good and workmanlike manner so as not to damage or alter
the primary structure or structural qualities of the buildings and other
improvements situated on the Premises or of which the Premises are a part.
7. SIGNS. Any signage Tenant desires for the Premises shall be
subject to Landlord's written approval and shall be submitted to Landlord prior
to the commencement date of this Lease. Tenant shall repair, paint, and/or
replace the building facia surface to which its signs are attached upon vacation
of the Premises, or the removal or alteration of its signage. Tenant shall not,
(i) make any changes to the exterior of the Premises, (ii) install any exterior
lights, decorations, balloons, flags, pennants, banners or painting, or (iii)
erect or install any
3
<PAGE>
signs, windows or door lettering, placards, decorations or advertising media of
any type which can be viewed from the exterior of the Premises, without
Landlord's prior written consent. All signs, decorations, advertising media,
blinds, draperies and other window treatment or bars or other security
installations visible from outside the Premises shall conform in all respects to
the criteria established by Landlord.
8. PARKING. Tenant shall be entitled to park in common with other
tenants of the development in those areas designated for common or non-reserved
parking. Tenant agrees not to burden the parking facilities and agrees to
cooperate with Landlord and other tenants in the use of the parking facilities.
Landlord reserves the right, in its absolute discretion, to determine whether
parking facilities are becoming crowded and, in such event, to allocate parking
spaces among Tenant and other tenants. Landlord shall not be responsible for
enforcing Tenant's parking rights against any third parties. No vehicle storage
of any nature or kind shall be allowed or permitted in any parking area without
Landlord's prior written consent.
9. UTILITIES. Landlord agrees to provide normal water and electrical
service to the Premises. Tenant shall pay for all water, gas, heat, light,
power, telephone, sewer, sprinkler charges, refuse and trash collection, and
other utilities and services used on or at the Premises, together with any
taxes, penalties, surcharges or the like pertaining to the Tenant's use of the
Premises, and any maintenance charges for utilities. Landlord shall have the
right to cause any of said services to be separately metered or charged to
Tenant, at Tenant's expense. Tenant shall pay its pro rata share, as reasonably
determined by Landlord, of all charges for jointly metered utilities. Landlord
shall not be liable for any interruption or failure of utility service on the
Premises.
10. INSURANCE.
A. Landlord shall maintain insurance covering the buildings situated
on the Premises or of which the Premises are a part for the full "replacement
cost" thereof, except for a commercially reasonable deductible, insuring against
the perils of Fire, Lightning, Extended Coverage, Vandalism and Malicious
Mischief.
B. Tenant, at its own expense, shall maintain during the term of this
Lease a policy or policies of worker's compensation and comprehensive general
liability insurance, including personal injury and property damage, with
contractual liability endorsement, in the amount of One Million Dollars
($1,000,000.00) for property damage and One Million Dollars ($1,000,000.00) per
occurrence for personal injuries or deaths of persons occurring in or about the
Premises. Tenant, at its own expense, also shall maintain during the term of
this Lease, fire and extended coverage insurance covering the replacement cost
of (i) all alterations, additions, partitions and improvements installed or
placed on the Premises by Tenant or by Landlord on behalf of Tenant and (ii) all
of Tenant's personal property contained within the Premises. Said policies
shall (i) name Landlord as additional insured and insure Landlord's contingent
liability under this Lease (except for the worker's compensation policy, which
instead shall include waiver of subrogation endorsement in favor of Landlord),
(ii) be issued by an insurance company which is acceptable to Landlord, (iii)
provide that said insurance shall not be canceled unless thirty (30) days prior
written notice shall have been given to Landlord, and (iv) provide primary
coverage to Landlord, when any policy issued to Landlord provides duplicate or
is similar coverage, Landlord's policy will be excess over Tenant's policies.
Said policy or policies or certificates thereof shall be delivered to Landlord
by Tenant upon commencement of the term of the Lease and upon each renewal of
said insurance.
C. Tenant will not permit the Premises to be used for any purpose or
in any manner that would (i) void the insurance thereon, (ii) increase the
insurance risk, or (iii) cause the disallowance of any sprinkler credits,
including without limitation, use of the Premises for the receipt, storage or
handling of any product, material or merchandise that is explosive or highly
inflammable. If any increase in the cost of any insurance on the Premises or
the building of which the Premises are a part is caused by Tenant's use of the
Premises, or because Tenant vacates the Premises, then Tenant shall pay the
amount of such increase to Landlord.
4
<PAGE>
11. FIRE AND CASUALTY DAMAGE.
A. If the premises or the building of which the Premises are a part
should be damaged or destroyed by fire or other peril, Tenant immediately shall
give written notice to Landlord. If the buildings situated upon the Premises or
of which the Premises are a part should be totally destroyed by any peril
covered by the insurance to be provided by Landlord under Paragraph 10A above,
or if they should be so damaged thereby that, in Landlord's estimation,
rebuilding or repairs cannot be completed within one hundred eighty (180) days
after the date of such damage, this Lease shall terminate and the rent shall be
abated during the unexpired portion of this Lease, effective upon the date of
the occurrence of such damage, provided Tenant has paid to Landlord the
deductible or applicable portion of the deductible, as the case may be, under
the Landlord's insurance policy.
B. If the buildings situated upon the Premises or of which the
Premises are a part, should be damaged by any peril covered by the insurance to
be provided by Landlord under Paragraph 10A above, and in Landlord's estimation,
rebuilding or repairs can be substantially completed within one hundred eighty
(180) days after the date of such damage, this Lease shall not terminate, and
Landlord shall restore the Premises to substantially its previous condition,
except that Landlord shall not be required to rebuild, repair or replace any
part of the partitions, fixtures, additions and other improvements that may have
been constructed, erected or installed in, or about the Premises or for the
benefit of, or by or for Tenant. Tenant shall pay to Landlord the amount of the
deductible under Landlord's insurance policy within thirty (30) days after
receipt of Landlord's invoice thereof. If the damage covered by the insurance
also involves portions of the building or buildings other than the Premises,
Tenant shall pay only a portion of the deductible, based on the ratio of the
cost of repairing the damage in the Premises to the total cost of repairing all
damage in the building or buildings. If such repairs and rebuilding have not
been substantially completed within one hundred eighty (180) days after the date
of such damage, Tenant, as Tenant's exclusive remedy, may, upon payment to the
Landlord of the deductible or applicable portion of the deductible, as the case
may be, under Landlord's insurance policy, terminate this Lease by delivering
written notice of termination to Landlord in which event the rights and
obligations hereunder shall cease and terminate.
C. Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed of trust covering the
Premises requires that the insurance proceeds be applied to such indebtedness,
then Landlord shall have the right to terminate this Lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made known by any such holder, whereupon all rights and obligations hereunder
shall cease and terminate.
D. Anything in this Lease to the contrary notwithstanding, Landlord
and Tenant hereby waive and release each other of and from any and all rights of
recovery, claim, action or cause of action, against each other, their agents,
officers and employees, for any loss or damage that may occur to the Premises,
improvements to the building of which the Premises are a part, or personal
property (building contents) within the building and/or Premises, for any reason
regardless of cause or origin, Each party to this Lease agrees immediately
after execution of this Lease to give each insurance company, which has issued
to it policies of fire and extended coverage insurance, written notice of the
terms of the mutual waivers contained in this subparagraph, and if necessary, to
have the insurance policies properly endorsed.
12. LIABILITY AND INDEMNIFICATION. Except for any claims, rights of
recovery and causes of action that Tenant has released, Landlord shall hold
Tenant harmless and defend Tenant against any and all claims or liability for
any injury or damage to any person in, on or about the Premises or any part
thereof and/or the building of which the Premises are a part, when such injury
or damage shall be caused by the act, neglect, negligence, fault of, or omission
of any duty with respect to the same by Landlord, its agents, servants and
employees. Except for any claims, rights of recovery and causes of action that
Landlord has released, Tenant shall hold Landlord harmless from and defend
Landlord against any and all claims or liability for any injury or damage (i) to
any person or property whatsoever occurring in, on or about the Premises or any
part thereof and/or of the building of which the Premises are a part, including
without limitation elevators, stairways, passageways or hallways, the use of
which Tenant may have in accordance with this Lease, when such injury or damage
shall be caused by the act, neglect, negligence, fault of, or omission of any
duty with respect to the same by Tenant, its agents, servants, employees or
invitees (ii) arising from the conduct of management of any work
5
<PAGE>
done by Tenant in or about the Premises, (iii) arising from transactions of the
Tenant, (iv) Tenant's breach of any covenant contained in this Lease, including,
but not limited to, Tenant's failure to comply with any of the matters set forth
relating to hazardous wastes or regulated substances as defined and described on
Exhibit "D", attached hereto and incorporated herein by reference, and (v) all
costs, counsel fees, expenses and liabilities incurred in connection with any
such claim or action or proceeding brought thereon. The provisions of this
Paragraph 12 shall survive the expiration or termination of this Lease with
respect to any claims or liability occurring prior to such expiration or
termination.
13. USE. The Premises shall be used only for the purpose of
receiving, storing, shipping and selling (other than retail) products, materials
and merchandise made and/or distributed by Tenant and for such other lawful
purposes as may be incidental thereto. Outside storage, including without
limitation, storage of trucks or other vehicles, is prohibited without
Landlord's prior written consent. Tenant shall comply with all governmental
laws, ordinances and regulations applicable to the use of the Premises, and
promptly shall comply with all governmental orders and directives for the
correction, prevention and abatement of nuisances in or upon, or connected with,
the Premises, all at Tenant's sole expense. Tenant shall not permit any
objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to
emanate from the Premises, nor take any other action that would constitute a
nuisance or would disturb, unreasonably interfere with, or endanger Landlord or
any other tenants of the building in which the Premises are a part.
14. INSPECTION. Landlord and Landlord's agents and representatives
shall have the right to enter the Premises at any reasonable time during
business hours, to inspect the Premises and to make such repairs as may be
required or permitted pursuant to this Lease. During the period that is six (6)
months prior to the end of the Lease term, upon telephonic notice to Tenant,
Landlord and Landlord's representative may enter the Premises during business
hours for the purpose of showing the Premises. In addition, Landlord shall have
the right to erect a suitable sign on the Premises stating the Premises are
available. Tenant shall notify Landlord in writing at least thirty (30) days
prior to vacating the Premises and shall arrange to meet with Landlord for a
joint inspection of the Premises prior to vacating. If Tenant fails to give
such notice or to arrange for such inspection, then Landlord's inspection of the
Premises shall be deemed correct for the purpose of determining Tenant's
responsibility for repairs and restoration of the Premises.
15. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not have the right to assign, sublet, transfer or
encumber this Lease, or any interest therein, without the prior written consent
of Landlord. Any attempted assignment, subletting, transfer or encumbrance by
Tenant in violation of the terms and covenants of this Paragraph shall be void.
Notwithstanding the foregoing, Tenant shall have the right to assign this Lease
to any affiliate provided that such assignment is in the form satisfactory to
Landlord. Any assignee, sublessee or transferee of Tenant's interest in this
Lease (all such assignees, sublessee and transferees being hereinafter referred
to as "Transferees"), by assuming Tenant's obligations hereunder, shall assume
liability to Landlord for all amounts paid to persons other than Landlord by
such Transferees in contravention of this Paragraph. No assignment, subletting
or other transfer, whether consented to by Landlord or not permitted hereunder
shall relieve Tenant of its liability hereunder. If an event of default occurs
while the Premises or any part thereof are assigned or sublet, then Landlord, in
addition to any other remedies herein provided, or provided by law, may collect
directly from such Transferee all rents payable to the Tenant and apply such
rent against any sums due Landlord hereunder. No such collection shall be
construed to constitute a novation or release of Tenant from the further
performance of Tenant's obligations hereunder.
B. If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et. seq. (the
"Bankruptcy Code"), any and all monies or other consideration payable or
otherwise to be delivered in connection with such assignment shall be paid or
delivered to Landlord, shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any and all monies or other considerations
constituting Landlord's property under the preceding sentence not paid or
delivered to Landlord shall be held in trust for the benefit of Landlord and be
promptly paid or delivered to Landlord.
6
<PAGE>
C. Any person or entity to which this Lease is assigned pursuant to
the provisions of the Bankruptcy Code, shall be deemed, without further act or
deed, to have assumed all of the obligations arising under this Lease on and
after the date of such assignment. Any such assignee shall upon demand execute
and deliver to Landlord an instrument confirming such assumption.
16. CONDEMNATION. If more than eighty percent (80%) of the Premises
are taken for any public or quasi-public use under governmental law, ordinance
or regulation, or by right of eminent domain, or by private purchase in lieu
thereof and the taking prevents or materially interferes with the use of the
Premises for the purpose for which they were leased to Tenant, this Lease shall
terminate and the rent shall be abated during the unexpired portion of this
Lease, effective on the date of such taking. If less than eighty percent (80%)
of the Premises are taken for any public or quasi-public use under any
governmental law, ordinance or regulation, or by right of eminent domain, or by
private purchase in lieu thereof, this Lease shall not terminate, but the rent
payable hereunder during the unexpired portion of this Lease shall be reduced to
such extent as may be fair and reasonable under all of the circumstances. All
compensation awarded in connection with or as a result of any of the foregoing
proceedings shall be the property of Landlord, and Tenant hereby assigns any
interest in any such award to Landlord; provided, however, Landlord shall have
no interest in any award made to Tenant for loss of business or goodwill or for
the taking of Tenant's fixtures and improvements, if a separate award for such
items is made to Tenant.
17. HOLDING OVER. At the termination of this Lease by its expiration
or otherwise, Tenant immediately shall deliver possession to Landlord with all
cleaning, repairs and maintenance required herein to be performed by Tenant
completed. If, for any reason, Tenant retains possession of the Premises after
the expiration or termination of the Lease, unless the parties hereto otherwise
agree in writing, such possession shall be subject to termination by either
Landlord or Tenant at any time upon not less than ten (10) days advance written
notice, and all of the other terms and provisions of this Lease shall be
applicable during such period, except that Tenant shall pay Landlord from time
to time, upon demand, as rental for the period of such possession, an amount
equal to double the rent in effect on the termination date, computed on a daily
basis for each day of such period. No holding over by Tenant, whether with or
without consent of Landlord shall operate to extend this Lease except as
otherwise expressly provided. The preceding provisions of this Paragraph 17
shall not be construed as consent for Tenant to retain possession of the
Premises in the absence of written consent thereto by Landlord.
18. QUIET ENJOYMENT. Landlord covenants that on or before the
commencement date it will have good title to the Premises, free and clear of all
liens and encumbrances, excepting only the lien for current taxes not yet due,
such mortgage or mortgages as are permitted by the terms of this Lease, zoning
ordinances and other building and fire ordinances and governmental regulations
relating to the use of such property, and easements, restrictions and other
conditions of record. If this Lease is a sublease, then Tenant agrees to take
the Premises subject to the provisions of the prior Leases. Landlord represents
that it has the authority to enter into this Lease and that so long as Tenant
pays all amounts due hereunder and performs all other covenants and agreements
herein set forth, Tenant shall peaceably and quietly have, hold and enjoy the
Premises for the term hereof without hindrance or molestation from Landlord,
subject to the terms and provisions of this Lease.
19. EVENTS OF DEFAULT. The following events (herein individually
referred to as "event of default") each shall be deemed to be events of
nonperformance by Tenant under this Lease:
A. Tenant shall fail to pay any installment of the rent herein
reserved when due, or any other payment or reimbursement to Landlord required
herein when due, and such failure shall continue for a period of five (5) days
from the date such payment was due.
B. The Tenant or any guarantor of the Tenant's obligations hereunder
shall (i) become insolvent; (ii) admit in writing its inability to pay its
debts; (iii) make a general assignment for the benefit of creditors; (iv)
commence any case, proceeding or other action seeking to have an order for
relief entered on its behalf as a debtor or to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization
7
<PAGE>
or relief of debtors or seeking appointment of a receiver, trustee, custodian or
other similar official for it or for all or of any substantial part of its
property; or (v) take any action to authorize or in contemplation of any of the
actions set forth above in this Paragraph.
C. Any case, proceeding or other action against the Tenant or any
guarantor of the Tenant's obligations hereunder shall be commenced seeking (i)
to have an order for relief entered against it as debtor or to adjudicate it a
bankrupt or insolvent; (ii) reorganization, arrangement, adjustment,
liquidation, dissolution or composition of it or its debts under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors; (iii)
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its property, and such case, proceeding or
other action (a) results in the entry of an order for relief against it which it
is not fully stayed within seven (7) business days after the entry thereof or
(b) shall remain undismissed for a period of forty-five (45) days.
D. Tenant shall (i) vacate all or a substantial portion of the
Premises or (ii) fail to continuously operate its business at the Premises for
the permitted use set forth herein, whether or not Tenant is in default of the
rental payments due under this Lease.
E. Tenant shall fail to discharge any lien placed upon the Premises
in violation of Paragraph 22 hereof within twenty (20) days after such lien or
encumbrance is filed against the Premises.
F. Tenant shall fail to comply with any term, provision or covenant
of this Lease (other than those listed in this Paragraph 19), and shall not cure
such failure within twenty (20) days after written notice thereof to Tenant.
20. REMEDIES.
A. Upon each occurrence of an event of default, Landlord shall have
the option to pursue any one or more of the following remedies without any
notice or demand:
(1) Terminate this Lease; and/or (2) Enter upon and take possession of
the Premises without terminating this Lease; and/or (3) Alter all locks and
other security devices at the Premises with or without terminating this Lease,
and pursue, at Landlord's option, one or more remedies pursuant to this Lease,
Tenant hereby specifically waiving any state or federal law to the contrary; and
in any such event Tenant immediately shall surrender the Premises to Landlord,
and if Tenant fails to do so, Landlord, without waiving any other remedy it may
have, may enter upon and take possession of the Premises and expel or remove
Tenant and any other person who may be occupying such Premises or any part
thereof, without being liable for prosecution or any claim of damages therefor.
B. If Landlord terminates this Lease, at Landlord's option, Tenant
shall be liable for and shall pay to Landlord, the sum of all rental and other
payments owed to Landlord hereunder accrued to the date of such termination,
plus, as liquidated damages, an amount equal to (1) the present value of the
total rental and other payments owed hereunder for the remaining portion of the
Lease term, calculated as if such term expired on the date set forth in
Paragraph 1, less (2) the then present fair market rental value of the Premises
for such period, which because of the difficulty of ascertaining such value,
Landlord and Tenant stipulate and agree, shall in no event be deemed to exceed
seventy-five percent (75%) of the rental amount set forth in Paragraph 2 above.
C. If Landlord repossesses the Premises without terminating the
Lease, Tenant, at Landlord's option, shall be liable for and shall pay Landlord
on demand all rental and other payments owed to Landlord hereunder, accrued to
the date of such repossession, plus all amounts required to be paid by Tenant to
Landlord until the date of expiration of the term as stated in Paragraph 1,
diminished by all amounts received by Landlord through reletting the Premises
during such remaining term (but only to the extent of the rent herein reserved).
Actions to collect amounts due by Tenant to Landlord under this subparagraph may
be brought from time to time, on one or more occasions, without the necessity of
Landlord's waiting until expiration of the Lease term.
D. Upon an event of default, in addition to any sum provided to be
paid herein, Tenant shall also be liable for and shall pay to Landlord (i)
brokers' fees incurred by Landlord in
8
<PAGE>
connection with reletting the whole or any part of the Premises; (ii) the costs
of removing and storing Tenant's or other occupant's property; (iii) the costs
of repairing, altering, remodeling or otherwise putting the Premises into
condition acceptable to a new Tenant or Tenants; and (iv) all reasonable
expenses incurred by Landlord in enforcing or defending Landlord's rights and/or
remedies. If either party hereto institute any action or proceeding to enforce
any provision hereof by reason of an alleged breach of any provision of this
Lease, the prevailing party shall be entitled to receive from the losing party
all reasonable attorney's fees and all court costs in connection with such
proceeding.
E. In the event Tenant fails to make any payment due hereunder when
payment is due, to help defray the additional cost to Landlord for processing
such late payments, Tenant shall pay to Landlord on demand a late charge in an
amount equal to five percent (5%) of such installment; and the failure to pay
such amount within ten (10) days after demand therefor shall be an additional
event of default hereunder. The provision for such late charge shall be in
addition to all of Landlord's other rights and remedies hereunder or at law and
shall not be construed as liquidated damages or as limiting Landlord's remedies
in any manner.
F. Exercise by Landlord of any one or more remedies hereunder granted
or otherwise available shall not be deemed to be an acceptance of surrender of
the Premises by Landlord, whether by agreement or by operation of law, it being
understood that such surrender can be effected only by the written agreement of
Landlord and Tenant. Tenant and Landlord further agree that forbearance by
Landlord to enforce its rights pursuant to the Lease at law or in equity shall
not be a waiver of Landlord's right to enforce one or more of its rights in
connection with any subsequent default.
G. In the event of termination and/or repossession of the Premises
for an event of default, Landlord shall use reasonable efforts to relet the
Premises and to collect rental after reletting; provided that, Tenant shall not
be entitled to credit or reimbursement of any proceeds in excess of the rental
owed hereunder. Landlord may relet the whole or any portion of the Premises for
any period, to any Tenant and for any use and purpose.
H. If Landlord fails to perform any of its obligations hereunder
within thirty (30) days after written notice from Tenant specifying such
failure, Tenant's exclusive remedy shall be an action for damages. Unless and
until Landlord fails to so cure any default after such notice, Tenant shall not
have any remedy or cause of action by reason thereof. All obligations of
Landlord hereunder will be construed as covenants, not conditions; and all such
obligations will be binding upon Landlord only during the period of its
possession of the Premises and not thereafter. The term "Landlord" shall mean
only the owner, for the time being of the Premises, and in the event of the
transfer by such owner of its interest in the Premises, such owner shall
thereupon be released and discharged from all covenants and obligations of the
Landlord thereafter accruing, but such covenants and obligations shall be
binding during the Lease term upon each new owner for the duration of such
owner's ownership. Notwithstanding any other provision hereof, Landlord shall
not have any personal liability hereunder. In the event of any breach or
default by Landlord in any term or provision of this Lease, Tenant agrees to
look solely to the equity or interest then owned by Landlord in the Premises or
of the building of which the Premises are a part; however, in no event, shall
any deficiency judgment or any money judgment of any kind be sought or obtained
against any Landlord.
I. If Landlord repossesses the Premises pursuant to the authority
herein granted, the Landlord shall have the right to (i) keep in place and use
or (ii) remove and store all of the furniture, fixtures and equipment at the
Premises, including that which is owned by or leased to Tenant at all times
prior to any foreclosure thereon by Landlord or repossession thereof by any
Landlord thereof or third party having a lien thereon. Landlord also shall have
the right to relinquish possession of all or any portion of such furniture,
fixtures, equipment and other property to any person ("Claimant") who presents
to Landlord a copy of any instrument represented by Claimant to have been
executed by Tenant (or any predecessor of Tenant) granting Claimant the right
under various circumstances to take possession of such furniture, fixtures,
equipment or other property, without the necessity on the part of Landlord to
inquire into the authenticity or legality of said instrument. The rights of
Landlord herein stated shall be in addition to any and all other rights that
Landlord has or may hereafter have at law or in equity; and Tenant stipulates
and agrees that the rights herein granted Landlord are commercially reasonable.
9
<PAGE>
J. Notwithstanding anything in this Lease to the contrary, all
amounts payable by Tenant to or on behalf of Landlord under this Lease, whether
or not expressly denominated as rent, shall constitute rent.
K. This is a contract under which applicable law excuses Landlord
from accepting performance from (or rendering performance to) any person or
entity other than Tenant.
21. MORTGAGES. Tenant accepts this Lease subject and subordinate to
any mortgages and/or deeds of trust now or any time hereafter constituting a
lien or charge upon the Premises or the improvements situated thereon or the
building of which the Premises are a part, provided, however, that if the
mortgagee, trustee, or holder of any such mortgage or deed of trust elects to
have Tenant's interest in this Lease superior to any such instrument, then by
notice to Tenant from such mortgage, trustee or holder, this Lease shall be
deemed superior to such lien, whether this Lease was executed before or after
said mortgage or deed of trust. Tenant, at any time hereafter on demand, shall
execute any instruments, releases or other documents that may be required by any
mortgagee for the purpose of subjecting and subordinating this Lease to the lien
of any such mortgage. Further, Tenant, at any time hereafter on demand, shall
deliver to Landlord a certified copy of its most recent financial statement.
22. MECHANIC'S LIENS. Tenant has no authority, express or implied, to
create or place any lien or encumbrance of any kind or nature whatsoever upon,
or in any manner to bind the interest of Landlord or Tenant in the Premises or
to charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs. Tenant covenants and agrees that it will pay
or cause to be paid all sums legally due and payable by it on account of any
labor performed or materials furnished in connection with any work performed on
the Premises and that it will save and hold Landlord harmless from any and all
loss, cost or expense based on or arising out of asserted claims or liens
against the leasehold estate or against the right, title and interest of the
Landlord in the Premises or under the terms of this Lease. Tenant agrees to
give Landlord immediate written notice of the placing of any lien or encumbrance
against the Premises.
23. MISCELLANEOUS.
A. Words of any gender used in this Lease shall be held and construed
to include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions
inserted in this Lease are for the convenience only and in no way define, limit
or otherwise describe the scope or intent of this Lease, or any provision
hereof, or in any way affect the interpretation of this Lease.
B. In the event the Premises constitute a portion of a multiple
occupancy building or buildings, Tenant's "proportionate share", as used in this
Lease, shall mean a fraction, the numerator of which is the space contained in
the Premises and the denominator of which is the entire space contained in the
building or buildings.
C. The terms, provisions and covenants and conditions contained in
this Lease shall run with the land and shall apply to, inure to the benefit of,
and be binding upon, the parties hereto and upon their respective heirs,
executors, personal representatives, legal representatives, successors and
assigns, except as otherwise herein expressly provided. Landlord shall have the
right to transfer and assign, in whole or in part, its rights and obligations in
the building and property that are the subject of this Lease. Each party agrees
to furnish to the other, promptly upon demand, a corporate resolution, proof of
due authorization by partners, or other appropriate documentation evidencing the
due authorization of such party to enter into this Lease.
D. Landlord shall not be held responsible for delays in the
performance of its obligations hereunder when caused by strikes, lockouts, labor
disputes, acts of God, inability to obtain labor or materials or reasonable
substitutes therefor, governmental restrictions, governmental regulations,
governmental controls, enemy or hostile governmental action, civil commotion,
fire or other casualty, and other causes beyond the control of the Landlord.
10
<PAGE>
E. Tenant agrees, from time to time, within ten (10) days after
request of Landlord, to deliver to Landlord, or Landlord's designee, a
Certificate of Occupancy and an estoppel certificate stating that this Lease is
in full force and effect, the date to which rent has been paid, the unexpired
term of this Lease and such other factual matters pertaining to this Lease as
may be requested by Landlord. It is understood and agreed that Tenant's
obligation to furnish such estoppel certificates in a timely fashion is a
material inducement for Landlord's execution of this Lease.
F. This Lease constitutes the entire understanding and agreement of
the Landlord and Tenant with respect to the subject matter of this Lease, and
contains all of the covenants and agreements of Landlord and Tenant with respect
thereto. Landlord and Tenant each acknowledge that no representations,
inducements, promises or agreements, oral or written, have been made by Landlord
or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not
contained herein, and any prior agreements, promises, negotiations or
representations not expressly set forth in this Lease are of no force or effect.
This Lease may not be altered, changed or amended except by an instrument in
writing signed by both parties hereto.
G. All obligations of Tenant hereunder not fully performed as of the
expiration or earlier termination of the term of this Lease shall survive the
expiration or earlier termination of the term hereof, including without
limitation, all payment obligations with respect to operating expenses as set
forth in Paragraph 2C and all obligations concerning the condition and repair of
the Premises. Upon the expiration or earlier termination of the term hereof,
and prior to Tenant vacating the Premises, Tenant shall pay to Landlord any
amount reasonably estimated by Landlord as necessary to put the Premises,
including without limitation, all heating and air conditioning systems and
equipment therein, in good condition and repair, reasonable wear and tear
excluded. Tenant shall also, prior to vacating the Premises, pay to Landlord
the amount, as estimated by Landlord of Tenant's obligation hereunder for
operating expenses for the year in which the Lease expires or terminates. All
such amounts shall be used and held by Landlord for payment of such obligations
of Tenant hereunder, with Tenant being liable for any additional costs therefor
upon demand by Landlord, or with any excess to be returned to Tenant after all
such obligations have been determined and satisfied as the case may be. Any
security deposit held by Landlord shall be credited against the amount due from
Tenant under this Paragraph 23G.
H. If any clause or provision of this Lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event, it is the intention of the parties hereto that
the remainder of this Lease shall not be affected thereby, and it is also the
intention of the parties to this Lease that in lieu of each clause or provision
of this Lease that is illegal, invalid or unenforceable, there be added, as a
part of this Lease, a clause or provision as similar in terms to such illegal,
invalid or unenforceable clause or provision as may be possible and be legal,
valid and enforceable.
I. All references in this Lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this Lease.
J. Tenant represents and warrants that it has dealt with no broker,
agent or other person in connection with this transaction or that no broker,
agent or other person brought about this transaction, other than Lynda Gibbons
--------------
of Gibbons-White, Inc., and as may be referenced in a separate written agreement
- - ---------------------------
executed by Tenant, and delivered to Landlord prior to the date hereof, and
Tenant agrees to indemnify and hold Landlord harmless from and against any
claims by any other broker, agent or other person claiming a commission or other
form of compensation by virtue of having dealt with Tenant with regard to this
leasing transaction.
K. If and when included within the term "Landlord", as used in this
instrument, there is more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of a notice
specifying some individual at some specific address for the receipt of notices
and payments to Landlord. If and when included within the term "Tenant", as
used in this instrument, there is more than one person, firm, or corporation,
all shall jointly arrange among themselves for their joint execution of a notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payments to Tenant. All parties
included within the term "Landlord" and "Tenant", respectively shall be
11
<PAGE>
bound by notices given in accordance with the provisions of Paragraph 25 hereof
to the same effect as if each had received such notice.
L. Tenant shall, at all times during the term of this Lease and any
extension thereof, comply with all reasonable rules and regulations ("Building
Rules and Regulations") at any time or from time to time established by Landlord
covering use of the Premises and common areas. The existing Building Rules and
Regulations currently in force and effect are attached hereto as Exhibit "E" and
made a part hereof. In the event of any conflict between said Building Rules
and Regulations and the Lease, the terms and provisions of the Lease shall
control.
M. Landlord shall have the right to substitute for the Premises other
space within the building or buildings; provided, however, the usable area of
the substituted premises shall not be less than the usable area of the
originally leased Premises, and no increase in the rentals provided to be paid
by Tenant hereunder shall be occasioned by such substitution of Premises.
Tenant shall relocate to such substituted premises upon thirty (30) days notice
thereof, and Landlord shall pay the reasonable moving expenses of Tenant
incidental to such substitution of premises. Upon such relocation such
substituted premises shall be considered the Premises described in this Lease
for all uses and purposes as though originally leased to Tenant by this Lease.
24. NOTICES. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivering of notice or the making of any payment by
Landlord to Tenant or with reference to the sending, mailing or delivering of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address for Landlord set
forth below or at such other address as Landlord may specify from time to time
by written notice delivered in accordance herewith. Tenant's obligation to pay
rent and any other amounts to Landlord under the terms of this Lease shall not
be deemed satisfied until such rent and other amounts have been actually
received by Landlord. In addition to base rental due hereunder, all sums of
money and all payments due Landlord hereunder shall be deemed to be additional
rental owed to Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address set forth below, or at such other
address within the continental United States as Tenant may specify from time to
time by written notice delivered in accordance herewith.
(c) Any written notice or document required or permitted to be
delivered hereunder shall be deemed to be delivered whether actually received or
not when deposited in the United States Mail, postage prepaid, Certified or
Registered Mail, addressed to the parties hereto at the respective addresses set
out below, or at such other address as they have theretofore specified by
written notice delivered in accordance herewith.
25. LANDLORD'S LIEN. In addition to any statutory lien for rent in
Landlord's favor, Landlord shall have and Tenant hereby grants to Landlord a
continuing security interest for all rentals and other sums of money due or
which may become due hereunder from Tenant, upon all goods, wares, equipment,
fixtures, furniture, inventory, and other personal property of the Tenant now or
hereafter situated at 6837 Winchester Circle, Boulder, Colorado 80301, and such
------------------------------------------------
property shall not be removed therefrom without the consent of Landlord until
all arrearages in rent as well as any and all other sums of money then due to
Landlord hereunder shall first have been paid and discharged. In the event any
of the foregoing described property is removed from the Premises in violation of
the covenant in the preceding sentence, the security interest shall continue in
such property and all proceeds and products, regardless of locations. Upon a
default hereunder by Tenant in addition to all other rights and remedies,
Landlord shall have all rights and remedies under the Uniform Commercial Code,
including without limitation, the right to sell the property described in this
Paragraph at public or private sale upon five (5) days notice by Landlord.
Tenant hereby agrees to execute such other instruments, necessary or desirable
under applicable law to perfect the security interest hereby created. Landlord
and Tenant agree that this Lease and security agreement serves as a financing
statement and that a copy, photographic or other reproduction of this portion of
this Lease may be filed of record by Landlord and have the same force and effect
as the original.
12
<PAGE>
This security agreement and financing statement also covers fixtures located at
the Premises subject to this Lease and legally described in Exhibit "A" attached
hereto and incorporated herein by reference and is to be filed for record in the
real estate records.
EXECUTED BY LANDLORD, this 16th day of November, 1998.
---- --------
ADDRESS: LANDLORD:
c/o Trammell Crow Company TC BOULDER WAREHOUSE, LP,
7535 E. Hampden Avenue #650 a Delaware limited partnership
Denver, Colorado 80231-4845
/s/ Stephen M. Moyski
---------------------
By: Stephen M. Moyski
Title: President
EXECUTED BY TENANT, this 13th day of November, 1998.
---- ---------
ADDRESS: TENANT:
CARRIER ACCESS CORPORATION, a Colorado
corporation
/s/ Nancy Pierce
----------------
By: Nancy Pierce
Title: Chief Financial Officer
13
<PAGE>
Consent of Independent Auditors
The Board of Directors
Carrier Access Corporation:
We consent to incorporation by reference in the registration statement (No. 333-
71209) on Form S-8 of Carrier Access Corporation of our reports dated January
20, 1999, relating to the balance sheets of Carrier Access Corporation as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1998, and the related financial statement
schedule, which reports appear in the December 31, 1998, annual report on Form
10-K of Carrier Access Corporation.
KPMG LLP
Denver, Colorado
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,201
<SECURITIES> 22,777
<RECEIVABLES> 9,136
<ALLOWANCES> 643
<INVENTORY> 5,053
<CURRENT-ASSETS> 69,579
<PP&E> 3,445
<DEPRECIATION> 846
<TOTAL-ASSETS> 72,248
<CURRENT-LIABILITIES> 8,890
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 63,329
<TOTAL-LIABILITY-AND-EQUITY> 72,248
<SALES> 48,133
<TOTAL-REVENUES> 48,133
<CGS> 23,067
<TOTAL-COSTS> 15,629
<OTHER-EXPENSES> (1,224)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,661
<INCOME-TAX> 3,712
<INCOME-CONTINUING> 6,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,949
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
</TABLE>
