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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-24597
CARRIER ACCESS CORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1208770
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5395 Pearl Parkway, Boulder, CO 80301
------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(303) 442-5455
------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's common stock, par value
$0.001, as of April 30, 1999 was 23,853,204 shares.
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CARRIER ACCESS CORPORATION
TABLE OF CONTENTS
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Page No.
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements............................................................... 2
Condensed Balance Sheets - March 31, 1999 (unaudited) and December 31, 1998 2
Condensed Statements of Operations (unaudited) -- Three Months Ended March 31, 3
1999 and 1998
Condensed Statements of Cash Flows (unaudited) -- Three Months Ended March 31, 4
1999 and 1998
Notes to Condensed Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 6
Operations.........................................................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 9
<CAPTION>
PART II OTHER INFORMATION
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Item 1. Legal Proceedings.................................................................. 17
Item 2. Changes in Securities and Use of Proceeds.......................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................................ 17
Item 6. Exhibits and Reports on Form 8-K................................................... 17
Signature.......................................................................... 18
</TABLE>
Page 1
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CARRIER ACCESS CORPORATION
CONDENSED BALANCE SHEETS
(in thousands)
March 31,
1999 December 31,
(unaudited) 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $30,304 $31,201
Marketable securities available for sale 28,258 22,777
Accounts receivable, net 9,925 8,493
Inventory, net 5,510 5,053
Deferred income taxes 1,292 1,198
Prepaid expenses and other current assets 1,038 804
------------------- -------------------
Total current assets 76,327 69,526
Property and equipment, net 2,934 2,599
Deferred income taxes 118 118
Other assets 72 70
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Total assets $79,451 $72,313
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,798 $ 6,955
Income taxes payable 903 2,000
------------------- -------------------
Total current liabilities 8,701 8,955
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Stockholders' equity:
Common stock and additional paid-in-capital 62,258 59,983
Deferred stock option compensation (2,172) (2,377)
Retained earnings 10,664 5,752
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Total stockholders' equity 70,750 63,358
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Total liabilities and stockholders' equity $79,451 $72,313
=================== ===================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 2
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<TABLE>
<CAPTION>
CARRIER ACCESS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
Three Months Ended
-------------------------------------------
March 31, March 31,
1999 1998
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<S> <C> <C>
Net revenue $21,684 $ 7,243
Cost of goods sold 8,884 3,768
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Gross profit 12,800 3,475
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Operating expenses:
Research and development 2,323 843
Sales and marketing 2,279 975
General and administrative 930 531
Amortization of deferred stock compensation 205 104
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Total operating expenses 5,737 2,453
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Income from operations 7,063 1,022
Other income, net 556 168
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Income before income taxes 7,619 1,190
Income tax expense 2,707 450
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Net income 4,912 740
Preferred stock dividend requirement --- (658)
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Net income available to common stockholders $ 4,912 $ 82
=================== ===================
Income per share:
Basic $0.21 $0.01
Diluted $0.19 $0.01
Weighted average common shares:
Basic 23,741 14,381
Diluted 25,218 15,417
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 3
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CARRIER ACCESS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,912 $ 740
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization expense 184 93
Provision for doubtful accounts and returns 195 309
Provision for inventory obsolescence 114 ---
Tax benefit relating to exercise of stock options 2,223 ---
Compensation expense related to stock
options issued at less than fair value 205 21
Deferred income tax benefit (94) (148)
Changes in operating assets and liabilities:
Accounts receivable (1,627) (392)
Inventory (571) (1,563)
Prepaid expenses and other (236) 48
Accounts payable and accrued expenses 843 (83)
Income taxes payable (1,097) 548
------------------- ------------------
Net cash provided (used) by operating activities 5,051 (427)
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (519) (272)
Sales (purchases) of securities available for sale, net (5,481) 946
Other --- (1)
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Net cash provided (used) by investing activities (6,000) 673
------------------- ------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 52 29
------------------- ------------------
Net increase (decrease) in cash and cash equivalents (897) 275
Cash and cash equivalents at beginning of period 31,201 6,104
------------------- ------------------
Cash and cash equivalents at end of period $30,304 $ 6,379
=================== ==================
Supplemental cash flow disclosures:
Cash paid for income taxes $ 1,674 $ ---
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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CARRIER ACCESS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Business and Basis of Presentation
Carrier Access Corporation ("CAC" or the "Company") is a leading provider of
multi-service digital access ("MDA") equipment to competitive telecommunications
carriers, including competitive local exchange carriers ("CLECs"), internet
service providers ("ISPs") and wireless carriers. 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 mainly through
distributors.
The accompanying unaudited financial statements of CAC have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not contain all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, in the opinion of management, such statements reflect all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of interim period results. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission ("SEC") on March 31, 1999.
The results of operations for the interim periods are not necessarily
indicative of results to be expected for the entire year or for other future
interim periods.
Note 2. Inventory
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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<S> <C> <C>
Raw materials $3,322 $3,327
Work-in-process 44 93
Finished goods 2,834 2,209
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6,200 5,629
Less: reserve for obsolescence (690) (576)
------------------ -----------------
Total inventory, net $5,510 $5,053
================== =================
</TABLE>
Note 3. Stockholders' Equity and Redeemable Preferred Stock
On August 5, 1998, the Company completed its initial public offering ("IPO")
of 3,000,000 shares of Common Stock, and on August 11, 1998 completed the
450,000 share over-allotment purchase by the underwriters, both at the IPO price
of $12.00 per share. The IPO resulted in net proceeds of approximately $37.6
million. Aggregate offering costs were approximately $3.8 million.
On August 5, 1998, in conjunction with the Company's IPO, 1,210,861 shares of
Series A preferred stock and 2,517,894 shares of Series B preferred stock with a
liquidation value of $2.86 and $4.99 per share, respectively, were converted
into Common Stock. The conversion gave effect to a three-for-two forward stock
split, resulting in the issuance of 5,593,133 shares of Common Stock to the
preferred stockholders.
As a result of the Company's IPO, exercise of the over-allotment option, the
conversion of the Redeemable Preferred Stock and the exercise of certain stock
options by employees, the Company had 23,816,461 shares of Common Stock
outstanding at March 31, 1999.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Notice Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that
have been made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on current
expectations, estimates and projections about CAC's industry, management's
beliefs, and assumptions made by management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Risk Factors."
Particular attention should be paid to the cautionary language in "Risk Factors"
under the headings "Significant Fluctuations in Results of Operations,"
"Dependence on Emerging Competitive Carriers," "Intense Competition,"
"Dependence on Distribution Channels," "Competitive Carrier Customer
Concentration," "Possible Decline in Prices," and "Risks Associated with
Manufacturing." Unless required by law, CAC undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Results of Operations
<TABLE>
<CAPTION>
Summary
Three Months Ended
(In thousands, except per share amounts) March 31,
1999 1998
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<S> <C> <C>
Net revenue 21,684 7,243
Gross Profit 12,800 3,475
Income from operations 7,063 1,022
Net income available to common stockholders 4,912 82
Income per share (diluted) $ 0.19 $ 0.01
</TABLE>
For the three months ended March 31, 1999, CAC's net income and operating
income increased to $4.9 million and $7.1 million, respectively, compared to
$82,000 and $1.0 million for the three months ended March 31, 1998. These
increases were due primarily to a significant increase in the sales of CAC
products, reflecting the introduction of new products and increased sales of
existing products. CAC's gross margin on net revenue was 59% for the three
months ended March 31, 1999, compared to 48% for the three months ended March
31, 1998. Also, contributing to higher net income for 1999 was a substantial
increase in other income, primarily reflecting an increase in interest income on
the proceeds of the IPO.
Net Revenue and Cost of Goods Sold
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands) 1999 1998
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<S> <C> <C>
Net revenue 21,684 7,243
Cost of goods sold 8,884 3,768
</TABLE>
Net revenue for the three months ended March 31, 1999 increased to $21.7
million, compared to $7.2 million for the same period of 1998. These increases
were attributable to the introduction of new products, primarily the Wide Bank
NEBS, Access Bank II/HDSL, and the Access Navigator product families, along with
increases in the sales of existing CAC products to distributors. The timing and
quantities of orders for CAC products may vary from quarter to quarter in the
future due to factors such as demand for the products, ordering patterns of
distributors, and the introduction and sale of competing products. A
significant portion of our net revenue has been derived from a limited number of
large orders, and we believe that this trend will continue in the future,
especially as the percentage direct sales to end users increases as we
anticipate. The timing of these orders and our ability to fulfill them can
cause material fluctuations in our operating results, and we anticipate that
such fluctuations will occur.
During the three month period ended March 31, 1999, most of the sales of the
Company's products were made through distributors, and the Company's success
depends on the continued sales and customer support efforts of its network of
distributors. In the first three months of 1999, Walker & Associates and
Phillips Communications and Equipment accounted for 48% and 15%, respectively,
of net revenue. The Company expects that the sale of its products will continue
to be made to a small number of distributors. Accordingly, the loss of, or a
reduction in sales to, any of the Company's key distributors could have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition to being dependent on a small number of
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distributors for a majority of its net revenue, the Company believes that its
products are distributed to a limited number of competitive carrier customers
who are primarily CLECs. In the three months ended March 31, 1999, the Company
believes that two of these competitive carrier end user customers each accounted
for more than 10% of its net revenue.
Costs of goods sold increased to $8.9 million for the three months ended March
31, 1999 compared to $3.8 million for the corresponding three-month period of
1998. These increases were primarily attributable to increased product shipments
partially offset by cost reductions in existing product platforms.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
Gross margin 59% 48%
</TABLE>
The increase in CAC's gross margin in the three months ended March 31, 1999
compared to the same period of 1998 was primarily due to favorable changes in
the mix of products sold and cost reductions in existing product platforms. The
Company does not believe that the gross margin in the first three months of 1999
can be sustained in future quarters.
The Company believes that average selling prices and gross margins for its
products will decline as such products mature, as volume price discounts in
distributor contracts and direct sales relationships take effect and as
competition intensifies, among other factors. In addition, discounts to
distributors vary among product lines and are based on volume shipments, both of
which affect gross margins. The Company's gross margin for its Access Bank and
Access Navigator product families are currently higher than the gross margin for
its Wide Bank product family. The Company believes that its gross margins are
likely to fluctuate in the future based on product mix and channel mix. Margins
will also likely be adversely effected from time to time by new product
introductions by the Company and its competitors.
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands) 1999 1998
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<S> <C> <C>
Research and development expenses 2,323 843
Percentage of net revenue 11% 12%
</TABLE>
Research and development expenses increased to $2.3 million in the three
months ended March 31, 1999 compared to $843,000 for the same period in 1998.
This increase was primarily due to an increase in the number of personnel
engaged in the development of new products, primarily the Access Navigator. The
Company expects the amount of research and development expense will increase at
a faster rate in second and third quarters 1999 to fund the development of new
products and enhancements to existing product families.
Sales, Marketing and General and Administrative Expenses
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands) 1999 1998
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<S> <C> <C>
Sales and marketing expenses 2,279 975
General and administrative expenses 930 531
Amortization of deferred stock compensation 205 104
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Total selling, general and administrative expenses 3,414 1,610
As a percentage of net revenue 16% 22%
</TABLE>
Selling, general and administrative expenses increased to $3.4 million for the
three months ended March 31, 1999 from $1.6 million for the same period of 1998.
The increase in sales and marketing expenses was the result of CAC's expanded
sales and marketing activities and an increase in the size of the sales force
and a corresponding increase in sales salaries and commissions. The increase in
general and administrative expenses in the three months ended March 31, 1999
compared with the same period of 1998 was due to the addition of personnel and
facilities costs necessary to support the expansion of CAC's business. The
Company has hired and intends to continue to hire additional sales and marketing
personnel and to continue to aggressively pursue sales and marketing campaigns,
and therefore expects these expenses to increase in absolute dollars in the
future. The Company also expects general and administrative expenses to
increase in absolute dollars as the Company continues to add personnel and
incurs additional costs related to the expansion of its business and operation
as a public company but to continue to decrease as a percentage of net
revenues.
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Other Income, Net
Interest and other income increased to $556,000 for the three months ended
March 31, 1999 compared to $168,000 for the same period in 1998, due to higher
cash balances as a result of the IPO.
Income Taxes
For the three months ended March 31, 1999, CAC's effective combined federal
and state income tax rate was 36%, compared to 38% for the three months ended
March 31, 1998. CAC's annual effective tax rate decreased due to the research
and development tax credit and non-taxable interest income on tax exempt
marketable securities.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 1999 1998
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<S> <C> <C>
Working capital 67,626 60,571
Cash, cash equivalents and marketable securities 58,562 53,978
Total assets 79,451 72,313
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 31, December 31,
Net cash provided (used) by: 1999 1998
------------ -------------
<S> <C> <C>
Operating activities 5,051 (427)
Investing activities (6,000) 673
Financing activities 52 29
</TABLE>
Net cash provided by operating activities for the three months ended March 31,
1999 totaled approximately $5.1 million. Cash provided by operating activities
was primarily due to net income and the tax benefit relating to the exercise of
stock options, partially offset by increases in accounts receivable and,
inventory and a decrease in income taxes payable.
Cash used by investing activities was approximately $6.0 million for the three
months ended March 31, 1999. Cash used by investing activities of $5.5 million
was primarily a result of purchasing U.S. Government Agency and Corporate bonds
with maturities greater then three months. CAC's capital expenditures for the
three months ended March 31, 1999 were $519,000 for additions to facilities and
equipment to support its research, development and manufacturing activities.
CAC believes its current facilities and equipment are sufficient to meet its
current operating requirements. However the Company does anticipate adding
additional facilities capacity to support the addition of new employees.
Capital expenditures during the remainder of 1999 are expected to continue to
increase over 1998 levels.
Cash provided by financing activities was approximately $52,000 for the three
months ended March 31, 1999, due to the exercise of stock options.
The Company's net inventory levels increased approximately $457,000 to $5.5
million at March 31, 1999 from $5.1 million at December 31, 1998, due primarily
to an increase in finished goods inventory.
CAC 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 operating and
investing activities may use cash. Should the need arise, CAC 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.
CAC may consider using its capital to make strategic investments or to acquire
or license technology or products.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. This statement will be effective for
all annual and interim periods beginning after June 15, 1999.
The Company's management does not believe the adoption of this standard will
have a material effect on its financial statements.
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The Year 2000 Issue
As is true for most companies, the Year 2000 problem creates a risk for us.
If our systems or the systems of third parties do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
our operations. The risk exists primarily in four areas:
. potential warranty or other claims from our customers;
. systems we use to run our business;
. systems used by our suppliers and manufacturers; 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.
ITEM 3. QUANTITAIVE 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 March 31, 1999, the Company has had little or no exposure to market risk
in the area of changes in foreign currency exchange rates as measured against
the United States dollar. Historically, and as of March 31, 1999, the Company
has not used derivative instruments or engaged in hedging activities.
ITEM 7A. DISCLOSURES
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; and
. the risks associated with increased business development and expansion of
our operations.
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Due to our limited operating history and experience with respect to these
issues, we may not successfully implement any of our strategies or successfully
address these risks and uncertainties.
Our Quarterly Results Fluctuate Significantly, and We May Not be Able to
Maintain Our Existing Growth Rates.
Although our revenues have grown significantly in recent quarters, such growth
rates may not be sustainable, and you should not use these past results to
predict future revenue or operating results. Our quarterly and annual operating
results have fluctuated in the past and may vary significantly in the future.
Our future operating results will depend on many factors, many of which are
outside of our control, including the following:
. the size of the orders for our products, and the timing of such orders;
. the commercial success of our products, and our ability to ship enough
products to meet customer demand in any particular period;
. changes in the financial stability of our distributors, customers or
suppliers;
. changes in our pricing policies or the pricing policies of our competitors;
. seasonal fluctuations in the placement of orders;
. changes in our distribution channels;
. potential delays or deferrals in our product implementation at customer
sites;
. technical problems in customizing or integrating our products with end
users' systems, and potential product failures or errors;
. certain government regulations; and
. general economic conditions as well as those specific to the
telecommunications equipment industry.
A significant portion of our net revenue has been derived from a limited
number of large orders, and we believe that this trend will continue in the
future, especially as the percentage direct sales to end users increases as we
anticipate. The timing of these orders and our ability to fulfill them can
cause material fluctuations in our operating results, and we anticipate that
such fluctuations will occur. Also, our distribution and purchase agreements
generally allow our distributors to postpone or cancel orders without penalty
until a relatively short period of time prior to shipment. In the past, we have
occasionally experienced cancellations and delays of orders, and we expect to
continue to experience order cancellations and delays from time to time in the
future. Any shortfall in orders would adversely affect our operating income for
a quarter or series of quarters, especially since operating expenses in a
quarter are relatively fixed, and these fluctuations could affect the market
price of our common stock.
Because most all of our sales are through indirect distribution channels, our
ability to judge the timing and size of individual orders is more limited than
for manufacturers selling directly to the end users of their products.
Moreover, any downturn in general 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 will likely be adversely affected.
In addition, many of the industries in which the competitive carriers operate
have recently experienced consolidation. In particular, many telecommunication
carriers have recently acquired 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
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1996 Act is subject to many uncertainties. Such uncertainties include judicial
and administrative proceedings designed to define rights and obligations
pursuant to the 1996 Act, actions or inactions by ILECs or other carriers that
affect the pace at which changes contemplated by the 1996 Act occur, resolution
of questions concerning which parties will finance such changes, and other
regulatory, economic and political factors. Any changes to the 1996 Act or the
regulations adopted thereunder, the adoption of new regulations by federal or
state regulatory authorities under the 1996 Act or any legal challenges to the
1996 Act could have a material adverse impact upon the market for our products.
We are aware of certain litigation challenging the validity of the 1996 Act
and local telephone competition rules adopted by the Federal Communications
Commission ("FCC") for the purpose of implementing the 1996 Act. Furthermore,
Congress has indicated that it may hold hearings to gauge the competitive impact
of the 1996 Act, and we cannot assure you that Congress will not propose changes
to the Act. This litigation and potential regulatory changes may delay further
implementation of the 1996 Act, which could hurt demand for our products.
Moreover, our distributors or competitive carrier customers may require that we
modify our products to address actual or anticipated changes in the regulatory
environment. Further, we may decide to modify our products to meet these
anticipated changes. Our inability to modify our products in a timely manner or
address such regulatory changes could have a material adverse impact on our
business, financial condition or results of operations.
Our Markets are Highly Competitive and Have Many More Established Competitors.
The market for our products is intensely competitive, with a large number of
equipment suppliers providing a variety of products to diverse market segments
within the telecommunications industry. Our existing and potential competitors
include many large domestic and international companies, including certain
companies that have substantially greater financial, manufacturing,
technological, sales and marketing, distribution and other resources. Our
principal competitors for our Access Bank product family include Adtran, 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 recently begun
to manufacture products similar to ours. Due to the rapidly evolving markets in
which we compete, additional competitors with significant market presence and
financial resources, including large telecommunications equipment manufacturers
and computer hardware and software companies, may enter these markets through
acquisition, thereby further intensifying competition. Additionally, one of our
distributors is currently competing with us, and additional distributors may
begin to develop or market products that compete with our products.
Many of our current and potential competitors are substantially larger than us
and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, such competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources than we can devote to the development, promotion and sale of their
products. Such competitors may enter our existing or future markets with
solutions which may be less costly, provide higher performance or additional
features or be introduced earlier than our solutions. Many telecommunications
companies have large internal development organizations which develop software
solutions and provide services similar to our products and services. We expect
our competitors to continue to improve the performance of their current products
and to introduce new products or technologies that provide added functionality
and other features. Successful new product introductions or enhancements by our
competitors could cause a significant decline in sales or loss of market
acceptance of our products. Competitive products may also cause continued
intense price competition or render our products or technologies obsolete or
noncompetitive.
To be competitive, we will have to continue to invest significant resources in
research and development and sales and marketing. We cannot assure you that we
will have sufficient resources to make such investments or that we will be able
to make the technological advances necessary to be competitive. In addition,
our current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of our prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which would have a material adverse effect on our business,
financial condition and results of operations.
We Are Substantially Dependent on Our Distribution Channels.
To date, 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.
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. In 1998, Walker, Phillips and Telsource accounted for 40%, 17% and 15% of
net revenue, respectively.
In the three months ended March 31, 1999, Walker and Phillips accounted for
48% 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 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 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 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 the Company's net revenue, that in
1998, thirty-five (35) competitive carrier customers indirectly were the end
users of approximately 83% of the Company's net revenue and in the three months
ended March 31, 1999, twenty-seven (27) competitive carrier customers indirectly
were the end users of approximately 85% of the Company's net revenue. In
addition, we believe that three competitive carrier end users 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.
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
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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
approximately 49 key components from vendors for which there is currently no
substitute, and we purchase approximately an additional 45 key components from
single vendors. In addition, we rely on several independent manufacturers to
provide certain PCBs, chassis and subassemblies for our products. Our inability
to obtain sufficient quantities of these components has in the past resulted in,
and may in the future result in, delays or reductions in product shipments,
which could materially adversely affect our business, financial condition or
results of operations. In the event of a reduction or interruption of supply,
we may need as much as six months before we would begin receiving adequate
supplies from alternative suppliers, if any. We cannot assure you that any such
source would become available to us or that any such source would be in a
position to satisfy our production requirements on a timely basis, if at all.
In such event, our business, financial condition and results of operations would
be materially adversely affected.
In addition, manufacturing certain of these single or sole source components
is extremely complex, and our reliance on the suppliers of these components
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
or results of operations.
We Have Limited Manufacturing Experience, and Our Dependence on Independent
Manufacturers Could Result in Product Delivery Delays.
We currently use several independent manufacturers to provide certain
components, PCBs, chassis and subassemblies. Our reliance on independent
manufacturers involves a number of risks, including the potential for inadequate
capacity, the unavailability of or interruptions in access to certain process
technologies, and reduced control over delivery schedules, manufacturing yields
and costs. Some of our manufacturers and suppliers are undercapitalized, and
such manufacturers or suppliers may be unable in the future to continue to
provide manufacturing services or components to us. If these manufacturers are
unable to manufacture our components in required volumes, we will have to
identify and qualify acceptable additional or alternative manufacturers, which
could take in excess of 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
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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 customers
and operations. We cannot assure you that we will not experience significant
problems with respect to any infrastructure expansion or the attempted
implementation of systems, procedures and controls. If our management is unable
to manage growth effectively, our business, financial condition or results of
operations could be materially adversely affected.
Our Growth is Dependent on Our Introduction of New Products and Enhancements to
Existing Products, and any Delay in Customers' Transition to Our New Products
Could Adversely Affect Our Business.
Our success depends on our ability to enhance our existing products and to
timely and cost-effectively develop new products and features that meet changing
end user requirements and emerging industry standards. However, we cannot
assure you that we will be successful in identifying, developing, manufacturing,
and marketing product enhancements or new products that will respond to
technological change or evolving industry standards. We intend to continue to
invest significantly in product and technology development. We have in the
recent past experienced delays in the development and commencement of commercial
shipment of new products and enhancements, resulting in distributor and end user
frustration and delay or loss of net revenue. It is possible that we will
experience similar or other difficulties in the future that could delay or
prevent the successful development, production or shipment of such new products
or enhancements, or that our new products and enhancements will not adequately
meet the requirements of the marketplace and achieve market acceptance.
Announcements of currently planned or other new product offerings by us or our
competitors have in the past caused, and may in the future cause, distributors
or end users to defer or cancel the purchase of our existing products. Our
inability to develop on a timely basis new products or enhancements to existing
products, or the failure of such new products or enhancements to achieve market
acceptance, could have a material adverse effect on our business, financial
condition or results of operations.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. Our introduction of new or
enhanced products will also require us to manage the transition from older
products in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demand. We have historically
reworked certain of our products previously sold in order to add new features
which were included in subsequent release of such product. We can give no
assurance that these historical practices will not occur in the future and cause
us to record lower revenue or negatively affect our gross margins.
We believe that average selling prices and gross margins for our products will
decline as such products mature and as competition intensifies. To offset
declining selling prices, we believe that we must successfully reduce the costs
of production of our existing products and introduce and sell new products and
product enhancements on a timely basis at a lower cost or sell products and
product enhancements that incorporate features that enable them to be sold at
higher average selling prices. We may not be able to achieve the desired cost
savings. To the extent that we are unable to reduce costs sufficiently to
offset any declining average selling prices or we are unable to introduce
enhanced products with higher selling prices, our gross margins will decline,
and such decline would have a material adverse effect on our business, financial
condition and results of operations.
Our Products May Suffer from Defects or Errors Which May Subject Us to Product
Returns and Product Liability Claims.
Our products have in the past contained, and may in the future contain,
undetected or unresolved errors when first introduced or as new versions are
released. Despite our extensive testing, errors, defects or failures are
possible in our current or future products or enhancements. If such defects
occur after commencement of commercial shipments, the following may happen:
. delay in or loss of market acceptance and sales;
. product returns;
. diversion of development resources;
. injury to our reputation; or
. increased service and warranty costs.
Any of these results could have a material adverse effect on our business,
financial condition and results of operations. Significant delays in meeting
deadlines for announced product introductions or enhancements or performance
problems with such products could
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result in an undermining of customer confidence in our products, which would
materially and adversely affect our customer relationships as well.
Although we have not experienced any product liability claims to date, the
sale and support of our products entails the risk of such claims, and it is
possible that we will be subject to such claims in the future. A successful
product liability claim brought against us could have a material adverse effect
on our business, financial condition or results of operations. Our agreements
with our distributors typically contain provisions designed to limit our
exposure to potential product liability claims. However, it is possible that
the limitation of liability provisions contained in our agreements may not be
effective under the laws of certain jurisdictions.
A Longer Than Expected Sales Cycle May Affect Our Revenues and Operating
Results.
The sale of our MDA products averages approximately four to six months in the
case of competitive carriers, but can take significantly longer in the case of
ILECs and certain distributors and other end users. This process is often
subject to delays over which we have little or no control, including (1) a
distributor's or a competitive carrier's budgetary constraints, (2) distributor
or competitive carrier internal acceptance reviews, (3) the success and
continued internal support of competitive carrier's own development efforts, and
(4) the possibility of cancellation or delay of projects by distributors or
competitive carriers. In addition, as competitive carriers have matured and
grown larger, their purchase process 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 March 31,
1999, we had approximately $59 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.
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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 31, 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 also have three U.S.
registered trademarks and two U.S. trademark application pending. We have also
entered into confidentiality agreements with all of our employees and
consultants and entered into non-disclosure agreements with our suppliers and
distributors in order to limit access to and disclosure of our proprietary
information. However, such measures may not be adequate to deter and prevent
misappropriation of our technologies or independent third-party development of
similar technologies.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary. Further, we may be subject
to additional risks as we enter into transactions in foreign countries where
intellectual property laws do not protect our proprietary rights as fully as do
the laws of the U.S. We cannot assure you that our competitors will not
independently develop similar or superior technologies or duplicate any
technology that we have. Any such events could have a material adverse effect
on our business, financial condition or results of operations.
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants in our markets increases and the
functionality of our products is enhanced and overlaps with the products of
other companies, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. From time to
time, third-parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to us. We have
no assurance that any future claims, if determined adversely to us, would not
have a material adverse effect on our business, financial condition or results
of operations. In our distribution agreements, we agree to indemnify
distributors and competitive carrier customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third-parties. In certain limited instances, the amount of such indemnities may
be greater than the net revenue we may have received from the distributor.
In the event litigation is required to determine the validity of any third-
party claims, such litigation, whether or not determined in our favor, could
result in significant expense to us, divert the efforts of our technical and
management personnel or cause product shipment delays. In the event of an
adverse ruling in any litigation, we might be required to discontinue the use
and sale of infringing products, expend significant resources to develop non-
infringing technology or obtain licenses from third-parties. In the event of a
claim or litigation against or by us or our failure to develop or license a
substitute technology on commercially reasonable terms, our business, financial
condition or results of operations could be materially adversely affected.
Our Stock Price Has Been Highly Volatile.
The market price of our common stock has been and is likely to continue to be
subject to fluctuations in response to variations in operating results,
announcements of technological innovations or new products by us or our
competitors, changes in financial estimates or recommendations by securities
analysts, regulatory developments and other events or factors. In addition, the
stock market in general and the market prices of equity securities of many high
technology companies in particular, have experienced extreme price fluctuations,
which often have been unrelated to the operating performance of such companies.
These broad market fluctuations may materially adversely affect the market price
of our common stock.
Our Company is Controlled by a Small Number of Stockholders.
Members of the Board of Directors and the executive officers of our Company,
together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 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.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings..
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the registration statement for the Company's IPO, filed
on Form S-1 under the Securities Act of 1933 (File No. 333-53947), was July 30,
1998. The class of securities registered was Common Stock. The Offering
commenced on July 31, 1998 and all securities were sold in the offering. The
managing underwriters for the offering were Credit Suisse First Boston,
Hambrecht & Quist and Warburg Dillon Read LLC.
Pursuant to the IPO Registration Statement, 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 IPO. The
net IPO proceeds to the Company after total expenses were approximately $37.6
million.
The Company has used approximately $16.8 million of the proceeds from the IPO
as follows: approximately $10.8 million for working capital; approximately $5.5
million for product development; approximately $1.3 million for capital
expenditures; and approximately $8.9 million for general corporate purposes.
Approximately $11.3 million of the proceeds have been used to purchase
securities available for sale. The use of the proceeds from the offering does
not represent a material change in the use of proceeds described in the
prospectus.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
27.1 Financial Data Schedule
(b) Form 8-K Reports
The Company filed no reports on Form 8-K during the three months ended
March 31, 1999.
Page 17
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARRIER ACCESS CORPORATION
(Registrant)
By: /s/ Nancy Pierce
---------------------------------------------
May 17, 1999 Nancy Pierce
Vice President, Finance, and
Chief Financial Officer
(Principal Accounting Officer and
Authorized Signatory)
Page 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,304
<SECURITIES> 28,258
<RECEIVABLES> 10,763
<ALLOWANCES> 838
<INVENTORY> 5,510
<CURRENT-ASSETS> 76,327
<PP&E> 3,964
<DEPRECIATION> 1,030
<TOTAL-ASSETS> 79,451
<CURRENT-LIABILITIES> 8,701
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 70,721
<TOTAL-LIABILITY-AND-EQUITY> 79,451
<SALES> 21,684
<TOTAL-REVENUES> 21,684
<CGS> 8,884
<TOTAL-COSTS> 5,737
<OTHER-EXPENSES> (556)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,619
<INCOME-TAX> 2,707
<INCOME-CONTINUING> 4,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,912
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.19
</TABLE>
