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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 June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________ to ____________________
Commission file number: 000-24597
CARRIER ACCESS CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1208770
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5395 Pearl Parkway, Boulder, CO 80301
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(Address of principal executive offices)
(Zip Code)
(303) 442-5455
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's common stock, par value
$0.001, as of July 31, 2000 was 24,432,723 shares.
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CARRIER ACCESS CORPORATION
TABLE OF CONTENTS
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<CAPTION>
Page No.
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements...............................................................
Condensed Consolidated Balance Sheets - June 30, 2000 (unaudited) and December
31,1999
Condensed Consolidated Statements of Operations (unaudited) Three and Six Months
Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows (unaudited) -- Six Months Ended
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................................
Item 2. Changes in Securities and Use of Proceeds..........................................
Item 4. Submission of Matters to a Vote of Security Holders................................
Item 6. Exhibits and Reports on Form 8-K...................................................
Signature..........................................................................
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARRIER ACCESS CORPORATION
Condensed Consolidated BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(unaudited) 1999
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,870 $ 25,460
Marketable securities available for sale 12,094 39,861
Accounts receivable, net 26,395 22,454
Inventory, net 11,254 9,444
Prepaid expenses and other current assets 4,771 4,045
------------------- -------------------
Total current assets 118,384 101,264
Property and equipment, net 10,802 6,890
Other assets 975 191
------------------- -------------------
Total assets $ 130,161 $ 108,345
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,518 $ 9,712
Income taxes payable 1,430 1,399
------------------- -------------------
Total current liabilities 15,948 11,111
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Stockholders' equity:
Common stock and additional paid-in-capital 70,332 69,476
Deferred stock option compensation (817) (1,559)
Retained earnings 44,698 29,317
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Total stockholders' equity 114,213 97,234
------------------- -------------------
Total liabilities and stockholders' equity $ 130,161 $ 108,345
=================== ===================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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CARRIER ACCESS CORPORATION
Condensed CONSOLIDATED statements OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
2000 1999 2000 1999
---------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net revenue $ 44,126 $ 25,288 $ 82,851 $ 46,972
Cost of goods sold 19,102 11,088 35,847 19,972
---------------- ----------------- ------------------ -----------------
Gross profit 25,024 14,200 47,004 27,000
---------------- ----------------- ------------------ -----------------
Operating expenses:
Research and development 7,153 2,893 13,085 5,216
Sales and marketing 4,994 2,630 9,100 4,909
General and administrative 2,011 1,084 3,493 2,015
Amortization of deferred stock 103 205 227 409
compensation
---------------- ----------------- ------------------ -----------------
Total operating expenses 14,261 6,812 25,905 12,549
---------------- ----------------- ------------------ -----------------
Income from operations 10,763 7,388 21,099 14,451
Other income, net 801 543 1,522 1,099
---------------- ----------------- ------------------ -----------------
Income before income taxes 11,564 7,931 22,621 15,550
Income tax expense 3,701 2,814 7,239 5,520
---------------- ----------------- ------------------ -----------------
Net income 7,863 5,117 15,382 10,030
---------------- ----------------- ------------------ -----------------
Net income available to common stockholders $ 7,863 $ 5,117 $ 15,382 $ 10,030
================ ================= ================== =================
Income per share:
Basic $ 0.32 $ 0.21 $ 0.64 $ 0.42
Diluted $ 0.32 $ 0.20 $ 0.62 $ 0.40
Weighted average common shares:
Basic 24,270 23,920 24,176 23,812
Diluted 24,848 25,285 24,927 25,231
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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CARRIER ACCESS CORPORATION
CONDENSED CONSOLIDATED StatementS of Cash Flows (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,382 $ 10,030
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 1,193 404
Provision for doubtful accounts and returns 34 349
Provision for inventory obsolescence 391 216
Tax benefit relating to exercise of stock
options 1,400 2,552
Compensation expense related to stock
options issued at less than fair value 227 409
Deferred income tax benefit (833) (94)
Changes in operating assets and liabilities:
Accounts receivable (3,975) (5,683)
Inventory (2,200) (691)
Prepaid expenses and other (590) (650)
Accounts payable and accrued expenses 4,806 2,393
Income taxes payable (1,460) (294)
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Net cash provided by operating activities 14,375 8,941
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (5,103) (1,293)
Sales (Purchases) of securities available for sale, net 27,768 (4,367)
Other 0 2
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Net cash provided (used) by investing activities 22,665 (5,658)
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Cash flows from financing activities:
Proceeds from exercise of stock options 1,370 356
------------------- ------------------
Net increase in cash and cash equivalents 38,410 3,639
Cash and cash equivalents at beginning of period 25,460 31,201
------------------- ------------------
Cash and cash equivalents at end of period $ 63,870 $ 34,840
=================== ==================
Supplemental cash flow disclosures:
Cash paid for income taxes 8,021 2,421
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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CARRIER ACCESS CORPORATION
Notes to Condensed CONSOLIDATED Financial Statements (unaudited)
Note 1. Summary of Significant Accounting Policies
Business and Basis of Presentation
We are a leading provider of broadband digital equipment solutions to
communications service providers. These service providers include competitive
local exchange carriers, incumbent local exchange carriers, independent
operating companies, interexchange carriers, Internet service providers, and
wireless mobility carriers. Our products are used by our customers to provide
services including local and long distance voice, high-speed data and Internet
services to businesses, government and enterprise end users. Our Access Bank
(R), Wide Bank (R), Access Navigator (TM), In-Loop (TM) and Adit (TM) (formerly
Cactus), products are connected to T1, digital subscriber line, digital radio,
T3 and optical access networks.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, such condensed consolidated financial statements reflect all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of interim period results. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1999 Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
30, 2000.
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):
June 30, December 31,
2000 1999
(unaudited)
------------------ -----------------
Raw materials $ 5,375 $ 5,109
Work-in-process 0 25
Finished goods 6,887 4,927
------------------ -----------------
12,262 10,061
Reserve for obsolescence (1,008) (617)
------------------ -----------------
Total inventory, net $11,254 $ 9,444
================== =================
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Notice Concerning Forward-Looking Statements
The information contained in this report contains certain forward-looking
statements. When used in this report, the words "anticipates," "believes,"
"expects," "intends," "will," "forecasts," "plans," "future," "strategy," or
similar expressions may identify forward-looking statements. These statements
are based on current expectations and projections about our industry and
assumptions made by the management and are not guarantees of future performance.
Our actual results, performance or achievements may differ materially from those
anticipated or implied by forward-looking statements. Factors that could cause
or contribute to material differences include the disclosure in the "Factors
Affecting Future Performance" section in this report, as well as our Form 10-K
and other periodic reports on Form 10-Q filed with the Securities and Exchange
Commission. We undertake no obligation to update any forward-looking statements
in this Report on Form 10-Q.
Results of Operations
<TABLE>
<CAPTION>
Summary
Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30, June 30,
---------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $44,126 $25,288 $82,851 $46,972
Gross Profit $25,024 $14,200 $47,004 $27,000
Income from operations $10,763 $ 7,388 $21,099 $14,451
Net income $ 7,863 $ 5,117 $15,382 $10,030
Income per share (diluted) $ 0.32 $ 0.20 $ 0.62 $ 0.40
</TABLE>
For the three months ended June 30, 2000 our net income and operating income
increased to $7.9 million and $10.8 million respectively from $5.1 million and
$7.4 million for the three months ended June 30, 1999. For the six months ended
June 30, 2000, our net income and operating income increased to $15.4 million
and $21.1 million, respectively, compared to $10.0 million and $14.5 million for
the six months ended June 30, 1999. These increases were due primarily to an
increase in the sales of our existing products in addition to sales of the
Access Navigator that began shipping in the first quarter of 1999. Sales of the
Adit product, introduced in the fourth quarter of 1999 also contributed to
higher sales in the first six months of 2000. These increases were partially
offset by a reduction in the sales of the Access Bank product as our customers
purchased the Adit instead of the Access Bank. Also contributing to higher net
income for 2000 was an increase in other income, primarily reflecting an
increase in interest income.
Net Revenue and Cost of Goods Sold
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
(In thousands) 2000 1999 2000 1999
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenue $44,126 $25,288 $82,851 $46,972
Cost of goods sold $19,102 $11,088 $35,847 $19,972
</TABLE>
Net revenue for the three months ended June 30, 2000 increased to $44.1
million from the $25.3 million reported for the three months ended June 30,
1999. Net revenue for the six months ended June 30, 2000 increased to $82.9
million from $47.0 million for the same period of 1999. These increases were
attributable to the introduction of new products, primarily the Wide Bank STS,
Adit, and the Access Navigator products, along with increases in the sales of
our existing products to distributors. These increases were partially offset by
a reduction in sales of the Access Bank product as customers purchased the Adit
product in its place. The timing and quantities of orders for our 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.
During the three and six month periods ended June 30, 2000, most of the
sales of our products were made through distributors, and our success depends on
the continued sales and customer support efforts of our network of distributors.
In the first six months of
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2000, ADC Telecommunications and Walker & Associates accounted for 18.9% and
16.3%, respectively, of net revenue. We expect that the sale of our products
will continue to be made through a small number of distributors. Accordingly,
the loss of, or a reduction in sales to, any of our key distributors could have
a material adverse effect on our business. In addition to being dependent on a
small number of distributors for a majority of our net revenue, we believe that
our products are distributed to a limited number of competitive carrier
customers who are primarily CLECs. In the six months ended June 30, 2000, we
believe that one of these competitive carrier end user customers accounted for
18% of our net revenue. A decrease in sales to this competitive carrier customer
could have a material adverse effect on our business.
Cost of goods sold for the three months ended June 30, 2000 increased to
$19.1 million from $11.1 million for the three months ended June 30, 1999. Costs
of goods sold increased to $35.8 million for the six months ended June 30, 2000
compared to $20.0 million for the corresponding six-month period of 1999. These
increases were primarily attributable to increased product shipments and were
partially offset by product cost reductions in some of our existing product
platforms.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Gross Margin 57% 56% 57% 57%
</TABLE>
Our gross margin for the three months ended June 30, 2000 increased to 57%
from the 56% reported for the three months ended June 30, 1999. This slight
increase reflects the sale of a higher percentage of higher gross margin
products for those three months. Gross margin for the six months ended June 30,
2000 and for the six months ended June 30, 1999 was 57%.
We believe that average selling prices and gross margins for our products
may decline as 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 products and are based on volume shipments, both of which affect gross
margins. The gross margin for our Wide Bank and Access Navigator products are
currently higher than the gross margin for our Adit product. We believe gross
margins are likely to fluctuate in the future based on product mix and channel
mix. Margins will also likely be adversely affected from time to time by new
product introductions from our competitors and us.
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
(In thousands) 2000 1999 2000 1999
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Research and development expenses $ 7,153 $ 2,893 $ 13,085 $ 5,216
As a percentage of net revenue 16% 11% 16% 11%
</TABLE>
For the three months ended June 30, 2000 research and development expenses
were $7.2 million, an increase from the $2.9 million reported for the three
months ended June 30, 1999. Research and development expenses increased to
$13.1 million in the six months ended June 30, 2000 compared to $5.2 million for
the same period in 1999. These increases are primarily due to an increase in the
number of personnel engaged in the development of new products and enhancements
to our current products. They also reflect the addition of a research and
development facility located in Tulsa, Oklahoma during July of 1999. We expect
the amount of research and development expense will increase in the third and
fourth quarters of 2000 as we continue to fund the development of new products
and enhancements to existing products. Expenses could also increase if we add
additional remote research and development facilities.
Sales, Marketing and General and Administrative Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
(In thousands) 2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Sales and marketing expenses $4,994 $2,630 $ 9,100 $4,909
General and administrative expenses 2,011 1,084 3,493 2,015
Amortization of deferred stock compensation 103 205 227 409
---------------------------- ----------------------------
Total selling, general and administrative expenses $7,108 $3,919 $12,820 $7,333
As a percentage of net revenue 16% 15% 15% 16%
</TABLE>
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Selling, general and administrative expenses were $7.1 million for the three
months ended June 30, 2000 up from the $3.9 million reported for the three
months ended June 30, 1999. Selling, general and administrative expenses
increased to $12.8 million for the six months ended June 30, 2000 from $7.3
million for the same period of 1999. Sales and marketing expenses increased
from $2.6 million for the three months ended June 30, 1999 to $5.0 million for
the three months ended June 30, 2000 and from $4.9 million for the six months
ended June 30, 1999 to $9.1 million for the same period of 2000. The increase
in sales and marketing expenses was the result of our 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 increases also
represented costs associated with the introduction of the new Adit product. We
hired and intend to continue to hire additional sales and marketing personnel
and to continue to aggressively pursue sales and marketing campaigns, and
therefore expect these expenses to increase in absolute dollars in the future.
The increase in general and administrative expenses to $2.0 million for the
three months ended June 30, 2000 from the $1.1 million for the three moths ended
June 30, 1999 and the increase to $3.5 million for the six months ended June 30,
2000 from $2.0 for the same period of 1999 was due to the addition of personnel
and facilities costs necessary to support the expansion of our business. We also
expect general and administrative expenses to increase in absolute dollars as we
continue to add personnel and incur additional costs related to the expansion of
our business and operations.
Other Income
For the three months ended June 30, 2000 interest and other income increased
to $801,000 from $543,000 for the three months ended June 30, 1999. Interest
and other income increased to $1.5 million for the six months ended June 30,
2000 compared to $1.1 million for the same period in 1999. Both increases are
attributable due to interest earned on higher cash balances as a result of cash
generated from operating activities.
Income Taxes
For the three and six months ended June 30, 2000, our effective combined
federal and state income tax rate was 32%, compared to 35.5% for the three and
six months ended June 30, 1999. Our annual effective tax rate decreased due to
the research and development tax credit, non-taxable interest income on tax-
exempt marketable securities and reduced state income taxes.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 2000 1999
--------------- --------------
<S> <C> <C>
Working capital $102,436 $ 90,153
Cash, cash equivalents and marketable securities $ 75,964 $ 65,321
Total assets $130,161 $ 108,345
Six Months Ended
(In thousands) June 30, December 31,
Net cash provided (used) by: 2000 1999
--------------- --------------
<S> <C> <C>
Operating activities $ 14,375 $ 5,235
Investing activities $ 22,665 $ (16,728)
Financing activities $ 1,370 $ 2,114
</TABLE>
Net cash provided by operating activities provided net cash of approximately
$14.4 million for the six months ended June 30, 2000, as compared to $5.2
million for the six month period ending December 31, 1999. The increase in cash
provided by operating activities was primarily due to increased net income, and
increases in accounts payable. These operating increases in net cash were
partially offset by increases in accounts receivable, inventory, income taxes
payable and prepaid expenses.
For the six months ended June 30, 2000, we sold a net $27.8 million of U.S.
Government Agency and Corporate bonds with maturities greater then six months.
Our capital expenditures for the six months ended June 30, 2000 were $5.1
million for additions to facilities and equipment to support our research,
development and manufacturing activities. This resulted in $22.7 million of net
cash generated from investing activities. We believe our current facilities and
equipment are sufficient to meet our current operating requirements. However
we do anticipate adding additional facilities capacity to support the addition
of new employees. Capital expenditures during the remainder of 2000 are
expected to continue to increase over 1999 levels.
Sales of securities provided $1.4 million in cash for the six months ended
June 30, 2000, due to the exercise of stock options.
The Company's net inventory levels increased approximately $1.9 million to
$11.3 million at June 30, 2000 from $9.4 million at December 31,1999, due
primarily to increases in finished goods inventory and in critical components
with long lead times. Inventory levels are expected to be adequate to meet
orders.
We believe that our existing cash, investment balances, and our line of
credit are adequate to fund our projected working capital and capital
expenditure requirements for at least the next 12 months. Although operating
activities may provide cash in certain
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periods, to the extent we experience growth in the future, we anticipate that
our operating and investing activities may use cash. Should the need arise; we
believe we would be able to borrow additional funds or otherwise raise
additional capital. However, we cannot assure you that additional funds or
capital will be available to us in adequate amounts and with reasonably
acceptable terms. We may consider using our capital to make strategic
investments or to acquire or license technology or products.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 137 is an amendment to
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 137 establishes accounting and
reporting standards for all derivative instruments. SFAS 137 is effective for
fiscal years beginning after June 15, 1999. We anticipate that, due to our
limited use of derivative instruments, the adoption of SFAS No. 137 will not
have a material impact on our consolidated financial statements.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities- an amendment of FASB
Statement No. 133", SFAS 138 addresses a limited number of issues causing
implementation difficulties for a large number of entities getting ready to
apply SFAS No. 133. SFAS 138 is effective for fiscal years beginning after June
15, 2000. We anticipate that due to our limited use of derivative instruments,
the adoption of SFAS 138 will not have a material impact on our consolidated
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 sets forth guidelines for accounting and disclosures
related to revenue recognition. SAB No. 101 does not require registrants that
have not applied this accounting to restate prior financial statements, provided
they report a change in accounting principle in accordance with Accounting
Principles Board Opinion No. 20, "Accounting Changes," no later than the first
fiscal quarter of the fiscal year beginning after December 15, 1999. In March
2000, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101A, "Amendment: Revenue Recognition in Financial Statements" ("SAB 101A").
SAB 101A delays the implementation of SAB 101 by one quarter ending June 30,
2000 for registrants with fiscal years that begin between December 16, 1999 and
March 15, 2000. We anticipate that the adoption of SAB No. 101 will not have a
material impact on our consolidated financial statements.
In March 2000, FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB Opinion No.
25 (FIN 44). FIN 44 applies prospectively to new awards, exchanges of awards in
a business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July 1, 2000, except for the provisions
related to reprising and the definition of an employee, which apply to awards
issued after December 15, 1998. The provisions related to modifications to
fixed stock option awards to add a reload feature are effective for awards
modified after January 12, 2000. We anticipate that the adoption of FIN 44 will
not have a material impact on our consolidated financial statements.
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 June 30, 2000, 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 June 30, 2000, the Company has
not used derivative instruments or engaged in hedging activities.
FACTORS AFFECTING FUTURE PERFORMANCE
Investors should carefully consider the risks described below before making
an investment decision. The risks described below are not the only ones facing
our company. Additional risks not presently known to us or that we currently
believe are immaterial may also impair our business operations. Our business
could be harmed by any of these risks. The trading price of our common stock
could decline due to any of these risks and investors may lose all or part of
their investment. In assessing these risks, investors should also refer to the
other information contained or incorporated by reference in this Form 10-Q
Report, including our condensed consolidated financial statements and related
notes.
We Have a Limited Operating History.
We have a limited operating history. We did not begin commercial deployment
of our broadband digital access 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 three 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
communications equipment industry. Some of these risks include:
. significant fluctuations in quarterly operating results;
. the intensely competitive market for communications 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 packet based products
and product enhancements; and
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. the risks associated with increased business development and expansion of
our operations.
Due to our limited operating history and experience with respect to these
issues, we may not successfully implement any of our strategies or successfully
address these risks and uncertainties.
Our Quarterly Results Fluctuate Significantly, and We May Not be Able to
Maintain Our Existing Growth Rates.
Although our revenues have grown significantly in recent quarters, these
growth rates may not be sustainable, as is evidenced by our Access Bank revenue,
and you should not use these past results to predict future revenue or operating
results. Our quarterly and annual operating results have fluctuated in the past
and may vary significantly in the future. Our future operating results will
depend on many factors, many of which are outside of our control, including the
following:
. the size of the orders for our products, and the timing of such orders;
. the commercial success of our products, and our ability to ship enough
products to meet customer demand;
. changes in the financial stability of our distributors, customers or
suppliers;
. changes in our pricing policies or the pricing policies of our
competitors;
. fluctuations in ordering due to increased direct sales to customers;
. potential bad debt due to increased direct sales;
. inability to obtain third party financing for our service provider
customers;
. 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
communications equipment industry.
A significant portion of our net revenue has been derived from a limited
number of large orders, and we believe that this trend will continue in the
future, especially if the percentage of direct sales to end users increases as
we anticipate. The timing of these orders and our ability to fulfill them can
cause material fluctuations in our operating results, and we anticipate that
such fluctuations will occur. Also, our distribution and purchase agreements
generally allow our distributors and direct customers to postpone or cancel
orders without penalty until a relatively short period of time prior to
shipment. In the past, we have occasionally experienced cancellations and
delays of orders, and we expect to continue to experience order cancellations
and delays from time to time in the future. Any shortfall in orders would harm
our operating income for a quarter or series of quarters, especially since
operating expenses in a quarter are relatively fixed, and these fluctuations
could affect the market price of our common stock.
Because most all of our sales have historically been through indirect
distribution channels, our ability to judge the timing and size of individual
orders is more limited than for manufacturers who have been selling directly to
the end users of their products for longer periods of time. Moreover, any
downturn in general economic conditions could lead to significant reductions in
customer spending for telecommunications equipment, which could result in delays
or cancellations of orders for our products. Our operating expenses are based
on our expectations of future revenues and are relatively fixed in the short
term. Due to these and other factors, if our quarterly or annual revenues fall
below the expectations of securities analysts and investors, the trading price
our common stock could significantly decline.
We Depend on Emerging Service Providers for Substantially All of Our Business.
Up until now, our customers have consisted primarily of competitive local
exchange carriers and, to a lesser extent, long distance service providers,
Internet service providers, independent operating carriers and wireless service
providers. The market for the services provided by the majority of these
service providers has only begun to emerge since the passage of the
Telecommunications Act of 1996 (the "1996 Act"), and many new and existing
service providers are continuing to build their networks and infrastructure and
rolling out their services in new geographical areas. These new service
providers require substantial capital for the development, construction and
expansion of their networks and the introduction of their services. The ability
of these emerging service providers to fund such expenditures often depends on
their ability to obtain sufficient financing. This financing may not be
available to many of these emerging service providers on favorable terms, if at
all. If our current or potential emerging service provider customers cannot
successfully raise the needed funds, or if they experience any other trends
adversely affecting their operating results or profitability,
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these service providers' capital spending programs may be adversely impacted. If
our current or potential service provider customers are forced to defer or
curtail their capital spending programs, our sales and operating results will
likely be harmed.
In addition, many of the industries in which the service providers operate
have recently experienced consolidation. In particular, many telecommunication
service providers have recently acquired, been acquired or merged with Internet
service providers or other service providers. The loss of one or more of our
service provider 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 local exchange carriers are allowed to compete with independent
local exchange carriers 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 independent local exchange carriers 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 inaction by independent local
exchange carriers or other service providers 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 change may delay further
implementation of the 1996 Act, which could hurt demand for our products.
Moreover, our distributors or service provider 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 harm our business.
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 and Adit product include Adtran,
General Datacom, Lucent, Newbridge, Nortel, Pairgain, Paradyne and other small
private companies. Our principal competitors for our Wide Bank product include
Adtran, Alcatel, Fujitsu, NEC and other small private companies. Our principal
competitors for our Access Navigator product include AFC, Alcatel, Cisco, DSC,
Lucent, Nortel, Telect, Tellabs and other small private companies. We expect
that many of our competitors who currently offer products competitive with only
one of our products will eventually offer products competitive with all of our
products. In addition, many start-up companies have recently begun to
manufacture products similar to ours. Due to the rapidly evolving markets in
which we compete, additional competitors with significant market presence and
financial resources, including large telecommunications equipment manufacturers
and computer hardware and software companies, may enter these markets through
acquisition, thereby further intensifying competition. Additionally, one of our
distributors is currently competing with us, and additional distributors may
begin to develop or market products that compete with our products.
Many of our current and potential competitors are substantially larger than
us and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, such competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources than we can devote to the development, promotion and sale of their
products. Such competitors may enter our existing or future markets with
solutions that 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 that 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
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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 harm our business.
We Are Substantially Dependent on Our Distribution Channels.
To date, a large portion of the sales of our products has been made through
distributors. Our distributors are responsible for warehousing product and
fulfilling product orders as well as servicing potential competitive service
provider customers and, in some cases, customizing and integrating our products
at end users' sites. As a result, our success depends on maintaining good
relations with our distributors. Sales of our products historically have been
made to a limited number of distributors and other direct customers, as follows:
. In 1998, Walker and Associates, Phillips Communications and Telsource
Corporation accounted for 43%, 15% and 13% of net revenue, respectively.
. In 1999, Walker and Associates and ADC Telecommunications, Inc.
accounted for 27% and 14% of net revenue, respectively.
. For the six months ended June 30, 2000 Walker and Associates and ADC
Telecommunications, Inc. accounted for 16.3% and 18.9% of net revenue
respectively.
We expect that a significant portion of sales of our products will continue
to be made to a small number of distributors. Accordingly, if we lose any of
our key distributors, or experience reduced sales to such distributors, our
business would likely be harmed.
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 certain 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 harm 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 original equipment
manufacturers and distributors, and our original equipment manufacturers 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
original equipment manufacturers in the future, could reduce the demand for our
products, create conflicts with other distributors or otherwise harm our
business. In addition, three times a year certain distributors are allowed to
return a maximum of fifteen percent of our unsold products for an equal dollar
amount of new equipment. The products must have been held in stock by such
distributor and have been purchased within the four-month period prior to the
return date. While to date these returns have not had a material impact on our
results of operations, we cannot assure you that we will not experience
significant returns in the future or that we will make adequate allowances to
offset these returns. We believe we have made adequate allowances for these
returns to date.
We are generally required to give our distributors a 60-day notice of price
increases. Orders entered by distributors within the 60-day period are filled
at the lower product price. In the event of a price decrease, we are sometimes
required to credit distributors the difference in price for any stock they have
in their inventory. 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 service provider customers who are primarily competitive local
exchange carriers. None of these service provider customers has any obligation
to purchase additional products. Accordingly, we cannot assure you that present
or future customers will not terminate their purchasing arrangements with either
us 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 harm our business.
We are Substantially Dependant on our Direct Sales and Direct Customers.
Currently, a significant portion of the sales of our products is being made
through direct sales. As a result, our continued success depends on building
and maintaining good relations with our direct customers.
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We have limited knowledge of the financial condition of certain of our
direct customers, however, we are aware that some of our direct customers have
limited financial and other resources which could impair their ability to pay
us, although the financial instability of these direct customers has not limited
any direct customer's ability to pay us for our products to date. We cannot
assure you that any bad debts that we incur will not exceed our reserves or that
the financial instability of one or more of our direct customers will not harm
our business, financial condition or results of operations.
Any reduction in planned purchases by direct customers in the future could
harm our business. In addition, we grant certain of our direct customers "most
favored customer" terms, pursuant to which we have agreed to not knowingly
provide another direct customer with similar terms and conditions a better price
than those provided to the existing direct customer, without offering the more
favorable prices to the existing direct customer. It is possible that these
price protection and "most favored customer" clauses could cause a material
decrease in the average selling prices and gross margins of our products, which
could, in turn, harm our business.
Currently, our direct customers do not have any obligation to purchase
additional products. Accordingly, we cannot assure you that present or future
direct customers will not terminate their purchasing arrangements with us, 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
harm our business.
Our Growth is Dependent upon Successfully Maintaining and Expanding Our
Distribution Channels and Direct Sales.
Our future net revenue growth will depend in large part on the following
factors:
. our success in maintaining our current distributor and direct
relationships; and
. diversifying our distribution channels by selling to new distributors
and to new direct customers.
Maintaining and Expanding our Current Service Provider Customer Base
Most of our existing distributors currently also distribute the products of
our competitors. Some of our existing distributors may in the future distribute
or use other competitive products. We cannot assure you that we will be able to
attract and retain a sufficient number of our existing or future distributors
and direct customers or that they will recommend, or continue to use, our
products or that our distributors will devote sufficient resources to market and
provide the necessary customer support for such products. In the event that any
of our current distributors or direct customers reduce their purchases of our
products, or that we fail to obtain future distributors or direct customers, our
business could be harmed.
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 products 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 that
alternative sources are not currently available. We currently purchase
approximately ten key components from vendors that there is currently no
substitute, and we purchase over fifty key components from single vendors. In
addition, we rely on several independent manufacturers to provide certain
printed circuit boards, 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 harm 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 would be materially harmed.
In addition, manufacturing certain of these single or sole source
components is extremely complex, and our reliance on the suppliers of these
components, especially for newly designed components, exposes us to potential
production difficulties and quality variations that they experience, which has
negatively impacted cost and timely delivery of our products. Any significant
interruption in the supply, or degradation in the quality, of any such component
could have a material adverse effect on our business, financial condition or
results of operations.
Our Ability to Meet Customer Demand Depends on the Availability of Our
Components.
Our distributors and direct customers frequently require rapid delivery
after placing an order. Because we do not maintain significant component
inventories, delays in shipment by one of our suppliers have lead to lost sales
and sales opportunities. Lead times for materials and components vary
significantly and depend on many factors, some of which are beyond our control,
such as specific supplier performance, contract terms and general market demand
for components. If distributor orders vary significantly from
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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 harm our business.
Our Dependence on Independent Manufacturers Could Result in Product Delivery
Delays.
We currently use several independent manufacturers to provide certain
components, printed circuit boards, chassis and subassemblies. Our reliance on
independent manufacturers involves a number of risks, including the potential
for inadequate capacity, the unavailability of, or interruptions in access to
certain process technologies, and reduced control over delivery schedules,
manufacturing yields and costs. Some of our manufacturers and suppliers are
undercapitalized, and such manufacturers or suppliers may be unable in the
future to continue to provide manufacturing services or components to us. If
these manufacturers are unable to manufacture our components in required
volumes, we will have to identify and qualify acceptable additional or
alternative manufacturers, which could take in excess of nine months. We cannot
assure you that any such source would become available to us or that any such
source would be in a position to satisfy our production requirements on a timely
basis, if available. Any significant interruption in our supply of these
components would result in delays or in the allocation of products to customers,
which in turn could have a material adverse effect on our business, financial
condition or results of operations. Moreover, since all of our final assembly
and test operations are performed in one location, any fire or other disaster at
our assembly facility would harm our business.
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, Corporate Development Officer and
our key management, sales, engineering, finance, customer support and product
development personnel, many of whom would be difficult to replace. In
particular, the loss of Roger Koenig, President and Chief Executive Officer, who
co-founded us, could harm 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 harm our
business.
Our Ability to Manage Our Growth Will Affect Our Business.
We have experienced rapid growth in net revenue and expansion of our
operations, and we anticipate that further significant expansion will be
required to address potential growth in our customer base and market
opportunities. Such growth continues to place significant strain on our
management, information systems, operations and resources. For example, in the
past we have experienced minor shipping errors primarily as a result of training
new personnel in the face of a period of rapid growth. Our ability to manage
any future growth will continue to depend upon the successful expansion of our
sales, marketing, research and development, customer support, manufacturing and
administrative infrastructure and the ongoing implementation and improvement of
a variety of internal management systems, procedures and controls. Continued
growth will also require us to hire more engineering, sales and marketing and
administrative personnel, expand customer support capabilities, expand
management information systems and improve our inventory management practices.
Recruiting qualified personnel is an intensely competitive and time-
consuming process. We cannot assure you that we will be able to attract and
retain the necessary personnel to accomplish our growth strategies or that we
will not experience constraints that will harm our ability to satisfy customer
demand in a timely fashion or to satisfactorily support our customers and
operations. We cannot assure you that we will not experience significant
problems with respect to any infrastructure expansion or the attempted
implementation of systems, procedures and controls. If our management is unable
to manage growth effectively, our business could be harmed.
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 including 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
our competitors or us 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 harm our business.
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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 harm our business.
Our Products May Suffer from Defects or Errors That 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 resulting in new product development
delay;
. injury to our reputation; or
. increased service and warranty costs.
Any of these results could have a material adverse effect on our business.
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 harm 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 harm our business. Our
agreements with our distributors and direct customers typically contain
provisions designed to limit our exposure to potential product liability claims.
However, it is possible that the limitation of liability provisions contained in
our agreements may not be effective or adequate under the laws of certain
jurisdictions.
A Longer Than Expected Sales Cycle May Affect Our Revenues and Operating
Results.
The sale of our broadband digital access products averages approximately
four to nine months in the case of service providers, but can take significantly
longer in the case of incumbent local exchange carriers 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 service provider's budgetary constraints, (2)
distributor or service provider internal acceptance reviews, (3) the success and
continued internal support of service provider's own development efforts, and
(4) the possibility of cancellation or delay of projects by distributors or
service providers. In addition, as service providers have matured and grown
larger, their purchase process may become more institutionalized, and it will
become increasingly difficult, and requires more of our time and effort, to gain
the initial acceptance and final adoption of our products by these end users.
Although we attempt to develop our products with the goal of facilitating the
time to market of our service provider's products, the timing of the
commercialization of a new distributor or service provider applications or
services based on our products is primarily dependent on the success and timing
of a service provider'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 harm
our business 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 communications marketplace 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 packet based
technologies will emerge as competition in the communications industry increases
and the need for higher volume and more cost efficient transmission equipment
expands. Industry standards for multi-service digital access 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
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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 harm sales of our current
products or delay introduction of our future products.
Failure to Meet Future Capital Needs May Adversely Affect Our Business.
We require substantial working capital to fund our business. As of June 30,
2000, we had approximately $76.0 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 harm our business.
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
communications services. The global communications marketplace is evolving, and
it is difficult to predict our 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 would be harmed.
Our Failure to Adequately Protect Our Proprietary Rights May Adversely Affect
Us.
We rely primarily on a combination of patent, copyright, trademark and
trade secret laws, as well as confidentiality procedures and contractual
restrictions, to establish and protect our proprietary rights. As of June 1,
2000, we have been issued a total of seven U.S. patents, we have ten additional
patent that are pending issuance, of which one is allowable. We also have four
U.S. registered trademarks, seven U.S. trademark applications pending and five
international trademark applications pending. We have also entered into
confidentiality agreements with our employees and consultants and entered into
non-disclosure agreements with our suppliers, customers 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 harm our business.
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
harm our business. In our distribution agreements, we agree to indemnify
distributors and service provider 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 could be
harmed.
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 harm the market price of our common stock.
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We are Controlled by a Small Number of Stockholders.
Our members of the Board of Directors and executive officers, together with
members of their families and entities that may be deemed affiliates of or
related to such persons or entities, beneficially own approximately 57.8% of our
outstanding shares of common stock. In particular, Mr. Koenig and Ms. Pierce,
our Chief Executive Officer and Corporate Development Officer, respectively, are
married and together beneficially own approximately 56.5 % 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 and may harm 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
None.
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Stockholders, held on May 25, 2000, the following
matters were voted upon by stockholders pursuant to proxies solicited pursuant
to Regulation 14A of the Securities Exchange Act of 1934:
The following individuals were elected to the Board of Directors:
Nominee For Against
------- --- -------
Roger L. Koenig 13,744,625
Nancy Pierce 13,744,625
John Barnett, Jr. 13,350,213 394,412
Douglas Carlisle 13,323,888
Joseph Graziano 13,323,888
Ryal Poppa 13,323,888
The vote for the ratification of the appointment of KPMG LLP was as follows:
----------------------------------------------------------------------------
For Against Abstain
--- ------- -------
13,323,888 420,737
The vote for the approval of the Amendment of the Company's 1998 Stock Incentive
Plan was as follows:
For Against Abstain
--- ------- -------
13,320,875 2,813 420,937
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 six months ended June
30, 2000.
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<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/ Timothy Anderson
-------------------------------------------------------
August 14, 2000 Timothy Anderson
Chief Financial Officer
(Principal Accounting Officer and Authorized Signatory)
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