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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________________ to ____________________
Commission file number: 000-24597
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CARRIER ACCESS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 84-1208770
- --------------------------------------------- -------------------
(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 April 30, 2000 was 24,282,322 shares.
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CARRIER ACCESS CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements....................................
Condensed Consolidated Balance Sheets - March 31,
2000 (unaudited) and December 31,1999
Condensed Consolidated Statements of Operations
(unaudited) -- Three Months Ended March 31, 2000
and 1999
Condensed Consolidated Statements of Cash Flows
(unaudited) -- Three Months Ended March 31, 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...............................................
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARRIER ACCESS CORPORATION
Condensed Consolidated BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(unaudited) 1999
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,671 $ 25,460
Marketable securities available for sale 41,457 39,861
Accounts receivable, net 23,842 22,454
Inventory, net 8,305 9,444
Prepaid expenses and other current assets 4,115 4,045
Total current assets 109,390 101,264
Property and equipment, net 9,115 6,890
Other assets 1,012 191
Total assets $119,517 $108,345
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,689 $ 9,712
Income taxes payable 1,672 1,399
------------------- -------------------
Total current liabilities 12,361 11,111
------------------- -------------------
Stockholders' equity:
Common stock and additional paid-in-capital 71,230 69,476
Deferred stock option compensation (910) (1,559)
Retained earnings 36,836 29,317
Total stockholders' equity 107,156 97,234
------------------- -------------------
Total liabilities and stockholders' equity $119,517 $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 March 31,
-------------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Net revenue $38,726 $21,684
Cost of goods sold 16,745 8,884
------------------- -------------------
Gross profit 21,981 12,800
------------------- -------------------
Operating expenses:
Research and development 5,931 2,323
Sales and marketing 4,107 2,279
General and administrative 1,483 930
Amortization of deferred stock compensation 124 205
------------------- -------------------
Total operating expenses 11,645 5,737
------------------- -------------------
Income from operations 10,336 7,063
Other income, net 721 556
------------------- -------------------
Income before income taxes 11,057 7,619
Income tax expense 3,538 2,707
------------------- -------------------
Net income $ 7,519 $ 4,912
------------------- -------------------
Net income available to common stockholders $ 7,519 $ 4,912
=================== ===================
Income per share:
Basic $ 0.31 $ 0.21
Diluted $ 0.30 $ 0.19
Weighted average common shares:
Basic 24,179 23,741
Diluted 24,962 25,218
</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>
Three Months Ended March 31,
--------------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,519 $ 4,912
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 497 184
Provision (credit) for doubtful accounts and (182) 195
returns
Provision (credit) for inventory obsolescence (17) 114
Tax benefit relating to exercise of stock options 1,400 2,223
Compensation expense related to stock 124 205
options issued at less than fair value
Deferred income tax benefit - (94)
Changes in operating assets and liabilities:
Accounts receivable (1,206) (1,627)
Inventory 1,157 (571)
Prepaid expenses and other (892) (236)
Accounts payable and accrued expenses 975 843
Income taxes payable (1,127) (1097)
Net cash provided by operating activities 8,248 5,051
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (2,721) (519)
Purchases of securities available for sale, net (1,596) (5,481)
------------------- ------------------
Net cash used by investing activities (4,317) (6,000)
------------------- ------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 2,280 52
------------------- ------------------
Net increase (decrease) in cash and cash equivalents 6,211 (897)
Cash and cash equivalents at beginning of period 25,460 31,201
------------------
Cash and cash equivalents at end of period $31,671 $30,304
=================== ==================
Supplemental cash flow disclosures:
Cash paid for income taxes $ 1,855 $ 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 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 CACTUS(TM) family products
are connected to TI, digital subscriber line, digital radio, T3 and optical
access networks. Our digital equipment provides a "last mile" solution for the
distribution and management of high bandwidth services from service providers.
Reaching large numbers of consumers using voice and high speed Internet access
requires connectivity from service provider networks to end user locations.
Installation of our central office communications and customer-located voice and
data communications equipment enables this connectivity. Our products allow
service providers to cost-effectively connect end users to their network
products, decrease ongoing transmission equipment and maintenance expenses,
while enabling new service delivery, such as integrated voice and high speed
Internet access. Our products enable high bandwidth digital deployments targeted
at end users requiring between four and 2800 telephone and data line equivalents
of bandwidth. We believe that over 300 service providers and 500 other end users
have purchased our products directly or through our distributors.
The accompanying unaudited condensed consolidated financial statements 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 our Annual Report on Form 10-K filed with the Securities and
Exchange Commission ("SEC") 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):
March 31, December 31,
2000 1999
(unaudited)
------------------ -----------------
Raw materials $5,656 $ 5,102
Work-in-process 27 0
Finished goods 3,222 4,959
------------------ -----------------
8,905 10,061
Less: reserve for obsolescence 600 617
Total inventory, net $8,305 $ 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 "Risk
Factors" section in this report, as well as our 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
Summary
Three
Months Ended
(In thousands, except per share amounts) March 31,
--------------------
2000 1999
------- -------
Net revenue $38,726 $21,684
Gross Profit $21,981 $12,800
Income from operations $10,336 $ 7,063
Net income $ 7,519 $ 4,912
Income per share (diluted) $ 0.30 $ 0.19
For the three months ended March 31, 2000, our net income and operating income
increased to $7.5 million and $10.3 million, respectively, compared to $4.9 and
$7.1 million for the three months ended March 31,1999. These increases were due
primarily to a significant increase in the sales of our products, including the
introduction of new products. 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
Three Months Ended
March 31,
--------------------
(In thousands) 2000 1999
------- -------
Net revenue $38,726 $21,684
Cost of goods sold $16,745 $ 8,884
Net revenue for the three months ended March 31, 2000 increased to $38.7
million from $21.7 million for the same period of 1999. These increases were
attributable to the introduction of new products, primarily the Wide Bank STS,
CACTUS, and the Access Navigator product families, along with increases in the
sales of our existing products to distributors. 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, especially as the
percentage of direct sales to end users increases. The timing of these orders
and our ability to fulfill them can cause material fluctuations in our operating
results, and we anticipate that such fluctuations will occur.
During the three month period ended March 31, 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 three months of 2000, ADC Telecommunications and Walker & Associates
accounted for 20.5% and 13.5%, respectively, of net revenue. We expect that the
sale of our products will continue to be made to 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, financial
condition or results of operations. In addition to being dependent on a small
number of distributors for a majority of its net revenue, we believe that our
products are distributed to a limited number of competitive carrier customers
who are primarily CLECs. In the three months ended March 31, 2000, we believe
that one of these competitive carrier end user customers accounted for 19.5% of
our net revenue.
Costs of goods sold increased to $16.7 million for the three months ended
March 31, 2000 compared to $8.9 million for the corresponding three-month period
of 1999. These increases were primarily attributable to increased product
shipments and were partially offset by cost reductions in our existing product
platforms.
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Three Months Ended
March 31,
------------------------
2000 1999
----------- -----------
Gross Margin 57% 59%
The decrease in our gross margin in the three months ended March 31, 2000
compared to the same period of 1999 was primarily due to a change in the mix of
products sold (i.e., a higher percentage of lower margin products were sold in
the three months ending March 31, 2000) and increased costs associated with the
introduction of the new CACTUS product platform.
We believe that average selling prices and gross margins for our products will
continue to 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 gross margin for our Wide Bank and Access
Navigator product families are currently higher than the gross margin for our
CACTUS product family. 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
Three Months Ended
March 31,
------------------------
(In thousands) 2000 1999
--------- --------
Research and development expenses 5,931 2,323
As a percentage of net revenue 15% 11%
Research and development expenses increased to $5.9 million in the three
months ended March 31, 2000 compared to $2.3 million for the same period in
1999. This increase was primarily due to an increase in the number of personnel
engaged in the development of new products, primarily CACTUS and the addition of
a research and development facility in Tulsa, Oklahoma in July of 1999. We
expect the amount of research and development expense will increase in the
second and third quarters of 2000 to fund the development of new products and
enhancements to existing product families.
Sales, Marketing and General and Administrative Expenses
Three Months Ended
March 31,
--------------------
(In thousands) 2000 1999
------ ------
Sales and marketing expenses $4,107 $2,279
General and administrative expenses 1,483 930
Amortization of deferred stock compensation 124 205
------ ------
Total selling, general and administrative expenses $5,714 $3,414
As a percentage of net revenue 15% 16%
Selling, general and administrative expenses increased to $5.7 million for the
three months ended March 31, 2000 from $3.4 million for the same period of 1999.
Sales and marketing expenses increased from $2.3 million for the three months
ended March 31, 1999 to $4.1 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 increase in
general and administrative expenses to $1.5 million for the three months ended
March 31, 2000 from $930,000 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 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. 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. However, we expect
these costs will decrease as a percent of revenue.
Other Income
Interest and other income increased to $721,000 for the three months ended
March 31, 2000 compared to $556,000 for the same period in 1999, due to higher
cash balances as a result of cash generated from operating activities.
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Income Taxes
For the three months ended March 31, 2000, our effective combined federal and
state income tax rate was 32%, compared to 35.5% for the three months ended
March 31,1999. 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
March 31, December 31,
(In thousands) 2000 1999
-------- --------
Working capital $ 97,029 $ 90,153
Cash, cash equivalents and marketable securities $ 73,128 $ 65,321
Total assets $119,517 $108,345
Three Months Ended
(In thousands) March 31, December 31,
Net cash provided (used) by: 2000 1999
-------- --------
Operating activities $ 8,248 $ 142
Investing activities $ (4,317) $(22,172)
Financing activities $ 2,280 $ 4,757
Net cash provided by operating activities provided net cash of approximately
$8.2 million for the three months ended March 31, 2000, as compared to $142,000
for the three months ending December 31, 1999. The increase in cash provided by
operating activities was primarily due to increased net income, increases in
accounts payable, a decrease in our tax liability relating to the tax benefit
derived from stock option exercises, and a decrease in inventory. These
operating increases in net cash were partially offset by increases in accounts
receivable and prepaid expenses.
We invested approximately $4.3 million of our cash for the three months ended
March 31, 2000, $1.6 million of which was primarily used to purchase U.S.
Government Agency and Corporate bonds with maturities greater then three months.
Our capital expenditures for the three months ended March 31, 2000 were $2.7
million for additions to facilities and equipment to support our research,
development and manufacturing 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.
Our financing activities provided $2.3 million in cash for the three months
ended March 31, 2000, due to the exercise of stock options.
The Company's net inventory levels decreased approximately $1.1 million to
$8.3 million at March 31, 2000 from $9.4 million at December 31,1999, due
primarily to a decrease in finished goods inventory. 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 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
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
operations or other comprehensive income, depending upon whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. We anticipate that, due to its limited use of derivative
instruments, the adoption of SFAS No. 133 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
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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 repricings 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 March 31, 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 March 31, 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 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, in addition to those
risks disclosed elsewhere in this "Risk Factors" section, 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
. 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;
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. 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, 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.
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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 CACTUS product family include
Adtran, General Datacom, Lucent, Newbridge, Nortel, Pairgain, Paradyne and other
small private companies. Our principal competitors for our Wide Bank product
family include Adtran, Alcatel, Fujitsu, NEC other small private companies. Our
principal competitors for our Access Navigator product family 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 product lines will eventually offer products
competitive with all of our product lines. In addition, many start-up companies
have recently begun to manufacture products similar to ours. Due to the rapidly
evolving markets in which we compete, additional competitors with significant
market presence and financial resources, including large telecommunications
equipment manufacturers and computer hardware and software companies, may enter
these markets through acquisition, thereby further intensifying competition.
Additionally, one of our distributors is currently competing with us, and
additional distributors may begin to develop or market products that compete
with our products.
Many of our current and potential competitors are substantially larger than
us and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, such competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources than we can devote to the development, promotion and sale of their
products. Such competitors may enter our existing or future markets with
solutions 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 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.
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
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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.
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
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Most of our existing distributors currently also distribute the product
lines of our competitors. Some of our existing distributors may in the future
distribute or use other competitive product lines. 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 product
lines and (3) do not require the distributor to purchase any minimum dollar
amount of our products. Additionally, our distribution agreements do not
attempt to allocate certain territories for our products among our distributors.
To the extent that different distributors target the same end users of our
products, distributors may come into conflict with one another, which could
damage our relationship with, and sales to, such distributors.
Our Operating Results are Substantially Dependent on Sole and Single Source
Suppliers.
Although we generally use standard parts and components for our products,
many key parts and components are purchased from sole source vendors that
alternative sources are not currently available. We currently purchase over 25
key components from vendors that there is currently no substitute, and we
purchase over 150 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 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, Chief Financial Officer and our key management,
sales, engineering, customer support and product development personnel, many of
whom would be difficult to replace. In particular, the loss of Roger Koenig,
President and Chief Executive Officer, who 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
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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 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 harm our business.
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;
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. 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 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 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 March 31,
2000, we had approximately $73.1 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.
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We rely primarily on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality procedures and contractual restrictions,
to establish and protect our proprietary rights. As of March 1, 2000, we have
been issued a total of six U.S. patents, we have nine additional patent that are
pending issuance, of which one is allowable. We also have four U.S. registered
trademarks, eight U.S. trademark applications pending and five international
trademark applications pending. We have also entered into confidentiality
agreements with all of 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.
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 59% of our
outstanding shares of common stock. In particular, Mr. Koenig and Ms. Pierce,
our Chief Executive Officer and Chief Development Officer, respectively, are
married and together beneficially own approximately 57.0 % 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
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, 2000.
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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
---------------------
May 12, 2000 Timothy Anderson
Vice President, Finance,
and Chief Financial Officer
(Principal Accounting Officer
and Authorized Signatory)
Page 18
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