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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number : 000-23023
MMC NETWORKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0319809
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
1144 E. Arques Avenue
Sunnyvale, CA 94085
(Address of principal offices)
(zip code)
(408) 731-1600
(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 as of June 30,
2000 was 32,848,357.
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MMC NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 ........................................... 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2000 and 1999 ..................... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 ......................... 5
Notes to the Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 19
Item 2. Changes in Securities and Use of Proceeds ....................... 19
Item 3. Defaults Upon Senior Notes ...................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ............. 19
Item 5. Other Information ............................................... 19
Item 6. Exhibits and Reports on Form 8-K ................................ 19
SIGNATURES ..................................................................... 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MMC NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 40,744 $ 13,484
Short-term investments ............................................. 33,412 58,511
Accounts receivable, net of allowances of $422, at June and December 10,189 6,358
Inventories ........................................................ 4,722 3,216
Prepaid expenses and other current assets .......................... 4,587 6,374
--------- ---------
Total current assets ............................................ 93,654 87,943
Property and equipment, net .............................................. 10,100 8,222
Other assets ............................................................. 1,521 230
--------- ---------
$ 105,275 $ 96,395
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 6,591 $ 4,725
Accrued expenses ................................................... 4,525 3,710
--------- ---------
Total current liabilities ....................................... 11,116 8,435
--------- ---------
Stockholders' equity:
Preferred Stock: $0.001 par value; 10,000 shares authorized; no
shares issued or outstanding .................................. - -
Common Stock: $0.001 par value; 100,000 shares authorized; 32,848
and 31,871 shares issued and outstanding ...................... 29 28
Additional paid-in capital ......................................... 74,372 68,771
Notes receivable from stockholders ................................. (47) (47)
Retained earnings .................................................. 19,907 19,343
Accumulated other comprehensive loss ............................... (102) (135)
--------- ---------
Total stockholders' equity ...................................... 94,159 87,960
--------- ---------
$ 105,275 $ 96,395
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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MMC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ...................................... $ 17,030 $ 19,323 $ 29,669 $ 35,433
Cost of revenues .............................. $ 5,013 5,667 8,860 10,468
-------- -------- -------- --------
Gross profit ...................... 12,017 13,656 20,809 24,965
-------- -------- -------- --------
Operating expenses:
Research and development ................ $ 7,913 5,256 15,082 9,710
Selling, general and administrative ..... 3,737 2,683 6,949 5,075
-------- -------- -------- --------
Total operating expenses .......... 11,650 7,939 22,031 14,785
Operating income (loss) ....................... 367 5,717 (1,222) 10,180
Interest income, net .................... 1,050 691 2,050 1,345
-------- -------- -------- --------
Income before income taxes .................... 1,417 6,408 828 11,525
Provision for income taxes .................... 453 2,305 264 4,145
-------- -------- -------- --------
Net income .................................... $ 964 $ 4,103 $ 564 $ 7,380
======== ======== ======== ========
Basic income per share ........................ $ 0.03 $ 0.13 $ 0.02 $ 0.24
======== ======== ======== ========
Shares used to compute basic income per share 32,738 30,716 32,472 30,523
======== ======== ======== ========
Diluted income per share ...................... $ 0.03 $ 0.12 $ 0.02 $ 0.22
======== ======== ======== ========
Shares used to compute diluted income per share 35,310 34,587 35,386 34,043
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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MMC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 564 $ 7,380
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 2,358 1,448
Changes in assets and liabilities:
Accounts receivable .................................. (3,831) 9
Inventories .......................................... (1,506) (856)
Prepaid expenses and other current assets ............ 1,787 308
Accounts payable ..................................... 1,866 1,094
Accrued expenses ..................................... 815 (559)
-------- --------
Net cash provided by operating activities ........ 2,053 8,824
-------- --------
Cash flows from investing activities:
Sale of short-term investments ............................. 25,132 3,196
Acquisition of property and equipment ...................... (4,236) (1,814)
Investment in convertible debenture ........................ (1,000) -
Other assets ............................................... (291) (99)
-------- --------
Net cash provided by investing activities ........ 19,605 1,283
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net ................ 5,602 2,175
Principal payments on capital lease obligations ............ - (156)
-------- --------
Net cash provided by financing activities ........ 5,602 2,019
-------- --------
Net increase in cash and cash equivalents ....................... 27,260 12,126
Cash and cash equivalents at beginning of period ................ 13,484 31,452
-------- --------
Cash and cash equivalents at end of period ...................... $ 40,744 $ 43,578
======== ========
Supplemental disclosure:
Cash paid for interest ..................................... $ - $ 21
Cash paid for income taxes ................................. $ 50 $ 4,664
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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MMC NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements and notes
to the condensed consolidated financial statements of MMC Networks, Inc. ("MMC")
are unaudited. In the opinion of management, these statements and notes have
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the financial position, results of
operations and cash flows for MMC for the periods presented. Results for the
interim periods presented are not necessarily indicative of results for the
entire year. The words "we", "us" and "our" used in this report refer to MMC
Networks, Inc.
The accompanying condensed consolidated financial statements and notes
do not include certain information and footnote disclosures normally required
under generally accepted accounting principles. Therefore, these condensed
consolidated financial statements and notes should be read in conjunction with
the audited consolidated financial statements and notes included in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 1999.
NOTE 2 - EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the
periods presented are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income available to common stockholders ........... $ 964 $ 4,103 $ 564 $ 7,380
======= ======= ======= =======
Shares used to compute basic income per share ......... 32,738 30,716 32,472 30,523
Effect of dilutive securities:
Stock options .................................... 2,572 3,871 2,914 3,520
------- ------- ------- -------
Shares used to compute diluted income per share ....... 35,310 34,587 35,386 34,043
======= ======= ======= =======
Basic income per share ................................ $ 0.03 $ 0.13 $ 0.02 $ 0.24
======= ======= ======= =======
Diluted income per share .............................. $ 0.03 $ 0.12 $ 0.02 $ 0.22
======= ======= ======= =======
</TABLE>
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MMC NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - COMPOSITION OF INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(in thousands)
<S> <C> <C>
Inventories:
Work in process ..... $2,951 $1,541
Finished goods ...... 1,771 1,675
------ ------
$4,722 $3,216
====== ======
</TABLE>
NOTE 4 - FINANCING AGREEMENTS AND OTHER COMMITMENTS
The Company maintains a loan agreement with a bank that allows the
Company to borrow up to $10.0 million. Borrowings bear interest at the bank's
prime interest rate, which was 9.5% at June 30, 2000. The agreement requires
that we comply with certain financial covenants. In the event of default, all
outstanding borrowings will accrue interest at a rate of five percentage points
above the rate effective immediately prior to a default. There have been no
borrowings against the loan agreement since its inception in 1998. The loan
agreement expires in May 2001.
During 1999, the Company entered into an agreement with a software
vendor. Under this agreement, the Company committed to pay $3.8 million over 3
years beginning April 1999 in exchange for the use of certain design software.
As of June 30, 2000, $2.4 million remains outstanding under this commitment.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 133,"Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. It requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains and losses be reported either in the statement of operations
or as a component of comprehensive income (loss), depending on the type of
hedging relationship that exists. In July 1999, the FASB issued SFAS 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS 137 deferred the effective date
of SFAS 133 until fiscal years beginning after June 15, 2000. Management does
not believe that the adoption of SFAS 133 will have a material impact on its
reported operations or financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. On June 26,
2000, the SEC issued SAB 101B to provide registrants with additional time to
implement guidance contained in SAB 101. SAB 101B delays the implementation date
of SAB 101 until no later than the Company's fourth fiscal quarter of fiscal
2000. In various areas,
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MMC NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
including revenue recognition, accounting standards and practices continue to
evolve. Additionally, the SEC is preparing to issue interpretative guidance
relating to SAB 101, and the FASB's Emerging Issues Task Force continues to
address revenue related accounting issues. The management of the Company
believes it is in compliance with all of the rules and related guidance as they
currently exist. However, any changes to generally accepted accounting
principles in these areas could impact the Company's future accounting for its
operations.
In March 2000, the Financial Accounting Standard Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation", an interpretation of APB Opinion No. 25 ("APB 25"). FIN 44
clarifies the application of APB 25 for:
a) the definition of "employee" for the purposes of applying APB 25,
b) the criteria for determining whether a plan qualifies as a
non-compensatory plan,
c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and
d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. We believe that the impact of FIN 44 will not have a material effect on
our financial position or results of operations of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with: (1) the
interim condensed consolidated financial statements and the notes included in
Part I, Item 1 of this Quarterly Report on Form 10-Q and (2) the consolidated
financial statements and notes contained in our Annual Report on Form 10-K for
the year ended December 31, 1999.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which reflect our
current views with respect to future events which may impact our results of
operations and financial condition. In this report, the words "anticipate",
"believe", "expect", "intend" and similar expressions identify forward-looking
statements. These forward-looking statements are subject to risks and
uncertainties and other factors, including those described below under the
caption "Factors Affecting Future Results", which could cause our actual future
results to differ materially from historical results or from those described in
the forward-looking statements. We urge readers not to place undue reliance on
these forward-looking statements, which reflect our outlook only as of the date
of this report.
BACKGROUND
MMC Networks, Inc. (the "Company" or "MMC ") is a leading developer and
supplier of Network Processing Platforms, including both Network Processors and
Switch Fabrics, that allow network equipment vendors to more rapidly develop
high-performance, feature-rich, cost-effective products supporting a broad range
of networking functions.
Network Processors are high-performance, software-programmable
processors optimized for networking and communications applications. Switch
Fabrics are high-capacity, software-configurable devices that provide central,
high-speed interconnections among multiple processors or other devices. MMC's
Network Processors and Switch Fabrics form the core silicon "engines" of WAN and
LAN products for both Service Provider and Enterprise networks.
The Company's AnyFlow(TM) family of products includes the MMC nP(TM)
family of Network Processors, the nPX(TM) family of Switch Fabrics, and the nPC
family of Coprocessors and Connectivity Components. MMC Networks also offers and
markets nP Design Services(TM), which include hardware and software design
consulting in addition to training and traditional support services. The Company
believes that network equipment vendors are able to reduce design and
development costs and accelerate product development cycles for high-performance
routers and switches by using the Company's products and services.
The Company's products employ its proprietary nPcore(TM)
network-optimized RISC processor core and its ViX(TM) interconnect architecture.
These enable network equipment vendors to implement high-performance,
value-added features in their switch and router products. MMC Networks'
customers use the Company's Network Processor Platforms to develop and market
multi-gigabit, wire-speed, policy-enabled, Layer 2-7 WAN and LAN switches and
routers; wireless, cable, and dial-up access and aggregation platforms; Web
switching; optical switching; security and firewall devices; Virtual Private
Network (VPN) systems; Voice Over IP (VoIP) switching; ATM switches; and other
communications platforms.
The Company was incorporated in California in September 1992 and
reincorporated in Delaware in October 1997. The Company's principal executive
offices are located at 1144 East Arques Avenue, Sunnyvale, California 94085, and
its telephone number is (408) 731-1600.
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RESULTS OF OPERATIONS
The following table shows certain statement of operations data expressed as a
percentage of our revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ....................... 29.4% 29.3% 29.9% 29.6%
--------- --------- --------- ---------
Gross profit ................... 70.6% 70.7% 70.1% 70.4%
--------- --------- --------- ---------
Operating expenses:
Research and development .......... 46.5% 27.2% 50.8% 27.4%
Selling, general and administrative 21.9% 13.9% 23.4% 14.3%
--------- --------- --------- ---------
Total operating expenses ....... 68.4% 41.1% 74.2% 41.7%
--------- --------- --------- ---------
Operating income (loss) ................ 2.2% 29.6% -4.1% 28.7%
Interest income, net .............. 6.1% 3.5% 6.9% 3.8%
--------- --------- --------- ---------
Income before income taxes ............. 8.3% 33.1% 2.8% 32.5%
Provision for income taxes ............. 2.6% 11.9% 0.9% 11.7%
--------- --------- --------- ---------
Net income ............................. 5.7% 21.2% 1.9% 20.8%
========= ========= ========= =========
</TABLE>
Revenues. Revenues increased during the second quarter of 2000 by $4.4
million in comparison to revenues for the first quarter of 2000 of $12.6
million. Revenues decreased to $17.0 million for the three months ended June 30,
2000 from $19.3 million for the three months ended June 30, 1999. Revenues
decreased to $29.7 million for the six months ended June 30, 2000 from $35.4
million for the same period in 1999.
The decreases in second quarter revenues and first half revenues in 2000
compared to the same periods in 1999 are primarily due to two events. First,
IBM, which accounted for 23% of revenues in the second quarter of 1999,
announced during the third quarter of 1999 that it was closing down most of its
network equipment business and informed MMC that it was ceasing the manufacture
and sale of its network equipment products, which use MMC products. Revenues to
IBM were zero in the first and second quarters of 2000.
Second, Cisco Systems, our largest customer in the six months ended June
30, 1999 at 52% of revenues, decreased its purchases from MMC during the fourth
quarter of 1999 and the first half of 2000, as it terminated a large program and
decreased purchases while it consumed inventory already purchased. Revenues from
Cisco were 45% of total revenues in the fourth quarter of 1999, 35% in the first
quarter of 2000 and 25% in the second quarter of 2000. These revenues from Cisco
exclude revenues from ArrowPoint Communications, which Cisco acquired on June
23, 2000.
Decreases in revenues from IBM and Cisco were partially offset by
increases in revenues from other customers. Revenues from ArrowPoint
Communications increased to 8% of revenues in the first quarter of 2000 and 20%
in the second quarter of 2000, up from under 5% in the fourth quarter of 1999.
Revenues from Nortel Networks increased to 24% of revenues in the first quarter
of 2000 and 23% of revenues in the second quarter of 2000, up from 18% in the
fourth quarter of 1999. Revenues from Fujitsu increased to 11% of revenues in
the first quarter of 2000 and 13% in the second quarter of 2000, up from under
5% in the fourth quarter of 1999.
The Company may experience substantial period-to-period
fluctuations in future operating results due to changes in demand for its
products or due to the continued average sales price erosion that characterizes
the data networking and semiconductor industries.
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Cost of Revenues; Gross Profit. Cost of revenues decreased to $5.0
million for the three months ended June 30, 2000 from $5.7 million for the three
months ended June 30, 1999. Cost of revenues also decreased to $8.9 million for
the first half of 2000 from $10.5 million for the same period in 1999. Decreased
cost of revenues in both periods resulted from decreased unit shipments.
Gross margin was 70.6% for the three months ended June 30, 2000,
compared to 70.7% for the three months ended June 30, 1999. Gross margin for the
six months ended June 30, 2000 was 70.1%, compared to 70.4% for the same period
in 1999. We anticipate that gross margins will remain in the same range during
the remainder of 2000.
Research and Development Expense. Research and development expenses
increased to $7.9 million for the three months ended June 30, 2000 from $5.3
million for the three months ended June 30, 1999. These expenses also increased
to $15.1 million for the six months ended June 30, 2000 from $9.7 million during
the same period in 1999. The increases in both 2000 periods are due primarily to
increased new product development activity. As a percentage of total revenues,
research and development expenses increased to 46.5% during the second quarter
of 2000 from 27.2% during the same period in 1999, increased to 50.8% during the
first half of 2000 from 27.4% in the same period in 1999 due to the continued
increase in research and development activity and the decrease in revenue from
period to period.
In 2000, we expect research and development expenses to continue to
increase in absolute dollars, but to increase at a lower percentage rate than
the expected rate of increase in revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3.7 million for the three months ended
June 30, 2000 from $2.7 million for the three months ended June 30, 1999. These
expenses also increased to $6.9 million for the six months ended June 30, 2000
from $5.1 million during the same period in 1999. The increases in both 2000
periods are due to increased headcount in selling, general and administrative
functions and increased sales support functions.
As a percentage of total revenues, selling, general and administrative
expenses increased to 21.9% for the three months ended June 30, 2000 from 13.9%
for the three months ended June 30, 1999. They also increased to 23.4% during
the first half of 2000 from 14.3% in the same period in 1999. The increases in
both 2000 periods are due to increased headcount in selling, general and
administrative functions and increased sales support functions, and the decrease
in revenue from period to period.
In 2000, we expect selling, general and administrative expenses to
continue to increase in absolute dollars, but to increase at a lower percentage
rate than the expected rate of increase in revenues.
Interest income, net. Interest income, net increased to $1.1 million for
the three months ended June 30, 2000 from $691,000 for the three months ended
June 30, 1999. Interest income, net increased to $2.1 million for the six months
ended June 30, 2000 from $1.3 million during the same period in 1999. Interest
income, net consists of interest income, which is interest earned on average
cash, cash equivalents and short-term investments, offset by interest expense.
Interest income, net consisted primarily of interest income for the periods
presented. The increases in interest income, net are due to increased cash and
investment balances provided by cash flow from operations and the exercise of
stock options.
Provision for Income Taxes. The provision for income taxes decreased to
$453,000 for the three months ended June 30, 2000 from $2.3 million for the
three months ended June 30, 1999, reflecting effective tax rates of 32% and 36%,
respectively. The provision for income taxes decreased to $264,000 for the first
half of 2000 from $4.1 million during the same period in 1999. The decrease in
the provision for income taxes during both periods is due to the decrease in
income before taxes and the decrease in the effective tax rate. The decrease in
the effective tax rate is due to increased research and development tax credits
and an anticipated increase in operations in Israel, where we have qualified for
certain low rates of taxation. The Company expects its effective tax rate to
remain at about 32% during 2000.
11
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had cash, cash equivalents and
short-term investments of $74.2 million compared to $72.0 million at December
31, 1999, an increase of $2.2 million. As of June 30, 2000, the Company had cash
and cash equivalents of $40.7 million, up from $13.5 million at December 31,
1999. This $27.3 million increase in cash and cash equivalents was due to cash
flows from operating activities of $2.1 million, $19.6 million in investing
activities primarily from the sale of short-term investments and $5.6 million in
financing activities from the exercise of stock options. Cash was used to
acquire property and equipment of $4.2 million during the first half of 2000.
During April 2000, we invested $1.0 million in a software development company in
exchange for a debenture, convertible into common stock of the company.
The Company maintains a $10.0 million credit facility with a bank, which
expires in May 2001. Borrowings bear interest at the bank's prime rate. Our
agreement with the bank requires compliance with certain financial covenants. In
the event of default, all outstanding borrowings will accrue interest at a rate
of five percentage points above the rate effective immediately prior to the
default. The credit facility has not been used since its inception in 1998.
We anticipate that a significant portion of future capital expenditures
will be devoted to investment in design tool software and computer equipment on
which the design software tools run.
We believe that our existing cash balances together with the borrowing
capacity under our credit facility and cash flow from future operations will be
sufficient to meet our capital requirements through the next twelve months. It
is possible that the Company could be required, or could elect, to seek to raise
additional capital before such time. This is a forward-looking statement, and
the actual period of time for which our resources will be sufficient will depend
on many factors, including:
- the rate of revenue growth, if any
- the timing and extent of spending to support product development
efforts
- the expansion of sales and marketing efforts
- the timing and size of business or technology acquisitions
- the timing of introductions of new products and enhancements to
existing products
- market acceptance of the Company's products
There can be no assurance that additional equity or debt financing, if
required, will be available on acceptable terms or at all.
FACTORS AFFECTING FUTURE RESULTS
As described by the following factors, past financial performance should
not be considered a reliable indicator of future performance, and investors
should not use historical trends to anticipate results or trends in future
periods.
FLUCTUATIONS IN OPERATING RESULTS. The Company's revenues and expenses
have fluctuated significantly in the past and may continue to do so in the
future. For example, revenues in the fourth quarter of 1999 fell to $11.6
million from $23.1 million in the previous quarter, resulting in a decrease in
net income from $4.9 million to a loss of $427,000. Two events caused this
decrease. First, IBM, one of our major customers, announced it was closing down
most of its network equipment business and informed MMC that it was ceasing the
manufacture and sale of its network equipment products that use MMC products.
Second, Cisco, our largest customer in the first three quarters of 1999,
decreased its
12
<PAGE> 13
purchases from MMC in the fourth quarter of 1999 and the first half of 2000 as
it terminated a large program and decreased purchases while it consumed
inventory already purchased.
Such fluctuations in operating results can be caused by a variety of
factors, many of which are outside our control. Factors that could affect our
future operating results include:
- the loss of or a reduction in sales to major customers
- changes in demand for the network equipment products of our
customers
- variations, delays or cancellations of orders and/or shipments
of our products
- reduction in the selling prices of our products
- changes in the mix of products being sold
- fluctuations in our manufacturing yields and other potential
problems or delays in the fabrication, assembly, testing or
delivery of our products
- failure to manufacture and ship our products on time
- increases in the costs of products from our suppliers
- availability of semiconductor foundry capacity
- external events causing disruption of fabrication activities
- fluctuations in product life cycles
- delays in introducing new products
- introduction of new products by our competitors
- variances in the timing and amount of non-recurring engineering
funding and operating expenses
- intellectual property disputes
A large portion of our operating expenses, including salaries, rent and
software time license expenses, is fixed and difficult to reduce or change on
short notice. Accordingly, if our total revenues do not meet our expectations,
we may not be able to adjust our expenses quickly enough to compensate for the
shortfall in revenues. This situation could have a negative effect on our
business, financial condition and results of operations.
CUSTOMER CONCENTRATION. A relatively small number of major network
equipment vendors dominate the network equipment market. Accordingly, a small
number of customers has accounted for a large portion of our revenues to date.
We expect the Company to continue to be dependent on a small number of
customers for the majority of its sales. For example, in the second quarter of
2000 Cisco Systems accounted for 25%, ArrowPoint Communications (which Cisco
acquired on June 23, 2000) accounted for 20% and Nortel Networks accounted for
23% of our revenues. This subjects the Company and its financial results to
particular risks, including the loss of or reduction in sales to these
customers, as occurred in the fourth quarter of 1999 when IBM informed the
Company that it was ceasing the manufacture and sale of its network equipment
products that use our products.
If MMC loses other significant customers or if sales to these customers
decrease, future financial results would suffer. It is important to note that
our ability to maintain or increase sales to key customers and/or attract new
significant customers is subject to a variety of factors, including:
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<PAGE> 14
- our network equipment vendor customers may stop incorporating
our products into their own products with limited notice to us
and suffer little or no penalty
- the introduction of one of our customer's significant new
products may be late or less successful in the market than
planned
- a significant customer's product line using our products may
rapidly decline or be phased out
- our significant customers may not incorporate our Network
Processors in their future product designs
- design wins with customers may not result in significant sales
to such customers
- our agreements with our customers typically do not require them
to purchase a minimum amount of our products
- many of our customers have pre-existing relationships with our
current or potential competitors that may cause them to switch
from our products to competing products
- we may not be able to successfully develop relationships with
additional significant network equipment vendors
- our relationship with some of our larger customers may deter
other potential customers (who compete with these customers)
from buying our products
Any one of the factors above could have a material adverse effect on our
business, financial condition and results of operation.
DEPENDENCE UPON DEVELOPMENT OF THE MARKET FOR NETWORK PROCESSORS. Many
of the Company's current and potential customers have substantial technological
capabilities and financial resources. They traditionally use these resources to
internally develop the Application-Specific Integrated Circuit ("ASIC")
components and program the general purpose processors utilized in their
products.
The Company's future prospects are dependent upon our customers
acceptance of network processors as an alternative to ASIC components and
general-purpose processors. Future prospects are also dependent upon acceptance
of third party sourcing for network processors as an alternative to in-house
development. Network equipment vendors may in the future continue to use
internally-developed ASIC components and general-purpose processors. They may
also decide to develop or acquire components, technologies or network processors
that are similar to, or that may be substituted for, the Company's products.
The Company must anticipate market trends and the price, performance and
functionality requirements of its customers. It must also successfully develop
and manufacture products that meet these requirements. The products must be
available to customers on a timely basis and at competitive prices.
If the Company's network equipment vendor customers fail to accept
network processors as an alternative, if they develop or acquire the technology
to develop such components internally rather than purchase the Company's
products, or if the Company is otherwise unable to develop strong relationships
with network equipment vendors, the Company's business, financial condition and
results of operations would be materially and adversely affected.
LIMITED OPERATING HISTORY AS A PUBLIC COMPANY; NO ASSURANCE OF FUTURE
Profitability. Although the Company experienced significant revenue growth in
recent years and achieved profitability in each of the last four years through
December 31, 1999, these results do not presume profitability and should not be
considered indicative of future performance. For example, we recorded a net loss
of $400,000 during the three month period ended March 31, 2000. There also is no
assurance that the Company will be profitable in any future period.
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<PAGE> 15
Due to anticipated increases in the Company's operating expenses, the
Company's operating results will be adversely affected if the Company's revenues
do not continue to increase. The sales cycle for the Company's products can
range from three to six months or more. There is also an additional nine to 24
months or more before a network equipment vendor customer commences volume
production of equipment that incorporates the Company's products.
As a result, there may be a significant delay between an increase in
research and development and sales and marketing expenses and the generation of
higher revenues, if any, from such expenditures. To remain profitable, the
Company must, among other things:
- successfully increase the scope of its operations
- respond to competitive developments
- continue to attract, retain and motivate qualified personnel
- continue to commercialize products incorporating innovative
technologies.
There can be no assurance that the Company will be successful in doing so.
EROSION OF AVERAGE SELLING PRICES. The data networking and semiconductor
industries have experienced rapid erosion of average selling prices ("ASPs") due
to a number of factors, including rapid technological change, price/performance
enhancements and product obsolescence. The Company may experience substantial
period-to-period fluctuations in future operating results due to continued ASP
erosion.
The Company anticipates that ASPs will decrease in the future in
response to product introductions by competitors or new product introductions by
MMC. Other factors impacting ASPs also include price pressures from significant
customers. In particular, the market for Ethernet switching and routing
components has experienced, and is expected to continue to experience,
significant ASP erosion.
Therefore, the Company must continue to develop and introduce, on a
timely basis, new products that incorporate features that can be sold at higher
ASPs or provide a reduced cost per function. Failure to achieve any or all of
the factors that have been mentioned could cause the Company's revenues and
gross margins to decline, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The data networking
and semiconductor industries are characterized by rapidly changing technology,
frequent product introductions and evolving industry standards. The technical
innovations required for MMC to remain competitive must be completed before
developments in networking technologies or standards make them obsolete. These
innovations must also be compelling enough to make network equipment vendors
want to use them over other technologies. Accordingly, our future performance
depends on a number of factors, including our ability to:
- properly identify target markets
- identify emerging technological trends in our target markets
- develop and maintain competitive products
- enhance our products by adding innovative features that
differentiate MMC products from competitors' products
- bring products to market on a timely basis at competitive prices
- respond effectively to new technological changes or new product
announcements by others
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<PAGE> 16
It is possible that our design and introduction schedules for future
products and additions and enhancements to our existing products will not be
met. It is possible that these products will not achieve market acceptance or
that we will not be able to sell these products at prices that are favorable to
us. We must design new products and sometimes redesign existing products to be
manufactured on newer wafer process technologies that provide smaller circuit
dimensions. It is possible that either (1) the suppliers of these new
manufacturing technologies will not deliver them to us or our vendors on
schedule or (2) we will not be able to complete our designs on the new processes
on schedule. Our success will also depend on the ability of our customers to
develop new products and enhance existing products within our market segment and
to successfully introduce and promote those products.
To keep pace with the rapid technological changes, we must incur
substantial research and development costs before we can determine the
likelihood that the technology for a product is sound and that our network
equipment vendors will accept the product. It is possible that revenues from
future products or product enhancements will not be sufficient to recover the
development costs associated with those products or enhancements. It is possible
that we may not be able to obtain additional financing necessary to fund future
development efforts. Our failure to adequately address any of the factors above
could have a negative impact on our business, financial condition and results of
operations.
DEPENDENCE ON INDEPENDENT MANUFACTURERS. We depend on independent
foundries to manufacture all of our products. We purchase both (1) fully
assembled and tested products which we can immediately resell to our customers
and (2) finished silicon wafers which we then consign to third party
subcontractors who perform assembly and test functions. Because we rely on
independent foundries and third party subcontractors, we face several
significant risks including:
- a lack of committed manufacturing, assembly or test capacity
- limited control over delivery schedules, quality assurance and
control, manufacturing yields and production costs
- the unavailability of, or potential delays in, obtaining access
to key process technologies
Although we work closely with our suppliers to minimize the likelihood of
reduced manufacturing yields, in the past our suppliers have occasionally
experienced lower than anticipated manufacturing yields. This often occurs
during the production of new products or the installation and start-up of new
wafer process technologies that use smaller circuit dimensions.
We do not have long-term volume purchase agreements or a guaranteed
level of production capacity with any of our suppliers. We depend on our
suppliers to deliver sufficient quantities of finished product to us in a timely
manner. Since we place our orders on a purchase order basis, these suppliers can
allocate, and in the past have allocated, capacity to the production of other
companies' products while reducing deliveries to us on short notice. None of our
products is currently manufactured by more than one supplier.
In order to meet our customer demand, currently we must place most
orders approximately 10 to 13 weeks in advance of expected delivery. Some orders
require that orders be placed up to 18 weeks in advance of expected delivery. If
capacity becomes less available in the future, we may be required to place
orders earlier than 10 to 18 weeks in advance of expected delivery, making it
more difficult to meet customer demand. Any sudden increase in customer demand
that we did not anticipate in advance could result in our inability to deliver
product on a timely basis. This inability to deliver product may reduce our
product revenues or increase our cost of revenues and negatively impact our
business, financial condition and results of operations.
In addition, we must place orders based on forecast demand to ensure
enough lead time to be able to meet anticipated customer orders. Any sudden
decrease in customer demand could result in excess inventory that could reduce
our profit margins and have a negative effect on our business, financial
condition and results of operations.
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Processes used to manufacture our products are complex, customized to
our specification and can only be performed by a limited number of manufacturing
facilities. If our current manufacturing suppliers were unable to provide us
with adequate manufacturing capacity, we would have to identify and qualify one
or more substitute suppliers for a substantial majority of our products. Our
manufacturers may experience unanticipated events, like the September 1999
Taiwan earthquake, that could inhibit their abilities to provide us with
adequate manufacturing capacity on a timely basis, or at all. All of the
Company's manufacturing subcontractors are located in countries outside the
United States. Disruptions in the political environment could cause these
suppliers to decrease or stop their supply of products to the Company.
Introducing new products or transferring existing products to a new third party
manufacturer would require significant development time to adapt our designs to
their manufacturing processes and could cause product shipment delays. In
addition, the costs associated with manufacturing our products may increase if
we are required to use a new third party manufacturer. If we fail to satisfy our
manufacturing requirements, our business would be materially harmed.
COMPETITION. The data networking and semiconductor industries are
intensely competitive and are characterized by constant technological change,
rapid rates of product obsolescence and price erosion. The Company's Network
Processors and Switch Fabrics compete now or are expected to compete in the
future with current or future products from companies such as Broadcom,
Conexant, Galileo Technology, IBM, Intel, Lucent Technologies, Motorola,
PMC-Sierra, Texas Instruments and Vitesse Semiconductors (which acquired SiTera
on May 31, 2000), as well as future start-up companies. Additional existing
domestic and international semiconductor suppliers could also enter the market
in the future. The Company could also face competition from suppliers of
products based on new or emerging technologies. In addition, many of the
Company's existing and potential customers, including Cisco, internally develop
ASICs, general purpose processors, Network Processors, or other devices which
attempt to perform some or all of the functions performed by the Company's
products.
Many of our current and prospective competitors offer broader product
lines and have significantly greater financial, technical, manufacturing and
marketing resources than we do. To the extent we fail to overcome these
challenges, there would be a negative effect on our business and operating
results.
DEPENDENCE ON GROWTH IN DEMAND FOR NETWORKING EQUIPMENT. The Company's
future success is in large measure dependent on continued growth in the market
for networking equipment, in particular the market for mid- to high-end switches
and routers which are manufactured and sold by the Company's customers. The
market for these products has in the past and may in the future fluctuate
significantly based upon numerous factors, including:
- the lack of industry standards
- adoption of alternative technologies
- capital spending levels
- general economic conditions
There can be no assurance of the rate, or extent to which, the
networking equipment market will grow. The Company may experience a decline in
demand for its products. Any decrease in the growth of the networking equipment
market or decline in demand for the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We pay suppliers for expenses incurred by our subsidies in Israel and
the United Kingdom in local currency and also have a supplier contract that
requires changes based on currency fluctuations. Therefore, the Company is
subject to foreign currency rate exposure. Foreign currency rates fluctuate
17
<PAGE> 18
frequently and there is always a possibility that fluctuations could have a
material impact on the Company's income or cash flows.
As of June 30, 2000, the Company held a total of $69.6 million in
marketable securities. These securities consisted primarily of commercial paper
and securities issued or guaranteed by the U.S. government. These securities,
like all fixed income instruments, are subject to interest rate risk and will
decline in value if market interest rates increase. The Company has the ability
to hold its fixed income investments until maturity and therefore, the Company
would not expect to recognize a decline in the fair value of the portfolio and
the related adverse impact on income or cash flows.
The Company currently does not use derivative financial instruments in
its investment portfolio. The Company currently has no fixed-rate obligations
and holds no equity securities. Thus the Company does not face risk of material
adverse impact from market rate changes from these sources.
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<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 31, 2000, the
stockholders voted to (1) elect two Class III directors to serve three-year
terms and (2) ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants for MMC for the fiscal year ending December 31, 2000.
(1) The Class III directors were elected with the following vote:
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST
------- --- -------
<S> <C> <C>
John G. Adler 28,024,698 15,810
Irwin Federman 24,970,205 3,070,303
</TABLE>
The terms of office of the following directors continued after the
meeting: Douglas C. Spreng, Geoffrey Y. Yang, Andrew S. Rappaport and
Amos Wilnai
(2) The appointment of PricewaterhouseCoopers LLP as independent
accountants for the fiscal year ended December 31, 2000 was
ratified with the following vote:
<TABLE>
<CAPTION>
For Against Abstentions
--- ------- -----------
<S> <C> <C>
28,026,455 7,580 6,473
</TABLE>
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
27.1 Financial Data Schedule as of June 30, 2000 and
for the six months then ended.
</TABLE>
Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended June 30,
2000.
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SIGNATURES
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.
Dated: July 21, 2000 MMC NETWORKS, INC.
By: /s/ DOUGLAS C. SPRENG
------------------------------------------
Douglas C. Spreng
President and
Chief Executive Officer
By: /s/ RICHARD C. YONKER
------------------------------------------
Richard C. Yonker
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
27.1 Financial Data Schedule as of June 30, 2000 and
for the six months then ended.
</TABLE>
