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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 0-22369
RAMP NETWORKS, INC. (Exact name of Registrant as specified in its charter)
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3100 De La Cruz Boulevard
Santa Clara, CA 95054
(Address of principal executive offices)
(408) 988-5353
(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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of October 31, 2000, there were 21,701,739 shares of the Registrant's Common Stock outstanding.
Ramp Networks, Inc.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Interim Condensed Consolidated Financial Statements (unaudited): |
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| Condensed Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 |
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Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2000 and 1999 |
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Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 |
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| Notes to Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| PART II. OTHER INFORMATION |
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| Item 1. Legal Proceedings |
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| Item 2. Changes in Securities and Use of Proceeds |
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| Item 3. Defaults Upon Senior Securities |
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| Item 4. Submission of Matters to a Vote of Security Holders |
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| Item 5. Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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| Signature |
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PART I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 1. Financial Statements
Ramp Networks, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
September 30, December 31,
2000 1999
(Unaudited)
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents........................ $7,807 $12,530
Marketable securities............................ 7,494 27,590
Accounts receivable, net......................... 5,076 4,523
Inventory, net................................... 8,981 2,273
Prepaid expenses and other current assets........ 1,106 900
------------ ------------
Total current assets............................ 30,464 47,816
Property and equipment, net........................ 3,162 1,724
Other assets....................................... 458 375
------------ ------------
Total assets.................................... $34,084 $49,915
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations..... $120 $101
Current portion of long-term debt................ 2,395 2,233
Accounts payable................................. 5,433 2,634
Accrued liabilities.............................. 6,458 3,440
Deferred revenue................................. 5,062 --
------------ ------------
Total current liabilities....................... 19,468 8,408
Capital lease obligations, less
current portion................................... 84 178
Long-term debt, less current portion............... 1,628 3,449
------------ ------------
Total liabilities............................... 21,180 12,035
------------ ------------
Stockholders' equity:
Preferred stock - 5,000 authorized, $.001
par value, no shares issued at September
30, 2000 and December 31, 1999................. -- --
Common stock - 100,000 authorized, $.001
par value, issued and outstanding -
21,702 and 21,097 at September 30, 2000 and
December 31, 1999, respectively ............... 22 21
Additional paid-in capital....................... 88,621 86,689
Deferred stock compensation...................... (1,368) (1,723)
Accumulated deficit.............................. (74,371) (47,107)
------------ ------------
Total stockholders' equity...................... 12,904 37,880
------------ ------------
Total liabilities and stockholders' equity...... $34,084 $49,915
============ ============
See accompanying notes to condensed consolidated financial statements.
Ramp Networks, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
Restated,
See Note 2
--------- --------- --------- ---------
Revenue................................ $2,971 $5,002 $11,478 $13,418
Cost of revenue........................ 6,258 2,950 12,280 8,333
--------- --------- --------- ---------
Gross margin........................... (3,287) 2,052 (802) 5,085
--------- --------- --------- ---------
Operating expenses:
Research and development
(excluding amortization of
deferred stock compensation of
$34 and $63 for the three months
ended September 30, 2000 and 1999,
respectively, and $169 and $291
for the nine months ended September
30, 2000 and 1999, respectively.... 1,964 1,225 5,716 3,568
Sales and marketing
(excluding amortization of
deferred stock compensation of
$21 and $50 for the three months
ended September 30, 2000 and 1999,
respectively, and $105 and $236
for the nine months ended September
30, 2000 and 1999, respectively.... 5,785 2,605 15,297 6,877
General and administrative
(excluding amortization of
deferred stock compensation of
$17 and $28 for the three months
ended September 30, 2000 and 1999,
respectively, and $81 and $131
for the nine months ended September
30, 2000 and 1999, respectively.... 1,272 803 3,676 1,983
Legal and severance cost............. -- 1,169 -- 1,169
Amortization of deferred
compensation...................... 72 141 355 658
Restructuring charge................. 541 -- 541 --
--------- --------- --------- ---------
Total operating expenses............... 9,634 5,943 25,585 14,255
--------- --------- --------- ---------
Loss from operations................... (12,921) (3,891) (26,387) (9,170)
Interest expense....................... (187) (255) (644) (485)
Other income (expense)................. 179 526 1,074 585
--------- --------- --------- ---------
Loss before cumulative effect of
change in accounting policy.......... (12,929) (3,620) (25,957) (9,070)
Cumulative effect of change in
accounting policy.................... -- -- (1,307) --
--------- --------- --------- ---------
Net loss............................... ($12,929) ($3,620) ($27,264) ($9,070)
========= ========= ========= =========
Basic and diluted loss per common
share before cumulative effect
of change in accounting policy........ ($0.60) ($0.17) ($1.21) ($0.89)
========= ========= ========= =========
Basic and diluted net loss per
common share.......................... ($0.60) ($0.17) ($1.27) ($0.89)
========= ========= ========= =========
Shares used in computing basic and
diluted net loss per common share..... 21,664 20,910 21,435 10,210
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
Ramp Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2000 1999
Restated,
See Note 2
---------- ----------
Operating activities:
Net loss............................................. ($27,264) ($9,070)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation....................................... 897 480
Gain on disposal of fixed assets................... -- (15)
Noncash compensation expense....................... 435 856
Noncash technology acquisition..................... -- 573
Changes in operating assets and liabilities:
Accounts receivable.............................. (553) (2,749)
Inventory........................................ (6,708) (1,023)
Prepaid expenses and other assets................ (289) (535)
Accounts payable................................. 2,799 (138)
Accrued liabilities.............................. 3,676 1,160
Deferred revenues................................ 5,062 --
---------- ----------
Net cash used in operating activities.......... (21,945) (10,461)
---------- ----------
Investing activities:
Purchase of property and equipment................... (2,335) (549)
Proceeds from sale of assets......................... -- 47
Maturities of short term investments................. 44,861 --
Purchases of short term investments.................. (24,765) (27,264)
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Net cash provided (used) by investing
activities................................... 17,761 (27,766)
---------- ----------
Financing activities:
Principal payments on capital lease obligations...... (75) (92)
Borrowings under long term debt agreements........... -- 6,305
Repayments of long term debt......................... (1,659) (610)
Net proceeds from issuance of common stock........... 1,195 44,811
---------- ----------
Net cash (used) provided by financing
activities................................... (539) 50,414
---------- ----------
Net (decrease) increase in cash and cash equivalents... (4,723) 12,187
Cash and cash equivalents, beginning of period......... 12,530 3,764
---------- ----------
Cash and cash equivalents, end of period............... $7,807 $15,951
========== ==========
See accompanying notes to condensed consolidated financial statements.
Ramp Networks, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Ramp Networks, Inc. ("Ramp"), formerly Trancell Systems, Inc., a California corporation, was incorporated on February 17, 1994, and re-incorporated in Delaware in June 1999. Ramp develops, designs, manufactures and markets multi-user Internet access devices designed for small business and home use. Ramp sells its products through distributors and value added resellers and to original equipment manufacturers located in the United States and abroad.
2. Summary of Significant Accounting Policies:
Basis of Presentation
The condensed consolidated financial statements have been prepared by Ramp, pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of Ramp Networks, Inc., and its wholly-owned subsidiary (collectively the "Company"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, and adjustments to reflect the restatement of amounts for changes in revenue recognition accounting as noted below which are necessary for a fair presentation of the financial position at September 30, 2000, and the operating results and cash flows for the three months and nine months ended September 30, 2000 and 1999.
The condensed consolidated balance sheet at December 31, 1999 is from audited financial statements as of that date. These financial statements and notes should be read in conjunction with the Company's audited consolidated financial statements and notes thereto, included in the Company's Form 10-K filed with the Securities and Exchange Commission.
The results of operations for the three months and nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2000.
Since inception, we have experienced negative cash flow from operations and we expect to continue to experience negative cash flow from operations for the foreseeable future. Therefore, we have relied primarily on issuances of equity securities to fund our operations to date. We currently anticipate that our existing cash balances and available lines will not be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 months and we will need to raise additional funds prior to the expiration of such period. We cannot be certain that additional financing, through the issuance of equity securities or otherwise, will be available to us on favorable terms, or at all. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage of market opportunities, develop new products or otherwise respond to competitive pressures which could adversely affect our ability to achieve and sustain positive cash flow and profitability in the future. The Company is currently in the process of exploring alternative financing sources to fund future operations. The uncertainty about our ability to raise additional funds causes substantial doubt about our ability to continue as a going concern. The accompanying financial statements are prepared on the basis that the Company will continue as a going concern and do not reflect any adjustments that might be needed to reflect the ultimate realization of asset values should this not be the case.
Revenue Recognition, Cumulative Effect of Change in Accounting and Restatement
Ramp's revenue consists principally of amounts earned from the sale of manufactured products. Historically, revenue has been recognized by the Company upon transfer of title and risks of ownership, which generally occurred upon product shipment. Certain agreements with distributors and retailers provide for rights of return, co-op advertising, price protection, and stock rotation rights. Under the guidelines and requirements of Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists", the Company concluded that it had sufficient history and experience to quantify reserves required for these provisions. Accordingly, Ramp provided an allowance for returns and price adjustments and provided a warranty reserve at the point of revenue recognition. These reserves have been adjusted periodically based upon historical experience and anticipated future returns, price adjustments, and warranty costs.
In the first quarter of 2000, the Company launched a new sales and marketing campaign that involved sales of new technology and products to both existing and a variety of new types of customers, including new customers serving the relatively new Digital Subscriber Loop (DSL) market. The DSL market experienced significant fluctuations in supply and demand in 2000. As a result, current customers and potential customers experienced delays in the provisioning of this marketplace which delayed demand for the Company's products. During 2000, the Company has experienced changing business conditions and demand for product from its distributors. Specifically, the Company experienced lower demand for both new and existing products and a trend of increasing past due accounts receivable from its current distributors as well as from some of the Company's new customers. The Company has now decided that this increase in past due accounts receivable from distributors was a result of the distributors not paying the Company until product was ultimately "sold through" to the customer. Additionally, certain new customers returned a significant portion of previously sold product in amounts greater than had been estimated by the Company. In 2000, the Company continued to apply revenue recognition accounting policies in accordance with past practices. Revenue recognition was based on historical experience with long-term customer payment patterns and returns and conventional industry practices. In the third quarter of 2000, the Company reassessed its receivable collection history and product returns history with its major distributors as well as new customers, based upon the current market demand for the Company's products. As a result of this reassessment, the Company determined that the negative trends in product sales demand and delayed collection of receivable amounts was not a temporary trend. These significant changes in circumstances have necessitated a change in accounting policies for its current sales activity. The Company has decided to restate earlier quarters so that the accounting for revenue is consistent for all interim periods in 2000.
The Company determined that given the current market, a more preferable method of revenue recognition would be to defer the recognition of revenue. Under this new method, the Company will now record revenue on product shipped to distributors when the product is ultimately "sold through" to the customer. Additionally, the Company will now defer revenues for all other customers where collection and returns history is not proven until such activity reflects the "sell through" of products by Value Added Resellers ("VAR") and Managed Service Providers ("MSP").
The Company has changed its revenue recognition policy retroactive to January 1, 2000. The result of the change in the revenue recognition policy was an increase in net loss of $1.3 million and an increase in deferred revenues. This amount represents the net amount of gross margin on shipments previously recorded for product shipped to the distributors, but not "sold through" to customers, as of January 1, 2000. This amount is included as a cumulative effect of change in accounting policy in the accompanying financial statements for the nine months ended September 30, 2000. Additionally, the Company has restated amounts previously recorded in its Forms 10-Q for the quarterly periods ended March 31, 2000 and June 30, 2000 to reflect the changes in the revised revenue recognition policy and to properly account for certain third quarter 2000 returns of product that had previously been recognized as revenue under the prior revenue recognition policy.
The impact on the Company's Statements of Operations and Balance Sheets for the change in the Company's revenue recognition policy and the restatement of certain third quarter returns is summarized as follows (in thousands except per share amounts):
Three Months Ended Three Months Ended Six Months Ended
March 31, 2000 June 30, 2000 June 30, 2000
----------------------- ----------------------- ----------------------
As Reported As Amended As Reported As Amended As Reported As Amended
----------- ----------- ----------- ----------- ----------- ----------
Statement of Operations:
Revenue............................. $5,583 $3,531 $5,765 $4,976 $11,348 $8,507
Cumulative accounting change........ -- (1,307) -- -- -- (1,307)
Net loss............................ (5,530) (7,501) (7,068) (6,834) (12,598) (14,335)
Net loss per share.................. ($0.26) ($0.35) ($0.33) ($0.32) ($0.59) ($0.67)
Balance Sheet:
Accounts receivable, net............ $6,100 $6,372 $9,037 $10,232 $9,037 $10,232
Inventory........................... 3,396 6,367 3,937 7,179 3,937 7,179
Deferred revenue.................... -- 5,214 1,350 7,524 1,350 7,524
The restatement of items related to revenues is summarized into the following categories for the periods presented (in thousands):
Three Three Six
Months Months Months
Ended Ended Ended
March 31, June 30, June 30,
2000 2000 2000
----------- ----------- -----------
Revenues, as reported................. $5,583 $5,765 $11,348
Summary of Adjustments:
(1) Adjustments to reflect the change
to a preferable revenue
recognition policy
related to distributors........... (1,092) 938 (154)
(2) Revision of revenue recognition
policy related to new customers... (960) (1,727) (2,687)
----------- ----------- -----------
Revenues, as restated................. $3,531 $4,976 $8,507
=========== =========== ===========
At September 30, 2000 the Company has recorded Deferred Revenue of $5.1 million. The deferred revenue represents shipments of product to customers where title has passed and the Company has invoiced the customer. However, to the extent that product is returned to the Company or credits are approved, this deferred revenue will not result in revenue to the Company. As stated, this deferred revenue will result in revenue when sold through by the distributors or to the extent VAR's and MSP's pay on their account based on sales to their customers.
The SEC has issued SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 and related interpretations summarize the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. The Company believes that its revised accounting policy complies with the provisions of SAB No. 101.
Use of Estimates in Preparation of Condensed Consolidated Financial Statements
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Comprehensive Loss
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which Ramp adopted beginning on January 1, 1998. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of SFAS No. 130 is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with shareholders ("comprehensive loss"). Comprehensive loss is the total of net loss and all other non-owner changes in equity. For the three and nine month periods ended September 30, 2000 and 1999, the Company's comprehensive loss was equal to its net loss.
Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average number of shares of common stock outstanding. The Company issued 3,853,000 shares of common stock and converted all of its outstanding redeemable convertible preferred stock to common stock on June 22, 1999, the date of the Company's initial public offering. Additionally, in July 1999, the underwriters of the initial public offering exercised their over-allotment option to purchase 600,000 shares of the Company's common stock.
Basic and diluted net loss per common share are the same in the accompanying condensed consolidated statements of operations since potential common shares from conversion of preferred stock and warrants, prior to their conversion to common stock, stock options and shares subject to repurchase are anti-dilutive for computing diluted net loss per common share. The Company evaluated the requirements of the Securities and Exchange Commission (SAB) No. 98 and concluded that there are no nominal issuances of common stock or potential common stock which would be required to be shown as outstanding for all periods as outlined in SAB No. 98.
Segment and Significant Customer Reporting
During 1998, Ramp adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires a new basis of determining reportable business segments, i.e., the management approach. This approach requires that business segment information used by management to assess performance and manage company resources be the source for information disclosure.
On this basis, Ramp is organized and operates as one business segment, the design, development, manufacture, and marketing of multi-user Internet access devices designed for small business and home use. The Company's long-lived assets are primarily located in the United States. Revenue by region as a percentage of total revenue is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
Restated,
See Note 2
----------- ----------- ----------- -----------
North America......................... 92% 85% 73% 84%
Pacific Rim........................... 2% 15% 19% 11%
Europe................................ 6% 0% 8% 5%
----------- ----------- ----------- -----------
Total revenue...................... 100% 100% 100% 100%
=========== =========== =========== ===========
The Company's customers representing 10% or more of total revenues were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
Restated,
See Note 2
----------- ----------- ----------- -----------
Customer A............................ 38% 17% 31% 26%
Customer B............................ 16% 9% 19% 15%
Customer C............................ 0% 0% 15% 0%
Accounts receivable as of September 30, 2000 from the major customers highlighted above were $3.0 million.
Accounting For Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires companies to record derivative financial instruments on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management does not believe this Statement will have a material impact on the financial condition or results of the operations, as the Company does not currently hold any derivative instruments and does not engage in hedging activities.
Accounting for Certain Transactions Involving Stock Compensation
In March 2000, the FASB issued Financial Standards Board Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44 addresses the application of APB No. 25 to clarify, among other issues, (i) the definition of employee for purposes of applying APB No. 25, (ii) the criteria for determining whether a plan qualifies as a noncompensatory plan, (iii) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (iv) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000. The Company has adopted FIN 44 and adoption did not have a material effect on its financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
3. Inventory
Inventories, net of reserves, consisted of the following (in thousands):
September 30, December 31,
2000 1999
----------- -----------
Raw materials........................... $588 $699
Finished goods, including $2.7
million of inventory related to
deferred revenue as of
September 30, 2000.................... 8,393 1,574
----------- -----------
Total inventory................... $8,981 $2,273
=========== ===========
During the three month period ended September 30, 2000, the Company recorded inventory provisions of $1.5 million. These charges were the result of the Company assessing its current inventory levels and determining that such amounts could not be fully realized. These charges are included in cost of sales in the accompanying financial statements. Additionally, the Company has accrued and expensed $ 2.2 million as of September 30, 2000, as a best estimate of the provisions for losses due to cancellation of future commitments to contract manufacturers of inventory orders that are no longer required. This amount is included in cost of sales and accrued liabilities in the accompanying financial statements.
4. Restructuring Charge
Results of Operations for the three and nine months ended September 30, 2000 include $0.5 million in restructuring charges resulting from the 35 employee decrease, a 21% reduction, in workforce implemented by the Company in September 2000. The reduction in workforce was comprised of sales and support staff. Additionally, the Company closed certain field offices and disposed certain assets that were no longer useful. Substantially all of the restructuring costs have been paid out as of November 14, 2000. These amounts are reflected as part of the accrued liabilities balance as of September 30, 2000. Details of the cost of restructuring are summarized as follows (in thousands):
Severance and outplacement cost-cash.................... $347
Write-down of fixed assets-non-cash..................... 130
Cost associated with closure of field offices-cash...... 64
-----------
Total restructuring charges.......................... $541
===========
5. Contingencies
Legal Claims
Todd Simon, individually and on behalf of all others similarly situated v. Ramp Networks, Inc. and Mahesh Veerina, Case No. CV-00-3645 JCS, United States District Court for the Northern District of California, filed on October 3, 2000; Jacob Elefant, individually and on behalf of all others similarly situated v. Ramp Networks, Inc. and Mahesh Veerina, Case No. C00-210043 PVT, United States District Court for the Northern District of California, filed on October 6, 2000; and Doron Shauly, on behalf of himself and all others similarly situated v Ramp Networks, Inc. and Mahesh Veerina, Case No. C00-021086 EAI, United States District Court for the Northern District of California, filed on October 23, 2000 are punitive class actions filed on behalf of purchasers of the Company's common stock between November 15, 1999 and September 29, 2000. Each of the complaints asserts that the defendants fraudulently recognized revenues through purported "channel stuffing," and disseminated materially false and misleading statements regarding the demand for, and market acceptance of, the Company's products, the strength of its technologies, its competitiveness and trends in its business. The complaints allege claims for relief under Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, as well as Section 20 of the Exchange Act, seeking unspecified compensatory damages, attorneys' fees and costs. It is possible that additional complaints have been or will be filed alleging similar claims. The Company intends to vigorously defend the suits and any other similar suits subsequently filed.
Additionally, from time to time the Company is involved in certain other legal proceedings in the ordinary course of business. None of such proceedings are expected to have a material adverse impact on the Company's business, results of operations or financial condition.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements that involve risks and uncertainties. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under "Overview", "Liquidity and Capital Resources" and "Risk Factors" included in this section and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.
OVERVIEW
Ramp Networks is a leading provider of easy-to-use, reliable and affordable shared Internet access solutions for the small office market, which includes small businesses, remote and branch offices of large corporations, and home offices. Our WebRamp product family allows multiple users in a small office to share the same Internet connection simultaneously while optimizing each user's access speed. Our WebRamp product family is a flexible and scalable platform that provides software-based routing and bridging functionality to deliver Internet-enabled applications and services. Our products support existing analog phone lines, as well as ISDN and security/VPN and increasingly support access technologies such as DSL and cable modems. Our Connection Optimized Link Technology enables multiple users to access the Internet simultaneously through regular phone lines and analog modems at up to three times the access speed of a single analog connection.
We were incorporated in California in February 1994 and reincorporated in Delaware in June 1999. Our wholly-owned subsidiary, Ramp Networks Private Limited, is incorporated in India and performs research and development for us. From our inception in February 1994 through early 1995, we were focused on developing products for the asynchronous transfer mode market. We subsequently licensed this technology to a related party and focused on the small office market for shared Internet access solutions. From early 1995 through May 1996, our operating activities were related primarily to developing, prototyping and testing our first WebRamp product, staffing our administrative, sales and marketing and operations organizations and establishing relationships with VAR's, Internet Service Providers ("ISP") and mail order catalogs for the distribution of our products. In June 1996, we commenced shipments of our first ISDN-based WebRamp product. The quarter ended March 31, 2000 was the first quarter that the Company shipped volume production units of all its DSL products, namely; ADSL - WebRamp 600I , SDSL WebRamp 500I and WebRamp 510I, and IDSL - WebRamp 450i.
Our revenue is derived primarily from the sale of our WebRamp family of products. We market and sell our products via a two-tier distribution system primarily to distributors, such as Ingram Micro and Tech Data (in North America), who then resell our products to VAR's, selected retail outlets, mail order catalogs and ISP's. These VAR's then sell our products to end-users. Additionally, we also sell our products to Original Equipment Manufacturers ("OEM") and with the advent of our DSL portfolio sell to VAR's, MSP's and ISP's that work directly with DSL service providers or carriers.
The level of sales to any customer may vary from quarter to quarter. However, we expect that sales to Ingram Micro and Tech Data will continue to represent a significant portion of our revenue. Revenue from the Company's customers representing 10% or more of total revenues are summarized in Item 1, Notes to Condensed Consolidated Financial Statements, under "Segment and Significant Customer Reporting".
Revenue Recognition, Cumulative Effect of Change in Accounting and Restatement
Ramp's revenue consists principally of amounts earned from the sale of manufactured products. Historically, revenue has been recognized by the Company upon transfer of title and risks of ownership, which generally occurred upon product shipment. Certain agreements with distributors and retailers provide for rights of return, co-op advertising, price protection, and stock rotation rights. Under the guidelines and requirements of Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists", the Company concluded that it had sufficient history and experience to quantify reserves required for these provisions. Accordingly, Ramp provided an allowance for returns and price adjustments and provided a warranty reserve at the point of revenue recognition. These reserves have been adjusted periodically based upon historical experience and anticipated future returns, price adjustments, and warranty costs.
In the first quarter of 2000, the Company launched a new sales and marketing campaign that involved sales of new technology and products to both existing and a variety of new types of customers, including new customers serving the relatively new Digital Subscriber Loop (DSL) market. The DSL market experienced significant fluctuations in supply and demand in 2000. As a result, current customers and potential customers experienced delays in the provisioning in this marketplace which delayed demand for the Company's products. During 2000, the Company has experienced changing business conditions and demand for product from its distributors. Specifically, the Company experienced lower demand for both new and existing products and a trend of increasing past due accounts receivable from its current distributors as well as from some of the Company's new customers. The Company has now decided that this increase in past due accounts receivable from distributors was a result of the distributors not paying the Company until product was ultimately "sold through" to the customer. Additionally, certain new customers returned a significant portion of previously sold product in amounts greater than had been estimated by the Company. In 2000, the Company continued to apply revenue recognition accounting policies in accordance with past practices. Revenue recognition was based on historical experience with long-term customer payment patterns and returns and conventional industry practices. In the third quarter of 2000, the Company reassessed its receivable collection history and product returns history with its major distributors as well as new customers, based upon the current market demand for the Company's products. As a result of this reassessment, the Company determined that the negative trends in product sales demand and slower collection of receivable amounts was not a temporary trend. These significant changes in circumstances have necessitated a change in accounting policies for its current sales activity. The Company has decided to restate earlier quarters so that the accounting for revenue is consistent for all interim periods in 2000.
The Company determined that in light of the current market conditions , a more preferable method of revenue recognition would be to defer the recognition of revenue. Under this new method, the Company will now record revenue on product shipped to distributors when the product is ultimately "sold through" to the customer. Additionally, the Company will now defer revenues for all other customers where collection and returns history is not proven until such activity reflects the "sell through" of products to VAR's and MSP's.
The Company has changed its revenue recognition policy retroactive to January 1, 2000. The result of the change in the revenue recognition policy was an increase in net loss of $1.3 million and an increase in deferred revenues. This amount represents the net amount of gross margin on shipments previously recorded for product shipped to the distributors, but not "sold through" to customers, as of January 1, 2000. This amount is included as a cumulative effect of change in accounting policy in the accompanying financial statements for the nine months ended September 30, 2000. Additionally, the Company has restated amounts previously recorded in its Forms 10-Q for the quarterly periods ended March 31, 2000 and June 30, 2000 to reflect the changes in the revised revenue recognition policy and to properly account for certain third quarter returns of product that had previously been recognized as revenue under the prior revenue recognition policy.
The impact on the Company's Statements of Operations and Balance Sheets for the change in the Company's revenue recognition policy and the restatement of certain third quarter returns is summarized as follows (in thousands except per share amounts):
Three Months Ended Three Months Ended Six Months Ended
March 31, 2000 June 30, 2000 June 30, 2000
----------------------- ----------------------- ----------------------
As Reported As Amended As Reported As Amended As Reported As Amended
----------- ----------- ----------- ----------- ----------- ----------
Statement of Operations:
Revenue............................. $5,583 $3,531 $5,765 $4,976 $11,348 $8,507
Cumulative accounting change........ -- (1,307) -- -- -- (1,307)
Net loss............................ (5,530) (7,501) (7,068) (6,834) (12,598) (14,335)
Net loss per share.................. ($0.26) ($0.35) ($0.33) ($0.32) ($0.59) ($0.67)
Balance Sheet:
Accounts receivable, net............ $6,100 $6,372 $9,037 $10,232 $9,037 $10,232
Inventory........................... 3,396 6,367 3,937 7,179 3,937 7,179
Deferred revenue.................... -- 5,214 1,350 7,524 1,350 7,524
The Company's international sales currently are U.S. dollar-denominated. As a result, an increase in the value of the U.S. dollar relative to foreign currencies, particularly in China, could make our products less competitive in international markets. In the future, we may elect to invoice some of our international customers in local currency. Doing so will expose us to losses due to fluctuations in exchange rates between the U.S. dollar and the particular local currency. We may choose to limit any currency exposure through the purchase of forward foreign exchange contracts or other hedging strategies, but such strategies may not be successful in avoiding exchange-related losses. See "Risk Factors . If We Are Not Successful in Expanding Our Business in International Markets, Our Growth Will Suffer". Revenue by geographical region as a percentage of the Company's total revenue is summarized in Item 1 Notes to Condensed Consolidated Financial Statements, under "Segment and Significant Customer Reporting".
We generally expect to experience price pressure due to the impact of competition. Average selling prices have varied considerably in the past based on such price pressure and also on the mix of the various products shipped by the Company. Additionally, OEM unit pricing is generally significantly lower than distribution pricing. Pricing in the OEM market depends on the specific features and functional content of the products sold, the degree of integration with the OEM's products, purchase volumes and the level of sales and service support.
The Company uses "turn-key" suppliers for the purchase, assembly and packaging of all products sold that require hardware components. From time to time the Company has made strategic purchases of material components from vendors to ensure supply of critical components for its products. Significant portions of the critical components used in the Company's products are multi- source to ensure adequate supply to our turn-key vendors. Key components such as processors and certain types of memory, including "flash" memory, are and have been a consistent variable in the marketplace for both supply and price. As such, the Company continually manages such supply with vendors to meet the requirements of its own demand for finished products.
Our gross margins are affected by fluctuations in manufacturing volumes and component costs, and the mix of products sold. During the three months ended September 30, 2000, gross margin as a percentage of revenue declined as compared to the three months ended September 30, 1999. During the three months ended September 30, 2000, the Company's revenue included higher unit volumes of its Broadband products. These products have higher unit costs because volume production levels have not been achieved with the Company's vendors that supply such products. Our gross margins vary by the mix of Broadband products. Continued market pressure on all CPE vendors indicates that margins may continue to decline until such time as the Company's new line of Broadband Security products are shipped in volume. Predicting the future mix of products or volumes shipped is difficult and as such we cannot assure you that we will maintain or increase our gross margins as a percentage of revenues. In the short term we expect gross margins to continue to decline (from the third quarter 2000 percentage excluding the one-time charges and write-offs) as we focus our efforts on inventory reduction that will include certain price reductions on excess inventories.
Research and development expenses consist primarily of salaries and related personnel expenses, fees paid to consultants and outside service providers, and prototyping expenses related to the design, development and testing of our products. Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and support functions, as well as costs associated with promotional and other sales activities. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and human resources personnel, professional fees, and other corporate expenses. We expect expenses relating to research and development, sales and marketing, general and administrative and operations to increase in absolute dollars. Sales and marketing expenses are expected to decrease in the fourth quarter of 2000 as a result of the reduction in force implemented in September. We expect sales and marketing expenses to increase in absolute dollars beginning in 2001 as we expand our marketing efforts focused on the broadband security business. The percentage of revenue that each of these categories represents will vary depending on the rate of our revenue growth and investments that may be required to support the development of new products and our penetration of new markets.
Since our inception, we have incurred significant losses and, as of September 30, 2000, we had an accumulated deficit of $74.4 million. These losses have resulted primarily from our activities to develop our products, establish brand recognition and to develop our distribution channels.
As of December 31, 1999, we had net operating loss carry-forwards of $41 million for federal purposes and $16 million for state purposes. The federal and state net operating loss carry-forwards expire on various dates through 2019. We have provided a full valuation allowance against our deferred tax assets, consisting primarily of net operating loss carry-forwards, because of the uncertainty regarding their realization. Further, these net operating loss carry-forwards could be subject to limitations due to changes in our ownership resulting from equity financing.
Results of Operations
The following table sets forth certain financial data for the periods indicated as a percentage of revenue.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
Restated,
See Note 2
--------- --------- --------- ---------
Revenue................................ 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue........................ 210.6 59.0 107.0 62.1
--------- --------- --------- ---------
Gross margin........................... (110.6) 41.0 (7.0) 37.9
--------- --------- --------- ---------
Operating expenses:
Research and development............. 66.1 24.5 49.8 26.6
Sales and marketing.................. 194.7 52.1 133.3 51.3
General and administrative........... 42.8 16.1 32.0 14.8
Legal and severance cost............. 0.0 23.4 0.0 8.7
Amortization of deferred
compensation...................... 2.4 2.8 3.1 4.9
Restructuring charge................. 18.2 0.0 4.7 0.0
--------- --------- --------- ---------
Total operating expenses............... 324.3 118.8 222.9 106.2
--------- --------- --------- ---------
Loss from operations................... (434.9) (77.8) (229.9) (68.3)
Interest expense....................... (6.3) (5.1) (5.6) (3.6)
Other income (expense)................. 6.0 10.5 9.4 4.4
Cumulative effect of change in
accounting policy.................... 0.0 0.0 (11.4) 0.0
--------- --------- --------- ---------
Net loss .............................. (435.2)% (72.4)% (237.5)% (67.6)%
========= ========= ========= =========
Three Months Ended September 30, 2000 and 1999
Revenue. Revenue decreased 41% to $3.0 million in the three months ended September 30, 2000 from $5.0 million in the three months ended September 30, 1999. The decrease reflects lower demand in the U.S. and Asia for the Company's dial products.
Gross margin. The Company's total gross margin decreased from $2.1 million, or 41% of revenue, for the three months ended September 30, 1999 to $(3.3) million, or (111)% of revenue, for the three months ended September 30, 2000. The negative gross margin in 2000 includes inventory provisions of $3.8 million for costs and reserves associated with inventory that the Company believes, based on its current best estimates, will be sold or disposed of with lower gross margins. Excluding these one-time charges, gross margin would be 17% of revenue reflecting;
Research and development expenses. Research and development expenses increased from $1.2 million, or 25% of revenue, for the three months ended September 30, 1999 to $2.0 million, or 66% of revenue, for the three months ended September 30, 2000. This increase reflects significant activity on engineering projects associated with the introduction of the Company's new Broadband products as well as efforts focused on integration of "Internet security" and "voice-over-DSL" technologies.
Sales and marketing expenses. Sales and marketing expenses increased from $2.6 million, or 52% of revenue, for the three months ended September 30, 1999 to $5.8 million, or 195% of revenue, for the three months ended September 30, 2000. Sales and marketing expenses for the three months ended September 30, 2000 includes one-time charges of $0.8 million associated with the cancellation or expiration of contracts which will result in the elimination or minimization of future liabilities to the Company. The remaining increase of $2.4 million of expense for the three months ended September 30, 2000 was due to significant expenditures which were incurred to support the enterprise business that as a result of the Company's restructuring will be reduced significantly.
General and administrative expenses. General and administrative expenses increased from $0.8 million, or 16% of revenue, for the three months ended September 30, 1999 to $1.3 million, or 43% of revenue, for the three months ended September 30, 2000. The increase in general and administrative expenses is due primarily to increases in personnel and professional consulting costs. General and administrative expenses are expected to decrease in the fourth quarter of 2000 due to the reduction in force the Company implemented in September.
Legal and severance cost. For the three months ended September 30, 1999, the Company recorded a charge of $1.2 million for legal and severance costs. The charge includes a settlement of a legal dispute with two prior employees and a settlement of a patent dispute with a prior employee.
Amortization of deferred stock compensation. Amortization of deferred stock compensation was $0.1 million for each of the three months ended September 30, 2000 and 1999, respectively. This amortization is associated with recorded deferred compensation of $2.5 million related to stock options granted in the year ended December 31, 1998 and during the three months ended March 31, 1999 at less than their deemed fair market value. The Company amortizes the deferred compensation over the vesting periods of the applicable options. During the period, the deferred stock compensation was adjusted to eliminate, on a prospective basis, employees who have terminated from the Company and to which such stock options have been cancelled.
Restructuring charge. Results of Operations for the three months ended September 30, 2000 include $0.5 million of restructuring charges resulting from the 21% reduction in force implemented by the Company in September 2000. Substantially all of the restructuring costs have been paid out as of November 14, 2000. Details of the cost of restructuring are summarized in Note 4 to the financial statements.
Nine Months Ended September 30, 2000 (As restated, See Note 2 to the financial statements ) and 1999
Revenue. Revenue decreased 14% to $11.5 million, as restated for the nine months ended September 30, 2000 from $13.4 million for the nine months ended September 30, 1999. The decrease reflects lower demand in the U.S. and Asia for the Company's dial products.
Gross margin. The Company's total gross margin decreased from $5.1 million, or 38% of revenue, for the nine months ended September 30, 1999 to $(0.8) million, or (7)% of revenue, for the nine months ended September 30, 2000. The negative gross margin in 2000 includes one-time charges and write-offs of $3.8 million for costs and reserves associated with inventory that the Company believes, based on its current best estimates, will be sold or disposed of with lower gross margins. Excluding these one-time charges, gross margin would be 26% reflecting;
Research and development expenses. Research and development expenses increased from $3.6 million, or 27% of revenue, for the nine months ended September 30, 1999 to $5.7 million, or 50% of revenue, for the nine months ended September 30, 2000. This increase reflects significant activity on engineering projects associated with the introduction of the Company's new Broadband products as well as efforts focused on integration of "Internet security" and "voice-over-DSL" technologies.
Sales and marketing expenses. Sales and marketing expenses increased from $6.9 million, or 51% of revenue, for the nine months ended September 30, 1999 to $15.3 million, or 133% of revenue, for the nine months ended September 30, 2000. Sales and marketing expenses for the nine months ended September 30, 2000 includes one-time charges of $0.8 million associated with the cancellation or expiration of contracts which will result in the elimination or minimization of future liabilities to the Company. The remaining $7.6 million increase is due to for the nine months ended September 30, 2000was due to significant expenditures which were incurred to support the enterprise business that as a result of the Company's restructuring will be reduced significantly.
General and administrative expenses. General and administrative expenses increased from $2.0 million, or 15% of revenue, for the nine months ended September 30, 1999 to $3.7 million, or 32% of revenue, for the nine months ended September 30, 2000. The increase in general and administrative expenses is due primarily to increases in personnel and professional consulting costs. General and administrative expense are expected to decrease in the fourth quarter of 2000 due to the reduction in force the Company implemented in September.
Legal and severance cost. For the nine months ended September 30, 1999, the Company recorded a charge of $1.2 million for legal and severance costs. The charge includes a settlement of a legal dispute with two prior employees and a settlement of a patent dispute with a prior employee.
Amortization of deferred stock compensation. Amortization of deferred stock compensation was $0.7 million for the nine months ended September 30, 1999 as compared to $0.4 million for the nine months ended September 30, 2000 . This amortization is associated with recorded deferred compensation of $2.5 million related to stock options granted in the year ended December 31, 1998 and during the nine months ended March 31, 1999 at less than their deemed fair market value. The Company amortizes the deferred compensation over the vesting periods of the applicable options. During the period, the deferred stock compensation was adjusted to eliminate, on a prospective basis, employees who have terminated from the Company and to which such stock options have been cancelled.
Restructuring charge. Results of Operations for the nine months ended September 30, 2000 include $.5 million of restructuring charges resulting from the 21% reduction in force implemented by the Company in September 2000. Substantially all of the restructuring costs have been paid out as of November 14, 2000. Details of the cost of restructuring are summarized in Note 4 to the financial statements.
Cumulative change in accounting policy. The Results of Operations for the nine months ended September 30, 2000 include a $1.3 million increase in net loss as a result of a cumulative change in accounting policy. See note 2.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of September 30, 2000 consisted of $15.3 million in cash equivalents and marketable securities, a $1.0 million fixed asset lease line, a working capital credit facility with a borrowing limit of up to the lower of $5.0 million or 100% of eligible accounts receivable and 50% of inventory and a $3.0 million bridge loan facility. As of September 30, 2000, the Company had outstanding obligations of $0.2 million and $4.0 million under the fixed asset lease line and the bridge loan and working capital facilities, respectively. Borrowings under the fixed asset lease line bear interest at 7.5%, are payable ratably over a 36 month term, are subject to a 15% termination payment and are secured by the fixed assets that are leased under the line. Borrowings under the working capital credit facility bear interest at 8.4%, are payable ratably over a 36 month term, are subject to a termination payment of 12.5% and are secured by our receivables and inventory. Borrowings under the bridge loan facility bear interest at 14.6% and are payable ratably over a 36 month term. Certain of these debt agreements contain provisions that limit the payment of cash dividends.
Since inception, we have financed our operations primarily through the sale of stock, capital equipment lease lines and working capital lines of credit.
Net cash used in operating activities was $21.9 million and $10.5 million in the nine months ended September 30, 2000 and 1999, respectively. The cash utilized in both periods was attributable primarily to net losses and working capital required to fund the Company's growth in operations, including inventory and accounts receivable and deferred revenue.
Net cash provided by investing activities was $17.8 million for the nine months ended September 30, 2000, consisting primarily of $20.1 million in maturities of marketable securities net of purchases of new marketable securities. Additionally, the cash provided by investing activities for the nine months ended September 30, 2000 included the purchase of $2.3 million in property and equipment. Net cash used in investing activities for the nine months ended September 30, 1999 was $27.8 million and included $27.2 million for purchases of short term maturities as well as $0.5 million used in the purchase of property and equipment.
Net cash used in financing activities was $0.5 million for the nine months ended September 30, 2000 reflecting $1.7 million in the scheduled pay down of the Company's debt offset by $1.2 million in cash generated from the issuance of common stock associated with the exercise of employee stock options and shares of common stock purchased by employees under the Company's stock purchase plan. Net cash provided by financing activities for the nine months ended September 30, 1999 was $50.4 million of which $44.8 million was provided by the issuance of common stock and $6.3 million from borrowings under the Company's debt agreements.
We currently anticipate that our existing cash balances and available lines will not be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 months and we will need to raise additional funds prior to the expiration of such period. The Company is currently in the process of exploring alternative financing sources to fund future operations. The uncertainty about our ability to raise additional funds causes substantial doubt about our ability to continue as a going concern. The financial statements are prepared on the basis that the Company will continue as a going concern and do not reflect any adjustment that might be needed to reflect the ultimate realization of asset values. See "Risk Factors - We expect to Continue to Experience Negative Cash Flow From Operations and May Be Unable to Meet Our Future Capital Requirements Through the Issuance of Additional Securities".
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short- term instruments. Due to the nature of our short-term investments, we have concluded that there is no material interest rate risk exposure and no quantitative tabular disclosures are required.
Risk Factors
We Have a Limited Operating History and Consequently Our Future Prospects are Difficult to Evaluate
We were incorporated in February 1994 and began shipping our products commercially in April 1996. We have shipped products in volume since the second quarter of 1997. We have limited operating history and the uncertain nature of the rapidly changing markets in which we serve, makes the prediction of future results of operations difficult or impossible. Furthermore, our prospects must be evaluated in light of the risks, uncertainties, and difficulties frequently encountered by companies in the early stage of development. We may not be successful in addressing these risks and our business strategy may not be successful.
We Have a History of Losses, We Expect Future Losses and We Cannot Assure You That We Will Achieve or Maintain Profitability
We have incurred losses since we commenced operations in February 1994. We incurred net losses of $6.3 million in 1996, $11.5 million in 1997, $13.4 million in 1998 and $13.2 million in 1999. As of September 30, 2000, we had an accumulated deficit of $74.4 million. We have not achieved profitability and our revenue has not grown in recent quarters. As such, we cannot be certain that we will realize sufficient revenue to achieve profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. We may not generate a sufficient level of revenue to offset these expenditures or be able to adjust spending in a timely manner to respond to any unanticipated decline in revenue. If revenue does not grow, if gross margins do not improve or if operating expenditures exceed our expectations or cannot be adjusted accordingly, we may continue to experience significant losses on a quarterly and annual basis.
We Expect to Continue to Experience Negative Cash Flow From Operations and May Be Unable to Meet Our Future Capital Requirements Through the Issuance of Additional Securities
Since inception, we have experienced negative cash flow from operations and we expect to continue to experience negative cash flow from operations for the foreseeable future. Therefore, we have relied primarily on issuances of equity securities to fund our operations to date. We currently anticipate that our existing cash balances and available lines will not be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 months and we will need to raise additional funds prior to the expiration of such period. We cannot be certain that additional financing, through the issuance of equity securities or otherwise, will be available to us on favorable terms, or at all. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage of market opportunities, develop new products or otherwise respond to competitive pressures which could adversely affect our ability to achieve and sustain positive cash flow and profitability in the future. Furthermore, without new funds, the Company may not be able to continue as a going concern.
Our Financial Results from Period to Period May Fluctuate as a Result of Several Factors, Any of Which Could Adversely Affect Our Stock Price
We believe that period-to-period comparisons of our operating results are not a good indication of our future performance. In past periods our operating results have been below the expectations of public market analysts and investors and the price of our common stock has fallen. It is possible that this may also occur in future periods. Our revenue and operating results may vary significantly from period to period due to a number of factors, many of which are not in our control. These factors include:
- continued market acceptance of our products;
- fluctuations in demand for our products and services;
- variations in the timing of orders and shipments of our products;
- the timing of new product and service introductions by us or our competitors;
- the mix of products sold and the mix of distribution channels through which they are sold;
- our ability to obtain sufficient supplies of sole or limited source components for our products;
- unfavorable changes in the prices of the components we purchase;
- our ability to achieve required cost reductions;
- our ability to attain and maintain production volumes and quality levels for our products; and
- our ability to integrate new technologies we develop or acquire into our products.
The amount and timing of our operating expenses generally will vary from quarter to quarter depending on the level of actual and anticipated business activities. Research and development expenses will vary as we develop new products. Sales and marketing expense fluctuations in past periods have been due primarily to the level of sales and marketing expenses associated with new product introductions. General and administrative expense fluctuations in past periods have been due primarily to increases in personnel expense as we hire new employees and build the Company infrastructure. In the past, we have experienced fluctuations in operating results. We have experienced sharply increased revenue in periods that involved new product introductions and significant sales to OEMs, with equally sharp decreases in revenue in subsequent periods as distributors and OEMs complete their inventory build-up process. Furthermore, we have a limited backlog of orders, and revenue for any future quarter is difficult to predict. Supply, manufacturing or testing constraints could result in delays in the delivery of our products. Any delay in the product deployment schedule of one or more of our new products would likely adversely affect our operating results for a particular period.
We have experienced declining gross margins and cannot assure you that we will be able to sustain or improve our gross margins in the future, or that we will be able to offset future price declines with cost reductions. As a result, we may experience substantial period-to-period fluctuations in future operating results and further declines in gross margins. A variety of factors affect our gross margins, including the following:
- the type of distribution channel through which we sell our products;
- the volume of products manufactured;
- our product sales mix;
- the average selling prices of our products; and
- the effectiveness of our cost reduction efforts.
We also anticipate that orders for our products may vary significantly from period to period. As a result, operating expenditures and inventory levels in any given period could be disproportionately high. In some circumstances, customers may delay purchasing our current products in favor of next-generation products, which could affect our operating results in any given period.
We May Experience Significant Variability in Our Quarterly Revenue Due to Our Reliance on Indirect Sales Channels and the Variability of Our Sales Cycles
The timing of our revenue is difficult to predict because of our reliance on indirect sales channels and the length and variability of our sales cycle. The length of our sales cycle may vary substantially from customer to customer depending upon the size of the order and the distribution channel through which our products are sold. Sales from our distributors to our VARs typically take one month to complete. Sales to our larger end-user accounts, who buy larger quantities of our products for distribution to their multiple offices, typically take two to three months to complete and it typically takes nine months or more to establish volume sales contracts with our OEMs. Furthermore, the purchase of our products by end-users often represents a significant and strategic decision regarding their communications infrastructures and typically involves significant internal procedures associated with the evaluation, testing, implementation and acceptance of new technologies. This evaluation process frequently results in a lengthy sales process which is often subject to significant delays as a result of our customers' budgetary constraints and internal acceptance reviews. If orders forecasted for a specific customer in a particular quarter do not occur in that quarter, our operating results for that quarter could be adversely affected.
If a Distributor, OEM or Reseller Cancels or Delays a Large Purchase, Our Revenue May Decline and the Price of Our Stock May Fall
To date, a limited number of customers have accounted for a significant portion of our revenue. If any of our major customers stops or delays its purchase of our products or "sell through" to the ultimate consumer, our revenue and profitability would be adversely affected. We anticipate that sales of our products to relatively few customers will continue to account for a significant portion of our revenue. In the nine month period ended September 30, 2000, customers totaling 10% or more of revenue accounted for 65% of our revenue. We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will continue at the levels of previous periods or that we will be able to obtain orders from new customers.
Because our expense levels are based on our expectations as to future revenue and to a large extent are fixed in the short term, a substantial reduction or delay in sales of our products, unexpected returns from resellers or the loss of any significant distributor, reseller or OEM could adversely affect our operating results and financial condition. Although our financial performance depends on large orders from a few key distributors, resellers and OEMs, we do not have binding commitments from any of them. For example:
- our distributors, resellers and OEMs can stop purchasing or marketing our products at any time;
- our reseller agreements generally are not exclusive and are for one year terms, with no obligation of the resellers to renew their agreements with us;
- our reseller agreements provide for discounts based on expected or actual volumes of products purchased or resold in a given period;
- our reseller and OEM agreements generally do not require minimum purchases; and
- our customers may, under certain circumstances, return products to us.
If We Fail to Enhance Our Existing Products or Develop and Introduce New Products and Features in a Timely Manner to Meet Changing Customer Requirements and Emerging Industry Standards, Our Ability to Grow Our Business Will Suffer
The market for shared Internet access solutions is characterized by rapidly changing technologies and short product life cycles. Our future success will depend in large part upon our ability to:
- identify and respond to emerging technological trends in the market;
- develop and maintain competitive products;
- enhance our products by adding innovative features that differentiate our products from those of our competitors;
- bring products to market on a timely basis at competitive prices;
- respond effectively to new technological changes or new product announcements by others; and
- respond to emerging broadband access technologies including DSL and cable modems.
We will not be competitive unless we continually introduce new products and product enhancements that meet these emerging standards. In the future, we may not be able to effectively address the compatibility and interoperability issues that arise as a result of technological changes and evolving industry standards.
The technical innovations required for us to remain competitive are inherently complex, require long development cycles and are dependent in some cases on sole source suppliers. We will be required to continue to invest in research and development in order to attempt to maintain and enhance our existing technologies and products, but we may not have the funds available to do so. Even if we have sufficient funds, these investments may not serve the needs of customers or be compatible with changing technological requirements or standards. Most development expenses must be incurred before the technical feasibility or commercial viability of new or enhanced products can be ascertained. Revenue from future products or product enhancements may not be sufficient to recover the associated development costs.
If We Fail To Develop and Expand Our Indirect Distribution Channels, Our Business Could Suffer
Our product distribution strategy focuses primarily on continuing to develop and expand our indirect distribution channels through distributors, resellers and OEMs, as well as focusing our field sales organization in the broadband security market. If we fail to develop and cultivate relationships with significant resellers, or if these resellers are not successful in their sales efforts, our product sales may decrease and our operating results may suffer. Many of our resellers also sell products that compete with our products. In addition, our operating results will likely fluctuate significantly depending on the timing and amount of orders from our resellers. We cannot assure you that our resellers will market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support.
In order to support and develop leads for our indirect distribution channels, we plan to focus our efforts on target accounts with a specialized team of sales and support staff. We cannot assure you that this will be successfully completed, that the cost of this team will not exceed the revenue generated or that our expanded sales and support staff will be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of our current or potential competitors. Our inability to effectively establish our distribution channels or manage the sales and support staff would adversely affect our ability to grow and increase revenue.
Average Selling Prices of Our Products May Decrease, Which May Affect Our Gross Margins
The average selling prices for our products may be lower than expected as a result of competitive pricing pressures, promotional programs and customers who negotiate price reductions in exchange for longer term purchase commitments. The pricing of products sold to our OEMs depends on the specific features and functions of the product, the degree of integration with the OEM's products, purchase volumes and the level of sales and service support. Generally, the market has reflected pricing pressures for both ISDN and analog based products and we expect such price pressures from competition to continue in the future. Additionally, we are experiencing aggressive pricing in the market for Broadband-based products and with the higher cost per unit to manufacture than the ISDN and analog products, we may experience gross margin percentage reductions as we continue to move our portfolio of products to a higher mix of Broadband-based products and attempt to reduce our inventory levels. As such, we cannot assure you that we will be successful in developing and introducing on a timely basis new products with enhanced features that can be sold at higher gross margins.
If We Are Unable to Lower the Cost of Our Products, Purchasers May Buy From Our Competitors and Our Financial Results Would Suffer
Certain of our competitors currently offer Internet access products at prices lower than ours. Market acceptance of our products will depend in part on reductions in the unit cost of our products. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures or lead to improved gross margins. Many of our competitors are larger and manufacture products in significantly greater quantities than we intend to for the foreseeable future. Consequently, these competitors have more leverage in obtaining favorable pricing from suppliers and manufacturers. In order to remain competitive, we must reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products. Even if we are successful, our redesign may be delayed or may contain significant errors and product defects. In addition, any redesign may not result in sufficient cost reductions to allow us to significantly reduce the list price of our products or improve our gross margins. Reductions in our manufacturing costs will require us to use more highly integrated components in future products and may require us to enter into high volume or long-term purchase or manufacturing agreements. Volume purchase or manufacturing agreements may not be available on acceptable terms. We could incur expenses without related revenue if we enter into a high volume or long-term purchase or manufacturing agreement and then decide that we cannot use the products or services offered by such agreement.
Our Market Continues to Develop and Our Products May Not Achieve Widespread Market Acceptance
Our success will depend upon the widespread commercial acceptance of shared Internet access products by small offices. Small offices are deploying shared Internet access products, and the market for these products is continuing to develop. If the single Internet access devices, such as analog modems or ISDN, DSL and cable modems, currently utilized by many small offices are deemed sufficient even though they do not enable shared access, then the market acceptance of our products may be slower than expected. Potential users of our products may have concerns regarding the security, reliability, cost, and ease of use and capability of our products. We cannot accurately predict the future growth rate or the ultimate size of the small office market for shared Internet access solutions.
We Depend on Contract Manufacturers for Substantially All of Our Manufacturing Requirements and We May Be Unable to Successfully Expand Our Manufacturing Operations as We Grow
We have developed a highly out-sourced contract manufacturing capability for the production of our products. Therefore, we rely on third party contract manufacturers to procure components, assemble, test and package our products. Our primary turn-key manufacturing partners are Micron Custom Manufacturing Services, Inc., Delta Networks, Inc., Discopy Labs Corporation and SMT Unlimited, Inc. Any interruption in the operations of one or more of these contract manufacturers or delays in their shipment of products would adversely affect our ability to meet scheduled product deliveries to our customers.
We intend to regularly introduce new products and product enhancements that will require that we rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers. The inability of our contract manufacturers to provide us with adequate supplies of high quality products or the loss of any of our contract manufacturers would cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer. In addition, our inability to accurately forecast the actual demand for our products could result in supply, manufacturing or testing capacity constraints. These constraints could result in delays in the delivery of our products or the loss of existing or potential customers.
Although we perform random spot testing on manufactured products, we rely on our contract manufacturers for assembly and primary testing of our products. Any product shortages or quality assurance problems could increase the costs of manufacturing, assembling or testing our products.
We Purchase Several Key Components of Our Products from Sole or Limited Sources and Could Lose Sales If These Sources Fail to Satisfy Our Supply Requirements
We currently purchase several key components used in the manufacture of our products from sole or limited sources and are dependent upon supply from these sources to meet our needs. We are likely to encounter shortages and delays in obtaining components in the future which could adversely affect our ability to meet customer orders. Our principal sole sourced components include microprocessors, line interface integrated circuits, modem integrated circuits, DRAMs, transformers, selected other integrated circuits, and plastic tooled enclosures.
We use a rolling six-month forecast based on anticipated product orders to determine our material requirements. Lead times for materials and components we order vary significantly, and depend on factors such as specific supplier, contract terms and demand for a component at a given time. Our components that have long lead times include power converters, ISDN integrated circuits, DSL integrated circuits, flash memories, DRAMs and SRAMs. If orders do not match forecasts, we may have excess or inadequate inventory of certain materials and components, which could harm our business.
Although we enter, either directly or through our contract manufacturers, into purchase orders with our suppliers for components based on our forecasts, we do not have any guaranteed supply arrangements with these suppliers. Any extended interruption in the supply of any of the key components currently obtained from a sole or limited source could affect our ability to meet scheduled product deliveries to customers. We cannot assure you that, as our demand for these components increases, we will be able to obtain these components in a timely manner in the future. In addition, financial or other difficulties facing our suppliers or significant worldwide demand for the components they provide could adversely affect the availability of these components. If we are unable to obtain, either directly or through our contract manufacturers, a sufficient supply of components from our current sources, we could experience difficulties in obtaining alternative sources or in altering product designs to use alternative components. Resulting delays or reductions in product shipments could damage customer relationships. Further, we may also be subject to increases in component costs.
The Market in Which We Sell Our Products is Intensely Competitive and Our Business Would Be Adversely Affected If We Lose Market Share or Otherwise Fail to Successfully Compete in This Market
We compete in a new, rapidly evolving and highly competitive market. We expect competition to persist and intensify in the future. Our current and potential competitors offer a variety of competitive products, including shared Internet access devices such as the products offered by 3Com, thin servers, and high-end networking equipment such as routers and switches offered by companies such as Lucent, Cisco, Intel, Efficient and Netopia.
Many of our competitors are substantially larger than we are and have significantly greater financial, sales and marketing, technical, manufacturing and other resources and more established distribution channels. These competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. Furthermore, some of our competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their ability to rapidly gain market share by addressing the needs of our prospective customers. These competitors may enter our existing or future markets with solutions that may be less expensive, provide higher performance or additional features or be introduced earlier than our solutions. Given the market opportunity in the shared Internet access market, we also expect that other companies may enter our market with better products and technologies. If any technology that is competing with ours is more reliable, faster, and less expensive or has other advantages over our technology, then the demand for our products and services would decrease, which would seriously harm our business.
We expect our competitors to continue to improve the performance of their current products and introduce new products or new technologies as industry standards and customer requirements evolve that may supplant or provide lower cost alternatives to our products. Successful new product introductions or enhancements by our competitors could reduce the sales or market acceptance of our products and services, perpetuate intense price competition or make our products obsolete. To be competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. We cannot be sure 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. As a result, we may not be able to compete effectively against our competitors. Our failure to maintain and enhance our competitive position within the market may seriously harm our business.
Increased competition is likely to result in price reductions, reduced gross margins, longer sales cycles and loss of market share, any of which would seriously harm our business and results of operations. We cannot be certain that we will be able to compete successfully against current or future competitors or that competitive pressures will not seriously harm our business.
We Have Experienced Fluctuations in Growth in our Business in Recent Periods and Our Failure to Effectively Manage This and Future Growth Will Adversely Affect Our Business
We have both significantly expanded and reduced our operations in recent periods and anticipate that further significant changes will be required to address potential growth in our customer base and market opportunities. These changes have placed and are expected to continue to place, significant strain on our engineering, managerial, administrative, operational, financial and marketing resources, and increased demands on our systems and controls. To exploit the market for our products, we must develop new and enhanced products while managing anticipated growth in sales by implementing effective planning and operating processes. To manage the growth of our operations, we will need to:
- improve existing and implement new operational, financial and management information controls, reporting systems and procedures;
- hire, train and manage additional qualified personnel;
- continue to expand and upgrade our core technologies; and
- effectively manage multiple relationships with our customers, suppliers, distributors and other third parties.
We cannot assure you that we will be able to effectively manage the expansion of our operations, that our systems, procedures or controls will be adequate to support our operations or that the executive management team will be able to achieve the rapid execution necessary to fully exploit the market opportunity for our products and services. Any failure to effectively manage our growth could harm our business.
We Depend on Our Key Personnel Who May Not Continue to Work For Us
Our future success depends in large part upon the continued services of our key technical, sales and senior management personnel who are not bound by an employment agreement. The loss of any of our senior management or other key research, development, sales and marketing personnel, particularly if lost to competitors, could harm our business. In particular, the services of Mahesh Veerina, President and Chief Executive Officer, would be difficult to replace.
Even though we implemented a reduction in force in September, 2000, we expect that we will need to hire additional personnel in all areas in the event customer demand for our product accelerates. The competition for qualified personnel in our industry is intense, particularly in the San Francisco Bay Area where our corporate headquarters are located and in Hyderabad, India where we conduct a significant portion of our research and development operations. At times, we have experienced difficulty in hiring and retaining personnel with appropriate qualifications, particularly in technical areas. Recent stock price declines may make it more difficult to retain existing personnel. If we do not succeed in attracting new personnel, or retaining and motivating existing personnel, our business will be adversely affected.
If We Do Not Provide Adequate Product Support and Training to Our Resellers Our Sales Could Be Adversely Affected
Our ability to achieve our planned sales growth, retain current and future customers and expand our network of resellers will depend in part upon the quality of our customer service and product support operations. We rely primarily on our resellers to provide the product support and training required by our customers particularly during the initial deployment and implementation of our products. We may not have adequate personnel to provide the levels of support and product training our resellers may require during initial product deployment or on an ongoing basis to adequately support our customers. We also provide direct customer service and support to the end-users of our products. Our inability to provide sufficient support to our customers and resellers could delay or prevent the successful deployment of our products and could reduce our overall sales volumes. In addition, our failure to provide adequate support could adversely impact our reputation and our relationships with customers and resellers and could prevent us from gaining new customers or expanding our reseller network.
If Our Products Contain Undetected Defects and Errors We Could Incur Significant Unexpected Expenses, Experience Product Returns and Lost Sales, and Be Subject to Product Liability Claims
Our products are complex and may contain undetected defects, errors or failures, particularly when first introduced or as new enhancements and versions are released. We cannot assure you that, despite our testing procedures, defects and errors will not be found in new products or in new versions or enhancements of existing products after commencement of commercial shipments. Any defects or errors in our products discovered in the future could result in adverse customer reactions, negative publicity regarding us and our products, delays in market acceptance of our products, product returns, lost sales and unexpected expenses.
Sales and support of our products generally involve the risk of product liability claims. Although our customer license agreements typically contain provisions designed to limit our exposure to these claims, it is possible that these limitation of liability provisions may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. A successful product liability claim brought against us could harm our business.
If We Are Not Successful in Expanding Our Business in International Markets, Our Growth Will Suffer
As part of our strategy to address the global needs of our customers and partners, we have committed significant resources to opening international offices and expanding our international sales and support channels in advance of revenue. We cannot assure you that our efforts to develop international sales and support channels will be successful. Moreover, international sales are subject to a number of risks, including changes in foreign government regulations and communications standards, export license requirements, tariffs and taxes, other trade barriers, difficulty in collecting accounts receivable, difficulty in managing foreign operations, and political and economic instability. To the extent our customers may be impacted by currency devaluations or general economic crises, the ability of these customers to purchase our products could be adversely affected. Payment cycles for international customers are typically longer than those for customers in the United States. We cannot assure you that foreign markets for our products will not develop more slowly than currently anticipated. In addition, if the relative value of the U.S. dollar in comparison to the currency of our foreign customers should increase, the resulting effective price increase of our products to these foreign customers could result in decreased sales.
We anticipate that our foreign sales will generally be invoiced in U.S. dollars and, accordingly, we do not currently plan to engage in foreign currency hedging transactions. However, as we expand our international operations, we may allow payment in foreign currencies and exposure to losses in foreign currency transactions may increase. We may choose to limit any currency exposure through the purchase of forward foreign exchange contracts or other hedging strategies. We cannot assure you that any currency hedging strategy we may adopt would be successful in avoiding exchange related losses.
If Political, Social or Economic Developments in India Adversely Affect Our Research and Development Operations in India, Our Ability to Introduce New and Enhanced Products Would Be Harmed and Our Sales May Suffer
Our wholly-owned subsidiary, Ramp Networks Private Limited, is incorporated in India and a substantial number of our research and development personnel are located in India. Consequently, our business may be affected by changes in exchange rates and controls, interest rates, government of India policies, including taxation policy, as well as political, social and economic developments affecting India.
In the past, the government of India has adopted policies that have resulted in the nationalization of some industries. We cannot assure you that economic policies adopted by the government of India will not result in the expropriation of our business activities in India or otherwise impair or prohibit our current research and development operations in India. Furthermore, there is increasing competition for experienced engineers in India and we cannot assure you that we will be successful in attracting and retaining sufficient engineering personnel to support our research and development operations in India which we expect to expand in the future.
Our Products Must Comply With Complex Government Regulations Which May Prevent Us From Sustaining Our Revenue or Achieving Profitability
In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally, products that we develop may be required to comply with standards established by telecommunications authorities in various countries as well as with recommendations of the International Telecommunications Union. If we fail to obtain timely domestic or foreign regulatory approvals or certificates, we would not be able to sell our products where these regulations apply, which may prevent us from sustaining our revenue or achieving profitability.
If Internet Usage Declines or the Internet Infrastructure Is Not Adequately Maintained and Expanded, Demand for Our Products May Decline
The Internet has recently begun to develop and is rapidly evolving. As a result, the commercial market for products designed to enable high-speed access to the Internet has only recently begun to develop. Our success will depend in large part on increased use of the Internet and other networks based on Internet protocol by corporate telecommuters and small offices. Critical issues concerning the commercial use of the Internet remain unresolved and are likely to affect the development of the market for our products. These issues include security, reliability, cost, ease of access, government regulation and quality of service. The adoption of the Internet for commerce and communications, particularly by enterprises that have historically relied upon alternative means of commerce and communications, generally requires the acceptance of a new method of conducting business and exchanging information. The recent growth in the use of the Internet has caused frequent periods of performance degradation that have prompted efforts to upgrade the Internet infrastructure. Any perceived degradation in the performance of the Internet as a whole could undermine the benefits of our products. Potentially increased performance and other benefits provided by our products and the products of others are ultimately limited by, and are reliant upon, the speed and reliability of the Internet backbone itself. Consequently, the emergence and growth of the market for our products will depend on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion.
If We Are Unable to Adequately Protect Our Intellectual Property Rights Other Companies May Use our Intellectual Property to Develop Competitive Products that May Reduce Demand for Our Products
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot assure you that any issued or pending patents will protect our intellectual property or that they will not be challenged by third parties. Furthermore, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that may be issued.
We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. In addition, we provide our products to end-users primarily under "shrink-wrap" license agreements included in the packaging. These agreements are not negotiated with or signed by the licensee, and thus these agreements may not be enforceable in some jurisdictions. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. We cannot assure you that these precautions will prevent misappropriation or infringement of our intellectual property. Monitoring unauthorized use of our products is difficult, and we cannot assure you that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.
Some of our OEM agreements also provide manufacturing rights and access to our intellectual property and source code upon the occurrence of specified conditions of default. If we were to default on these agreements, our OEMs could use our intellectual property and source code to develop and manufacture competing products, which would adversely affect our performance and ability to compete.
We May Be Subject to Intellectual Property Infringement Claims That are Costly to Defend and Could Limit our Ability to Use Certain Technologies in the Future
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the data communications and networking markets have extensive patent portfolios with respect to modem and networking technology. From time to time, third parties, including these leading companies, have asserted and may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to us. We expect that we may increasingly be subject to infringement claims as the numbers of products and competitors in the small office market for shared Internet access solutions grow and the functionality of products overlaps.
We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights to determine the scope and validity of our proprietary rights. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis, our business would be harmed.
Any Acquisitions We Make Could Adversely Affect Our Business
As part of our business strategy, we expect to review acquisition prospects that would complement our existing business or enhance our technological capabilities. Future acquisitions by us could result in large and immediate write-offs, the incurrence of debt and contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could materially and adversely affect our results of operations. Furthermore, acquisitions entail numerous risks and uncertainties, including:
- difficulties in the assimilation of operations, personnel, technologies, products and the information systems of the acquired companies;
- diversion of management's attention from other business concerns;
- risks of entering geographic and business markets in which we have no or limited prior experience; and
- potential loss of key employees of acquired organizations.
Although we do not currently have any agreement with respect to any material acquisitions, we may make acquisitions of complementary businesses, products or technologies in the future. We cannot be certain that we would be able to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future, and our failure to do so could adversely affect our business.
Future Issuances of Additional Securities May Adversely Affect Our Stockholders
In the future, we will be required to raise additional funds through the issuance of equity, equity-related or debt securities to fund our operations, take advantage of market opportunities, develop new products, pursue acquisition opportunities or otherwise respond to competitive pressures. The issuance of additional securities may be dilutive to our existing stockholders. Furthermore, securities we may issue in the future could have rights, preferences or privileges senior to those of our existing stockholders.
Stock Market Volatility and Litigation Risks
The stock market in general, and the technology sector in particular, has experienced volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance. As a result, Ramp's stock price may be extremely volatile.
It is often the case that when the stock price of a company suffers a rapid decline, the company is subjected to litigation by stockholders seeking to recover damages. On September 29, 2000 we announced that our earnings for the third quarter of 2000 would be substantially below the expectations of the public market analysts, precipitating a decline in our stock price. Subsequently, three law firms announced the commencement of class action lawsuits against us. We are currently assessing the claims as presented. Based on advice from our counsel, we can make no further comments as to these claims. Similar lawsuits may be initiated in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Risk factors-- We May Be Subject to Intellectual Property Infringement Claims That are Costly to Defend and Could Limit our Ability to Use Certain Technologies in the Future".
On October 13th, 1999, the Company and certain former employees of the Company appeared in the United States District Court Northern District of California in San Jose and agreed to a settlement of claims made by the former employees in exchange for cash and shares of common stock of the Company. The dispute between the parties was associated with the prior acquisition by the Company of certain technologies and assets in June 1998. The estimated cost associated with this settlement was included in the Legal and severance cost charge included in the Statement of Operations for the year ended December 31, 1999. The parties to the dispute signed a settlement agreement on January 10, 2000 and the dispute was formally dismissed on February 7, 2000.
In March 1999, the Company received a letter from NovaWeb Technologies , Inc. (NovaWeb) alleging that certain of the Company's products may have infringed on NovaWeb's patents pertaining to intelligent modem bonding technology. On May 21, 1999, NovaWeb filed a complaint in the United States District Court Northern District of California against the Company alleging infringement of this patent. In February 2000, the Company and NovaWeb signed a Settlement and Patent License Agreement whereby the Company will pay NovaWeb a 1% royalty on net sales of certain of the Company's products commencing February 15, 2000. As consideration, the Company paid NovaWeb $350,000 as a prepayment for future royalties. The maximum cumulative royalty payable under this non-exclusive worldwide license agreement is $1,500,000. In relation to this agreement NovaWeb has filed a dismissal for all claims.
Todd Simon, individually and on behalf of all others similarly situated v. Ramp Networks, Inc. and Mahesh Veerina, Case No. CV-00-3645 JCS, United States District Court for the Northern District of California, filed on October 3, 2000; Jacob Elefant, individually and on behalf of all others similarly situated v. Ramp Networks, Inc. and Mahesh Veerina, Case No. C00-210043 PVT, United States District Court for the Northern District of California, filed on October 6, 2000; and Doron Shauly, on behalf of himself and all others similarly situated v Ramp Networks, Inc. and Mahesh Veerina, Case No. C00-021086 EAI, United States District Court for the Northern District of California, filed on October 23, 2000 are punitive class actions filed on behalf of purchasers of the Company's common stock between November 15, 1999 and September 29, 2000. Each of the complaints asserts that the defendants fraudulently recognized revenues through purported "channel stuffing," and disseminated materially false and misleading statements regarding the demand for, and market acceptance of, the Company's products, the strength of its technologies, its competitiveness and trends in its business. The complaints allege claims for relief under Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, as well as Section 20 of the Exchange Act, seeking unspecified compensatory damages, attorneys' fees and costs. It is possible that additional complaints have been or will be filed alleging similar claims. The Company intends to vigorously defend the suits and any other similar suits subsequently filed. The Company intends to vigorously defend the suits and any other similar suits subsequently filed.
Additionally, from time to time the Company is involved in certain other legal proceedings in the ordinary course of business. None of such proceedings are expected to have a material adverse impact on the Company's business, results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
27.01 Financial Data schedule (For Edgar filing only)
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.
Date: November 14, 2000
| Ramp Networks, Inc. |
| (Registrant) |
| By: | /s/ PERRY GRACE |
|
| |
| Perry Grace | |
| Vice President Finance | |
| (Duly Authorized Officer and Principal Financial and Accounting Officer) |
|
|