<PAGE>
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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 fiscal quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________.
Commission File Number 000-27843
Somera Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0521878
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5383 Hollister Avenue, Santa Barbara, CA 93111
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (805) 681-3322
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at September 30, 2000
Common Stock, $0.001 par value 47,900,852
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<PAGE>
SOMERA COMMUNICATIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 and December 31, 1999
(unaudited)
Statements of Operations for the Three and Nine Month Periods
Ended September 30, 2000 and 1999 (unaudited)
Statements of Cash Flows for the Nine Month Periods Ended
September 30, 2000 and 1999 (unaudited)
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
SOMERA COMMUNICATIONS, INC.
BALANCE SHEETS
(in thousands)
(Unaudited)
Sep. 30, Dec. 31,
2000 1999
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 37,657 $ 54,492
Accounts receivable, net .............................. 36,599 19,592
Inventories, net....................................... 28,513 18,386
Deferred tax asset--current portion.................... 3,741 2,236
Other current assets................................... 2,171 2,147
-------- --------
Total current assets.............................. 108,681 96,853
Property and equipment, net.............................. 4,745 1,505
Deferred tax asset--net of current portion............... 15,572 16,490
Other assets............................................. 848 903
-------- --------
Total assets...................................... $129,846 $115,751
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable....................................... $ 19,692 $ 23,636
Accrued compensation................................... 2,368 1,707
Other accrued liabilities.............................. 2,380 2,284
Capital lease obligations--current portion............. -- 830
Income taxes payable................................... -- 508
-------- --------
Total current liabilities......................... 24,440 28,965
-------- --------
Stockholders' equity:
Common stock........................................... 48 48
Additional paid in capital............................. 66,771 66,419
Retained earnings...................................... 38,862 20,905
Unearned stock-based compensation...................... (275) (586)
-------- --------
Total stockholders' equity........................ 105,406 86,786
-------- --------
Total liabilities and stockholders' equity........ $129,846 $115,751
======== ========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SOMERA COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share/unit data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sep. 30, Nine Months Ended Sep. 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenue.................................................... $57,604 $34,200 $149,485 $87,034
Cost of net revenue............................................ 36,638 22,655 94,314 56,678
------- ------- -------- -------
Gross profit........................................... 20,966 11,545 55,171 30,356
Operating expenses:
Sales and marketing........................................ 5,380 2,853 14,656 7,238
General and administrative (excludes stock-based
compensation of $66, $459, $311 and $652 for the
three and nine months ended Sep. 30, 2000 and 1999)...... 4,627 2,086 10,932 5,085
Stock-based compensation................................... 66 459 311 652
------- ------- -------- -------
Total operating expenses............................... 10,073 5,398 25,899 12,975
------- ------- -------- -------
Income from operations..................................... 10,893 6,147 29,272 17,381
Interest income (expense), net................................. 592 (512) 1,856 (656)
------- ------- -------- -------
Income before income taxes................................. 11,485 5,635 31,128 16,725
Income tax provision........................................... 4,851 -- 13,171 --
------- ------- -------- -------
Net income............................................. $ 6,634 $ 5,635 $ 17,957 $16,725
======= ======= ======== =======
Net income per share/unit--basic............................... $ 0.14 $ 0.15 $ 0.38 $ 0.44
======= ======= ======== =======
Weighted average shares/units--basic........................... 47,883 38,063 47,856 38,063
======= ======= ======== =======
Net income per share/unit--diluted............................. $ 0.14 $ 0.15 $ 0.37 $ 0.44
======= ======= ======== =======
Weighted average shares/units--diluted......................... 48,416 38,249 48,361 38,115
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SOMERA COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended Sep. 30,
--------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income....................................... $ 17,957 $ 16,725
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization................. 476 175
Provision for doubtful accounts............... 2,030 450
Provision for write-down of inventories....... 2,580 789
Stock-based compensation...................... 311 652
Forgiveness of loans to officers.............. 56 --
Training costs financed by capital lease...... -- 65
Changes in operating assets and liabilities:
Accounts receivable........................ (19,037) (7,824)
Inventories................................ (12,707) (5,770)
Other current assets....................... (80) (115)
Deferred tax asset.......................... (587) --
Accounts payable........................... (3,944) 4,699
Accrued compensation....................... 661 774
Other accrued liabilities.................. 96 637
Income taxes payable....................... (508) --
-------- --------
Net cash provided by (used in)
operating activities................ (12,696) 11,257
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment......... (3,716) (459)
Decrease (increase) in other assets........... 55 (639)
-------- --------
Net cash used in investing activities... (3,661) (1,098)
-------- --------
Cash flows from financing activities:
Payment of capital lease...................... (830) --
Proceeds from term loan....................... -- 48,900
Proceeds from revolving loan facility......... -- 6,435
Repayment of notes payable.................... -- (3,457)
Common shares issued for employee stock plan.. 352 --
Distributions to members...................... -- (63,772)
-------- --------
Net cash used in financing activities... (478) (11,894)
-------- --------
Net decrease in cash and cash equivalents.......... (16,835) (1,735)
Cash and cash equivalents, beginning of period..... 54,492 1,930
-------- --------
Cash and cash equivalents, end of period........... $ 37,657 $ 195
======== ========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SOMERA COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1--Formation and Business of the Company and Basis of Presentation:
Somera Communications, LLC. ("Somera, LLC") was formed as a Limited
Liability Company in 1995 under the laws of the State of California. Somera
Communications, Inc. ("Somera, Inc.") was formed in August 1999 and is
incorporated under the laws of the State of Delaware. Concurrent with the
closing of Somera, Inc.'s initial public offering on November 12, 1999, each
member of Somera, LLC received one common share of Somera, Inc. in exchange for
each unit held and Somera, Inc. assumed the assets, liabilities and the
operations of Somera, LLC. The historical results of Somera, LLC have been
presented as a predecessor business of Somera, Inc. as no change in control
occurred as a result of this transaction. The term Company in these financial
statements refers to both Somera, LLC and Somera, Inc.
The Company is a provider of telecommunications infrastructure and data
networking equipment and services. The Company provides customers with a
combination of new and de-installed equipment.
The accompanying unaudited interim financial statements reflect all
adjustments, which in the opinion of management, are necessary for a fair
presentation of the results of operations for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The balance sheet
as of December 31, 1999 is derived from the audited financial statements as of
and for the year then ended but does not include all notes and disclosures
required by accounting principles generally accepted in the United States.
These financial statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1999. Certain prior period balances
have been reclassified to conform to current period presentation.
Note 2--Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
In July 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, or SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB No. 133. SFAS 137 deferred
the effective date of SFAS 133 until the first fiscal quarter of fiscal years
beginning after June 15, 2000. The Company does not currently hold derivative
instruments or engage in hedging activities. The Company does not expect the
adoption of SFAS 133 to have a material effect on its financial position or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company currently is required to adopt SAB 101 in the quarter
ended December 31, 2000. In October 2000, the SEC issued additional guidance
regarding the application and implementation of SAB 101. The Company is
currently assessing the impact of the additional guidance provided on its
financial position and results of operations.
5
<PAGE>
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998, or January 12, 2000. Adoption
of FIN 44 did not have a material effect on the financial position and results
of operations.
Note 3--Basic and Diluted Net Income per Share/Unit:
Basic net income per share/unit is computed by dividing the net income for
the period by the weighted average number of shares/units outstanding during the
period. Diluted net income per share/unit is computed by dividing the net income
for the period by the weighted average number of shares/units and equivalent
shares/units outstanding during the period. Equivalent shares/units, composed of
shares/units issuable upon the exercise of options and warrants, are included in
the diluted net income per share/unit computation to the extent such
shares/units are dilutive. A reconciliation of the numerator and denominator
used in the calculation of basic and diluted net income per share/unit follow
(in thousands, except per share/unit data):
<TABLE>
<CAPTION>
Three Months Ended Sep. 30, Nine Months Ended Sep. 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator
Net income........................................ $ 6,634 $ 5,635 $17,957 $16,725
------- ------- ------- -------
Denominator
Weighted average shares/units--basic.............. 47,883 38,063 47,856 38,063
Dilutive effect of options and warrants to
purchase shares/units.......................... 533 186 505 52
------- ------- ------- -------
Weighted average shares/units--diluted................ 48,416 38,249 48,361 38,115
------- ------- ------- -------
Net income per share/unit--basic...................... $ 0.14 $ 0.15 $ 0.38 $ 0.44
======= ======= ======= =======
Net income per share/unit--diluted.................... $ 0.14 $ 0.15 $ 0.37 $ 0.44
======= ======= ======= =======
</TABLE>
Options to purchase 19,250 shares of common stock have been excluded from
the calculation of net income per share/unit-diluted for the three and nine
month periods ended September 30, 2000, as their effect is anti-dilutive.
Prior to the effectiveness of the initial public offering in November 1999,
Somera was not subject to federal or state income taxes. The pro forma effect of
income taxes on the Company's net income and net income per unit for 1999 is
presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
Computation of 1999 adjusted earnings per unit:
Income before income taxes........................................ $5,635 $16,725
Pro forma income taxes at 40%..................................... 2,254 6,690
------- -------
Adjusted net income............................................... $3,381 $10,035
====== =======
Adjusted net income per unit--basic................................... $ 0.09 $ 0.26
====== =======
Adjusted net income per unit--diluted................................. $ 0.09 $ 0.26
====== =======
</TABLE>
Note 4--Comprehensive Income:
There was no difference between the Company's net income and its total
comprehensive income for the three and nine month periods ended September 30,
2000 and 1999.
6
<PAGE>
Note 5--Segment Information:
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available that is evaluated by
the chief operating decision maker or decision making group to make decisions
about how to allocate resources and assess performance. The Company's chief
operating decision maker is the chief executive officer. To date the Company has
reviewed its operations in principally two segments. The chief operating
decision maker assesses performance based on the gross profit generated by each
segment.
The Company does not report operating expenses, depreciation and
amortization, interest expense, capital expenditures or identifiable net assets
by segment. All segment revenues are generated from external customers. Segment
information is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Sep. 30, Nine Months Ended Sep. 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenue:
New equipment................................... $24,473 $12,651 $ 60,572 $26,672
De-installed equipment.......................... 33,131 21,549 88,913 60,362
------- ------- -------- -------
Total........................................ $57,604 $34,200 $149,485 $87,034
======= ======= ======== =======
Gross profit:
New equipment................................... $ 4,311 $ 2,133 $ 11,041 $ 4,281
De-installed equipment.......................... 16,655 9,412 44,130 26,075
------- ------- -------- -------
Total........................................ $20,966 $11,545 $ 55,171 $30,356
======= ======= ======== =======
</TABLE>
Net revenue information by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Sep. 30, Nine Months Ended Sep. 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenue:
United States................................... $51,079 $31,691 $136,678 $77,728
Canada.......................................... 1,912 1,430 5,593 2,606
Latin America................................... 2,287 952 4,649 6,234
Other........................................... 2,326 127 2,565 466
------- ------- -------- -------
Total........................................ $57,604 $34,200 $149,485 $87,034
======= ======= ======== =======
</TABLE>
All long-lived assets are maintained in the United States.
Note 6--Subsequent Event:
Pursuant to a Stock Purchase Agreement dated as of October 16, 2000, the
Company acquired all of the outstanding common stock of MSI Communications, Inc.
in exchange for total consideration of $16.0 million, consisting of $10.0
million in cash paid at closing, and $6.0 million worth of common stock of the
Company, which is to be held in escrow subject to certain requirements.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis below contain trend analysis and other forward-
looking statements regarding future revenues, cost levels and operations within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We may from time to time make additional
written and oral forward-looking statements, including statements contained in
our filings with the Securities and Exchange Commission and in our reports to
stockholders. Such forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that
7
<PAGE>
might cause such a difference include, but are not limited to, those discussed
below under "Certain Factors That May Affect Future Operating Results" and
elsewhere in this Report. We do not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
Readers should carefully review the risk factors described in this Report and in
other documents we file from time to time with the Securities and Exchange
Commission.
Overview
We provide telecommunications carriers with a broad range of infrastructure
equipment and related services designed to meet their specific and changing
equipment needs. We generate revenue primarily from sales of new and de-
installed telecommunications infrastructure equipment. Our customers include
incumbent local exchange carriers, long distance carriers, wireless carriers and
competitive local exchange carriers. Incumbent local exchange carriers, or
ILECs, provided local telephone service on an exclusive basis prior to
deregulation. Since deregulation, competitive local exchange carriers, or CLECs,
have competed with ILECs to provide local telecommunications service. We do not
manufacture any of the equipment we sell.
We purchase de-installed equipment primarily from telecommunications
carriers, many of whom are also our customers. We purchase the new equipment we
sell primarily from OEMs and distributors. By using our relationship management
database to track carriers' de-installed equipment we are able to offer our
customers a broad range of equipment. We generally have not entered into long-
term contracts or distribution arrangements with our suppliers, and if we fail
to develop and maintain our relationships with our suppliers, our business will
suffer.
Results of Operations
The following table sets forth, for the period indicated, income statement
data expressed as a percentage of net revenue.
<TABLE>
<CAPTION>
Three Months Ended Sep. 30, Nine Months Ended Sep. 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenue.................................... 100.0% 100.0% 100.0% 100.0%
Cost of net revenue............................ 63.6 66.2 63.1 65.1
----- ----- ----- -----
Gross profit................................... 36.4 33.8 36.9 34.9
----- ----- ----- -----
Operating expenses:
Sales and marketing...................... 9.4 8.4 9.8 8.3
General and administrative............... 8.0 6.1 7.3 5.8
Stock-based compensation................. 0.1 1.3 0.2 0.8
----- ----- ----- -----
Total operating expenses............ 17.5 15.8 17.3 14.9
----- ----- ----- -----
Income from operations......................... 18.9 18.0 19.6 20.0
Interest income (expense), net................. 1.0 (1.5) 1.2 (0.8)
----- ----- ----- -----
Income before income taxes..................... 19.9 16.5 20.8 19.2
Income tax provision........................... 8.4 -- 8.8 --
----- ----- ----- -----
Net income..................................... 11.5% 16.5% 12.0% 19.2%
===== ===== ===== =====
</TABLE>
Net Revenue. Net revenue consists of sales of new and de-installed
telecommunications equipment, including switching, transmission, access, cell
site, microwave and power products. Net revenue increased 68% to $57.6 million
in the third quarter of 2000 and 72% to $149.5 million for the nine months ended
September 30, 2000, from $34.2 million and $87.0 million for the comparable
periods in 1999. Net revenue attributable to new equipment sales increased to
$24.5 million in the third quarter of 2000 and $60.6 million for the nine month
period, from $12.7 million and $26.7 million for the comparable periods in 1999.
The increase in net revenue attributable to new equipment sales was due to
greater customer demand for new telecommunications equipment and our offering a
broader variety of new equipment to customers. We believe that net revenue
attributable to new equipment sales will continue to increase in absolute dollar
terms in response to customer demand for new telecommunications equipment and as
we increase our customer base. Net revenue attributable to de-installed
equipment sales increased to $33.1 million in the third quarter of 2000 and
$88.9 million for the nine month period, from $21.5 million and $60.4
8
<PAGE>
million for the comparable periods in 1999. The increase in net revenue
attributable to de-installed equipment sales was due to greater customer demand
in connection with the build out and servicing of their existing networks. We
believe net revenue attributable to de-installed equipment will increase in
absolute dollar terms as we increase our customer base and our customers
continue to build out their existing networks.
Cost of Net Revenue. Substantially all of our cost of net revenue
consists of the costs of the equipment we purchase from third party sources.
Cost of net revenue increased 62% to $36.6 million in the third quarter of 2000
and 66% to $94.3 million for the nine months ended September 30, 2000, from
$22.7 million and $56.7 million for the comparable periods in 1999. Cost of net
revenue attributable to new equipment sales increased to $20.2 million in the
third quarter of 2000 and $49.5 million for the nine month period, from $10.5
million and $22.4 million for the comparable periods in 1999. Cost of net
revenue attributable to de-installed equipment sales increased to $16.5 million
in the third quarter of 2000 and $44.8 million for the nine month period, from
$12.1 million and $34.3 million for the comparable periods in 1999. The increase
in cost of net revenue for both new and de-installed equipment corresponds
primarily to the increase in the volume of equipment sales. The overall gross
profit as a percentage of net revenue, or gross margin, increased to 36.4% in
the third quarter of 2000 and 36.9% for the nine month period, from 33.8% and
34.9% for the comparable periods in 1999. Gross margin on new equipment sales
increased to 17.6% in the third quarter of 2000 and 18.2% for the nine month
period, from 16.9% and 16.1% for the comparable periods in 1999. The increase in
gross margin attributable to new equipment sales was due primarily to the deeper
discount levels attained from our suppliers corresponding to the increase in
volume, as well as further development of our procurement sources. Gross margin
on de-installed equipment sales increased to 50.3% in the third quarter of 2000
and 49.6% for the nine month period, from 43.7% and 43.2% for the comparable
periods in 1999. The increase in gross margin attributable to de-installed
equipment sales was due primarily to several strategic inventory investments, as
well as a number of special procurement opportunities. We believe these gross
margins will continue to fluctuate depending upon the mix of the new and de-
installed equipment we sell and other factors.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and benefits for sales, marketing and procurement
employees, as well as costs associated with advertising, promotions and our
business-to-business e-commerce initiative. A majority of our sales and
marketing expenses are incurred in connection with establishing and maintaining
long-term relationships with a variety of carriers. Sales and marketing expenses
increased 89% to $5.4 million in the third quarter of 2000 and 102% to $14.7
million for the nine months ended September 30, 2000, from $2.9 million and $7.2
million, for the comparable periods in 1999. This increase was due to higher
absolute commission expenses consistent with increased gross profit upon which
our sales commissions are based, as well as the hiring of additional sales and
procurement personnel, and expenses relating to our business-to-business e-
commerce initiative. We expect that our sales and marketing expenses will
continue to increase in absolute dollar terms as we expand our product and
service offerings, increase our hiring of additional sales and marketing
personnel, pay commissions consistent with increased gross profit, continue
development of our e-commerce initiative, and develop our international
infrastructure, although such expenses may vary as a percentage of net revenue.
General and Administrative. General and administrative expenses consist
principally of salary and benefit costs for executive, administrative and
distribution personnel, as well as professional fees, insurance, and facility
costs. General and administrative expenses increased 122% to $4.6 million in the
third quarter of 2000 and 115% to $10.9 million for the nine months ended
September 30, 2000, from $2.1 million and $5.1 million, for the comparable
periods in 1999. This increase was due primarily to the increase in the number
of employees resulting from the expansion of our operations, recruitment costs,
expenses relating to a new computer system, costs relating to our new
distribution center, higher provisions for bad debt, and higher professional
fees associated with being a public company. We expect that general and
administrative expenses will increase in absolute dollar terms in the future as
we continue to expand our operations, although such expenses may vary as a
percentage of net revenue.
Liquidity and Capital Resources
Our cash and cash equivalents totaled $37.7 million at September 30, 2000.
Cash and cash equivalents are
9
<PAGE>
highly liquid investments with original maturities of ninety days or less. At
September 30, 2000, we had no long term debt and stockholders' equity was $105.4
million. We do not currently plan to pay dividends, but rather to retain
earnings for use in the operation of our business and to fund future growth.
We used net cash of $12.7 million in operating activities in the nine
months ended September 30, 2000, primarily relating to funding of an increase in
accounts receivable and payments made pursuant to a major procurement contract
entered into on March 17, 2000 with a large international telecommunications
carrier.
We anticipate significant increases in working capital in the future
primarily as a result of increased sales of equipment. We will also continue to
expend significant amounts of capital on property and equipment related to the
expansion of our corporate headquarters, distribution facilities and equipment
testing infrastructure to support our growth. In addition, we will expend
significant resources relating to the implementation of our business-to-business
e-commerce initiative, various information technology enhancements, and our
international expansion efforts.
Net cash used in investing activities in the nine months ended September
30, 2000 was $3.7 million, primarily representing expenditures relating to our
business-to-business e-commerce initiative. Net cash used in financing
activities for the nine months ended September 30, 2000 was $478,000, primarily
reflecting the repayment of our capital lease.
We believe that cash and cash equivalents and anticipated cash flow from
operations will be sufficient to fund our working capital and capital
expenditure requirements for at least the next 12 months.
Certain Factors That May Affect Future Operating Results
You should carefully consider the risks described below. If any of the
following risks actually occur, our business could be harmed and the trading
price of our common stock could decline. You should also refer to other
information contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999, including our financial statements and related
notes.
Our operating results are likely to fluctuate in future periods, which might
lead to reduced prices for our stock.
Our annual or quarterly operating results are difficult to predict and are
likely to fluctuate significantly in the future as a result of numerous factors,
many of which are outside of our control. If our annual quarterly operating
results do not meet the expectations of securities analysts and investors, the
trading price of our stock could significantly decline. Factors that could
impact our operating results include:
. the rate, timing and volume of orders for the telecommunications
infrastructure equipment we sell;
. the rate at which telecommunications carriers de-install their
equipment;
. decreases in our selling prices due to competition in the secondary
market;
. our ability to obtain products cost-effectively from original equipment
manufacturers, or OEMs, distributors, carriers and other secondary
sources of telecommunications equipment;
. our ability to provide equipment and service offerings on a timely basis
to satisfy customer demand;
. variations in customer purchasing patterns due to seasonality and other
factors;
. write-offs due to inventory defects or obsolescence;
10
<PAGE>
. the sales cycle for equipment we sell, which can be relatively lengthy;
. delays in the commencement of our operations in new market segments and
geographic regions; and
. costs and our abilities relating to possible acquisitions and
integration of new businesses.
A downturn in the telecommunications industry or an industry trend toward
reducing or delaying additional equipment purchases due to cost-cutting
pressures could reduce demand for our products.
We rely significantly upon customers concentrated in the telecommunications
industry as a source of net revenue and de-installed equipment inventory. We
believe that a downturn in the telecommunications industry in general or
decreased carrier operating performance could result in reduced sales to our
customers and postpone network upgrades. These reduced sales could negatively
impact our ability to generate revenue and delayed projects could impair our
ability to obtain de-installed telecommunications equipment.
We do not have many formal relationships with suppliers of telecommunications
equipment and may not have access to adequate product supply.
For the nine months ended September 30, 2000, approximately 60% of our
net revenue was generated from the sale of de-installed telecommunications
equipment. Typically, we do not have supply contracts to obtain this equipment
and are dependent on the de-installation of equipment by carriers to provide us
with much of the equipment we sell. Our ability to buy de-installed equipment
from carriers is dependent on our relationships with them. If we fail to develop
and maintain these business relationships with carriers or they are unwilling to
sell de-installed equipment to us, our ability to sell de-installed equipment
will suffer.
Our customer base is concentrated and the loss of one or more of our key
customers would have a negative impact on our net revenue.
Historically, a significant portion of our sales have been to relatively
few customers. Sales to our ten largest customers accounted for 37.8% of our net
revenue in the nine months ended September 30, 2000, 32.1% in 1999, 43.8% in
1998 and 42.2% in 1997. In the nine months of 2000 and total year 1999, no
single customer accounted for over 10% of our net revenue. In 1998, ALLTEL
Corporation accounted for 10.2% of our net revenue and in 1997, Vodafone
AirTouch plc (now part of Verizon Wireless) accounted for 10.1% of our net
revenue. In addition, substantially all of our sales are made on a purchase
order basis. As a result, we cannot be certain that our current customers will
continue to purchase from us. The loss of, or any reduction in orders from, a
significant customer would have a negative impact on our net revenue.
The market for de-installed telecommunications equipment is relatively new and
it is unclear whether our equipment and service offerings and our business will
achieve long-term market acceptance.
The market for de-installed telecommunications equipment is relatively new
and evolving, and we are not certain that our potential customers will adopt and
deploy de-installed telecommunications equipment in their networks. For example,
with respect to de-installed equipment that includes a significant software
component, potential customers may be unable to obtain a license or sublicense
for the software. Even if they do purchase de-installed equipment, our potential
customers may not choose to purchase de-installed equipment from us for a
variety of reasons. Our customers may also re-deploy their displaced equipment
within their own networks which would eliminate their need for our equipment and
service offerings. These internal solutions would also limit the supply of de-
installed equipment available for us to purchase, which would limit the
development of this market.
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Our operating results could suffer as a result of our recent acquisition.
In October 2000, we acquired MSI Communications, Inc., a data networking
equipment and services company. We may not be able to effectively integrate
this company's operations, personnel, equipment or services into our
organization. These difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses. Moreover, our profit
margins may suffer because of acquisition-related costs or amortization of
acquired goodwill and other intangible assets. This acquisition could disrupt
our ongoing business and impact important customer relationships. There can be
no assurance that we will be successful in overcoming these risks or any other
problems encountered in connection with this acquisition.
We may fail to engage in future acquisitions which could limit our future
growth.
One of our strategies for growth is to engage in selective acquisitions.
Our ability to conduct such acquisitions may be limited by our ability to
identify potential acquisition candidates and obtain necessary financing. In the
event we are unable to identify and take advantage of these acquisition
opportunities, we may experience difficulty in achieving future growth in our
business.
If we do engage in future acquisitions, we may take actions that could dilute
our existing stockholders, or cause us to incur contingent liabilities, debt or
significant expense.
Future acquisitions of selective businesses, if they occur, could result in
the issuance of equity securities that would be dilutive to our existing
stockholders, or the incurrence of debt or contingent liabilities. Furthermore,
there can be no assurance that any strategic acquisition will succeed. We could
have difficulty assimilating or retaining the acquired companies' personnel or
integrating their operations, equipment or services into our organization.
These difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses. Any future acquisition carries the
risk that it could harm our operating results, profit margins or financial
condition.
Failure by our customers to accept our internet sales strategy could result in
lower than expected revenues.
We are developing an internet-based e-commerce sales solution intended to
enable us to better serve our customers and vendors. We anticipate this solution
will not be fully functional until the fourth quarter of 2000. These planned
services are very different from the traditional sales methods we currently
employ with our customers. There can be no assurance that our customers will
utilize our internet solution and any delay in the completion of this initiative
could negatively impact customer adoption of this solution.
We may fail to continue to attract, develop and retain key management and sales
personnel, which could negatively impact our operating results.
We depend on the performance of our executive officers and other key
employees. The loss of any member of our senior management, in particular, Dan
Firestone, our president and chief executive officer, or other key employees
could negatively impact our operating results and our ability to execute our
business strategy. In addition, we depend on our sales professionals to serve
customers in each of our markets. The loss of any of our sales professionals
could significantly disrupt our relationships with our customers. We do not have
"key person" life insurance policies on any of our employees except for Dan
Firestone.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in the
telecommunications equipment industry is intense. Additionally, we depend on our
ability to train and develop skilled sales people and an inability to do so
would significantly harm our growth prospects and operating performance. We have
experienced, and we expect to continue to experience difficulty in hiring and
retaining highly skilled employees.
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If we do not expand our international operations our growth could suffer.
We intend to continue expanding our business in international markets. This
expansion will require significant management attention and financial resources
to develop a successful international business, including sales, procurement and
support channels. We may not be able to maintain or increase international
market demand for the equipment we sell, and therefore we might not be able to
expand our international operations. We currently have limited experience
providing equipment outside the United States. Sales to customers outside of the
United States accounted for approximately 8.5% of our net revenue for the nine
months ended September 30, 2000.
Our ability to meet customer demand and the growth of our net revenue could be
harmed if we are unable to manage our inventory needs accurately.
To meet customer demand in the future, we believe it is necessary to
maintain or increase some levels of inventory. Failure to maintain adequate
inventory levels in these products could hurt our ability to make sales to our
customers. In the past, we have experienced inventory shortfalls, and we cannot
be certain that we will not experience shortfalls again in the future, which
could harm our reputation and our business. Further, rapid technology
advancement could make our existing inventory obsolete and cause us to incur
losses. In addition, if our forecasts lead to an accumulation of inventories
that are not sold in a timely manner, our business could suffer.
If we are unable to meet our additional capital needs in the future, we may not
be able to execute our business growth strategy.
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months. However, our resources may not be
sufficient to satisfy these requirements. We may need to raise additional funds
through public or private debt or equity financings to:
. take advantage of business opportunities, including more rapid
international expansion or acquisitions of complementary businesses;
. develop and maintain higher inventory levels;
. gain access to new product lines;
. develop new services; or
. respond to competitive pressures.
Any additional financing we may need might not be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our business could suffer if the inability to
raise this funding threatens our ability to execute our business growth
strategy. Moreover, if additional funds are raised through the issuance of
equity securities, the percentage of ownership of our current stockholders will
be reduced. Newly issued equity securities may have rights, preferences and
privileges senior to those of investors in our common stock. In addition, the
terms of any debt could impose restrictions on our operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We currently do not hold any derivative instruments and do not engage in
hedging activities. All of our revenue
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and capital spending is denominated in U.S. dollars. We invest our excess cash
in short term, interest-bearing, investment grade marketable securities. Due to
the short time the investments are outstanding and their general liquidity,
these instruments are classified as cash equivalents and do not represent a
material interest rate risk. As of September 30, 2000, we had no long term debt
outstanding.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, we may be involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date hereof, we are not a
party to or aware of any litigation or other legal proceeding that could harm
our business.
ITEM 2. Use of Proceeds
On November 12, 1999, a registration statement on Form S-1 (No. 333-86927)
was declared effective by the Securities and Exchange Commission, pursuant to
which 9,775,000 shares of the Company's common stock were offered and sold for
the account of the Company at a price of $12.00 per share, generating gross
offering proceeds of $117.3 million. The managing underwriters were Lehman
Brothers, Dain Rauscher Wessels and Thomas Weisel Partners LLC.
In connection with the offering, the Company incurred $8.2 million in
underwriting discounts and commissions, and approximately $1.7 million in other
related expenses. The net proceeds from the offering, after deducting the
foregoing expenses, were $107.4 million.
The Company has used a portion of the net proceeds of the offering to pay
off the $50.0 million term loan facility, the then outstanding amount on the
revolving loan facility of approximately $6.4 million, fund working capital
needs, and to pay for part of the cost of acquiring MSI Communications, Inc. in
October 2000.
ITEM 3. Default Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 14th day of
November, 2000.
Somera Communications, Inc.
By: /s/ Gary J. Owen
-----------------------------
(Gary J. Owen
Chief Financial Officer)
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EXHIBIT INDEX
EXHIBIT EXHIBIT
NO. DESCRIPTION
-------------- ---------------------------------
27.1 Financial Data Schedule
