<PAGE>
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 June 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 June 30, 2000
Common Stock, $0.001 par value 47,864,134
<PAGE>
SOMERA COMMUNICATIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2000 and December 31, 1999
(unaudited)
Statements of Operations for the Three and Six Month
Periods Ended June 30, 2000 and 1999 (unaudited)
Statements of Cash Flows for the Six Month Periods Ended June 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, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- -------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................................ $ 39,851 $ 54,492
Accounts receivable, (net of allowance for doubtful accounts of $1,120 and $736
at June 30, 2000 and December 31, 1999 ) ............................................... 27,308 19,592
Inventories, net ......................................................................... 30,123 18,386
Deferred tax asset--current portion ...................................................... 2,236 2,236
Other current assets ..................................................................... 2,493 2,147
-------- --------
Total current assets .................................................................. 102,011 96,853
Property and equipment, net ................................................................ 2,619 1,505
Deferred tax asset--net of current portion ................................................. 15,878 16,490
Other assets ............................................................................... 852 903
-------- --------
Total assets .......................................................................... $121,360 $115,751
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable ......................................................................... $ 18,722 $ 23,636
Accrued compensation ..................................................................... 1,571 1,707
Other accrued liabilities ................................................................ 2,714 2,284
Capital lease obligations--current portion ............................................... -- 830
Income taxes payable ..................................................................... -- 508
-------- --------
Total current liabilities ............................................................. 23,007 28,965
-------- --------
Stockholders' equity:
Common stock ............................................................................. 48 48
Additional paid in capital ............................................................... 66,419 66,419
Retained earnings ........................................................................ 32,228 20,905
Unearned stock-based compensation ........................................................ (342) (586)
-------- --------
Total stockholders' equity ............................................................ 98,353 86,786
-------- --------
Total liabilities and stockholders' equity ............................................ $121,360 $115,751
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SOMERA COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share/unit data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue ................................................ $51,708 $29,586 $91,880 $52,834
Cost of net revenue ........................................ 32,835 19,414 57,677 34,023
------- ------- ------- -------
Gross profit .......................................... 18,873 10,172 34,203 18,811
Operating expenses:
Sales and marketing ...................................... 5,028 2,418 9,274 4,385
General and administrative (excludes stock-based
compensation of $122, $193, $244 and $193 for the three
and six months ended June 30, 2000 and 1999) ............ 3,541 1,579 6,308 2,999
Stock-based compensation ................................. 122 193 244 193
------- ------- ------- -------
Total operating expenses .............................. 8,691 4,190 15,826 7,577
------- ------- ------- -------
Income from operations ................................... 10,182 5,982 18,377 11,234
Interest income (expense), net ............................. 602 (85) 1,264 (144)
------- ------- ------- -------
Income before income taxes ............................... 10,784 5,897 19,641 11,090
Income tax provision ....................................... 4,556 -- 8,318 --
------- ------- ------- -------
Net income ............................................ $ 6,228 $ 5,897 $11,323 $11,090
======= ======= ======= =======
Net income per share/unit--basic ........................... $ 0.13 $ 0.15 $ 0.24 $ 0.29
======= ======= ======= =======
Weighted average shares/units--basic ....................... 47,848 38,063 47,843 38,063
======= ======= ======= =======
Net income per share/unit--diluted ......................... $ 0.13 $ 0.15 $ 0.23 $ 0.29
======= ======= ======= =======
Weighted average shares/units--diluted ..................... 48,165 38,063 48,337 38,063
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SOMERA COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................................ $ 11,323 $11,090
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization .......................................................... 291 94
Provision for doubtful accounts ........................................................ 1,080 209
Provision for write-down of inventories ................................................ 1,518 539
Deferred tax benefit ................................................................... 612 --
Stock-based compensation ............................................................... 244 193
Forgiveness of loans to officers ....................................................... 38 --
Training costs financed by capital lease ............................................... -- 65
Changes in operating assets and liabilities:
Accounts receivable ................................................................. (8,796) (4,961)
Inventories ......................................................................... (13,255) (6,466)
Other current assets ................................................................ (384) (43)
Accounts payable .................................................................... (4,914) 5,759
Accrued compensation ................................................................ (136) 454
Other accrued liabilities ........................................................... 430 110
Income taxes payable ................................................................ (508) --
-------- -------
Net cash provided by (used in) operating activities .............................. (12,457) 7,043
-------- -------
Cash flows from investing activities:
Acquisition of property and equipment ..................................................... (1,405) (272)
Decrease (increase) in other assets ....................................................... 51 (86)
-------- -------
Net cash used in investing activities ............................................ (1,354] (358)
-------- -------
Cash flows from financing activities:
Payment of capital lease .................................................................. (830) --
Proceeds from revolving loan facility ..................................................... -- 779
Distributions to members .................................................................. -- (8,912)
-------- -------
Net cash used in financing activities ............................................ (830) (8,133)
-------- -------
Net decrease in cash and cash equivalents ................................................... (14,641) (1,448)
Cash and cash equivalents, beginning of period .............................................. 54,492 1,930
-------- -------
Cash and cash equivalents, end of period .................................................... $ 39,851 $ 482
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SOMERA COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1--Formation and Business of the Company and Basis of Presentation:
Somera Communications, LLC. ("Somera") 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 received one share of Somera, Inc. in exchange for each unit
held and Somera, Inc. assumed the assets, liabilities and the operations of
Somera. The historical results of Somera 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 and Somera, Inc.
The Company is a provider of telecommunications infrastructure services and
equipment to telecommunications carriers. 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.
The Company does not currently hold derivative instruments or engage in hedging
activities.
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.
In December 1999, the Securities and Exchange Commission 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. Management believes that, based on information
currently available, the adoption of SAB 101 will not have a material effect on
the financial position or results of operations of the Company. However, the
guidance given in SAB 101 is still under discussion by the Securities and
Exchange Commission and may be revised. Such revisions could have a material
effect on the financial position or results of operations of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
Accounting for Certain Transactions
<PAGE>
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.
Management believes that the effects of the conclusions which are specific to
events after December 15, 1998 and January 12, 2000 will not have a material
effect on the financial position and results of operations on adoption of FIN
44. In addition, management believes that the adoption of the other conclusions
of FIN 44 will not have a material effect on the financial position or results
of operations of the Company.
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 June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator
Net income ............................................... $ 6,228 $ 5,897 $11,323 $11,090
------- ------- ------- -------
Denominator
Weighted average shares/units--basic ..................... 47,848 38,063 47,843 38,063
Dilutive effect of options and warrants to .
purchase shares/units ................................ 317 -- 494 --
------- ------- ------- -------
Weighted average shares/units--diluted ...................... 48,165 38,063 48,337 38,063
------- ------- ------- -------
Net income per share/unit--basic ............................ $ 0.13 $ 0.15 $ 0.24 $ 0.29
======= ======= ======= =======
Net income per share/unit--diluted .......................... $ 0.13 $ 0.15 $ 0.23 $ 0.29
======= ======= ======= =======
</TABLE>
Options to purchase 31,250 shares of common stock have been excluded from the
calculation of net income per share/unit-diluted for the three and six month
periods ended June 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>
Computation of 1999 adjusted earnings per unit:
<S> <C> <C>
Income before income taxes .......................................... $5,897 $11,090
Pro forma income taxes at 40% ....................................... 2,359 4,436
------ -------
Adjusted net income ................................................. $3,538 $ 6,654
====== =======
Adjusted net income per unit--basic .................................... $ 0.09 $ 0.17
====== =======
Adjusted net income per unit--diluted .................................. $ 0.09 $ 0.17
====== =======
</TABLE>
Note 4--Comprehensive Income:
There was no difference between the Company's net income and its total
comprehensive income for the three and six month periods ended June 30, 2000 and
1999.
<PAGE>
Note 5--Commitments:
On March 17, 2000, the Company entered into a contract with an international
telecommunications carrier to de-install and procure approximately $20 million
of currently installed telecommunications equipment. The Company has paid
approximately $13 million under this contract as of June 30, 2000.
Note 6--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 June 30, Six Months Ended June 30,
--------------------------- --------------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue:
New equipment $19,443 $ 8,182 $36,099 $14,021
De-installed equipment 32,265 21,404 55,781 38,813
------- ------- ------- -------
Total $51,708 $29,586 $91,880 $52,834
======= ======= ======= =======
Gross profit:
New equipment $ 3,399 $ 1,225 $ 6,729 $ 2,148
De-installed equipment 15,474 8,947 27,474 16,663
------- ------- ------- -------
Total $18,873 $10,172 $34,203 $18,811
======= ======= ======= =======
</TABLE>
Net revenue information by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue:
United States $48,353 $26,698 $85,623 $45,760
Canada 1,974 389 3,680 1,178
Latin America 1,269 2,375 2,349 5,547
Other 112 124 228 349
------- ------- ------- -------
Total $51,708 $29,586 $91,880 $52,834
======= ======= ======= =======
</TABLE>
All long-lived assets are maintained in the United States.
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 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
<PAGE>
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 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 June 30, Six Months Ended June 30,
----------------------------- ---------------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue ..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of net revenue ............................................. 63.5 65.6 62.8 64.4
----- ----- ----- -----
Gross profit .................................................... 36.5 34.4 37.2 35.6
----- ----- ----- -----
Operating expenses:
Sales and marketing .......................................... 9.7 8.2 10.1 8.3
General and administrative ................................... 6.9 5.3 6.8 5.7
Stock-based compensation ..................................... 0.2 0.7 0.3 0.3
----- ----- ----- -----
Total operating expenses ................................ 16.8 14.2 17.2 14.3
----- ----- ----- -----
Income from operations .......................................... 19.7 20.2 20.0 21.3
Interest income (expense), net .................................. 1.2 ( 0.3) 1.4 ( 0.3)
----- ----- ----- -----
Income before income taxes ...................................... 20.9 19.9 21.4 21.0
Income tax provision ............................................ 8.9 -- 9.1 --
----- ----- ----- -----
Net income ...................................................... 12.0% 19.9% 12.3% 21.0%
===== ===== ===== =====
</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 75% to $51.7 million
in the second quarter of 2000 and 74% to $91.9 million for the six months, from
$29.6 million and $52.8 million for the comparable periods in 1999. Net revenue
attributable to new equipment sales increased to $19.4 million in the second
quarter of 2000 and $36.1 million for the six months, from $8.2 million and
$14.0 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 response to customers' demand for new
telecommunications equipment. Net revenue attributable to de-installed equipment
sales increased to $32.3 million in the second quarter of 2000 and $55.8 million
for the six months, from $21.4 million and $38.8 million for the comparable
periods in 1999. The increase in net revenue attributable to de-installed
equipment sales was due to greater demand among our customers in connection with
the build out and servicing of their existing networks. We believe net revenue
attributable to de-installed equipment will increase as our customers
<PAGE>
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 69% to $32.8 million in the second quarter of 2000 and 70% to
$57.7 million for the six months, from $19.4 million and $34.0 million for the
comparable periods in 1999. Cost of net revenue attributable to new equipment
sales increased to $16.0 million in the second quarter of 2000 and $29.4 million
for the six months, from $7.0 million and $11.9 for the comparable periods in
1999. Cost of net revenue attributable to de-installed equipment sales increased
to $16.8 million in the second quarter of 2000 and $28.3 million for the six
months, from $12.5 million and $22.2 million for the comparable periods in 1999.
The increase in cost of net revenue 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 36.5% in the second quarter of 2000 and
37.2% for the six months, from 34.4% and 35.6% for the comparable periods in
1999. Gross margin attributable to new equipment sales increased to 17.5% in the
second quarter of 2000 and 18.6% for the six months, from 15.0% and 15.3% 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 attributable to de-
installed equipment sales increased to 48.0% in the second quarter of 2000 and
49.3% for the six months, from 41.8% and 42.9% 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 108% to $5.0 million in the second quarter of 2000 and 112% to $9.3
million for the six months, from $2.4 million and $4.4 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 as we
expand our product and service offerings, increase our hiring of additional
sales and marketing personnel, pay commissions consistent with increased gross
profit, and continue developing our e-commerce initiative, 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 124% to $3.5 million in the
second quarter of 2000 and 110% to $6.3 million for the six months, from $1.6
million and $3.0 million, for the comparable periods in 1999. This increase was
due primarily to the increase in the number of employees relating to the
expansion of our operations, recruitment costs, expenses relating to the 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 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 $39.9 million at June 30, 2000. Cash
and cash equivalents are highly liquid investments with original maturities of
ninety days or less. At June 30, 2000, we had no long term debt and
stockholders' equity was $98.4 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 $12.4 million in operating activities in the six months
ended June 30, 2000, primarily
<PAGE>
relating to payments made pursuant to the approximately $20.0 million
procurement contract entered into on March 17, 2000 with a major international
telecommunications carrier.
We anticipate significant increases in working capital in the future primarily
as a result of increased sales of equipment and higher levels of inventory. 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 six months ended June 30, 2000
was $1,354,000, primarily representing expenditures relating to our business-to-
business e-commerce initiative. Net cash used in financing activities for the
six months ended June 30, 2000 was $830,000, representing 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;
. 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
<PAGE>
. 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.
Through the end of 1999, 65% or more of our annual net revenue has been
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 37.4% of our net
revenue in the six months of 2000, 32.1% in 1999, 43.8% in 1998 and 42.2% in
1997. In the six 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, and no
customer has entered into a long-term purchasing agreement with us. 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.
Failure by our customers to accept our internet sales strategy could result in
lower than expected revenues.
We recently began developing an internet-based e-commerce sales solution
intended to enable us to better serve
<PAGE>
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.
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 10.9% of our net revenue in 1999, 19.7% of our net
revenue in 1998 and 16.5% of our net revenue in 1997.
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:
<PAGE>
. 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 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 June
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 $117,300,000. The managing underwriters were Lehman Brothers, Dain
Rauscher Wessels and Thomas Weisel Partners LLC.
In connection with the offering, the Company incurred $8,211,000 in
underwriting discounts and commissions, and approximately $1,693,000 in other
related expenses. The net proceeds from the offering, after deducting the
foregoing expenses, were $107,396,000.
The Company has used a portion of the net proceeds of the offering to pay off
the $50.0 million term loan facility and the then outstanding amount on the
revolving loan facility of approximately $6.4 million.
ITEM 3. Default Upon Senior Securities
None.
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on May 2, 2000, the
following matters were acted upon by the stockholders of the Company:
1. The re-election of Peter Y. Chung as Class 1 director for an additional
three-year term:
Shares in favor: 45,588,679
Shares withheld: 24,042
2. The ratification of the appointment of PricewaterhouseCoopers LLP as the
independent accountants of the Company for the fiscal year ending December
31, 2000:
Shares in favor: 45,581,732
Shares against: 24,185
Shares abstained: 6,804
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
<PAGE>
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 10th day of August,
2000.
Somera Communications, Inc.
By: /s/ Gary J. Owen
---------------------------------
(Gary J. Owen
Chief Financial Officer)
