<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-30741
ACCELERATED NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0442752
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 SCIENCE DRIVE 93021
MOORPARK, CALIFORNIA (Zip Code)
(Address of principal executive office)
(805) 553-9680
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL DOCUMENTS AND
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 NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock
outstanding as of July 31, 2000: 50,452,427 shares.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
------------------------------ ----
<S> <C> <C>
Item 1. Consolidated Balance Sheets at June 30, 2000 and December 31, 1999........................... 1
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2000 and 1999................................................................ 2
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999........ 3
Notes to Consolidated Financial Statements................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................. 31
Part II Other Information
--------------------------
Item 1. Legal Proceedings............................................................................ 32
Item 2. Changes in Securities and Use of Proceeds.................................................... 32
Item 3. Defaults Upon Senior Securities.............................................................. 33
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 33
Item 5. Other Information............................................................................ 33
Item 6. Exhibits and Reports on Form 8-K............................................................. 34
A. Exhibits................................................................................ 34
B. Reports on Form 8-K..................................................................... 34
Signatures............................................................................................ 35
</TABLE>
In this Report, "Accelerated Networks," the "Company," "we," "us" and
"our" collectively refers to Accelerated Networks, Inc.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCELERATED NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF
--------------------------
June 30, December 31,
2000 1999
---------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 103,853 $ 15,207
Accounts receivable, net of allowance for doubtful accounts of $314
(2000) and $110 (1999) ............................................. 6,344 3,277
Amounts due from related party ........................................ 613 1,104
Inventories ........................................................... 3,917 3,811
Prepaid and other current assets ...................................... 514 296
--------- --------
Total current assets ................................................ 115,241 23,695
Property and equipment, net .............................................. 7,325 4,840
Other Assets ............................................................. 171 143
--------- --------
Total assets ........................................................ $ 122,737 $ 28,678
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ................................. $ 7,823 $ 3,567
Accrued payroll ....................................................... 924 756
Capital lease obligations, current .................................... 12 28
Credit facilities, current ............................................ 2,230 884
Deferred revenue ...................................................... 532 219
--------- --------
Total current liabilities ........................................... 11,521 5,454
Capital lease obligations, net of current portion ........................ 10 13
Credit facilities, net of current portion ................................ 209 1,919
--------- --------
Total liabilities ................................................... 11,740 7,386
--------- --------
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value; authorized --
5,000 (2000) and 31,946 (1999) shares; issued and outstanding --
0 (2000) and 31,651 (1999) shares; liquidation preference of $0 (2000)
$50,091 (1999) ........................................................ -- 49,857
Stockholders' equity (deficit):
Common stock, authorized -- 200,000 (2000) and 75,000 (1999); issued
and outstanding -- 50,452 (2000) and 10,166 (1999) shares .......... 50 579
Additional paid-in capital ............................................ 184,554 13,481
Deferred stock compensation ........................................... (10,357) (10,165)
Accumulated deficit ................................................... (63,250) (32,460)
--------- --------
Total stockholders' equity (deficit) ................................ 110,997 (28,565)
--------- --------
Total liabilities and stockholders' equity (deficit) ................ $ 122,737 $ 28,678
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 4
ACCELERATED NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenue (includes related party revenue of
$487 and $3,283 for the three and six months
ended June 30, 2000, respectively) ......... $ 8,770 $ 1,245 $ 15,922 $ 1,245
Cost of revenue ............................... 5,692 1,167 10,779 1,167
-------- ------- -------- -------
Gross profit .................................. 3,078 78 5,143 78
Operating expenses
Research and product development ........... 5,540 2,200 9,690 4,667
Sales and marketing ........................ 6,509 1,648 10,472 2,600
General and administrative ................. 1,325 420 2,119 809
Amortization of deferred stock compensation 2,389 408 4,774 646
-------- ------- -------- -------
Total operating expenses ................. 15,763 4,676 27,055 8,722
-------- ------- -------- -------
Loss from operations .......................... (12,685) (4,598) (21,912) (8,644)
Other income (expense):
Interest income ............................ 689 387 1,130 599
Interest expense ........................... (69) (9) (125) (20)
-------- ------- -------- -------
Loss before provision for income taxes ........ (12,065) (4,220) (20,907) (8,065)
Provision for income taxes .................... -- -- 1 --
-------- ------- -------- -------
Net loss ...................................... (12,065) (4,220) (20,908) (8,065)
Beneficial conversion feature ................. -- -- (9,882) --
-------- ------- -------- -------
Net loss applicable to common stockholders .... $(12,065) $(4,220) $(30,790) $(8,065)
======== ======= ======== =======
Basic and diluted net loss per share applicable
to common stockholders ..................... $ (1.08) $ (0.69) $ (3.26) $ (1.36)
Weighted-average shares outstanding used to
compute basic and diluted net loss per share
applicable to common stockholders .......... 11,213 6,153 9,438 5,923
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
ACCELERATED NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
2000 1999
--------- --------
<S> <C> <C>
Operating activities:
Net loss .............................................................. $ (20,908) $ (8,065)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 1,123 336
Provision for bad debts ............................................. 203 --
Issuance of warrant to US WEST ...................................... 1,385 --
Amortization of deferred stock compensation ......................... 4,774 646
Changes in current assets and liabilities:
Accounts receivable ............................................... (2,780) (1,217)
Inventories ....................................................... (106) (2,309)
Prepaid and other current assets .................................. (217) 88
Other assets ...................................................... (28) (118)
Accounts payable and accrued expenses ............................. 4,256 1,640
Accrued payroll ................................................... 168 330
Deferred revenue .................................................. 313 --
--------- --------
Net cash used in operating activities ........................... (11,817) (8,669)
Investing activities:
Purchase of available-for-sale securities ............................. -- (2,000)
Maturity of available-for-sale securities ............................. -- 7,954
Purchase of property and equipment .................................... (3,608) (1,456)
--------- --------
Net cash provided by (used in) investing activities ............. (3,608) 4,498
Financing activities:
Proceeds from issuance of common stock, net ........................... 65,352 --
Proceeds from issuance of redeemable convertible preferred stock, net . 38,425 29,939
Proceeds from exercise of stock options, net of repurchases ........... 677 85
Payments under capital lease obligations and credit facilities ........ (383) (81)
Proceeds from credit facilities ....................................... -- 483
--------- --------
Net cash provided by financing activities ....................... 104,071 30,426
--------- --------
Net increase (decrease) in cash and cash equivalents ............ 88,646 26,225
Cash and cash equivalents at beginning of year ........................... 15,207 3,507
--------- --------
Cash and cash equivalents at end of year ................................. $ 103,853 $ 29,762
========= ========
Supplemental disclosure of noncash transactions:
Conversion of preferred to common stock upon completion of initial
public offering ...................................................... $ 88,282 $ --
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
ACCELERATED NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INTERIM INFORMATION RELATING TO THE PERIODS ENDED
JUNE 31, 1999 AND 2000 IS UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Accelerated
Networks, Inc. (the "Company") are unaudited, other than the consolidated
balance sheet at December 31, 1999, and reflect all material adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to present fairly the Company's financial position,
results of operations and cash flows for the interim periods. The results of
operations for the current interim periods are not necessarily indicative of
results to be expected for the entire fiscal year.
These consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Registration Statement on Form S-1, as amended, as
filed with the Securities and Exchange Commission on June 22, 2000 for the year
ended December 31, 1999.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Adoption of SAB 101 is required in the fourth quarter of 2000. The Company is
evaluating the provisions of SAB 101; however, the Company believes adoption of
SAB 101 will not have a material impact on the Company's financial statements.
3. COMPLETION OF INITIAL PUBLIC OFFERING
On June 28, 2000, the Company completed its initial public offering.
The Company issued 4.6 million shares of common stock in exchange for net
proceeds of approximately $62.4 million, net of underwriters' discount of $4.8
million and other offering expenses of $1.8 million. On June 28, 2000,
immediately following the closing of the initial public offering in a concurrent
private placement, the Company issued 200,000 shares of common stock to U S WEST
Internet Ventures, Inc. ("U S WEST") in exchange for proceeds of $3 million.
Upon completion of the initial public offering, all $88.3 million of
the Company's redeemable convertible preferred stock converted into 35.1 million
shares of common stock.
4
<PAGE> 7
4. NET LOSS PER SHARE
Basic and diluted net loss per share applicable to common stockholders
has been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase.
The following table presents the computation of basic and diluted net
loss per share applicable to common stockholders (in thousands, except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Net loss applicable to common stockholders ...... $(12,065) $(4,220) $(30,790) $(8,065)
======== ======= ======== =======
Denominator (Basic and diluted):
Weighted-average common shares
outstanding ................................ 13,519 9,839 11,914 9,613
Less weighted-average common shares
subject to repurchase ...................... (2,306) (3,686) (2,476) (3,690)
-------- ------- -------- -------
Weighted-average shares used to compute basic and
diluted net loss per common share applicable
to common stockholders ....................... 11,213 6,153 9,438 5,923
======== ======= ======== =======
Basic and diluted net loss per common share
applicable to common stockholders ............ $ (1.08) $ (0.69) $ (3.26) $ (1.36)
</TABLE>
The following table presents the common stock equivalents (potential common
stock) that are not included in the diluted net loss per share calculation above
because their effect would be antidilutive for the periods indicated (shares in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted-average common stock equivalents:
Series A preferred stock ................. 10,347 11,220 10,771 11,220
Series B preferred stock ................. 10,684 11,585 11,121 11,585
Series C preferred stock ................. 8,158 8,846 8,492 6,192
Series D preferred stock ................. 3,187 -- 2,370 --
Unvested shares of common stock subject to
repurchase ............................. 2,306 3,686 2,476 3,690
Warrants ................................. 29 -- 29 --
Stock options ............................ 5,956 2,690 5,193 2,456
------ ------ ------ ------
40,667 38,027 40,452 35,143
====== ====== ====== ======
</TABLE>
5
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5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials ........... $1,679 $1,735
Work-in-process ......... 1,055 710
Finished goods .......... 1,183 1,366
------ ------
$3,917 $3,811
====== ======
</TABLE>
6. RELATED-PARTY TRANSACTIONS
For the three and six months ended June 30, 2000, the Company sold
product of approximately $487,000 and $3,283,000, respectively, to a stockholder
of the Company. No sales were made to the stockholder in the corresponding
periods for the preceding fiscal year. At June 30, 2000 and December 31, 1999,
amounts due from the stockholder totaled $613,000 and $1,104,000, respectively,
which are included in accounts receivable.
7. SUBSEQUENT EVENT
In July 2000, the Company repaid the outstanding $2.2 million balance
of their $2,500,000 line of credit, which was used to finance equipment
purchases ("Equipment Line"). The Equipment Line bears interest at the bank's
base rate plus .5% per annum. At June 30, 2000, amounts outstanding under the
Equipment Line totaled $2.2 million and was included in current liabilities. At
December 31, 1999, amounts outstanding under the Equipment Line totaled
$2,500,000, of which approximately $833,000 was current.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements based on
our current expectations, estimates and projections about our industry,
management's beliefs and certain assumptions made by us. Words such as
"anticipates," "expects," "intends," "plans," "believes," "may," "will" or
similar expressions are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. Such statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors. The section entitled "Risk Factors"
set forth in this Form 10-Q and similar discussions in our registration
statement declared effective by the SEC on June 22, 2000, discuss some of the
important risk factors that may affect our business, results of operations and
financial condition. You should carefully consider those risks, in addition to
the other information in this report and in our other filings with the SEC,
before deciding to invest in our company or to maintain or increase your
investment. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason. The information contained in this
Form 10-Q is not a complete description of our business or the risks associated
with an investment in our common stock. We urge you to carefully review and
consider the various disclosures made by us in this report and in our other
reports filed with the SEC that discuss our business in greater detail.
OVERVIEW
We design and market telecommunications products that enable the
bundling of voice and data services over a single broadband access network. Our
multiservice broadband access products are designed to allow our customers to
efficiently and cost-effectively deliver and manage multiple voice and data
services over a single broadband access facility using various broadband access
technologies. Our target customers are CLECs, IXCs, RBOCs, ILECs, and foreign
telephone companies.
We were incorporated in October 1996. From inception through March
1999, our operating activities consisted primarily of developing a research and
development organization, testing prototype designs, staffing of our marketing,
sales, field service and customer support organizations, building a management
team, and establishing relationships with potential customers. We commenced
shipments of our MSAP voice gateways, MSAP concentrators and carrier-class IADs
in the second calendar quarter of 1999. Sales of our MSAP and carrier-class IAD
products constituted approximately 58% and 42%, respectively, of our revenue for
the year ended December 31, 1999 and 59% and 41%, respectively, of our revenue
for the three months ended June 30, 2000. Since inception, we have incurred
significant losses and as of June 30, 2000, we had an accumulated deficit of
$63.3 million. We have not achieved profitability on a quarterly or annual
basis. We expect to incur significant research and development, sales and
marketing, and general and administrative expenses in the future and, as a
result, we will need to generate significantly higher revenue to achieve and
maintain profitability.
7
<PAGE> 10
To date, we have generated substantially all of our revenue from sales
of our MSAP and carrier-class IAD products and we believe that sales of these
products will continue to account for substantially all of our revenue for the
foreseeable future. We have not generated any significant amount of revenue from
sales of our AccessPilot element management system software or sales of our
extended warranty and customer support services, and we do not expect that sales
of these products and services will comprise a significant portion of our
revenue in the foreseeable future. A majority of all our sales of products are
through our direct sales force and we expect this trend to continue for the
foreseeable future. In addition, we sell a significant amount of our products in
the United States through our OEM relationship with Siemens ICN, an affiliate of
Siemens AG. For the year ended December 31, 1999, direct sales and sales through
Siemens ICN accounted for 84% and 16%, respectively. To date, we have not
generated any revenue from international sales, although we recently initiated
sales and marketing efforts internationally. As part of these efforts, we
recently expanded our relationship with Siemens by entering into an OEM
relationship with Siemens AG to distribute our products outside the United
States.
For the year ended December 31, 1999, sales to our three largest
customers accounted for approximately 90% of our revenue, of which sales to CTC
Communications Group, FirstWorld Communications and Siemens ICN accounted for
approximately 54%, 20% and 16% of our revenue, respectively. For the three
months ended June 30, 2000, sales to our four largest customers accounted for
approximately 87% of our revenue, of which sales to Light Year Unidial, CTC
Communications Group, Solunet and FirstWorld Communications accounted for
approximately 36%, 23%, 15% and 13% of our revenue, respectively. While we
anticipate that sales to any specific customer will vary from period to period,
we expect that we will continue to have significant customer concentration for
the foreseeable future. To date, we have derived a significant portion of our
revenue from a small number of orders and all of our sales have been made on the
basis of individual purchase orders, rather than long-term commitments.
We recognize revenue at the time products are shipped to our customers,
provided that a purchase order has been received or a contract has been
executed, there are no uncertainties regarding customer acceptance, the fee is
fixed and determinable and collectibility is deemed probable. If uncertainties
regarding customer acceptance exist, revenue is recognized when such
uncertainties are resolved. Revenue associated with multiple-element
arrangements (products, upgrades, enhancements and post-contract support) are
allocated to each element based on vendor-specific objective evidence. Extended
warranty and other service revenues are recognized ratably over the respective
service periods. Such services have not been significant to date. Amounts billed
in excess of revenue recognized are deferred and included as deferred revenue on
the consolidated balance sheet. As of June 30, 2000, we had approximately
$532,000 of deferred revenue. Although we have not generated any support,
installation or training revenue to date, we plan to recognize support revenue
ratably over the support period and installation and training revenue as
services are performed. We generally warrant our products for one year after
sale and provide for estimated future warranty costs at the time we recognize
revenue.
Our cost of revenue consists primarily of amounts paid to third-party
contract manufacturers, personnel and other costs such as royalties on product
shipments, warranty expense and assembly costs. We outsource most of our product
and printed circuit board assembly to contract manufacturers. Avnet procures the
majority of our component kits for its
8
<PAGE> 11
sub-contractor, A-Plus, which assembles, manufactures and tests our products at
its facility in San Jose, California. Arrow performs the same services as Avnet
for a limited number of our products and also sub-contracts with A-Plus for
assembly, manufacturing and testing.
Our MSAP products typically have higher gross margin than our
carrier-class IADs. Our actual mix of products sold will depend significantly on
the amount of orders from new and existing customers, and the stage of their
network deployment. As a result, our gross margin may fluctuate significantly
from period to period. In general, our gross margin will primarily be affected
by the following factors:
- demand for our products and services;
- new product introductions both by us and by our competitors;
- changes in our pricing policies and those of our competitors;
- the mix of our products and services sold;
- the mix of sales channels through which our products and services
are sold; and
- the volume manufacturing pricing we are able to attain from our
contract manufacturers for outsourced manufacturing.
Research and development expenses consist primarily of salaries and
related personnel costs, consulting costs, costs associated with licensed
technology, prototype costs and other costs related to the design, development,
testing, and enhancements of our products. We also incur significant expenses in
connection with the purchase of equipment used to test our products as well as
the use of our products for internal design and learning purposes. We expense
our research and development costs as they are incurred. Several components of
our research and development efforts require significant expenditures, the
timing of which can cause significant quarterly variability in our expenses. We
believe that continued investment in research and development is critical to
attain our strategic product development objectives and to meet changing
customer requirements and technological advances. As a result, we expect our
research and development expenses to increase in the future.
Sales and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with promotional and
other marketing expenses. We intend to expand our direct and indirect sales
operations substantially, both domestically and internationally, in order to
increase market penetration of our products. We expect that sales and marketing
expenses will increase substantially over the next year as we hire additional
sales and marketing personnel, initiate additional marketing programs and
establish sales offices in additional domestic and international locations. In
addition, we believe our future success is dependent upon establishing
successful relationships with a variety of distribution partners. To date, we
have only entered into OEM relationship with Siemens AG and one of its
affiliates, Siemens ICN. To be successful, we must reach agreements with
additional distribution partners, both domestically and internationally.
Similarly, the complexity of our products require highly trained customer
service, professional services and support personnel. We expect to significantly
expand our customer service, professional services and support organization to
meet these requirements. We believe that continued investment in sales and
marketing is critical to our success and expect these expenses to increase in
the future.
9
<PAGE> 12
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, human resources, information
technology, and administrative personnel, as well as recruiting, professional
fees, insurance and other general corporate expenses. We expect general and
administrative expenses to increase in the future as we add personnel and incur
additional costs related to the growth of our business and operation as a public
company.
Currently, competition in our market is intense. We continue to add
features to our products based on the needs of our customers. This has resulted
in increased research and development expenses and may result in reduced
operating margins. We expect competition to increase in the future. This
competition may also result in price reductions and loss of market share. We
expect that product life cycles will remain relatively short and that the
average selling price and gross margin for our products will decline as each
product matures. To offset such declines, we must introduce new, higher
performance products on a timely basis. Further, we must reduce our
manufacturing costs on a per unit basis and sell sufficient volumes in order to
maintain our gross margin. If we fail to reduce our manufacturing costs on a per
unit basis or achieve volume shipment requirements, our gross margin will
decline. Any of the above events could have a material and adverse effect on our
business, results of operations and financial condition.
In 1998 and 1999, we recorded total deferred stock compensation of
approximately $13.2 million, representing the difference between the deemed
value of our common stock for accounting purposes and the exercise price of the
options at their date of grant. Options granted are typically subject to a four
year vesting period. Stock issuances are generally subject to our right to
repurchase the stock, which lapses over a four year period. We are amortizing
the deferred stock compensation over the vesting periods of the applicable
options, or repurchase periods for the exercised options, generally over four
years. After taking into account the approximately $3.2 million of amortization
charges we recognized in 1998 and 1999, the outstanding future annual
amortization for deferred stock compensation based on option grants as of
December 31, 1999 will be approximately $5.4 million, $2.8 million, $1.5 million
and $0.5 million for the years ending December 31, 2000, 2001, 2002 and 2003,
respectively. In addition, we recorded approximately $5.0 million of deferred
stock compensation for the six months ended June 30, 2000. This amount will be
amortized over the vesting period of the underlying options.
In connection with an agreement with an affiliate of U S West, Inc. to
test certain of our products for potential deployment in U S West's network, we
issued a two-year warrant to U S WEST Internet Ventures in June 2000. The
Warrant is exercisable for $3.0 million of our common stock at a price per share
of $15.00. We recorded sales and marketing expenses of approximately $1.4
million for the fair value of the warrant upon its issuance.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
NET REVENUE
We recognized net revenue of approximately $8.8 million for the three
months ended June 30, 2000, which represented an increase of approximately $7.6
million, or 605%, from approximately $1.2 million for the three months ended
June 30, 1999. We recognized net
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<PAGE> 13
revenue of approximately $15.9 million for the six months ended June 30, 2000,
which represented an increase of approximately $14.7 million, or 1179%, from
approximately $1.2 million for the six months ended June 30, 1999. Net revenue
for the three months ended June 30, 2000 was primarily derived from sales of our
MSAP voice gateways and concentrators, which amounted to approximately $5.2
million, and from sales of our carrier-class IADs, which amounted to
approximately $3.6 million. Net revenue from sales to our four largest customers
accounted for approximately 87% of our net revenue for the three months ended
June 30, 2000.
COST OF REVENUE
Cost of revenue for the three months ended June 30, 2000 was
approximately $5.7 million, which represented an increase of approximately $4.5
million, or 375%, from approximately $1.2 million for the three months ended
June 30, 1999. Cost of revenue for the six months ended June 30, 2000 was
approximately $10.8 million, which represented an increase of approximately $9.6
million, or 800%, from approximately $1.2 million for the six months ended June
30, 1999. Cost of revenue in the three months ended June 30, 2000 consisted
primarily of amounts paid to third-party contract manufacturers, personnel and
other costs such as royalties on product shipments, warranty expense, inventory
reserves and assembly costs. As a percentage of net revenue, cost of revenue for
the three months ended June 30, 2000 was approximately 65%. We expect that our
cost of revenue will increase in absolute dollars in future periods but will
vary as a percentage of net revenue depending on the mix and average selling
prices of products sold.
RESEARCH AND PRODUCT DEVELOPMENT EXPENSES
Research and product development expenses for the three months ended
June 30, 2000 were approximately $5.5 million, which represented an increase of
approximately $3.3 million, or approximately 150%, from approximately $2.2
million for the three months ended June 30, 1999. Research and product
development expenses for the six months ended June 30, 2000 were approximately
$9.7 million, which represented an increase of approximately $5.0 million, or
approximately 106%, from approximately $4.7 million for the six months ended
June 30, 1999. This increase was primarily a result of additional personnel
costs, higher design and prototype expenses and higher costs of using our
products for internal design and testing purposes. As a percentage of net
revenue, research and product development expenses for the three months ended
June 30, 2000 were approximately 63%. Research and development expenditures are
essential to our future success and we expect that these expenses will
significantly increase in future periods.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended June 30, 2000
were approximately $6.5 million, which represented an increase of approximately
$4.9 million, or approximately 306%, from approximately $1.6 million for the
three months ended June 30, 1999. Sales and marketing expenses for the six
months ended June 30, 2000 were approximately $10.5 million, which represented
an increase of approximately $7.9 million, or approximately 304%, from
approximately $2.6 million for the six months ended June 30, 1999. The increase
was primarily attributable to our expanded efforts to sell and market our MSAP
and carrier-class IAD products, including increased costs related to the hiring
of additional sales and systems
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engineers, customer support, product marketing, and key management personnel,
as well as increased advertising, trade shows and public relations costs,
commission expenses, demonstration equipment costs and a one-time charge for the
fair value of a warrant issued to US WEST Internet Ventures, Inc. We expect
sales and marketing expenses to significantly increase in future periods as we
continue to expand our domestic and international sales and marketing efforts.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended June 30,
2000 were approximately $1.3 million, which represented an increase of
approximately $905,000, or approximately 215%, from approximately $420,000 for
the three months ended June 30, 1999. General and administrative expenses for
the six months ended June 30, 2000 were approximately $2.1 million, which
represented an increase of approximately $1.3 million, or approximately 163%,
from approximately $809,000 for the six months ended June 30, 1999. This
increase was primarily due to the hiring of additional general and
administrative personnel necessary to support and scale our operations,
increased legal and accounting expenses and increased recruiting expenses to
hire additional personnel. We expect our general and administrative expenses to
increase in future periods as we hire additional personnel required to support
the expansion of our operations.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
We recorded approximately $2.4 million in amortization of deferred
stock compensation in connection with employee and consultant stock option
grants for the three months ended June 30, 2000 and approximately $408,000
million for the three months ended June 30, 1999.
OTHER INCOME (EXPENSE)
Our other income (expense) consists primarily of interest earned on our
cash balances and cash equivalents partially offset by interest expenses paid on
capital leases and credit facilities. Other income (expense) for the three
months ended June 30, 2000 was approximately $620,000, which represented an
increase of approximately $242,000, or approximately 64% from approximately
$378,000 for the three months ended June 30, 1999. Other income (expense) for
the six months ended June 30, 2000 was approximately $1,005,000, which
represented an increase of approximately $426,000, or approximately 74% from
approximately $579,000 for the six months ended June 30, 1999. This increase was
primarily attributable to interest earned on higher average cash balances
throughout the relevant period, and higher weighted-average rates of interest.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
sales of equity securities. We raised approximately $88.6 million in private
placements of redeemable convertible preferred securities prior to our initial
public offering. In June 2000, we completed an initial public offering of
4,600,000 shares (including 600,000 shares pursuant to the underwriters'
over-allotment option) of Common Stock at a price of $15.00 per share, resulting
in proceeds of approximately $62.4 million net of the underwriters discount and
offering
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expenses. We also sold 200,000 shares of our Common Stock at $15.00 per share in
a concurrent private placement, resulting in proceeds of approximately $3.0
million. We have a $2.5 million line of credit with Comerica Bank, a $1.5
million equipment loan facility with Phoenix Leasing Incorporated, and a $4.0
million revolving loan facility with Comerica Bank. We have not drawn down on
our revolving loan facility with Comerica Bank.
At June 30, 2000, we had cash and cash equivalents of approximately
$103.9 million, approximately $22,000 in outstanding capitalized lease
obligations, $2.2 million of outstanding debt under our line of credit with
Comerica Bank, and approximately $286,000 of outstanding obligations under our
equipment loan facility with Phoenix Leasing. Amounts outstanding under our line
of credit with Comerica Bank bear interest at Comerica's base rate, plus 0.5%
per annum. Amounts outstanding under our equipment loan facility with Phoenix
Leasing bear interest at approximately 15% per annum. Any amounts which become
outstanding under our revolving loan facility with Comerica Bank will bear
interest at Comerica's base rate. As of June 30, 2000, Comerica's base rate was
10%.
We used approximately $11.8 million in cash for operating activities
for the six months ended June 30, 2000, an increase of approximately $3.1
million, or 36%, from the approximately $8.7 million used for operating
activities for the six months ended June 30, 1999. The increase was primarily
due to an increase in our net loss from approximately $8.1 million for the six
months ended June 30, 1999 to approximately $20.9 million for the six months
ended June 30, 2000, and an increase in accounts receivable of approximately
$2.8 million for the six months ended June 30, 2000 partially offset by
increased non-cash charges of approximately $6.5 million and an increase in
accounts payable and accrued expenses of $4.3 million for the six months ended
June 30, 2000.
We used approximately $3.6 million for our investing activities in the
six months ended June 30, 2000, a difference of approximately $8.1 million from
the approximately $4.5 million generated from investing activities for the six
months ended June 30, 1999. The difference was due primarily to the proceeds of
approximately $8.0 million generated from the sale of investments, partially
offset by the purchase of investments of approximately $2.0 million and an
increase in purchase of property and equipment of $2.2 million in the six months
ended June 30, 1999.
Cash provided by financing activities for the six months ended June 30,
2000 was approximately $104.1 million, up from approximately $30.4 million for
the six months ended June 30, 1999. Cash provided by financing activities
primarily consists of funds received from issuances of redeemable convertible
preferred stock, proceeds from our initial public offering and concurrent
private placement in June 2000, our credit facility, our equipment loan facility
and stock option exercises. Cash provided by financing activities is partially
offset by principal and interest payments on our term loan facility, equipment
loan facility and capitalized lease obligations. The increase in the six months
ended June 30, 2000 of approximately $73.7 million was primarily due to proceeds
from our initial public offering and our concurrent private placement in June
2000 and our Series D Preferred Stock financing in February and March 2000.
We currently have no significant commitments for capital expenditures
or obligations outstanding under capital lease commitments. We anticipate that
we will increase
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our capital expenditures and capital lease commitments consistent with our
anticipated growth in operations, infrastructure, including facilities and
systems, and personnel.
We expect to experience significant growth in our operating expenses
for the foreseeable future. As a result, we anticipate that operating expenses,
as well as planned capital expenditures, will constitute a material use of our
cash resources. In addition, we may use cash resources to fund acquisitions or
investments in complementary businesses, technologies or product. We believe
that our cash on hand, available borrowings under our credit facilities and the
net proceeds from the sale of the common stock in this offering and the
concurrent private placement will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months. In the event
additional financing is required, we may not be able to raise it on acceptable
terms, or at all.
YEAR 2000 ISSUE
To date we have not experienced any known material Year 2000 problems
in our products, our internal systems or facilities, or the products, systems
and services of third parties. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly. We did not incur material costs to identify and address specific Year
2000 compliance issues. We could however incur additional costs in addressing
any residual Year 2000 issues, which could have a material and adverse effect on
our business.
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RISK FACTORS
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE
YOUR INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN
ADDITION TO THE OTHER INFORMATION IN THIS REPORT AND OUR OTHER FILINGS WITH THE
SEC. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING
OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR
THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF
ANY OF THESE RISKS ACTUALLY OCCUR, THIS COULD SERIOUSLY HARM OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN THAT EVENT, THE MARKET PRICE
FOR OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS THAT MAY CAUSE FINANCIAL FLUCTUATIONS
WE HAVE A LIMITED OPERATING HISTORY, WHICH WILL MAKE IT DIFFICULT OR IMPOSSIBLE
FOR YOU TO PREDICT OUR FUTURE RESULTS OF OPERATIONS.
We have a very limited operating history upon which to base your
investment decision. We were incorporated in October 1996 and did not begin
shipping our products in significant volume until June 1999. Due to our limited
operating history, it is difficult or impossible to predict our future results
of operations. Investors in our common stock must consider our business,
industry and prospects in light of the risks and difficulties typically
encountered by companies in their early stages of development, particularly
those in rapidly evolving and intensely competitive markets such as the market
for broadband access equipment. In particular, you should carefully consider the
specific risks which are discussed in more detail in this section and the
disclosure elsewhere in this prospectus.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO GENERATE SUFFICIENT NET
REVENUE IN THE FUTURE TO ACHIEVE OR SUSTAIN PROFITABILITY.
We have incurred significant losses since inception and expect that our
net losses and negative cash flow will continue for the foreseeable future as we
grow our business. As of June 30, 2000, we had an accumulated deficit of
approximately $63.3 million. Although our net revenue has grown from zero for
the quarter ended March 31, 1999 to approximately $8.8 million for the quarter
ended June 30, 2000 and approximately $8.5 million for the year ended December
31, 1999, our net revenue may not continue to grow in the future, and we cannot
assure you that we will ever generate sufficient net revenue to achieve or
sustain profitability.
We have large fixed expenses and we expect to continue to incur
significant and increasing expenses for research and development, sales and
marketing, customer support, developing distribution channels and general and
administrative expenses. In particular, given our early stage of development,
our increasing operating expenses, and the rate at which competition in our
industry is intensifying, we may not be able to adequately control our costs and
expenses or achieve or maintain adequate operating margins. As a result, our
ability to achieve and sustain profitability will depend on our ability to
generate and sustain substantially
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higher revenue while maintaining reasonable cost and expense levels. We may not
be able to achieve or sustain profitability in the future.
WE DERIVE ALMOST ALL OF OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERS AND OUR
REVENUE COULD DECLINE SIGNIFICANTLY IF WE LOSE A CUSTOMER OR IF A CUSTOMER
CANCELS OR DELAYS AN ORDER.
Since we depend on a small number of customers, our revenue could be
materially and adversely impacted if we lose a customer, or if a customer
cancels or delays an order. Sales to CTC Communications Group, FirstWorld
Communications and Siemens ICN, accounted for approximately 54%, 20% and 16% of
our total revenue, respectively, for the year ended December 31, 1999 and sales
to Light Year Unidial, CTC Communications Group, Solunet, and FirstWorld
Communications accounted for approximately 36%, 23%, 15% and 13% of our total
revenue, respectively, for the quarter ended June 30, 2000. Accordingly, if we
do not diversify and expand our customer base, our future success would
significantly depend upon the timing and size of future purchase orders, if any,
from our largest existing customers. In addition, if any of our customers is
acquired, we may lose its business. The loss of any one of our customers, or the
delay of a significant order from any of our customers, even if only temporary,
could, among other things, reduce or delay our recognition of revenue, harm our
reputation in the industry, and reduce our ability to accurately predict
cash-flow. Any of these events could materially and adversely affect our
business, financial condition and results of operations.
IF WE FAIL TO CAPITALIZE ON OPPORTUNITIES TO WIN CONTRACTS FROM OUR KEY
CUSTOMERS, WE MAY NOT BE ABLE TO SELL PRODUCTS TO THOSE CUSTOMERS FOR AN
EXTENDED PERIOD OF TIME.
We believe that our key customers deploy their networks in large
increments and on a sporadic basis. As a result, if we fail to win a purchase
contract from a key customer, we may not have an opportunity to sell products to
that customer until its next purchase cycle, which may not be for an extended
period of time. In addition, if we fail to win contracts from key customers that
are at an early stage in their design cycle, our ability to sell products to
these customers in the future may be adversely affected because they may prefer
to continue purchasing products from their existing vendor. Since we rely on a
small number of customers for the majority of our sales, our failure to
capitalize on limited opportunities to win contracts with these customers would
have a material adverse effect on our business, results of operations and
financial condition.
IF OUR REVENUE AND OPERATING RESULTS FALL BELOW ANALYSTS' AND INVESTORS'
EXPECTATIONS, OUR STOCK PRICE COULD SIGNIFICANTLY DECLINE.
Our quarterly operating results have fluctuated in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. If our quarterly or annual operating
results do not meet the expectations of investors and securities analysts, the
trading price of our common stock could significantly decline. Some of the
factors that could affect our quarterly or annual operating results include:
- the amount and timing of orders for our products;
- the cancellation or rescheduling of significant orders for our
products;
- our ability to develop, manufacture, introduce, ship and support new
products and product enhancements;
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- our ability to manage product transitions and adapt to technological
advancements;
- our ability to develop, manufacture, ship and support all of our
product lines, for example, IADs, MSAP as a concentrator and MSAP as
a voice gateway.
- announcements, new product introductions and reductions in the price
of products offered by our competitors;
- our mix of products sold and the mix of distribution channels
through which our products are sold;
- the amount and timing of our research and development expenses;
- our ability to control costs;
- our ability to obtain sufficient supplies of sole or limited source
components for our products;
- changes in the prices of our components;
- our ability to attain and maintain production volumes and quality
levels for our products;
- the length and variability of the sales cycle for our products;
- our ability to realize forecasted sales for a particular period;
- the timing of recognizing revenue and deferral of revenue;
- our ability to receive and fulfill orders evenly, across any given
quarter;
- potential seasonality of our sales;
- costs relating to possible acquisitions and integration of
technologies or businesses; and
- telecommunications market conditions and economic conditions.
As a result of any of these factors, it is likely that in the future,
our quarterly or annual operating results will fall below the expectations of
public market analysts and investors. In this event, the price of our common
stock could significantly decline.
OUR CUSTOMERS MAY SPORADICALLY PLACE LARGE ORDERS WITH SHORT LEAD TIMES, WHICH
MAY CAUSE OUR REVENUE AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER.
We believe that our customers often deploy their networks in large
increments and on a sporadic basis. Accordingly, we expect to receive purchase
orders for significant dollar amounts on an irregular basis. These orders may
have short lead times. As a result, we may not have sufficient inventory to
fulfill these orders and we may incur significant costs in attempting to
expedite and fulfill these orders. Further, our revenue and operating results
may vary significantly and unexpectedly from quarter to quarter.
THE LONG SALES AND IMPLEMENTATION CYCLES FOR OUR PRODUCTS MAY CAUSE OUR REVENUE
AND OPERATING RESULTS TO VARY SIGNIFICANTLY.
A customer's decision to purchase our products often involves a
significant commitment of its resources and a lengthy evaluation and product
qualification process. As a result, our sales cycles may be lengthy and we may
incur substantial sales and marketing expenses and expend significant management
effort without any guarantee of a sale. The length of our sales cycles will vary
depending on the type of customer to whom we are selling. In particular, we
believe that our sales cycle will typically range from 1 to 3 months for CLECs,
3 to 6 months for IXCs, and 6 to 12 months for RBOCs. Even after making the
decision to purchase our products, our customers often deploy our products
slowly and deliberately. Timing of deployment can vary widely and depends on:
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- the skill set of our customers;
- the size of the network deployment;
- the complexity of our customers' network environment;
- the degree of hardware and software configuration necessary to
deploy our products; and
- their ability to finance their purchase of our products as well as
their operations.
- As a result, our revenue and operating results may vary
significantly from quarter to quarter.
IF WE FAIL TO MANAGE OUR ORDER BACKLOG; NEW ORDERS AND SHIPMENT SCHEDULES FOR
EACH QUARTER OUR OPERATING RESULTS FOR THAT PERIOD WILL BE ADVERSELY AFFECTED.
We recognize revenue when our products are shipped and the linearity of
our revenue will depend on our ability to receive and fulfill orders evenly
across any given quarter. To date, our order backlog at the beginning of each
quarter has not been significant and we expect this trend to continue for the
foreseeable future. Accordingly, we must obtain additional orders in a quarter
for shipment in that quarter to achieve our revenue objectives. Our sales
agreements may allow purchasers to delay scheduled delivery dates without
penalty. Further, our customer purchase orders allow purchasers to cancel orders
within negotiated time frames without significant penalty. In addition, due in
part to factors such as the timing of product release dates, purchase orders and
product availability, significant volume shipments of our products could occur
at the end of our fiscal quarters. If we fail to ship products by the end of a
quarter our operating results may be materially and adversely affected for that
quarter. In the past, we have experienced cancellation of orders, resulting in
additional costs and expenses.
IF WE FAIL TO INCREASE OUR REVENUE, OR IF WE EXPERIENCE DELAYS IN GENERATING OR
RECOGNIZING REVENUE, WE COULD INCUR SUBSTANTIAL OPERATING LOSSES.
We plan to significantly increase our operating expenses to fund
greater levels of research and development, expand our sales and marketing
operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
capabilities to address the demands resulting from this offering and the
continued growth of our business. Our operating expenses are largely based on
anticipated personnel requirements and revenue trends, and a high percentage of
our expenses are, and will continue to be, fixed. In addition, we may be
required to spend more in research and development than originally budgeted in
order to respond to industry trends. We may also incur significant new costs
related to possible acquisitions and the integration of new technologies. As a
result, if we fail to increase our revenue, or if we experience delays in
generating or recognizing revenue results we could incur substantial operating
losses.
IF WE FAIL TO MANAGE THE GROWTH OF OUR OPERATIONS, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
We have rapidly and significantly expanded our operations and expect to
continue to do so. This expansion is placing a significant strain on our
managerial, operational and financial resources. During 1999, we increased the
number of our employees from 63 to 174. Most of our existing senior management
personnel joined us within the last 18 months, including a number of key
managerial, technical and operations personnel whom we have not yet fully
integrated. We expect to add additional key personnel in these areas in the near
future. To manage the expected growth of our operations and personnel, we will
be required to:
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- improve existing and implement new operational, financial and
management controls, reporting systems and procedures;
- expand access to additional manufacturing capacity;
- hire, train, motivate and manage our personnel; and
- effectively manage multiple relationships with our customers,
suppliers and other parties.
In addition, we will need to coordinate our domestic and international
operations and establish the necessary infrastructure to implement our
international strategy. If we are not able to accomplish the foregoing in an
efficient and timely manner, our business, financial condition and results of
operations will be materially and adversely affected.
IF WE FAIL TO ENHANCE OUR EXISTING PRODUCTS OR DEVELOP AND INTRODUCE NEW
PRODUCTS THAT MEET CHANGING CUSTOMER REQUIREMENTS AND TECHNOLOGICAL ADVANCES,
OUR ABILITY TO SELL OUR PRODUCTS WOULD BE MATERIALLY AND ADVERSELY AFFECTED.
Our markets are characterized by rapid technological advances, evolving
industry standards, changes in end-user requirements, frequent new product
introductions and changes in voice and data service offerings by service
providers. Our future success will significantly depend on our ability to
anticipate or adapt to such changes and to offer, on a timely and cost-effective
basis, products that meet changing customer demands and industry standards. The
timely development of new or enhanced products is a complex and uncertain
process and we may not have sufficient resources to successfully and accurately
anticipate technological and market trends, or to successfully manage long
development cycles. We may also experience design, manufacturing, marketing and
other difficulties that could delay or prevent our development, introduction or
marketing of new products and enhancements. The introduction of new or enhanced
products also requires that we manage the transition from older products to
these new or enhanced products in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products are
available for delivery to meet anticipated customer demand. We may also be
required to collaborate with third parties to develop our products and may not
be able to do so on a timely and cost-effective basis, if at all. If we are not
able to develop new products or enhancements to existing products on a timely
and cost-effective basis, or if our new products or enhancements fail to achieve
market acceptance, our business, financial condition and results of operations
would be materially and adversely affected.
OUR ABILITY TO OPERATE AND GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS WITH THIRD PARTIES.
Our success will substantially depend on our ability to develop and
maintain strategic relationships. For example, it is important that we continue
to leverage our OEM relationship with Siemens to support both our domestic and
planned international distribution and sales operations. Our strategic
relationships are relatively new, and we cannot be certain that any revenue will
be derived from those arrangements. The amount and timing of resources which our
strategic partners devote to our business is not within our control and our
strategic partners may not perform their obligations as expected. In the event
that any strategic partner breaches or terminates its relationship with us, we
may not be able to sustain or grow our business. We may also not be able to
maintain or develop strategic relationships or to replace strategic partners.
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IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL, WE MAY NOT
BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.
Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, marketing, engineering and
management personnel, many of whom perform important management functions and
would be difficult to replace. None of our officers or key employees is bound by
an employment agreement for any specific term and, except for Suresh Nihalani,
our President and Chief Executive Officer, we do not have "key person" life
insurance policies covering any of our employees. The loss of the services of
any key personnel, particularly senior management, sales personnel and
engineers, could materially adversely affect our business, financial condition
and results of operations.
In addition, our growth and expansion of operations has placed
significant demands on our management, engineering, sales and marketing staff
and facilities. We will need to hire additional personnel in each of these areas
to continue to grow our business. Recruiting qualified personnel in our industry
is intensely competitive and time-consuming. In particular, we have experienced
difficulty in hiring hardware, software, system and test and customer support
engineers. We believe that we will continue to experience difficulty in
recruiting and retaining qualified personnel in the future. If we are not able
to attract and retain the necessary personnel, we will not be able to operate
and grow our business.
IF WE DO NOT SUBSTANTIALLY EXPAND OUR SALES AND MARKETING OPERATIONS, WE WILL
NOT BE ABLE TO ACHIEVE BRAND AWARENESS FOR OUR PRODUCTS AND GENERATE ADDITIONAL
SALES.
Our products and services are generally of a highly technical nature
and therefore require a sophisticated sales effort targeted at several key
people within each of our prospective customers' organizations. We have recently
expanded our direct sales force and plan to hire additional qualified sales
personnel and system and consulting engineers. We might not be able to hire the
kind and number of sales personnel and system and consulting engineers we need.
Similarly, our marketing efforts must be highly focused on creating
brand awareness. These efforts require significant marketing resources,
including technically-proficient personnel and substantial marketing budgets. We
may not be able to hire and retain the required personnel. Further, many of our
competitors have significantly larger marketing budgets than we have. As a
result, we may not be able to create sufficient brand awareness to generate
additional sales of our products.
IF WE ARE NOT ABLE TO ESTABLISH RELATIONSHIPS WITH A VARIETY OF DISTRIBUTION
PARTNERS, WE MAY NOT BE ABLE TO INCREASE OUR SALES AND GROW OUR BUSINESS.
We believe that our future success is dependent upon establishing
successful relationships with a variety of distribution partners. To date, we
have only entered into OEM agreements with Siemens AG and one of its affiliates.
While Siemens AG and its affiliates own approximately 18.4% of our outstanding
shares, Siemens also sells products that compete with our products and we cannot
assure you that it will devote adequate resources to distributing our products.
We also cannot be certain that we will be able to reach agreement with
additional distribution partners on a timely basis or at all, or that any of our
current or future distribution
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partners will devote adequate resources to selling our products. If we cannot
establish these relationships, we may not be able to increase our sales and grow
our business.
IF INSTALLATION OF OUR MSAP CONCENTRATORS AT CENTRAL OFFICES ARE DELAYED, OUR
REPUTATION MAY BE HARMED AND WE MAY LOSE SALES.
Our MSAP concentrators are generally installed at carrier central
offices. In many cases, deployment of our equipment at carrier central offices
is intended to facilitate the provisioning of services which compete with the
carrier's services. Therefore, carriers may have an incentive to withhold or
delay installations of our MSAP concentrators. While we believe that current
regulations and laws require these carriers to cooperate in allowing
installation of our equipment, any delay, whether justified or not, will
adversely affect our customers' ability to deploy our equipment, which in turn
would adversely affect our reputation and result in lost sales. This would
result in a material adverse effect on our business, results of operations and
financial condition.
WE HAVE NO SIGNIFICANT EXPERIENCE OPERATING IN INTERNATIONAL MARKETS AND WE MAY
NOT BE ABLE TO SUCCESSFULLY ESTABLISH AND MANAGE OUR INTERNATIONAL OPERATIONS.
We intend to expand our international operations and enter new markets.
This expansion will require significant management attention and financial
resources. We have only recently launched our international sales operations in
Canada and Europe. As a result, we have limited experience in marketing and
distributing our products internationally and in developing versions of our
products that comply with local standards. Our current international sales
efforts, particularly those in Europe, will likely be impacted by seasonal
purchasing patterns in foreign countries, which is typical of European customers
during the summer months. In addition, our international operations, including
those in Canada and Europe, will be subject to other inherent risks, including:
- difficulties and costs of staffing and managing foreign operations;
- certification requirements;
- longer sales cycles;
- expenses associated with customizing products for foreign countries;
- dependence on local vendors;
- dependence on our ability to establish and maintain strategic
relationships with international distribution partners;
- protectionist laws and business practices that favor local
competition;
- reduced protection for intellectual property rights in some
countries;
- difficulties associated with enforcing agreements through foreign
legal systems;
- greater difficulty in collecting accounts receivable;
- fluctuations in currency exchange rates;
- unexpected changes in regulatory requirements;
- the impact of recessions in economies outside the United States;
- political and economic instability;
- import or export licensing requirements; and
- potential adverse tax consequences.
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IF OUR PRODUCTS CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS, WE COULD INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES.
Our products are highly technical and are designed to be deployed in
very large and complex networks. Although we have thoroughly tested our
products, because of their nature, they can only be fully tested when deployed
in networks which generate high amounts of voice and/or data traffic. Because of
our short operating history, our products have not yet been broadly deployed.
Consequently, our customers may discover errors or defects in our products after
they have been broadly deployed. In addition, our customers may use our products
in conjunction with products from other vendors. As a result, when problems
occur, it may be difficult to identify the source of the problem. Any defects or
errors in our products discovered in the future, or failures of our customers'
networks, whether caused by our products or another vendor's products, could
result in:
- loss of, or delay in, revenue and loss of market share;
- product returns;
- negative publicity regarding us and our products;
- unexpected expenses to remedy errors;
- diversion of our development resources;
- increased service warranty, costs and repair; and
- increased insurance costs.
Any of the above items could have a material adverse effect on our
business, results of operations and financial condition.
IF OUR PRODUCTS CONTAIN DEFECTS, WE COULD BE EXPOSED TO SIGNIFICANT PRODUCT
LIABILITY CLAIMS AND DAMAGE TO OUR REPUTATION.
Because our products are designed to provide critical communications
services, we may be subject to significant liability claims. Our agreements with
customers typically contain provisions intended to limit our exposure to
liability claims. However, these limitations may not preclude all potential
claims resulting from a defect in one of our products. Although we believe that
we maintain adequate product liability insurance covering certain damages
arising from implementation and use of our products, our insurance may not be
sufficient to cover us against all possible liability. Liability claims could
also require us to spend significant time and money in litigation or to pay
significant damages. As a result, any such claims, whether or not successful,
could seriously damage our reputation and have a material adverse effect on our
business, financial condition and results of operations.
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<PAGE> 25
IF WE DO NOT SUBSTANTIALLY EXPAND OUR CUSTOMER SERVICE AND SUPPORT ORGANIZATION,
WE WILL NOT BE ABLE TO PROVIDE THE LEVEL OF SERVICE REQUIRED TO ESTABLISH STRONG
RELATIONSHIPS WITH OUR CUSTOMERS.
The nature of our business requires us to develop strong relationships
with our customers, which will depend on our ability to provide our customers
with a high level of service and support. The complexity of our products
requires us to have highly trained customer service and support personnel. We
currently have a small customer service and support organization, and we will
need to increase these resources to support the expanding needs of our existing
customers as well as new customers. Hiring customer service and support
personnel in our industry is very competitive due to the limited number of
people available with the necessary technical skills and understanding of our
technologies. If we are unable to expand our customer service and support
organization, our customers may become dissatisfied and our reputation could be
harmed. These events would prevent us from increasing sales to existing or new
customers.
BECAUSE WE DEPEND UPON A SMALL NUMBER OF OUTSIDE CONTRACTORS TO MANUFACTURE OUR
PRODUCTS, OUR OPERATIONS COULD BE DELAYED OR INTERRUPTED IF WE ENCOUNTER
PROBLEMS WITH THEM.
We currently rely on Avnet, Inc., A-Plus Manufacturing and Arrow
Electronics to build our products. We do not have internal manufacturing
capabilities. Our reliance on these manufacturers involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
component availability, delivery schedules, manufacturing yields and costs. If
Avnet, A-Plus or Arrow is unable or unwilling to continue manufacturing our
products in required volumes and at high quality levels, we will have to
identify, qualify and select acceptable alternative manufacturers, which could
take more than six months. It is possible that an alternate source may not be
available to us when needed or be in a position to satisfy our production
requirements at acceptable prices and quality. Any significant interruption in
manufacturing would result in us having to reduce our supply of products to our
customers, which in turn could have a material adverse effect on our customer
relations, business, financial condition and results of operations. Avnet, Arrow
and A-Plus also build products for other companies, and we cannot be certain
that they will always have sufficient quantities of inventory available to fill
orders placed by our customers, or that they will allocate their internal
resources to fill our orders on a timely basis.
We currently do not have a long-term supply contract with Avnet, A-Plus
or Arrow. Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming. If we are required or choose to
change contract manufacturers, our revenue may decline and our customer
relationships may be damaged.
We may not be able to effectively manage our relationships with our
contract manufacturers and they may not meet our future requirements for timely
delivery. Any interruption in the operations of our contract manufacturers would
adversely affect our ability to meet our scheduled product deliveries to our
customers, which could cause the loss of existing or potential customers and
could materially adversely affect our business, results of operations and
financial condition. In addition, if our contract manufacturers fail to build
products with
23
<PAGE> 26
sufficient quality, our reputation, business, results of operations and
financial condition will be harmed.
IF WE FAIL TO ACCURATELY PREDICT OUR MANUFACTURING REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS.
We do not have long-term supply contracts with our contract
manufacturers. Consequently, these manufacturers are not obligated to supply
products to us for any specific period, in any specific quantity or at any
certain price, except as may be provided in a particular purchase order. We
currently provide forecasts of our demand to our contract manufacturers 12
months prior to scheduled delivery of products to our customers. Lead times for
the materials and components that we order vary significantly and depend on
numerous factors, including the specific supplier, contract terms and demand for
a component at a given time. If we overestimate our component requirements, our
contract manufacturers may purchase excess inventory. For those parts which are
unique to our products, we could be required to pay for these excess parts and
recognize related inventory write-down costs. If we underestimate our
requirements, our contract manufacturers may have an inadequate inventory, which
could interrupt manufacturing of our products and result in delays in shipments
and revenue. We also may experience shortages of certain components from time to
time, which also could delay the manufacturing of our products and recognition
of revenue.
WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY COMPONENTS, AND IF
WE ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY BASIS, WE WILL NOT BE ABLE TO
DELIVER OUR PRODUCTS TO OUR CUSTOMERS.
Several of the key components used in our products, including field
programmable gate arrays, DSL transreceivers, microprocessors, digital signal
processors and custom power supplies, are sourced from single or limited sources
of supply. These suppliers range from small vendors to large established
companies. We do not have guaranteed supply arrangements with most of our key
suppliers, and we or our contract manufacturers may not be able to obtain
necessary supplies in a timely manner. Financial or other difficulties faced by
these suppliers or significant changes in demand for these components could
limit the availability of these components. In addition, any of our sole-source
suppliers could be acquired by, or enter into exclusive arrangements with, our
competitors, stop selling their products or components to us at commercially
reasonable prices, or refuse to sell their products or components to us
altogether. Any interruption or delay in the supply of any of these components,
or the inability to obtain these components from alternate sources at acceptable
prices and within a reasonable amount of time, would adversely affect our
ability to meet scheduled product deliveries to our customers and would
materially adversely affect our business, results of operations and financial
condition. As much as six months could be required before we would begin
receiving adequate supplies from alternative suppliers, if any. In addition,
qualifying additional suppliers is time-consuming and expensive and exposes us
to potential supplier production difficulties or quality variations.
It is also possible that a source may not be available for us or be in
a position to satisfy our production requirements at acceptable prices and on a
timely basis, if at all, which could have a material adverse effect on our
business, financial condition and results of operations.
24
<PAGE> 27
WE MAY INVEST A SIGNIFICANT AMOUNT OF OUR RESOURCES TO DEVELOP, MARKET AND SELL
OUR PRODUCTS AND MAY NOT REALIZE ANY RETURN ON THIS INVESTMENT.
We plan to invest a significant amount of our resources to develop,
market and sell our products. Accordingly, our success will depend on our
ability to generate sufficient revenue from sales of these products to offset
the expenses associated with developing, marketing and selling them. There are
many risks that we face in doing so. In particular, the rapidly changing
technological environment in which we operate can require the frequent
introduction of new products, resulting in short product lifecycles.
Accordingly, if our products do not quickly achieve market acceptance, they may
become obsolete before we have generated enough revenue from their sales to
realize a sufficient return on our investment.
As a result, we may incur significant expenses and losses due to lack
of customer demand, unusable purchased components for these products and the
diversion of our engineers from future product development efforts. From time to
time we may also need to write-off excess and obsolete inventory. We recorded
charges totaling $264,000 for the year ended December 31, 1999 to take into
consideration excess inventory levels and obsolete inventory. If we incur
substantial development, sales, marketing and inventory expenses that we are not
able to recover, and we are not able to compensate for such expenses, our
business, financial condition and results of operations could be materially and
adversely affected.
IF THE DEVELOPMENT AND ADOPTION OF RELEVANT INDUSTRY STANDARDS DO NOT OCCUR ON A
TIMELY BASIS, OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.
Our ability to achieve market acceptance for our products will also
depend on the timing and adoption of industry standards for new technologies in
our markets. Many technological developments occur prior to the adoption of
relevant industry standards. The absence of an industry standard related to a
specific technology may prevent widespread market acceptance of products using
that technology. The existence of multiple competing standards may also retard
or delay the development of a broad market for our products. We may develop
products that use new technologies prior to the adoption of industry standards
related to these technologies. Consequently, our products may not comply with
eventual industry standards, which could hurt our ability to sell these products
and also require us to quickly design and manufacture new products that meet
these standards. Even after industry standards are adopted, the future success
of our products depends upon widespread market acceptance of their underlying
technologies.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR
ABILITY TO COMPETE.
Our success and ability to compete substantially depend on our
proprietary technology. Despite our efforts to protect our proprietary rights,
existing copyright, trademark and trade secret laws afford us only limited
protection. Any infringement of our proprietary rights could result in
significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenue.
We rely on a combination of patent, copyright, trademark and trade secret laws,
as well as confidentiality agreements and licensing arrangements, to establish
and protect our proprietary rights. We presently have no patents,
25
<PAGE> 28
although we have six patent applications pending. In addition, the laws of
certain foreign countries do not protect our proprietary rights to the same
extent as do the laws of the United States. Attempts may be made to copy or
reverse engineer aspects of our products or to obtain and use information that
we regard as proprietary. Accordingly, we may not be able to protect our
proprietary rights against unauthorized third-party copying or use. Furthermore,
policing the unauthorized use of our products is difficult. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business,
financial condition and operating results.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Our industry is characterized by frequent intellectual property
litigation based on allegations of infringement of intellectual property rights.
From time to time, third parties may assert patent, copyright, trademark and
other intellectual property rights to technologies or rights that are important
to our business. In addition, in our agreements, we may agree to indemnify our
customers for any expenses or liabilities resulting from claimed infringements
of patents, trademarks or copyrights of third parties. Any claims asserting that
our products infringe or may infringe on proprietary rights of third parties,
with or without merit, could be time-consuming, resulting in costly litigation
and diverting the efforts of our technical and management personnel. These
claims could also result in product shipment delays or require us to modify our
products or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, if at all.
Although we are not aware of any intellectual property claims against
us, we may be a party to litigation in the future. We also cannot assure you
that we would prevail in any such actions, given their complex technical issues
and inherent uncertainties. Although we carry general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed.
IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS WE COULD INCUR SUBSTANTIAL COSTS IN
DEFENDING OURSELVES.
Companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We have received claims of this kind in the past and we cannot
assure you that we will not receive claims of this kind in the future or that
those claims will not result in material litigation. We could incur substantial
costs in defending ourselves against these claims, regardless of their merits,
which would have a material and adverse effect on our business, financial
condition and results of operations.
POTENTIAL ECONOMIC AND POLITICAL INSTABILITY IN INDIA COULD ADVERSELY AFFECT OUR
PRODUCT DEVELOPMENT EFFORTS.
We believe that we currently receive favorable tax and tariff treatment
for our product development activities in India. However, if political
instability in India results in a
26
<PAGE> 29
government adverse to foreign corporate activity, a number of adverse
consequences could occur, including higher tariffs, taxes or export controls,
and increased governmental ownership or regulation, any of which would increase
our costs of product development. In addition, we record expenses for our
subsidiary in India in Indian Rupees. Accordingly, our operating results are
also exposed to changes in exchange rates between the U.S. dollar and Indian
Rupee. While to date, our results have not materially been affected by any
changes in currency exchange rates, devaluation of the U.S. dollar against the
Indian Rupee would adversely affect our expenses for our Indian subsidiary.
OUR BUSINESS COULD BE SHUT DOWN OR SEVERELY IMPACTED IF A NATURAL DISASTER
OCCURS.
Our business and operations depend on the extent to which our facility
and products are protected against damage from fire, earthquakes, power loss,
and similar events. Despite precautions taken by us, a natural disaster or other
unanticipated problem could, among other things, hinder our research and
development efforts, delay the shipment of our products and affect our ability
to receive and fulfill orders. For example, since we perform all of our final
assembly and tests in one location, any fire or other disaster at our assembly
facility would have a material adverse effect on our business, results of
operations and financial condition. While we believe that our insurance policy
is comparable to those of similar companies in our industry, it does not cover
all natural disasters, in particular, earthquakes or floods.
IF WE ENCOUNTER SIGNIFICANT YEAR 2000 PROBLEMS WITH OUR PRODUCTS, CUSTOMERS OR
VENDORS, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Although we are not aware of any Year 2000 issues to date associated
with our products or with our customers or vendors, we cannot assure you that
these issues will not arise in the future. If we experience significant
unanticipated problems and costs associated with Year 2000 compliance, our
business, results of operations and financial condition could be materially and
adversely affected. In addition, we have not developed, and do not plan to
develop, any contingency plan to address any Year 2000 situations that may
result.
RISKS ASSOCIATED WITH THE BROADBAND ACCESS INDUSTRY
INTENSE COMPETITION COULD PREVENT US FROM INCREASING OR SUSTAINING OUR REVENUE
AND PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY.
The market for multiservice broadband access products is highly
competitive. We compete directly with numerous companies, including Alcatel SA,
Cisco Systems, Inc., CopperCom, Inc., Copper Mountain Networks, Inc., Jetstream
Communications, Inc., Lucent Technologies, Inc., Nokia, Nortel Networks, Inc.
and Tollbridge Technologies, Inc. Many of our current and potential competitors
have longer operating histories, significantly greater selling and marketing,
technical, manufacturing, financial, customer support, professional services and
other resources, including vendor-sponsored financing programs. As a result,
these competitors are able to devote greater resources to the development,
promotion, sale and support of their products. Moreover, our competitors may
foresee the course of market developments more accurately than we do and could
develop new technologies that compete with our products or even render our
products obsolete. We may not have sufficient resources to continue to make the
investments or achieve the technological advances necessary to compete
successfully with
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<PAGE> 30
existing or new competitors. In addition, due to the rapidly evolving markets in
which we compete, additional competitors with significant market presence and
financial resources, including other large telecommunications equipment
manufacturers, may enter our markets, thereby further intensifying competition.
The markets in which we compete are characterized by increasing
consolidation, as exemplified by the acquisitions of Promatory Communications,
Inc., by Nortel Networks, FlowPoint Corporation by Efficient Networks, Inc. and
PairGain Technologies, Inc. by ADC Telecommunications, Inc. We cannot predict
how industry consolidation will affect our competitors and we may not be able to
compete successfully in an increasingly consolidated industry. Additionally,
because we may be dependent on strategic relationships with third parties in our
industry, any consolidation involving these parties could reduce the demand for
our products and otherwise harm our business prospects. Our competitors that
have large market capitalizations or cash reserves are also better positioned
than we are to acquire other companies, including our competitors, thereby
obtaining new technologies or products that may displace our product lines. Any
of these acquisitions could give our competitors a strategic advantage that
would materially and adversely affect our business, financial condition and
results of operations.
In addition, many of our competitors have much greater name recognition
and have a more extensive customer base, broader customer relationships,
significant financing programs, and broader product offerings than we do. These
companies can adopt aggressive pricing policies and leverage their customer
bases and broader product offerings to gain market share. We have encountered,
and expect to continue to encounter, potential customers that, due to existing
relationships with our competitors, are committed to the product offerings of
these competitors. As a result, these potential customers may not consider
purchasing our products.
We expect that competitive pressures will result in price reductions,
reduced margin and loss of market share, which would materially and adversely
affect our business, financial condition and results of operations.
SALES OF OUR PRODUCTS DEPEND ON THE WIDESPREAD ADOPTION OF MULTISERVICE
BROADBAND ACCESS SERVICES AND IF THE DEMAND FOR MULTISERVICE BROADBAND ACCESS
SERVICES DOES NOT DEVELOP, THEN OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION WOULD BE ADVERSELY AFFECTED.
Our business would be harmed, and our results of operations and
financial condition would be adversely and materially affected, if the demand
for multiservice broadband access services does not increase as rapidly as we
anticipate, or if our customers' multiservice broadband access service offerings
are not well received in the marketplace. Certain critical factors will likely
continue to affect the development of the multiservice broadband access services
market. These factors include:
- demand for broadband access;
- the development of a viable business model for multiservice
broadband access services, including the capability to market, sell,
install and maintain these services;
- the extent that service providers are unable to deploy broadband
access using DSL due to delays or other difficulties in gaining
access to the copper-pair infrastructure from ILECs;
- cost constraints, such as installation, space and power requirements
at carrier central offices;
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<PAGE> 31
- ability to interoperate with equipment from multiple vendors in
service provider networks;
- evolving industry standards for DSL, T1 and other transmission
technologies;
- varying and uncertain conditions of the copper-pair infrastructure,
including size and length, electrical interference, and crossover
interference with voice and data telecommunications services; and
- domestic and foreign government regulation.
Even if these factors are adequately addressed, the market for
multiservice broadband access services may fail to develop or may develop more
slowly than anticipated. This could happen for a number of reasons. For
instance, if our customers, particularly CLECs, fail to obtain sufficient
capital, personnel and other resources to operate and grow their business or
fail to execute their business plans, our market may fail to develop or may
develop more slowly than anticipated. As a result, our business would be harmed,
and our results of operations and financial condition would be adversely
affected.
IF OUR PRODUCTS ARE NOT INTEROPERABLE WITHIN OUR CUSTOMERS' NETWORKS, ORDERS
WILL BE DELAYED OR CANCELED AND COULD RESULT IN SUBSTANTIAL PRODUCT RETURNS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Many of our customers require that our products be designed to
interface with their existing networks, each of which may have different
specifications and utilize multiple protocol standards. Our customers' networks
may contain multiple generations of products from different vendors that have
been added over time as their networks have grown and evolved. Our products may
be required to interoperate with these products as well as with future products
in order to meet our customers' requirements. In some cases, we may be required
to modify our product designs to achieve a sale, which may result in a longer
sales cycle, increased research and development expense, and reduced operating
margins. If our products do not interoperate with existing equipment in our
customers' networks, installations could be delayed, orders for our products
could be cancelled or our products could be returned. This could have a material
adverse effect on our business, financial condition and results of operations.
IF WE FAIL TO COMPLY WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS, SALES OF
OUR EXISTING AND FUTURE PRODUCTS COULD BE ADVERSELY AFFECTED.
The markets for our products are characterized by a significant number
of laws, regulations and standards, including those promulgated by the Federal
Communications Commission, or FCC, and standards established by Underwriters
Laboratories, some of which are evolving as new technologies are deployed. While
we believe that our products comply with all current governmental laws,
regulations and standards, we cannot assure you that we will be able to continue
to design our products to comply with all necessary requirements in the future.
In addition, our customers may require our products to comply with various
industry standards, such as those promulgated by Telcordia Technologies, or
proprietary standards promoted by our competitors. Our key competitors may
establish proprietary standards which they do not make available to us. As a
result, we may not be able to achieve interoperability with their products.
Internationally, we may also be required to comply with standards established by
telecommunications authorities in various countries as well as with
recommendations of the International Telecommunication Union.
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<PAGE> 32
Our customers may also require, or we may otherwise deem it necessary
or advisable, that we modify our products to address actual or anticipated
changes in the regulatory environment. Failure of our products to comply, or
delays in compliance, with the various existing, anticipated, and evolving
industry regulations and standards could adversely affect sales of our existing
and future products. Moreover, the enactment of new laws or regulations, changes
in the interpretation of existing laws or regulations or a reversal of the trend
toward deregulation in the telecommunications industry, could have a material
adverse effect on our customers, and thereby materially adversely affect our
business, financial condition and results of operations.
OUR CUSTOMERS ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS THAT NEGATIVELY IMPACT OUR CUSTOMERS COULD HARM OUR
BUSINESS.
The jurisdiction of the FCC extends to the entire communications
industry, including our customers. Future FCC regulations affecting the
broadband access industry, our customers, or their service offerings, may harm
our business. For example, FCC regulatory policies that affect the availability
of data and Internet services may impede our customers' penetration into certain
markets or affect the prices that they are able to charge. In addition,
international regulatory bodies are beginning to adopt standards and regulations
for the broadband access industry. These domestic and foreign standards and
regulations address various aspects of Internet use, including issues relating
to liability for information retrieved from or transmitted over the Internet,
online context regulation, user privacy, taxation, consumer protection, security
of data, access by law enforcement, as well as intellectual property ownership,
obscenity and libel. Resulting standards and regulations, or judgments in favor
of plaintiffs in lawsuits against service providers, e-commerce and other
Internet companies, could adversely affect the development of e-commerce and
other uses of the Internet. This, in turn, could directly or indirectly
materially adversely impact the broadband telecommunications and data industry
in which our customers operate. To the extent our customers are adversely
affected by laws or regulations regarding their business, products or service
offerings, this could result in a material and adverse effect on our business,
financial condition and results of operations.
IF NECESSARY LICENSES OF THIRD PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE
VERY EXPENSIVE, WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS OR PRODUCT
ENHANCEMENTS, WHICH WOULD SERIOUSLY IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that these third-party licenses will be available to us on commercially
reasonable terms, if at all. Our inability to obtain necessary third-party
licenses may force us to obtain substitute technology of lower quality or
performance standards or at greater cost, any of which could seriously harm the
competitiveness of our products and which would result in a material and adverse
effect on our business, financial condition and results of operations.
IF THIRD-PARTY SUPPLIERS DO NOT CONTINUE TO DEVELOP NEW COMPONENTS THAT WE RELY
ON FOR FUTURE PRODUCTS, WE MAY NOT BE ABLE TO OFFER COMPETITIVE PRODUCTS.
Some of our planned future products will rely on components developed
by third parties, such as higher bandwidth switch fabrics. If these components
fail to be developed by
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<PAGE> 33
third parties in a timely basis, or at all, or if they are not otherwise made
available to us, we may not be able to offer new products which are competitive.
In this event, our business, financial condition and results of operations could
be materially and adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold financial instruments for trading or speculative
purposes. Our financial instruments have short maturities and therefore are not
subject to significant interest rate risk. We generally place our marketable
security investments in high credit quality instruments, primarily corporate
obligations with contractual maturities of less than one year. Our financial
liabilities that are subject to interest rate risk are our credit facilities,
which have stated interest rates based on the bank's prime rate. We do not
expect any material loss from our marketable security investments and therefore
believe that our potential interest rate exposure is not material. We do not use
any derivatives or similar instruments to manage our interest rate risk.
We currently have product development activities in India. We record
expenses for our subsidiary in India in Indian Rupees. Accordingly, our
operating results are also exposed to changes in exchange rates between the U.S.
dollar and Indian Rupee. While to date, our results have not materially been
affected by any changes in currency exchange rates, devaluation of the U.S.
dollar against the Indian Rupee would adversely affect our expenses for our
Indian subsidiary.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) SALES OF UNREGISTERED SECURITIES. During the three months ended
June 30, 2000, following the exercise of options to purchase shares of Common
Stock that had been granted under the 1997 Stock Option/Stock Issuance Plan by
employees, the Company issued an aggregate of 115,333 shares of Common Stock for
an aggregate purchase price of approximately $87,000. All of such sales of
Common Stock were made pursuant to the exemption from the registration
requirements of the Securities Act afforded by Rule 701 promulgated under the
Securities Act. In addition, the Company issued 200,000 shares of its Common
Stock for an aggregate purchase price of $3,000,000 in a concurrent private
placement with its initial public offering which closed on June 28, 2000. The
Company also issued a warrant to purchase 200,000 shares of its Common Stock at
an exercise price of $15.00 per share, for a payment of $5,000. These
transactions were exempt from the registration requirements of the Securities
Act by virtue of Section 4(2) thereof.
(d) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. On June 28,
2000, the Company completed an initial public offering (the "Offering") of its
Common Stock, $.001 par value. The managing underwriters in the Offering were
Credit Suisse First Boston, UBS Warburg LLC, and U.S. Bancorp Piper Jaffray (the
"Underwriters"). The shares of Common Stock sold in the Offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (the "Registration Statement") (Reg. No. 333-31732) that was declared
effective by the SEC on June 22, 2000. The Offering commenced on June 23, 2000
and closed on June 28, 2000 after all 4,600,000 shares of Common Stock
registered under the Registration Statement (including 600,000 shares sold
pursuant to the exercise of the Underwriters' over-allotment option) were sold
at a price of $15.00 per share. The aggregate price of the Offering amount
registered was $69,000,000. In connection with the Offering, the Company paid an
aggregate of $4,830,000 in underwriting discounts and commissions to the
Underwriters. In addition, the following table sets forth an estimate of all
expenses incurred in connection with the Offering, other than underwriting
discounts and commissions. All amounts shown are estimated except for the fees
payable to the SEC, National Association of Securities Dealers, Inc. ("NASD")
and Nasdaq National Market.
<TABLE>
<S> <C>
SEC registration fee $ 52,000
NASD filing fee 31,000
Nasdaq National Market listing fee 111,000
Printing and engraving expenses 293,000
Legal fees and expenses 549,000
Accounting fees and expenses 517,000
Transfer Agent fees 2,000
Miscellaneous 293,000
----------
Total $1,848,000
==========
</TABLE>
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After deducting the underwriting discounts and commissions and the
estimated Offering expenses described above, the Company received net proceeds
from the Offering of approximately $62,400,000. As of June 30, 2000, the Company
had not used any of the net proceeds from the Offering and had used its existing
cash balances to fund the general operations of the Company. The Company intends
to use the proceeds for general corporate purposes as described in the
prospectus for the Offering. None of the Company's net proceeds of the Offering
were paid directly or indirectly to any director, officer, general partner of
the Company or their associates, persons owning 10% or more of any class of
equity securities of the Company, or an affiliate of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 11, 2000, the sole stockholder of the Company approved an
amendment to the bylaws of the Company to increase the number of directors from
one to a range from five (5) to eight (8). The sole stockholder also approved
the Amended and Restated Certificate of Incorporation and the Amended and
Restated Bylaws of the Company which became effective upon the closing of its
initial public offering. The sole stockholder also elected the following
directors: Suresh Nihalani, Brigadeer General H.R. Johnson, Steven M. Krausz,
Robert F. Kuhling, Jr., Anthony T. Maher, Peter T. Morris, and Lip-Bu Tan, and
the sole stockholder also ratified and approved a classified Board of Directors
which became effective upon the closing of the initial public offering.
On April 11, 2000, the sole stockholder of the Company approved an
Agreement and Plan of Merger, whereby Accelerated Networks, Inc., a California
corporation ("Accelerated-California") merged with and into the Company, each
share of capital stock of Accelerated-California was converted into and
exchanged for one share of the same series or class of stock of the Company, and
all liabilities and all option plans of Accelerated-California were assumed by
the Company.
ITEM 5. OTHER INFORMATION
None.
33
<PAGE> 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Amended and Restated Bylaws of the Registrant
10.1* Memorandum of Understanding dated as of May 10, 2000, by and between the Registrant
and U S WEST !nterprise America, Inc.
10.2* Common Stock Subscription Agreement dated as of May 15, 2000, by and between the
Registrant and U S West Internet Ventures, Inc.
10.3* Agreement for Purchase of Products dated as of May 15, 2000, by and between the
Registrant and Siemens AG
27.1 Financial Data Schedule
</TABLE>
-----------------------
* incorporated by reference to Exhibits 3.1, 3.2, 10.30, 10.31, and
10.32, respectively, to Registrant's Form S-1 (Registration No.
333-31732).
(b) REPORTS OF FORM 8-K
No such reports were filed during the three months ended June
30, 2000.
34
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCELERATED NETWORKS, INC.
(Registrant)
By: /s/ Frederic T. Boyer
------------------------------------
Frederic T. Boyer
Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Dated: August 14, 2000
35
<PAGE> 38
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Amended and Restated Bylaws of the Registrant
10.1* Memorandum of Understanding dated as of May 10, 2000, by and between the Registrant
and U S WEST !nterprise America, Inc.
10.2* Common Stock Subscription Agreement dated as of May 15, 2000, by and between the
Registrant and U S West Internet Ventures, Inc.
10.3* Agreement for Purchase of Products dated as of May 15, 2000, by and between the
Registrant and Siemens AG
27.1 Financial Data Schedule
--------------
* incorporated by reference to Exhibits 3.1, 3.2, 10.30, and 10.32,
respectively, to Registrant's Form S-1 (Registration No. 333-31732).
</TABLE>
