<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 SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _____________
COMMISSION FILE NUMBER 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 [X] NO [ ]
----- -----
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 October 30, 2000: 50,364,933
shares.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
------------------------------ ----
<S> <C> <C>
Item 1. Consolidated Balance Sheets at September 30, 2000 and December 31, 1999...................... 1
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000
and 1999..................................................................................... 2
Consolidated Statements of Cash Flows for the Nine Months Ended September 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.............................................................. 32
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 32
Item 5. Other Information............................................................................ 32
Item 6. Exhibits and Reports on Form 8-K............................................................. 33
A. Exhibits................................................................................ 33
B. Reports on Form 8-K..................................................................... 33
Signatures................................................................................................. 34
</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
------------------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 86,727 $ 15,207
Accounts receivable, net of allowance for doubtful accounts of $732
(2000) and $110 (1999) ................................................ 8,920 3,277
Amounts due from related party ........................................... 4,930 1,104
Inventories .............................................................. 3,996 3,811
Prepaid and other current assets ......................................... 1,231 296
--------- ---------
Total current assets ................................................... 105,804 23,695
Property and equipment, net ................................................. 7,615 4,840
Other Assets ................................................................ 187 143
--------- ---------
Total assets ......................................................... $ 113,606 $ 28,678
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses .................................... $ 6,285 $ 3,567
Accrued payroll .......................................................... 1,580 756
Capital lease obligations, current ....................................... 9 28
Credit facilities, current ............................................... 88 884
Deferred revenue ......................................................... 1,333 219
--------- ---------
Total current liabilities ............................................ 9,295 5,454
Capital lease obligations, net of current portion ........................... 8 13
Credit facilities, net of current portion ................................... 186 1,919
--------- ---------
Total liabilities ...................................................... 9,489 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) and
$50,091 (1999) ........................................................... -- 49,857
Stockholders' equity (deficit):
Common stock, authorized -- 200,000 (2000) and 75,000 (1999); issued
and outstanding -- 50,352 (2000) and 10,166 (1999) shares ............. 50 579
Additional paid-in capital ............................................... 184,619 13,481
Deferred stock compensation .............................................. (8,310) (10,165)
Accumulated deficit ...................................................... (72,242) (32,460)
--------- ---------
Total stockholders' equity (deficit) ................................. 104,117 (28,565)
--------- ---------
Total liabilities and stockholders' equity (deficit) ................. $ 113,606 $ 28,678
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
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ACCELERATED NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenue (includes related party revenue of
$4,034 and $7,317 for the three and nine months ... $ $ $ $
ended September 30, 2000, respectively) ........... 11,567 2,883 27,489 4,128
Cost of revenue ...................................... 7,805 2,478 18,584 3,645
-------- -------- -------- --------
Gross profit ......................................... 3,762 405 8,905 483
Operating expenses
Research and product development .................. 5,704 3,280 15,394 7,947
Sales and marketing ............................... 5,101 1,963 15,573 4,563
General and administrative ........................ 1,189 462 3,308 1,271
Amortization of deferred stock compensation ....... 2,246 661 7,020 1,307
-------- -------- -------- --------
Total operating expenses ........................ 14,240 6,366 41,295 15,088
-------- -------- -------- --------
Loss from operations ................................. (10,478) (5,961) (32,390) (14,605)
Other income (expense):
Interest income ................................... 1,505 326 2,636 925
Interest expense .................................. (19) (13) (145) (33)
-------- -------- -------- --------
Loss before provision for income taxes ............... (8,992) (5,648) (29,899) (13,713)
Provision for income taxes ........................... -- -- 1 --
-------- -------- -------- --------
Net loss ............................................. (8,992) (5,648) (29,900) (13,713)
Beneficial conversion feature ........................ -- -- (9,882) --
-------- -------- -------- --------
Net loss applicable to common stockholders ........... $ (8,992) $ (5,648) $(39,782) $(13,713)
======== ======== ======== ========
Basic and diluted net loss per share applicable
to common stockholders ............................ $ (0.19) $ (0.85) $ (1.45) $ (2.22)
Weighted-average shares outstanding used to
compute basic and diluted net loss per share
applicable to common stockholders ................. 48,535 6,661 27,430 6,169
======== ======== ======== ========
</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>
NINE MONTHS ENDED
-----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
--------------- --------------
<S> <C> <C>
Operating activities:
Net loss .............................................................. $ (29,900) $ (13,713)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 1,859 635
Provision for bad debts ............................................. 622 --
Issuance of warrant to US WEST ...................................... 1,385 --
Amortization of deferred stock compensation ......................... 7,020 1,307
Changes in current assets and liabilities:
Accounts receivable ............................................... (10,091) (2,440)
Inventories ....................................................... (185) (2,391)
Prepaid and other current assets .................................. (935) (74)
Other assets ...................................................... (44) (142)
Accounts payable and accrued expenses ............................. 2,718 1,991
Accrued payroll ................................................... 824 374
Deferred revenue .................................................. 1,114 145
--------- ---------
Net cash used in operating activities ........................... (25,613) (14,308)
Investing activities:
Purchase of available-for-sale securities ............................ -- (2,000)
Maturity of available-for-sale securities ............................ -- 7,954
Purchase of property and equipment .................................... (4,634) (3,097)
--------- ---------
Net cash provided by (used in) investing activities ............. (4,634) 2,857
Financing activities:
Proceeds from issuance of common stock, net ........................... 65,286 --
Proceeds from issuance of redeemable convertible preferred stock, net . 38,425 29,939
Proceeds from exercise of stock options, net of repurchases ........... 609 286
Payments under capital lease obligations and credit facilities ........ (2,553) (380)
Proceeds from credit facilities ....................................... -- 2,043
--------- ---------
Net cash provided by financing activities ....................... 101,767 31,888
--------- ---------
Net increase (decrease) in cash and cash equivalents ............ 71,520 20,437
Cash and cash equivalents at beginning of period ......................... 15,207 3,507
--------- ---------
Cash and cash equivalents at end of period ............................... $ 86,727 $ 23,944
========= =========
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
SEPTEMBER 30, 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 $62.3 million, net of underwriters' discount of $4.8 million
and other offering expenses of $1.9 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss applicable to common stockholders .......... $ (8,992) $ (5,648) $(39,782) $(13,713)
Denominator (Basic and diluted):
Weighted-average common shares
outstanding .................................... 50,398 10,068 29,701 9,765
======== ======== ======== ========
Less weighted-average common shares
subject to repurchase .......................... (1,863) (3,407) (2,271) (3,596)
-------- -------- -------- --------
Weighted-average shares used to compute basic and
diluted net loss per common share applicable
to common stockholders ........................... 48,535 6,661 27,430 6,169
======== ======== ======== ========
Basic and diluted net loss per common share
applicable to common stockholders ................ $ (0.19) $ (0.85) $ (1.45) $ (2.22)
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average common stock equivalents:
Series A preferred stock ........................... -- 11,220 5,497 11,220
Series B preferred stock ........................... -- 11,585 5,676 11,585
Series C preferred stock ........................... -- 8,846 4,334 7,076
Series D preferred stock ........................... -- -- 1,371 --
Unvested shares of common stock subject to
repurchase ....................................... 1,863 3,407 2,271 3,596
Warrants ........................................... 229 -- 102 --
Stock options....................................... 6,446 3,157 5,111 2,690
----- ------ ------ ------
8,538 38,215 24,362 36,167
----- ------ ------ ------
</TABLE>
5
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5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials.................................................... $ 1,206 $ 1,735
Work-in-process.................................................. 698 710
Finished goods................................................... 2,092 1,366
--------- ----------
$ 3,996 $ 3,811
========= ==========
</TABLE>
6. RELATED-PARTY TRANSACTIONS
For the three and nine months ended September 30, 2000, the Company sold
product of approximately $4,034,000 and $7,317,000, respectively, to a
stockholder of the Company. No sales were made to the stockholder in the
corresponding periods for the preceding fiscal year. At September 30, 2000 and
December 31, 1999, amounts due from the stockholder totaled $4,930,000 and
$1,104,000, respectively.
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 and our subsequent
report on Form 10-Q filed with the SEC on August 14, 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 37% and 63%, respectively, of our revenue
for the three months ended September 30, 2000. Since inception, we have incurred
significant losses and as of September 30, 2000, we had an accumulated deficit
of $72.2 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
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a result, we will need to generate significantly higher revenue to achieve and
maintain profitability.
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, of our product sales. 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 expanded our relationship with Siemens by entering into an OEM
relationship with Siemens AG in the second quarter of this fiscal year 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 September 30, 2000, sales to our three largest customers accounted
for approximately 100% of our revenue, of which sales to CTC Communications
Group, Siemens ICN, and Light Year Unidial accounted for approximately 44%, 35%
and 21% 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 September 30, 2000, we had approximately
$1,333,000 of deferred revenue. Although we have not generated any significant
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.
8
<PAGE> 11
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 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:
- the mix of our products and services sold;
- 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 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 relationships 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
9
<PAGE> 12
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.
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. We recorded approximately $7.0 million of stock compensation expense for
the nine months ended September 30, 2000 and have approximately $8.3 million of
deferred stock compensation as of September 30, 2000, which is 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.
10
<PAGE> 13
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
NET REVENUE
We recognized net revenue of approximately $11.6 million for the three
months ended September 30, 2000, which represented an increase of approximately
$8.7 million, or 301%, from approximately $2.9 million for the three months
ended September 30, 1999. We recognized net revenue of approximately $27.5
million for the nine months ended September 30, 2000, which represented an
increase of approximately $23.4 million, or 566%, from approximately $4.1
million for the nine months ended September 30, 1999. These increases were
primarily attributable to increased sales of both our MSAP voice gateways and
concentrators and our carrier-class IAD'S. Net revenue for the three months
ended September 30, 2000 was primarily derived from sales of our MSAP voice
gateways and concentrators, which amounted to approximately $4.3 million, and
from sales of our carrier-class IADs, which amounted to approximately $7.3
million.
COST OF REVENUE
Cost of revenue for the three months ended September 30, 2000 was
approximately $7.8 million, which represented an increase of approximately $5.3
million, or 215%, from approximately $2.5 million for the three months ended
September 30, 1999. Cost of revenue for the nine months ended September 30, 2000
was approximately $18.6 million, which represented an increase of approximately
$15.0 million, or 410%, from approximately $3.6 million for the nine months
ended September 30, 1999. These increases were primarily a result of increased
sales of our products. Cost of revenue in the three months ended September 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 September 30, 2000 was approximately
67%. 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
September 30, 2000 were approximately $5.7 million, which represented an
increase of approximately $2.4 million, or approximately 74%, from approximately
$3.3 million for the three months ended September 30, 1999. Research and product
development expenses for the nine months ended September 30, 2000 were
approximately $15.4 million, which represented an increase of approximately $7.5
million, or approximately 94%, from approximately $7.9 million for the nine
months ended September 30, 1999. These increases were 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 September 30, 2000 were approximately 49%. Research and
development expenditures are essential to our future success and we expect that
these expenses will significantly increase in future periods.
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SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended September 30, 2000
were approximately $5.1 million, which represented an increase of approximately
$3.1 million, or approximately 160%, from approximately $2.0 million for the
three months ended September 30, 1999. Sales and marketing expenses for the nine
months ended September 30, 2000 were approximately $15.6 million, which
represented an increase of approximately $11.0 million, or approximately 241%,
from approximately $4.6 million for the nine months ended September 30, 1999.
These increases were 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 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. 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 September
30, 2000 were approximately $1.2 million, which represented an increase of
approximately $727,000, or approximately 157%, from approximately $462,000 for
the three months ended September 30, 1999. General and administrative expenses
for the nine months ended September 30, 2000 were approximately $3.3 million,
which represented an increase of approximately $2.0 million, or approximately
160%, from approximately $1.3 million for the nine months ended September 30,
1999. These increases were 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 $2.2 million in amortization of deferred stock
compensation in connection with employee and consultant stock option grants for
the three months ended September 30, 2000 as compared to approximately $661,000
million for the three months ended September 30, 1999. For the nine months ended
September 30, 2000 we recorded approximately $7.0 million in amortization of
deferred stock compensation in connection with employee and consultant stock
option grants as compared to approximately $1.3 million for the nine months
ended September 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, net of other expenses, for
the three months ended September 30, 2000 was approximately $1.5 million, which
represented an increase of approximately $1.2 million, or
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approximately 375% from approximately $313,000 for the three months ended
September 30, 1999. Other income (expense) for the nine months ended September
30, 2000 was approximately $2.5 million, which represented an increase of
approximately $1.6 million, or approximately 179% from approximately $892,000
for the nine months ended September 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 $62.3 million net of the underwriters discount and offering
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 $4.0 million revolving loan facility with Comerica Bank. We
have not drawn down on our revolving loan facility with Comerica Bank.
At September 30, 2000, we had cash and cash equivalents of approximately
$86.7 million, no outstanding debt under our line of credit with Comerica Bank,
and approximately $274,000 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 September 30, 2000, Comerica's base rate was 10%.
We used approximately $25.6 million in cash for operating activities for
the nine months ended September 30, 2000, an increase of approximately $11.3
million, or 79%, from the approximately $14.3 million used for operating
activities for the nine months ended September 30, 1999. The increase was
primarily due to an increase in our net loss from approximately $13.7 million
for the nine months ended September 30, 1999 to approximately $29.9 million for
the nine months ended September 30, 2000, and an increase in accounts receivable
of approximately $10.1 million for the nine months ended September 30, 2000
partially offset by increased non-cash charges of approximately $8.9 million, an
increase in accounts payable and accrued expenses of $2.8 million, and an
increase in deferred revenue of $1.1 million for the nine months ended September
30, 2000.
We used approximately $4.6 million for our investing activities in the nine
months ended September 30, 2000, a difference of approximately $7.5 million from
the approximately $2.9 million generated from investing activities for the nine
months ended September 30, 1999. The difference was due primarily to the
proceeds of approximately $8.0 million generated from the sale of investments in
the nine months ended September 30, 1999, partially offset by the purchase of
investments of approximately $2.0 million in the nine months ended September 30,
1999 and an increase in purchase of property and equipment of $1.5 million in
the nine months ended September 30, 2000.
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Cash provided by financing activities for the nine months ended September
30, 2000 was approximately $101.8 million, up from approximately $31.9 million
for the nine months ended September 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 the payoff of our term loan facility and principal and
interest payments on our equipment loan facility and capitalized lease
obligations. The increase in the nine months ended September 30, 2000 of
approximately $69.9 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 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 our initial public 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, in our Quarterly
Report on Form 10-Q filled with the SEC on August 14, 2000 and in our
registration statement on Form S-1 declared effective by the SEC on June 22,
2000.
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 September 30, 2000, we had an accumulated deficit of
approximately $72.2 million. Although our net revenue has grown from zero for
the quarter ended March 31, 1999 to approximately $8.5 million for the year
ended December 31, 1999 and approximately $11.6 million for the quarter ended
September 30, 2000, 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
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achieve and sustain profitability will depend on our ability to generate and
sustain substantially 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 CTC Communications Group, Siemens ICN, and Light Year Unidial accounted for
approximately 44%, 35%, and 21% of our total revenue, respectively, for the
quarter ended September 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:
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- 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;
- 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.
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;
- 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, our
customers, particularly CLECs, may not be able to obtain sufficient capital,
personnel and other resources to operate and grow their business or may fail to
execute their business plans. In the case of DSL, we believe that the rate of
deployment of broadband access using DSL has in fact been slower than expected,
resulting in decreased capital expenditures on broadband access equipment by
telecommunications service providers. If these circumstances continue to exist,
or if we are not able to address the foregoing factors, our business would be
harmed, and our results of operations and financial condition would be adversely
affected.
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
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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:
- 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.
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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. Most of our existing senior
management personnel joined us within the last two years, 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. For instance, we recently opened an office in Belgium
and will need to integrate that office into existing operations. 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 18.2% 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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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
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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
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could have a material adverse effect on our business, financial condition and
results of operations.
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 $485,000 and $1,041,000 for the three and nine months ended
September 30, 2000 and $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
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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, although we
have seven 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.
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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 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
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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 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.
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
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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.
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
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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 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
(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 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 and paid other expenses of approximately $1,886,000. After
deducting the underwriting discounts and commissions and the estimated Offering
expenses described above, the Company received net proceeds from the Offering of
approximately $62,300,000.
As of September 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
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1* Amended and Restated Certificate of Incorporation of the
Registrant
3.2* Amended and Restated Bylaws of the Registrant
10.1+ Mini-OSS Software License, Development and Distribution
Agreement dated as of July 1, 2000, by and between the
Registrant and Dorado Software, Inc.
10.2 Amendment No.1 to that certain Agreement for Purchase of
Products -OEM Agreement dated as of January 21, 1999 dated as of
October 16, 2000, by and between the Registrant and Siemens
Information and Communication Networks, Inc.
27.1 Financial Data Schedule
-----------------
* Incorporated by reference to Exhibits 3.1 and 3.2, respectively, to
Registrant's Form S-2 (Registration No. 333-31732).
+ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 24b-2 under the Securities
and Exchange Act, as amended. In accordance with Rule 24b-2, these
confidential portions have been omitted from this exhibit and filed
separately with the Securities and Exchange Commission.
(B) REPORTS OF FORM 8-K
No such reports were filed during the three months ended September 30,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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: November 14, 2000
34
<PAGE> 37
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
3.1* Amended and Restated Certificate of Incorporation of the
Registrant
3.2* Amended and Restated Bylaws of the Registrant
10.1+ Mini-OSS Software License, Development and Distribution
Agreement dated as of July 1, 2000, by and between the
Registrant and Dorado Software, Inc.
10.2 Amendment No.1 to that certain Agreement for Purchase of
Products -OEM Agreement dated as of January 21, 1999 dated as
of October 16, 2000, by and between the Registrant and Siemens
Information and Communication Networks, Inc.
27.1 Financial Data Schedule
-----------------
* Incorporated by reference to Exhibits 3.1 and 3.2, respectively, to
Registrant's Form S-2 (Registration No. 333-31732).
+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 24b-2 under the Securities and Exchange
Act, as amended. In accordance with Rule 24b-2, these confidential portions
have been omitted from this exhibit and filed separately with the
Securities and Exchange Commission.
