SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ____________ To __________________
COMPUTER ACCESS TECHNOLOGY CORPORATION
(exact name of registrant as specified in its charter)
Delaware 77-0302527
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2403 Walsh Avenue, Santa Clara
California 95051
(Address of principal executive offices) (Zip Code)
(408) 727-6600
(Registrant's telephone number, including area code)
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of May 1, 2001, there were 18,708,985 shares of the registrant's Common
Stock outstanding.
1
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMPUTER ACCESS TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited in thousands)
December 31, March 31,
2000 2001
----------- --------
ASSETS
Current assets:
Cash and cash equivalents....................... $47,411 $46,762
Short-term investments.......................... 285 --
Trade accounts receivable, net.................. 2,452 1,762
Related party receivable........................ 756 1,388
Inventories..................................... 799 1,105
Deferred tax assets............................. 390 228
Other current assets............................ 771 806
------- -------
Total current assets.......................... 52,864 52,051
Property and equipment, net....................... 832 1,020
Other assets...................................... 196 188
------- -------
$53,892 $53,259
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 543 $ 738
Accrued expenses................................ 3,179 1,133
------- -------
Total current liabilities..................... 3,722 1,871
Deferred rent..................................... 13 2
------- -------
Total liabilities............................. 3,735 1,873
------- -------
Stockholders' equity:
Common Stock.................................... 18 19
Additional paid-in capital...................... 54,029 53,816
Deferred stock-based compensation............... (7,853) (6,042)
Retained earnings............................... 3,963 3,593
------- -------
Total stockholders' equity.................... 50,157 51,386
------- -------
$53,892 $53,259
======= =======
See accompanying notes.
2
COMPUTER ACCESS TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited in thousands, except per share amounts)
Three Month Period Ended
March 31,
------------------------------------
2000 2001
--------------- -----------------
Revenue............................................................ $ 4,338 $ 5,675
Cost of revenue (inclusive of amortization of deferred stock-based
compensation of $55 and $176 in 2000 and 2001, respectively)..... 1,005 1,265
--------------- -----------------
Gross profit....................................................... 3,333 4,410
--------------- -----------------
Operating expenses:
Research and development (exclusive of amortization of deferred
stock-based compensation of $162 and $726 in 2000 and 2001,
respectively).................................................. 937 1,916
Sales and marketing (exclusive of amortization of deferred
stock-based compensation of $216 and $215 in 2000 and 2001,
respectively).................................................. 492 603
General and administrative (exclusive of amortization of
deferred stock-based compensation of $11 and $411 in 2000 and
2001, respectively)............................................ 170 807
Amortization of deferred stock-based compensation................ 389 1,352
--------------- -----------------
Total operating expenses..................................... 1,988 4,678
--------------- -----------------
Income (loss) from operations...................................... 1,345 (268)
Interest income.................................................... 67 642
--------------- -----------------
Income before provision for income taxes........................... 1,412 374
Provision for income taxes......................................... 711 744
--------------- -----------------
Net income (loss).................................................. $ 701 $ (370)
=============== =================
Net income (loss) per share:
Basic............................................................ $ 0.05 $ (0.02)
Diluted.......................................................... $ 0.05 $ (0.02)
=============== =================
Weighted average shares outstanding
Basic............................................................ 14,293 18,602
=============== =================
Diluted.......................................................... 15,261 18,602
=============== =================
See accompanying notes.
3
COMPUTER ACCESS TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands)
Three Month Period Ended
March 31,
----------------------------
2000 2001
----------- ------------
Cash flows from operating activities:
Net income (loss).................................................. $ 701 $ (370)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................... 27 88
Provision for doubtful accounts.................................. 13 4
Amortization of deferred stock-based compensation................ 444 1,528
Fair value of stock options in exchange for services............. -- 8
Changes in assets and liabilities:
Accounts receivable............................................ (497) 54
Inventories.................................................... (89) (306)
Deferred tax assets............................................ (392) 162
Other assets................................................... (64) (27)
Accounts payable............................................... 210 195
Accrued expenses............................................... 963 (2,046)
Deferred rent.................................................. (2) (11)
----------- ------------
Net cash provided by (used in) operating activities......... 1,314 (721)
----------- ------------
Cash flows from investing activities:
Acquisition of property and equipment.............................. (63) (276)
(Purchase) sale of short-term investments.......................... (1,843) 285
----------- ------------
Net cash provided by (used in) investing activities......... (1,906) 9
----------- ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 7 63
----------- ------------
Net cash provided by financing activities.................. 7 63
----------- ------------
Net decrease in cash and cash equivalents........................... (585) (649)
Cash and cash equivalents at beginning of period.................... 4,195 47,411
----------- ------------
Cash and cash equivalents at end of period.......................... $ 3,610 $ 46,762
=========== ============
Supplemental information:
Cash paid for income taxes.......................................... $ 728 $ 2,858
=========== ============
See accompanying notes.
4
COMPUTER ACCESS TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Computer Access Technology Corporation is a provider of advanced
verification systems and connectivity products for existing and emerging digital
communications standards. Our products are used by semiconductor, device, system
and software companies at each phase of their products' lifecycles from
development through production and market deployment.
We have expertise in the USB, USB 2.0, IEEE 1394, Bluetooth, Infiniband and
Ethernet standards and are actively engaged with our customers throughout their
development and production processes. Utilizing our easy to use, color-coded
software, the CATC Trace, our development products generate, capture, filter and
analyze high speed communications traffic, allowing our customers to quickly
discover and correct persistent and intermittent errors and flaws in their
product design. Our production products are used in manufacturing to ensure that
products comply with standards and operate with other devices as well as to
assist system manufacturers in downloading software onto new computers. Our
connectivity products are devices that translate communications traffic between
USB and Ethernet and enable reliable, uninterrupted service for broadband
Internet access. These connectivity products also allow for simple installation
and incorporate an application specific integrated circuit, or ASIC, and our
proprietary embedded software and software drivers.
Interim Financial Information and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as
of March 31, 2001, and for the three month periods ended March 31, 2001 and
2000, have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements and
pursuant to the rules and regulations of the Securities and Exchange Commission
and include the accounts of Computer Access Technology Corporation and its
wholly-owned subsidiary (collectively, "Computer Access Technology Corporation"
or the "Company"). Intercompany accounts and transactions have been eliminated
in consolidation. Certain information and footnote disclosures normally
included in annual consolidated financial statements prepared in accordance with
generally accepted accounting principles in the United States of America have
been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position at March 31, 2001
and the operating results and cash flows for the three month periods ended March
31, 2001 and 2000. These unaudited condensed consolidated financial statements
should be read in conjunctions with the Company's audited consolidated financial
statements and notes for the year ended December 31, 2000.
The unaudited condensed consolidated balance sheet at December 31, 2000 has
been derived from the audited consolidated financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles in the United States of America for complete
financial statements.
5
COMPUTER ACCESS TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of credit risk
Revenue and accounts receivable of the customers comprising more than 10%
of revenue or receivables are summarized as follows:
Three Month Period Ended
March 31,
-----------------------------
2000 2001
----------- -------------
Revenue:
Company A............................................................ 17% 32%
December 31, March 31,
2000 2001
-------------- -------------
Accounts receivable:
Company A............................................................ 22% 36%
Company B............................................................ 15% 3%
NOTE 2 - COMPREHENSIVE INCOME
Comprehensive income is defined as changes in equity of a company from
transactions, other events and circumstances, excluding transactions resulting
from investments by owners and distributions to owners. There is no difference
between net income and comprehensive income for the Company in any of the
periods presented.
NOTE 3 - STOCK-BASED COMPENSATION
In connection with certain stock option grants in 2000, 1999 and 1998, the
Company recorded deferred stock-based compensation totaling $14,393,000 which
represents the difference between the exercise price and the deemed fair value
at the date of grant, which is being recognized over the vesting period of the
related options. Amortization of deferred stock-based compensation was
$1,528,000 in the quarter ended March 31, 2001, of which $176,000 was included
in cost of revenue. Amortization of deferred stock-based compensation was
$444,000 in the quarter ended March 31, 2000, of which $55,000 was included in
cost of revenue. Amortization of deferred stock-based compensation on grants
prior to December 31, 2000 is estimated to be approximately $4,766,000,
$1,940,000, $768,000 and $96,000 in the years ending December 31, 2001, 2002,
2003 and 2004 respectively, and may change due to the granting of additional
options or the cancellation of existing grants in future periods.
NOTE 4 - NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with SFAS
No. 128, Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98.
Under the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per
share is computed by dividing net income (loss) for the period by the weighted
average number of shares of common stock outstanding during the period. The
calculation of diluted net (loss) income per share excludes potential common
stock if their effect is antidilutive. Potential common stock consists of
incremental common shares issuable upon the exercise of stock options.
6
COMPUTER ACCESS TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands except per share
data):
Three Month Period Ended
March 31,
----------------------------
2000 2001
------------ ------------
Numerator:
Net income (loss).................................................... $ 701 $ (370)
============ ============
Denominator:
Weighted average shares outstanding.................................. 14,293 18,602
------------ ------------
Denominator for basic calculation.................................... 14,293 18,602
Dilutive effect of stock options..................................... 968 --
------------ ------------
Denominator for diluted calculation.................................. 15,261 18,602
============ ============
Net income (loss) per share:
Basic................................................................ $ 0.05 $ (0.02)
============ ============
Diluted.............................................................. $ 0.05 $ (0.02)
============ ============
NOTE 5 - INVENTORIES
Inventories consist of the following (in thousands):
December 31, March 31,
-------------- -------------
2000 2001
-------------- -------------
Raw materials......................................................... $ 361 $ 496
Work in progress...................................................... 160 259
Finished goods........................................................ 278 350
-------------- -------------
$ 799 $ 1,105
============== =============
NOTE 6 - INCOME TAXES
The reconciliation between the effective tax rates and statutory federal
income tax rate is shown in the following table:
Three Month Period Ended
March 31,
----------------------------
2000 2001
------------ -----------
Statutory federal income tax rate.......................................... 34.0% 35.0%
State taxes, net of federal income tax benefit............................. 7.0 25.7
Amortization of deferred stock-based compensation.......................... 10.7 143.1
Other...................................................................... (1.3) (4.9)
------------ -----------
Effective tax rate...................................................... 50.4% 198.9%
============ ===========
7
COMPUTER ACCESS TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION
The Company has three reportable segments categorized by product type:
development products, production products and connectivity products. The
development products are advanced verification systems that assist hardware and
software manufacturers in the efficient design of reliable and interoperable
systems and devices. Production products are production verification systems and
connectivity solutions designed to assist hardware and software manufacturers in
volume production of reliable devices and systems. Connectivity products are
designed to assist broadband Internet service providers in delivering convenient
and dependable service and device manufacturers in producing reliable products.
The Company has no inter-segment revenue.
The Company analyzes segment revenue and cost of revenue, but does not
allocate operating expenses, including stock-based compensation, or assets to
segments. Accordingly, the Company has presented only revenue and gross profit
by segment.
Segment information (in thousands)
Unallocated
Stock-based
Development Production Connectivity Compensation
Products Products Products Expense Total
--------------- ------------- --------------- ----------------- ----------
Three Month Period Ended March 31, 2000
Segment revenue from external
customers........................... $2,208 $1,235 $ 895 $ -- $4,338
Segment gross profit.................. $1,948 $1,025 $ 415 $ (55) $3,333
Three Month Period Ended March 31, 2001
Segment revenue from external
customers........................... $4,325 $ 503 $ 847 $ -- $5,675
Segment gross profit.................. $3,844 $ 414 $ 328 $(176) $4,410
Geographic information (in thousands):
Long-Lived
Revenue Assets
-------------- --------------
Three Month Period Ended March 31, 2000
North America................................. $ 2,645 $ 291
Europe........................................ 654 --
Asia.......................................... 1,028 --
Rest of world................................. 11 --
------------ --------------
Total....................................... $ 4,338 $ 291
============ ==============
Three Month Period Ended March 31, 2001
North America................................. $ 2,322 $ 835
Europe........................................ 845 185
Asia.......................................... 2,462 --
Rest of world................................. 46 --
------------ --------------
Total....................................... $ 5,675 $ 1,020
============ ==============
Revenues are attributed to countries based on delivery locations. Sales to
foreign customers accounted for 39% and 59% of revenue during the quarters ended
March 31, 2000 and 2001, respectively.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the unaudited
condensed consolidated financial information and notes thereto included in Item
1 of this report and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in our Form 10-K as filed with
the Securities and Exchange Commission on March 12, 2001.
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements within the
meaning of the federal securities laws. These statements may contain words such
as "expects," "anticipates," "intends," "plans," "believes," "estimates," or
other wording indicating future results. Forward-looking statements are subject
to risks and uncertainties. Actual results may differ materially from the
results discussed in forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
under "Risk Factors" following "Recent Accounting Pronouncements" below, and
elsewhere in this report. We undertake no obligation to revise or update any
forward-looking statements to reflect any event or circumstance that may arise
after the date of this report.
Overview
We are a provider of advanced verification systems and connectivity
products for existing and emerging digital communications standards such as USB,
IEEE 1394, Bluetooth wireless technology, Infiniband and Ethernet. Our products
are used by semiconductor, device, system and software companies at each phase
of their products' lifecycles from development through production and market
deployment. Our verification systems consist of development and production
products that accurately monitor communications traffic and diagnose operational
problems to ensure that products comply with standards and operate with other
devices as well as to assist system manufacturers in downloading software onto
new computers. Our connectivity products enable reliable, uninterrupted service
for broadband Internet access. We currently outsource most of the manufacturing
of our verification systems and connectivity products so that we may concentrate
our resources on the design, development and marketing of our existing and new
products.
We were formed in February 1992 and offered our first verification system
and our first connectivity product in 1996. Our product offerings have expanded
to include a range of analyzers, testers and connectivity products, including
FireInspector, our 1394 bus and protocol analyzer; NetMate Plus, a USB
connectivity product; UPT, a USB production product; IBTracer, our Infiniband
bus protocol analyzer and first module for our Universal Protocol Analyzer
System; USBTracer, our fifth generation USB bus and protocol analyzer and
Merlin, a Bluetooth wireless protocol analyzer.
We report our revenue and gross profit in three business segments:
development, production and connectivity products. In the quarter ended March
31, 2001, our revenue from our development products was $4.3 million, from
production products was $503,000 and from connectivity products was $847,000.
Historically, we have generated a majority of our revenue across all segments
from products for the USB standard. Revenue from our USB products accounted for
approximately 64.1% of our revenue in the quarter ended March 31, 2001, of which
17.7% was from our USB 2.0 products.
We sell our products on a purchase order basis. We have adopted Statement
of Position, or SOP, 97-2, Software Revenue Recognition. Under SOP 97-2, we
recognize revenue to resellers and end users upon shipment provided that there
is persuasive evidence of an arrangement, the product has been delivered, the
fee is fixed and determinable and collection of the resulting receivable is
reasonably assured. When we have shipped products but some elements essential to
the functionality of the products have not been completed, revenue and
associated cost of revenue are deferred until all remaining elements have been
delivered. As a result, our revenue trends are dependent on the timing of
delivery of these essential elements. Our products are typically sold with a one
year parts and labor repair warranty. Provisions for warranty costs are recorded
at the time products are shipped. Product returns to date have not been
significant.
We sell our products to technology, infrastructure and application
companies through our direct sales force and indirectly through our distributors
and resellers. Historically, a significant portion, but less than half of our
revenue, has been derived from customers outside of the United States. In the
quarter ended March 31, 2001, 59.1%
9
of our revenue was derived from international customers, of which 31.9% was
derived from customers based in Japan, 11.5% was derived from customers based in
other parts of Asia, and 14.9% was derived from customers based in Europe.
International revenue increased as a percentage of total revenue in the quarter
primarily due to the general economic slow down in the United States. All of our
revenue and accounts receivable are denominated in U.S. dollars. Although
seasonality affects many of our target markets, to date our revenues and
financial condition as a whole have not been materially impacted by seasonality.
The development of emerging communications standards and technological
change have influenced and are likely to continue to influence our quarterly and
annual revenue and results of operations. Our product development and marketing
strategies are focused on working closely with the promoter companies and
communications standards groups to gain early access to new communications
standards and technologies. We have invested significantly in the research and
development and marketing of our products for emerging communications standards,
often before these standards have gained widespread industry acceptance and in
advance of generating substantial revenue related to these investments.
Additionally, the rate and timing of customer orders may vary significantly from
month to month. Accordingly, if sales of our products do not occur when we
expect and we are unable to predict or adjust our estimates on a timely basis,
our expenses may increase as a percentage of revenue.
We expect that our planned new product releases and the industry's adoption
of new technologies should enable us to grow our revenue for 2001, although the
overall economic environment continues to create uncertainties for us and our
customers. We have experienced some weakness in each of our business segments as
a result of slowing growth in the global economy and delays in orders as a
result of reduced spending by many of our customers. Our near term financial
results have been and may continue to be affected by our decision to accelerate
sales, marketing and research and development spending in the first and future
quarters of 2001.
Results of Operations
The following table presents selected consolidated financial data for the
periods indicated as a percentage of revenue:
Three Month Period
Ended March 31,
---------------------------
2000 2001
------------ -----------
Consolidated Statement of Income Data:
Revenue..................................................... 100.0% 100.0%
Cost of Revenue............................................. 23.2 22.3
------------ -----------
Gross profit................................................ 76.8 77.7
------------ -----------
Operating expenses:
Research and development.................................. 21.6 33.8
Sales and marketing....................................... 11.3 10.6
General and administrative................................ 3.9 14.2
Amortization of deferred stock-based compensation......... 9.0 23.8
------------ -----------
Total operating expenses.............................. 45.8 82.4
------------ -----------
Income (loss) from operations............................... 31.0 (4.7)
Interest income............................................. 1.5 11.3
------------ -----------
Income before provision for income taxes.................... 32.5 6.6
Provision for income taxes.................................. 16.3 13.1
------------ -----------
Net income (loss)........................................... 16.2% (6.5)%
============ ===========
10
Comparisons of Quarters Ended March 31, 2000 and 2001
Revenue. Our revenue was $5.7 million in the quarter ended March 31, 2001
and $4.3 million in the quarter ended March 31, 2000. This represents an
increase of 30.8% from the quarter ended March 31, 2000 to the quarter ended
March 31, 2001. The increase in revenue was due primarily to sales of our new
products, including our Merlin Bluetooth Analyzer and our Advisor USB 2.0
Analyzer, which represented $2.4 million, offset by decreases in our sales of
production products of $732,000. Revenue from international customers increased
by 97.4%, while domestic revenue decreased by 12.0%. International revenue
represented 59.1% of our revenue in the quarter ended March 31, 2001,as compared
to 39.0% in the quarter ended March 31, 2000. Revenue from Japan, through our
distributor Toyo, represented 31.9% of our total revenue in the quarter ended
March 31, 2001, as compared to 16.9% in the quarter ended March 31, 2000.
Cost of Revenue and Gross Profit. Our gross profit was $4.4 million in the
quarter ended March 31, 2001 and $3.3 million in the quarter ended March 31,
2000. This represent an increase of 32.3% from the quarter ended March 31, 2000
to the quarter ended March 31, 2001. The dollar increase was primarily the
result of increased unit sales from quarter to quarter. Our gross margin was
77.7% in the quarter ended March 31, 2001 and 76.8% in the quarter ended March
31, 2000. The increase in gross margin was due primarily to the change in the
mix of our revenue by business segment, with our higher margin business segment,
development products, increasing as a percentage of total revenue by 25%, and
our lower margin business segment, connectivity products, decreasing as a
percentage of revenue by 5.7%. Excluding amortization of deferred stock-based
compensation, our gross margin would have been 80.8% in the quarter ended March
31, 2001 and 78.1% in the quarter ended March 31, 2000.
Research and Development. Our research and development expenses were $1.9
million in the quarter ended March 31, 2001 and $937,000 in the quarter ended
March 31, 2000. This represents an increase of 104.5% from the quarter ended
March 31, 2000 to the quarter ended March 31, 2001. Research and development
expenses represented 33.8% of revenue in the quarter ended March 31, 2001 and
21.6% of revenue in the quarter ended March 31, 2000. The dollar and percentage
of revenue increase was primarily due to an increase in personnel and related
costs of $894,000.
Sales and Marketing. Our sales and marketing expenses were $603,000 in the
quarter ended March 31, 2001 and $492,000 in the quarter ended March 31, 2000.
This represents an increase of 22.6% from the quarter ended March 31, 2000 to
the quarter ended March 31, 2001. Sales and marketing expenses represented 10.6%
of revenue in the quarter ended March 31, 2001 and 11.3% of revenue in the
quarter ended March 31, 2000. The dollar increase was primarily due to increases
in personnel and related costs of approximately $100,000. The decrease as a
percentage of revenue was primarily due to revenue growth of approximately 30.8%
from the quarter ended March 31, 2000 to the quarter ended March 31, 2001.
General and Administrative. Our general and administrative expenses were
$807,000 in the quarter ended March 31, 2001 and $170,000 in the quarter ended
March 31, 2000. This represents an increase of 374.7% from the quarter ended
March 31, 2000 to the quarter ended March 31, 2001. General and administrative
expenses represented 14.2% of revenue in the quarter ended March 31, 2001 and
3.9% of revenue in the quarter ended March 31, 2000. The dollar increase and
percentage of revenue increase was primarily due to the addition of management
and administrative personnel and related costs of $223,000 and the increase in
professional services of $281,000, primarily legal fees.
Interest Income. Interest income was $642,000 in the quarter ended March
31, 2001 and $67,000 in the quarter ended March 31, 2000. The increase was the
result of additional excess cash balances and the proceeds from our initial
public offering in November 2000.
Provision for Income Taxes. Provision for income taxes was $744,000 in the
quarter ended March 31, 2001 and $711,000 in the quarter ended March 31, 2000.
These amounts represent an increase of 4.6% from the quarter ended March 31,
2000 to the quarter ended March 31, 2001. Our effective tax rate increased from
50.4% in the quarter ended March 31, 2000 to 198.9% in the quarter ended March
31, 2001 due primarily to an increase in the amortization
11
of deferred stock-based compensation. Our effective tax rate after excluding the
effect of amortization of deferred stock-based compensation was 39.1% in the
quarter ended March 31, 2001 and 38.3% in the quarter ended March 31, 2000.
Net Income (loss). Our net loss was $370,000 in the quarter ended March 31,
2001 and our net income was $701,000 in the quarter ended March 31, 2000. Our
net loss represented 6.5% of revenue in the quarter ended March 31, 2001 and our
net income represented 16.2% of revenue in the quarter ended March 31, 2000. The
net loss in the quarter ended March 31, 2001 was primarily the result of an
increase in the amortization of deferred stock-based compensation and operating
costs from the quarter ended March 31, 2000. Net income before the effect of the
amortization of deferred stock-based compensation was $1.2 million in the
quarter ended March 31, 2001 and $1.1 million in the quarter ended March 31,
2000.
Amortization of Deferred Stock-based Compensation. Amortization of deferred
stock-based compensation represents the difference between the exercise price
and the deemed fair value at the date of grant, in connection with certain stock
option grants in 2000, 1999 and 1998, which is being recognized over the vesting
period of the related options. Amortization of deferred stock-based compensation
was $1.5 million in the quarter ended March 31, 2001, of which $176,000 was
included in cost of revenue during that period. Amortization of deferred stock-
based compensation was $444,000 in the quarter ended March 31, 2000, of which
$55,000 was included in cost of revenue during that period. Amortization of
deferred stock-based compensation on grants prior to December 31, 2000 is
estimated to be approximately $4,766,000, $1,940,000, $768,000 and $96,000 in
the years ending December 31, 2001, 2002, 2003 and 2004 respectively, and may
change due to the granting of additional options or the cancellation of existing
grants in future periods.
The following table sets forth net income and net income per share, both
after excluding the amortization of deferred stock-based compensation (in
thousands, except per share amounts).
Three Month Period Ended
March 31,
----------------------------
2000 2001
------------ -------------
Net income, excluding amortization of deferred compensation................. $ 1,145 $ 1,158
Net income per share, excluding amortization of deferred compensation
Basic.................................................................... $ 0.08 $ 0.06
Diluted.................................................................. $ 0.08 $ 0.06
Weighted average shares outstanding
Basic.................................................................... 14,293 18,602
Diluted.................................................................. 15,261 19,768
Liquidity and Capital Resources
Our operating cash flow requirements have generally increased reflecting
the expanding scope and level of our activities. Since our inception, we have
financed our operations primarily through cash flows from operating activities.
In November 2000, we received net proceeds of $38.3 million from the initial
public offering of our common stock.
As of March 31, 2001, our principal sources of liquidity were $46.8 million
in cash and cash equivalents. In the quarter ended March 31, 2001, cash used in
operating activities of $721,000 primarily consisted of net loss of $370,000, an
increase in the level of inventory of $306,000, and a decrease in accrued
expenses of $2.1 million, offset by an increase in amortization of deferred
stock-based compensation of $1.5 million, an increase in accounts payables of
$195,000, a decrease in deferred tax assets of $162,000, depreciation expense of
$88,000 and a decrease in accounts receivable of $54,000. The decrease in
accrued expenses primarily related to decreased income tax accruals of $2.2
million and increased accrued expenses from operations of $204,000. Cash
provided by investing activities was $9,000, related to the proceeds from the
sale of short-term investments of $285,000 offset by capital
12
expenditures of $276,000. Cash provided by financing activities of $63,000
related to the proceeds from the exercise of stock options.
In the quarter ended March 31, 2000, cash provided by operating activities
of $1.3 million primarily consisted of net income of $701,000, an increase in
the level of inventory of $89,000, amortization of deferred stock-based
compensation of $444,000, an increase in accrued expenses of $590,000, an
increase in accounts payable of $210,000, and an increase in deferred revenue of
$373,000, offset by an increase in accounts receivable of $497,000, an increase
in deferred tax assets of $392,000, and a decrease in other assets of $64,000.
Cash used in investing activities of $1.9 million related to the purchase of
short-term investments of $1.8 million and capital expenditures of $63,000.
As of March 31, 2001, we had cash and cash equivalents of $46.8 million,
working capital of $50.2 million and no debt. We believe that the net proceeds
from our initial public offering in November 2000, together with funds generated
from operations, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. Thereafter, we may
find it necessary to obtain additional equity or debt financing. If we are
required to raise additional funds, we may not be able to do so on acceptable
terms or at all. In addition, if we issue new securities, stockholders might
experience dilution or the holders of the new securities might have rights,
preferences or privileges senior to those of existing stockholders.
Recent Accounting Pronouncements
In various areas, including revenue recognition and stock-based
compensation, accounting standards and practices continue to evolve. The SEC has
recently issued interpretive guidance relating to SAB 101, and the FASB
continues to address revenue recognition and other related accounting issues. We
believe we comply with all of the rules and related guidance as they currently
exist. However, any changes to generally accepted accounting principles in the
United States of America in these areas would likely affect our results of
operations.
RISK FACTORS
Our future operating results are unpredictable and are likely to fluctuate
from quarter to quarter and, if we fail to meet the expectations of securities
analysts or investors, our stock price would likely decline significantly.
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a number of factors,
some of which are wholly or partially outside of our control. Many of these
risks are described in the following risk factors. Accordingly, we believe that
period-to-period comparisons of our results of operations are not meaningful and
should not be relied upon as indications of future performance. Some of the
factors that could cause our quarterly or annual operating results to fluctuate
include:
. the amount and timing of our operating expenses and capital
expenditures;
. changes in the volume of our product sales and pricing concessions on
volume sales;
. the timing, reduction, deferral or cancellation of customer orders or
purchases;
. seasonality in some of our target markets;
. the effectiveness of our product cost reduction efforts;
. variability of our customers' product lifecycles;
. changes in the average selling prices of our products; and
. cancellations, changes or delays of deliveries to us by our
manufacturers and suppliers.
13
If our operating results fall below the expectations of securities analysts
or investors, the trading price of our common stock would likely decline
significantly.
If we fail to keep up with rapid technological change and evolving industry
standards, our products could become less competitive or obsolete.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. Our products may cease to be competitive if we fail
to introduce new products or product enhancements that address these changes,
meet new customer requirements and support new standards. To continue to
introduce new products or product enhancements on a timely basis, we must:
. identify emerging technological trends in our target markets, including
new communications standards;
. accurately define and design new products or product enhancements to
meet market needs;
. develop or license the underlying core technologies necessary to create
new products and product enhancements; and
. respond effectively to technological changes and product introductions
by others.
If we are unable to identify, develop, manufacture, market or support new
or enhanced products successfully or on a timely basis, our competitors could
gain market share or our new products or product enhancements might not gain
market acceptance. Further, we might not be able to respond effectively to
product announcements by competitors, technological changes or emerging industry
standards.
We depend upon widespread market acceptance of our USB products, and our
revenue will decline if the market does not continue to accept these products.
We currently derive a substantial majority of our revenue from sales of our
USB products. Revenue from sales of our USB products accounted for approximately
64.1% of our revenue in the quarter ended March 31, 2001. We expect that revenue
from these products will continue to account for a substantial portion of our
revenue for the foreseeable future. If the market does not continue to accept
our USB products, our revenue will decline significantly. Factors that may
affect the market acceptance of our current USB products include the continued
growth of the markets for USB compliant devices as well as the performance and
pricing of our USB products and the availability, functionality and price of
competing products. Companies must also modify their products to support new
versions of USB as they are developed, such as USB 2.0. Many of these factors
are beyond our control. In addition, in order to maintain widespread market
acceptance, we must continue to differentiate ourselves from the competition
through our technical expertise, product offerings and brand name recognition.
Failure of our USB products to maintain market acceptance would adversely impact
our revenue.
If we devote resources to developing products for communications standards that
ultimately are not widely accepted, our business could be harmed.
We may incur significant expenses and dedicate significant time and
resources in developing products for emerging communications standards that may
not gain broad acceptance. For example, we spent four years from 1992 to 1995
developing products for the ACCESS.bus technology, a standard designed to
connect peripheral devices to computers, which did not gain market acceptance.
The failure of a standard for which we devote resources to gain widespread
acceptance, or our failure to be first to market with products that address a
particular standard, would likely harm our business.
If we fail to maintain and expand our relationships with the core or promoter
companies in our target markets, we may have difficulty developing and marketing
our products.
It is important to our success to maintain and expand our relationships
with companies that are leaders in developing new communications standards in
our target markets. We believe that we need to work closely with
14
these core or promoter companies to gain valuable insights into the market
demands for new products, to obtain early access to new communications standards
as they are developed and to help us design new products. We will need to
maintain our relationships with leading technology and infrastructure companies,
as well as expand our relationships with leaders in markets that are new for us.
Generally, we do not enter into formal contracts that obligate these companies
to work or share their technology with us. Industry leaders could choose to work
with other companies as they develop new communications standards in the future.
If we fail to maintain and expand our industry relationships, we could lose the
opportunity for first-mover advantage with respect to emerging standards and it
would be more difficult for us to develop and market products that address these
standards.
If our target markets do not accept our products for emerging communications
standards, our revenue growth could suffer.
Our future growth depends upon our ability to sell advanced verification
systems and connectivity products for emerging communications standards such as
Bluetooth wireless technology. However, our products may not gain widespread
acceptance by customers. The success of our products depends upon volume
production of computer, communications and consumer electronic products that use
a particular standard and the acceptance of these products by customers. The
markets for emerging standards products have only recently begun to develop and
are rapidly evolving. As a result, it is difficult to predict their potential
size or future growth rate. There is significant uncertainty as to whether these
markets ultimately will develop at all or, if they do develop, whether they will
develop rapidly. If the markets for a particular emerging communications
standard fail to develop or develop more slowly than expected, or if our
products do not achieve widespread market acceptance by customers in these
markets, our business would be significantly harmed.
Delays in the development of new products or product enhancements could harm our
operating results and our competitive position.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as accurate anticipation of
technological and market trends. Although we have not experienced any material
product development delays in the past, these types of delays could occur in the
future. To the extent that we do not introduce the first product for an emerging
standard or customers defer or cancel orders with the expectation of a new
product or product enhancement release, our operating results could suffer.
Product development delays may result from numerous factors, including:
. changing product specifications and customer requirements;
. difficulties in hiring and retaining necessary technical personnel;
. difficulties in allocating engineering resources and overcoming resource
limitations;
. difficulties with contract manufacturers;
. changing market or competitive product requirements; and
. unanticipated engineering complexities.
If we are unable to meet the design and market introduction schedules for
our new products or product enhancements, our operating results and competitive
position may suffer.
Variations in our revenue may cause fluctuations in our operating results.
We may experience a delay in generating or recognizing revenue for a number
of reasons. Historically, we have had little backlog and our revenue in any
quarter has depended upon orders booked and shipped in that quarter.
Furthermore, our customers may delay scheduled delivery dates and cancel orders
without significant penalty. In addition, even if we ship orders, generally
accepted accounting principles may require us to defer recognition of revenue
from those orders until a later date. Because we budget our operating expenses
on anticipated revenue
15
trends and a high percentage of our expenses is fixed in the short term, any
delay in generating forecasted revenue could have a significant negative impact
on our operating results.
We continue to face uncertainty relating to economic conditions affecting our
customers.
At this time, we continue to see uncertainty in the degree to which current
adverse business and economic conditions may negatively affect growth and
capital spending by our existing and potential customers. Although we reported
continued revenue growth in the first quarter over the same quarter last year
notwithstanding these uncertainties, we cannot predict whether or when current
adverse economic trends affecting many sectors of technology companies may
adversely impact our results.
Shifts in our product mix may result in declines in gross margins.
Our gross margins vary among our products, with our gross margins generally
being higher on our advanced verification systems than on our connectivity
products. Our overall gross margins might fluctuate from period to period as a
result of shifts in product mix, the channels through which we sell our
products, the introduction of new products and product costs.
Decreases in average selling prices of our products may reduce gross margins and
revenue.
The average selling prices of our products may decrease in the future in
response to product introductions by us or our competitors, or as a result of
other factors, including discounts given on volume purchase orders or pricing
pressures. In that event, we would need to continue to develop and introduce on
a timely basis new products that incorporate features that can be sold at higher
average selling prices. Failure to do so would likely cause our revenue and
gross margins to decline.
Continued competition in our markets may lead to a reduction in our prices,
revenue and market share.
The markets for advanced verification and connectivity products for
emerging communications standards are highly competitive. We compete with
multiple companies in various markets, including 3A International in the markets
for products for the 1394 standard. Any of our competitors may develop
technologies that address our targeted markets more effectively and at a lower
cost. In addition, these competitors may enter into strategic alliances or
business combinations that increase their ability to innovate and address our
markets.
We may also face competition from other equipment manufacturers, such as
Finisar, National Instruments, Rhode & Schwartz and Tektronix. Many of these
companies have substantially greater financial, technical, marketing and
distribution resources and brand name recognition than we have. We expect that
more companies, including some of our customers, will enter our markets. If
these companies develop products that compete with our products or form
alliances with or acquire companies offering competing products, even if those
products do not have capabilities comparable to our products, they would be
significant competitors and their activities could cause us to reduce our
prices. Increased competition could result in significant price erosion, reduced
revenue, lower margins and loss of market share, any of which would
significantly harm our business.
We depend on contract manufacturers for substantially all of our manufacturing
requirements and if these manufacturers fail to provide us with adequate
supplies of high-quality products, our competitive position, reputation and
business could be harmed.
We currently rely on four contract manufacturers for all of our
manufacturing requirements except for the final assembly, testing and quality
assurance on our lower volume, higher margin products. We do not have long-term
contracts with any of these manufacturers. As a result, our manufacturers could
refuse to continue to manufacture all or some of our products that we require or
change the terms under which they manufacture our products. We have experienced
delays in product shipments from some of our contract manufacturers in the past,
which in turn forced us to delay product shipments to our customers. We may in
the future experience similar delays or other problems, such as inferior quality
and insufficient quantity of products, any of which could significantly harm our
business. Our contract manufacturers may not be able to meet our future
requirements for timely delivery of products of sufficient quality and quantity.
We intend to introduce new products and product enhancements
16
regularly, which will require that we rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract manufacturers.
The inability of our contract manufacturers to provide us with adequate supplies
of high quality products or the loss of any of our contract manufacturers would
cause a delay in our ability to fulfill orders while we obtain a replacement
manufacturer.
If we are unable to forecast our supply needs accurately, our costs may increase
or we may not be able to ship products in a timely manner.
We purchase components used in the manufacture of our products from several
key sources. We depend on these sources to deliver necessary components in a
timely manner based on twelve-month rolling forecasts that we provide. Lead
times for materials and components that we order vary significantly and depend
on factors such as specific supplier requirements, contract terms and current
market demand for particular components. If we overestimate our component
requirements, we may develop excess inventory, which would increase our costs.
If we underestimate our component requirements, we may not be able to fulfill
customer orders.
We depend on sole source suppliers for several key components of our products,
and we may lose sales if they fail to meet our needs.
We obtain some parts, components and packaging used in our products from
sole sources of supply. For example, we obtain field programmable gate array
integrated circuits from Altera, ASICs from LSI Logic through Wyle Electronics
and micro-controllers from Intel and Cypress Semiconductor. If suppliers are
unable to meet our demand for sole source components at reasonable costs and if
we are unable to obtain an alternative source or the price for an alternative
source is prohibitive, our ability to maintain timely and cost-effective
production of our products would be harmed. In addition, because we rely on
purchase orders rather than long-term contracts with our suppliers, including
our sole source suppliers, we cannot predict with certainty our ability to
obtain components in the longer term. If we are unable to obtain components or
receive a smaller allocation of components than is necessary to manufacture
products in quantities sufficient to meet demand, customers could choose to
purchase competing products.
If our distributors and resellers do not actively sell our products, our product
sales may decline.
We sell a substantial portion of our products through distributors and
resellers, including Toyo, our distributor in Japan, which accounted for
approximately 31.9% of our revenue in the quarter March 31, 2001. Our
distributors and resellers generally offer products from multiple manufacturers.
Accordingly, there is a risk that these distributors and resellers may give
higher priority to selling products from other suppliers and reduce their
efforts to sell our products. Our distributors and resellers may not market our
products effectively or continue to devote the resources necessary to provide us
with effective sales, marketing and technical support. Our distributors and
resellers may on occasion build inventories in anticipation of substantial
growth in sales and, if growth does not occur as rapidly as anticipated, may
decrease the quantity of products ordered from us in subsequent quarters. A
slowdown in orders from our distributors could reduce our revenue in any given
quarter and give rise to fluctuations in our operating results.
In addition, our sales to Toyo are made on the basis of purchase orders
rather than a long-term commitment. Our sales to our other distributors are made
by purchase orders. The loss of any one of our major distributors, or the delay
of significant orders from these distributors, could result in decreased
revenue.
If we are unable to hire and retain additional sales, marketing, engineering,
operations and finance personnel, our growth will be impaired.
To grow our business successfully and maintain a high level of quality, we
will need to recruit, retain and motivate additional highly skilled sales,
marketing, engineering, operations and finance personnel. If we are not able to
hire and retain a sufficient number of qualified employees, our growth will be
impaired. In particular, as a company focused on the development of complex
products, we will need to hire additional hardware and software developers and
engineers and project managers of various experience levels in order to keep
pace with technological change and develop products that meet the needs of
rapidly evolving markets. Competition for skilled employees, particularly in the
San Francisco Bay Area, is intense. We may have even greater difficulty
recruiting potential
17
employees if prospective employees perceive the equity component of our
compensation package to be less valuable as a results of market fluctuations in
the price of our common stock.
The loss of key management personnel, on whose knowledge, leadership and
technical expertise we rely, would harm our ability to execute our business
plan.
Our success depends heavily upon the continued contributions of our key
management personnel, whose knowledge, leadership and technical expertise would
be difficult to replace. All of our executive officers and key personnel are
employees at will. We maintain no key person insurance on any of our personnel.
If we were to lose the services of any of our key personnel, our ability to
execute our business plan would be harmed. In addition, employees who leave our
company may subsequently compete against us.
If we fail to manage our growth effectively, our business could suffer.
Our ability to offer products and implement our business plan successfully
in a rapidly evolving market requires an effective planning and management
process. We increased our headcount by 13.9% in the quarter ended March 31,
2001. This growth may place a significant strain on our management systems,
infrastructure and other resources. We expect that we will need to continue to
improve our financial and managerial controls, reporting systems and procedures.
For example, we intend to migrate our operations to a new enterprise resource
planning system that affects almost every facet of our business operations.
Typically, these conversions negatively affect a company's near-term ability to
conduct business due to problems such as historical data conversion errors,
personnel training time associated with the new system, delays in implementation
or unforeseen technical problems during conversion. If problems arise during
this transition, we could experience delays in or lack of shipping, an inability
to support our existing customer base, delays in paying vendors, delays in
collecting from customers, an inability to place or receive product orders or
other operational problems. If this were to occur, our profitability or
financial position could be negatively impacted. If we are not able to manage
our growth effectively and efficiently, the quality of our products, our ability
to retain key personnel and our operating results could suffer.
Our products may contain defects that cause us to incur significant costs,
divert our attention from product development efforts and result in a loss of
customers.
Highly complex products such as our verification systems and connectivity
products frequently contain defects when they are first introduced or as new
versions are released. Although none of our products has contained any material
defects in the past, our products may contain defects of this nature in the
future. If any of our products contains defects or have reliability, quality or
compatibility problems, our reputation may be damaged and customers may be
reluctant to buy our products. As a result, our ability to retain existing
customers or attract new customers could be harmed. In addition, these defects
could interrupt or delay sales to our customers. We may have to invest
significant capital and other resources to alleviate these problems. If any of
these problems remains undiscovered until after we have commenced commercial
production of a new product, we may be required to incur additional development
costs and product recall, repair or replacement costs. These problems may also
result in claims against us by our customers or others. In addition, these
problems may divert our technical and other resources from other development
efforts.
If we are unable to expand our direct sales operations and our distributor and
reseller channels or successfully manage our expanded sales organization, our
ability to increase our revenue will be harmed.
Historically, we have relied on a limited direct sales organization,
supported by third-party resellers, to sell our products domestically and on
third-party distributors to sell our products internationally. We intend to
develop and expand our direct sales organization in North America and our
indirect distribution channels internationally. We may not be able to expand our
direct sales organization successfully, and the cost of any expansion may exceed
the revenue generated from expansion. In addition, if we fail to develop
relationships with significant distributors or resellers, or if our current
distributors or resellers are not successful in their sales or marketing
efforts, sales of our products may decrease.
18
Any acquisitions that we undertake could be difficult to integrate, disrupt our
business, dilute stockholder value and harm our operating results.
We expect to review opportunities to buy other businesses or technologies
that would complement our current products, expand the breadth of our markets or
enhance our technical capabilities, or that might otherwise offer growth
opportunities. While we have no current agreements or negotiations underway, we
may buy businesses, product lines or technologies in the future. If we make any
future acquisitions, we could issue stock that would dilute the percentage
ownership of our existing stockholders, incur substantial debt or assume
contingent liabilities. To date, we have not acquired any other business or
technologies. Potential acquisitions also involve numerous risks, including:
. problems in assimilating the purchased operations, technologies or
products;
. costs or accounting charges associated with the acquisition;
. diversion of management's attention from our existing business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have little or no
prior experience; and
. potential loss of key employees of purchased businesses.
Economic, political and other risks associated with international sales and
operations could adversely affect our sales.
Because we sell our products worldwide, our business is subject to risks
associated with doing business internationally. We recognized 59.1% of our
revenue from sales to international customers in the quarter ended March 31,
2001. We anticipate that revenue from international operations will continue to
represent a substantial portion of our revenue. In addition, several of our
manufacturers' facilities and suppliers are located outside the United States.
Accordingly, our future results could be harmed by a variety of factors,
including:
. changes in foreign currency exchange rates;
. changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
. trade protection measures and import or export licensing requirements;
. potentially negative consequences from changes in tax laws;
. difficulty in staffing and managing widespread operations;
. differing labor regulations;
. differing protection of intellectual property; and
. unexpected changes in regulatory requirements.
Our headquarters and our contract manufacturers are located in Northern
California, Asia and other areas where natural disasters may occur.
Currently, our corporate headquarters and some of our contract
manufacturers are located in Northern California and our other contract
manufacturers are located in Asia. Northern California and Asia historically
have been vulnerable to natural disasters and other risks, such as earthquakes,
fires, floods, power loss and
19
telecommunication failure, which at times have disrupted the local economy and
posed physical risks to our and our manufacturers' properties. We also maintain
facilities in San Diego, California and Netanya, Israel. We do not have
redundant, multiple site capacity in the event of a natural disaster.
Any failure to protect our intellectual property adequately may significantly
harm our business.
To date, we protect our proprietary processes, software, know-how and other
intellectual property and related rights through copyrights, trademarks and
maintenance of trade secrets, including entering into confidentiality
agreements. Our success and ability to compete depend in part on our proprietary
technology. We currently do not have any patents. Although we have three
patents pending, patents may not issue as a result of these or other patent
applications. Any patents that ultimately issue may be successfully challenged
by others or invalidated, or may not provide us with a significant competitive
advantage. Third parties may breach confidentiality agreements or other
protective contracts into which we have entered, and we may not be able to
enforce our rights in the event of these breaches. We may be required to spend
significant resources to monitor and police our intellectual property rights,
including pursuing remedies in court. We may become involved in legal
proceedings against other parties, which may also cause other parties to assert
claims against us. We report material pending legal proceedings, if any, under
the separate caption "Part II, Item 1. Legal Proceedings" elsewhere in this
report. However, in the future, we may not be able to detect infringement and
may lose competitive position in our markets before we do so. In addition,
competitors may design around our technologies or develop competing
technologies. The laws of other countries in which we market our products might
offer little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it, which could significantly harm our business.
Claims that we infringe third-party intellectual property rights could result in
significant expenses or restrictions on our ability to sell our products.
Our industry is characterized by uncertain and conflicting intellectual
property claims and frequent intellectual property litigation, especially
regarding patent rights. To date, we have not received any letters, and we do
not have any other reason to believe, that our products infringe any other
party's intellectual property rights. However, we cannot be certain that our
products do not and will not infringe issued patents or other intellectual
property rights of others. Historically, patent applications in the United
States have not been publicly disclosed until the patent is issued, and we may
not be aware of filed patent applications that relate to our products or
technology. If patents are later issued in connection with these applications,
we may be liable for infringement. From time to time, other parties may assert
patent, copyright and other intellectual property rights to technologies and in
various jurisdictions that are important to our business. Any claims asserting
that our products infringe or may infringe proprietary rights of third parties,
including claims arising through our contractual indemnification of our
customers, regardless of their merit or resolution, would likely be costly and
time-consuming, result in costly litigation, divert the efforts of our technical
and management personnel, cause product shipment delays or require us to enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us, or at all.
Changes in current laws or regulations or the imposition of new laws or
regulations could impede the sale of our products.
In the United States, the entire telecommunications industry and many of
our customers and their products are subject to regulations and standards set by
the Federal Communications Commission, or FCC. Internationally, many of our
customers and their products may also be required to comply with regulations
established by local authorities in various countries. We believe that neither
our business nor our products is currently subject to regulations or standards
set by the FCC or any similar foreign authority. However, our business or
products may be deemed by the FCC or any similar foreign authority to be subject
to their jurisdiction. New products or lines of business we pursue may also be
subject to these types of regulations or standards. In addition, the regulations
in force both in the United States and in foreign jurisdictions are constantly
changing. As a result, our business or products could become subject to
regulations or standards in the future. Failure to comply with regulations
established by regulatory authorities or to obtain timely domestic or foreign
regulatory approvals or certificates could significantly harm our business.
20
The energy crisis in California may cause our operating results to suffer.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. Suppliers of electric power have on some
occasions implemented, and may in the future continue to implement, rolling
blackouts throughout California. We currently do not have backup generators or
alternate sources of power in the event of a blackout, and our current insurance
does not provide coverage for any damages our customers or we may suffer as a
result of any interruption in the power supply. If blackouts interrupt our
power supply, we would be temporarily unable to continue operations at our
facilities in California. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and to obtain new customers, and result in lost
revenue, any of which could substantially harm our business and results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities in which we invest
may be subject to market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with an interest rate fixed at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. As of March 31, 2001,
all of our investments were in money market funds, certificates of deposit or
high quality commercial paper.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 29, 2000, we filed in the United States District Court for the
Northern District of California a complaint against Catalyst Enterprises, Inc.,
alleging trade dress infringement, copyright infringement, and unfair
competition, and seeking damages and injunctive relief. We believe that the
interface design that Catalyst uses in one of its new products infringes our
CATC Trace dress and our copyright interests in the CATC Trace and that use of
this design is unlawful and constitutes unfair competition. On March 9, 2001, we
served the complaint on Catalyst. On March 28, 2001, we filed a motion
requesting a preliminary injunction be entered against Catalyst. On April 6,
2001, Catalyst responded by denying each of the substantive claims and asserting
unfair competition counterclaims, and seeking recovery of damages and attorneys'
fees. We cannot predict the outcome of this matter at this time.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
Exhibit No. Document Name
---------- -------------
3.1* Amended and Restated Certificate of Incorporation of
the Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen Certificate of the Registrant's common stock.
* Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-43866) as filed with the SEC on August 16, 2000, as
subsequently amended, and incorporated in this
quarterly report by reference.
b. Reports on Form 8-K
None
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date May 11, 2001 Computer Access Technology Corporation
By: /s/ Dennis W. Evans
-------------------------------------------
Dennis W. Evans
Vice President, Chief Financial Officer and
Secretary (Principal Financial Officer and
Principal Accounting Officer)
22