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 September 30, 2001
[_] 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: 000-31863
COMPUTER ACCESS TECHNOLOGY CORPORATION
(exact name of registrant as specified in its charter)
Delaware 77-0302527
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
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 October 31, 2001, there were 18,820,497 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, September 30,
2000 2001
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 47,411 $ 47,660
Short-term investments ...................................... 285 --
Trade accounts receivable, net .............................. 2,452 1,263
Related party receivable .................................... 756 651
Inventories ................................................. 799 923
Deferred tax assets ......................................... 390 378
Other current assets ........................................ 771 1,961
-------- --------
Total current assets .................................... 52,864 52,836
Property and equipment, net ..................................... 832 1,281
Other assets .................................................... 196 101
-------- --------
$ 53,892 $ 54,218
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 543 $ 424
Accrued expenses ............................................ 3,179 1,265
-------- --------
Total current liabilities .............................. 3,722 1,689
Deferred rent ................................................... 13 4
-------- --------
Total liabilities ...................................... 3,735 1,693
-------- --------
Stockholders' equity:
Common Stock ................................................ 18 19
Additional paid-in capital .................................. 54,029 53,320
Deferred stock-based compensation ........................... (7,853) (3,406)
Retained earnings ........................................... 3,963 2,592
-------- --------
Total stockholders' equity ............................ 50,157 52,525
-------- --------
$ 53,892 $ 54,218
======== ========
See accompanying notes.
2
COMPUTER ACCESS TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited in thousands, except per share amounts)
Three Month Period Ended Nine Month Period Ended
September 30, September 30,
----------------------- ----------------------
2000 2001 2000 2001
-------- -------- -------- --------
Revenue .............................................................. $ 5,926 $ 3,554 $ 14,708 $ 13,376
Cost of revenue (inclusive of amortization of deferred stock-
based compensation of $163 and $(19) in the three month
period ended September 30, 2000 and 2001, respectively, and
of $275 and $327 in the nine month period ended September
30, 2000 and 2001, respectively) ................................... 1,423 740 3,591 3,218
-------- -------- -------- --------
Gross profit ......................................................... 4,503 2,814 11,117 10,158
-------- -------- -------- --------
Operating expenses:
Research and development (exclusive of amortization of
deferred stock-based compensation of $773 and $478 in
the three month period ended September 30, 2000 and
2001, respectively, and of $1,109 and $1,954 in the nine
month period ended September 30, 2000 and 2001,
respectively) ................................................... 1,285 1,831 3,167 5,540
Sales and marketing (exclusive of amortization of deferred
stock-based compensation of $379 and $(196) in the
three month period ended September 30, 2000 and 2001,
respectively, and of $789 and $164 in the nine month
period ended September 30, 2000 and 2001,
respectively) ................................................... 523 798 1,626 2,175
General and administrative (exclusive of amortization of
deferred stock-based compensation of $460 and $184 in
the three month period ended September 30, 2000 and
2001, respectively, and of $486 and $966 in the nine
month period ended September 30, 2000 and 2001,
respectively) ................................................... 498 733 931 2,297
Amortization of deferred stock-based compensation ................. 1,612 466 2,384 3,084
-------- -------- -------- --------
Total operating expenses ..................................... 3,918 3,828 8,108 13,096
-------- -------- -------- --------
Income (loss) from operations ........................................ 585 (1,014) 3,009 (2,938)
Interest income ...................................................... 110 419 266 1,593
-------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes ............ 695 (595) 3,275 (1,345)
Provision (benefit) for income taxes ................................. 947 (681) 2,272 26
-------- -------- -------- --------
Net income (loss) .................................................... $ (252) $ 86 $ 1,003 $ (1,371)
======== ======== ======== ========
Net income (loss) per share:
Basic ............................................................ $ (0.02) $ 0.00 $ 0.07 $ (0.07)
======== ======== ======== ========
Diluted .......................................................... $ (0.02) $ 0.00 $ 0.06 $ (0.07)
======== ======== ======== ========
Weighted average shares outstanding
Basic ............................................................ 14,485 18,783 14,485 18,702
======== ======== ======== ========
Diluted .......................................................... 14,485 19,176 15,525 18,702
======== ======== ======== ========
See accompanying notes.
3
COMPUTER ACCESS TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands)
Nine Month Period Ended
September 30,
-----------------------
2000 2001
--------- --------
Cash flows from operating activities:
Net income (loss) ....................................................... $ 1,003 $ (1,371)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................................ 97 322
Provision for doubtful accounts ...................................... 26 1
Amortization of deferred stock-based compensation .................... 2,659 3,411
Fair value of stock options in exchange for services ................. -- 25
Changes in assets and liabilities:
Accounts receivable ............................................... (1,009) 1,293
Inventories ....................................................... (468) (124)
Deferred tax assets ............................................... (681) 12
Other assets ...................................................... (1,170) (1,095)
Accounts payable .................................................. 285 (119)
Accrued expenses .................................................. 3,639 (1,914)
Deferred rent ..................................................... (6) (9)
-------- --------
Net cash provided by operating activities .................. 4,375 432
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment ................................... (379) (771)
(Purchase) sale of short-term investments ................................ (382) 285
Acquisition of other assets ............................................. (125) --
-------- --------
Net cash used in investing activities ...................... (886) (486)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options ................................. 222 166
Proceeds from employee stock purchase plan .............................. -- 137
-------- --------
Net cash provided by financing activities .................. 222 303
-------- --------
Net increase in cash and cash equivalents .................................. 3,711 249
Cash and cash equivalents at beginning of period ........................... 4,195 47,411
-------- --------
Cash and cash equivalents at end of period ................................. $ 7,906 $ 47,660
======== ========
Supplemental information:
Cash paid for income taxes ................................................. $ 2,348 $ --
======== ========
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, Serial ATA 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 September 30, 2001, and for the three and nine month periods ended
September 30, 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 (SEC) 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 SEC
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
consolidated financial position at September 30, 2001, the consolidated
operating results for the three and nine month periods ended September 30, 2001
and 2000 and consolidated cash flows for the nine month periods ended September
30, 2001 and 2000. These unaudited condensed consolidated financial statements
should be read in conjunction 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 each customer comprising more than
10% of revenue or receivables are summarized as follows:
Nine Month Period Ended
September 30,
--------------------------------
2000 2001
------------- --------------
Revenue:
Company A ............................... 19% 28%
December 31, September 30,
2000 2001
------------- --------------
Accounts receivable:
Company A ............................... 22% 31%
Company B ............................... 15% --
Company C ............................... 6% 15%
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
$447,000 and $3,411,000 in the quarter ended September 30, 2001 and the nine
month period ended September 30, 2001, respectively, of which $(19,000) and
$327,000 was included in cost of revenue in the quarter ended September 30, 2001
and the nine month period ended September 30, 2001, respectively. Amortization
of deferred stock-stock based compensation includes adjustments of compensation
expenses recorded for unvested shares subsequently forfeited. Amortization of
deferred stock-based compensation was $1,775,000 and $2,659,000 in the quarter
ended September 30, 2000 and the nine month period ended September 30, 2000,
respectively, of which $163,000 and $275,000 was included in cost of revenue in
the quarter ended September 30, 2000 and the nine month period ended September
30, 2000, respectively. Amortization of deferred stock-based compensation on
grants prior to December 31, 2000 is estimated to be approximately $806,000 in
the quarter ending December 31, 2001 and $1,803,000, $709,000 and $88,000 in the
years ending December 31, 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 its 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 Nine Month Period Ended
September 30, September 30,
------------------------------- ----------------------------
2000 2001 2000 2001
-------------- ------------ ------------- ----------
Numerator:
Net income (loss) ............................... $ (252) $ 86 $ 1,003 $ (1,371)
============== ============ ============= ==========
Denominator:
Weighted average shares outstanding ............. 14,485 18,783 14,485 18,702
-------------- ------------ ------------- ----------
Denominator for basic calculation ............... 14,485 18,783 14,485 18,702
Dilutive effect of stock options ................ -- 393 1,040 --
-------------- ------------ ------------- ----------
Denominator for diluted calculation ............. 14,485 19,176 15,525 18,702
============== ============ ============= ==========
Net income (loss) per share:
Basic ........................................... $ (0.02) $ 0.00 $ 0.07 $ (0.07)
============== ============ ============= =========
Diluted ......................................... $ (0.02) $ 0.00 $ 0.06 $ (0.07)
============== ============ ============= ==========
Total common stock equivalents, related to
options outstanding, excluded from the
computation of earnings per share as their
effect is antidilutive ............................. 1,167 575 -- 1,055
============== ============ ============= ==========
NOTE 5 - INVENTORIES
Inventories consist of the following (in thousands):
December 31, September 30,
2000 2001
------------ -------------
Raw materials ................................. $ 361 $ 405
Work in progress .............................. 160 218
Finished goods ................................ 278 300
------------ -------------
$ 799 $ 923
============ =============
NOTE 6 - INCOME TAXES
The reconciliation between the effective tax rate and statutory federal
income tax rate is shown in the following table:
7
COMPUTER ACCESS TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Month Period Ended Nine Month Period Ended
September 30, September 30,
------------------------ -----------------------
2000 2001 2000 2001
-------- --------- --------- ---------
Statutory federal income tax rate ....................... 34.0% 34.0% 34.0% 34.0%
State taxes, net of federal income tax benefit .......... (0.5) 18.6 5.4 2.2
Amortization of deferred stock-based compensation ....... 103.9 75.6 31.2 (41.5)
Research and development credit ......................... (2.2) (0.5) (2.1) 6.1
Other ................................................... 1.0 (13.2) 0.9 (2.7
-------- -------- --------- ---------
Effective tax rate .................................. 136.2% 114.5% 69.4% (1.9)%
-------- -------- --------- ---------
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 September 30, 2000
Segment revenue from external customers ...... $ 4,125 $ 839 $ 962 $ -- $ 5,926
Segment gross profit ......................... $ 3,555 $ 766 $ 345 $ (163) $ 4,503
Three Month Period Ended September 30, 2001
Segment revenue from external customers ...... $ 2,781 $ 453 $ 320 $ -- $ 3,554
Segment gross profit ......................... $ 2,382 $ 334 $ 79 $ 19 $ 2,814
Nine Month Period Ended September 30, 2000
Segment revenue from external customers ...... $ 8,153 $ 3,596 $ 2,959 $ -- $14,708
Segment gross profit ......................... $ 7,109 $ 3,077 $ 1,206 $ (275) $11,117
Nine Month Period Ended September 30, 2001
Segment revenue from external customers ...... $10,120 $ 1,437 $ 1,819 $ -- $13,376
Segment gross profit ......................... $ 8,794 $ 1,116 $ 575 $ (327) $10,158
8
COMPUTER ACCESS TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Geographic information (in thousands):
Long-Lived
Revenue Assets
------- ----------
Three Month Period Ended September 30, 2000
North America ................................... $ 2,871
Europe .......................................... 873
Asia ............................................ 2,130
Rest of world ................................... 52
-------
Total ......................................... $ 5,926
=======
Three Month Period Ended September 30, 2001
North America ................................... $ 1,379 $1,040
Europe .......................................... 475 241
Asia ............................................ 1,694 --
Rest of world ................................... 6 --
------- ------
Total ......................................... $ 3,554 $1,281
======= ======
Nine Month Period Ended September 30, 2000
North America ................................... $ 8,728
Europe .......................................... 2,006
Asia ............................................ 3,896
Rest of world ................................... 78
-------
Total ......................................... $14,708
=======
Nine Month Period Ended September 30, 2001
North America ................................... $ 5,831 $1,040
Europe .......................................... 1,983 241
Asia ............................................ 5,493 --
Rest of world ................................... 69 --
------- ------
Total ......................................... $13,376 $1,281
======= ======
Revenues are attributed to countries based on delivery locations. Sales to
foreign customers accounted for 51.6% and 61.2% of revenue during the quarters
ended September 30, 2000 and 2001, respectively, and 40.7% and 56.4% for the
nine months ended September 30, 2000 and 2001, respectively.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations," which addresses financial accounting and
reporting for certain obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The provisions of
SFAS No. 143 are required to be applied starting with fiscal years beginning
after June 15, 2002. We believe the adoption of the provisions of this statement
will not have a material effect on the Company's consolidated financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the
purchase method of accounting for business combinations initiated after
September 30, 2001 and eliminates the pooling-of-interests method. We believe
that the adoption of SFAS 141 will not have a significant impact on our
consolidated financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is
effective for fiscal years beginning after March 15, 2001. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions upon adoption for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the testing for impairment
of existing
9
COMPUTER ACCESS TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
goodwill and other intangibles. We believe that the adoption of SFAS 142 will
not have a significant impact on our consolidated financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS No.144), Accounting for the Impairment or Disposal of
Long-Lived Assets, which is required to be applied starting with years beginning
after December 15, 2001. SFAS 144 requires, amongst other things, the
application model for long-lived assets that are impaired or to be disposed of
by sale. The adoption of SFAS 144 is not expected to have a significant impact
on our consolidated financial statements.
10
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 statements 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.
This report 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, Serial ATA 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 report our revenue and gross profit in three business segments:
development, production and connectivity products. In the quarter ended
September 30, 2001, our revenue from our development products was $2.8 million,
from production products was $453,000 and from connectivity products was
$320,000. 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 59.4% of our revenue in the quarter ended September
30, 2001, of which 23.0% 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. In June 2001 we began to offer
maintenance and support contracts for our products. Maintenance revenue is
deferred and recognized ratably over the maintenance period. 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 substantial portion of our revenue has been
derived from customers outside of the United States. In the quarter ended
September 30, 2001, 61.2% of our revenue was derived from international
customers, of which 31.8% was derived from customers based in Japan, 15.8% was
derived from customers based in other parts of Asia, and 13.4% was derived from
customers based in Europe. International revenue increased as a percentage of
total revenue in the quarter ended September 30, 2001, primarily due to the
general economic slowdown, which has been exacerbated by the impact of the
September 11, 2001 terrorist attack, 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.
11
The overall economic environment continues to create uncertainties for
us and our customers. We have experienced continuing weakness in each of our
business segments over the last nine months 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, which has been exacerbated by the September 11, 2001 terrorist
attack. 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 nine months 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 Nine Month Period Ended
September 30, September 30,
------------------------- -----------------------
2000 2001 2000 2001
----------- ---------- ---------- ----------
Consolidated Statement of Income Data:
Revenue ......................................................... 100.0% 100.0% 100.0% 100.0%
Cost of Revenue ................................................. 24.0 20.8 24.4 24.1
----------- ---------- ---------- ----------
Gross profit .................................................... 76.0 79.2 75.6 75.9
----------- ---------- ---------- ----------
Operating expenses:
Research and development ...................................... 21.7 51.5 21.5 41.4
Sales and marketing ........................................... 8.8 22.5 11.1 16.3
General and administrative .................................... 8.4 20.6 6.3 17.2
Amortization of deferred stock-based compensation ............. 27.2 13.1 16.2 23.0
----------- ---------- ---------- ----------
Total operating expenses ..................................... 66.1 107.7 55.1 97.9
----------- ---------- ---------- ----------
Income (loss) from operations ................................... 9.9 (28.5) 20.5 (22.0)
Interest income ................................................. 1.9 11.8 1.8 11.9
----------- ---------- ---------- ----------
Income before provision (benefit) for income taxes .............. 11.8 (16.7) 22.3 (10.1)
Provision (benefit) for income taxes ............................ 16.0 (19.1) 15.5 0.2
----------- ---------- ---------- ----------
Net income (loss) ............................................... (4.2)% 2.4% 6.8% (10.3)%
=========== ========== ========== ==========
Comparison of Quarters Ended September 30, 2000 and 2001
Revenue. Our revenue was $3.6 million in the quarter ended September
30, 2001 and $5.9 million in the quarter ended September 30, 2000. This
represents a decrease of 40.0% from the quarter ended September 30, 2000 to the
quarter ended September 30, 2001. The decrease in revenue was due primarily to
decreases in our sales of certain development products, production products and
connectivity products of $2.4 million, $541,000 and $631,000, respectively,
offset by sales of our new development products, which represented $1.1 million.
Revenue from international customers decreased by 28.8%, while domestic revenue
decreased by 52.0%. International revenue represented 61.2% of our revenue in
the quarter ended September 30, 2001, as compared to 51.6% in the quarter ended
September 30, 2000. Revenue from Japan, through our distributor Toyo,
represented 31.8% of our total revenue in the quarter ended September 30, 2001,
as compared to 26.7% in the quarter ended September 30, 2000.
Cost of Revenue and Gross Profit. Our gross profit was $2.8 million in
the quarter ended September 30, 2001 and $4.5 million in the quarter ended
September 30, 2000. This represents a decrease of 37.5% from the quarter ended
September 30, 2000 to the quarter ended September 30, 2001. The dollar decrease
was primarily the result of decreased unit sales of development, production and
connectivity products, offset by a decrease in the amortization of deferred
stock-based compensation of $182,000. Our gross margin was 79.2% in the quarter
ended September 30, 2001 and 76.0% in the quarter ended September 30, 2000. This
represents an increase of 3.2% from the quarter ended September 30, 2000 to the
quarter ended September 30, 2001. This increase in gross margin was due
primarily to the change in the mix of our revenue by business segment. Our lower
margin business segments, production products and connectivity products,
decreased as a percentage of revenue by 1.4% and 7.2%, respectively, and our
higher margin business segment, development products, increased as a percentage
of revenue by 8.6%. This was primarily offset by reduced margins for our
production products, due to higher costs associated with low volume initial
product releases, and lower margins for our connectivity products, due to
competitive pricing pressure. Excluding amortization of deferred stock-based
compensation, our gross margin would have been 78.6% in the quarter ended
September 30, 2001 and 78.7% in the quarter ended September 30, 2000.
12
Research and Development. Our research and development expenses were
$1.8 million in the quarter ended September 30, 2001 and $1.3 million in the
quarter ended September 30, 2000. This represents an increase of 42.5% from the
quarter ended September 30, 2000 to the quarter ended September 30, 2001.
Research and development expenses represented 51.5% of revenue in the quarter
ended September 30, 2001 and 21.7% of revenue in the quarter ended September 30,
2000. The dollar increase was primarily due to an increase in personnel and
related costs of $374,000. The percentage of revenue increase was primarily due
to a decrease in revenue and an increase in personnel and related costs.
Sales and Marketing. Our sales and marketing expenses were $798,000
in the quarter ended September 30, 2001 and $523,000 in the quarter ended
September 30, 2000. This represents an increase of 52.6% from the quarter ended
September 30, 2000 to the quarter ended September 30, 2001. Sales and marketing
expenses represented 22.5% of revenue in the quarter ended September 30, 2001
and 8.8% of revenue in the quarter ended September 30, 2000. The dollar increase
was primarily due to increases in personnel and related costs of approximately
$236,000. The percentage of revenue increase was primarily due to a decrease in
revenue and increases in personnel and related costs.
General and Administrative. Our general and administrative expenses
were $733,000 in the quarter ended September 30, 2001 and $498,000 in the
quarter ended September 30, 2000. This represents an increase of 47.2% from the
quarter ended September 30, 2000 to the quarter ended September 30, 2001.
General and administrative expenses represented 20.6% of revenue in the quarter
ended September 30, 2001 and 8.4% of revenue in the quarter ended September 30,
2000. The dollar increase was primarily due to an increase in professional
services of $165,000. The percentage of revenue increase was primarily due to a
decrease in revenue and an increase in professional services.
Interest Income. Interest income was $419,000 in the quarter ended
September 30, 2001 and $110,000 in the quarter ended September 30, 2000. This
represents an increase of 280.9% from the quarter ended September 30, 2000 to
the quarter ended September 30, 2001. The increase was the result of the
investment of additional excess cash balances and the proceeds from our initial
public offering in November 2000.
Provision (benefit) for Income Taxes. Benefit for income taxes was
$681,000 in the quarter ended September 30, 2001 and the provision for income
taxes was $947,000 in the quarter ended September 30, 2000. The tax benefit for
the quarter reflects the true-up adjustment of our year-to-date tax provision
based on our revised estimate of our expected effective annual tax rate. These
amounts represent a decrease of 171.9% from the quarter ended September 30, 2000
to the quarter ended September 30, 2001. Our effective tax rate decreased from
136.2% in the quarter ended September 30, 2000 to 114.5% in the quarter ended
September 30, 2001, due primarily to a decrease in the amortization of deferred
stock-based compensation, an increase in our expected research and development
tax credit for the year and the effect of annual accounting adjustments
associated with an estimate of the effective tax rate for the full year. Our
effective tax rate after excluding the effect of amortization of deferred
stock-based compensation was 460.1% in the quarter ended September 30, 2001 and
38.3% in the quarter ended September 30, 2000.
Net Income (loss). Our net income was $86,000 in the quarter ended
September 30, 2001 and our net loss was $252,000 in the quarter ended September
30, 2000. Our net income represented 2.4% of revenue in the quarter ended
September 30, 2001 and our net loss represented 4.2% of revenue in the quarter
ended September 30, 2000. The net income in the quarter ended September 30, 2001
was primarily the result of reduced amortization of stock-based compensation,
increased interest income, and the benefit for income taxes, offset by reduced
revenue and increased operating costs excluding the amortization of deferred
stock-based compensation. Our net income before the effect of the amortization
of deferred stock-based compensation was $533,000 in the quarter ended September
30, 2001 and $1.5 million in the quarter ended September 30, 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 $447,000 in the quarter ended September 30, 2001, of which
$(19,000) was included in cost of revenue during that period. Amortization of
deferred stock-based compensation was $1.8 million in the quarter ended
September 30, 2000, of which $163,000 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 $806,000 in the quarter
ending December 31, 2001, and $1,803,000, $709,000 and $88,000 in the years
ending December 31, 2002, 2003 and 2004, respectively, and may change due to the
granting of additional options or the cancellation of existing grants in future
periods.
13
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
September 30,
---------------------------
2000 2001
----------- -----------
Net income, excluding amortization of deferred compensation ............. $ 1,523 $ 533
Net income per share, excluding amortization of deferred compensation
Basic ................................................................ $ 0.11 $ 0.03
Diluted .............................................................. $ 0.10 $ 0.03
Weighted average shares outstanding
Basic ................................................................ 14,485 18,783
Diluted .............................................................. 15,652 19,176
Comparison of Nine Months Ended September 30, 2000 and 2001
Revenue. Our revenue was $13.4 million in the nine months ended
September 30, 2001 and $14.7 million in the nine months ended September 30,
2000. This represents a decrease of 9.1% from the nine months ended September
30, 2000 to the nine months ended September 30, 2001. The decrease in revenue
was due primarily to decreases in our sales of certain development products,
production products and connectivity products of $1.5 million, $2.1 million and
$1.1 million, respectively, offset by sales of our new development products,
which represented $3.4 million. Revenue from international customers increased
by 26.2%, while domestic revenue decreased by 33.2%. International revenue
represented 56.4% of our revenue in the nine months ended September 30, 2001, as
compared to 40.7% in the nine months ended September 30, 2000. Revenue from
Japan, through our distributor Toyo, represented 27.7% of our total revenue in
the nine months ended September 30, 2001, as compared to 18.5% in the nine
months ended September 30, 2000.
Cost of Revenue and Gross Profit. Our gross profit was $10.2 million
in the nine months ended September 30, 2001 and $11.1 million in the nine months
ended September 30, 2000. This represents a decrease of 8.6% from the nine
months ended September 30, 2000 to the nine months ended September 30, 2001. The
dollar decrease was primarily the result of a decrease in unit sales of
production and connectivity products and an increase in amortization of deferred
stock-based compensation of $52,000, partially offset by an increase in unit
sales of our development products. Our gross margin was 75.9% in the nine months
ended September 30, 2001 and 75.6% in the nine months ended September 30, 2000.
This represents a increase of 0.3% from the nine months ended September 30, 2000
to the nine months ended September 30, 2001. This increase in gross margin was
due primarily to the change in the mix of our revenue by business segment. Our
higher margin business segment, development products, increased as a percentage
of revenue by 20.2%, and our lower margin business segments, production products
and connectivity products, decreased as a percentage of revenue by 13.7% and
6.5%, respectively. This was primarily offset by reduced margins for our
development products, due to higher costs associated with low volume initial
product releases, and lower margins for our connectivity products, due to
competitive pricing pressure. Excluding amortization of deferred stock-based
compensation, our gross margin would have been 78.4% in the nine months ended
September 30, 2001 and 77.5% in the nine months ended September 30, 2000.
Research and Development. Our research and development expenses were
$5.5 million in the nine months ended September 30, 2001 and $3.2 million in the
nine months ended September 30, 2000. This represents an increase of 74.9% from
the nine months ended September 30, 2000 to the nine months ended September 30,
2001. Research and development expenses represented 41.4% of revenue in the nine
months ended September 30, 2001 and 21.5% of revenue in the nine months ended
September 30, 2000. The dollar increase was primarily due to an increase in
personnel and related costs of $2.1 million. The percentage of revenue increase
was primarily due to a decrease in revenue and an increase in personnel and
related costs.
Sales and Marketing. Our sales and marketing expenses were $2.2
million in the nine months ended September 30, 2001 and $1.6 million in the nine
months ended September 30, 2000. This represents an increase of 33.8% from the
nine months ended September 30, 2000 to the nine months ended September 30,
2001. Sales and marketing expenses represented 16.3% of revenue in the nine
months ended September 30, 2001 and 11.1% of revenue in the nine months ended
September 30, 2000. The dollar increase was primarily due to increases in
personnel and related costs of approximately $483,000. The percentage of revenue
increase was primarily due to a decrease in revenue and increases in personnel
and related costs.
14
General and Administrative. Our general and administrative expenses
were $2.3 million in the nine months ended September 30, 2001 and $931,000 in
the nine months ended September 30, 2000. This represents an increase of 146.7%
from the nine months ended September 30, 2000 to the nine months ended September
30, 2001. General and administrative expenses represented 17.2% of revenue in
the nine months ended September 30, 2001 and 6.3% of revenue in the nine months
ended September 30, 2000. The dollar increase was primarily due to an increase
in professional services of $746,000, primarily legal fees, the addition of
management and administrative personnel and related costs of $280,000, and an
increase in insurance of $214,000. The percentage of revenue increase was
primarily due to a decrease in revenue and an increase in professional service,
primarily legal fees, the addition of management and administrative personnel
and related costs and an increase in insurance as a result of being a publicly
trade company.
Interest Income. Interest income was $1.6 million in the nine months
ended September 30, 2001 and $266,000 in the nine months ended September 30,
2000. This represents an increase of 498.9% from the nine months ended September
30, 2000 to the nine months ended September 30, 2001. The increase was the
result of the investments 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 $26,000 in
the nine months ended September 30, 2001 and $2.3 million in the nine months
ended September 30, 2000. These amounts represent a decrease of 98.9% from the
nine months ended September 30, 2000 to the nine months ended September 30,
2001. Our effective tax rate decreased from 69.4% in the nine months ended
September 30, 2000 to (1.9)% in the nine months ended September 30, 2001 due
primarily to an increase in the amortization of deferred stock-based
compensation, offset by an increase in our expected research and development tax
credit for the year and the effect of annual accounting adjustments associated
with an estimate of the effective tax rate for the full year. Our effective tax
rate after excluding the effect of amortization of deferred stock-based
compensation was 1.3% in the nine months ended September 30, 2001 and 38.3% in
the nine months ended September 30, 2000.
Net Income (loss). Our net loss was $1.4 million in the nine months
ended September 30, 2001 and our net income was $1.0 million in the nine months
ended September 30, 2000. Our net loss represented 10.3% of revenue in the nine
months ended September 30, 2001 and our net income represented 6.8% of revenue
in the nine months ended September 30, 2000. The net loss in the nine months
ended September 30, 2001 was primarily the result of reduced revenue and
increased operating costs, offset by the reduced provision for income taxes and
increased interest income. Net income before the effect of the amortization of
deferred stock-based compensation was $2.0 million in the nine months ended
September 30, 2001 and $3.7 million in the nine months ended September 30, 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 $3.4 million in the nine months ended September 30, 2001, of
which $327,000 was included in cost of revenue during that period. Amortization
of deferred stock-based compensation was $2.7 million in the nine months ended
September 30, 2000, of which $275,000 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 $806,000 in the quarter
ending December 31, 2001, and $1,803,000, $709,000 and $88,000 in the years
ending December 31, 2002, 2003 and 2004, respectively, and may change due to the
granting of additional options or the cancellation of existing grants in future
periods.
15
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).
Nine Month Period Ended
September 30,
-----------------------------
2000 2001
------------ ------------
Net income, excluding amortization of deferred compensation...................... $ 3,662 $ 2,040
Net income per share, excluding amortization of deferred compensation
Basic......................................................................... $ 0.25 $ 0.11
Diluted....................................................................... $ 0.24 $ 0.11
Weighted average shares outstanding
Basic......................................................................... 14,485 18,702
Diluted....................................................................... 15,525 19,294
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 September 30, 2001, our principal sources of liquidity were $47.7
million in cash and cash equivalents. In the nine months ended September 30,
2001, cash provided by operating activities of $432,000 primarily consisted of
an increase in amortization of deferred stock-based compensation of $3.4
million, a decrease in accounts receivable of $1.3 million, depreciation expense
of $322,000, the fair value of stock options issued in exchange for services of
$25,000 and a decrease in deferred tax assets of $12,000, offset by a net loss
of $1.4 million, a decrease in accrued expenses of $1.9 million, an increase in
other assets of $1.1 million, an increase in the level of inventory of $124,000
and a decrease in accounts payable of $119,000. The decrease in accrued expenses
primarily related to decreased income tax accruals of $2.3 million offset by
increased accrued expenses from operations of $358,000. Cash used in investing
activities was $486,000, related to capital expenditures of $771,000, offset by
the proceeds from the sale of short-term investments of $285,000. Cash provided
by financing activities was $303,000, related to the proceeds from the exercise
of stock options of $166,000 and to the sale of stock pursuant to our stock
purchase plan of $137,000.
In the nine months ended September 30, 2000, cash provided by operating
activities of $4.4 million primarily consisted of net income of $1.0 million, an
increase in accrued expenses of $3.6 million, the amortization of deferred
stock-based compensation of $2.7 million and an increase in accounts payable of
$285,000, offset by increases in other assets of $1.2 million, accounts
receivable of $1.0 million, deferred tax assets of $681,000 and the level of
inventory of $468,000. Cash used in investing activities of $886,000 primarily
related to the purchase of short-term investments of $382,000 and capital
expenditures of $379,000. Cash provided by financing activities was $222,000,
related to the proceeds from the exercise of stock options.
As of September 30, 2001, we had cash and cash equivalents of $47.7
million, working capital of $51.0 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.
RISK FACTORS
We continue to face uncertainty relating to economic conditions affecting our
customers.
We face uncertainty in the degree to which the current economic slowdown
will negatively affect growth and capital spending by our existing and potential
customers. We continue to experience instances of customers delaying or
deferring orders for our products, and longer lead times needed to close our
customer sales. If global economic conditions do not improve, or if
16
there is a worsening in the global economic slowdown, we may continue to
experience adverse impacts on our business, operating results and financial
condition. Any adverse developments relating to the economic slowdown may make
the occurrence of one or more of the factors discussed under "Risk Factors" in
this report more likely to occur.
The recent terrorist attacks are unprecedented events that have created many
economic and political uncertainties, some of which may harm our business and
prospects and our ability in general to conduct business in the ordinary course.
Terrorist attacks in New York and Washington, D.C. in September 2001 have
disrupted commerce throughout the world. The continued threat of terrorism and
the resulting military, economic and political response and heightened security
measures may cause significant disruption to commerce throughout the world. To
the extent that this disruption results in a general decrease in our customers'
spending, our business and results of operations could be materially and
adversely affected. We also may experience delays in receiving payments from
customers that have been affected by the attacks, which, in turn, would harm our
cash flow. We are unable to predict whether the threat of terrorism or the
responses thereto will result in any long-term commercial disruptions or if such
activities or responses will have a long-term adverse effect on our business,
results of operations or financial condition. These and other developments
arising out of the attacks may make the occurrence of one or more of the factors
discussed under "Risk Factors" in this report more likely to occur.
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.
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
17
. 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
59.4% of our revenue in the quarter ended September 30, 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 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 consumers. 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
18
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 or suppliers of key components;
. 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 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.
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 or enhancements by us or our competitors, or
as a result of other factors, including discounts given on volume purchase
orders or pricing pressures. For example, we recently reduced the prices of
certain of our connectivity products in response to competitive pricing
pressure. We anticipate that we will 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 Yokagawa in the markets for
products for the 1394 standard, Tektronix in the markets for products for the
Bluetooth wireless technology and Finisar in the markets for products for the
InfiniBand 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
Agilent, National Instruments and Rhode & Schwartz. 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
19
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 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,
certain Bluetooth components from Ericsson, semiconductor devises from Agilent,
and micro-controllers from Intel, SMSC 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 31.8% of our revenue in the quarter ended September 30, 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 and our other distributors are made on the
basis of purchase orders rather than a long-term commitment. The loss of any one
of our major distributors, or the delay of significant orders from these
distributors, could result in decreased revenue.
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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 employees if prospective employees perceive the equity
component of our compensation package to be less valuable as a result 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. For example, as we previously reported in June 2001,
Dan Wilnai, our president and chief executive officer, announced his intention
to retire. 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 and were unable to hire qualified
replacements, 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 decreased our headcount by 4.4% in the quarter ended September 30,
2001. Even though our headcount decreased slightly in the quarter ended
September 30, 2001, we expect that our headcount will increase in future
quarters and that we will need to continue to improve our financial and
managerial controls, reporting systems and procedures. For example, we are in
the process of migrating 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.
21
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 and have a research and development
facility in Israel, our business is subject to risks associated with doing
business internationally. We recognized 61.2% of our revenue from sales to
international customers in the quarter ended September 30, 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 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
22
and ability to compete depend in part on our proprietary technology. We
currently do not have any patents. Although we have five 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, substantial portions of the telecommunications
industry, we 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 authorities in various countries. We
are required to determine to what extent our products may be subject to FCC
standards and regulations and to what extent we are required to obtain
authorizations from the FCC directly or from a third-party authorized by the FCC
to issue such authorizations. We are also required to maintain in good standing
any equipment authorization we receive from the FCC or an FCC-approved party. In
addition, the regulations in force both in the United States and in foreign
jurisdictions may change. 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.
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 September 30,
2001, all of our investments were in money market funds, certificates of deposit
or high quality commercial paper.
23
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 trademark and trade dress infringement, copyright infringement and
unfair competition and seeking damages and attorneys' fees. The case is referred
to as Computer Access Technology Corporation v. Catalyst Enterprises, Inc., Case
No. C 00 4852 DLJ. Catalyst responded to the complaint on April 6, 2001 by
denying each of the substantive claims and asserting federal and state unfair
competition counterclaims, and requesting an award of attorneys' fees. We
answered the counterclaims on September 27, 2001, and denied all the substantive
claims of Catalyst's counterclaims. The case is set for trial on July 1, 2002.
On March 28, 2001, we filed a motion for preliminary injunction against
Catalyst. The Court denied this motion by order entered June 13, 2001. We filed
a notice of appeal to the 9th Circuit Court of Appeals on July 12, 2001. The
parties stipulated to a continuance of the briefing schedule for the appeal, and
our opening brief is now due on December 4, 2001.
We cannot predict the outcome of this matter at this time.
Item 5. Other Information
On October 29, 2001, we announced the hiring of Keith Perry as our new vice
president, sales and customer services.
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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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date November 14, 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)
26