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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number 000-27843
Somera Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0521878
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5383 Hollister Avenue, Santa Barbara, CA 93111
(Address of principal executive offices and zip code)
(805) 681-3322
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value per share
(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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on the closing sale price of the Common Stock as reported
on the NASDAQ National Market on March 14, 2002) was approximately $149,000,000.
The number of outstanding shares of the Registrant's Common Stock as of the
close of business on March 14, 2002 was 48,793,960.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders are incorporated by reference in Part III of this Form
10-K to the extent stated herein.
SOMERA COMMUNICATIONS, INC.
INDEX
Page
----
PART I
Item 1. Business................................................................................... 1
Item 2. Properties................................................................................. 7
Item 3. Legal Proceedings.......................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders........................................ 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 8
Item 6. Selected Financial Data.................................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10
Item 7A. Qualitative and Quantitative Disclosures About Market Risk................................. 24
Item 8. Financial Statements....................................................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 47
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 47
Item 11. Executive Compensation..................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 47
Item 13. Certain Relationships and Related Transactions............................................. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 48
PART I
This Annual Report on Form 10-K contains forward-looking statements that
are subject to a number of risks and uncertainties, many of which are beyond our
control. These statements, other than statements of historical facts included in
this Annual Report on Form 10-K, regarding our strategy, future operations,
financial position, estimated revenues or losses, projected costs, prospects,
plans and objectives of management are forward-looking statements. When used in
this Annual Report on Form 10-K, the words "may," "will," "should," "plan,"
"anticipate," "believe," "intend," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this Annual Report on
Form 10-K. You should not place undue reliance on these forward-looking
statements.
Although we believe that our plans, intentions and expectations reflected
in or suggested by the forward-looking statements we make in this Annual Report
on Form 10-K are reasonable, we can give no assurance that these plans,
intentions or expectations will be achieved. We disclose important factors in
"Risks Factors" and elsewhere in this Annual Report that could cause our actual
results to differ materially from the forward-looking statements in this Form
10-K. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf. We undertake no duty to
update any of the forward-looking statements after the date of this report to
conform these statements to actual results or to changes in our expectations.
ITEM 1. BUSINESS
We provide telecommunications operators with equipment sourcing and
services to support their need to manage their networks and equipment assets
more efficiently and cost-effectively. We offer our customers a unique
combination of new and redeployed equipment from a variety of manufacturers,
allowing them to stretch capital budgets and make fast multi-vendor purchases
from a single cost-effective source. To further address our customers' dynamic
equipment sourcing needs, we offer equipment services for asset recovery,
deployment, diagnostics & repair, and customization. A key element of our
success is the application of our "intellectual capital," which enables
executional excellence and provides a distinct competitive advantage. This
intellectual capital is grounded in our proprietary global database of
customers, networks and equipment that provides insight into market dynamics; in
the quality and skills of our people that include rich customer relationships
and execution in the buying, selling and customization of telecom equipment; and
finally in our first-class operations and capabilities in equipment deployment
and related services.
Equipment Sourcing and Equipment Services
Equipment Sourcing
We offer our customers multiple categories of telecommunications
infrastructure equipment to address their specific and changing equipment
requirements for network maintenance and build-outs. The equipment we sell
includes new and redeployed items from a variety of manufacturers. In 2001, we
had a database of over 30,000 different items, from over 300 different
manufacturers. We offer the original manufacturer's warranty on all new
equipment. On redeployed equipment, we offer our own warranty which guarantees
that the equipment will perform up to the manufacturer's original
specifications.
The new equipment we offer consists of telecommunications equipment
purchased primarily from the original equipment manufacturers ("OEM") directly
or distributors. The redeployed equipment we offer consists primarily of
equipment removed from operators' existing telecommunications networks and
equipment purchased from resellers. These operators are typically the original
owners of such equipment and either the operator, another third party, or a
Somera trained professional removes the equipment from the network on behalf of
the operator.
The equipment we sell is grouped into several general core and ancillary
product categories including switching, transmission, access, wireless, data,
microwave and power products.
1
Switching. Switching equipment is used by operators to manage call traffic
and to deliver value-added services. Switches and related equipment are located
in the central office of a telecommunications operator and serve to determine
pathways and circuits for establishing, breaking or completing voice and data
communications over the public switched telephone network ("PSTN") and the
Internet. We provide a variety of switching equipment, including switches,
circuit cards, shelves, racks and other ancillary items in support of carrier
upgrades and reconfigurations. Manufacturers of switching equipment whose
products we sell include Alcatel USA, Lucent Technologies and Nortel Networks.
Transmission. Transmission equipment is used by operators to carry
information to multiple points in their network. Transmission equipment serves
as the backbone of a telecommunications operator's network and transmits voice
and data traffic in the form of standard electrical or optical signals. We sell
a broad range of transmission products, including channel banks, multiplexers,
digital cross-connect systems, DSX panels and echo cancellers. Manufacturers of
transmission equipment whose products we sell include ADC Telecommunications,
Fujitsu, Lucent Technologies, NEC, Nortel Networks, Telco Systems and Tellabs.
Access. Access equipment is used by operators, to provide local telephone
service and Internet access. Access equipment is used in the local loop, or last
mile, portion of the PSTN and connects a home or business to the switch in an
operator's central office. We provide a variety of access equipment, including
digital loop carriers, digital subscriber line products, channel service
units/digital subscriber units, multiplexers and network interface units.
Manufacturers of access equipment whose products we sell include ADC
Telecommunications, Carrier Access, Lucent Technologies, NEC, Newbridge
Networks, Nortel Networks, Telco Systems and VINA Technologies.
Wireless. Cell sites and related ancillary wireless products are used by
cellular, PCS and paging operators to provide wireless telephone and Internet
access. This equipment is used to amplify, transmit and receive signals between
mobile users and transmission sites, including cell sites and transmission
towers. We sell a broad range of wireless equipment including radio base
stations, towers, shelters, combiners, transceivers and other related items.
Manufacturers of wireless and cell site equipment whose products we sell include
Telefon AB LM Ericsson, Lucent Technologies, Motorola, Nortel Networks, Paragon
Networks and Siemens.
Data. Data networking equipment is used to transmit, route and switch data
communications traffic within an operator's network. We provide a wide variety
of data networking products including routers, ATM switches, hubs and bridges.
Manufacturers of data networking equipment whose products we sell include Cisco
Systems, Lucent Technologies, Motorola, Nortel Networks, Redback and Riverstone.
Microwave. Microwave systems are used by operators to transmit and receive
voice, data and video traffic. These systems enable point-to-point and
point-to-multipoint high speed wireless communications. We provide a variety of
microwave systems, including antennas, dishes, coaxial cables and connectors.
Manufacturers of microwave systems whose products we sell include Alcatel
Alsthom, Adaptive Broadband, Digital Microwave, Digital Transmission Systems,
Harris-Farinon Canada, Nortel Networks and Western Multiplex.
Power. Power equipment is used by operators to provide direct current (DC)
and/or alternate current (AC) power to support their network infrastructure
equipment. We sell a broad range of power equipment, including power bays,
rectifiers, batteries, breaker panels and converters. Manufacturers of power
equipment whose products we sell include Argus, Lucent Technologies, Marconi and
Nortel Networks.
Equipment Services
The foundation for our unique value proposition has expanded to include
equipment services as a complement to our equipment sourcing in response to our
customers' demand for both. Our ability to deliver a combined equipment and
services solution, which supplements or replaces services that customers
traditionally performed themselves, can enable the customers to focus on their
core business strategies. To date, our revenues from these services have not
been significant.
We provide the following services in connection with our equipment sourcing:
. Equipment Asset Recovery Services: Our customized asset recovery
programs provide operators with effective solutions to manage their
existing, surplus, or unwanted equipment assets. These programs are
2
customized to meet the specific objectives of each operator, and
include direct equipment purchases as well as equipment trade-ins,
consignment and re-marketing programs. The programs allow operators to
easily and rapidly recapture value from redeployed equipment.
. Equipment Customization Services: Our customization services include
refurbishment and reconfiguration services providing quality,
warranteed equipment that meet the requirements of today's network
operators. Typically, the operator, another third party, or a
Somera-trained professional removes the equipment from the network.
The refurbishment process is conducted by our in-house technicians,
whom we train, or by third parties, to conform to manufacturer
specifications. Our reconfiguration services are designed to support
turn-key, multi-vendor integration of both new and redeployed
equipment to meet complex network configuration requirements.
. Equipment Deployment Services: Somera's intellectual capital in people
and operations are uniquely qualified to provide installation and
de-installation services from the over 300 different manufacturers
represented. Trained technicians are dispatched to the location, where
removal of the equipment is performed. Typically, the equipment
redeployed from the site is shipped to our distribution and operations
center for refurbishment and reconfiguration.
. Equipment Diagnostic & Repair Services: To ensure the reliability of
redeployed equipment we sell, many of our products are subjected to a
rigorous testing and evaluation process. The process includes
loop-back testing, field simulation testing, and self-diagnostics. We
test equipment for procurement activities and customer orders prior to
shipment. We also perform repair services for customer-owned
equipment.
Sales, Marketing and Procurement
Our sales organization is located primarily at our corporate headquarters
in Santa Barbara, California and is augmented by our regional offices located in
California, Colorado, New Jersey, Georgia, Kansas, Washington, Texas, and our
international offices in Amsterdam, The Netherlands and Singapore. As of
December 31, 2001, we employed over 190 sales, services and procurement
professionals. We generate leads primarily through direct sales contact,
telemarketing, direct marketing, customer referrals and participation in
industry tradeshows. Our sales force is organized by market segment, including
specialized teams focused on the regional bell operating companies ("RBOCs"),
incumbent local exchange carriers ("ILECs"), long distance carriers ("IXCs"),
competitive local exchange carriers ("CLECs"), wireless carriers, including
cellular, personal communications service companies ("PCSs") and specialized
mobile radio operators ("SMRs"), and internet service providers ("ISPs").
For our customers in the U.S. and Canada, our sales force operates on a
named account basis rather than by geography, which allows us to maintain a
consistent, single point of contact for each customer. For our customer in all
other countries, we approach the business more on a geographic basis due to
language and country specific considerations. Another key feature of our selling
effort is the relationships we establish at various levels in our customers'
organizations. This structure allows us to establish multiple contacts with each
customer across their management, engineering and purchasing operations. For
each type of operator, we employ dedicated teams with extensive market knowledge
to meet the specific equipment needs of these customers.
Each team member has access to, and is supported by, our relationship
management database. This real time proprietary information system allows each
team to:
. respond to customer requirements by accessing our proprietary global
database of excess and redeployed equipment located at operators,
manufacturers, distributors and other third parties worldwide, as well
as by accessing our select inventory;
. access relevant detailed purchase and sale information by customer and
part number;
. access technical and system configuration information;
. trace and track all customer and vendor order activity; and
3
. project and anticipate customer equipment requirements.
Each of our teams is headed by a group sales director who is responsible
for the overall customer relationship and is supported by a number of group
sales managers, account executives, and project managers to support logistics
and production requirements. We believe our dedicated team structure provides
consistent high quality customer service which builds long-term relationships
with our customers. Our account executives have frequent customer contact and
oversee customer proposals while our logistics administrators work with our
production controllers as well as our customers to coordinate sourcing, delivery
and any required follow-through procedures to ensure our customers receive
quality, timely customer service.
Our marketing effort focuses on enhancing market awareness of our brand
through industry trade shows, professional sales presentations and brochures, an
informative web site, branded giveaways and special customer events.
Additionally, we advertise in key telecommunications industry publications. We
believe the size and scope of our operations in our highly fragmented industry
gives us both a unique advantage and opportunity to further build and enhance
our brand recognition.
In support of our sales activities, we have teams who are responsible for
procurement of the redeployed equipment we sell. Procurement teams are organized
by market segment, including specialized teams focused on wireless operators,
wireline operators, OEMs and distributors. Our procurement project managers are
dedicated, on a named account basis, to purchase redeployed equipment from
operators. We also employ a product marketing group that develops and maintains
our relationships with manufacturers and distributors to assure the availability
of new equipment for our customers.
Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. As a result, we may commit resources to the
procurement and testing of products without having received advance purchase
commitments from customers. We anticipate that our operating results for any
given period will continue to be dependent, to a significant extent, on purchase
orders. These purchase orders can be delayed or canceled by our customers
without penalty. Additionally, as telecommunications equipment supplier
competition increases, we may need to lower our selling prices or pay more for
the equipment we procure. Consequently, our gross margins may decrease over
time. We recognize revenue, net of estimated provision for sales returns and
warranty obligations, when we ship equipment to our customers, provided that
there are no significant post-delivery obligations.
As we attempt to expand our sales, marketing and procurement efforts into
international markets, we face a number of challenges, including:
. recruiting skilled sales and technical support personnel;
. creation of new supply and customer relationships;
. difficulties and costs of managing and staffing international
operations; and
. developing relationships with local suppliers.
Any of these factors could potentially harm our future international
operations.
Customers
We sell to every major segment of the telecommunications sector. We sell
equipment to ILECs, RBOCs, IXCs, wireless operators including cellular, PCS,
paging and SMRs, and CLECs. We have a healthy account diversity with over 1,100
customers worldwide with the majority located in the United States. In 2001,
Verizon Communications accounted for 16.1% of our net revenue, with no other
customers accounting for more than 4% of our net revenue. In 2000, Verizon
Communications accounted for 11.3% of our net revenue. In 1999, no single
customer accounted for more than 10% of our net revenue. Sales to customers
outside of the United States accounted for 9.7% of our net revenue in 2001, 7.8%
of our net revenue in 2000, and 10.9% of our net revenue in 1999. Customers from
whom we recognized at least $5.0 million in net revenue in 2001 include leading
operators such as Verizon Communications,
4
ALLTEL, Western Wireless and AT&T Wireless.
Competition
The market for our equipment and service offerings is highly competitive.
We believe that the trends toward greater demand for telecommunications
services, increasing global deregulation and rapid technology advancements
characterized by shortened product lifecycles will continue to drive competition
in our industry for the foreseeable future. Increased competition may result in
price reductions, lower gross margins and loss of our market share.
Increased competition in the secondary market for telecommunications
equipment could also heighten demand for the limited supply of redeployed
equipment, which would lead to increased prices for, and reduce the availability
of, this equipment. Any increase in these prices could significantly impact our
ability to maintain our gross margins. Any reduction in the availability of this
equipment could cause us to lose customers.
The market for equipment deployment services is very fragmented. We
currently face competition primarily from OEMs, distributors and secondary
market dealers. Many of these competitors have longer operating histories,
significantly greater resources and name recognition, and a larger base of
customers. These competitors are also likely to enjoy substantial competitive
advantages over us, including the following:
. ability to devote greater resources to the development, promotion and
sale of their equipment and related services;
. ability to adopt more aggressive pricing policies than we can;
. ability to expand existing customer relationships and more effectively
develop new customer relationships than we can, including securing
long term purchase agreements;
. ability to leverage their customer relationships through volume
purchasing contracts, and other means intended to discourage customers
from purchasing products from us;
. ability to more rapidly adopt new or emerging technologies and
increase the array of products offered to better respond to changes in
customer requirements;
. greater focus and expertise on specific manufacturers or product
lines; and
. ability to form new alliances or business combinations to rapidly
acquire significant market share.
There can be no assurance that we will have the resources to compete
successfully in the future or that competitive pressures will not harm our
business.
Employees
As of December 31, 2001, we had 339 full-time employees. We consider our
relations with our employees to be satisfactory. We have never had a work
stoppage, and none of our employees is represented by a collective bargaining
agreement. We believe that our future success will depend in part on our ability
to attract, integrate, retain and motivate highly qualified personnel, and upon
the continued service of our senior management and key sales personnel. Demand
for qualified personnel in the telecommunications equipment industry and our
primary geographic locations is competitive. We may not be successful in
attracting, integrating, retaining and motivating a sufficient number of
qualified employees to conduct our business in the future.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the Company's
current executive officers as of February 28, 2002.
Name Age A.Position
---- --- ----------
Rick Darnaby......... 50 President, Chief Executive Officer and Director
Dan Firestone........ 40 Executive Chairman of the Board of Directors
Gary J. Owen......... 47 Chief Financial Officer
Jeffrey G. Miller.... 38 Executive Vice President, North America
Gil Varon............ 40 Vice President, Wireline Division and Director
Brandt A. Handley.... 43 Vice President, International
Glenn E. Berger...... 39 Vice President, Operations
Rick Darnaby has served as our President and Chief Executive Officer since
joining Somera Communications in September 2001. Prior to joining Somera, Mr.
Darnaby was employed in a number of positions at Motorola, Inc. From December
1999 to April 2001, Mr. Darnaby served as Regional President, Senior Vice
President & General Manager - EMEA for the personal communications business,
from February 1998 to December 1999, Mr. Darnaby served as Senior Vice President
& General Manager, Consumer Solutions Group, and from November 1996 to January
1998, Mr. Darnaby served as Corporate Vice President & Director, Global Brand
Management for Motorola. From 1994 to 1996, Mr. Darnaby served as President, and
from 1991 to 1994 served as executive in various capacities for The Nutrasweet
Group. From 1989 to 1991, Mr. Darnaby served as President & Chief Executive
Officer of Monsanto, Canada, Inc. Prior to 1989, Mr. Darnaby served in various
positions of management for Monsanto Company. Mr. Darnaby holds a B.S. degree in
business administration and an M.B.A. from Oklahoma State University. Mr.
Darnaby also holds an Advanced Management Degree in International Business from
I.N.S.E.A.D. (Institute of European Administration) Fountainbleau, France.
Dan Firestone co-founded Somera Communications in July 1995, and has served
as our Executive Chairman of the Board since September 2001. Mr. Firestone
served as our Chief Executive Officer from 1996 to September 2001, served as our
President from December 1998 to September 2001, and has also served as our
Chairman of the Board since our inception. From 1994 to the present, Mr.
Firestone has also operated SDC Business Consulting, a private business
consulting firm. In 1984, Mr. Firestone co-founded Century Computer Marketing, a
distributor of computer service spare parts and related products, and served as
its Chief Executive Officer until May 1994.
Gary J. Owen has served as our Chief Financial Officer since joining Somera
Communications in July 1999. From January 1999 until July 1999, Mr. Owen served
as Group Finance Director for Logical Holdings Ltd., a U.K. software development
and services company. From January 1997 to January 1999, Mr. Owen served as
Group Finance Director for IFX Group plc, an international information services
company. From September 1996 to December 1996, Mr. Owen served as a finance
consultant performing project work for Fujitsu Telecommunications Ltd. From May
1994 to September 1996, Mr. Owen served as Director, European Operations, for
Aurora Electronics, Inc., an electronic materials management company. From 1986
until May 1994, Mr. Owen served as Chief Financial Officer of Century Computer
Marketing, a distributor of computer service spare parts and related products.
Mr. Owen holds a B.A. in accounting and finance from Nottingham University,
England. Mr. Owen is also a qualified member of the Institute of Chartered
Accountants.
Jeffrey G. Miller has served as our Executive Vice President, North America
since January 2002. Mr. Miller served as our Executive Vice President, Sales and
Marketing from May 1999 to December 2001. From January 1996 until May 1999, Mr.
Miller served as Regional Director for North American Sales and Operations for
the Cellular Infrastructure Group of Motorola, Inc. From 1985 until January
1996, Mr. Miller worked in various capacities with
6
AT&T, including positions in sales management, product management, marketing,
and software development in their long distance, premises equipment, and voice
messaging business segments. Mr. Miller holds a B.S. in business administration
from Miami University and an M.B.A. from Ohio State University.
Gil Varon co-founded Somera Communications in July 1995, served as our
President from July 1995 until December 1998, has served as our Vice President,
Wireline Division since January 1999, and has served as one of our directors
since our inception. From 1995 until the present, Mr. Varon has also served as a
Senior Sales Manager. From May 1994 to June 1995, Mr. Varon served in sales and
procurement positions for Aurora Electronics, Inc. From 1985 until May 1994, Mr.
Varon served as a Group Sales Manager at Century Computer Marketing.
Brandt A. Handley has served as our Vice President, International, since
joining Somera Communications in January 2001. From September 1999 to December
2000, Mr. Handley founded and operated Seedvest, Inc., an equity investment and
consultancy firm. From 1991 to September 1999, Mr. Handley served as a vice
president at The Walt Disney Company, establishing two start-up companies in
Asia. From 1982 to 1991, Mr. Handley served in various management capacities in
the marketing department of The Procter & Gamble Company, including assignments
in the U.S., Middle East, Europe and Asia. Mr. Handley holds a B.A. in
international business from the University of Oregon and is a graduate of the
Advanced Management Program from the Wharton School at the University of
Pennsylvania.
Glenn E. Berger has served as our Vice President of Operations since
joining Somera Communications in November 1999. From 1994 to November 1999, Mr.
Berger served as Director of North American Distribution Operations and
Logistics Strategy for Compaq Computer Corporation. From 1984 to 1994, Mr.
Berger held several logistics, transportation, and distribution management
positions with Frito-Lay, Inc. Mr. Berger graduated from Arizona State
University with a B.S. degree in Business Administration.
ITEM 2. PROPERTIES
Our principal executive and corporate offices, located in Santa Barbara,
California, occupy approximately 37,000 square feet under several lease
agreements that expire from March 2003 to March 2004. We also occupy six
additional office sites in the United States under lease agreements, totaling
approximately 21,000 square feet. At December 31, 2001, we operated three
distribution facilities in the United States, occupying approximately 146,000
square feet, under several lease agreements that expire from May 2004 to
December 2005. Our primary distribution center is located in Oxnard, California,
and occupies approximately 100,000 square feet under a lease agreement that
expires in May 2004. Our European headquarters and distribution center, located
in Amsterdam, The Netherlands, occupies approximately 14,000 square feet. We
believe that our facilities are adequate for our current operations and that
additional space can be obtained as needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date hereof, we are not a
party to or aware of any litigation or other legal proceeding that could
materially harm our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of holders of Common Stock during the
quarter ended December 31, 2001.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market under the
symbol "SMRA" since our initial public offering on November 12, 1999. The
following table sets forth, for the periods indicated, the high and low closing
sale prices for our common stock as reported by the Nasdaq National Market:
High Low
------ ------
Year Ended December 31, 2001
First quarter .................................. $11.69 $ 4.50
Second quarter ................................. $ 7.23 $ 4.00
Third quarter .................................. $ 7.05 $ 3.95
Fourth quarter ................................. $ 8.15 $ 4.14
Year Ended December 31, 2000
First quarter .................................. $15.44 $11.19
Second quarter ................................. $14.88 $ 7.50
Third quarter .................................. $14.31 $ 9.50
Fourth quarter ................................. $12.50 $ 5.88
On March 12, 2002, the last reported sale price for our common stock on the
Nasdaq National Market was $7.56 per share. As of March 5, 2002, there were
approximately 165 holders of record. Because many of such shares are held by
brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these record holders.
While we do not plan to pay dividends, any future determination to pay
dividends will be at the discretion of the board of directors and will depend
upon our financial condition, operating results, capital requirements and other
factors the board of directors deems relevant. We currently plan to retain cash
from earnings for use in the operation of our business and to fund future
growth.
Since our inception in July 1995 through the effective date of our initial
public offering in November 1999, we operated in the form of a limited liability
company and income had been taxed directly to our equity members. During that
time, we made regular quarterly distributions to our members based on our funds
available for distribution. In the period beginning January 1, 1999 through
November 12, 1999, we made quarterly distributions in an aggregate amount of
$1.79 per unit to our members, including the distribution of the proceeds of our
term loan facility.
8
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data together with our
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Annual Report on Form 10-K. Historical results are not necessarily indicative of
the results to be expected in the future.
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- --------- -------- --------
(in thousands except per share/unit data)
Statements of Operations:
Net revenue (1) ............................. $221,256 $211,192 $ 126,861 $ 73,180 $ 35,060
Cost of net revenue (1) ..................... 148,478 134,618 82,761 44,126 21,044
-------- -------- --------- -------- --------
Gross profit ................................ 72,778 76,574 44,100 29,054 14,016
-------- -------- --------- -------- --------
Operating expenses:
Sales and marketing .................... 23,469 20,312 10,320 5,747 2,593
General and administrative ............. 23,482 16,108 8,756 3,939 1,648
Amortization of intangible assets ...... 1,484 302 -- -- --
Restructuring charges .................. 352 -- -- -- --
-------- -------- --------- -------- --------
Total operating expenses .......... 48,787 36,722 19,076 9,686 4,241
-------- -------- --------- -------- --------
Income from operations ...................... 23,991 39,852 25,024 19,368 9,775
Interest income (expense), net .............. 1,724 2,376 (2,193) (187) (82)
-------- -------- --------- -------- --------
Income before income taxes .................. 25,715 42,228 22,831 19,181 9,693
Income tax provision (benefit) .............. 10,929 17,737 (17,403) -- --
-------- -------- --------- -------- --------
Net income ............................. $ 14,786 $ 24,491 $ 40,234 $ 19,181 $ 9,693
======== ======== ========= ======== ========
Net income per share/unit--basic (2) ........ $ 0.31 $ 0.51 $ 1.02 $ 0.50 $ 0.25
======== ======== ========= ======== ========
Weighted average shares/units--basic ........ 48,260 47,928 39,408 38,063 38,052
======== ======== ========= ======== ========
Net income per share/unit--diluted (2) ...... $ 0.30 0.51 $ 1.02 $ 0.50 $ 0.25
======== ======== ========= ======== ========
Weighted average shares/units--diluted ...... 48,625 48,329 39,484 38,063 38,052
======== ======== ========= ======== ========
December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- ------
(in thousands)
Balance Sheet Data:
Working capital .................................. $ 90,476 $ 78,513 $ 67,888 $ 9,482 $4,602
Total assets ..................................... 177,082 143,572 115,751 17,009 9,281
Notes payable--net of current portion ............ -- -- -- 3,457 638
Mandatorily redeemable Class B units ............. -- -- -- 51,750 --
Stockholders' equity/members' capital (deficit) .. 132,016 114,497 86,786 (45,136) 3,787
(1) During 2000, we adopted new guidance for the accounting for shipping and
handling revenues and expenses, and accordingly have reclassified the prior
period balances to conform with our current policy for the years ended
December 31, 2000, 1999, 1998 and 1997. See also Note 2 of Notes to the
Consolidated Financial Statements.
(2) See Note 2 of Notes to the Consolidated Financial Statements for an
explanation of the calculation of net income per share/unit--basic and
diluted.
Our fiscal years are on a 52 and 53 week basis. For presentation purposes
we are using a calendar quarter and calendar year end convention. Our fiscal
years 1997, 1998, 1999, 2000 and 2001 ended on December 28, 1997, January 3,
1999, January 2, 2000, December 31, 2000, and December 30, 2001, respectively.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of financial condition and results of operations
should be read in conjunction with the financial statements and related notes
appearing elsewhere in this Annual Report on Form 10-K. Our actual results could
differ materially from the results contemplated by these forward-looking
statements as a result of factors, including those discussed previously, under
"Risk Factors" or in other parts of this Annual Report on Form 10-K.
Corporate History
We were organized as a limited liability company, or LLC, and commenced
operations in July 1995. In August 1999, we entered into a $50 million term loan
facility and a $15 million revolving loan facility with a syndicate of financial
institutions led by Fleet National Bank. In November 1999, we raised
approximately $107 million in net proceeds from the initial public offering of
9,775,000 shares of our common stock. Approximately $60 million of the proceeds
were used to payoff the Fleet National Bank term loan and revolving loan
facilities, including associated accrued interest. The balance of the proceeds
have been invested in short term, interest bearing, investment grade marketable
securities.
Business Combinations. In October 2000, we acquired MSI Communications Inc.
("MSI"). This acquisition has enabled Somera to strengthen its product offering
in data networking equipment and services, increase its national presence, and
provide key personnel. This transaction was accounted for as a purchase. We paid
$10.6 million in cash, including acquisition costs and issued 693,391 shares of
our common stock, which were held in escrow at December 31, 2001. In October
2001, we completed the acquisition of the equipment repair business of Asurent
Technologies, Inc. ("Asurent") for $6.3 million in cash and acquisition costs.
The acquisition of Asurent provides Somera with enhanced equipment repair
capabilities, key personnel, and additional customer and supplier relationships.
The financial results of these acquisitions have been included in our
consolidated financial statements from the dates of acquisition. For further
details about these acquisitions, see Note 3 of Notes to the Consolidated
Financial Statements.
Results of Operations
2001 Compared to 2000
Net Revenue. Substantially all of our net revenue consists of sales of new
and redeployed telecommunications and data networking equipment, including
switching, transmission, access, wireless, microwave and power products, net of
estimated provision for returns. Net revenue increased to $221.3 million in 2001
from $211.2 million in 2000. The increase in net revenue was primarily
attributable to a general increase in our equipment and services offerings
rather than significant increases in the price of the products we sold,
expansion of our international operations, and growth in significant customer
accounts. Net revenues from customers outside of the United States increased to
$21.4 million in 2001 from $16.5 million in 2000 due to the expansion of our
international operations. Our acquisitions of MSI in October 2000 and the
equipment repair business of Asurent in October 2001 contributed to the general
increase in equipment and service offerings. These increases were partially
offset by the effects of the general slow-down in the telecommunications
operators' capital spending levels, including increased price pressure on our
redeployed equipment prices, caused by OEMs' reduction of their equipment
prices. Net revenue attributable to new equipment sales increased slightly to
$90.9 million in 2001 from $90.7 million in 2000. Net revenue attributable to
redeployed equipment sales increased to $130.4 million in 2001 from $120.5
million in 2000. The increase in net revenue attributable to redeployed
equipment sales was due to greater demand among our customers in connection with
the build-out and servicing of their existing networks. We believe net revenue
attributable to new and redeployed equipment will increase as our customers
continue to build-out their existing networks. We believe net revenue from
customers outside of the United States will increase in both absolute dollars
and as a percentage of overall net revenue as we continue to expand our
international operations.
Cost of Net Revenue. Substantially all of our cost of net revenue consists
of the costs of the equipment we purchase from third party sources. Cost of net
revenue increased to $148.5 million in 2001 from $134.6 million in 2000. The
increase in cost of net revenue during this period is primarily attributable to
increases in our volume of
10
redeployed equipment sales. Cost of net revenue attributable to new equipment
sales decreased slightly to $73.2 million in 2001 from $73.8 million in 2000.
Cost of net revenue attributable to redeployed equipment sales increased to
$75.3 million in 2001 from $60.8 million in 2000. The increase in cost of net
revenue attributable to redeployed equipment was due primarily to increased
volume of redeployed equipment sales. We believe that the cost of net revenue
attributable to redeployed equipment will continue to increase in absolute
dollar terms as our volume of redeployed equipment sales increases in response
to customer demand.
Gross profit as a percentage of net revenue, or gross margin, decreased to
32.9% in 2001 from 36.3% in 2000. The decrease in gross margin was primarily due
to increased price pressure on redeployed equipment due to OEMs' reduction of
their equipment prices, as a result of the slow-down of the economy in 2001.
Gross margin attributable to new equipment sales increased to 19.4% in 2001 from
18.6% in 2000. The increase in gross margin attributable to new equipment sales
was primarily a function of equipment mix. We believe gross margin attributable
to new equipment sales will continue to fluctuate depending upon the mix of the
new equipment we sell. Gross margin attributable to redeployed equipment sales
decreased to 42.3% in 2001 from 49.5% in 2000. The decrease in gross margin
attributable to redeployed equipment sales was due primarily to increased price
pressure on redeployed equipment. We believe that gross margins attributable to
redeployed equipment sales may continue to fluctuate depending upon the mix of
redeployed equipment we sell, our ability to make significant discounted
purchases, and the pace of recovery of the economy in general and the
telecommunications industry, in particular.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and benefits for sales, marketing and procurement
employees as well as costs associated with advertising, promotions and our
e-commerce initiative. A majority of our sales and marketing expenses are
incurred in connection with establishing and maintaining long-term relationships
with a variety of operators. Sales and marketing expenses increased to $23.5
million, or 10.6% of net revenue, in 2001 from $20.3 million, or 9.6% of net
revenue, in 2000. This increase was primarily due to an increase of $4.2 million
in salaries and wages associated with the hiring of additional sales and
procurement personnel, and an increase of $800,000 in travel related costs
associated with our intensified sales efforts, partially offset by a decrease of
$2.4 million in lower absolute commissions corresponding to lower gross profit
on which commissions are based. The absolute increase in salaries and wages and
decrease in commissions were also due to a change in compensation structure for
our senior sales personnel, wherein base salaries were increased and commission
rates were reduced. We expect that our sales and marketing expenses will
continue to increase in absolute dollars as we expand our product and service
offerings and increase our hiring of additional sales, services and procurement
personnel, although such expenses may fluctuate as a percentage of net revenue.
General and Administrative. General and administrative expenses consist
principally of salary and benefit costs for executive and administrative
personnel, professional fees and facility costs. General and administrative
expenses increased to $23.5 million, or 10.6% of net revenue, in 2001 from $16.1
million, or 7.6% of net revenue, in 2000. This increase was due primarily to an
increase of $3.6 million in compensation costs and benefits associated with the
increase in employees relating to the expansion of our operations, an increase
of $1.2 million associated with facilities costs and an increase of $1.7 million
in depreciation. We expect that general and administrative expenses will
increase in absolute dollars in the future as we expand our operations, although
such expenses may fluctuate as a percentage of net revenue.
Reorganization Charges. On March 8, 2001, in light of the economic
environment and the state of the telecommunications industry, we undertook a
reorganization in which the domestic workforce was reduced by 28 people, or
approximately 10% of the then existing workforce. The terminations were not
concentrated in any particular aspect of the business. We recorded total
associated charges of $352,000 representing accrued salaries and wages,
severance, accrued vacation, payroll taxes and other directly related costs, all
of which were paid during 2001.
Amortization of Intangible Assets. Intangible assets consist of acquired
workforce, customer contract and goodwill related to our acquisitions during
2000 and 2001 which were amortized on a straight-line basis over their estimated
economic lives. Amortization of intangible assets increased to $1.5 million in
2001 from $302,000 in 2000. This increase in 2001 reflects a full year of
amortization of the goodwill and purchased intangibles arising from the MSI
acquisition compared with three months of amortization in 2000. We expect
amortization of intangible assets to decrease in the future upon adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
11
Interest Income (Expense), Net. Interest income (expense), net consists of
investment earnings on cash and cash equivalent balances. Interest income, net
decreased to $1.7 million in 2001 from $2.4 million in 2000. The decrease was
primarily due to lower interest rates in effect during 2001. We had no long-term
debt outstanding as of December 31, 2001.
Income Tax Provision. Income tax provision decreased to $10.9 million in
2001, an effective tax rate of 42.5%, from $17.7 million in 2000, an effective
tax rate of 42.0%.
2000 Compared to 1999
Net Revenue. Net revenue increased to $211.2 million in 2000 from $126.9
million in 1999. The increase in net revenue was driven primarily by greater
overall customer demand for our equipment rather than significant increases in
the price of the products we sold, our expansion in United States markets and
growth in significant customer accounts. Net revenue attributable to new
equipment sales increased to $90.7 million in 2000 from $44.3 million in 1999.
The increase in net revenue attributable to new equipment sales was due to
greater customer demand for new telecommunications equipment and our offering a
broader variety of new equipment to customers. Net revenue attributable to
redeployed equipment sales increased to $120.5 million in 2000 from $82.6
million in 1999. The increase in net revenue attributable to redeployed
equipment sales was due to greater demand among our customers in connection with
the build-out and servicing of their existing networks.
Cost of Net Revenue. Cost of net revenue increased to $134.6 million in
2000 from $82.8 million in 1999. The increase in cost of net revenue during this
period is primarily attributable to increases in our volume of new and
redeployed equipment sales. Cost of net revenue attributable to new equipment
sales increased to $73.8 million in 2000 from $36.9 million in 1999. The
increase in cost of net revenue attributable to new equipment was due primarily
to increases in the volume of new equipment we sold rather than increased unit
costs of equipment we purchased. Cost of net revenue attributable to redeployed
equipment sales increased to $60.8 million in 2000 from $45.9 million in 1999.
The increase in cost of net revenue attributable to redeployed equipment was due
primarily to increased volume of redeployed equipment sales.
Gross profit as a percentage of net revenue, or gross margin, increased to
36.3% in 2000 from 34.8% in 1999. The increase in gross margins was primarily
due to more favorable prices obtained from our suppliers due in part to our
increased volume of purchases and opportunistic buys, offset by an increase in
the proportion of new equipment we sold, which generally has lower gross margins
than redeployed equipment. Gross margin attributable to new equipment sales
increased to 18.6% in 2000 from 16.7% in 1999. The increase in gross margin
attributable to new equipment sales was due primarily to our ability to leverage
the increased volume of purchases in negotiating more favorable pricing from our
suppliers. Gross margin attributable to redeployed equipment sales increased to
49.5% in 2000 from 44.4% in 1999. The increase in gross margin attributable to
redeployed equipment sales was due primarily to our opportunistic purchases of
redeployed equipment in 2000.
Sales and Marketing. Sales and marketing expenses increased to $20.3
million, or 9.6% of net revenue, in 2000 from $10.3 million, or 8.1% of net
revenue, in 1999. This increase was due to higher absolute commission expenses
consistent with increased gross profit, hiring of additional sales and
procurement personnel, intensified marketing and advertising activities and
costs associated with our e-commerce initiative.
General and Administrative. General and administrative expenses increased
to $16.1 million, or 7.6% of net revenue, in 2000 from $8.8 million, or 6.9% of
net revenue, in 1999. This increase was due primarily to the increase in
employees relating to the expansion of our operations and associated facilities
costs.
Interest Income (Expense), Net. Interest income (expense), net consists of
investment earnings on cash and cash equivalent balances, offset by interest
expense associated with debt obligations. Interest income, net for 2000 was $2.4
million. Interest expense, net was $2.2 million in 1999 representing a one-time
write-off of $1.1 million of unamortized loan fees and interest on outstanding
debt principal.
Income Tax Provision (Benefit). Income tax provision for 2000 totaled $17.7
million, an effective tax rate of 42%, compared to an income tax benefit of
$17.4 million in 1999. In the fourth quarter of 1999, we realized a $19.5
million deferred tax credit as a result of the change in tax status of the
company from a limited liability company to a
12
"C" Corporation. This deferred tax asset is being amortized over 15 years. As a
limited liability company, we were not subject to federal or state income taxes.
13
Quarterly Results of Operations
The following tables set forth unaudited statement of operations data for
each of the eight quarters in the period ended December 31, 2001, as well as the
percentage of our net revenue represented by each item. In our opinion, this
unaudited information has been prepared on the same basis as the annual
financial statements. This information includes all adjustments (consisting only
of normal recurring adjustments) necessary for fair presentation when read in
conjunction with the financial statements and related notes included elsewhere
in this Annual Report on Form 10-K. The operating results for any quarter are
not necessarily indicative of results for any future period.
Quarter Ended
-----------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- -------- --------- -------- --------- --------
2000 2000 2000 2000 2001 2001 2001 2001
--------- -------- --------- -------- --------- -------- --------- --------
(unaudited)
(in thousands)
Statements of Operations Data:
Net revenue ....................... $40,626 $52,315 $58,289 $59,962 $47,809 $60,103 $54,973 $58,371
Cost of net revenue ............... 25,296 33,442 37,323 38,557 32,475 41,747 36,035 38,221
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ...................... 15,330 18,873 20,966 21,405 15,334 18,356 18,938 20,150
Operating expenses:
Sales and marketing .......... 4,246 5,028 5,380 5,658 5,064 5,615 6,070 6,720
General and administrative ... 2,889 3,663 4,693 4,863 5,784 5,322 5,969 6,407
Amortization of intangible
assets ..................... -- -- -- 302 350 350 350 434
Restructuring charges
-- -- -- -- 352 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses ............... 7,135 8,691 10,073 10,823 11,550 11,287 12,389 13,561
------- ------- ------- ------- ------- ------- ------- -------
Income from operations ............ 8,195 10,182 10,893 10,582 3,784 7,069 6,549 6,589
Interest income (expense), net .... 662 602 592 520 507 470 461 286
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ........ 8,857 10,784 11,485 11,102 4,291 7,539 7,010 6,875
Income tax provision .............. 3,762 4,556 4,851 4,568 1,818 3,210 2,979 2,922
------- ------- ------- ------- ------- ------- ------- -------
Net income ........................ $ 5,095 $ 6,228 $ 6,634 $ 6,534 $ 2,473 $ 4,329 $ 4,031 $ 3,953
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Net Revenue:
Net revenue ....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenue ............... 62.3 63.9 64.0 64.3 67.9 69.5 65.6 65.5
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ...................... 37.7 36.1 36.0 35.7 32.1 30.5 34.4 34.5
Operating expenses:
Sales and marketing .......... 10.4 9.6 9.2 9.5 10.6 9.3 11.0 11.5
General and administrative ... 7.1 7.0 8.1 8.1 12.1 8.9 10.9 11.0
Amortization of intangible
assets ..................... -- -- -- 0.5 0.7 0.6 0.6 0.7
Restructuring charges
-- -- -- -- 0.7 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses ............... 17.5 16.6 17.3 18.1 24.1 18.8 22.5 23.2
------- ------- ------- ------- ------- ------- ------- -------
Income from operations ............ 20.2 19.5 18.7 17.6 8.0 11.7 11.9 11.3
Interest income (expense), net .... 1.6 1.1 1.0 0.9 1.0 0.8 0.8 0.5
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ........ 21.8 20.6 19.7 18.5 9.0 12.5 12.7 11.8
Income tax provision (benefit) .... 9.3 8.7 8.3 7.6 3.8 5.3 5.4 5.0
------- ------- ------- ------- ------- ------- ------- -------
Net income ........................ 12.5% 11.9% 11.4% 10.9% 5.2% 7.2% 7.3% 6.8%
======= ======= ======= ======= ======= ======= ======= =======
Historically, prior to 2001, our net revenue and gross profit had increased
in each quarter compared to the same quarter in the previous year due primarily
to increased levels of customer demand for the equipment we sell in general.
However, due primarily to the general slow-down in the economy in 2001, net
revenue for the third and fourth quarters did not exceed the amounts in
comparable quarters in 2000, and gross profit was generally lower than the year
earlier quarters. Our gross margin worsened in 2001 versus 2000 primarily due to
increased price pressure from OEMs. Sales and marketing expenses have increased
in absolute dollars in almost every quarter reflecting greater commissions paid
on increased gross profit, the addition of sales personnel and intensified
marketing efforts. General and administrative expenses increased in absolute
dollar terms in almost every quarter due to the increase in personnel and
facilities costs and professional fees required to support our growth.
14
Historically, our net revenue and results of operations have been subject
to significant fluctuations, particularly on a quarterly basis, and could
fluctuate significantly from quarter to quarter and from year to year in the
future. Causes of such fluctuations may include the rate and timing of
customers' orders for the equipment we sell, the rate at which
telecommunications operators redeploy equipment, decreases in the prices of the
equipment we sell due to increased secondary market competition, our ability to
locate and obtain equipment, our ability to deploy equipment on a timely basis,
seasonal variations in customer purchasing, write-offs due to inventory defects
and obsolescence, the potentially long sales cycle for our equipment, delays in
the commencement of operations in new markets, costs relating to possible
acquisitions, and general economic conditions and conditions specific to the
telecommunications industry. Significant quarterly fluctuations in our net
revenue will cause significant fluctuations in our cash flows and working
capital.
Liquidity and Capital Resources
Since inception in July 1995, we have financed our operations primarily
through cash flows from operations. Net cash generated by operating activities
in 2001 was $32.2 million, comprised of net income of $14.8 million, noncash
expenses of $9.6 million and a decrease in operating assets and liabilities of
$7.8 million. Net cash used in operating activities in 2000 was $3.2 million,
comprised of net income of $24.5 million, noncash expenses of $6.2 million and
an increase in operating assets and liabilities of $33.9 million. The increase
in operating assets and liabilities in 2000 is primarily due to an increase in
accounts receivable of $18.8 million and our strategic investment in inventory,
resulting in an increase in inventory of $13.1 million. Net cash generated by
operating activities was $20.5 million in 1999. Through November 1999,
substantially all of the cash generated by operating activities was distributed
to the members of Somera Communications, LLC, our predecessor entity.
Net cash used in investing activities in 2001 comprised primarily our
acquisition of Asurent for $6.3 million in cash, including acquisition costs,
and acquisition of property and equipment of $4.7 million. Net cash used in
investing activities in 2000 comprised primarily our acquisition of MSI for
$10.6 million in cash, including acquisition costs, and acquisition of property
and equipment of $6.1 million. Net cash used in investing activities in 1999
comprised primarily loans to officers of $2.0 million and acquisition of
property and equipment of $600,000.
On August 31, 1999, we entered into a credit agreement with a syndicate of
financial institutions led by Fleet National Bank. The credit agreement provided
for a term loan facility and a revolving loan facility. The term loan facility
was for an aggregate principal amount of $50.0 million. The revolving loan
facility allowed us to borrow $15.0 million, with a $5.0 million sublimit for
the issuance of letters of credit. The obligations under the term loan facility
and the revolving loan facility were secured by a first priority lien on all our
tangible and intangible assets. The proceeds of our term loan facility were used
to make a distribution to the members of Somera Communications, LLC of $48.5
million in September 1999 and the remaining $1.5 million was used to pay off a
portion of outstanding balances on notes payable. Additionally, approximately
$1.5 million of our revolving loan facility was used to pay off the current
portion of the notes payable. The remaining amount of notes payable,
approximately $500,000 was satisfied from available cash.
On November 12, 1999, we sold 9,775,000 shares of our common stock at
$12.00 per share through an initial public offering, raising approximately
$107.4 million in net proceeds. In November 1999, we repaid and retired the
outstanding balance of the term loan facility and the outstanding balance of the
revolving loan facility with the proceeds of the offering.
As of December 31, 2001, we had approximately $54.5 million in cash and
cash equivalents. We do not currently plan to pay dividends, but rather to
retain earnings for use in the operation of our business and to fund future
growth. We had no long-term debt outstanding as of December 31, 2001.
The following summarizes the our contractual obligations under various
operating leases for both office and warehouse space as at December 31, 2001,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods. The remaining lease terms range in length from one to
four years with future minimum lease payments, net of sublease proceeds of
$432,000 in 2002 and $110,000 in 2003, as follows (in thousands):
15
Operating
Leases
--------
2002 ........................................................ $2,355
2003 ........................................................ 2,162
2004 ........................................................ 1,302
2005 ........................................................ 656
------
Total minimum lease payments ................................ $6,475
======
We are also exposed to credit risk in the event of default of the
sublessee, because we are still liable to meet our obligations under the terms
of the original lease agreement.
We anticipate significant increases in working capital in the future
primarily as a result of increased sales of equipment and higher relative levels
of inventory. We will also continue to expend significant amounts of capital on
property and equipment related to the expansion of our corporate headquarters,
distribution centers, equipment testing infrastructure, and additional
facilities to support our growth, as well as expending significant resources in
support of our business-to-business e-commerce activities and other information
technology projects.
We believe that cash and cash equivalents and anticipated cash flow from
operations will be sufficient to fund our working capital and capital
expenditure requirements for at least the next 12 months.
Critical Accounting Policies
We consider certain accounting policies related to revenue recognition,
valuation allowances, valuation of goodwill and intangible assets, and income
taxes to be critical policies.
Revenue Recognition. Substantially all of our revenue is derived from the
sale of products. Revenue is recognized upon our delivery of product provided
that, at the time of delivery, there is evidence of a contractual arrangement
with the customer, the fee is fixed and determinable, collection of the
resulting receivable is reasonably assured and there are no significant
remaining obligations. Delivery occurs when title and risk of loss transfer to
the customer, generally at the time the product is shipped to the customer.
We also generate some services revenue in connection with equipment sales.
Revenue for transactions that include multiple elements such as equipment and
services is allocated to each element based on its relative fair value (or in
the absence of fair value, the residual method) and recognized when the revenue
recognition criteria have been met for each element. We recognize revenue for
delivered elements only when the following criteria are satisfied: (1)
undelivered elements are not essential to the functionality of delivered
elements, (2) uncertainties regarding customer acceptance are resolved, and (3)
the fair value for all undelivered elements is known. Through 2001 revenue from
services represented less than 5% of total revenue.
Revenue is deferred when customer acceptance is uncertain, when significant
obligations remain, or when undelivered elements are essential to the
functionality of the delivered products. A reserve for sales returns and
warranty obligations is recorded at the time of shipment and is based on our
historical experience. Actual results could differ from those estimates, which
could affect our operating results. At December 31, 2001, the reserve for sales
returns and warranty obligations was $1.0 million.
Valuation Allowances. The preparation of financial statements in conformity
with generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Specifically, we make estimates of doubtful accounts and slow-moving and
obsolete inventory. At December 31, 2001, the estimates for doubtful accounts
and slow-moving and obsolete inventory were $1.7 million and $3.2 million,
respectively. These estimates are made based on a consideration of various
factors, including historical experience, knowledge of customers and the
telecommunications equipment market, and current economic trends. Actual results
could differ from those estimates, which could affect our operating results.
16
Valuation of Goodwill and Intangible Assets. We assess the impairment of
identifiable intangibles and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
considered important which could trigger an impairment review include, but are
not limited to, significant underperformance relative to expected historical or
projected future operating results, significant changes in the manner of use of
the acquired assets or the strategy for our overall business, and significant
negative industry or economic trends. When we determine that the carrying value
of long-lived assets may not be recoverable based upon the existence of one or
more of the above indicators of impairment, we measure any impairment based on a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in our current business model. See further discussion under
"Recent Accounting Pronouncements" below. At December 31, 2001, we determined
that our identifiable intangibles and goodwill were appropriately recorded and
that there was no loss impairment.
Deferred Taxes. The carrying value of our net deferred tax assets assumes
that we will be able to generate sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions. If these estimates and
related assumptions change in the future, we may be required to record valuation
allowances against our deferred tax assets resulting in additional income tax
expense. We evaluate the realizability of the deferred tax assets quarterly and
assess the need for additional valuation allowances related to our net deferred
tax assets. As of December 31, 2001, we had no valuation allowances recorded
against our deferred tax assets.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 ("SFAS 141") "Business Combinations" and SFAS No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets." SFAS 141 requires business combinations
initiated after June 30, 2001, to be accounted for using the purchase method of
accounting, and broadens the criteria for recording intangible assets separately
from goodwill. Recorded goodwill and intangibles will be evaluated against these
new criteria and may result in certain intangibles being subsumed into goodwill,
or alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written-down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. We are required to adopt the provisions of SFAS No. 142 on
January 1, 2002. In the year ended December 31, 2001, we recorded approximately
$1.4 million of amortization expense on goodwill and acquired workforce which
would not have been recognized if this standard were in effect for the current
year. For business combinations initiated after June 30, 2001, we will follow
the non-amortization method under SFAS 142.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 addresses significant issues relating to the
implementation of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and develops a single accounting method under which long-lived
assets that are to be disposed of by sale are measured at the lower of book
value or fair value less cost to sell. Additionally, SFAS 144 expands the scope
of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and its provisions are to be applied
prospectively. We are currently assessing the impact of SFAS 144 on our
financial position and results of operations.
Risk Factors
You should carefully consider the risks described below. If any of the
following risks actually occur, our business could be harmed and the trading
price of our common stock could decline. You should also refer to other
information contained in this Annual Report on Form 10-K, including our
financial statements and related notes.
Our operating results are likely to fluctuate in future periods, which might
lead to reduced prices for our
17
stock.
Our annual or quarterly operating results are difficult to predict and are
likely to fluctuate significantly in the future as a result of numerous factors,
many of which are outside of our control. If our annual quarterly operating
results do not meet the expectations of securities analysts and investors, the
trading price of our stock could significantly decline. Factors that could
impact our operating results include:
. the rate, timing and volume of orders for the telecommunications
infrastructure equipment we sell;
. the rate at which telecommunications operators de-install their
equipment;
. decreases in our selling prices due to competition in the secondary
market or price pressure from OEMs;
. our ability to obtain products cost-effectively from OEMs,
distributors, operators and other secondary sources of
telecommunications equipment;
. our ability to provide equipment and service offerings on a timely
basis to satisfy customer demand;
. variations in customer capital spending patterns due to seasonality,
economic conditions for telecommunications operators and other
factors;
. write-offs due to inventory defects or obsolescence;
. the sales cycle for equipment we sell, which can be relatively
lengthy;
. delays in the commencement of our operations in new market segments
and geographic regions; and
. costs relating to possible acquisitions and integration of new
businesses.
Our business depends upon our ability to match third party redeployed equipment
supply with carrier demand for this equipment and failure to do so could reduce
our net revenue.
Our success depends on our continued ability to match the equipment needs
of telecommunications operators with the supply of redeployed equipment
available in the secondary market. We depend upon maintaining business
relationships with third parties who can provide us with redeployed equipment
and information on available redeployed equipment. Failure to effectively manage
these relationships and match the needs of our customers with available supply
of redeployed equipment could damage our ability to generate net revenue. In the
event operators decrease the rate at which they de-install their networks, or
choose not to de-install their networks at all, it would be more difficult for
us to locate this equipment, which could negatively impact our net revenue.
A downturn in the telecommunications industry or an industry trend toward
reducing or delaying additional equipment purchases due to cost-cutting
pressures could reduce demand for our products.
We rely significantly upon customers concentrated in the telecommunications
industry as a source of net revenue and redeployed equipment inventory. In 2001,
we experienced a general downturn in the level of capital spending by our
telecommunications customers. This slow-down in capital in capital spending
could result in reduced sales to our customers and postponement of network
upgrades. There can be no assurance that the level of capital spending in the
telecommunications industry or by our customers specifically will increase or
remain at current levels. Lower capital spending could result in reduced sales
to our customers, and could impair our ability to obtain redeployed
telecommunications equipment.
The market for supplying equipment to telecommunications operators is
competitive, and if we cannot compete effectively, our net revenue and gross
margins might decline.
18
Competition among companies who supply equipment to telecommunications
operators is intense. We currently face competition primarily from three
sources: OEMs, distributors and secondary market dealers who sell new and
redeployed telecommunications infrastructure equipment. If we are unable to
compete effectively against our current or future competitors, we may have to
lower our selling prices and may experience reduced gross margins and loss of
market share, either of which could harm our business.
Competition is likely to increase as new companies enter this market, as
current competitors expand their products and services or as our competitors
consolidate. Increased competition in the secondary market for
telecommunications equipment could also heighten demand for the limited supply
of redeployed equipment which would lead to increased prices for, and reduce the
availability of, this equipment. Any increase in these prices could
significantly impact our ability to maintain our gross margins.
We do not have many formal relationships with suppliers of telecommunications
equipment and may not have access to adequate product supply.
In fiscal year 2001, 59% of our net revenue was generated from the sale of
redeployed telecommunications equipment. Typically, we do not have supply
contracts to obtain this equipment and are dependent on the de-installation of
equipment by operators to provide us with much of the equipment we sell. Our
ability to buy redeployed equipment from operators is dependent on our
relationships with them. If we fail to develop and maintain these business
relationships with operators or they are unwilling to sell redeployed equipment
to us, our ability to sell redeployed equipment will suffer.
Our customer base is concentrated and the loss of one or more of our key
customers would have a negative impact on our net revenue.
Historically, a significant portion of our sales have been to relatively
few customers. Sales to our ten largest customers accounted for 39.7% of our net
revenue in 2001, 39.5% of our net revenue in 2000, and 32.1% in 1999. Verizon
Communications accounted for 16.1% and 11.3% of our net revenue in 2001 and
2000, respectively. In 1999, no single customer accounted for over 10% of our
net revenue. In addition, substantially all of our sales are made on a purchase
order basis, and no customer has entered into a long-term purchasing agreement
with us. As a result, we cannot be certain that our current customers will
continue to purchase from us. The loss of, or any reduction in orders from, a
significant customer would have a negative impact on our net revenue.
We may be forced to reduce the sales prices for the equipment we sell, which may
impair our ability to maintain our gross margins.
In the future we expect to reduce prices in response to competition and to
generate increased sales volume. In 2001 some manufacturers reduced their prices
of new telecommunications equipment. If manufacturers reduce the prices of new
telecommunications equipment, we may be required to further reduce the price of
the new and redeployed equipment we sell. If we are forced to reduce our prices
or are unable to shift the sales mix towards higher margin equipment sales, we
will not be able to maintain current gross margins.
The market for redeployed telecommunications equipment is relatively new and it
is unclear whether our equipment and service offerings and our business will
achieve long-term market acceptance.
The market for redeployed telecommunications equipment is relatively new
and evolving, and we are not certain that our potential customers will adopt and
deploy redeployed telecommunications equipment in their networks. For example,
with respect to redeployed equipment that includes a significant software
component, potential customers may be unable to obtain a license or sublicense
for the software. Even if they do purchase redeployed equipment, our potential
customers may not choose to purchase redeployed equipment from us for a variety
of reasons. Our customers may also re-deploy their displaced equipment within
their own networks which would eliminate their need for our equipment and
service offerings. These internal solutions would also limit the supply of
redeployed equipment available for us to purchase, which would limit the
development of this market.
19
We may fail to continue to attract, develop and retain key management and sales
personnel, which could negatively impact our operating results.
We depend on the performance of our executive officers and other key
employees. The loss of any member of our senior management or other key
employees could negatively impact our operating results and our ability to
execute our business strategy. In addition, we depend on our sales professionals
to serve customers in each of our markets. The loss of any of our sales
professionals could significantly disrupt our relationships with our customers.
We do not have "key person" life insurance policies on any of our employees.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in the
telecommunications equipment industry is intense. Additionally, we depend on our
ability to train and develop skilled sales people and an inability to do so
would significantly harm our growth prospects and operating performance. We have
experienced, and we expect to continue to experience difficulty in hiring and
retaining highly skilled employees.
Our business may suffer if we are not successful in our efforts to keep up with
a rapidly changing market.
The market for the equipment and services we sell is characterized by
technological changes, evolving industry standards, changing customer needs and
frequent new equipment and service introductions. Our future success in
addressing the needs of our customers will depend, in part, on our ability to
timely and cost-effectively:
. respond to emerging industry standards and other technological
changes;
. develop our internal technical capabilities and expertise;
. broaden our equipment and service offerings; and
. adapt our services to new technologies as they emerge.
Our failure in any of these areas could harm our business. Moreover, any
increased emphasis on software solutions as opposed to equipment solutions could
limit the availability of redeployed equipment, decrease customer demand for the
equipment we sell, or cause the equipment we sell to become obsolete.
The lifecycles of telecommunications infrastructure equipment may become
shorter, which would decrease the supply of, and carrier demand for, redeployed
equipment.
Our sales of redeployed equipment depend upon telecommunications operator
utilization of existing telecommunications network technology. If the lifecycle
of equipment comprising operator networks is significantly shortened for any
reason, including technology advancements, the installed base of any particular
model would be limited. This limited installed base would reduce the supply of,
and demand for, redeployed equipment which could decrease our net revenue.
Many of our customers are telecommunications operators that may at any time
reduce or discontinue their purchases of the equipment we sell to them.
If our customers choose to defer or curtail their capital spending
programs, it could have a negative impact on our sales to those
telecommunications operators, which would harm our business. A significant
portion of our customers are emerging telecommunications operators who compete
against existing telephone companies. These new participants only recently began
to enter these markets, and many of these operators are still building their
networks and rolling out their services. They require substantial capital for
the development, construction and expansion of their networks and the
introduction of their services. If emerging operators fail to acquire and retain
customers or are unsuccessful in raising needed funds or responding to any other
trends, such as price reductions for
20
their services or diminished demand for telecommunications services in general,
then they could be forced to reduce their capital spending programs.
If we fail to implement our strategy of purchasing equipment from and selling
equipment to regional bell operating companies, our growth will suffer.
One of our strategies is to develop and expand our relationships with
regional bell operating companies, or RBOCs. We believe the RBOCs could provide
us with a significant source of additional net revenue. In addition, we believe
the RBOCs could provide us with a large supply of redeployed equipment. We
cannot assure you that we will be successful in implementing this strategy.
RBOCs may not choose to sell redeployed equipment to us or may not elect to
purchase this equipment from us. RBOCs may instead develop those capabilities
internally or elect to compete with us and resell redeployed equipment to our
customers or prospective customers. If we fail to successfully develop our
relationships with RBOCs or if RBOCs elect to compete with us, our growth could
suffer.
If we do not expand our international operations our growth could suffer.
We intend to continue expanding our business in international markets. This
expansion will require significant management attention and financial resources
to develop a successful international business, including sales, procurement and
support channels. Following this strategy, we opened our European headquarters
in the fourth quarter of 2000, hired a vice president to oversee our
international operations in the first quarter of 2001 and a regional sales
director for Asia in the second quarter of 2001. However, we may not be able to
maintain or increase international market demand for the equipment we sell, and
therefore we might not be able to expand our international operations. We
currently have limited experience providing equipment outside the United States.
Sales to customers outside of the United States accounted for 9.7% of our net
revenue in 2001, 7.8% of our net revenue in 2000, and 10.9% of our net revenue
in 1999.
We may fail to engage in selective acquisitions which could limit our future
growth.
One of our strategies for growth is to engage in selective acquisitions.
Our ability to conduct such acquisitions may be limited by our ability to
identify potential acquisition candidates and obtain necessary financing. If we
are unable to identify and take advantage of these opportunities, our future
growth could be limited.
If we do engage in selective acquisitions, we may experience difficulty
assimilating the operations or personnel of the acquired companies, which could
threaten our future growth.
If we make acquisitions in the future, we could have difficulty
assimilating or retaining the acquired companies' personnel or integrating their
operations, equipment or services into our organization. These difficulties
could disrupt our ongoing business, distract our management and employees and
increase our expenses. Moreover, our profitability may suffer because of
acquisition-related costs, impairment of goodwill, or amortization of acquired
other intangible assets. Furthermore, we may have to incur debt or issue equity
securities in any future acquisitions. The issuance of equity securities would
be dilutive to our existing stockholders.
Failure to manage our rapid growth effectively could harm our results of
operations.
Since we began commercial operations in July 1995, we have experienced
rapid growth and expansion that is straining our resources. Continued growth
could place a further strain on our management, operational and financial
resources. Our inability to manage growth effectively could harm our business.
Our current or planned operational systems, procedures and controls may not be
adequate to support our future operations. Delays in the implementation of new
systems or operational disruptions when we transition to new systems would
impair our ability to accurately forecast sales demand, manage our equipment
inventory and record and report financial and management information on a timely
and accurate basis.
21
Defects in the equipment we sell may seriously harm our credibility and our
business.
Telecommunications operators require a strict level of quality and
reliability from telecommunications equipment suppliers. Telecommunications
equipment is inherently complex and can contain undetected software or hardware
errors. If we deliver telecommunications equipment with undetected material
defects, our reputation, credibility and equipment sales could suffer. Moreover,
because the equipment we sell is integrated into our customers' networks, it can
be difficult to identify the source of a problem should one occur. The
occurrence of such defects, errors or failures could also result in delays in
installation, product returns, product liability and warranty claims and other
losses to us or our customers. In some of our contracts, we have agreed to
indemnify our customers against liabilities arising from defects in the
equipment we sell to them. Furthermore, we supply most of our customers with
guarantees that cover the equipment we offer. While we may carry insurance
policies covering these possible liabilities, these policies may not provide
sufficient protection should a claim be asserted. A material product liability
claim, whether successful or not, could be costly, damage our reputation and
distract key personnel, any of which could harm our business.
Our strategy to outsource services could impair our ability to deliver our
equipment on a timely basis.
While we have expanded our services capability, we still currently depend
on, to a large degree, third parties for a variety of equipment-related
services, including engineering, repair, transportation, testing, installation
and de-installation. This outsourcing strategy involves risks to our business,
including reduced control over delivery schedules, quality and costs and the
potential absence of adequate capacity. In the event that any significant
subcontractor were to become unable or unwilling to continue to perform their
required services, we would have to identify and qualify acceptable
replacements. This process could be lengthy, and we cannot be sure that
additional sources of third party services would be available to us on a timely
basis, or at all.
Our quarterly net revenue and the price of our stock may be negatively impacted
by the seasonal purchasing patterns of our customers.
Our quarterly net revenue may be subject to the seasonal purchasing
patterns of our customers, which may occur as a result of our customers' annual
budgetary, procurement and sales cycles. If our quarterly net revenue fails to
meet the expectations of analysts due to those seasonal fluctuations, the
trading price of our common stock could be negatively affected.
Our ability to meet customer demand and the growth of our net revenue could be
harmed if we are unable to manage our inventory needs accurately.
To meet customer demand in the future, we believe it is necessary to
maintain or increase some levels of inventory. Failure to maintain adequate
inventory levels in these products could hurt our ability to make sales to our
customers. In the past, we have experienced inventory shortfalls, and we cannot
be certain that we will not experience shortfalls again in the future, which
could harm our reputation and our business. Further, rapid technology
advancement could make our existing inventory obsolete and cause us to incur
losses. In addition, if our forecasts lead to an accumulation of inventories
that are not sold in a timely manner, our business could suffer.
The corruption or interruption of key software systems we use could cause our
business to suffer if it delays or restricts our ability to meet our customers'
needs.
We rely on the integrity of key software and systems. Specifically we rely
on our relationship management database which tracks information on currently or
potentially available redeployed equipment. This software and these systems may
be vulnerable to harmful applications, computer viruses and other forms of
corruption and interruption. In the event our software or systems are affected
by any form of corruption or interruption, it could delay or restrict our
ability to meet our customers' needs, which could harm our reputation or
business.
22
If we are unable to meet our additional capital needs in the future, we may not
be able to execute our business growth strategy.
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months. However, our resources may not be
sufficient to satisfy these requirements. We may need to raise additional funds
through public or private debt or equity financings to:
. take advantage of business opportunities, including more rapid
international expansion or acquisitions of complementary businesses;
. develop and maintain higher inventory levels;
. gain access to new product lines;
. develop new services; or
. respond to competitive pressures.
Any additional financing we may need might not be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our business could suffer if the inability to
raise this funding threatens our ability to execute our business growth
strategy. Moreover, if additional funds are raised through the issuance of
equity securities, the percentage of ownership of our current stockholders will
be reduced. Newly issued equity securities may have rights, preferences and
privileges senior to those of investors in our common stock. In addition, the
terms of any debt could impose restrictions on our operations.
We face the risk of future non-recurring charges in the event of impairment.
We adopted SFAS 142 beginning in January 2002 and, as a result, we no
longer amortize goodwill. However, we will continue to have amortization related
to other purchased intangibles, and we must evaluate our intangible assets,
including goodwill, at least annually for impairment. For 2001, our amortization
charge for other intangibles was $84,000, and our amortization charge for
goodwill was $1.4 million. If we determine that these items are impaired, we
will be required to take a related non-recurring charge to earnings.
Our facilities could be vulnerable to damage from earthquakes and other natural
disasters.
Our main facilities are located on or near known earthquake fault zones and
are vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. If a disaster occurs, our
ability to test and ship the equipment we sell would be seriously, if not
completely, impaired, and our inventory could be damaged or destroyed, which
would seriously harm our business. We cannot be sure that the insurance we
maintain against fires, floods, earthquakes and general business interruptions
will be adequate to cover our losses in any particular case.
Our officers and directors exert substantial influence over us, and may make
future business decisions with which some of our stockholders might disagree.
Our executive officers, directors and entities affiliated with them
beneficially own an aggregate of approximately 60% of our outstanding common
stock as of December 31, 2001. As a result, these stockholders will be able to
exercise substantial influence over all matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in our control.
23
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We have reviewed the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risks
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments." We had no holdings of derivative financial or
commodity instruments at December 31, 2001.
Substantially all of our revenue and capital spending is denominated in
U.S. dollars. We invest our excess cash in short term, interest-bearing,
investment grade marketable securities. Due to the short time the investments
are outstanding and their general liquidity, these instruments are classified as
cash equivalents and do not represent a material interest rate risk. As of
December 31, 2001, we had no long-term debt outstanding.
24
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants...................................... 26
Consolidated Balance Sheets............................................ 27
Consolidated Statements of Operations.................................. 28
Consolidated Statement of Stockholders' Equity/
Members' Capital (Deficit)............................................. 29
Consolidated Statements of Cash Flows.................................. 30
Notes to Consolidated Financial Statements............................. 31
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Somera Communications, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Somera Communications, Inc. and its subsidiaries at December 31,
2001 and 2000 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 29, 2002
26
SOMERA COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
---------------------
2001 2000
---------------------
ASSETS
------
Current assets:
Cash and cash equivalents ....................................................... $ 54,522 $ 33,266
Accounts receivable, (net of allowance for doubtful accounts of $1,701 and $1,330
at December 31, 2001 and 2000 respectively) .................................. 43,275 38,288
Inventories, net ................................................................ 30,009 29,716
Deferred tax asset, current portion ............................................. 4,857 3,778
Other current assets ............................................................ 2,879 2,540
--------- ---------
Total current assets ....................................................... 135,542 107,588
Property and equipment, net .......................................................... 8,687 7,108
Deferred tax asset, net of current portion ........................................... 14,300 15,900
Other assets ......................................................................... 1,060 895
Intangible assets, net ............................................................... 17,493 12,081
--------- ---------
Total assets ............................................................... $ 177,082 $ 143,572
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable ................................................................ $ 29,694 $ 24,145
Accrued compensation ............................................................ 2,401 2,523
Other accrued liabilities ....................................................... 3,202 2,227
Capital lease obligations, current portion ...................................... -- 180
Deferred revenue ................................................................ 4,550 --
Income taxes payable ............................................................ 5,219 --
--------- ---------
Total current liabilities .................................................. 45,066 29,075
Commitments (Note 6)
Stockholders' equity:
Common stock: $0.001 par value
Shares authorized: 200,000
Shares issued and outstanding: 48,535 and 48,191 at December 31, 2001 and
2000 respectively ............................................................ 49 48
Additional paid-in capital ...................................................... 71,929 69,272
Unearned stock-based compensation ............................................... (71) (219)
Accumulated other comprehensive income .......................................... (73) --
Retained earnings ............................................................... 60,182 45,396
--------- ---------
Total stockholders' equity ................................................. 132,016 114,497
--------- ---------
Total liabilities and stockholders' equity ................................. $ 177,082 $ 143,572
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
27
SOMERA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Net revenue .................................. $221,256 $211,192 $126,861
Cost of net revenue .......................... 148,478 134,618 82,761
-------- -------- --------
Gross profit ....................... 72,778 76,574 44,100
Operating expenses:
Sales and marketing ..................... 23,469 20,312 10,320
General and administrative .............. 23,482 16,108 8,756
Amortization of intangible assets ....... 1,484 302 --
Restructuring charges ................... 352 -- --
-------- -------- --------
Total operating expenses ........... 48,787 36,722 19,076
-------- -------- --------
Income from operations ....................... 23,991 39,852 25,024
Interest income (expense), net ............... 1,724 2,376 (2,193)
-------- -------- --------
Income before income taxes ................... 25,715 42,228 22,831
Income tax provision (benefit) ............... 10,929 17,737 (17,403)
-------- -------- --------
Net income ......................... $ 14,786 $ 24,491 $ 40,234
======== ======== ========
Net income per share--basic .................. $ 0.31 $ 0.51 $ 1.02
======== ======== ========
Weighted average shares--basic ............... 48,260 47,928 39,408
======== ======== ========
Net income per share--diluted ................ $ 0.30 $ 0.51 $ 1.02
======== ======== ========
Weighted average shares--diluted ............. 48,625 48,329 39,484
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
SOMERA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/MEMBERS' CAPITAL (DEFICIT)
(in thousands)
Accumulated
Common Stock Additional Unearned Other
----------------- Paid-in Stock-Based Comprehensive Retained
Number Value Capital Compensation Income Earnings
------- ------- ----------- ------------ ------------- --------
Balances, December 31, 1998 .............................. -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock in conversion of outstanding
units .................................................. 38,063 38 (40,967) -- -- --
Issuance of common stock through initial public offering,
net of issuance costs of $9,904 ........................ 9,775 10 107,386 -- -- --
Unearned employee stock-based compensation ............... -- -- -- (830) -- --
Amortization of unearned stock-based compensation ........ -- -- -- 244 -- --
Warrants issued in exchange for services ................. -- -- -- -- -- --
Net income ............................................... -- -- -- -- -- 20,905
Distributions to members ................................. -- -- -- -- -- --
------- ------- --------- -------- -------- --------
Balances, December 31, 1999 .............................. 47,838 $ 48 $ 66,419 $ (586) $ -- $ 20,905
Issuance of common stock through employee stock purchase
plan ................................................... 37 -- 353 -- -- --
Issuance of common stock through exercise of warrants .... 27 -- -- -- -- --
Issuance of common stock on acquisition of MSI
Communications, Inc. ................................... 289 -- 2,500 -- -- --
Amortization of unearned stock-based compensation ........ -- -- -- 367 -- --
Net income ............................................... -- -- -- -- -- 24,491
------- ------- --------- -------- -------- --------
Balances, December 31, 2000 .............................. 48,191 $ 48 $ 69,272 $ (219) $ -- $ 45396
Issuance of common stock through employee stock purchase
plan ................................................... 118 -- 580 -- -- --
Issuance of contingent common stock on acquisition of MSI
Communications, Inc. ................................... 226 1 1,841 -- -- --
Warrants issued in exchange for services.................. -- -- 236 -- -- --
Amortization of unearned stock-based compensation ........ -- -- -- 148 -- --
Foreign currency translation adjustment .................. -- -- -- -- (73) --
Net income ............................................... -- -- -- -- -- 14,786
------- ------- --------- -------- -------- --------
Balances, December 31, 2001 .............................. 48,535 $ 49 $ 71,929 $ (71) $ (73) $ 60,182
======= ======= ========= ======== ======== ========
Mandatorily
Redeemable Class B
Class A Units Class B Units Units
------------------ ----------------- ------------------
Number Value Number Value Total Number Value
------- -------- ------ -------- -------- ------- --------
Balances, December 31, 1998 .............................. 23,993 $(51,359) -- $ 6,223 $(45,136) 14,070 $ 51,750
Issuance of common stock in conversion of outstanding
units .................................................. (23,993) 80,825 -- 11,854 51,750 (14,070) (51,750)
Issuance of common stock through initial public offering,
net of issuance costs of $9,904 ........................ -- -- -- -- 107,396 -- --
Unearned employee stock-based compensation ............... -- 830 -- -- -- -- --
Amortization of unearned stock-based compensation ........ -- -- -- -- 244 -- --
Warrants issued in exchange for services ................. -- 530 -- -- 530 -- --
Net income ............................................... -- 12,184 7,145 40,234 -- --
Distributions to members ................................. -- (43,010) -- (25,222) (68,232) -- --
------ -------- --- -------- -------- ------- --------
Balances, December 31, 1999 .............................. -- $ -- -- $ -- $ 86,786 -- $ --
Issuance of common stock through employee stock purchase
plan ................................................... -- -- -- -- 353 -- --
Issuance of common stock through exercise of warrants .... -- -- -- -- -- -- --
Issuance of common stock on acquisition of MSI
Communications, Inc. ................................... -- -- -- -- 2,500 -- --
Amortization of unearned stock-based compensation ........ -- -- -- -- 367 -- --
Net income ............................................... -- -- -- -- 24,491 -- --
------ -------- --- -------- -------- ------- --------
Balances, December 31, 2000 .............................. -- $ -- $ -- $114,497 -- $ --
Issuance of common stock through employee stock purchase
plan ................................................... -- -- -- -- 580 -- --
Issuance of contingent common stock on acquisition of MSI
Communications, Inc. ................................... -- -- -- -- 1,842 -- --
Warrants issued in exchange for services ................. -- -- -- -- 236 -- --
Amortization of unearned stock-based compensation ........ -- -- -- -- 148 -- --
Foreign currency translation adjustment .................. -- -- -- -- (73) -- --
Net income ............................................... -- -- -- -- 14,786 -- --
------ -------- --- -------- -------- ------- --------
Balances, December 31, 2001 .............................. -- $ -- -- $ -- $132,016 -- $ --
====== ======== === ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
SOMERA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
-------------------------------
2001 2000 1999
-------- -------- ---------
Cash flows from operating activities:
Net income ...................................................................... $ 14,786 $ 24,491 $ 40,234
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .............................................. 5,038 1,015 401
Provision for doubtful accounts ............................................ 592 1,778 578
Provision for excess and obsolete inventories .............................. 2,974 3,062 1,258
Deferred tax provision (benefit) ........................................... 521 (54) (18,726)
Amortization of loan fees .................................................. -- -- 1,100
Warrants issued in exchange for services ................................... 236 -- 530
Training costs financed by capital lease ................................... -- -- 65
Amortization of stock-based compensation ................................... 148 367 244
Forgiveness of loans to officers ........................................... 89 75 37
Loss on disposal of assets ................................................. -- -- 5
Changes in operating assets and liabilities:
Accounts receivable ................................................... (4,652) (18,811) (9,933)
Inventories ........................................................... (2,375) (13,077) (15,577)
Other current assets .................................................. (340) (518) (908)
Accounts payable ...................................................... 4,587 (513) 17,735
Accrued compensation .................................................. (122) 816 1,211
Deferred revenue ...................................................... 4,550 -- --
Other accrued liabilities ............................................. 975 (1,282) 1,743
Income taxes payable .................................................. 5,219 (508) 508
-------- -------- ---------
Net cash provided by (used in) operating activities .............. 32,226 (3,159) 20,505
-------- -------- ---------
Cash flows from investing activities:
Acquisition of property and equipment ........................................... (4,706) (6,129) (599)
Acquisition of business, net of cash acquired ................................... (6,336) (10,568) --
Loans to officers ............................................................... (300) (300) (1,951)
Repayment of loan to officer .................................................... -- 425 --
Decrease in other assets ........................................................ 45 8 --
-------- -------- ---------
Net cash used in investing activities ............................ (11,297) (16,564) (2,550)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from term loan, net of fees ............................................ -- -- 48,900
Repayment of term loan .......................................................... -- -- (50,000)
Borrowings on line of credit .................................................... -- -- 9,500
Repayment of line of credit ..................................................... -- (1,026) (9,500)
Payment of capital lease ........................................................ (180) (830) --
Proceeds from employee stock purchase plan ...................................... 580 353 --
Proceeds from initial public offering, net of issuance costs .................... -- -- 107,396
Repayment of notes payable ...................................................... -- -- (3,457)
Distributions to members ........................................................ -- -- (68,232)
-------- -------- ---------
Net cash provided by (used in) financing activities 400 (1,503) 34,607
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents ................................. 21,329 (21,226) 52,562
Effect of exchange rate changes on cash and cash equivalents ......................... (73) -- --
Cash and cash equivalents, beginning of year ......................................... 33,266 54,492 1,930
-------- -------- ---------
Cash and cash equivalents, end of year ............................................... $ 54,522 $ 33,266 $ 54,492
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ........................................ $ 64 $ 136 $ 1,081
======== ======== =========
Income taxes paid ............................................................... $ 4,815 $ 18,974 $ 815
======== ======== =========
Fixed assets acquired under capital lease ....................................... $ -- $ 258 $ 765
======== ======== =========
Issuance of common stock in acquisition of business ............................. $ 1,842 $ 2,500 $ --
======== ======== =========
Conversion of mandatorily redeemable Class B units to common stock .............. $ -- $ -- $ 51,750
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
30
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Formation and Business of the Company:
Somera Communications, LLC. ("Somera") was formed as a Limited Liability
Company in 1995 under the laws of the State of California. Somera
Communications, Inc. ("Somera, Inc.") was formed in August 1999 and is
incorporated under the laws of the State of Delaware. Concurrent with the
closing of Somera, Inc.'s initial public offering on November 12, 1999, each
member of Somera received one share of Somera, Inc. in exchange for each unit
held and Somera, Inc. assumed the assets, liabilities and the operations of
Somera. The historical results of Somera have been presented as a predecessor
business of Somera, Inc. as no change in control occurred as a result of this
transaction. The term Company in these financial statements refers to both
Somera and Somera, Inc.
The Company provides telecommunications operators with equipment sourcing
and services. The Company provides customers with a combination of new and
redeployed equipment.
Note 2 - Summary of Significant Accounting Policies:
Basis of Presentation
The Company's fiscal years reported are the 52- or 53-week periods ending
on the Sunday nearest to December 31. Fiscal years 2001, 2000 and 1999 comprised
the 52-week periods ended on December 30, 2001, December 31, 2000 and January 2,
2000, respectively.
Principles of Consolidation
The Company acquired MSI Communications, Inc., In October 2000, formed
Somera Communications B.V., incorporated in The Netherlands, in November 2000,
and formed Somera Communications Pte Ltd., incorporated in Singapore, in August
2001. The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Specifically, estimates are used for, but not limited to the accounting
for doubtful accounts receivable, slow-moving and obsolete inventory, sales
returns reserves, valuation of goodwill and purchased intangibles and deferred
taxes. Actual results could differ from those estimates.
Revenue Recognition
Substantially all of the Company's revenue is derived from the sale of
products. Revenue is recognized upon delivery of product by the Company provided
that, at the time of delivery, there is evidence of a contractual arrangement
with the customer, the fee is fixed or determinable, collection of the resulting
receivable is reasonably assured and there are no significant remaining
obligations. Delivery occurs when title and risk of loss transfer to the
customer, generally at the time the product is shipped to the customer.
The Company also generates some services revenue in connection with
equipment sales. Revenue for transactions that include multiple elements such as
equipment and services is allocated to each element based on its relative fair
value (or in the absence of fair value, the residual method) and recognized when
the revenue recognition criteria have been met for each element. The Company
recognizes revenue for delivered elements only when the following criteria are
satisfied: (1) undelivered elements are not essential to the functionality of
delivered elements, (2) uncertainties regarding customer acceptance are
resolved, and (3) the fair value for all undelivered elements is known. Through
2001, revenue from services represented less than 5% of total revenue.
31
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue is deferred when customer acceptance is uncertain, when significant
obligations remain, or when undelivered elements are essential to the
functionality of the delivered products. A reserve for sales returns and
warranty obligations is recorded at the time of shipment and is based on the
Company's historical experience.
Income Taxes
Income tax expense comprises the tax payable for the period and the change
during the period in deferred tax assets and liabilities. Deferred income taxes
are determined based on the difference between the financial reporting and tax
bases of assets and liabilities using enacted rates in effect during the year in
which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
The Company became a taxable entity on November 12, 1999. Prior to that
date, Somera was treated as a partnership for federal and state income tax
purposes. Consequently, federal income taxes were not payable, or provided for,
by Somera. Somera's members were taxed individually on their share of Somera's
earnings. Somera's net income or loss was allocated among the members in
accordance with the regulations of Somera.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its temporary cash with three high
credit quality financial institutions in the United States. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
requires no collateral.
For the year ended December 31, 2001, one customer accounted for 16.1% of
net revenue and two customers each accounted for 14% of accounts receivable at
December 31, 2001. For the year ended December 31, 2000, one customer accounted
for 11.3% of net revenue and no customer accounted for more than 10% of accounts
receivable. No individual customer accounted for more than 10% of net revenue or
accounts receivable for the year ended December 31, 1999.
One supplier accounted for 11.3% of equipment purchases in the year ended
December 31, 2001. Two suppliers accounted for 15.9% and 11.8% of equipment
purchases in the year ended December 31, 2000. No supplier accounted for 10% or
more of equipment purchases in the year ended December 31, 1999.
Foreign Currency Translation
The Company considers the local currency to be the functional currency for
its international subsidiaries. Assets and liabilities denominated in foreign
currencies are translated using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average exchange rates prevailing during
the year. Translation adjustments resulting from this process are charged or
credited to accumulated other comprehensive loss.
Foreign currency transaction gains and losses, which to date have not been
material, are included in the statement of operations.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, and accounts payable
approximate fair value due to their short-term maturities.
32
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with
remaining maturity of three months or less at the date of purchase to be cash
equivalents.
Inventories
Inventories, which are comprised of finished goods held for resale,
including redeployed equipment, are stated at the lower of cost (determined on
an average cost basis) or net realizable value. Costs may include refurbishment
costs associated with repairing and reconfiguring redeployed equipment held for
resale. Inventories are stated net of reserves for obsolete and slow moving
items.
Property and Equipment
Property and equipment are recorded at cost and are stated net of
accumulated depreciation. Depreciation is recorded using the straight-line
method over the estimated useful lives of the assets, ranging from three to
seven years. Leasehold improvements are amortized over the shorter of the
estimated useful life of the asset or remaining lease term on a straight-line
basis.
Expenditures for maintenance and repairs are charged to expense as
incurred. Additions, major renewals and replacements that increase the
property's useful life are capitalized. Gains and losses on dispositions of
property and equipment are included in net income.
During 1999 the Company adopted the provisions of Accounting Standards
Executive Committee ("AcSEC") Statement of Position ("SOP") 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." Any
costs capitalized are depreciated on a straight-line basis over the lesser of
the estimated useful life of three years or the term of the lease.
Intangible Assets
Intangible assets consist of acquired workforce and goodwill related to the
Company's acquisition of MSI Communications, Inc. and a customer contract and
goodwill related to the acquisition of the equipment repair business and certain
assets and assumption of certain liabilities of Asurent Technologies, Inc. The
customer contract is amortized on a straight-line basis over its estimated
economic life of eighteen months.
Impairment of Intangibles and Long-Lived Assets
The Company assesses the impairment of identifiable intangibles, goodwill
and fixed assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important which could
trigger an impairment review include, but are not limited to, significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of use of the acquired assets or the
strategy for the Company's overall business, significant negative industry or
economic trends, significant decline in the Company's stock price for a
sustained period, and the Company's market capitalization relative to net book
value. When the Company determines that the carrying value of long-lived assets
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, the Company measures any impairment based on a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in the Company's current business model.
33
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based Compensation
The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and its
interpretations in accounting for its employee stock options, and presents
disclosure of pro forma information required under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Stock and other equity instruments issued to nonemployees is
accounted for in accordance with SFAS 123 and Emerging Issues Task Force No.
96-18 or EITF 96-18, "Accounting for Equity Instruments Issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services" and
valued using the Black-Scholes option pricing model.
The Company amortizes stock based compensation arising from certain
employee and non-employee stock option grants over the vesting periods of the
related options, generally four years using the method set out in Financial
Accounting Standards Board Interpretation No. 28 ("FIN 28"). Under the
FIN 28 method, each vested tranche of options is accounted for as a separate
option grant awarded for past services. Accordingly, the compensation expense is
recognized over the period during which the services have been provided. This
method results in higher compensation expense in the earlier vesting periods of
the related options.
Shipping and Handling
The Company accounts for shipping and handling fees and costs in accordance
with EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." Shipping
and handling fees charged to customers are included in net revenue and the
related costs are included in cost of net revenue.
Advertising and Promotional Costs
The Company expenses advertising and promotional costs as they are
incurred. Advertising expense for 2001, 2000 and 1999, was $219,000, $247,000
and $20,000, respectively.
Net Income Per Share
Basic net income per share is computed by dividing the net income for the
period by the weighted average number of shares outstanding during the period.
Diluted net income per share is computed by dividing the net income for the
period by the weighted average number of shares and equivalent shares
outstanding during the period. Equivalent shares, composed of shares issuable
upon the exercise of options and warrants, are included in the diluted net
income per share computation to the extent such shares are dilutive. A
reconciliation of the numerator and denominator used in the calculation of basic
and diluted net income per share follows (in thousands, except per share data):
Year Ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Numerator
Net income ........................................ $14,786 $24,491 $40,234
Denominator
Weighted average shares--basic .................... 48,260 47,928 39,408
Dilutive effect of options and warrants to purchase
shares and escrow shares ....................... 365 401 76
------- ------- -------
Weighted average shares--diluted ....................... 48,625 48,329 39,484
------- ------- -------
Net income per share--basic ............................ $ 0.31 $ 0.51 $ 1.02
======= ======= =======
Net income per share--diluted .......................... $ 0.30 $ 0.51 $ 1.02
======= ======= =======
34
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2001, 404,478 and 127,581 shares of common
stock were excluded from the basic and fully diluted calculations of net income,
respectively. For the year ended December 31, 2000, 404,478 and 288,913 shares
of common stock were excluded from the basic and fully diluted calculations of
net income, respectively. These shares are considered contingent as they were
issued in connection with the MSI acquisition and held in escrow until certain
contingencies are resolved. In addition, for the years ended December 31, 2001,
2000 and 1999, options to purchase 5,001,518, 182,750 and 2,432,250 shares of
common stock were excluded from the fully diluted calculation as their effect
would be anti-dilutive.
Comprehensive Income
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. Foreign currency translation
losses of $73,000 resulted in total comprehensive income of $14,713,000 for the
year ended December 31, 2001. There was no difference between the Company's net
income and its total comprehensive income for the years ended December 31, 2000
and 1999.
Reclassifications
Certain financial statement items have been reclassified to conform to the
current year's presentation. These reclassifications had no impact on previously
reported net earnings.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 ("SFAS 141") "Business Combinations" and SFAS No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets." SFAS 141 requires business combinations
initiated after June 30, 2001, to be accounted for using the purchase method of
accounting, and broadens the criteria for recording intangible assets separately
from goodwill. Recorded goodwill and intangibles will be evaluated against these
new criteria and may result in certain intangibles being subsumed into goodwill,
or alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written-down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The Company is required to adopt the provisions of SFAS 142
on January 1, 2002. In the year ended December 31, 2001, the Company recorded
approximately $1,399,000 of amortization expense on goodwill and acquired
workforce which would not have been recognized if this standard were in effect
for the current year. For business combinations initiated after June 30, 2001,
the Company will follow the non-amortization method under SFAS 142.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses significant
issues relating to the implementation of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and develops a single accounting method under which long-lived assets that are
to be disposed of by sale are measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. The
Company is currently assessing the impact of SFAS 144 on its financial position
and results of operations.
35
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3 - Acquisitions
MSI Communications, Inc.
On October 17, 2000, the Company acquired all of the outstanding shares of
MSI Communications, Inc. ("MSI"), a data networking equipment sales and services
company, for $10.6 million in cash including acquisition costs, and 693,391
shares of common stock issued to MSI shareholders and held in an escrow account.
The acquisition has been accounted for as a purchase business combination and
the results of operations of MSI have been included in the consolidated
financial statements since the date of acquisition. The shares to be released
from escrow may be reduced based on resolution of certain contingencies. As of
the acquisition date, 288,913 shares, valued at $2,500,000, were expected to be
earned and were included in the allocated purchase price. The remaining 404,478
shares, valued at $3,500,000, were to be earned based on certain financial
performance and employee retention milestones as of December 31, 2001 and 2002,
resulting in an increase to the purchase price resulting in an increase in
goodwill. The share values were calculated based on the average closing price of
the last five business days prior to the acquisition date.
As of December 31, 2001, both the financial performance and employee
retention milestones for 2001 were achieved. As a result, 225,865 shares valued
at $1,842,000, using the year-end closing price, were earned, resulting in an
increase in the purchase price as detailed below.
The purchase price was allocated to the net tangible and identifiable
intangible assets acquired and liabilities assumed based on their estimated fair
values at the date of the acquisition as determined by management. The excess of
the purchase price over the fair value of the net identifiable assets was
allocated to goodwill. The additional 225,865 shares released from escrow due to
the resolution of certain contingencies, valued using the year-end closing
price, increased the purchase price by approximately $1,842,000, resulting in an
increase in goodwill of the same amount. The total purchase price including the
adjustment for achieving the year-end 2001 milestones was allocated as follows
(in thousands):
Current assets .................................................... $ 3,317
Property and equipment, net ....................................... 187
Deferred tax assets ............................................... 898
Assumed liabilities ............................................... (3,453)
Acquired workforce ................................................ 690
Goodwill .......................................................... 13,534
--------
Total purchase price .............................................. $ 15,173
========
The amortization of acquired workforce and goodwill was computed over three
and ten years, respectively, on a straight-line basis for the years ended
December 31, 2001 and 2000. Pursuant to SFAS 142 guidelines, for years
subsequent to December 31, 2001, the carrying values of these assets will be
reviewed for impairment on an annual basis, but no amortization will be
recorded.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and MSI as if the acquisition
had occurred January 1, 1999.
Year Ended December 31,
--------------------------
(in thousands except for per share data) 2000 1999
----------- -----------
Net revenue $221,403 $139,826
Net income $ 23,189 $ 38,861
Net income per share - basic $ 0.48 $ 0.99
Net income per share - diluted $ 0.48 $ 0.98
36
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as the reversal of a
one-time acquisition related compensation charge and amortization expense as a
result of goodwill and other intangible assets. They do not purport to be
indicative of the results of operations which actually would have occurred had
the combination been in effect on January 1, 1999, or of future results of
operations of the consolidated entities.
Asurent Technologies, Inc.
On October 10, 2001 the Company acquired the equipment repair business and
certain assets and liabilities of Asurent Technologies, Inc. ("Asurent"), a
telecommunications equipment sales and repair business, for $6,336,000 in cash
including acquisition costs. The Company followed the guidance of SFAS 141 for
this acquisition. The purchase price was allocated to the net tangible and
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition as determined by management.
The excess of the purchase price over the fair value of the net identifiable
assets was allocated to goodwill. The purchase price was allocated as follows:
Current assets ..................................................... $ 1,819
Property and equipment, net ........................................ 428
Assumed liabilities ................................................ (965)
Customer contract .................................................. 845
Goodwill ........................................................... 4,209
-------
Total purchase price ............................................. $ 6,336
=======
The amortization of the customer contract is being computed over the
calculated length of the contract of eighteen months on a straight-line basis.
In accordance with SFAS 142, no amortization has been recorded on the Asurent
goodwill. Goodwill is deductible for tax purposes over a fifteen year period.
Pro forma results of operations for the Asurent acquisition have not been
presented because the effects of the acquisition were not material.
Note 4--Balance Sheet Accounts (in thousands):
Property and Equipment, Net December 31,
--------------------
2001 2000
-------- -------
Computer and telephone equipment ........................ $ 10,366 $ 7,335
Office equipment and furniture .......................... 1,204 366
Warehouse equipment ..................................... 486 642
Leasehold improvements .................................. 1,972 510
-------- -------
14,028 8,853
Less accumulated depreciation and amortization .......... (5,341) (1,745)
-------- -------
$ 8,687 $ 7,108
======== =======
Depreciation and amortization expense for the years ended December 31,
2001, 2000 and 1999, amounted to $3,554,000, $713,000 and $401,000,
respectively.
Property and equipment included $258,000 under capital leases at December
31, 2000, with related accumulated depreciation of $95,000. There was no
property or equipment under capital leases at December 31, 2001.
37
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets, Net December 31,
----------------------
2001 2000
-------- --------
Acquired workforce ................................. $ 690 $ 690
Customer contract .................................. 845 --
Goodwill ........................................... 17,744 11,693
-------- --------
19,279 12,383
Less accumulated amortization ...................... (1,786) (302)
-------- --------
$ 17,493 $ 12,081
======== ========
Inventory, Net December 31,
----------------------
2001 2000
-------- --------
Finished goods ......................................... $ 33,250 $ 31,879
Less reserve for excess and obsolete inventory ......... (3,241) (2,163)
-------- --------
$ 30,009 $ 29,716
======== ========
Note 5--Long-Term Debt:
In 1998, the Company had notes payable to related parties representing
amounts payable to two of the Company's members totaling $619,000 at December
31, 1998. Also included in notes payable to related parties as of December 31,
1998 was an amount of $1,000,000 issued in March 1998 to an outside partnership,
of which a member is a general partner. Notes payable bore interest at rates
varying between 8% and 13% per annum. All of the notes were repaid in September
1999.
On January 12, 1999, the Company replaced its then existing $2,500,000
credit facility with a new revolving line of credit with the same bank. The
facility included a fixed amount of $2,000,000 plus an amount based on a
percentage of eligible accounts receivable and inventory with a maximum amount
of $17,000,000 available.
On August 31, 1999, the Company entered into an agreement under which a
syndicate of banks, led by Fleet National Bank provided a $50,000,000 term loan
and $15,000,000 revolving loan facility, which replaced the previous facility.
Proceeds, net of issuance costs of approximately $1,100,000, from the term loan
were $48,900,000. The issuance costs were capitalized and were being amortized
to interest expense over the term of the loan using the effective interest
method. The term loan and balance outstanding on the revolving loan facility
were repaid in November 1999 using a portion of the proceeds from the Company's
initial public offering. As a result, the Company wrote off the balance of the
capitalized issuance costs.
On February 9, 2001, the Company entered into a credit facility with Wells
Fargo HSBC Trade Bank which provides for issuances of letters of credit,
primarily for procurement of inventory. On September 6, 2001, the agreement was
amended to increase the facility from $3,000,000 to $4,000,000. The credit
agreement requires facility fees which are not significant, as well as the
maintenance of certain minimum net worth and other financial ratios. As of
December 31, 2001, the Company had $232,000 in letters of credit outstanding.
The Company had no long-term debt as of December 31, 2001.
Note 6--Commitments:
The Company is obligated under various operating leases for both office and
warehouse space. The remaining lease terms range in length from one to four
years. Rent expense, net of sublease income, for the years ended December 31
2001, 2000 and 1999, was $2,296,000, $1,101,000 and $579,000, respectively.
38
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments, net of sublease proceeds of $432,000 in 2002
and $110,000 in 2003, under non-cancelable operating leases at December 31, 2001
are as follows (in thousands):
Operating
Leases
------
2002 ............................................................... $2,355
2003 ............................................................... 2,162
2004 ............................................................... 1,302
2005 ............................................................... 656
------
Total minimum lease payments ....................................... $6,475
======
Under the terms of the lease agreements, the Company is also responsible
for internal maintenance, utilities and a proportionate share (based on square
footage occupied) of property taxes. The Company is also exposed to credit risk
in the event of default of the sublessee, because the Company is still liable to
meet its obligations under the terms of the original lease agreement.
Note 7--Stockholders' Equity/Members' Deficit:
Somera's capital included two classes of units--Class A and Class B. At
December 31, 1998 there were 23,993,000 Class A units and 14,070,000 Class B
mandatorily redeemable units outstanding. Each unit represented the members'
proportionate allocation of net income or net loss.
On July 23, 1998, the Company authorized the issuance and sale of an
aggregate of 14,070,000 Class B units, which represented approximately 37.0% of
the then outstanding units. Consideration of $51,750,000 was received in cash
for the sale of these units. The Company then authorized the repurchase of an
aggregate of 12,821,000 Class A units and an aggregate of 1,249,000 Class B
units for an aggregate amount of $51,750,000. Each of the remaining 2,501,000
Class B units were exchanged for one Class A unit.
The Class A units participated in the net income of the Company based on
their percentage ownership. In addition, the holder of each Class A unit was
entitled to one vote per unit. The Class B units issued in July 1998 differed
from the Class A units as follows:
(a) On a change in ownership the Class B unit holders could elect to
redeem all or any part of the Class B units at an amount equal to the
greater of:
(i) the original cost thereof; or
(ii) an amount equal to the number of Class B units to be
redeemed multiplied by the maximum consideration payable
with respect to any unit in such a change of ownership.
(b) In the event of the bankruptcy of the Company, all of the Class B
units were subject to immediate redemption at a price equal to the original
cost thereof.
(c) The Class B units converted on the closing of a firm commitment
underwritten public offering of the Company's (or a corporate successor's)
equity securities resulting in proceeds to the Company or such corporate
successor (net of underwriting discounts and commissions and related
offering expenses) of at least $30 million at a price per share to the
public of at least 200% of the original cost of each Class B unit.
(d) In a winding up or liquidation of the Company, the Class B units
were to be paid out in preference to the Class A units up to the amount of
the original cost of the Class B units.
39
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The members' liability was limited to the total balance held in the
members' capital account.
Stock Splits
In May 1999, the Company effected a 2,500-for-1 split of the outstanding
Class A and Class B units. In September 1999 the Company approved a 3-for-2
split of the Class A and B units. The effect of these splits has been
retroactively reflected throughout the financial statements.
Initial Public Offering
In November 1999, Somera, Inc. completed an initial public offering of
9,775,000 shares of common stock, at $12.00 per share, receiving proceeds, net
of underwriter's commissions and issuance costs, of $107,396,000. Concurrent
with the closing of the initial public offering, each outstanding unit of Somera
was exchanged for one share of Somera, Inc.'s common stock, and the assets,
liabilities and operations of Somera were assumed by Somera, Inc.
Warrants
In May 1999, warrants exercisable into 95,155 Class A units were issued in
consideration for recruitment services. The warrants became fully exercisable
upon completion of the Company's initial public offering. The warrants are
exercisable at $7.57 per share and have a two year term. The fair value of the
warrants of approximately $193,000 has been recorded as an expense in 1999. The
fair value of these warrants was estimated using the Black-Scholes option
pricing model and the following assumptions: dividend yield of 0%; volatility of
40%; risk free interest rate of 5.58% and a term of two years. In May 2000, the
warrants were exercised in a cash-less transaction resulting in the issuance of
26,634 shares.
In July 1999, the Company issued warrants to purchase 112,500 shares of
common stock in exchange for services. The warrants were immediately vested. The
fair value of the warrants of approximately $337,000 has been recorded as an
expense in 1999. The fair value of these warrants was estimated using the
Black-Scholes option pricing model and the following assumptions: dividend yield
of 0%; volatility of 40%; risk free interest rate of 5.65% and a term of two
years. These warrants were not exercised and expired in July, 2001.
In September 2001, the Company issued warrants to purchase 170,250 shares
of common stock in exchange for recruitment services. The warrants were
immediately vested. The fair value of the warrants of approximately $236,000 has
been recorded as an expense in 2001. The fair value of these warrants was
estimated using the Black-Scholes option pricing model and the following
assumptions: dividend yield of 0%; volatility of 40%; risk free interest rate of
3.30% and a term of three years.
1999 Stock Option Plans
In May 1999 the Company adopted the 1999 unit option plan (the "Unit Plan")
under which 2,003,000 Class A units were reserved for issuance of stock options
to employees, directors, or consultants under terms and provisions established
by the Board of Managers. On October 19, 1999 the Board of Managers increased
the number of units issuable under the unit option plan to a total of 3,400,000
units.
In September 1999 the Company adopted the 1999 Stock Option Plan (the
"Plan") under which 6,750,000 common shares were reserved for the issuance of
stock options to employees, directors and consultants. The primary purpose of
the Plan is to attract and retain the best available personnel and to provide
additional incentive to the grantees. Upon the completion of the initial public
offering in November 1999, options granted under the Unit Plan were converted to
options to purchase an equivalent number of common shares. Under the terms of
the Plan, incentive options may be granted to employees, and nonstatutory
options may be granted to employees, directors and
40
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consultants, at prices no less than 100% and 85%, respectively, of the fair
market value of the common shares at the date of grant. Options granted under
the Plan vest at a rate of 25% after one year with the remaining vesting evenly
over the next three years. The options expire ten years from the date of grant.
In July 1999, the Company issued stock options to two officers and one
outside director resulting in unearned stock-based compensation of $830,000,
which is being amortized over the vesting period of the underlying options of
four years. Amortization expense associated with unearned stock-based
compensation totaled $148,000, $367,000 and $244,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
In January 2001, the Board approved the increase in the number of options
available for grant by 1,943,770 pursuant to the provisions of the Plan. This
represents the annual increase calculated as 4% of the total outstanding shares
as of the beginning of the fiscal year.
Activity under the Plan is set forth below:
Weighted
Average
Available Outstanding Exercise
For Grant Shares Price
--------- ----------- --------
Shares reserved at plan inception ....... 6,750,000
Options assumed from Unit Plan ....... (2,943,343) 2,943,343 $ 9.53
Options granted ...................... (150,000) 150,000 11.00
---------- --------- -------
Balances, December 31, 1999 ............. 3,656,657 3,093,343 $ 9.60
---------- --------- -------
Options granted ...................... (2,683,500) 2,683,500 $ 10.90
Options canceled ..................... 237,520 (237,520) 11.26
---------- --------- -------
Balances, December 31, 2000 ............. 1,210,677 5,539,323 $ 10.16
---------- --------- -------
Annual increase ...................... 1,943,770 -- --
Options granted ...................... (1,750,725) 1,750,725 $ 5.48
Options canceled ..................... 532,542 (532,542) 10.61
---------- --------- -------
Balances, December 31, 2001 ............. 1,936,234 6,757,506 $ 7.58
---------- --------- -------
At December 31, 2001, 2,422,083 options outstanding were exercisable.
During 1999, options to purchase 830,000 shares of the Company's common
stock, with a weighted average exercise price of $8.50 per share and a weighted
average fair value of $3.05 per share, were granted with exercise prices below
the estimated market value at the date of grant.
During 2001, 2000 and 1999, options to purchase 1,750,725, 2,683,500 and
2,263,343 shares of the Company's common stock, with weighted average exercise
prices of $5.48, $10.90 and $10.00 per share and weighted average fair values of
$3.66, $4.82 and $2.54 per share, respectively, were granted with exercise
prices equal to the estimated market value at the date of grant.
1999 Director Option Plan
In September 1999, the Company adopted the 1999 Director Option Plan (the
"Director Plan"), which provides for the grant of non-statutory stock options to
non-employee directors. The Director Plan has a term of ten years. A total of
300,000 shares of the Company's common stock, plus an annual increase equal to
the number of shares needed to restore the number of shares of common stock that
are available for grant under the Director Plan to 300,000 shares, have been
reserved for issuance under the Director Plan. As of December 31, 2001, no
options have been granted under the Director Plan.
41
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Executive Stock Option Agreements
In September 2001, the Company issued stock options to purchase 1,923,000
and 500,000 shares of common stock in two separate stock option agreements to
two officers of the Company. The options were granted with an exercise price
equal to the stock's fair market value on the date of grant. The options vest at
a rate of 25% after one year with the remaining vesting evenly over the
following three years thereafter. The options expire ten years from the date of
grant.
In September 2001, the Company issued stock options to purchase 824,000
shares of stock to an officer of the Company. The options were granted with an
exercise price equal to the stock's fair market value on the date of grant. The
options are time accelerated restricted stock awards which become fully vested
seven days prior to their expiration date, September 2007. The options are
subject to accelerated vesting if certain performance criteria are met.
The aggregate of the Company's options outstanding and currently
exercisable by exercise price at December 31, 2001 are as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------ ----------------------------------------
Weighted
Average Weighted
Remaining Average Weighted
Contractual Life Exercise Number Average
Exercise Price Outstanding in Years Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------- ----------- --------------
$4.50 - $6.30 4,555,975 8.97 $ 4.76 32,981 $ 5.38
$7.57 - $10.75 3,714,551 8.32 9.40 1,500,217 9.07
$11.00 - $13.50 1,733,980 7.94 11.08 888,885 11.06
---------- ---- ------ --------- ------
10,004,506 8.55 $ 7.58 2,422,083 $ 9.75
========== ==== ====== ========= ======
Employee Stock Purchase Plan
In September 1999, the Company adopted the 1999 Employee Stock Purchase
Plan (the "ESPP"), which provides eligible employees with an opportunity to
purchase the Company's common stock at a discount through accumulated payroll
deductions, during each six-month offering period. The price at which the stock
is sold under the ESPP is equal to 85% of the fair market value of the common
stock, on the first or last day of the offering period, whichever is lower. A
total of 300,000 shares of common stock have been reserved for the issuance
under the ESPP. In February and August 2001, 50,364 and 67,938 shares,
respectively, were issued under the ESPP, generating contributions of $580,000.
The weighted average estimated fair values of the ESPP awards issued during
fiscal 2001 and 2000 were $2.19 and $3.01 per share, respectively. In August
2000, 36,718 shares were issued under the plan generating contributions of
$353,000.
Pro-forma Stock-based Compensation
The Company has adopted the disclosure-only provisions of SFAS 123 for
option grants to employees. Had compensation cost been determined based on the
fair value at the grant date for the awards in 2001, 2000 and 1999 consistent
with the provisions of SFAS 123, the Company's net income for 2001, 2000 and
1999 would have been as follows (in thousands, except per share data):
42
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Net income--as reported .................... $ 14,786 $ 24,491 $ 40,234
Net income--as adjusted .................... $ 2,170 $ 19,088 $ 38,862
Net income per share--basic as reported .... $ 0.31 $ 0.51 $ 1.02
Net income per share--basic as adjusted .... $ 0.04 $ 0.40 $ 0.99
Net income per share--diluted as reported .. $ 0.30 $ 0.51 $ 1.02
Net income per share--diluted as adjusted .. $ 0.04 $ 0.39 $ 0.98
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS 123
using the following assumptions:
Employee Stock Option Plan Employee Stock Purchase Plan
-------------------------- ----------------------------
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Risk-free interest rate .......... 4.15% 5.88% 5.62% 4.22% 6.13%
Expected life (in years) ......... 5 5 5 0.50 0.50
Dividend yield ................... 0% 0% 0% 0% 0%
Expected volatility .............. 92% 40% 0% 79% 40%
The Company used a volatility factor of 0% for options granted while it was
a private company. The determination of fair value of all options granted
subsequent to the Company's initial public offering included an expected
volatility based on the volatility of similar public companies and the
volatility of the Company's common stock since its initial public offering, in
addition to the factors described in the preceding paragraph. Accordingly, the
above results may not be representative of future periods. All options
outstanding at December 31, 1999 were granted prior to the completion of the
Company's initial public offering.
Note 8--401(k) Savings Plan:
In February 1998, the Company adopted a 401(k) Savings Plan (the "Savings
Plan") which covers all employees. Under the Savings Plan, employees are
permitted to contribute up to 15% of their gross compensation not to exceed the
annual IRS limitation for any plan year ($10,500 in 2001). The Company matches
25% of employee contributions on the first 5% of their contributions for all
employees who receive less than 50% of their total compensation in the form of
incentive compensation. The Company made matching contributions of $144,000,
$55,000, and $24,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Note 9--Loans to Officers:
On July 12, 1999 the Company entered into a mortgage loan agreement under
which it advanced $600,000 to an officer of the Company. The mortgage loan has a
term of eight years, is interest free and is collateralized by the principal
residence of the officer. Under the terms of the mortgage loan the amount
advanced will be forgiven as to $50,000 on each of the first four anniversaries
of the note and $100,000 on each of the fifth through eighth anniversaries. The
loan can be forgiven in full in the event that the officer's employment is
either terminated without cause or is constructively terminated within 12 months
of a change in control of the Company. If the officer's employment with the
Company ceases for any other reason, including death or disability, the
remaining balance becomes repayable to the Company. The term of repayment is
dependent upon the reason for the officer's employment ceasing and ranges from
six to eighteen months from the date of termination of employment.
On October 20, 1999 the Company entered into a mortgage loan agreement
under which it advanced $1,351,000 to an officer of the Company. The mortgage
loan is interest free, collateralized by the principal residence of the officer,
and had an original term of six months. Notwithstanding the foregoing, $300,000
of the amount advanced will be forgiven over eight years as to $25,000 on each
of the first four anniversaries of the note and $50,000 on each of the fifth
through eighth anniversaries. In June 2000, the officer repaid $425,000 of the
principal balance. In September 2000, the Company re-loaned $300,000 to the
officer on an interest free basis. The due date
43
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the new loan and remaining loan principal on the original loan, excluding the
amount to be forgiven, were extended to October 19, 2003.
On May 1, 2001, the Company entered into a mortgage loan agreement under
which it advanced $300,000 to an officer of the Company. The mortgage loan has a
term of eight years, is interest free and is collateralized by the principal
residence of the officer. Under the terms of the mortgage loan the amount
advanced will be forgiven as to $22,500 on the first anniversary of the note,
$25,000 on each of the second and third anniversaries of the note, $50,000 on
each of the fourth through seventh anniversaries and $27,500 the final year. If
the officer's employment with the Company ceases for any reason, the remaining
balance becomes repayable to the Company. The term of repayment is dependent on
the reason for the officer's termination, and ranges from one to six months from
the date of termination of employment.
As a result of the above, the Company recorded compensation charges of
$89,000, $75,000 and $37,000, equal to the total amounts forgiven in 2001, 2000
and 1999. The amounts scheduled to be repaid or forgiven during the year ended
December 31, 2002 have been included in other current assets.
Note 10--Income Taxes:
The provision for (benefit from) income taxes for the years ended December
31, 2001, 2000 and 1999 consist of the following (in thousands):
Year Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Current:
Federal ..................................................... $ 8,120 $ 13,969 $ 1,071
State ....................................................... 2,264 3,822 252
Foreign ..................................................... 23 -- --
-------- -------- --------
10,407 17,791 1,323
Deferred:
Federal--tax effects of incorporating flow-through entity ... -- -- (16,730)
State--tax effects of incorporating flow-through entity ..... -- -- (2,789)
Federal--post incorporation ................................. 464 (59) 667
State--post incorporation ................................... 57 5 126
-------- -------- --------
521 (54) (18,726)
-------- -------- --------
$ 10,929 $ 17,737 $(17,403)
======== ======== ========
As a limited liability company, Somera was not subject to federal or state
income taxes prior to November 12, 1999. Concurrent with the assumption by
Somera, Inc. of the assets liabilities and operations of Somera, a deferred tax
asset of $19,018,000, arising from the difference in the tax and book basis of
Somera's net assets, was recorded in net income on November 12, 1999.
44
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net deferred tax asset as of December 31, 2001 and 2000 was comprised
of the following (in thousands):
December 31,
--------------------
2001 2000
-------- --------
Deferred tax asset (liability):
Property and equipment ............................................... $ (379) $ (178)
Reserves and accruals ................................................ 3,606 2.558
Difference in tax and book basis of net assets upon conversion, net .. 15,543 16,889
Net operating loss carryforward ...................................... 555 671
Intangible assets .................................................... (168) (262)
-------- --------
Total deferred tax asset ........................................ 19,157 19,678
Valuation allowance .................................................. -- --
-------- --------
Net deferred tax asset .......................................... $ 19,157 $ 19,678
======== ========
A reconciliation of the actual income tax rate to the federal statutory
rate follows:
Year Ended December 31,
-------------------------
2001 2000 1999
----- ----- -------
Tax at federal statutory rate ........................................ 35.00% 35.00% 34.00%
State taxes (net of federal tax benefit) ............................. 5.95% 6.11% 7.89%
Difference in tax and book basis of net assets upon conversion, net .. -- -- (512.85)%
Non-deductible goodwill .............................................. 1.59% -- --
Other ................................................................ (.04)% 0.89% 1.67%
----- ----- -------
Effective tax rate ................................................... 42.50% 42.00% (469.29)%
----- ----- -------
The domestic and foreign components of earnings before taxes are:
Year Ended December 31,
----------------------------------
2001 2000 1999
-------- -------- --------
U.S. ................................................................. $ 25,650 $ 42,228 $ 22,831
Non-U.S .............................................................. 65 -- --
-------- -------- --------
$ 25,715 $ 42,228 $ 22,831
======== ======== ========
At December 31, 2001 the Company has federal and state net operating loss
carryforwards of approximately $1.2 million and $1.8 million, respectively,
available to offset future regular and alternative minimum taxable income. The
federal carryforwards will begin to expire in 2019 and the state carryforwards
will begin to expire in 2007 if not utilized.
The Company has not provided for U.S. Federal income taxes on $65,000 of
non-U.S subsidiaries' undistributed earnings as of December 31, 2001. The
Company intends to invest these earnings indefinitely in operations outside the
United States.
Note 11--Segment Information:
The Company has adopted Statement of Financial Accounting Standards No.
131, ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," effective January 1, 1998. The Company markets products and
related services to customers primarily in the United States, Canada, Europe,
Asia, and Latin America.
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available that is evaluated by
the chief operating decision maker or decision making group to make decisions
about how to allocate resources and assess performance. The Company's chief
operating decision maker is the chief executive officer. To date the Company has
reviewed its operations in principally two segments. The chief operating
decision maker assesses performance based on the gross profit generated by each
segment.
45
SOMERA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company does not report operating expenses, depreciation and
amortization, interest expense, capital expenditures or identifiable net assets
by segment. All segment revenues are generated from external customers. Segment
information is as follows (in thousands):
New Redeployed Total
------- ---------- --------
Year ended December 31, 1999
Revenue ................................... $44,316 $ 82,545 $126,861
------- -------- --------
Gross profit .............................. $ 7,410 $ 36,690 $ 44,100
------- -------- --------
Year ended December 31, 2000
Revenue ................................... $90,713 $120,479 $211,192
------- -------- --------
Gross profit .............................. $16,913 $ 59,661 $ 76,574
------- -------- --------
Year ended December 31, 2001
Revenue ................................... $90,879 $130,377 $221,256
------- -------- --------
Gross profit .............................. $17,658 $ 55,120 $ 72,778
------- -------- --------
Net revenue information by geographic area is as follows (in thousands):
Net Revenue
-----------
Year ended December 31, 1999:
United States.............................. $ 113,065
Canada .................................... 4,058
Latin America.............................. 7,662
Other...................................... 2,076
---------
Total................................. $ 126,861
=========
Year ended December 31, 2000:
United States.............................. $ 194,663
Canada .................................... 6,415
Latin America.............................. 6,640
Other ..................................... 3,474
---------
Total................................. $ 211,192
=========
Year ended December 31, 2001:
United States.............................. $ 199,809
Canada .................................... 4,421
Latin America.............................. 11,368
Europe .................................... 1,803
Asia ...................................... 3,060
Other ..................................... 795
---------
Total................................. $ 221,256
=========
Substantially all long-lived assets are maintained in the United States.
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference
to the information relating to the directors of the Registrant and compliance
with Section 16(a) of the Exchange Act that is contained in the Proxy Statement
relating to the Company's 2002 Annual Meeting of Stockholders scheduled to be
held on May 22, 2002, which will be filed with the SEC no later than 120 days
after the close of the fiscal year ended December 31, 2001.
The information required by this Item relating to the executive officers is
contained in Item 1 of Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the information relating to executive compensation that is contained in the
Proxy Statement relating to the Company's 2002 Annual Meeting of Stockholders
scheduled to be held on May 22, 2002, which will be filed with the SEC no later
than 120 days after the close of the fiscal year ended December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the information relating to security ownership of certain beneficial owners
and management that is contained in the Proxy Statement relating to the
Company's 2002 Annual Meeting of Stockholders scheduled to be held on May 22,
2002, which will be filed with the SEC no later than 120 days after the close of
the fiscal year ended December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the information relating to certain related party transactions that is
contained in the Proxy Statement relating to the Company's 2002 Annual Meeting
of Stockholders scheduled to be held on May 22, 2002, which will be filed with
the SEC no later than 120 days after the close of the fiscal year ended December
31, 2001.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements and Financial Statement Schedules.
2. List of Financial Statement Schedules.
II. Valuation and Qualifying Accounts and Reserves
3. Exhibits. The following exhibits are filed as part of, or incorporated
by reference into, this Report
Exhibit
Number Exhibit Title
- ------- --------------------------------------------------------------------------------------------
3.1(a) Amended and Restated Certificate of Incorporation of Somera Communications, Inc., a Delaware
corporation, as currently in effect.
3.2(a) Bylaws of Somera Communications, Inc., as currently in effect.
4.1(a) Specimen common stock certificate.
10.1(a) Form of Indemnification Agreement between Somera Communications, Inc. and each of its directors
and officers.
10.2(a) 1999 Stock Option Plan and form of agreements thereunder (as adopted September 3, 1999).
10.3(a) 1999 Employee Stock Purchase Plan (as adopted September 3, 1999).
10.4(a) 1999 Director Option Plan and form of agreements thereunder (as adopted September 3, 1999).
10.5(a) Loan Agreement by and between Somera Communications and Fleet National Bank, dated August 31,
1999.
10.6(a) Security Agreement by and between Somera Communications and Fleet National Bank, dated
August 31, 1999.
10.7(a) Employment Agreement between Somera Communications and Jeffrey Miller, dated May 6, 1999.
10.8(a) Employment Agreement between Somera Communications and Gary Owen, dated July 16, 1999.
10.9(a) Lease dated January 20, 1998 between Santa Barbara Corporate Center, LLC and Somera
Communications.
10.10(a) First Amendment to Lease, dated February 2, 1998, between Santa Barbara Corporate Center, LLC
and Somera Communications.
10.11(a) Second Amendment to Lease, dated February 1, 1999, between Santa Barbara Corporate Center, LLC
and Somera Communications.
10.12(a) Industrial/Commercial Lease, dated May 12, 1999, between Sunbelt Properties and Somera
Communications.
48
10.13(c) Second Amendment to Sublease, dated January 31, 2001, between GRC International, Inc. and Somera
Communications.
10.14(a) Form of Registration Agreement, between Somera Communications, Inc., and certain of its
stockholders.
10.15(c) Employment Agreement between Somera Communications and Brandt Handley, dated January 8, 2001.
10.16(c) Sub-Sublease, dated August 2, 2000, between EDS Information Services, L.L.C. and Somera
Communications, Inc.
10.17(c) Sublease Agreement, dated May 19, 2000, between Dames & Moore, Inc. and Somera Communications, Inc.
10.18(b) Stock Purchase Agreement, dated October 16, 2000 between the Somera Communications, Inc. and MSI Communications, Inc.
10.19(c) Lease, dated November 1, 2000 through October 31, 2005, between Somera Communications BV i.o. and
Stena Realty BV
10.20(c) Lease Agreement, dated November 1, 2000, between Jersey State Properties and Somera Communications,
Inc.
10.21(c) First Amendment to Lease Agreement, dated January 1, 2001, between Jersey State Properties and
Somera Communications, Inc.
10.22(c) Employment Agreement between Somera Communications, Inc. and Glenn Berger, dated October 8, 1999.
10.23(d) Credit Agreement by and between Somera Communications, Inc. and Wells Fargo HSBC Trade Bank, N.A.
dated February 9, 2001.
10.24(e) Employment Agreement between Somera Communications, Inc. and Dan Firestone.
10.25(e) Employment Agreement between Somera Communications, Inc. and Rick Darnaby.
10.26 Lease Agreement, dated July 10, 2000, between Endicott Company, LLC and Somera Communications, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
Notes:
(a) Incorporated by reference to the Company's Registration Statement on
Form S-1, filed September 10, 1999, as amended (File No. 333-86927).
(b) Incorporated by reference to the Company's Report on Form 8-K, filed
on October 27, 2000.
(c) Incorporated by reference to the Company's Report on Form 10-K, filed
on March 29, 2001.
(d) Incorporated by reference to the Company's Report on Form 10-Q, filed
on May 14, 2001.
(e) Incorporated by reference to the Company's Report on Form 10-Q, filed
on November 14, 2001.
(b) Reports on Form 8-K.
None.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 15th day of
March 2002.
Somera Communications, Inc.
/S/ RICK DARNABY
----------------------------------------------------
By: (Rick Darnaby, President and Chief Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints jointly and severally, Rick
Darnaby and Gary J. Owen, and each of them, as his attorney-in-fact, with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on March 15, 2002:
Signature Title
--------- -----
President, Chief Executive Officer
/s/ Rick Darnaby and Director
- ---------------------------------------- (Principal Executive Officer)
(Rick Darnaby)
/s/ Daniel A. Firestone Executive Chairman of the Board
- ----------------------------------------
(Daniel A. Firestone)
Chief Financial Officer and Assistant
/s/ Gary J. Owen Secretary (Principal Financial and
- ---------------------------------------- Accounting Officer)
(Gary J. Owen)
/s/ Gil Varon Director
- ----------------------------------------
(Gil Varon)
/s/ Walter G. Kortschak Director
- ----------------------------------------
(Walter G. Kortschak)
/s/ Peter Y. Chung Director
- ----------------------------------------
(Peter Y. Chung)
/s/ Barry Phelps Director
- ----------------------------------------
(Barry Phelps)
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Stockholders of
Somera Communications, Inc.
Our audits of the consolidated financial statements referred to in our
report dated January 29, 2002, appearing on page 26 of this Annual Report on
Form 10-K also included an audit of the financial statement schedule appearing
in Schedule II of this Annual Report on Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 29, 2002
Valuation and Qualifying Accounts and Reserves
----------------------------------------------
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
---------- ---------- ---------- ----------
Year ended December 31, 1999
Allowance for sales returns and warranty
obligations .................................. $ 285 $ 670 $ 485 $ 470
Allowance for doubtful accounts .............. 249 578 91 736
Allowance for excess and obsolete inventory .. 57 1,258 673 642
Year ended December 31, 2000
Allowance for sales returns and warranty
obligations .................................. $ 470 $3,380 $3,118 $ 732
Allowance for doubtful accounts .............. 736 1,778 1,184 1,330
Allowance for excess and obsolete inventory .. 642 3,062 1,541 2,163
Year ended December 31, 2001
Allowance for sales returns and warranty
obligations .................................. $ 732 $3,422 $3,160 $ 994
Allowance for doubtful accounts .............. 1,330 592 221 1,701
Allowance for excess and obsolete inventory .. 2,163 2,974 1,896 3,241