-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KEjd8c/9I3i0Xpd44LCSK46ev7Lip887iTXG9d9nsfmpkyKVSytxvP2GYsi0vhnv VDzQ7YKkmVP436Tl/ftwGg== 0000927356-00-000645.txt : 20000331 0000927356-00-000645.hdr.sgml : 20000331 ACCESSION NUMBER: 0000927356-00-000645 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRIER ACCESS CORP CENTRAL INDEX KEY: 0001018074 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 841208770 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24597 FILM NUMBER: 588864 BUSINESS ADDRESS: STREET 1: 5295 PEARL PARKWAY CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3032185500 MAIL ADDRESS: STREET 2: 5395 PEARL PKWY CITY: BOULDER STATE: CO ZIP: 80301 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1999 OR [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 000-24597 --------- CARRIER ACCESS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 84-1208770 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5395 PEARL PARKWAY, BOULDER, CO 80301 (Address of principal executive offices) (Zip Code) (303) 442-5455 (Registrant's telephone number, including area code) ------------------------------------------------------------- Securities registered pursuant to 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.001 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, and 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 or any amendment to this Form 10-K. [ ] Any delinquent filings. As of March 1, 2000, there were 24,269,923 shares of the Registrant's common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based upon the closing sale price of such shares on the Nasdaq National Market on March 1, 2000) was approximately $555,371,290. Shares of the Registrant's common stock held by each executive officer and director and by each entity that owns 10% or more of the Registrant's outstanding common stock have been excluded in that such persons or entities may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the Registrant's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K to the extent stated herein. CARRIER ACCESS CORPORATION(R) INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 Page No. -------- PART I Item 1. Business.......................................................... 4 Item 2. Properties........................................................ 20 Item 3. Legal Proceedings................................................. 20 Item 4. Submission of Matters to a Vote of Security Holders............... 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................... 21 Item 6. Selected Financial Data........................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 28 Item 8. Consolidated Financial Statements and Supplementary Data.......... 28 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.............................................. 41 PART III Item 10. Executive Officers of the Registrant.............................. 42 Item 11. Executive Compensation............................................ 42 Item 12. Security Ownership of Certain Beneficial Owners and Management.... 42 Item 13. Certain Relationships and Related Transactions.................... 42 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K....................................................... 43 Page 2 of 47 The information contained in this report contains certain forward-looking statements. When used in this report, the words "anticipates," "believes," "expects," "intends," "will," "forecasts," "plans," "future," "strategy," or similar expressions may identify forward-looking statements. These statements are based on current expectations and projections about our industry and assumptions made by the management and are not guarantees of future performance. Our actual results, performance or achievements may differ materially from those anticipated or implied by forward-looking statements. Factors that could cause or contribute to material differences include the disclosure in the "Risk Factors" section in this report, as well as our other periodic reports on Form 10-Q filed with the Securities and Exchange Commission. We undertake no obligation to update any forward looking statements in this Report on Form 10-K. Unless otherwise indicated, references in this report to specific years and quarters are to our fiscal year and fiscal quarters. We were incorporated in Colorado in September 1992 and reincorporated in Delaware in June 1998. Our principal executive offices are located at 5395 Pearl Parkway, Boulder, Colorado 80301; our telephone number is (303) 442-5455 and our web site is http://www.carrieraccess.com. The information on our web site is not incorporated in this report. Page 3 of 47 PART I. ITEM 1. BUSINESS GENERAL We are a leading provider of broadband digital equipment solutions to communications service providers. These service providers include competitive local exchange carriers , incumbent local exchange carriers, independent operating companies, interexchange carriers, Internet service providers, and wireless mobility carriers. Our products are used by our customers to provide services including local and long distance voice, high-speed data and Internet services to businesses, government and enterprise end users. Our Access Bank(R), Wide Bank(R), Access Navigator(TM), In-Loop(TM) and CACTUS(TM) family products are connected to T1, digital subscriber line, digital radio, T3 and optical access networks. Our digital equipment provides a "last mile" solution for the distribution and management of high bandwidth services from service providers. Reaching large numbers of consumers using voice and high speed Internet access requires connectivity from service provider networks to end user locations. Installation of our central office communications and customer-located voice and data communications equipment enables this connectivity. Our products allow service providers to cost-effectively connect end users to their network products, decrease ongoing transmission equipment and maintenance expenses, while enabling new service delivery, such as integrated voice and high speed Internet access. Our products enable high bandwidth digital deployments targeted at end users requiring between four and 2800 telephone and data line equivalents of bandwidth. We believe that over 300 service providers and 500 other end users have purchased our products directly or through our distributors. PRODUCTS. Our products currently include the Access Bank, Wide Bank, Access Navigator, and CACTUS product families. The Access Bank I offers digital connectivity for local and long distance voice service, and converts a single T1 digital network access line into 24 telephone circuits for voice, facsimile and modem connections. The Access Bank II expands on the voice functions of the Access Bank I by adding high-speed data ports for computer connectivity and dual T1 line interfaces for increasing data speeds and connecting end user phone systems. The Access Exchange is a customer-located access switch that enables long distance service providers to offer local services from their embedded base switching equipment. The Wide Bank 28 is a highly-integrated M1-3 standard multiplexer designed to connect T1 equipment to high-bandwidth T3 and STS1 digital circuits, providing up to 28 T1 connections for enhanced voice and high- speed data services. The Access Navigator/DCS Service Manager provides a complete solution for managing four to 32 access connections in a highly integrated package. With the functions of a 1/0 digital cross connect system, plus demarcation testing, service providers are able to decrease maintenance costs and labor while increasing service availability. The Access Navigator/GR- 303 offers a highly integrated solution for combining multi-line local voice and data services on customer T1 access lines. In addition to the concentration and management of CLASS(R) voice services the Access Navigator/GR-303 grooms and optimally concentrates fractional T1 data connections from customer locations. The In-Loop-RT offers a full 24 channels of telephone service to customers, over Carrier Service Area loop ranges using only the power provided by two high-bit- rate digital subscriber line network pairs. Local service providers can economically re-use copper pairs to achieve 12 times the number of telephone lines on copper feeder circuits, without the construction and installation costs of conventional digital loop carrier systems. The CACTUS.lite integrates high- speed data and business-class voice services, including POTS, DID, Tie Line and CLASS, in a compact 2RU, modular and cost-effective platform suitable for wall or rack mounting. An integrated 1/0 digital cross connect enables data and voice traffic to be groomed across up to 16 T1-E1 interfaces. In addition to business- voice and data service interfaces, CACTUS.lite is also designed to support, asynchronous transfer mode, Internet Protocol routing, Frame Relay, Office Channel Unit Data Port, sub-rate data multiplexing and Integrated Services Digital Network Basic Rate services. We differentiate our products on their ability to enable multiple service offerings, facilitate the rapid deployment of new services, reduce cost of ownership, provide programmable software-based functionality, scale cost-effectively at service provider and end user locations, and satisfy the safety and regulatory requirements of service providers and end users. The retail list prices of our products range from $995 to $20,000, depending upon product configuration. THE ACCESS BANK FAMILY OF PRODUCTS The Access Bank family of products was our first product designed to deliver carrier-class voice and data services in a one rack-unit (1.75") sized unit. Coupled with a price that enables economical T1 service delivery for communications service providers and patented technologies to deliver business quality voice and data services and typical installation times of one-third that of traditional solutions, we believe the Access Bank product family has helped fuel the growth of competitive local exchange carriers. The Access Bank product family provides a solution for major services, including voice only, voice and data over T1, voice and data over high-bit-rate digital subscriber line, and data over symmetrical digital subscriber line. While proving their ability in the competitive local exchange carriers and enterprise markets, the Access Bank products are equally Page 4 of 47 adept at delivering quality services for regional bell operating company, independent local exchange carriers, interexchange carriers, and Internet service providers. ACCESS BANK I-RELEASED: JUNE 1995 Our Access Bank I provides an economical, compact, and reliable solution for converting T1 digital access services from communications service providers including independent local exchange carriers and competitive local exchange carriers to 12 or 24 individual analog telephone circuits at end user locations. The unit consists of a controller, called the line interface unit and one or two telephone line interface cards. The Access Bank I incorporates an integrated T1 Channel Service Unit, which allows customers to plug in a T1 line without having to connect other external devices to perform service termination. Six different types of 12-channel telephone line interface circuit cards provide most popular voice service options while also delivering enhanced local services such as Caller ID and distinctive ringing. The Access Bank I supports data services such as fax and high-speed modem traffic by automatically adjusting to line conditions in order to provide a clean, high-quality transmission path. The Access Bank I is principally used by service providers for economical local service delivery, long distance service delivery using T1 access, digital service interconnection to PBXs and key systems, Internet modem pool connections to T1, branch office connectivity to T1, and rapid deployment of temporary telephone services. Systems integrators use the Access Bank I to convert T1 connections to a variety of analog service connections for applications such as remote access router interfaces, frame relay and Internet Protocol voice telephone system connectivity, and computer telephony interfaces. ACCESS BANK I TR-08-RELEASED: NOVEMBER 1996 The Access Bank I TR-08 provides a Bellcore Standard TR-08 digital loop carrier software protocol in addition to the basic features of the Access Bank I. TR-08 signaling delivers T1 connections directly to the line side T1 ports of local switches and is widely deployed in local exchange carrier, competitive local exchange carrier, and independent local exchange carrier networks. Service providers use the Access Bank I TR-08 for economical local service delivery and expansion of line capacity for local switches. The Access Bank I TR-08 provides low-cost, compact, wiring closet deployment of carrier-class enhanced voice features such as Caller ID and distinctive ringing to service providers using Lucent, Nortel, Siemens and other local exchange switches. Access Bank I TR-08 enables inexpensive provisioning of physically separate single shelf groups for 12 or 24 managed telephone lines from a T1. ACCESS BANK II-RELEASED: NOVEMBER 1996 Our Access Bank II delivers twice the T1 capacity of the Access Bank I in the same size package, enabling service providers to integrate high-speed Internet service with multi-line voice service in a single unit. The Access Bank II includes two T1 interfaces with fully integrated channel service unit and data service unit functionality and uses the same 12-channel telephone line interface circuit cards as the Access Bank I. Each of the two T1 interfaces can accommodate current and future bandwidth requirements for a combination of facsimile, modem, high-speed Internet, voice, and PBX user services. The T1s can also be configured to provide redundant protection for end users' mission critical voice and Internet applications. The integral V.35 data interface and T1 interfaces offer connectivity for Internet access routers, enterprise routers, frame relay devices, video and other high-speed data applications. Service providers rely on the flexibility of the Access Bank II to deliver multi-line voice plus high-speed Internet connections to enterprise branch offices, small business customers, and medium-sized business locations. By combining digital data with voice over one or two T1 lines, bandwidth can be utilized more efficiently, saving on communication access costs. The Access Bank II also includes sophisticated management capabilities such as an optional Ethernet simple network management protocol local area network management connection for configuration and monitoring. ACCESS BANK II/HDSL-RELEASED: MAY 1998 Service providers use the Access Bank II/HDSL (sold by ADC Telecommunications as the EZT1/DI/HDSL) to provide multi-line voice and high-speed Internet access over existing copper infrastructure. Access Bank II/HDSL represents the integration of ADC's high-bit-rate digital subscriber line technology into the Access Bank II, creating an end-to-end digital deployment solution for service providers from the wiring center to the end-user customer site. This solution enables service providers to decrease their monthly access costs while providing T1 quality digital service delivery over low-cost unbundled copper access loops. ACCESS EXCHANGE-RELEASED: APRIL 1998. The Access Exchange performs the functions of the Access Bank II and integrates software and digital signal processing capability to provide automatic call routing and number translation on a call-by-call basis. This product allows long distance service providers to combine local voice services with long distance and high-speed Internet access on their existing switch infrastructure while routing calls to the Local Exchange Carrier for local calling, directory, 911, and other lifeline services. Page 5 of 47 ACCESS BANK II/SDSL-RELEASED: MAY 1999. The Access Bank II/SDSL provides an innovative method for deploying data services from the Access Bank II. Using a symmetrical digital subscriber line interface in place of one of the T1s on the Access Bank II, the Access Bank II/SDSL allows service providers to deploy high speed data services over symmetrical digital subscriber line. Ordinary unshielded copper wiring can be used to transport data from the Access Bank II/SDSL to a variety of symmetrical digital subscriber line Internet access routers or modems located up to 12,000 feet from the unit. Service providers can easily deploy service in buildings using symmetrical digital subscriber line without rewiring a building for traditional Ethernet-based data services. INLOOP-RT Our InLoop-RT allows communications service providers to significantly reduce held orders for phone service and maximize the revenue potential of their most valuable asset - the existing copper plant. InLoop-RT supports up to 12 times the number of voice lines without the need for new construction or the installation cost of conventional digital loop carrier systems. InLoop-RT enables provisioning of up to 24 business-quality voice lines with full line-side CLASS(R) service using TR-57 and GR-303 digital switch and host terminal connections, over high-bit-rate digital subscriber line. Fully powered over the high-bit-rate digital subscriber line network pairs, InLoop-RT provides full-power ringing and line voltages, and supports V.90 modem throughput. Enclosed in an integral compact Outside Plant certified enclosure, InLoop-RT can mount easily on telephone poles, wiring pedestals, or buildings. WIDE BANK FAMILY OF PRODUCTS We designed the Wide Bank family of DS3 and STS-1 access products to replace a rack full of bulky, old-generation equipment in a dramatically reduced single rack-unit (1.75") sized unit. In addition, the Wide Bank product family utilizes new levels of software integration over older equipment to provide a feature-rich and cost-effective platform supporting full high and low-speed redundancy, hitless DS3 and STS-1 network protection, built-in Network Interface Units and Bit Error Rate Test capabilities. The Wide Bank product family also conforms to the most popular management schemes including simple network management protocol via Ethernet, local or remote Command Line Interface and Transaction Language 1 (TL1). Certification to Network Equipment Building Systems enables installation in a wide-array of service provider environments including central offices and co-location facilities while the modular design permits a platform cost and configuration to be matched exactly to the service provider needs. WIDE BANK 28/DS3 MULTIPLEXER-RELEASED: NOVEMBER 1997 Our Wide Bank 28/DS3 Multiplexer connects a high bandwidth digital T3 network access line to 28 T1 or 21 E1 service connections. The Wide Bank 28 allows communications service providers (wireline and wireless), Internet Service Providers, Enterprise, and Government customers to consolidate multiple T1s or E1s into T3 services to reduce monthly access costs. The Wide Bank 28 also provides redundant T3 service distribution from digital radio connections T1 service expansion from fiber multiplexers and connects T3 incumbent local exchange carrier services to Internet service providers remote access servers. The Wide Bank 28 is used by wireless service providers to provide T3 to 28 T1 conversion, T1 circuit grooming, network protection, and remote management using the C-Bit T3 overhead of their high-bandwidth digital wireline and digital radio connections. These connections typically provide the backbone links between mobile radio (cellular or PCS) transmission sites. Up to seven quad Digital Signal Cross-Connect Level 1 (T1) interface cards support up to 28 T1 connections or up to seven tri-port E1 interface cards support up to 21 E1 connections. Cards can therefore be quickly and easily added to meet bandwidth requirements. An identical spare quad T1 or tri-port E1 provides software-controlled low-speed redundancy for Automatic Protection Switching (APS) that is compliant with the FCC guidelines for service availability as outlined in Telcordia Technologies GR-499-CORE. The Wide Bank 28 also incorporates T1 Network Interface Unit functionality to eliminate additional equipment and installation labor costs for service providers. Redundancy options on the Wide Bank 28 include programmable T1 and T3 software-based functionality and electronics protection through the use of an additional quad T1 card, tri-port E1 card, or T3 controller card, respectively. The unit incorporates solid-state fuseless protection, hot swappable cards, multiple T1 and T3 line tests for fault isolation and built-in bit error rate testing. The Wide Bank 28 is housed in a compact, single rack-unit case. A Maintenance Service Option (MSO) is available for providing testing and maintenance capabilities without disruption of services by field technicians. Also, a Fan Face Plate Option will be available for high-density, high-capacity rack applications in Central Offices in order to increase overall rack capacity. Our Wide Bank 28 is Network Equipment Building Systems Level 3 certified and offers the features and performance in compliance with Network Equipment Building Systems Level 3 criteria as outlined by Telcordia Technologies for Central Office equipment. The Network Equipment Building Systems certification allows service providers to install the Wide Bank 28 in central office locations where the product is designed to operate under electrical and physical environmental stresses such as electromagnetic interference, high and low temperature range and earthquake and vibration conditions. Finally, the Wide Bank 28 offers TL-1 Management Control, a Java-based Graphical User Interface for ease of operations and management on the service providers' network, as well as a simple network management protocol systems enterprise MIB providing ease of integration with existing Network Management Systems. Page 6 of 47 WIDE BANK 28/STS-1 MULTIPLEXER-RELEASED JUNE 1999 The Wide Bank 28/STS-1 Multiplexer cost-effectively delivers T1 service connections from SONET STS-1 electrical interfaces. This addition to our widely accepted and deployed Wide Bank 28 product family offers new capabilities for high-bandwidth network access technology, building on the advanced features, proven technology and deployment of the Wide Bank 28 DS3 multiplexer as a "Carrier-Class" product. The Wide Bank 28/STS-1 Multiplexer reduces the overall cost of deploying T1 services at service provider Local Digital Switch (LDS), collocation, Point-of-Presence (POP), Service Access Point (SAP) and on-network building locations. Communications service providers deploying OC-3 and OC-12 SONET fiber collector rings or high-capacity OC-48 and OC-192 SONET metropolitan rings indicate that its not cost-effective to fill high-capacity SONET Add/Drop Multiplexers (ADMs) with low-speed T1 interfaces because it wastes precious bandwidth. Our Wide Bank 28/STS-1 Multiplexer is designed to eliminate the additional expense of transmultiplexing DS3 signals over SONET for fiber transport and reduce the amount of stranded bandwidth within the SONET shelf, while greatly decreasing the cost per T1 connection provided to service provider customers. High-capacity SONET add/drop multiplexers and digital radios can be more economically deployed to provide high-capacity T1 services. Using only one rack unit of space, the Wide Bank 28/STS-1 Multiplexer optimizes valuable space in central offices, co-location, or digital loop carrier cabinets. Services can be added in scalable quad T1 increments, suiting applications from small outside cabinets to large switching centers. The Wide Bank 28/STS-1 Multiplexer offers simple network management protocol, Telnet, and TL-1 management options as well as alarm reporting and performance monitoring to the Virtual Tributary 1.5 (VT1.5) tributary-based DSX-1 services, enabling service providers to gain the cost and management advantages of STS-1 interconnections in a very compact, scalable network product. ACCESS NAVIGATOR FAMILY OF PRODUCTS The Access Navigator Product Family contains three members: the Access Navigator/ DCS Service Manager, providing a cost effective 1/0 cross-connect solution; the Access Navigator/ GR-303 + Data Host, providing an easy to manage and install GR-303 host solution; and the most recent addition to the family, the Navigator Pilot Graphical User Interface configuration tool. With both Network Equipment Building Systems and customer premises certifications, we designed the Access Navigator Product Family to be located in service provider racks or on end user customer walls. The Navigator Product Family combines the power of a 32 port digital cross connect system with remotely managed demarcation and occupies only one and one half rack units of space. Integrated testing and optional common equipment redundancy ensure carrier-class service availability. The Access Navigator Product family was designed to significantly reduce space, power and installation labor as compared to old generation digital cross connect and channel service unit or NIU shelves. Additional quad T1 Cards can be installed while the Access Navigator is in service to provide from four to 32 T1/channel service unit connection ports. Access Navigator products provide management access via Ethernet simple network management protocol, Telnet CLI, RS-232 CLI, Navigator Pilot Graphical User Interface, and GR-303 EOC (for the GR-303 + Data Host version). Flow-through provisioning and testing control over ESF T1 connections, from the Access Navigator to our Access Bank II and CACTUS.lite units, are designed to reduce service provider truck rolls and improve voice and Internet service availability at customer premise locations. ACCESS NAVIGATOR/DCS SERVICE MANAGER-RELEASED: JANUARY 1999 The Access Navigator/DCS Service Manager provides a complete solution for managing four to 32 T1 access connections in a highly integrated package. With the functions of a 1/0 digital cross connect system, plus demarcation testing, service providers are able to decrease maintenance costs and labor, while increasing service availability. ACCESS NAVIGATOR/GR-303 + DATA HOST -RELEASED: JANUARY 1999 The Access Navigator/GR-303 offers a highly integrated solution for combining multi-line local voice and data services on customer T1 access lines. In addition to the concentration and management of CLASS voice services, the Access Navigator/GR-303 grooms fractional T1 data connections, including Internet traffic, from customer locations. Fractional voice and data services from multiple customers and applications are concentrated by the Access Navigator to save recurring transmission costs, and capital costs on switch or router ports. NAVIGATOR PILOT: - RELEASED: JANUARY 2000 A new addition to the Access Navigator family, the Navigator Pilot, provides a Graphical User Interface that eases the configuration of system parameters and cross connection mappings. The Navigator Pilot can be used in a standalone configuration or in conjunction with a customer's upper level Network Management System. Page 7 of 47 CACTUS FAMILY OF PRODUCTS CACTUS is an innovative family of Broadband Digital Access devices designed to enable carriers to offer existing and new broadband services at a low-cost per network and service port. The CACTUS family will use TDM, asynchronous transfer mode and Internet Protocol technologies and span a wide-range of platforms scaling from single T1 or digital subscriber line-fed devices to broadband. CACTUS.LITE-RELEASED DECEMBER 1999 CACTUS.lite builds on Access Bank concepts, doubling voice circuit density, and is designed to add digital subscriber line transport, ISDN BRI, LAN/WAN router, OCU DataPort, Subrate Data Multiplexer DCE interfaces, and expandable V.35 port capacity. Data and voice traffic can be groomed directly across 16 T1/E1s (up to 512 DS0s) with the integrated 1/0 digital cross connect at a fraction of the cost and size of previous solutions. A unique feature of CACTUS.lite is its ability to support TDM, designed with a migration path for asynchronous transfer mode, or inverse multiplexing over asynchronous transfer mode network connections. Selection of a network connection technology is simply a matter of choosing the appropriate controller card and software options. No changes to the chassis or service cards are required. Bandwidth can grow seamlessly as end-user customer service needs increase. The product architecture is designed for scalability for communications service providers, allowing them to deliver additional services to end users and grow their access solution set as their business grows, without costly replacement of customer located equipment. CUSTOMERS To date, a large portion of our sales are made through third-party distributors to communications service providers, such as competitive local exchange carriers, Internet service providers, independent operating carriers, independent local exchange carriers, utilities and wireless service providers who provide enhanced voice and high-speed data and Internet services to end user businesses. In addition, we are selling a significant portion of our products through direct sales. Listed below are our third-party distributors and a partial list of communications service providers who we believe have purchased our products based on information from our distributors and direct product sales. We believe that all of these service provider customers are currently using our products and are representative of our overall Customer base.
- ------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTORS - ------------------------------------------------------------------------------------------------------------------------------- ADC Telecommunications, Inc. (OEM) Power & Telephone Supply Co. Advantage Telcom Solunet, Inc. ALLTEL Supply, Inc. Somera Communications, Inc. C&L Communications Sprint North Supply Graybar Electric Company, Inc. Telsource Corporation Phillips Communications and Equipment Co. Walker & Associates - -------------------------------------------------------------------------------------------------------------------------------- SERVICE PROVIDER CUSTOMERS - -------------------------------------------------------------------------------------------------------------------------------- ACC Long Distance Corporation Electric Lightwave, Inc. PSI Net, Inc. Adelphia Communications Corporation Facilicom International, Inc. QWEST Communications International, Inc. Airtouch Cellular Florida Digital Network RCN Corporation Allegiance Telecom, Inc. Frontier Communications, Inc. Rochester Telephone Alltel Affiliates Gabriel Communications, Inc. Southwestern Bell AT&T Corp. Graybar Electric Company, Inc. Sprint Corporation Avista Communications GTE Services Corporation TDS Metrocom Broadview Networks Holdings, Inc. Harris Corporation Tech Data Corporation Bell Atlantic Corporation ICG Communications Teligent, Inc. BellSouth Corporation Integra Telecom Tharaldson Communications, Inc. Birch Telecom, Inc. Intermedia Communications, Inc. Thrifty Call, Inc. CenturyTel, Inc. Logix Communications Enterprises, Inc. Transaction Network Services, Inc. Choice One Communications MCI Worldcom, Inc. US LEC Corp Conectiv Communications MGC Communications, Inc. US Unwired LLC Covad Communications Co. Nextlink Communications, Inc. US WEST, Inc. Cox Communications, Inc. Optel Communications Corporation Vitts Networks Dynetrix Corporation Pacific Bell Network Integration Winstar Wireless, Inc. e.spire Communications, Inc. Project Interface Connections, Inc. Ziplink, Inc. East Ascension Telephone Company Pontio Communications Company, Inc. - --------------------------------------------------------------------------------------------------------------------------------
Page 8 of 47 Our customer base is distributed over 800 end users, however sales are concentrated among a small number of distributors that have historically accounted for a majority of our net revenue. For year ended December 31, 1999, Walker & Associates and ADC Telecommunications accounted for 27% and 14%, respectively, of net revenue. In 1998, Walker & Associates, Phillips Communications and Equipment and Telsource Corporation accounted for 40%, 17% and 15%, respectively, of net revenue. In addition to being dependent on a small number of distributors for a majority of our net revenue, we believe our products are distributed to a limited number of service provider customers who are primarily competitive local service providers. We believe that in 1998, thirty-five (35) service provider customers were the end users representing approximately 83% of our net revenue and that in 1999, seventy-five (75) service provider customers were the end users representing approximately 85% of our net revenue. SALES, MARKETING AND CUSTOMER SUPPORT Sales. We currently employ a leveraged sales model consisting of a direct sales force and a regional sales engineering support group, which works with strategic accounts and with our 12 third-party distributors to identify potential customers and provide pre- and post-sales support to our service provider customers and other end users. Sales from third-party distributors accounted for the majority of our revenues for the years ended December 31, 1998 and December 31, 1999. Third-Party Distributors. Our distributors are responsible for fulfilling product orders and warehousing product as well as identifying potential customers. We establish relationships with distributors through written agreements that provide prices, discounts and other material terms and conditions under which the distributor is eligible to purchase our products for resale. Such agreements generally do not grant exclusivity to the distributors, do not prevent the distributors from carrying competing product lines, and do not require the distributors to sell any particular dollar amount of our products, although the contracts may be terminated at our discretion if specified sales targets and end user satisfaction goals are not attained. We generally provide our distributors with limited stock rotation and price protection rights. Other than limited stock rotation rights, we do not provide our distributors with general product return rights. We have limited knowledge of the financial condition of certain of our distributors however, we are aware that some of our distributors have limited financial and other resources which could impair their ability to pay us. Although the financial instability of these certain distributors has not limited any distributor's ability to pay us for our products to date, we cannot assure you that any bad debt we incur will not exceed our bad debt reserves or that the financial instability of one or more of our distributors will not harm our business, financial condition or results of operations. We have limited knowledge of the inventory levels of our products carried by our original equipment manufacturers and distributors, and our original equipment manufacturers and distributors have in the past reduced, and may in the future reduce, planned purchases of our products due to overstocking. Moreover, distributors who have overstocked our products have in the past reduced, and may in the future reduce, their inventories of our products by selling such products at significantly reduced prices. Any such reduction in planned purchases or sales at reduced prices by distributors or original equipment manufacturers in the future could reduce the demand for our products, create conflicts with other distributors or harm our business. In addition, three times a year, some of our distributors are allowed to return a maximum of fifteen percent of our unsold products held in stock by such distributor, which were purchased within the four month period prior to such return date, for an equal dollar amount of new equipment. While to date these returns have not had a material impact on our results of operations, these returns through stock rotation could harm our future operations. We believe we have made adequate allowances to provide for these returns. We are generally required to give our distributors a 60-day notice of price increases or decreases. In addition, we grant certain of our distributors "most favored customer" terms, pursuant to which we have agreed to not knowingly grant another distributor the right to resell our products on terms more favorable than those granted to the existing distributor, without offering equally favorable terms to the existing distributor. These price protection and "most favored customer" clauses could cause a material decrease in the average selling prices and gross margins of our products. Although, we believe that price protection will not harm our business we cannot assure you that price protection will not harm our business in the future. Direct Sales. Currently, a significant portion of the sales of our products are being made through direct sales efforts. As a result, our continued success depends on building and maintaining good relations with our direct customers. We have limited knowledge of the financial condition of certain of our direct customers; however, we are aware that some of our direct customers have limited financial and other resources which could impair their ability to pay us, although the financial instability of these direct customers has not limited any direct customer's ability to pay us for our products to date. We cannot assure you that any bad debts that we incur will not exceed our reserves or that the financial instability of one or more of our direct customers will not harm our business, financial condition or results of operations. Any reduction in planned purchases by direct customers in the future could harm our business. In addition, we grant certain of our direct customers "most favored customer" terms, pursuant to which we have agreed to not knowingly provide another direct customer with similar terms and conditions a better price than those provided to the existing direct customer, without offering the more favorable prices to the existing direct customer. It is possible that these price protection and "most favored customer" clauses could cause a material decrease in the average selling prices and gross margins of our products, which could harm our business, financial condition or results of operations. Currently, our direct customers do not have any obligation to purchase additional products. Accordingly, Page 9 of 47 we cannot assure you that present or future direct customers will not terminate their purchasing arrangements with us, or that they will not significantly reduce or delay the amount of our products that they order. Any such termination, change, reduction or delay in orders could harm our business. Sales Engineering Support. Our sales engineering support group is responsible for product configuration, evaluation, installation and telephone sales support activities. Our sales support and sales engineering strategy focuses on assisting service providers and end users in rapidly integrating our products into their networks. The sales engineering support group identifies service provider and end user leads and, based on initial presentations, provides evaluation units for trial in communication service provider and end user networks. After successful trial and approval, the service provider or end user is provided with product installation and maintenance training. The sale of our products averages between four and twelve months in the case of certain service providers (including competitive local exchange carriers and service providers), but can take significantly longer in the case of independent local exchange carriers and certain distributors and other end users. Initially, our sales engineering support group is involved in educating service providers and end users on the functionality and benefits that may be derived from using our products. Subsequently, members of both our sales engineering and research and development organizations are involved in providing the service provider or end user with the required training and technical support to integrate our products into a new application or service. Marketing. Our marketing organization develops strategies for product families and, along with the sales force, develops key account strategies and defines product and service functions and features. Marketing is responsible for sales support, request for information, request for quotes and request for proposals, in-depth product presentations, interfacing with operations, setting price levels to achieve targeted margins, developing new services/business opportunities and writing proposals in response to customer requests for information or quotations. We engage in a number of marketing activities that include exhibiting products and customer applications at industry trade shows, advertising in selected publications aimed at targeted markets, public relations activities with trade and business press, publication of technical articles and the distribution of sales literature, technical specifications and documentation, in order to create awareness, market demand and sales opportunities for our products. Customer Service and Support. Based on customer support calls, we believe that ongoing customer support is critical to maintaining and enhancing relationships with service providers, end users and distributors. The service provider and end user support group has five functions: new product development, that provides for product ideas and enhancements based on customer requirements through the pre- and post-sales support effort; inbound technical support, that focuses on pre- and post-sales calls made to us from our customers; outbound application support and response to request for proposals and request for quotations; training, including installation and application development training for customers, sales engineers and employees; and reporting and analysis based on the automated trouble ticket and returned material systems. COMPETITION There is intense competition in the telecommunications equipment market with a large number of suppliers providing a variety of products to diverse market segments. We believe that the principal competitive factors in our markets include: performance and reliability; flexibility, scalability and ease-of-use; breadth of features and benefits; end-to-end management systems, and a lower initial and lifetime cost. We believe our product solutions compete favorably with respect to each of these factors. Our existing and potential competitors include many large domestic and international companies, including certain companies that have substantially greater financial, manufacturing, technological, sales and marketing, distribution and other resources. Our principal competitors for our Access Bank, InLoop and CACTUS.lite product family include Adtran, Inc. ("Adtran"), Advanced Fibre Communications, Inc. ("AFC"), Cisco Systems, Inc. ("Cisco"), General DataCom Industries, Inc. ("General DataCom"), Lucent Technologies, Inc. ("Lucent"), NEC USA, Inc. ("NEC"), Newbridge Networks Corporation ("Newbridge"), Northern Telecom Limited ("Nortel"), PairGain Technologies, Inc. ("Pairgain"), Paradyne Corporation ("Paradyne"), and other small private companies. Our principal competitors for our Wide Bank product family include Adtran, Alcatel Alsthom Compagnie Generale d'Electricite ("Alcatel"), NEC, Nortel, and other small private companies. Our principal competitors for our Access Navigator product family include Advanced Fibre Communications, Inc. ("AFC"), Alcatel Alsthom Compagnie Generale d'Electricite ("Alcatel"), Cisco Systems, Lucent Technologies, Inc. ("Lucent"), Newbridge Networks Corporation ("Newbridge"), Northern Telecom Limited ("Nortel"), Telect, Inc. ("Telect"), Tellabs, Inc. ("Tellabs") and other small private companies. We expect that many of our competitors who currently offer products competitive with only one of our product lines will eventually offer products competitive with all of our product lines. In addition, many start-up companies have recently begun to manufacture products similar to those offered by us. Due to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter those markets, thereby further intensifying competition. Additionally, one of our distributors is currently competing with us, and there can be no assurance that additional distributors will not begin to develop or market products in competition with us. Page 10 of 47 Many of our current and potential competitors are substantially larger than us and have significantly greater financial, sales and marketing, technical, manufacturing and other resources and more established channels of distribution. As a result, these competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. These competitors may enter our existing or future markets with solutions that may be less costly, provide higher performance or additional features or be introduced earlier than our solutions. Many communications companies have large internal development organizations that develop software solutions and provide services similar to our products and services. These communications companies also make a regular practice of acquiring smaller technology companies to gain entrance into our markets, further accelerating their product development efforts. Some of our competitors currently offer more lucrative financing alternatives to their customers than we provide at this time. Although we are currently offering third party financing alternatives to our service provider customers, there can be no assurance that we will be able to secure financing for all of our service provider customers. We expect our competitors to continue to improve the performance of their current products and to introduce new products or technologies that provide added functionality and other features. Successful new product introductions or enhancements by our competitors could cause a significant decline in sales or loss of market acceptance of our products and services, which could result in continued intense price competition or could make our products and services or technologies obsolete or noncompetitive. To be competitive, we will be required to continue investing significant resources in research and development and sales and marketing. There can be no assurance that we will have sufficient resources to make such investments or that we will be able to make the technological advances necessary to be competitive. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third-parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which would have a material adverse effect on our business. We cannot assure you that we will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on our business. MANUFACTURING Our manufacturing operations consist of materials planning and procurement, final assembly, product assurance testing, quality control, and packaging and shipping. We currently use several independent manufacturers to provide certain printed circuit boards, chassis and subassemblies. We have developed a manufacturing process that enables us to configure our products to be adapted to different customer hardware and software applications at the final assembly stage. This flexibility is designed to reduce both our manufacturing cycle time and our need to maintain a large inventory of finished goods. We believe that the efficiency of our manufacturing process to date is largely due to our product architecture and our commitment to manufacturing process design. We spend significant engineering resources producing customized software and hardware to assure consistently high product quality. We test every product both during and after the assembly process using internally developed automated product assurance testing procedures. These procedures consist of automated board and automated system testing as well as environmental testing. Through December 31, 1999, we had experienced a return rate for defective products of less than one percent. Although we generally use standard parts and components for our products, many key components are purchased from sole or single source vendors for that alternative sources are not currently available. We cannot assure you that we will not experience supply problems in the future from any of our manufacturers or vendors. Any such difficulties could harm our business. RESEARCH AND PRODUCT DEVELOPMENT We focus our development efforts on providing enhanced functionality to our existing products, including total network solutions and performance and the development of additional software-based features and functionality. Extensive product development input is obtained from customers and our monitoring of end user needs and changes in the marketplace. Our current product development focus has been on developing digital broadband access solutions and completing new products such as the recently introduced CACTUS.lite and Access Navigator product families. We believe that our success will depend, in part, on our ability to develop and introduce in a timely fashion new products and enhancements to our existing products. We have in the past made, and intend to continue to make, significant investments in product and technological development. Our engineering, research and development expenditures totaled approximately $2.8 million, $5.6 million and $13.6 million in 1997, 1998 and 1999, respectively. We perform our research and product development activities at our principal offices in Boulder, Colorado and we recently added an additional research and product development center in Tulsa, Oklahoma. Our inability to develop on a timely basis new products or enhancements to existing products, or the failure of these new products or enhancements to achieve market acceptance, could have a material adverse effect on our business. Page 11 of 47 PATENTS, LICENSES AND PROPRIETARY INFORMATION We rely upon a combination of patent, copyright and trademark and trade secret laws as well as confidentiality procedures and contractual restrictions to establish and protect our proprietary rights. We have also entered into confidentiality agreements with our employees and consultants and we enter into non-disclosure agreements with our suppliers and distributors so as to limit access to and disclosure of our proprietary information. We cannot assure you that such measures will be adequate to deter and prevent misappropriation of our technologies or independent third-party development of similar technologies. The laws of certain foreign countries in which our products are or may be developed, manufactured or sold may not protect our products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products more likely. As of March 1, 2000, we had been issued a total of six U.S. patents and we had a total of nine U.S. patent applications pending. The issued patents cover various aspects of: voice and data circuits; switching technologies and redundancy. The U.S. patents begin to expire commencing in the year 2015. We also have eight U.S. trademark applications pending, five international trademark applications pending, and four trademarks registered. A large number of patents and frequent litigation based on allegations of patent infringement exist within the telecommunications industry. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to us. Although we have not received communications from third parties asserting that our products infringe or may infringe proprietary rights of third parties, we have no assurance that any future claims, if determined adversely to us, would not have a material adverse effect on our business, financial condition or results of operations. EMPLOYEES At March 31, 2000, we employed 349 full-time employees in twenty states. Additionally, we employ a number of engineering and other employees on a part-time basis. No employees are covered by any collective bargaining agreements. We believe that our relationships with our employees are good. The loss of any of our key management or technical personnel could harm us. Many of our employees are highly skilled, and our continued success depends in part upon our ability to attract and retain such employees. In an effort to attract and retain such employees, we continue to offer employee benefit programs that we believe are at least equivalent to those offered by our competitors. Despite these programs, we along with most of our competitors, have experienced difficulties at times in hiring and retaining certain skilled personnel. In critical areas, we have utilized consultants and contract personnel to fill these needs until full-time employees could be recruited. We have never experienced a work stoppage, none of our domestic employees are represented by a labor organization, and we believe our employee relations to be good. There are no family relationships between any of our executive officers, other than that between Mr. Koenig and Ms. Pierce. RISK FACTORS Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Form 10-K Report, including our consolidated financial statements and related notes. WE HAVE A LIMITED OPERATING HISTORY. We have a limited operating history. We did not begin commercial deployment of our broadband digital access equipment until the summer of 1995. Prior to 1997, we recorded only nominal product revenue, and we have been profitable on an annual basis for only three years. Accordingly, an investor in our common stock must evaluate the risks, uncertainties and difficulties frequently encountered by early stage companies in rapidly evolving markets such as the communications equipment industry. Some of these risks, in addition to those risks disclosed elsewhere in this "Risk Factors" section, include: o significant fluctuations in quarterly operating results; o the intensely competitive market for communications equipment; o the expenses and challenges encountered in expanding our sales, marketing and research and development infrastructure; Page 12 of 47 o the risks related to our timely introduction of new packet based products and product enhancements; and o the risks associated with increased business development and expansion of our operations. Due to our limited operating history and experience with respect to these issues, we may not successfully implement any of our strategies or successfully address these risks and uncertainties. OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY, AND WE MAY NOT BE ABLE TO MAINTAIN OUR EXISTING GROWTH RATES. Although our revenues have grown significantly in recent quarters, these growth rates may not be sustainable, as is evidenced by our Access Bank revenue, and you should not use these past results to predict future revenue or operating results. Our quarterly and annual operating results have fluctuated in the past and may vary significantly in the future. Our future operating results will depend on many factors, many of which are outside of our control, including the following: o the size of the orders for our products, and the timing of such orders; o the commercial success of our products, and our ability to ship enough products to meet customer demand; o changes in the financial stability of our distributors, customers or suppliers; o changes in our pricing policies or the pricing policies of our competitors; o fluctuations in ordering due to increased direct sales to customers; o potential bad debt due to increased direct sales; o inability to obtain third party financing for our service provider customers; o seasonal fluctuations in the placement of orders; o changes in our distribution channels; o potential delays or deferrals in our product implementation at customer sites; o technical problems in customizing or integrating our products with end users' systems, and potential product failures or errors; o certain government regulations; and o general economic conditions as well as those specific to the communications equipment industry. A significant portion of our net revenue has been derived from a limited number of large orders, and we believe that this trend will continue in the future, especially if the percentage of direct sales to end users increases as we anticipate. The timing of these orders and our ability to fulfill them can cause material fluctuations in our operating results, and we anticipate that such fluctuations will occur. Also, our distribution and purchase agreements generally allow our distributors and direct customers to postpone or cancel orders without penalty until a relatively short period of time prior to shipment. In the past, we have occasionally experienced cancellations and delays of orders, and we expect to continue to experience order cancellations and delays from time to time in the future. Any shortfall in orders would harm our operating income for a quarter or series of quarters, especially since operating expenses in a quarter are relatively fixed, and these fluctuations could affect the market price of our common stock. Because most all of our sales have historically been through indirect distribution channels, our ability to judge the timing and size of individual orders is more limited than for manufacturers who have been selling directly to the end users of their products for longer periods of time. Moreover, any downturn in general economic conditions could lead to significant reductions in customer spending for telecommunications equipment, which could result in delays or cancellations of orders for our products. Our operating expenses are based on our expectations of future revenues and are relatively fixed in the short term. Due to these and other factors, if our quarterly or annual revenues fall below the expectations of securities analysts and investors, the trading price our common stock could significantly decline. WE DEPEND ON EMERGING SERVICE PROVIDERS FOR SUBSTANTIALLY ALL OF OUR BUSINESS. Up until now, our customers have consisted primarily of competitive local exchange carriers and, to a lesser extent, long distance service providers, Internet service providers, independent operating carriers and wireless service providers. The market for the services provided by the majority of these service providers has only begun to emerge since the passage of the Telecommunications Act of 1996 (the "1996 Act"), and many new and existing service providers are continuing to build their networks and infrastructure and rolling out their services in new geographical areas. These new service providers require substantial capital for the development, construction and expansion of their networks and the introduction of their services. Page 13 of 47 The ability of these emerging service providers to fund such expenditures often depends on their ability to obtain sufficient financing. This financing may not be available to many of these emerging service providers on favorable terms, if at all. If our current or potential emerging service provider customers cannot successfully raise the needed funds, or if they experience any other trends adversely affecting their operating results or profitability, these service providers' capital spending programs may be adversely impacted. If our current or potential service provider customers are forced to defer or curtail their capital spending programs, our sales and operating results will likely be harmed. In addition, many of the industries in which the service providers operate have recently experienced consolidation. In particular, many telecommunication service providers have recently acquired, been acquired or merged with Internet service providers or other service providers. The loss of one or more of our service provider customers, through industry consolidation or otherwise, could have a material adverse effect on our sales and operating results. OUR CUSTOMERS ARE SUBJECT TO HEAVY GOVERNMENT REGULATION IN THE TELECOMMUNICATIONS INDUSTRY, AND REGULATORY UNCERTAINTY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. Competitive local exchange carriers are allowed to compete with independent local exchange carriers in the provisioning of local exchange services primarily as a result of the adoption of regulations under the 1996 Act that impose new duties on independent local exchange carriers to open their local telephone markets to competition. Although the 1996 Act was designed to expand competition in the telecommunications industry, the realization of the objectives of the 1996 Act is subject to many uncertainties. Such uncertainties include judicial and administrative proceedings designed to define rights and obligations pursuant to the 1996 Act, actions or inaction by independent local exchange carriers or other service providers that affect the pace at which changes contemplated by the 1996 Act occur, resolution of questions concerning which parties will finance such changes, and other regulatory, economic and political factors. Any changes to the 1996 Act or the regulations adopted thereunder, the adoption of new regulations by federal or state regulatory authorities under the 1996 Act or any legal challenges to the 1996 Act could have a material adverse impact upon the market for our products. We are aware of certain litigation challenging the validity of the 1996 Act and local telephone competition rules adopted by the Federal Communications Commission ("FCC") for the purpose of implementing the 1996 Act. Furthermore, Congress has indicated that it may hold hearings to gauge the competitive impact of the 1996 Act, and we cannot assure you that Congress will not propose changes to the Act. This litigation and potential regulatory changes may delay further implementation of the 1996 Act, which could hurt demand for our products. Moreover, our distributors or service provider customers may require that we modify our products to address actual or anticipated changes in the regulatory environment. Further, we may decide to modify our products to meet these anticipated changes. Our inability to modify our products in a timely manner or address such regulatory changes could harm our business. OUR MARKETS ARE HIGHLY COMPETITIVE AND HAVE MANY MORE ESTABLISHED COMPETITORS. The market for our products is intensely competitive, with a large number of equipment suppliers providing a variety of products to diverse market segments within the telecommunications industry. Our existing and potential competitors include many large domestic and international companies, including certain companies that have substantially greater financial, manufacturing, technological, sales and marketing, distribution and other resources. Our principal competitors for our Access Bank product family include Adtran, General Datacom, Lucent, Newbridge, Nortel, Pairgain, Paradyne and other small private companies. Our principal competitors for our Wide Bank product family include Adtran, Alcatel, Fujitsu, NEC other small private companies. Our principal competitors for our Access Navigator product family include AFC, Alcatel, Cisco, DSC, Lucent, Nortel, Telect, Tellabs and other small private companies. We expect that many of our competitors who currently offer products competitive with only one of our product lines will eventually offer products competitive with all of our product lines. In addition, many start-up companies have recently begun to manufacture products similar to ours. Due to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter these markets through acquisition, thereby further intensifying competition. Additionally, one of our distributors is currently competing with us, and additional distributors may begin to develop or market products that compete with our products. Many of our current and potential competitors are substantially larger than us and have significantly greater financial, sales and marketing, technical, manufacturing and other resources and more established channels of distribution. As a result, such competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources than we can devote to the development, promotion and sale of their products. Such competitors may enter our existing or future markets with solutions that may be less costly, provide higher performance or additional features or be introduced earlier than our solutions. Many telecommunications companies have large internal development organizations that develop software solutions and provide services similar to our products and services. We expect our competitors to continue to improve the performance of their current products and to introduce new products or technologies that provide added functionality and other features. Successful new product introductions or enhancements by our competitors Page 14 of 47 could cause a significant decline in sales or loss of market acceptance of our products. Competitive products may also cause continued intense price competition or render our products or technologies obsolete or noncompetitive. To be competitive, we will have to continue to invest significant resources in research and development and sales and marketing. We cannot assure you that we will have sufficient resources to make such investments or that we will be able to make the technological advances necessary to be competitive. In addition, our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which would harm our business. WE ARE SUBSTANTIALLY DEPENDENT ON OUR DISTRIBUTION CHANNELS. To date, a large portion of the sales of our products has been made through distributors. Our distributors are responsible for warehousing product and fulfilling product orders as well as servicing potential competitive service provider customers and, in some cases, customizing and integrating our products at end users' sites. As a result, our success depends on maintaining good relations with our distributors. Sales of our products historically have been made to a limited number of distributors and other direct customers, as follows: o In 1998, Walker, Phillips and Telsource accounted for 40%, 17% and 15% of net revenue, respectively. o In 1999, Walker and ADC accounted for 27% and 14% of net revenue, respectively. We expect that a significant portion of sales of our products will continue to be made to a small number of distributors. Accordingly, if we lose any of our key distributors, or experience reduced sales to such distributors, our business would likely be harmed. We have limited knowledge of the financial condition of certain of our distributors, however, we are aware that some of our distributors have limited financial and other resources which could impair their ability to pay us, although the financial instability of these certain distributors has not limited any distributor's ability to pay us for our products to date. We cannot assure you that any bad debts that we incur will not exceed our reserves or that the financial instability of one or more of our distributors will not harm our business, financial condition or results of operations. We generally provide our distributors with limited stock rotation and price protection rights. Other than limited stock rotation rights, we do not provide our distributors with general product return rights. We have limited knowledge of the inventory levels of our products carried by our original equipment manufacturers and distributors, and our original equipment manufacturers and distributors have in the past reduced planned purchases of our products due to overstocking. Such reductions in purchases due to overstocking may occur again in the future. Moreover, distributors who have overstocked our products have in the past reduced their inventories of our products by selling such products at significantly reduced prices, and this may occur again in the future. Any reduction in planned purchases or sales at reduced prices by distributors or original equipment manufacturers in the future, could reduce the demand for our products, create conflicts with other distributors or otherwise harm our business. In addition, three times a year certain distributors are allowed to return a maximum of fifteen percent of our unsold products for an equal dollar amount of new equipment. The products must have been held in stock by such distributor and have been purchased within the four month period prior to the return date. While to date these returns have not had a material impact on our results of operations, we cannot assure you that we will not experience significant returns in the future or that we will make adequate allowances to offset these returns. We believe it has made adequate allowances for these returns to date. We are generally required to give our distributors a 60-day notice of price increases. Orders entered by distributors within the 60-day period are filled at the lower product price. In the event of a price decrease, we are sometimes required to credit distributors the difference in price for any stock they have in their inventory. In addition, we grant certain of our distributors "most favored customer" terms, pursuant to which we have agreed to, not knowingly, grant another distributor the right to resell our products on terms more favorable than those granted to the existing distributor, without offering the more favorable terms to the existing distributor. It is possible that these price protection and "most favored customer" clauses could cause a material decrease in the average selling prices and gross margins of our products, which could in turn have a material adverse effect on distributor inventories, our business, financial condition or results of operations. In addition to being dependent on a small number of distributors for a majority of our net revenue, we believe our products are distributed to a limited number of service provider customers who are primarily competitive local exchange carriers. None of these service provider customers has any obligation to purchase additional products. Accordingly, we cannot assure you that present or future customers will not terminate their purchasing arrangements with either us or our distributors, or that they will not significantly reduce or delay the amount of our products that they order. Any such termination, change, reduction or delay in orders could harm our business. Page 15 of 47 WE ARE SUBSTANTIALLY DEPENDANT ON OUR DIRECT SALES AND DIRECT CUSTOMERS. Currently, a significant portion of the sales of our products are being made through direct sales. As a result, our continued success depends on building and maintaining good relations with our direct customers. We have limited knowledge of the financial condition of certain of our direct customers, however, we are aware that some of our direct customers have limited financial and other resources which could impair their ability to pay us, although the financial instability of these direct customers has not limited any direct customer's ability to pay us for our products to date. We cannot assure you that any bad debts that we incur will not exceed our reserves or that the financial instability of one or more of our direct customers will not harm our business, financial condition or results of operations. Any reduction in planned purchases by direct customers in the future could harm our business. In addition, we grant certain of our direct customers "most favored customer" terms, pursuant to which we have agreed to not knowingly provide another direct customer with similar terms and conditions a better price than those provided to the existing direct customer, without offering the more favorable prices to the existing direct customer. It is possible that these price protection and "most favored customer" clauses could cause a material decrease in the average selling prices and gross margins of our products, which could, in turn, harm our business. Currently, our direct customers do not have any obligation to purchase additional products. Accordingly, we cannot assure you that present or future direct customers will not terminate their purchasing arrangements with us, or that they will not significantly reduce or delay the amount of our products that they order. Any such termination, change, reduction or delay in orders could harm our business. OUR GROWTH IS DEPENDENT UPON SUCCESSFULLY MAINTAINING AND EXPANDING OUR DISTRIBUTION CHANNELS AND DIRECT SALES. Our future net revenue growth will depend in large part on the following factors: o our success in maintaining our current distributor and direct relationships; and o diversifying our distribution channels by selling to new distributors and to new direct customers. MAINTAINING AND EXPANDING OUR CURRENT SERVICE PROVIDER CUSTOMER BASE Most of our existing distributors currently distribute and use the product lines of our competitors. Some of our existing distributors may in the future distribute or use other competitive product lines. We cannot assure you that we will be able to attract and retain a sufficient number of our existing or future distributors and direct customers or that they will recommend, or continue to use, our products or that our distributors will devote sufficient resources to market and provide the necessary customer support for such products. In the event that any of our current distributors or direct customers reduce their purchases of our products, or that we fail to obtain future distributors or direct customers, our business could be harmed. In addition, it is possible that our distributors will give a higher priority to the marketing and customer support of competitive products or alternative solutions than to our products. Further, we cannot assure you that our distributors will continue to offer our products. Our distributor relationships are established through formal agreements that generally (1) do not grant exclusivity, (2) do not prevent the distributor from carrying competing product lines and (3) do not require the distributor to purchase any minimum dollar amount of our products. Additionally, our distribution agreements do not attempt to allocate certain territories for our products among our distributors. To the extent that different distributors target the same end users of our products, distributors may come into conflict with one another, which could damage our relationship with, and sales to, such distributors. OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON SOLE AND SINGLE SOURCE SUPPLIERS. Although we generally use standard parts and components for our products, many key parts and components are purchased from sole source vendors that alternative sources are not currently available. We currently purchase over 25 key components from vendors that there is currently no substitute, and we purchase over 150 key components from single vendors. In addition, we rely on several independent manufacturers to provide certain printed circuit boards, chassis and subassemblies for our products. Our inability to obtain sufficient quantities of these components has in the past resulted in, and may in the future result in, delays or reductions in product shipments, which could harm our business, financial condition or results of operations. In the event of a reduction or interruption of supply, we may need as much as six months before we would begin receiving adequate supplies from alternative suppliers, if any. We cannot assure you that any such source would become available to us or that any such source would be in a position to satisfy our production requirements on a timely basis, if at all. In such event, our business would be materially harmed. In addition, manufacturing certain of these single or sole source components is extremely complex, and our reliance on the suppliers of these components, especially for newly designed components, exposes us to potential production difficulties and quality variations that they experience, which has negatively impacted cost and timely delivery of our products. Any Page 16 of 47 significant interruption in the supply, or degradation in the quality, of any such component could have a material adverse effect on our business, financial condition or results of operations. OUR ABILITY TO MEET CUSTOMER DEMAND DEPENDS ON THE AVAILABILITY OF OUR COMPONENTS. Our distributors and direct customers frequently require rapid delivery after placing an order. Because we do not maintain significant component inventories, delays in shipment by one of our suppliers have lead to lost sales and sales opportunities. Lead times for materials and components vary significantly and depend on many factors, some of which are beyond our control, such as specific supplier performance, contract terms and general market demand for components. If distributor orders vary significantly from forecasts, we may not have enough inventory of certain materials and components to fill orders. Any shortages in the future, including those occasioned by increased sales, could result in delays in fulfillment of customer orders. Such delays could harm our business. OUR DEPENDENCE ON INDEPENDENT MANUFACTURERS COULD RESULT IN PRODUCT DELIVERY DELAYS. We currently use several independent manufacturers to provide certain components, printed circuit boards, chassis and subassemblies. Our reliance on independent manufacturers involves a number of risks, including the potential for inadequate capacity, the unavailability of, or interruptions in access to certain process technologies, and reduced control over delivery schedules, manufacturing yields and costs. Some of our manufacturers and suppliers are undercapitalized, and such manufacturers or suppliers may be unable in the future to continue to provide manufacturing services or components to us. If these manufacturers are unable to manufacture our components in required volumes, we will have to identify and qualify acceptable additional or alternative manufacturers, which could take in excess of nine months. We cannot assure you that any such source would become available to us or that any such source would be in a position to satisfy our production requirements on a timely basis, if available. Any significant interruption in our supply of these components would result in delays or in the allocation of products to customers, which in turn could have a material adverse effect on our business, financial condition or results of operations. Moreover, since all of our final assembly and test operations are performed in one location, any fire or other disaster at our assembly facility would harm our business. OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE. Our success depends to a significant degree upon the continued contributions of our Chief Executive Officer, Chief Financial Officer and our key management, sales, engineering, customer support and product development personnel, many of whom would be difficult to replace. In particular, the loss of Roger Koenig, President and Chief Executive Officer, who co-founded us, could harm us. We believe that our future success will depend in large part upon our ability to attract and retain highly skilled managerial, sales, customer support and product development personnel. Competition for qualified personnel in our industry and geographic location is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. We do not have employment contracts with any of our key personnel. The loss of the services of any such persons, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineering personnel and qualified sales personnel, could harm our business. OUR ABILITY TO MANAGE OUR GROWTH WILL AFFECT OUR BUSINESS. We have experienced rapid growth in net revenue and expansion of our operations, and we anticipate that further significant expansion will be required to address potential growth in our customer base and market opportunities. Such growth continues to place significant strain on our management, information systems, operations and resources. For example, in the past we have experienced minor shipping errors primarily as a result of training new personnel in the face of a period of rapid growth. Our ability to manage any future growth will continue to depend upon the successful expansion of our sales, marketing, research and development, customer support, manufacturing and administrative infrastructure and the ongoing implementation and improvement of a variety of internal management systems, procedures and controls. Continued growth will also require us to hire more engineering, sales and marketing and administrative personnel, expand customer support capabilities, expand management information systems and improve our inventory management practices. Recruiting qualified personnel is an intensely competitive and time-consuming process. We cannot assure you that we will be able to attract and retain the necessary personnel to accomplish our growth strategies or that we will not experience constraints that will harm our ability to satisfy customer demand in a timely fashion or to satisfactorily support our customers and operations. We cannot assure you that we will not experience significant problems with respect to any infrastructure expansion or the attempted implementation of systems, procedures and controls. If our management is unable to manage growth effectively, our business could be harmed. Page 17 of 47 OUR GROWTH IS DEPENDENT ON OUR INTRODUCTION OF NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS, AND ANY DELAY IN CUSTOMERS' TRANSITION TO OUR NEW PRODUCTS COULD ADVERSELY AFFECT OUR BUSINESS. Our success depends on our ability to enhance our existing products and to timely and cost-effectively develop new products including features that meet changing end user requirements and emerging industry standards. However, we cannot assure you that we will be successful in identifying, developing, manufacturing, and marketing product enhancements or new products that will respond to technological change or evolving industry standards. We intend to continue to invest significantly in product and technology development. We have in the recent past experienced delays in the development and commencement of commercial shipment of new products and enhancements, resulting in distributor and end user frustration and delay or loss of net revenue. It is possible that we will experience similar or other difficulties in the future that could delay or prevent the successful development, production or shipment of such new products or enhancements, or that our new products and enhancements will not adequately meet the requirements of the marketplace and achieve market acceptance. Announcements of currently planned or other new product offerings by us or our competitors have in the past caused, and may in the future cause, distributors or end users to defer or cancel the purchase of our existing products. Our inability to develop, on a timely basis, new products or enhancements to existing products, or the failure of such new products or enhancements to achieve market acceptance, could harm our business. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. Our introduction of new or enhanced products will also require us to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet customer demand. We have historically reworked certain of our products, previously sold, in order to add new features which were included in subsequent release of such product. We can give no assurance that these historical practices will not occur in the future and cause us to record lower revenue or negatively affect our gross margins. We believe that average selling prices and gross margins for our products will decline as such products mature and as competition intensifies. To offset declining selling prices, we believe that we must successfully reduce the costs of production of our existing products and introduce and sell new products and product enhancements on a timely basis at a lower cost or sell products and product enhancements that incorporate features that enable them to be sold at higher average selling prices. We may not be able to achieve the desired cost savings. To the extent that we are unable to reduce costs sufficiently to offset any declining average selling prices or we are unable to introduce enhanced products with higher selling prices, our gross margins will decline, and such decline would harm our business. OUR PRODUCTS MAY SUFFER FROM DEFECTS OR ERRORS THAT MAY SUBJECT US TO PRODUCT RETURNS AND PRODUCT LIABILITY CLAIMS. Our products have in the past contained, and may in the future contain, undetected or unresolved errors when first introduced or as new versions are released. Despite our extensive testing, errors, defects or failures are possible in our current or future products or enhancements. If such defects occur after commencement of commercial shipments, the following may happen: o delay in or loss of market acceptance and sales; o product returns; o diversion of development resources resulting in new product development delay; o injury to our reputation; or o increased service and warranty costs. Any of these results could have a material adverse effect on our business. Significant delays in meeting deadlines for announced product introductions or enhancements or performance problems with such products could result in an undermining of customer confidence in our products, which would harm our customer relationships as well. Although we have not experienced any product liability claims to date, the sale and support of our products entails the risk of such claims, and it is possible that we will be subject to such claims in the future. A successful product liability claim brought against us could harm our business. Our agreements with our distributors and direct customers typically contain provisions designed to limit our exposure to potential product liability claims. However, it is possible that the limitation of liability provisions contained in our agreements may not be effective or adequate under the laws of certain jurisdictions. Page 18 of 47 A LONGER THAN EXPECTED SALES CYCLE MAY AFFECT OUR REVENUES AND OPERATING RESULTS. The sale of our broadband digital access products averages approximately four to nine months in the case of service providers, but can take significantly longer in the case of incumbent local exchange carriers and other end users. This process is often subject to delays over which we have little or no control, including (1) a distributor's or a service provider's budgetary constraints, (2) distributor or service provider internal acceptance reviews, (3) the success and continued internal support of service provider's own development efforts, and (4) the possibility of cancellation or delay of projects by distributors or service providers. In addition, as service providers have matured and grown larger, their purchase process may become more institutionalized, and it will become increasingly difficult, and requires more of our time and effort, to gain the initial acceptance and final adoption of our products by these end users. Although we attempt to develop our products with the goal of facilitating the time to market of our service provider's products, the timing of the commercialization of a new distributor or service provider applications or services based on our products is primarily dependent on the success and timing of a service provider's own internal deployment program. Delays in purchases of our products can also be caused by late deliveries by other vendors, changes in implementation priorities and slower than anticipated growth in demand for our products. A delay in, or a cancellation of, the sale of our products could harm our business and cause our results of operations to vary significantly from quarter to quarter. WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE. The communications marketplace is characterized by (1) rapidly changing technology, (2) evolving industry standards, (3) changes in end user requirements and (4) frequent new product introductions and enhancements that may render our existing products obsolete. We expect that new packet based technologies will emerge as competition in the communications industry increases and the need for higher volume and more cost efficient transmission equipment expands. Industry standards for MDA equipment and technology are still evolving. The introduction of products embodying new technologies or the emergence of new industry standards can render existing products obsolete or unmarketable. For example, if the business market were to broadly adopt telecommunications equipment based on cable modems or cable telephony, sales of our existing or future products could be significantly diminished. As standards and technologies evolve, we will be required to modify our products or develop and support new versions of our products. The failure of our products to comply, or delays in achieving compliance, with the various existing and evolving industry standards could harm sales of our current products or delay introduction of our future products. FAILURE TO MEET FUTURE CAPITAL NEEDS MAY ADVERSELY AFFECT OUR BUSINESS. We require substantial working capital to fund our business. As of December 31, 1999, we had approximately $65.3 million in cash and short-term investments. We believe that such cash and cash equivalents, together with cash generated by operations, if any, will be sufficient to meet our capital requirements for at least the next twelve months. However, our capital requirements depend on several factors, including the rate of market acceptance of our products, the ability to expand our client base, the growth of sales and marketing and other factors. If capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. Additional financing may not be available when needed on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our services, take advantage of future opportunities or respond to competitive pressures, which could harm our business. CONTINUED EXPANSION OF THE MARKET FOR COMMUNICATIONS SERVICES IS NECESSARY FOR OUR FUTURE GROWTH. Our success will also depend on continued growth in the market for communications services. The global communications marketplace is evolving, and it is difficult to predict our potential size or future growth rate. We cannot assure you that this market will continue to grow. Moreover, increased regulation may present barriers to the sales of existing or future products. If this market fails to grow or grows more slowly or in a different direction than we currently anticipate, our business would be harmed. OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT US. We rely primarily on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. As of March 1 2000, we have been issued a total of six U.S. patents, we have nine additional patent that are pending issuance, of which one is allowable. We also have four U.S. registered trademarks, eight U.S. trademark application pending and five international trademark applications pending. We have also entered into confidentiality agreements with all of our employees and consultants and entered into non-disclosure agreements with our suppliers, customers and distributors in order to limit access to and disclosure of our proprietary information. However, such measures may not be adequate to deter and prevent misappropriation of our technologies or independent third-party development of similar technologies. Page 19 of 47 Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. Further, we may be subject to additional risks as we enter into transactions in foreign countries where intellectual property laws do not protect our proprietary rights as fully as do the laws of the U.S. We cannot assure you that our competitors will not independently develop similar or superior technologies or duplicate any technology that we have. Any such events could harm our business. The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants in our markets increases and the functionality of our products is enhanced and overlaps with the products of other companies, we may become subject to claims of infringement or misappropriation of the intellectual property rights of others. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to us. We have no assurance that any future claims, if determined adversely to us, would not harm our business. In our distribution agreements, we agree to indemnify distributors and service provider customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third-parties. In certain limited instances, the amount of such indemnities may be greater than the net revenue we may have received from the distributor. In the event litigation is required to determine the validity of any third-party claims, such litigation, whether or not determined in our favor, could result in significant expense to us, divert the efforts of our technical and management personnel or cause product shipment delays. In the event of an adverse ruling in any litigation, we might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties. In the event of a claim or litigation against or by us or our failure to develop or license a substitute technology on commercially reasonable terms, our business could be harmed. OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE. The market price of our common stock has been and is likely to continue to be subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates or recommendations by securities analysts, regulatory developments and other events or factors. In addition, the stock market in general and the market prices of equity securities of many high technology companies in particular, have experienced extreme price fluctuations, which often have been unrelated to the operating performance of such companies. These broad market fluctuations may harm the market price of our common stock. WE ARE CONTROLLED BY A SMALL NUMBER OF STOCKHOLDERS. Our members of the Board of Directors and executive officers, together with members of their families and entities that may be deemed affiliates of or related to such persons or entities, beneficially own approximately 59.2% of our outstanding shares of common stock. In particular, Mr. Koenig and Ms. Pierce, our Chief Executive Officer and Chief Financial Officer, respectively, are married and together beneficially own approximately 57.0 % of our outstanding shares of common stock. Accordingly, these stockholders are able to elect all members of our Board of Directors and determine the outcome of all corporate actions requiring stockholder approval, such as mergers and acquisitions. This level of ownership by such persons and entities may delay, defer or prevent a change in control and may harm the voting and other rights of other holders of our common stock. ITEM 2. PROPERTIES Our principal administrative, sales and marketing, research and development and support facilities consist of approximately 60,000 square feet of office space in Boulder, Colorado. We occupy these premises under a lease expiring December 31, 2009. As of December 31, 1999, the annual base rent for this facility was approximately $476,112. We also have a research and development facility consisting of approximately 12,000 square feet of office space in Tulsa, Oklahoma. Our principal manufacturing facility consists of approximately 39,000 square feet of space in Boulder, Colorado. We occupy these premises under a lease expiring November 13, 2005. As of December 31, 1999, the annual base rent for this facility was approximately $310,512. In addition to our principal office space in Boulder, Colorado, we lease approximately 9,550 square feet of additional office space in Boulder, which is currently subleased. We also lease facilities and offices in Tulsa, OK and Greensboro, NC, Miami, FL and Leawood, KS for our field sales and support organization. We believe that our current facilities and planned expansions are adequate to meet our needs through the next 12 months. See "Business-Risk Factors" "Our Quarterly Results Fluctuate Significantly and We May Not be Able to Maintain Our Existing Growth Rates" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" --"Liquidity and Capital Resources." ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. Page 20 of 47 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of all our executive officers as of March 1, 2000 are listed below, followed by a brief account of their business experience during the past five years. Executive officers are normally appointed annually by the Board of Directors at a meeting of the directors immediately following the Annual Meeting of the Stockholders. There are no family relationships among these officers, other than between Mr. Koenig and Ms. Pierce, who are married, nor any arrangements or understandings between any officer and any other person pursuant to which an officer was selected. Name Age Position - ---------------------- ----- ------------------------------------------------- Roger L. Koenig....... 44 President and Chief Executive Officer Nancy Pierce.......... 42 Chief Financial Officer, Treasurer and Secretary Barry Kantner......... 39 Vice President, Marketing Tim Anderson.......... 40 Vice President, Finance and Administration - ------------- Roger L. Koenig. Mr. Koenig has served as President, Chief Executive Officer and Chairman of the Board of Directors of the Company since our inception in September 1992. Prior to co-founding the Company, Mr. Koenig served as the President and Chief Executive Officer of Koenig Communications, an equipment systems integration and consulting firm. Prior to founding Koenig Communications, Mr. Koenig held a number of positions with IBM/ROLM Europe, a telecommunications equipment manufacturer, including Engineering Section Manager for Europe. Mr. Koenig received a B.S. in Electrical Engineering from Michigan State University and an M.S. in Engineering Management from Stanford University. Nancy Pierce. Ms. Pierce has served as our Vice President-Finance and Administration, Chief Financial Officer, Treasurer, Secretary and Director since our inception in September 1992. Prior to co-founding the Company, Ms. Pierce served as the Controller of Koenig Communications, an equipment systems integration and consulting firm. Prior to joining Koenig Communications, Ms. Pierce was a systems analyst at IBM Corporation and an internal auditor at ROLM Corporation. Ms. Pierce received a B.S. from Colorado State University and an M.B.A. from California State University, Chico. Barry Kantner. Mr. Kantner joined us in September 1999, as Vice President, Marketing. Prior to joining us, Mr. Kantner served as the Director Marketing and Engineering for the Access Products Division of ADC Telecommunications from August 1998 to September 1999; Director of Marketing for the Access Products Division of ADC Telecommunications from November 1997 to August 1998, Program Market Manager for the Access Products Division of ADC Telecommunications from November 1996 to November 1997; Group Market Manager of High Performance Networks for Digital Equipment Corporation from July 1996 to November 1996; and previous to July 1996 was the Director of System and Channel Marketing for Ascom Nexion. Tim Anderson. Mr. Anderson joined us in February, 1996 as the corporate controller and became the Vice President, Finance in July, 1999. Prior to joining us, Mr. Anderson served as the controller of RIK Medical LLC from September, 1994 to February, 1996. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Price of and Dividends on the Registrant's Common Equity. We made our initial public offering on July 30, 1998 at a price of $12.00 per share. Our common stock is listed on the Nasdaq National Market under the symbol "CACS." The table below sets forth the high and the low closing sales prices per share as reported on the Nasdaq National Market for the periods indicated. YEAR ENDED DECEMBER 31, 1999 HIGH LOW ---------------------------- ---- --- First quarter ended March 31, 1999................ $80.375 $31.375 Second quarter ended June 30, 1999................ $76.750 $29.250 Third quarter ended September 30, 1999............ $57.125 $30.000 Fourth quarter ended December 31, 1999............ $71.500 $41.250 Page 21 of 47 On March 1, 2000, the last reported sale price of the Registrant's common stock was $55.75 per share. As of March 1, 2000, there were approximately 2,000 record holders of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to accurately estimate the total number of stockholders represented by these record holders. We have never declared cash dividends on our common stock. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. (b) Recent Sales of Securities In reliance on Rule 701 promulgated under the Securities Act of 1933, during the year ended December 31, 1999, we issued an aggregate of 9,237 shares of common stock pursuant to the exercise of stock option grants under our 1995 Stock Option Plan. ITEM 6. SELECTED FINANCIAL DATA The selected financial data for the years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from our audited consolidated financial statements. The information set forth below should be read in connection with our audited consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of the Financial Condition and Results of Operations" included elsewhere in this Annual Report. FINANCIAL HIGHLIGHTS
As of or for the Years Ended December 31 ----------------------------------------------------- (in thousands, except per share data) 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- Revenue, net ....................... $ 2,058 $ 5,809 $ 18,719 $ 48,133 $108,815 Gross profit ....................... 771 2,525 9,250 25,066 $ 63,316 Operating income (loss) ............ 135 (100) 2,346 9,437 $ 33,106 Net income (loss) (1) .............. $ 181 $ (76) $ 1,735 $ 6,949 $ 23,565 Net income (loss) available to common stockholders ......... $ 181 $ (361) $ 614 $ 5,363 $ 23,565 Income (loss) per share: Basic .......................... $ 0.01 $ (0.03) $ 0.04 $ 0.29 $ 0.98 Diluted ........................ $ 0.01 $ (0.03) $ 0.04 $ 0.28 $ 0.93 Working capital .................... $ 121 $ 2,941 $ 16,615 $ 60,571 $ 90,153 Total assets ....................... $ 1,045 $ 4,822 $ 21,680 $ 72,313 $108,345 Redeemable preferred stock ......... $ -- $ 3,722 $ 17,358 $ -- $ -- Stockholders' equity ............... $ 222 (158) 560 63,358 $ 97,234
(1) We were a Subchapter S Corporation for income tax purposes prior to January 1, 1996 and accordingly, taxable income was reported in the individual returns of the stockholders. Pro forma net income, calculated as if we had been a taxable entity during 1995 would have been $113,000. (2) No cash dividends were paid for any of the years presented. We paid distributions to shareholders while a Subchapter S Corporation totaling $25,000 and $48,000 in 1995 and 1996, respectively. Page 22 of 47 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTICE CONCERNING FORWARD-LOOKING STATEMENTS NOTICE CONCERNING FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and assumptions made by management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of these words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under Item 1 - "Business-Risk Factors." Particular attention should be paid to the cautionary language in Item 1 - "Business-Risk Factors" under the headings "Our Quarterly Results Fluctuate Significantly, and We May Not Be Able to Maintain Our Existing Growth Rates," "We Depend on Emerging Telecommunications Service Providers for Substantially All of Our Business," "Our Markets are Highly Competitive and Have Many More Established Competitors," "We are Substantially Dependent on Our Distribution Channels," and "Our Dependence on Independent Manufacturers Could Result in Product Delivery Delays". Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW We are a leading provider of broadband digital access equipment solutions to communications service providers, including competitive local exchange carriers , incumbent local exchange carriers, independent operating companies, Internet service providers, interexchange carriers and wireless mobility service providers. Carrier Access products are used for the provisioning of enhanced voice and high-speed data and Internet services by service providers to businesses, government and enterprise end users. Carrier Access Corporation's Access Bank, Wide Bank, Access Navigator and CACTUS family products are connected to T1, high-bit-rate digital subscriber line, digital radio, T3 and optical access and transport networks. Our digital equipment provides a "last mile" solution for the distribution and management of high bandwidth services from carriers throughout the United States. Reaching large numbers of consumers using voice and high speed Internet access requires connectivity from service providers to end users. Installation of our central office communications and customer-located voice and data communications equipment enables this connectivity. Our products allow service providers to cost-effectively connect end users to their network products, decrease ongoing transmission equipment and maintenance expenses, while enabling new service delivery, such as integrated voice and high speed Internet access. Our products enable high bandwidth digital deployments targeted at end users requiring between four and 2800 telephone and data line equivalents of bandwidth. We believe that over 300 service providers and 500 other end users have purchased our products directly or through our distributors. We were incorporated in September 1992 as a successor company to Koenig Communications, an equipment systems integration and consulting company which had been in operation since 1986. In the summer of 1995, we ceased our systems integration and consulting business and commenced our main product sales with the introduction of the Access Bank Product Family. In the fourth quarter of 1997, we began commercial deployment of our Wide Bank Product Family and in January of 1999, we began commercial deployment of our Access Navigator product family. In December 1999 we began deployment of the CACTUS family of products. Accordingly, we have only a limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, uncertainties and difficulties frequently encountered by companies in an early stage of development, particularly companies in new and rapidly evolving markets. Our net revenue is derived from the sales of broadband digital access equipment and accessories. We recognize revenue upon shipment of product from our factory to our distributors' warehouses and direct customers. See Note 1 of Notes to Consolidated Financial Statements. In 1997, our Access Bank product family and the Wide Bank product family accounted for approximately 68% and 27%, respectively, of our net revenue. In 1999, our Access Bank product family, Wide Bank product family and Access Navigator product family accounted for approximately 41%, 46% and 9%, respectively, of our net revenue. Most of the sales of our products have historically been through distributors. Our distributors are responsible for warehousing product and fulfilling product orders as well as identifying potential service provider customers and, in some cases, customizing and integrating our products at end users' sites. As a result, our success depends on maintaining good relations with our distributors. Sales of our products historically have been made to a limited number of distributors. In 1997, Walker, ADC and Phillips accounted for 37%, 20% and 14% of net revenue, respectively. In 1998, Walker, Phillips and Telsource accounted for 43%, 15% and 13% of net revenue, respectively. In 1999, Walker and ADC accounted for 27% and 14% of net revenue, respectively. We expect that sales of our products will continue to be made to a small number of key Page 23 of 47 distributors. Accordingly, the loss of, or reduction in sales to, any of our key distributors could have a material adverse effect on our business. See Note 8 of Notes to Consolidated Financial Statements. In addition, significant portions of the sales of our products are currently being made through direct sales. As a result, our continued success depends on building and maintaining good relations with our direct customers. We have limited knowledge of the financial condition of certain of our customers. However, we are aware that some of our customers have limited financial and other resources which could impair their ability to pay us, although the financial instability of these customers has not limited any customer's ability to pay us for our products to date. While we believe we have adequately provided for uncollectable accounts, we cannot assure you that any bad debts that we incur will not exceed our reserves or that the financial instability of one or more of our customers will not harm our business, financial condition or results of operations. Any reduction in planned purchases by our customers in the future could harm our business. In addition, we grant certain of our customers "most favored customer" terms, pursuant to which we have agreed to not knowingly provide another customer with similar terms and conditions or a better price than those provided to the existing customer, without offering the more favorable prices to the existing customer. It is possible that these price protection and "most favored customer" clauses could cause a material decrease in the average selling prices and gross margins of our products, which could in turn have a material adverse effect on our business, financial condition or results of operations. Currently, our customers do not have any obligation to purchase additional products. Accordingly, we cannot assure you that present or future direct customers will not terminate their purchasing arrangements with us, or that they will not significantly reduce or delay the amount of our products that they order. Any such termination, change, reduction or delay in orders could have a material adverse effect on our business. In addition to being dependent on a small number of distributors and direct customers for a majority of our net revenue, we believe our products are distributed to a limited number of competitive service provider customers who are primarily competitive local exchange carriers. We believe that in 1998, thirty-five (35) service provider customers, indirectly, accounted for 83% of our net revenue and that in 1999, approximately seventy-five (75) service provider customers, indirectly, accounted for 85% of our net revenue. In particular, we believe that two of these service provider customers each accounted for more than 10% of our net revenue in 1999. None of these customers has any obligation to purchase additional products or services. Accordingly, there can be no assurance that present or future customers will not terminate their purchasing arrangements with us or our distributors or significantly reduce or delay the amount of our products that they order. Any such termination, change, reduction or delay in orders could have a material adverse effect on our business. We generally provide our distributors with limited stock rotation and price protection rights, and we have granted certain of our distributors "most favored customer" terms. There can be no assurance that these stock rotation rights, price protection rights or most favored customer provisions will not have a material adverse effect on our business, operating results or financial condition. We believe that average selling prices and gross margins for our products will decline as such products mature, as volume price discounts in distributor contracts take effect and as competition intensifies, among other factors. In 1999, we reduced the price of our Access Bank products, and we expect to make further price reductions in 2000 with respect to certain Access Bank and Wide Bank products. In addition, discounts to distributors and direct customers vary among product lines and are based on volume shipments, both of which affect gross margins. We believe our gross margins are likely to fluctuate based on product and channel mix. Margins will also likely be reduced from time to time by new product introductions. RESULTS OF OPERATIONS
Year Ended December 31, -------------------------------- (In thousands, except percentages and per share amounts) 1997 1998 1999 -------- -------- -------- Net revenue ............................................ $ 18,719 $ 48,133 $108,815 Gross Margin as a percentage of revenue ................ 49% 52% 58% Net income available to common stockholders ........... 614 5,363 23,565 Income per share (diluted) ............................. $ 0.04 $ 0.28 $ 0.93
For 1999, our net revenue increased to $108.8 million compared to $48.1 million and $18.7 million for the years ended December 31, 1998 and 1997 respectively. For 1999, our net income available to common stockholders increased to $23.6 million from $5.3 million and $614,000 for the years ended December 31, 1998 and 1997 respectively. These increases in net revenue and net income available to common stockholders were due to a significant increase in the sale of all products, including the Access Navigator product family, enhancements to existing products and increased acceptance of the Wide Bank product family. Our gross margin was 58%, 52%, and 49% for the years ended December 31, 1999, 1998, and 1997 respectively. Contributing to higher net income for 1999 was a substantial increase in revenue, gross margin and other income (primarily interest income), partially offset by increased operating expenses. Page 24 of 47 NET REVENUE AND COST OF GOODS SOLD Year Ended December 31, ------------------------------ (Dollars in thousands) 1997 1998 1999 -------- -------- -------- Net revenue ....................... $ 18,719 $ 48,133 $108,815 Cost of goods sold ................ 9,469 23,067 45,499 Net revenue for 1999 was $108.8 million. This represented an increase of $60.7 million or 126% from the $48.1 million of net revenue in 1998. The increase was due to the introduction of new products, primarily the Access Navigator in January 1999, along with increases in the sale of existing products to distributors and other direct customers. Net revenue increased to $48.1 in 1998 from $18.7 million in 1997, representing an increase of $29.4 million or 157%. These increases were attributable to the increased sales of existing products and enhancements in the Access Bank and Wide Bank product families. We anticipate that sales for the Wide Bank and Access Navigator product families will increase at a greater rate than the Access Bank product family. The CACTUS product family was introduced in December 1999 and we believe trial and evaluations of this product will convert into customer sales in 2000. The timing and quantities of orders for our products may vary from quarter to quarter in the future. This is due to factors such as demand for the products and ordering patterns of distributors and other direct customers. We believe that this trend will continue in the future, especially if the percentage of direct sales to end users increases. The timing of customer orders and our ability to fulfill them can cause material fluctuations in our operating results; we anticipate that such fluctuations will occur. During 1999, the majority of sales of our products were made through distributors. Our success depends in part on the continued sales and customer support efforts of our network of distributors and increasing our sales to our direct customers. In 1999, Walker and ADC accounted for 27% and 14% respectively, of net revenue. We expect that the sale of our products will continue to be made to a small number of distributors and other direct customers. Accordingly, the loss of, or a reduction in sales to, any of our key distributors or key direct customers could have a material adverse effect on our business, financial condition or results of operations. In addition to being dependent on a small number of distributors for a majority of our net revenue, we believe that our products are distributed to a limited number of service provider customers who are primarily competitive local exchange carriers. In 1999, we believe, based on information provided to us by our distributors, that two of these end user customers' purchases were in excess of 10% of our revenue. Costs of goods sold increased to $45.4 million for 1999 compared to $23.1 million for 1998 and $9.5 million in 1997. In each year, the increase was primarily attributable to increased product shipments, partially offset by cost reductions in existing product platforms. Year Ended December 31, ----------------------------- (Dollars in thousands) 1997 1998 1999 ------- ------- ------- Gross profit ..................... $ 9,250 $25,066 $63,316 Gross margin ..................... 49% 52% 58% Our gross profit for 1999 was $63.3 million. This represents an increase of $38.3 million or 153% from the 1998 gross profit of $25.1 million. Gross margin increased to 58% in 1999 from 52% in 1998. The increase in gross profit was driven primarily by increased product shipments and cost reductions and manufacturing efficiencies. The increase in gross margin percentage were principally due to material cost reductions for the existing product lines in addition to increases in manufacturing efficiencies generated by greater production volumes. Gross profit was approximately $25.1 million in 1998, an increase from $9.3 million in 1997. This 171% increase was caused by the increased shipments of our products partially offset by cost reductions. Gross margins for 1998 and 1997 were 52% and 49%, respectively. We believe that gross margins will decline if pricing declines occur in our product families at a greater rate than anticipated cost reductions. New product introductions could also harm gross margins until production volumes increase. We believe that average selling prices and gross margins for our products will decline as such products mature, as volume price discounts in distributor contracts and direct sales relationships take effect and as competition intensifies, among other factors. In addition, discounts to distributors vary among product lines and are based on volume shipments, both of which affect gross margins. Our gross margins vary between product families. As a result, we believe that our gross margins are likely to fluctuate in the future based on product mix and channel mix. Margins will likely be reduced from time to time by new product introductions by us and our competitors. Page 25 of 47 RESEARCH AND DEVELOPMENT EXPENSES Year Ended December 31, --------------------------------- (Dollars in thousands) 1997 1998 1999 --------- --------- --------- Research and development expenses .... $ 2,848 $ 5,588 $ 13,601 As a percentage of net revenue ....... 15.2% 11.6% 12.5% Research and development expenses increased to $13.6 million for 1999 from $5.6 million for 1998. This increase of $8.0 million or 143% was primarily due to an increase in the number of personnel engaged in the development of new products, specifically the InLoop-RT and the CACTUS programs, the addition of a research and development facility in Tulsa, Oklahoma and personnel added for enhancing our existing products. Research and development expenses increased from $2.8 million in 1997 to $5.6 million for 1998. This increase of $2.8 million or 100% was primarily attributable to an increase in the number of personnel engaged in the development of new products, primarily the Access Navigator as well as enhancements developed for the existing product families. Expenditures for prototyping and regulatory compliance also contributed to the increase, although to a much lesser extent. We expect the amount of research and development will increase in 2000, especially the first half of 2000, to fund the development of new products and enhancements for existing product platforms and the possible additional new research and development facilities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Year Ended December 31, -------------------------------------------- (Dollars in thousands) 1997 1998 1999 --------- --------- --------- Sales and marketing expenses.................................. $ 2,395 $ 6,083 $ 11,154 General and administrative expenses........................... 1,578 3,270 4,637 --------- --------- --------- Total selling, general and administrative expenses............ 3,973 9,353 15,791 As a percentage of net revenue................................ 21.2% 19.4% 14.5%
Selling, general and administrative expenses increased to $15.8 million in 1999. For 1998 we had selling, general and administrative expenses totaling $9.4 million. This represented an increase of $6.4 million or 69%. Marketing expense increases reflected increased hiring and marketing activity with respect to the introduction of the Access Navigator, InLoop-RT and CACTUS product families, customer support, advertising and trade shows. The increase in sales and marketing expenses was the result of our expanded sales and marketing activities and an increase in the size of the sales force and a corresponding increase in sales salaries, bonuses and commissions. We have hired and intend to continue to hire additional sales and marketing personnel and to continue to aggressively pursue sales and marketing campaigns. We expect these expenses to increase in absolute dollars in the future. We also expect general and administrative expenses to increase in absolute dollars as we continue to add personnel and incur additional costs related to the expansion of our business and incur increased costs in connection with the administration of multiple facilities. STOCK-BASED COMPENSATION As discussed in Note 1 to the Consolidated Financial Statements, we account for our stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Since inception, we have generally granted stock options with exercise prices equal to the fair value of the underlying Common Stock, as determined by our Board of Directors and based on our other equity transactions. During 1997 and the six months ended June 30, 1998, we granted options to employees with exercise prices less than the fair value per share based upon our previous preferred stock offerings and the estimated price per share in the initial public offering. Accordingly, we have recorded deferred compensation expense totaling approximately $3.1 million. Such compensation expense will be recognized pro rata over the 48 month vesting period of the options. This deferred compensation expense totaled approximately $83,000, $688,000 and $818,000 for 1997, 1998 and 1999. Related compensation expense will total approximately $818,000 for each of the years ended December 31, 2000 and 2001. It is our intention to generally grant future stock options with exercise prices equal to the fair value of the underlying Common Stock on the date of grant and account for such grants in accordance with generally accepted accounting principles. INTEREST AND OTHER INCOME Interest and other income increased to $2.3 million in 1999 from $1.2 million in 1998. This increase of $1.1 million was due to interest income earned on higher cash and cash equivalent balances. Interest and other income increased to $1.2 million in 1998 from $180,000 in 1997. The increase was primarily due interest earned on the proceeds of the 1998 initial public offering and cash reserves generated by operations. Page 26 of 47 INCOME TAXES For 1999, our effective combined federal and state income tax rate was 33.5%, compared to 34.8% for 1998. In both 1999 and 1998 we realized a benefit from research and development tax credits and non-taxable interest income. We had a combined income tax rate in 1997 of 31.3 %. We expect our effective tax rate to remain in the 32% to 34% range in the future if tax laws and rates do not materially change. See Note 5 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date primarily through cash generated from operations, sales of common and preferred stock and periodic borrowings under our credit facilities. as of December 31, ---------------------- (In thousands) 1998 1999 --------- --------- Working capital................................... $ 60,571 $ 90,153 Cash, cash equivalents and securities............. 53,978 65,321 Total assets...................................... 72,313 108,345 Years Ended December 31, --------------------------------- (In thousands) 1997 1998 1999 --------- --------- --------- Net cash provided (used) by: Operating activities.............. $ (3,495) $ 9,553 $ 14,176 Investing activities.............. (3,617) (22,063) (22,387) Financing activities.............. 12,287 37,607 2,470 CASH FLOWS Net cash provided by operating activities for 1999 totaled approximately $14.2 million, while operating activities in 1998 generated approximately $9.6 million of net cash. Cash provided by operating activities in 1999 was mainly due to net income, the tax benefit relating to the exercise of stock options and an increase in accounts payable, partially offset by increases in accounts receivable, inventory and prepaid expenses. We anticipate that increased sales to direct customers could increase Days Sales Outstanding and therefore accounts receivable balances could increase in the future. Cash provided by operating activities in 1998 was mainly due to net income and increases in accrued liabilities, and was partially offset by increases in accounts receivable. Cash used by operating activities in 1997 was primarily due to increases in inventory and accounts receivable, partially offset by net income and increases in accounts payable. Our inventory levels increased to approximately $9.4 million at December 31, 1999 from approximately $5.1 million at December 31, 1998. The increase was due primarily to a decision to maintain higher inventory balances for finished goods in order to fulfill potential customer requirements. Cash used by investing activities was approximately $22.4 million for year ended December 31, 1999 and approximately $22.1 million for 1998. Cash used by investing activities in both years was primarily the result of purchasing U.S. Government Agency and corporate bonds with maturities greater than three months. Our capital expenditures for 1999 were $5.3 million for additions to facilities and equipment to support our research, development and manufacturing activities, compared to $1.8 million for 1998. We anticipate that we will need to expand our facilities in our current and other locations to accommodate hiring additional personnel throughout the year 2000 to support ongoing operations. Cash used by investing activities was approximately $3.6 million for 1997, related primarily to purchases of U.S. Government Agency and Corporate bonds with maturities greater than three months and capital expenditures for additions to facilities and equipment to support our research, development and manufacturing activities. We intend to continue to significantly increase our capital expenditures in 2000 and thereafter for additions to facilities and equipment to support our research, development and manufacturing activities. Cash provided by financing activities was approximately $2.5 million for 1999 and $37.6 million for 1998. Cash provided by financing activities in 1999 was primarily due to the exercise of stock options. Cash provided by financing activities in 1998 was primarily due to net proceeds from the issuance of Common Stock in our initial public offering. Net proceeds from the issuance of preferred stock resulted in the cash provided from financing activities in 1997. LIQUIDITY At December 31, 1999, our principal sources of liquidity included cash and marketable securities available for sale of approximately $65.3 million and an unsecured bank credit facility of $5.0 million, which bears interest either the prime rate or at the libor rate plus 200 basis points. This working capital line of credit is limited to a borrowing base determined by the balance of our eligible receivables and inventory. At December 31, 1999, there was $1.0 million outstanding under the working capital line. See Note 4 of Notes to Consolidated Financial Statements. Page 27 of 47 At December 31, 1998, our working capital was approximately $60.6 million and had increased to $90.2 million at December 31, 1999. We have no significant capital spending or purchase commitments other than normal inventory purchase commitments under facilities leases. See Note 10 of Notes to Consolidated Financial Statements. We believe that our existing cash, investment balances, and our line of credit are adequate to fund our projected working capital and capital expenditure requirements for at least the next 12 months. Although operating activities may provide cash in certain periods, to the extent we experience growth in the future, we anticipate that our investing activities may use cash. Should the need arise, we believe we would be able to borrow additional funds or otherwise raise additional capital; however, there can be no assurance that additional funds or capital will be available in adequate amounts and on terms reasonably acceptable to us. We may consider using our capital to make strategic investments or to acquire or license technology or products. We may also enter into strategic alliances with third parties that could provide access to additional capital. Any such activities could require us to obtain additional financing. See "Business-Risk Factors-Potential Need for Additional Capital; Risks Relating to Potential Acquisitions." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of we due to adverse changes in financial and commodity market prices and rates. Historically, and as of December 31, 1999, we have had little or no exposure to market risk. Historically, and as of December 31, 1999, we have not used derivative instruments or engaged in hedging activities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page(s) ------- CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors' Report.............................................. 29 Consolidated Balance Sheets December 31, 1998 and December 31, 1999................................... 31 Consolidated Statements of Operations Years ended December 31, 1997, 1998 and 1999.............................. 32 Consolidated Statements of Stockholders' Equity (Deficit) Years ended December 31, 1997, 1998 and 1999............................. 33 Consolidated Statements of Cash Flows Years ended December 31, 1997, 1998 and 1999.............................. 34 Notes to Consolidated Financial Statements................................ 35 FINANCIAL STATEMENT SCHEDULE: Independent Auditor's Report............................................. 44 SCHEDULE II - - VALUATION AND QUALIFYING ACCOUNTS............................ 45 Page 28 of 47 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS CARRIER ACCESS CORPORATION: We have audited the accompanying consolidated balance sheets of Carrier Access Corporation and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of Carrier Access Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carrier Access Corporation and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Boulder, Colorado January 21, 2000 Page 29 of 47 CARRIER ACCESS CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, -------------------- 1998 1999 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 31,201 $ 25,460 Marketable securities available for sale 22,777 39,861 Accounts receivable, net of allowances for doubtful accounts and returns of $643 and $1,099 in 1998 and 1999, respectively 8,493 22,454 Inventory, net (note 2) 5,053 9,444 Deferred income taxes (note 5) 1,198 2,182 Prepaid expenses and other 804 1,863 --------- --------- Total current assets 69,526 101,264 --------- --------- Property and equipment, net of accumulated depreciation and amortization (note 3) 2,599 6,890 Deferred income taxes (note 5) 118 60 Other assets 70 131 --------- --------- Total assets $ 72,313 $ 108,345 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,630 $ 4,140 Accrued compensation payable 1,838 2,339 Accrued warranty costs payable 594 981 Line-of-credit (note 4) -- 1,000 Cooperative advertising 467 271 Deferred rent concessions (note 10) 274 412 Income taxes payable 2,000 1,399 Other liabilities 152 569 --------- --------- Total current liabilities 8,955 11,111 --------- --------- Stockholders' equity (note 7): Common stock $0.001 par value, 60,000,000 authorized and 23,630,355 and 24,179,111 shares issued and outstanding for December 31, 1998 and 1999, respectively 28 29 Additional paid-in-capital 59,955 69,447 Deferred compensation (2,377) (1,559) Retained earnings 5,752 29,317 --------- --------- Total stockholders' equity 63,358 97,234 --------- --------- Commitments (note 10) Total liabilities and stockholders' equity $ 72,313 $ 108,345 ========= ========= See accompanying notes to consolidated financial statements. Page 31 of 47 CARRIER ACCESS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
Year Ended December 31, ----------------------------------- 1997 1998 1999 --------- --------- --------- Net revenue $ 18,719 $ 48,133 $ 108,815 Cost of sales 9,469 23,067 45,499 --------- --------- --------- Gross profit 9,250 25,066 63,316 --------- --------- --------- Operating expenses: Sales and marketing 2,395 6,083 11,154 Research and development 2,848 5,588 13,601 General and administrative 1,578 3,270 4,637 Amortization of deferred stock compensation (note 7) 83 688 818 --------- --------- --------- Total operating expenses 6,904 15,629 30,210 --------- --------- --------- Income from operations 2,346 9,437 33,106 Interest income 174 1,213 2,354 Other income (expense), net 6 11 (24) --------- --------- --------- Income before income taxes 2,526 10,661 35,436 Income tax expense (note 5) 791 3,712 11,871 --------- --------- --------- Net income 1,735 6,949 23,565 Preferred stock dividend requirement (note 6) (1,121) (1,586) -- --------- --------- --------- Net income available to common stockholders $ 614 $ 5,363 $ 23,565 ========= ========= ========= Income per share: Basic $ 0.04 $ 0.29 $ 0.98 Diluted $ 0.04 $ 0.28 $ 0.93 Weighted average common shares outstanding: Basic 14,132 18,253 23,939 Diluted 14,713 19,387 25,223
See accompanying notes to consolidated financial statements. Page 32 of 47 CARRIER ACCESS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (In Thousands)
Common Stock Additional Deferred Total -------------------- Paid-in Stock Option Retained Stockholders' Shares Amount Capital Compensation Earnings Equity (Deficit) -------- -------- -------- ------------ -------- ---------------- BALANCES AT JANUARY 1, 1997 ................. 14,025 $ 19 $ -- $ -- $ (177) $ (158) Exercise of stock options .......................... 275 -- 69 -- -- 69 Deferred stock compensation related to stock options issued at less than fair value (note 7) .......... -- -- 1,227 (1,227) -- -- Amortization of deferred stock compensation ........ -- -- -- 83 -- 83 (note 7) Preferred stock dividend requirement (note 6) ...... -- -- -- -- (1,121) (1,121) Distribution to stockholders ....................... -- -- -- -- (48) (48) Net income ......................................... -- -- -- -- 1,735 1,735 -------- -------- -------- -------- -------- -------- BALANCES AT DECEMBER 31, 1997 ............... 14,300 19 1,296 (1,144) 389 560 Exercise of stock options .......................... 299 -- 64 -- -- 64 Deferred stock compensation related to stock options issued at less than fair value (note 7) .......... -- -- 1,921 (1,921) -- -- Amortization of deferred stock compensation (note 7) ......................................... -- -- -- 688 -- 688 Preferred stock dividend requirement (note 6) ...... -- -- -- -- (1,586) (1,586) Issuance of common stock in initial public offering, net of offering costs (note 6) ................... 3,450 3 37,599 -- -- 37,602 Conversion of preferred stock to common stock (note 6) ......................................... 5,593 6 18,939 -- -- 18,945 Purchase and retirement of common stock ............ (12) -- (59) -- -- (59) Tax benefit from exercise of stock options (note 5) -- -- 195 -- -- 195 Net income ......................................... -- -- -- -- 6,949 6,949 -------- -------- -------- -------- -------- -------- BALANCES AT DECEMBER 31, 1998 ............... 23,630 28 59,955 (2,377) 5,752 63,358 Exercise of stock options .......................... 549 1 1,469 -- -- 1,470 Amortization of deferred stock compensation (note 7) ......................................... -- -- -- 818 -- 818 Tax benefit from exercise of stock options (note 5) -- -- 8,023 -- -- 8,023 Net income ......................................... -- -- -- -- 23,565 23,565 -------- -------- -------- -------- -------- -------- BALANCES AT DECEMBER 31, 1999 ............... $ 24,179 $ 29 $ 69,447 $ (1,559) $ 29,317 $ 97,234 ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. Page 33 of 47 CARRIER ACCESS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Year Ended December 31, -------------------------------- 1997 1998 1999 -------- -------- -------- Cash flows from operating activities: Net income ..................................................................... $ 1,735 $ 6,949 $ 23,565 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization expense .......................................... 421 470 1,012 Provision for doubtful accounts and returns .................................... 382 246 456 Provision for inventory obsolescence ........................................... -- 576 41 Compensation expense related to stock options issued at less than fair value.... 83 688 818 Deferred income tax benefit .................................................... (237) (1,079) (926) Tax benefit relating to exercise of stock options .............................. -- 195 8,023 Changes in operating assets and liabilities: Accounts receivable .......................................................... (4,000) (4,093) (14,417) Inventory .................................................................... (4,573) 1,155 (4,432) Prepaid expenses and other ................................................... (59) (747) (1,120) Accounts payable ............................................................. 2,083 945 510 Accrued warranty costs payable ............................................... 230 308 387 Accrued compensation payable ................................................. 203 1,457 501 Cooperative advertising ...................................................... 159 308 (196) Deferred rent concessions .................................................... 78 57 138 Income taxes payable ......................................................... -- 2,000 (601) Other liabilities ............................................................ -- 118 417 -------- -------- -------- Net cash provided (used by) operating activities ............................. (3,495) 9,553 14,176 -------- -------- -------- Cash flows from investing activities: Purchase of equipment .......................................................... (1,065) (1,802) (5,303) Sales (purchases) of securities available for sale, net ........................ (2,514) (20,261) (17,084) Other .......................................................................... (38) -- -- -------- -------- -------- Net cash used by investing activities ........................................ (3,617) (22,063) (22,387) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of preferred stock, net ................................. 12,514 -- -- Proceeds from issuance of common stock, net .................................... -- 37,602 -- Proceeds from exercise of stock options ........................................ 69 64 1,470 Purchase and retirement of common stock ........................................ -- (59) -- Distributions to stockholders .................................................. (48) -- -- Proceeds from short-term borrowings ............................................ 1,900 -- 1,000 Payments on short-term borrowings .............................................. (2,148) -- -- -------- -------- -------- Net cash provided by financing activities .................................... 12,287 37,607 2,470 -------- -------- -------- Net increase(decrease) in cash and cash equivalents .......................... 5,175 25,097 (5,741) Cash and cash equivalents at beginning of year ..................................... 929 6,104 31,201 ======== ======== ======== Cash and cash equivalents at end of year ........................................... $ 6,104 $ 31,201 $ 25,460 ======== ======== ======== Supplemental disclosure of cash flow and financing activities information: Cash paid for income taxes ..................................................... $ 948 $ 2,616 $ 5,330 ======== ======== ======== Conversion of debt and accrued interest payable into preferred stock ........... $ -- $ -- $ -- ======== ======== ======== Conversion of preferred stock to common stock .................................. $ -- $ 18,945 $ -- ======== ======== ========
See accompanying notes to consolidated financial statements. Page 34 of 47 CARRIER ACCESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1998 and 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Business and Basis of Presentation. Carrier Access Corporation ("CAC" or the "Company") is a leading provider of broadband digital access equipment to communications service providers, including competitive local exchange carriers , Internet service providers, IOCs, IXEs and wireless service providers, which is used for the provisioning of enhanced voice and high-speed Internet services by service providers to end users such as small and medium-sized businesses and government and educational institutions. The Company sells its products through distributors and directly to end user customers. The Company operates in one business segment and substantially all of its sales and operations are domestic. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of consolidated 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 at the date of the consolidated financial statements and disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. b. Cash and Cash Equivalents and Marketable Securities Available for Sale. Cash and cash equivalents include investments in highly liquid debt securities with maturities or interest reset dates of three months or less at the time of purchase. Marketable securities available for sale represent U.S. Government Agency and Corporate bonds with maturities of greater than three months and are recorded at the lower of amortized cost or market value. At December 31, 1998 and 1999, amortized cost approximates market value. Securities available for sale consisted of the following as of December 31 (in thousands): Amortized Cost and Market Value 1999 Interest Rates ------------------------------- ------------------- 1998 1999 -------- -------- Medium Term Notes $ 1,677 $ 8,500 4.43% to 4.70% Corporate Notes 5,943 4,622 5.99% Municipal Bonds 12,257 18,339 3.59% to 4.73% Other 2,900 8,400 3.75% -------- -------- $ 22,777 $ 39,861 Total ======== ======== c. Inventory. Inventory is recorded at the lower of cost or market using standard costs that approximate average costs. Costs include certain warehousing costs and other allocable overhead. d. Property and equipment. Property, equipment and leasehold improvements are recorded at cost and are depreciated and amortized using the straight-line method over useful lives ranging from three to thirty years or the lease term. Depreciation and amortization expense for the years ended December 31, 1997, 1998 and 1999 totaled $186,000, $470,000 and $1,012,000, respectively. e. Revenue Recognition. Revenue from sales of products is recognized upon shipment. Reserves for estimated sales returns through stock rotation are recorded when sales are made to customers with the right of return and are based on management's estimate of expected returns and historical experience. The Company provides limited price protection to its distributors, whereby increases in prices are subject to a 60-day notice period before becoming effective. In addition, the distributor is also entitled to receive a credit for subsequent price decreases to the extent of unsold distributor inventory at the time of the price decrease. The Company also provides its distributors with limited stock rotation rights, whereby products may be returned for an equal dollar amount of new or different equipment. Customers are limited to three exchanges per year and an amount equal to 15% of purchases in the preceding four month period. Neither of these rights affect the total sales price or payment obligations of the customer. In addition, the customers' obligation to the Company is not contingent upon the ultimate resale of the products. The Company provides for the estimated impact of price protection and stock rotation rights in its allowance for estimated returns based on historical experience and management's forecasts of price protection credits and returns. Page 35 of 47 f. Advertising Costs. In addition to its own advertising activities, the Company accrues a specified percentage of the previous quarter's sales over certain contractual minimums to reimburse distributors for a portion of their advertising costs. Any unused allowance expires if not used during the following six months. Cooperative advertising expense for the years ended December 31, 1997, 1998 and 1999 totaled $217,687, $342,442 and $269,224, respectively, and is included in sales and marketing expenses. g. Research and Development Costs. Research and development costs are charged to operations as incurred. h. Long-Lived Assets. The Company accounts for long-lived assets under the provisions 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 (SFAS 121), which requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is generally recognized when estimated undiscounted future cash flows expected to be generated by the asset is less than its carrying value. Measurement of impairment loss is based on the fair value of the asset, which is generally determined using valuation techniques such as the discounted present value of expected future cash flows. i. Income Taxes. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is required to the extent any deferred tax assets may not be realizable. j. Income Per Share, Common Stock Split and Re-Incorporation. Income per share (EPS) is presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (SFAS 128). SFAS 128 requires the presentation of basic and diluted EPS. Under SFAS 128, basic EPS excludes dilution for potential common shares and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted and resulted in the issuance of common stock. Diluted income per share includes the impact of common stock options and excludes the impact of redeemable preferred stock, as the effect of the assumed conversion of the preferred stock and the elimination of the related dividend requirement would be antidilutive. k. Stock-Based Compensation. The Company accounts for its stock-based employee compensation plan using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. The Company has provided pro forma disclosures of net income and income per share, as if the fair value based method of accounting for the plan, as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), had been applied. Stock options issued to consultants and others for services are recorded at fair value as prescribed by SFAS 123. Charges to operations associated with these option grants were not significant during the years ended December 31, 1997, 1998 and 1999. l. Warranty Costs. The Company provides limited warranty protection to customers for a period of up to five years from the date of sale for parts and labor. The Company has accrued for its warranty obligations based on historical experience and management's estimate of future warranty costs to be incurred. Page 36 of 47 2. INVENTORY The components of inventory as of December 31, are summarized as follows (in thousands): 1998 1999 ------ ------ Raw materials............................... $3,327 $5,109 Work-in-process............................. 93 25 Finished goods.............................. 2,209 4,927 Reserve for obsolescence.................... (576) (617) ------ ------ $5,053 $9,444 ====== ====== 3. PROPERTY AND EQUIPMENT Property and equipment as of December 31, consisted of the following (in thousands): 1998 1999 ------ ------ Machinery and software...................... $2,706 $6,831 Real property............................... 270 270 Furniture, fixtures and other............... 295 478 Leasehold improvements...................... 174 1,165 ------ ------ 3,445 8,744 Less accumulated depreciation............... (846) (1,854) ------ ------ $2,599 $6,890 ====== ====== 4. DEBT In 1999, the Company entered into a credit agreement with a bank that provides for a $5.0 million revolving line of credit. The revolving line of credit has two interest options, either prime rate or the libor rate plus 200 basis points, matures in 2000, and is secured by certain assets of the Company. Borrowings of $1.0 million were outstanding under the revolving line of credit at December 31, 1999. The above credit agreement contains certain restrictive covenants, including the maintenance of various financial ratios and does not permit the payment of any dividends without the prior written consent of the lender. 5. INCOME TAXES Income tax expense consists of the following for the years ended December 31, (in thousands): 1997 1998 1999 ------- ------- ------- Current $ 1,028 $ 4,791 $12,797 Deferred.................................... (237) (1,079) (926) ------- ------- ------- Income tax expense..................... $ 791 $ 3,712 $11,871 ======= ======= ======= A reconciliation of expected income tax expense calculated by applying the statutory Federal tax rate to actual income tax expense for the years ended December 31, is as follows (in thousands): 1997 1998 1999 ------- ------- ------- Expected income tax expense........................ $ 859 $ 3,631 $12,403 State income taxes, net of federal tax benefit..... 64 386 1,160 Change in valuation allowance ..................... (67) -- -- Research and development tax credit................ (112) (286) (1,232) Other, net......................................... 47 (19) (460) ------- ------- ------- Actual income tax expense........................ $ 791 $ 3,712 $11,871 ======= ======= ======= Page 37 of 47 The tax effects of significant temporary differences that result in deferred tax assets and liabilities at December 31, are as follows (in thousands): 1998 1999 -------- -------- Deferred tax assets: Allowance for doubtful accounts ................... $ 241 $ 519 Inventory reserves ................................ 321 237 Accrued warranty and co-operative advertising...... 398 386 Other accrued expenses ............................ 111 -- Compensation accruals ............................. 361 907 Research & experimentation credit.................. -- 432 Other, net ........................................ 55 166 -------- -------- Total deferred tax asset ..................... $ 1,487 $ 2,647 -------- -------- Deferred tax liabilities: Property and equipment ............................ (149) (349) Other, net ........................................ (22) (56) -------- -------- Total deferred tax liabilities ............... (171) (405) -------- -------- Net deferred tax asset ....................... $ 1,316 $ 2,242 ======== ======== For the years ended December 31, 1998 and 1999, the Company recognized $195,000 and $8,023,000 as a direct increase to paid-in capital for the income tax benefit resulting from the exercise of non-qualified stock options by employees. 6. REDEEMABLE PREFERRED STOCK AND INITIAL PUBLIC OFFERING During 1995, the Company authorized a new class of preferred stock, consisting of 5,000,000 convertible Series A preferred shares with a par value of $0.10 per share. The preferred shares were convertible, at the option of the holder, into shares of common stock which was subject to the three-for-two forward split. The preferred shares were redeemable at the option of a majority of the preferred stockholders, any time after four years from the date of issuance, provided that the Company had not achieved certain financial results or completed a public offering of common stock, both as defined. On June 21, 1996, the Company completed a private placement of 1,210,861 shares of Series A preferred stock at a price of $2.86 per share, for net proceeds of $3,049,406. The private placement included 135,678 preferred shares issued to noteholders. In the event of the Company's liquidation, or redemption of the preferred shares, the Series A preferred stockholders were entitled to $2.86 per share plus unpaid dividends equal to 15% of the liquidation value per annum. During 1997, the Company amended its articles of incorporation to authorize a new class of preferred stock, consisting of 2,725,998 convertible Series B preferred shares with a par value of $0.10 per share. On September 16, 1997, the Company completed a private placement of 2,517,894 shares of Series B preferred stock at a price of $4.99 per share, for net proceeds of $12,514,291. In the event of the Company's liquidation, or redemption of the preferred shares, the Series B stockholders were entitled to $4.99 per share plus unpaid dividends equal to 15% of the liquidation value per annum. In August 1998, the Company completed its initial public offering of 3,450,000 shares of common stock at $12.00 per share, for net proceeds of approximately $37.6 million. Aggregate offering costs were approximately $3.8 million. In connection with the initial public offering, 1,210,861 shares of Series A preferred stock and 2,517,894 shares of Series B preferred stock with a liquidation value of $2.86 and $4.99 per share, respectively, were converted into common stock, resulting in the issuance of 5,593,133 shares of common stock to the preferred stockholders. 7. STOCK OPTIONS Pursuant to the Company's 1995 stock option plan (the "Plan"), a committee appointed by the Company's Board of Directors may grant incentive and nonqualified options to employees, consultants and directors. The Plan currently authorizes the grant of options up to 4,875,000 shares of authorized common stock. Incentive stock options have a ten-year term and non-qualified stock options have a five-year term. A majority of the stock options vest 25% on the first anniversary date of the grant and 6.25% each quarter thereafter, with the remaining stock options vesting 100% five years from the grant date. As of December 31, 1999, an aggregate of 4,942,700 options had been granted under the Plan of which 1,211,250 were incentive stock options and 3,731,450 were non-qualified stock options. Page 37 of 46 The following summarizes stock option activity under the Plan:
Shares Weighted Average Under Option Exercise Price ------------ -------------- Options outstanding at January 1, 1997...................... 764,250 $0.25 Granted................................................ 927,675 0.50 Exercised.............................................. (274,689) 0.25 Canceled............................................... (73,284) 0.33 ---------- Options outstanding at December 31, 1997.................... 1,343,952 0.42 Granted................................................ 1,413,150 8.82 Exercised.............................................. (298,856) 0.22 Canceled............................................... (658,906) 3.33 ---------- Options outstanding at December 31, 1998.................... 1,799,340 5.99 Granted................................................ 1,084,050 40.19 Exercised.............................................. (548,847) 2.68 Canceled............................................... (414,427) 20.86 ---------- Options outstanding at December 31, 1999 ................... 1,920,116 22.99 ---------- Options available for grant at December 31, 1999 ........... 1,683,909 ----------
The following summarizes information about outstanding options at December 31, 1999:
Weighted- average Range of Exercise Number remaining Number vested and Weighted-average Prices outstanding contractual life exercisable exercise price - -------------------------- --------------- ------------------ -------------------- ----------------- $ 0.00 - $ 6.00 594,602 3.1 591,977 $ 2.70 $ 6.00 - $12.00 247,264 3.5 225,606 $10.90 $12.00 - $18.00 59,625 3.4 5,963 $14.25 $18.00 - $24.00 39,325 3.8 7,375 $24.00 $24.00 - $30.00 30,000 4.0 7,500 $28.75 $30.00 - $36.00 307,750 4.2 31,750 $31.51 $36.00 - $42.00 518,000 4.1 -- $-- $42.00 - $54.00 53,550 4.9 -- $-- $54.00 - $60.00 70,000 4.2 -- $--
As discussed in Note 1, the Company applies APB 25 and related interpretations in accounting for stock options issued to employees and directors. As a result, for options issued with exercise prices below the estimated fair market value on the date of grant, the Company recorded deferred compensation expense totaling approximately $1,227,000 for options granted during the year ended December 31, 1997, and $1,921,000 for options granted during the year ended December 31, 1998. Such deferred compensation expense will be amortized to operations pro rata over the forty-eight month option vesting period. Such amortization expense totaled approximately $83,000, $688,000 and $818,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Page 39 of 47 The weighted average fair values of options granted during 1997, 1998 and 1999 were $0.30, $6.28 and $30.61 per share, respectively, using the Black-Scholes option-pricing model with the following assumptions: no expected dividends, no volatility in 1997, 89.5% volatility in 1998 and 99.4% volatility in 1999, expected life of the options of three years in 1997, five years in 1998 and 1999 and a risk-free interest rate of 6.0% for all years. Had compensation cost for the Company's stock-based compensation plan been determined based upon the fair value of options on the grant dates, consistent with the provisions of SFAS 123, the Company's 1997, 1998 and 1999 pro forma net income would have been as follows (in thousands, except per share data): Year Ended December 31, --------------------------- 1997 1998 1999 ------- ------- ------- Net income available to common stockholders: As reported ............................. $ 614 $ 5,363 $23,565 Pro forma ............................... 577 5,039 14,779 Income per common share: As reported: Basic .............................. $ 0.04 $ 0.29 $ .98 Diluted ............................ 0.04 0.28 .93 Pro forma: Basic .............................. $ 0.04 $ 0.28 $ .62 Diluted ............................ 0.04 0.26 .59 8. SIGNIFICANT CUSTOMERS, SUPPLIERS AND CONCENTRATION OR CREDIT RISK Our customers are primarily distributors and an original equipment manufacturer, who resell the Company's products to end users. The Company recognized revenue from the following significant customers for the years ended December 31: Company 1997 1998 1999 ------- ------- ------- ------- A..................................... $ 6,840 $20,749 $29,877 B..................................... 2,698 7,369 9,858 C..................................... 1,253 6,360 3,660 D..................................... 3,802 2,337 15,195 Although the Company generally uses standard parts and components for its products, many key components are purchased from sole or single source vendors for which alternative sources may not currently be available. The identification and utilization of new suppliers for such items could adversely effect the Company's future operating results. The Company is exposed to potential concentrations of credit risk from its accounts receivable with its various customers and receivables are concentrated in customers in the telecommunications industry. To reduce this risk, the Company has a policy of assessing the creditworthiness of its customers and monitors the aging of its accounts receivable for potential uncollectable accounts. 9. EMPLOYEE BENEFIT PLAN In May 1996, the Company adopted a defined contribution employee benefit plan (the Plan) under Section 401(k) of the Internal Revenue Code which is available to all employees who meet the Plan's eligibility requirements. Employees may contribute up to the maximum limits allowed by the Internal Revenue Code. The Company may make discretionary employer matching contributions to the Plan. The Company made no contributions to the Plan in 1997, 1998 or 1999. Page 40 of 47 10. COMMITMENTS The Company leases office space under various noncancelable operating leases that expire through 2009. Future obligations under these leases are as follows (in thousands): Year Ending December 31: 1999............................ $ 896 2000............................ 1,076 2001............................ 1,064 2002............................ 1,110 2003............................ 1,159 Thereafter...................... 5,526 -------- $ 10,831 ======== The Company records rent expense under noncancelable operating leases using the straight-line method after consideration of increases in rental payments over the lease term, and records the difference between actual payments and rent expense as deferred rent concessions. Rent expense for the years ended December 31, 1997, 1998 and 1999 totaled $547,130, $555,483 and $977,889, respectively. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 41 of 47 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item concerning our directors and executive officers is incorporated by reference to the information set forth in the sections entitled "Proposal One--Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended December 31, 2000 (the "2000 Proxy Statement"), except that certain information required by this item concerning our executive officers is incorporated by reference to the information set forth in the section entitled "Executive Officers of the Company" at the end of Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item regarding executive compensation is incorporated by reference to the information set forth in the sections entitled "Proposal One--Election of Directors--Director Compensation" and "Executive Officer Compensation" in our 2000 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth in the section entitled "Share Ownership of Principal Stockholders and Management" in our 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item regarding certain relationships and related transactions is incorporated by reference to the information set forth in the section entitled "Transactions with Management" in our 2000 Proxy Statement. Page 42 of 47 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: 1. Consolidated Financial Statements. The following consolidated financial statements of the Company and the Independent Auditors' Report therein are filed as part of this Form 10-K: Page ---- Independent Auditors' Report................................................. 29 Consolidated Balance Sheets as of December 31, 1998 and 1999................. 31 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999........................................................ 32 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..................................... 33 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999........................................... 34 Notes to Consolidated Financial Statements................................... 35 2. Consolidated Financial Statement Schedule. The following consolidated financial statement schedule of the Company for the years ended December 31, 1997, 1998 and 1999 filed as part of this Form 10-K should be read in conjunction with the Consolidated Financial Statements, and related notes thereto, of the Company. Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1998 and 1999. Schedules other than those listed above have been omitted since they are either not required, not applicable, or the information is otherwise included. 3. Exhibits. The exhibits listed on the accompanying index to exhibits immediately following the consolidated financial statement schedule are filed as part of, or incorporated by reference into, this Form 10-K. (b) Reports on Form 8-K. No Reports on Form 8-K were filed during the fourth quarter ended December 31, 1999. Page 43 of 47 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS CARRIER ACCESS CORPORATION: Under date of January 21, 2000, we reported on the consolidated balance sheets of Carrier Access Corporation and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1999, as contained in the Company's Annual Report on Form 10-K for 1999. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement Schedule II-Valuation and Qualifying Accounts. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Boulder, Colorado January 21, 2000 Page 44 of 47 SCHEDULE II CARRIER ACCESS CORPORATION VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Balance At Additions Bad Debts Balance At Beginning Charged to Write-offs, and End Allowance for doubtful accounts and returns: of Period Operations (1) Returns (1) of Period ---------------- --------------- -------------- -------------- Year Ended: December 31, 1997 .......................... $ 20 $ 817 $ (439) $ 398 ================ =============== ============== ============== December 31, 1998 .......................... $ 398 $ 2,305 $ (2,060) $ 643 ================ =============== ============== ============== December 31, 1999 .......................... $ 643 $ 1,077 $ (621) $ 1,099 ================ =============== ============== ============== Inventory Obsolescence Reserve: Year Ended: December 31, 1997 .......................... $ -- $ -- $ -- $ -- ================ =============== ============== ============== December 31, 1998 .......................... $ -- $ 805 $ (229) $ 576 ================ =============== ============== ============== December 31, 1999 .......................... $ 576 $ 794 $ (753) $ 617 ================ =============== ============== ==============
(1) Includes provisions for stock rotations and other sales returns, and actual returns which were charged against revenue. (See note 1(e) to the Company's Consolidated Financial Statements included in Part II of this Annual Report). See accompanying independent auditors report. Page 45 of 47 EXHIBIT INDEX Exhibit Number Description of Document ------ ----------------------- 3.1 Registrant's Amended and Restated Certificate of Incorporation as filed with the Secretary of State of Delaware on August 5, 1998 (which is incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, Reg. No. 333-53947 ("Registrant's 1998 S-1")). 3.2 Registrant's Bylaws (which is incorporated herein by reference to Exhibit 3.2 to the Registrant's 1998 S-1). 4.1 Form of Registrant's Specimen Common Stock Certificate (which is incorporated herein by reference to Exhibit 4.1 to the Registrant's 1998 S-1). 4.2 Amended and Restated Investor Rights Agreement, among the Registrant and the investors and founders named therein, dated September 16, 1997 (which is incorporated herein by reference to Exhibit 4.2 to the Registrant's 1998 S-1). 10.1 ?Form of Diamond Level Distributor Agreement (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's 1998 S-1). 10.2 Form of Platinum Level OEM Agreement (which is incorporated herein by reference to Exhibit 10.2 to the Registrant's 1998 S-1). 10.3 Line of Credit Agreement with Bank One for $5,000,000 dated July 2, 1998 (which is incorporated herein by reference to Exhibit 10.3 to the Registrant's 1998 S-1). 10.4 Lease Agreement between Carrier Access Corporation and Cottonwood Land and Farms Ltd. for facilities at 5395 Pearl Parkway, Boulder, Colorado, dated June 1, 1995 (which is incorporated herein by reference to Exhibit 10.4 to the Registrant's 1998 S-1). 10.5 Amendment to Lease Agreement between Carrier Access Corporation and Cottonwood Land and Farms Ltd. Dated September 20, 1995 (which is incorporated herein by reference to Exhibit 10.5 to the Registrant's 1998 S-1). 10.6 Registrant's 1995 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.6 to the Registrant's 1998 S-1). 10.7 Registrant's 1998 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.7 to the Registrant's 1998 S-1). 10.8 Amendment to Lease Agreement between Carrier Access Corporation and Cottonwood Land and Farms Ltd. Dated October 25, 1998. 10.9 Form of Directors' and Officers' Indemnification Agreement (which is incorporated herein by reference to Exhibit 10.9 to the Registrant's 1998 S-1). 10.10 Lease Agreement between Carrier Access Corporation and TC Boulder Warehouse, LP, a Delaware limited partnership for facilities at 6837 Winchester Circle, Boulder, Colorado, dated November 13, 1998. 10.11* Line of Credit Agreement with Bank One for $5,000,000 dated July 2, 1999 23.1* Consent of KPMG LLP, Independent Certified Public Accountants. 24.1* Power of Attorney. Reference is made to the following Signature Page. 27.1* Financial Data Schedule. (In EDGAR format only) - ------------------ * Filed herewith. Page 46 of 47 SIGNATURE Pursuant to the requirements of section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boulder, State of Colorado, on this 30th day of March 1999. CARRIER ACCESS CORPORATION (Registrant) By: /s/ Nancy Pierce ------------------------------------------ Nancy Pierce Vice President-Finance and Administration, and Chief Financial Officer, Treasurer (Principal Financial and Accounting Officer), Secretary and Director POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Nancy Pierce, his or her attorney-in-fact, with power of substitution in any and all capacities, to sign any 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 the attorney-in-fact or his or her substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the persons whose signatures appear below, which persons have signed such report on March 30, 1999 in the capacities indicated: Signature Title --------- ----- /s/ Roger L. Koenig - ---------------------------------- (Roger L. Koenig) President, Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors /s/ Nancy Pierce - ---------------------------------- (Nancy Pierce) Vice President-Finance and Administration, Chief Financial Officer, Treasurer (Principal Financial and Accounting Officer), Secretary and Director /s/ Douglas Carlisle - ---------------------------------- (Douglas Carlisle) Director /s/ Joseph Graziano - ---------------------------------- (Joseph Graziano) Director /s/ Ryal Poppa - ---------------------------------- (Ryal Poppa) Director /s/ John W. Barnett, Jr. - ---------------------------------- (John W. Barnett, Jr.) Director Page 47 of 47 EX-10.11 2 LINE OF CREDIT AGREEMENT WITH BANK ONE Exhibit 10.11 [LOGO OF BANK ONE APPEARS HERE] LOAN AGREEMENT - ----------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call $5,000,000.00 07-02-1999 07-02-2000 078105 - ----------------------------------------------------------------------------- Collateral Account Officer Initials 328 1518454676 00410 - ----------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ----------------------------------------------------------------------------- Borrower: CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION 5395 PEARL PARKWAY BOULDER,CO 80301 Lender: Bank One, Colorado, NA Corporate Lending - Boulder 1125 17th Street Denver, Co 80217 ================================================================================ THIS LOAN AGREEMENT between CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION ("Borrower") and Bank One, Colorado, NA ("Lender") is made and executed as of July 2, 1998. This Agreement governs all loans, credit facilities and/or other financial accommodations described herein and, unless otherwise agreed to in writing by Lender and Borrower, all other present and future loans, credit facilities and other financial accommodations provided by Lender to Borrower. All such loans, credit facilities and other financial accommodations, together with all renewals, extensions and modifications thereof, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; and (b) all such Loans shall be and shall remain subject to the following terms and conditions of this agreement. TERM. This Agreement shall be effective as of July 2, 1998, and shall continue thereafter until all Loans and other obligations owing by Borrower to Lender hereunder have been paid in full and Lender has no commitments or obligations to make further Advances under the Loans to Borrower. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code as adopted in the State of Colorado. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Loan Agreement, as may be amended or modified from time to time, together with all exhibits and schedules attached hereto from time to time. Account. The word "Account" means a trade account receivable of Borrower for goods sold or leased or for services rendered by Borrower in the ordinary course of its business. Account Debtor. The words "Account Debtor" mean the person or entity obligated upon an Account. Advance. The word "Advance" means any advance or other disbursement of Loan proceeds under this Agreement. Borrower. The word "Borrower" means CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION. Borrowing Base. The words "Borrowing Base" mean The Borrowing Base will be, as determined by Lender from time to time, the lesser of (a) $5,000,000.00; or (b) the sum of (i) 75.00% of the aggregate amount of Eligible Accounts, plus (ii) 50.00% of the aggregate amount of Eligible Inventory backed by eligible purchase orders not exceeding $500,000.00 or the Accounts Receivable Borrowing Base, whichever is less. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral for any Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Committed Sum. The words "Committed Sum" mean an amount equal to $5,000,000.00. Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain terms and conditions acceptable to Lender and in which Lender has a first lien security interest, less the amount of all returns, discounts, credits, and offsets of any nature; provided, however, unless otherwise agreed to by Lender in writing, Eligible Accounts do not include; (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower and to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (b) All Accounts with respect to which Borrower has furnished a payment and/or performance bond and that portion of any Accounts for or representing retainage, if any, until all prerequisites to the immediate payment of such retainage have been satisfied. (c) Accounts with respect to which goods are placed on consignment or subject to a guaranteed sale or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which the Account Debtor is not a resident of, or whose principal place of business is located outside of, the United States or its territories, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender in its sole and absolute discretion. (e) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (f) Accounts which are subject to dispute, counterclaim, of setoff. (g) Accounts with respect to which all goods have not been shipped or delivered, or all services have not been rendered, to the Account Debtor. (h) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (i) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (j) Accounts which have not been paid or are not due and payable in full within 90 days from the original invoice date. Eligible Inventory. The words "Eligible Inventory" mean, at any time, the aggregate value of all of Borrower's Inventory as defined below except: (a) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties, except Lender's security interest. (b) Inventory which Lender, in its sole and absolute discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for further processing. (c) Inventory which has been returned or rejected. (d) Inventory which is held by others on consignment, sale on approval or otherwise not in Borrower's physical possession, except upon the written consent of Lender. (e) Inventory located outside the United States. For purposes of this Agreement, Eligible Inventory shall be valued at the lower of cost or market value. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Grantor. The word "Grantor" means and includes each and all of the persons or entities granting a Security Interest in any Collateral for any of the Loans. Guarantor. The word "Guarantor" means and includes without limitation, each and all of the guarantors, sureties, and accommodation parties for any of the Loans. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and accrued interest thereon, together with all other liabilities, costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus any accrued interest 07-02-1999 LOAN AGREEMENT Page 2 Loan No. (Continued) ================================================================================ thereon, owing by Borrower, or any one or more of them, to Lender of any kind or character, now existing or hereafter arising, as well as all present and future claims by Lender against Borrower, or any one or more of them, and all renewals, extensions, modifications, substitutions and rearrangements of any of the foregoing; whether such Indebtedness arises by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, overdraft, indemnity agreement or otherwise; whether such Indebtedness is voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be liable primarily or secondarily or as debtor, maker, comaker, drawer, endorser, guarantor, surety, accommodation party or otherwise. Inventory. The word "Inventory" means all raw materials and all tangible personal property, goods, merchandise and other personal property now owned or hereafter acquired by Borrower which is held for sale or lease in the ordinary course of Borrower's business, excluding all work in progress, spare parts, packaging materials, supplies and any advertising costs capitalized into inventory. Lender. The word "Lender" means Bank One, Colorado, NA, its successors and assigns. Line of Credit. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. Note. The word "Note" means any and all promissory note or notes which evidence Borrower's Loans in favor of Lender, as well as any amendment, modification, renewal or replacement thereof. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either (i) not yet due, or (ii) being contested in good faith by appropriate proceedings and for which Borrower has established adequate reserves; (c) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure any indebtedness permitted under this Agreement; and (d) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing. Related Documents. The words "Related Documents" mean and include without limitation the Note and all credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Note. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of security interest, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Line of Credit. Subject to the other terms and conditions herein, Lender hereby establishes a Line of Credit for Borrower through which Lender agrees to make advances to Borrower from time to time from the effective date of this Agreement until the maturity date of the Note evidencing the Line of Credit, provided the aggregate amount of such advances outstanding at any time does not exceed the lesser of the amount equal to the Borrowing Base or an amount equal to the Committed Sum. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement. Borrowing Base Compliance. If at any time the aggregate principal amount outstanding under the Line of Credit shall exceed the applicable Borrowing Base, Borrower shall pay to Lender an amount equal to the difference between the outstanding principal balance under the Line of Credit and the Borrowing Base. Representations and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; and (b) All Account information listed on reports and schedules delivered to Lender will be true and correct, subject to immaterial variance. Representations and Warranties Concerning Inventory. With respect to the Inventory, Borrower represents and warrants to Lender: (a) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement conforms to the requirements of the definition of Eligible Inventory; (b) All Inventory values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (c) The value of the Inventory will be determined on a consistent accounting basis; (d) Except as reflected in the Inventory schedules delivered to Lender, all Eligible Inventory is now and at all times hereafter will be of good and merchantable quality, free from defects; and (e) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect and examine the Inventory and to check and test the same as to quality, quantity, value, and condition. Representations and Warranties. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each request for an Advance, as of the date of any renewal, extension or modification of any Loan, and at all times any Loans or Lender's commitment to make Loans hereunder is outstanding: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Delaware and is duly qualified and in good standing in all other states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents to which Borrower is a party have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its certificate of incorporation, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Borrower has all requisite power and authority to execute and deliver this Agreement and all other Related Documents to which Borrower is a party. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely discloses Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement and all other Related Documents to which Borrower is a party constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles. Properties. Except for Permitted Liens, Borrower is the sole owner of, and has good title to, all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last six (6) years. Compliance. Except as disclosed in writing to Lender (a) Borrower is conducting Borrower's businesses in material compliance with all applicable federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions, including without limitation, those pertaining to health or environmental matters, and (b) Borrower otherwise does not have any known material contingent liability in connection with the release into the environment, disposal or the improper storage of any toxic or hazardous substance or solid waste. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may in any one case or in the aggregate materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. All tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those that have been disclosed in writing to Lender which are presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to and approved by Lender in writing, Borrower has not entered into any Security Agreements, granted a Security Interest or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral, except in favor of Lender. Licenses, Trademarks and Patents. Borrower possesses and will continue to possess all permits, licenses, trademarks, patents and rights thereto which are needed to conduct Borrower's business and Borrower's business does not conflict with or violate any valid rights of others with respect to the foregoing. Commercial Purposes. Borrower intends to use the Loan proceeds soley for business or commercial related purposes approved by Lender. 07-02-1999 LOAN AGREEMENT Page 3 Loan No (Continued) ================================================================================ and such proceeds will not be used for the purchasing or carrying of "margin stock" as defined in Regulation U issued by the Board of Governors of the Federal Reserve System. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's chief executive office if Borrower has more than one place of business, is located at 5395 PEARL PARKWAY, BOULDER, CO 80301. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending the Loans to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect during the term of this Agreement. Affirmative Covenants. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Depository Relationship. Establish and maintain its primary operating accounts with Lender. Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor, and (c) the creation, occurrence or assumption by Borrower of any actual or contingent liabilities not permitted under this Agreement. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine, audit and make and take away copies or reproductions of Borrower's books and records at all reasonable times. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Financial Statements. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet, income statement, and statement of changes in financial position for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than thirty five (35) days after the end of each fiscal quarter, Borrower's balance sheet, income statement, and statement of changes in financial position for the period ended, prepared and certified, subject to year-end review adjustments, as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply at all times with the following covenants and ratios: Debt to Tangible Net Worth Ratio. Maintain, at all times, a ratio of total liabilities to Tangible Net Worth of less than 1.25 TO 1.00. Current Ratio. Maintain, at all times, a ratio of Liquid Assets plus inventory, to current liabilities in excess of 1.50 TO 1.00. For purposes of this Agreement and to the extent the following terms are utilized in this Agreement, the term "Tangible Net Worth" shall mean borrower's total assets excluding all intangible assets (including, without limitation, goodwill, trademarks, patents, copyrights, organization expenses, and similar intangible items) less total liabilities excluding Subordinated Debt. The term "Subordinated Debt" shall mean all indebtedness owing by Borrower which has been subordinated by written agreement to all indebtedness now or hereafter owing by Borrower to Lender, such agreement to be in form and substance acceptable to Lender. The term "Working Capital" shall mean Borrower's Liquid Assets plus inventory, less current liabilities. The term "Liquid Assets" shall mean borrower's unencumbered cash, marketable securities and accounts receivable net of reserves. The term "Cash Flow" shall mean net income after taxes, and exclusive of extraordinary items, plus depreciation and amortization. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender. In connection with all policies covering assets in which Lender holds or is offered a Security Interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Fees and Charges. In addition to all other agreed upon fees and charges, pay the following: UNUSED BALANCE FEE OF .25%. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits; provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting principles. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act, all applicable environmental statutes, rules, regulations and ordinances and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Compliance Certificate. Unless waived in writing by Lender, provide Lender 35 days after each calendar quarter with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, (a) certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and that, as of the date of the certificate, no Event of Default exists under this Agreement, and (b) demonstrating compliance with all financial covenants set forth in this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all federal, state and local environment laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the 07-02-1999 LOAN AGREEMENT Page 4 Loan No (Continued) ================================================================================ environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; and furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Borrowing Base Certificate. Within 35 days after each month when line is in use, Borrower shall deliver to Lender a borrowing base certificate, in form and detail satisfactory to Lender, along with such supporting documentation as Lender may request, including without limitation, an accounts receivable aging report and/or a list or schedule of Borrower's accounts receivable, inventory and/or equipment. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Maintain Basic Business. Engage in any business activities substantially different than those in which Borrower is presently engaged. Continuity of Operations. Cease operations, liquidate, dissolve or merge or consolidate with or into any other entity. Indebtedness. Create, incur or assume additional indebtedness for borrowed money, including capital leases, or guarantee any indebtedness owing by others, other than (a) current unsecured trade debt incurred in the ordinary course of business, (b) indebtedness owing to Lender, (c) borrowings outstanding as of the date hereof and disclosed to Lender in writing, and (d) any borrowings otherwise approved by Lender in writing. Liens. Mortgage, assign, pledge, grant a security interest in or otherwise encumber Borrower's assets, except as allowed as a Permitted Lien. Transfer of Assets. Transfer, sell or otherwise dispose of any of Borrower's assets other than in the ordinary course of business. Change in Management. Permit a change in the senior executive or management personnel of Borrower. Transfer of Ownership. Permit the sale, pledge or other transfer of any ownership interest in Borrower. Investments. Invest in, or purchase, create, form or acquire any interest in, any other enterprise or entity. Loans. Make any loans to any person or entity. Dividends. Pay any dividends on Borrower's capital stock or purchase, redeem, retire or otherwise acquire any of Borrower's capital stock or alter or amend Borrower's capital structure. Affiliates. Enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate of Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable than would be obtained in a comparable arm's length transaction with a person or entity not an Affiliate of Borrower. As used herein, the term "Affiliate" means any individual or entity directly or indirectly controlling, controlled by or under common control with, another entity or individual. CONDITIONS PRECEDENT TO ADVANCES. Lender's obligation to make any Advances or to provide any other financial accommodations to or for the benefit of Borrower hereunder shall be subject to the conditions precedent that as of the date of such advance or disbursement and after giving effect thereto (a) all representations and warranties made to Lender in this Agreement and the Related Documents shall be true and correct as of and as if made on such date, (b) no material adverse change in the financial condition of Borrower or any Guarantor since the effective date of the most recent financial statements furnished to Lender, or in the value of any Collateral, shall have occurred and be continuing, (c) no event has occurred and is continuing, or would result from the requested advance or disbursement, which with notice or lapse of time, or both, would constitute an Event of Default, (d) no Guarantor has sought, claimed or otherwise attempted to limit, modify or revoke such Guarantor's guaranty of any Loan, and (e) Lender has received all Related Documents appropriately executed by Borrower and all other proper parties. ADDITIONAL AFFIRMATIVE COVENANT - TANGIBLE NET WORTH. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will comply at all times with the following covenant and ratio. Borrower will maintain a minimum Tangible Net Worth of $16,000,000.00 plus 75% of the net proceeds from any public and/or private equity offering. LINE OF CREDIT CLEARANCE. Borrower shall, at least once during "the term of the Line of Credit" reduce and maintain the outstanding principal balance of the Line of Credit to ZERO for a period of at least thirty (30) consecutive calendar days. ADDITIONAL AFFIRMATIVE COVENANT - ACCOUNTS RECEIVABLE AGINGS. Borrower shall furnish to Lender a listing and aging of all accounts receivable within thirty- five (35) days of each quarter end. ADDITIONAL PROVISION. Notwithstanding anything to the contrary contained in this Agreement, if Borrower's net shareholder's equity is in excess of $45,000,000.00, then Borrower may, without the prior written consent of Lender, invest in, or purchase, create, form or acquire an interest in any other enterprise or entity. RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or any other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on any of the Indebtedness. Other Defaults. Failure of Borrower, any Guarantor or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement, the Note or in any of the other Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement now existing or hereafter arising between Lender and Borrower. False Statements. Any warranty, representation or statement made or furnished to Lender under this Agreement or the Related Documents is false or misleading in any material respect. Default to Third Party. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Borrower, Grantor or any Guarantor to any third party under any agreement or undertaking. Bankruptcy or Insolvency. If the Borrower, Grantor or any Guarantor: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party. Liquidation, Death and Related Events. If Borrower, Grantor or any Guarantor is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, if any of such parties is an individual, the death or legal incapacity of any such individual. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the indebtedness, or by any governmental agency. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, Lender may, at its option, without further notice or demand, (a) terminate all commitments and obligations of Lender to make Loans to Borrower, if any, (b) declare all Loans and any other indebtedness 07-02-1999 LOAN AGREEMENT Page 5 Loan No (Continued) ================================================================================ immediately due and payable, (c) refuse to advance any additional amounts under the Note or to provide any other financial accommodations under this Agreement, or (d) exercise all the rights and remedies provided in the Note or in any of the Related Documents or available at law, in equity, or otherwise; provided, however, if any Event of Default of the type described in the "Bankruptcy or Insolvency" subsection above shall occur, all Loans and any other Indebtedness shall automatically become due and payable, without any notice, demand or action by Lender. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT OR ANY OTHER RELATED DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS. ARBITRATION. Lender and Borrower agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Agreement, any Related Document or otherwise, including without limitation contract disputes and tort claims, shall be arbitrated pursuant to the Commercial Rules of the American Arbitration Association. Any arbitration proceeding held pursuant to this arbitration provision shall be conducted in the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This arbitration provision shall not limit the right of either party during any dispute, claim or controversy to seek, use, and employ ancillary, provisional or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon or proceeding under forcible entry and detainer for possession of, any real or personal property, and any such action shall not be deemed an election of remedies. This includes, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under any deed of trust or mortgage, obtaining a writ of attachment or imposition of a receivership, or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right or remedy, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated; provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this arbitration provision shall preclude either party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action for this purpose. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may hire one or more attorneys to help collect the Indebtedness if Borrower does not pay, and Borrower will pay Lender's reasonable attorneys' fees. Notices. All notices required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, it there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute the same document. Signature pages may be detached from the counterparts to a single copy of this Agreement to physically form one document. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time Is of the Essence. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor or Guarantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consents may be granted or withheld in the sole discretion of Lender 07-02-1999 LOAN AGREEMENT Page 6 Loan No (Continued) ================================================================================ BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS EXECUTED AS OF THE DATE SET FORTH ABOVE. BORROWER: CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION By: /s/ Nancy Pierce ----------------------------------------------- NANCY PIERCE, CFO TREAS/SECRETARY LENDER: Bank One, Colorado, NA By: ----------------------------------------------- Authorized Officer CORPORATE RESOLUTION TO BORROW - -------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call Collateral $5,000,000.00 07-02-1999 07-02-2000 078105 328 Account Officer Initials 1518454676 00410 - -------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- Borrower: CARRIER ACCESS CORPORATION, Lender: Bank One, Colorado, NA A DELAWARE CORPORATION Corporate Lending - Boulder 5395 PEARL PARKWAY 1125 17TH STREET BOULDER,CO 80301 DENVER, CO 80217 ================================================================================ 1, the undersigned officer of CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware as a corporation for profit, with its principal office at 5395 PEARL PARKWAY, BOULDER, CO 80301, and is duly authorized to transact business in the State of Colorado. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held and at which a quorum was present and voting, or by other duly authorized corporate action in lieu of a meeting, the following resolutions were adopted: BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES ----- --------- ----------------- ROGER L. KOENIG PRESIDENT AND CEO /s/ Roger L. Koenig NANCY PIERCE CFO TREAS/SECRETARY /s/ Nancy Pierce acting for and on behalf of the Corporation and as its act and deed be, and they hereby are, authorized and empowered: Borrow Money. To negotiate and borrow money from Bank One, Colorado, NA ("Lender"), including letters of credit, and guarantee borrowings of others, on such terms as may be agreed upon between the Corporation's officers, employees or agents named above and Lender, and in such amount or amounts as in their judgment should be borrowed and/or guaranteed, without limitation. Execute Evidences of Debt. To execute and deliver to Lender promissory notes, checks, drafts, acceptances, agreements (including without limitation loan agreements), and guarantees of the Corporation at such rates of interest and on such terms as may be agreed upon between the Corporation's officers, employees or agents named above, and Lender, evidencing sums of money borrowed or guaranteed, or any indebtedness or obligation of the Corporation to Lender, and also to execute and deliver to Lender one or more renewals, extensions, modifications, refinancings, consolidations or substitutions for any one or more of, or any portion of, the foregoing. Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and deliver to Lender, as security for the payment of any loans so obtained or guaranteed, any promissory notes so executed or any other or further indebtedness of the Corporation or of others to Lender at any time owing, however the same may be evidenced, any property now or hereafter belonging to the Corporation or in which the Corporation now or hereafter may have an interest, including without limitation all real property and all personal property (tangible or intangible) of the Corporation. Such property may be mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered at the time such loans are obtained or such indebtedness is incurred, or at any other time or times, and may be either in addition to or in lieu of any property theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered. Execute Security Documents. To execute and deliver to Lender the forms of mortgage, deed of trust, pledge agreement, hypothecation agreement, and other security agreements and financing statements which may be submitted by Lender, and which shall evidence the terms and conditions under and pursuant to which such liens and encumbrances, or any of them, are given; and also to execute and deliver to Lender any other written instruments, any chattel paper, or any other collateral, of any kind or nature, which they may in their discretion deem reasonably necessary or proper in connection with or pertaining to the giving of the liens and encumbrances. Negotiate Items. To draw, endorse, and discount with Lender all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Lender, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. Further Acts. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements, including agreements waiving the right to a trial by jury, as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these Resolutions and performed prior to the passage of these Resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Lender may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Lender. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is delivered and received by Lender. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN TESTIMONY WHEREOF, I have hereunto set my hand on July 2, 1998 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: X /s/ Nancy Pierce --------------------------------------------- (Signature) Nancy Pierce --------------------------------------------- (Printed Name) SEC/Treasurer/CFO --------------------------------------------- (Title) BANK1ONE(R) COMMERCIAL SECURITY AGREEMENT - -------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call Collateral $5,000,000.00 07-02-1999 07-02-2000 078105 328 Account Officer Initials 1518454676 00410 - -------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: CARRIER ACCESS CORPORATION, Lender: BANK ONE, COLORADO, NA A DELAWARE CORPORATION Corporate Lending - Boulder 5395 PEARL PARKWAY 1125 17TH STREET BOULDER,CO 80301 DENVER, CO 80217 ================================================================================ THIS COMMERCIAL SECURITY AGREEMENT is entered into by CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION (referred to below as "Grantor") for the benefit of Bank One, Colorado, NA (referred to below as "Lender"). For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code as adopted in the State of Colorado ("Code"). All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Collateral. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: All inventory, chattel paper, accounts, equipment, general intangibles, excluding patents In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions, accessories, tools, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All proceeds (including, without limitation, insurance proceeds) from the sale, lease, destruction, loss, or other disposition of any of the property described in this Collateral section. (d) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Event of Default. The words "Event of Default" mean and include any of the Events of Default set forth below in the section titled "Events of Default." Grantor. The word "Grantor" means CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION, its successors and assigns (which is a debtor under the Code). Guarantor. The word "Guarantor" means and includes without limitation, each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and accrued interest thereon, together with all other liabilities, costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus any accrued interest thereon, owing by Grantor, or any one or more of them, to Lender of any kind or character, now existing or hereafter arising, as well as all present and future claims by Lender against Grantor, or any one or more of them, and all renewals, extensions, modifications, substitutions and rearrangements of any of the foregoing; whether such Indebtedness arises by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, overdraft, indemnity agreement or otherwise; whether such Indebtedness is voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others; whether Grantor may be liable primarily or secondarily or as debtor, maker, comaker, drawer, endorser, guarantor, surety, accommodation party or otherwise. Lender. The word "Lender" means Bank One, Colorado, NA, its successors and assigns (which is a secured party under the Code). Note. The word "Note" means the promissory note dated July 2, 1998, in the principal amount of $5,000,000.00 from CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for such promissory note. Related Documents. The words "Related Documents" mean and include without limitation the Note and all credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Note. OBLIGATIONS OF GRANTOR. Grantor represents, warrants and covenants to Lender as follows: Perfection of Security Interest. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby irrevocably appoints Lender as its attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor has disclosed to Lender all tradenames and assumed names currently used by Grantor, all tradenames and assumed names used by Grantor within the previous six (6) years and all of Grantor's current business locations. Grantor will notify Lender in writing at least thirty (30) days prior to the occurrence of any of the following: (i) any changes in Grantor's name, tradename(s) or assumed name(s), or (ii) any change in Grantor's business location(s) or the location of any of the Collateral. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. Location of the Collateral. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. Removal of Collateral. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists or vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Colorado, without the prior written consent of Lender. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business. Grantor 07-02-1999 COMMERCIAL SECURITY AGREEMENT Page 2 Loan No (Continued) ================================================================================ shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that it is the owner of the Collateral and holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement--covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Collateral Schedules and Locations. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. Maintenance and Inspection of Collateral. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and governmental charges or levies upon the Collateral and provide Lender evidence of such payment upon its request. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Compliance with Governmental Requirements. Grantor is conducting and will continue to conduct Grantor's businesses in material compliance with all federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions applicable to Grantor's businesses and to the production, disposition or use of the Collateral, including without limitation, those pertaining to health and environmental matters such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (collectively, together with any subsequent amendments, hereinafter called "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous Substance Waste Amendments of 1984 (collectively, together with any subsequent amendments, hereinafter called "RCRA"). Grantor represents and warrants that (i) none of the operations of Grantor is the subject of a federal, state or local investigation evaluating whether any material remedial action is needed to respond to a release or disposal of any toxic or hazardous substance or solid waste into the environment; (ii) Grantor has not filed any notice under any federal, state or local law indicating that Grantor is responsible for the release into the environment, the disposal on any premises in which Grantor is conducting its businesses or the improper storage, of any material amount of any toxic or hazardous substance or solid waste or that any such toxic or hazardous substance or solid waste has been released, disposed of or is improperly stored, upon any premises on which Grantor is conducting its businesses; and (iii) Grantor otherwise does not have any known material contingent liability in connection with the release into the environment, disposal or the improper storage, of any such toxic or hazardous substance or solid waste. The terms "hazardous substance" and "release", as used herein, shall have the meanings specified in CERCLA, and the terms "solid waste" and "disposal", as used herein, shall have the meanings specified in RCRA; provided, however, that to the extent that the laws of the State of Colorado establish meanings for such terms which are broader than that specified in either CERCLA or RCRA, such broader meanings shall apply. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the termination of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risk insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral, Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. Application of insurance proceeds to the payment of the Indebtedness will not extend, postpone or waive any payments otherwise due, or change the amount of such payments to be made and proceeds may be applied in such order and such amounts as Lender may elect. Solvency of Grantor. As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Grantor at the time of the execution of this Agreement, (i) Grantor is and will be solvent, (ii) the fair salable value of Grantor's assets exceeds and will continue to exceed Grantor's liabilities (both fixed and contingent), (iii) Grantor is paying and will continue to be able to pay its debts as they mature, and (iv) if Grantor is not an individual. Grantor has and will have sufficient capital to carry on Grantor's businesses and all businesses in which Grantor is about to engage. Lien Not Released. The lien, security interest and other security rights of Lender hereunder shall not be impaired by any indulgence, moratorium or release granted by Lender, including but not limited to, the following; (a) any renewal, extension, increase or modification of any of the Indebtedness; (b) any surrender, compromise, release, renewal, extension, exchange or substitution granted in respect of any of the Collateral; (c) any release or indulgence granted to any endorser, guarantor or surety of any of the Indebtedness; (d) any release of any other collateral for any of the Indebtedness; (e) any acquisition of any additional collateral for any of the Indebtedness; and (f) any waiver or failure to exercise any right, power or remedy granted herein, by law or in any of the Related Documents. Request for Environment Inspections. Upon Lender's reasonable request from time to time, Grantor will obtain at Grantor's expense an inspection or audit report(s) addressed to Lender of Grantor's operations from an engineering or consulting firm approved by Lender, indicating the presence or absence of toxic and hazardous substances, underground storage tanks and solid waste on any premises in which Grantor is conducting a business; provided, however, Grantor will be obligated to pay for the cost of any such inspection or audit no more than one time in any twelve (12) month period unless Lender has reason to believe that toxic or hazardous substance or solid wastes have been dumped or released on any such premises. If Grantor fails to order or obtain an inspection or audit within ten (10) days after Lender's request, Lender may at its option order such inspection or audit, and Grantor grants to Lender and its agents, employees, contractors and consultants access to the premises in which it is conducting its business and a license (which is coupled with an interest and is irrevocable) to obtain inspections and audits. Grantor agrees to promptly provide Lender with a copy of the results of any such inspection or audit received by Grantor. The cost of such inspections and audits by Lender shall be a part of the indebtedness, secured by the Collateral and payable by Grantor on demand. 07-02-1999 COMMERCIAL SECURITY AGREEMENT Page 3 Loan No (Continued) ================================================================================ Landlord's Waivers. Grantor agrees that upon the request of Lender, Grantor shall cause each landlord of real property leased by Grantor at which any of the Collateral is located from time to time to execute and deliver agreements satisfactory in form and substance to Lender by which such landlord waives or subordinates any rights it may have in the Collateral. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and be payable on demand by Lender. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Grantor to make any payment when due on the Indebtedness. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement, the Note, any of the other Related Documents or in any other agreement now existing or hereafter arising between Lender and Grantor. False Statements. Any warranty, representation or statement made or furnished to Lender under this Agreement, the Note or any of the other Related Documents is false or misleading in any material respect. Default to Third Party. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Grantor or any Guarantor to any third party under any agreement or undertaking. Bankruptcy or Insolvency. If the Grantor or any Guarantor: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party. Liquidation, Death and Related Events. If Grantor or any Guarantor is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, if any of such parties is an individual, the death or legal incapacity of any such individual. Creditor or Forfeiture Proceedings, Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise dispose of the Collateral or the proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral (as a unit or in parcels) at public auction or private sale. Lender may buy the Collateral, or any portion thereof, (i) at any public sale, and (ii) at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations. Lender shall not be obligated to make any sale of Collateral regardless of a notice of sale having been given. Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days prior to the date any public sale, or after which a private sale, of any of such Collateral is to be held. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Any sale of Collateral through the public trustee shall be deemed a commercially reasonable sale. Appoint Receiver. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. The receiver may be appointed by a court of competent jurisdiction upon ex parte application and without notice, notice being expressly waived. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the indebtedness or apply it to payment of the indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Grantor waives any right to require Lender to proceed against any third party, exhaust any other security for the indebtedness or pursue any other right or remedy available to Lender. Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any 07-02-1999 COMMERCIAL SECURITY AGREEMENT Page 4 Loan No (Continued) ================================================================================ other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. Miscellaneous Provisions. Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement and supercedes all prior written and oral agreements and understandings, if any, regarding same. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. Subject to the provisions on arbitration in any Related Document, this Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT OR ANY OTHER RELATED DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS. Attorneys' Fees; Expenses. Grantor will upon demand pay to Lender the amount of any and all costs and expenses (including without limitation, reasonable attorneys' fees and expenses) which Lender may incur in connection with (i) the perfection and preservation of the collateral assignment and security interests created under this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, (iii) the exercise or enforcement of any of the rights of Lender under this Agreement, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. Termination. Upon (i) the satisfaction in full of the Indebtedness and all obligations hereunder, (ii) the termination or expiration of any commitment of Lender to extend credit that would become Indebtedness hereunder, and (iii) Lender's receipt of a written request from Grantor for the termination hereof, this Agreement and the security interests created hereby shall terminate. Upon termination of this Agreement and Grantor's written request, Lender will, at Grantor's sole cost and expense, return to Grantor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof and execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. Indemnity. Grantor hereby agrees to indemnify, defend and hold harmless Lender, and its officers, directors, shareholders, employees, agents and representatives (each an "INDEMNIFIED PERSON") from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature (collectively, the "Claims") which may be imposed on, incurred by or asserted against, any Indemnified Person (whether or not caused by any Indemnified Person's sole, concurrent or contributory negligence) arising in connection with the Related Documents, the Indebtedness or the Collateral (including, without limitation, the enforcement of the Related Documents and the defense of any Indemnified Person's action and/or inactions in connection with the Related Documents), except to the limited extent that the Claims against the Indemnified Person are approximately caused by such Indemnified Person's willful misconduct. The indemnification provided for in this Section shall survive the termination of this Agreement and shall extend and continue to benefit each individual or entity who is or has at any time been an Indemnified Person hereunder. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Notices. All notices required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es). Power of Attorney. Grantor hereby irrevocably appoints Lender as its true and lawful attorney-in-fact, such power of attorney being coupled with an interest, with full power of substitution to do the following in the place and stead of Grantor and in the name of Grantor: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns; provided, however, Grantor's rights and obligations hereunder may not be assigned or otherwise transferred without the prior written consent of Lender. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right to thereafter demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JULY 2, 1998. GRANTOR: CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION By: /s/ Nancy Pierce ----------------------------------------------- NANCY PIERCE, CFO TREAS/SECRETARY [LOGO OF BANK ONE APPEARS HERE] PROMISSORY NOTE - ------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call $5,000,000.00 07-02-1999 07-02-2000 078105 - ------------------------------------------------------------------------------- Collateral Account Officer Initials 328 1518454676 00410 - ------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- Borrower: CARRIER ACCESS CORPORATION, Lender: Bank One, Colorado, NA A DELAWARE CORPORATION Corporate Lending - Boulder 5395 PEARL PARKWAY 1125 17th Street BOULDER,CO 80301 Denver, CO 80217 ================================================================================ Principal Amount: $5,000,000.00 Date of Note: July 2, 1999 PROMISE TO PAY. For value received, CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION ("Borrower") promises to pay to Bank One, Colorado, NA ("Lender"), or order, in lawful money of the United States of America, the principal amount of Five Million & 00/100 Dollars ($5,000,000.00) ("Total Principal Amount") or so much as may be outstanding, together with interest on the unpaid outstanding principal balance from the date advanced until paid in full. PAYMENT. This Note shall be payable as follows: Interest shall be due and payable monthly as it accrues, commencing on August 2, 1999 and continuing on the same day of each month thereafter during the term of this Note, and the outstanding principal balance of this Note, together with all accrued but unpaid interest, shall be due and payable on July 2, 2000. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at the address designated by Lender from time to time in writing. If any payment of principal of or interest on this Note shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day. As used herein, the term "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed. Unless otherwise agreed to, in writing, or otherwise required by applicable law, payments will be applied first to accrued, unpaid interest, then to principal, and any remaining amount to any unpaid collection costs, late charges and other charges, provided, however, upon delinquency or other default, Lender reserves the right to apply payments among principal, interest, late charges, collection costs and other charges at its discretion. The books and records of Lender shall be prima facie evidence of all outstanding principal of and accrued but unpaid interest on this Note. This Note may be executed in connection with a loan agreement. Any such loan agreement may contain additional rights, obligations and terms. VARIABLE INTEREST RATE. The interest rate on this Note is subject to fluctuation based upon the Prime Rate of interest in effect from time to time (the "Index") (which rate may not be the lowest, best or most favorable rate of interest which Lender may charge on loans to its customers). "Prime Rate" shall mean the rate announced from time to time by Lender as its prime rate. Each change in the rate to be charged on this Note will become effective without notice on the same day as the Index changes. Except as otherwise provided herein, the unpaid principal balance of this Note will accrue interest at a rate per annum which will from time to time be equal to the sum of the Index, plus 0.000%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower may pay without fee all or a portion of the principal amount owed hereunder earlier than it is due. All prepayments shall be applied to the indebtedness owing hereunder in such order and manner as Lender may from time to time determine in its sole discretion. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $25.00, whichever is greater, up to the maximum amount of $250.00 per late charge. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment of principal or interest when due under this Note or any other indebtedness owing now or hereafter by Borrower to Lender; (b) failure of Borrower or any other party to comply with or perform any term, obligation, covenant or condition contained in this Note or in any other promissory note, credit agreement, loan agreement, guaranty, security agreement, mortgage, deed of trust or any other instrument, agreement or document, whether now or hereafter existing, executed in connection with this Note (the Note and all such other instruments, agreements, and documents shall be collectively known herein as the "RELATED DOCUMENTS"); (c) Any representation or statement made or furnished to Lender herein, in any of the Related Documents or in connection with any of the foregoing is false or misleading in any material respect; (d) Borrower or any other party liable for the payment of this Note, whether as maker, endorser, guarantor, surety or otherwise, becomes insolvent or bankrupt, has a receiver or trustee appointed for any part of its property, makes an assignment for the benefit of its creditors, or any proceeding is commenced either by any such party or against it under any bankruptcy or insolvency laws; (e) the occurrence of any event of default specified in any of the other Related Documents or in any other agreement now or hereafter arising between Borrower and Lender; (f) the occurrence of any event which permits the acceleration of the maturity of any indebtedness owing now or hereafter by Borrower to any third party; or (g) the liquidation, termination, dissolution, death or legal incapacity of Borrower or any other party liable for the payment of this Note, whether as maker, endorser, guarantor, surety, or otherwise. LENDER'S RIGHTS. Upon default, Lender may at its option, without further notice or demand (i) declare the entire unpaid principal balance on this Note, all accrued unpaid interest and all other costs and expenses for which Borrower is responsible for under this Note and any other Related Document immediately due, (ii) refuse to advance any additional amounts under this Note, (iii) foreclose all liens securing payment hereof, (iv) pursue any other rights, remedies and recourses available to the Lender, including without limitation, any such rights, remedies or recourses under the Related Documents, at law or in equity, or (v) pursue any combination of the foregoing. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 3.000 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire an attorney to help collect this Note if Borrower does not pay and Borrower will pay Lender's reasonable attorneys' fees and all other costs of collection, unless prohibited by applicable law. This Note has been delivered to Lender and accepted by Lender in the State of Colorado. Subject to the provisions on arbitration, this Note shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. PURPOSE. Borrower agrees that no advances under this Note shall be used for personal, family, or household purposes and that all advances hereunder shall be used solely for business, commercial, agricultural or other similar purposes. JURY WAIVER. THE BORROWER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN BORROWER AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE OR THE OTHER RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or any other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owning on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Borrower may request advances and make payments hereunder from time to time, provided that it is understood and agreed that the aggregate principal amount outstanding from time to time hereunder shall not at any time exceed the Total Principal Amount. The unpaid principal balance of this Note shall increase and decrease with each new advance or payment hereunder, as the case may be. Subject to the terms hereof, Borrower may borrow, repay and reborrow hereunder. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. ARBITRATION. Lender and Borrower agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Note, any Related Document or otherwise, including without limitation contract disputes and tort claims, shall be arbitrated pursuant to the Commercial Rules of the American Arbitration Association. Any arbitration proceeding held pursuant to this arbitration provision shall be conducted in the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement to the parties. No act to take or dispose of any collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This arbitration provision shall not limit the right of either party during any dispute, claim or controversy to seek, use, and employ ancillary, provisional or preliminary rights and/or remedies, judicial or otherwise, for the purposes 07-02-1999 PROMISSORY NOTE Page 2 Loan No (Continued) ================================================================================ of realizing upon, preserving, protecting, foreclosing upon or proceeding under forcible entry and detainer for possession of, any real or personal property, and any such action shall not be deemed an election of remedies. This includes, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under any deed of trust or mortgage, obtaining a writ of attachment or imposition of a receivership, or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right or remedy, concerning any collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral, shall also be arbitrated; provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this arbitration provision shall preclude either party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action for these purpose. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. ADDITIONAL PROVISION - RIGHT TO CURE. Notwithstanding anything to the contrary contained in this Note or in any Related Document, no condition, event or failure shall be a default under this Note or an "Event of Default" as defined in any Related Document, provided that (A) such condition, event or failure is other than (i) a failure to pay any sum due under the provisions of this Note or (ii) the commencement of a bankruptcy or insolvency proceeding by or against Borrower or any Guarantor, or by or against any party that has granted collateral to secure this Note, and (B) if, after Lender sends Borrower written notice demanding cure of any such condition, event or failure, Borrower cures or causes to be cured such event, condition or failure within ten (10) days after such notice. Any notice delivered hereunder to Borrower shall be effective when deposited with a nationally recognized overnight courier or when deposited in the United States mail, first class postage prepaid, addressed to Borrower at Borrower's last known mailing address. ADDENDUM. An exhibit, titled "ADDENDUM," is attached to this Note and by this reference is made a part of this Note just as it all the provisions, terms and conditions of the Exhibit had been fully set forth in this Note. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this Note, or release any party or guarantor or collateral; or unjustifiably impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this Note without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION By: /s/ Nancy Pierce ----------------------------------------------- NANCY PIERCE, CFO TREAS/SECRETARY ================================================================================ ADDENDUM THIS ADDENDUM is executed with respect to the Promissory Note in the original principal amount of $5,000,000.00 dated July 2, 1998 [and maturing on July 2, 1999 (the "Note") , made by Carrier Access Corporation, A Colorado Corporation (referred to in this Addendum as "Borrower") payable to the order of Bank One, Colorado, N.A. ("Lender"), and is hereby incorporated into and made a part of the Note. Terms used in this Addendum with their initial letters capitalized are used as defined in the Note, unless they are otherwise expressly defined herein. 1. The paragraph in the Note having the caption "VARIABLE INTEREST RATE" is hereby deleted in its entirety and the following is hereby substituted in lieu thereof: VARIABLE INTEREST RATE. Subject to designation of a different interest rate index by Borrower as provided below, the interest rate on this Note is subject to fluctuation based upon the Prime Rate of interest in effect from time to time (the "Index") (which rate may not be the lowest, best or most favorable rate of interest which Lender may charge on loans to its customers). "Prime Rate" shall mean the rate announced from time to time by Lender as its prime rate. Each change in the variable interest rate to be charged on this Note will become effective without notice on the same day as the Index changes. Except as otherwise provided herein, the unpaid principal balance of this Note will accrue interest at a rate per annum which will from time to time be equal to the sum of the Index, plus 0.00%. INTEREST RATE OPTIONS. The following interest rate options are available under this Note: (a) Default Option. The interest rate margin and index described in the "VARIABLE INTEREST RATE" paragraph above (the "Default Option"). (b) ONE MONTH LONDON INTERBANK OFFERED RATE. A margin of 2.50 percentage points over the one month LONDON INTERBANK OFFERED RATE ("LIBOR"). For purposes of this Note, the one month LIBOR rate shall mean the one month offered rate for U.S. Dollar deposits of not less than $1,000,000.00 as of 11:00 A.M. City of London, England time two London Business Days prior to the first date of each one month Interest Period (as defined below) of this Note as shown on the display designated as "British Bankers Assoc. Interest Settlement Rates" on the Dow Jones Telerate Service ("Telerate"), Page 3750 (or such other page as may replace that page on that service for the purpose of displaying such rate). Provided, however, that if such LIBOR rate is not available on Telerate then such offered rate shall be otherwise independently determined by Lender from an alternate, substantially similar independent source or service available to Lender or shall be calculated by Lender by a substantially similar methodology as that theretofore used to determine such offered rate in Telerate. (c) THREE MONTH LONDON INTERBANK OFFERED RATE. A margin of 2.50 percentage points over the three month LONDON INTERBANK OFFERED RATE ("LIBOR"). For purposes of this Note, the three month LIBOR rate shall mean the three month offered rate for U.S. Dollar deposits of not less than $1,000,000.00 as of 11:00 A.M. City of London, England time two London Business Days prior to the first date of each three month Interest Period (as defined below) of this Note as shown on the display designated as "British Bankers Assoc. Interest Settlement Rates" on the Dow Jones Telerate Service ("Telerate"), Page 3750 (or such other page as may replace that page on that service for the purpose of displaying such rate). Provided, however, that if such LIBOR rate is not available on Telerate then such offered rate shall be otherwise independently determined by Lender from an alternate, substantially similar independent source or service available to Lender or shall be calculated by Lender by a substantially similar methodology as that theretofore used to determine such offered rate in Telerate. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. If used in this Note, "London Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions are generally authorized or obligated by law or executive order to close in the City of London, England. When the interest rate is based on a LIBOR rate, a Treasury Securities Rate or a Fixed Rate (an "Option Rate"), the rate shall be in effect for a period of the number of months as indicated in the rate option description (the "Interest Period") , in any case extended to the next succeeding business day when necessary, beginning on a borrowing date, conversion date or expiration date of the then current Interest Period. Adjustments in the interest rate due to changes in the maximum nonusurious interest rate allowed (the "Highest Lawful Rate") shall be made on the effective day of any change in the Highest Lawful Rate. Provided Borrower is not in default under this Note, Borrower may designate in advance which of the above interest rate indexes shall be applicable to any loan advance under this Note. In the absence of any such designation the interest rate option shall be the Default Option. Thereafter unpaid principal balances under this Note may be converted (at the end of an Interest Period if the index used to determine the interest rate therefore is an option Rate) to another of the above interest rate options, or continued for an additional interest period, when applicable, as designated by Borrower in advance; and in the absence of sufficient advance designation as determined by the Lender as to conversion to or continuation of an Option Rate index, the rate shall be converted to the Default Option. Notwithstanding the foregoing, an Option Rate index may not be elected for a loan or advance under this Note, nor any conversion to or continuation of an Option Rate index be elected, if the Interest Period thereof would extend beyond the maturity of this Note. Each loan or advance under this Note at conversion into or continuation of an Option Rate shall be in a minimum amount of $500,000.00 with no more than two tranches outstanding at any time. Unless otherwise provided herein, accrued interest on amounts for which the interest rate is based on a LIBOR rate or a Treasury Securities Rate shall be due and payable at the end of the respective Interest Period therefor. Borrower shall pay to Lender from time to time such amounts as Lender may determine to be necessary to compensate Lender for any costs incurred by Lender which Lender determines are attributable to its making or maintaining any LIBOR rates hereunder or its obligation to make any such LIBOR rates hereunder, or any reduction in any amount receivable by Lender under this Note in respect of any such rates or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any change after the date of this Note in U.S. federal, state, municipal, or foreign laws or regulations (including Regulation D), or the adoption or making after such date of any interpretations, directives, or requirements applying to a class of banks including Lender of or under any U.S. federal, state, municipal, or any foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof ("Regulatory Change"), which: (1) changes the basis of taxation of any amounts payable to Lender under this Note in respect of any such LIBOR rates (other than taxes imposed on the overall net income of the Lender); or (2) imposes or modifies any reserve, special deposit, compulsory loan, or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of Lender (including any of such LIBOR rates or any deposits referred to in the definition of any LIBOR rate); or (3) imposes any other condition affecting this Note (or any of such extensions of credit or liabilities) . Lender will notify the Borrower of any event occurring after the date of this Note which will entitle Lender to compensation pursuant to this paragraph as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Determinations by Lender for purposes of this paragraph of the effect of any Regulatory change in its costs of making or maintaining LIBOR rates or on amounts receivable by it in respect of LIBOR rates, and of the additional amounts required to compensate Lender in respect of any Additional Costs, shall be presumed prima facie correct. ----- ----- In respect of any LIBOR Loans, in the event that Lender shall have determined that dollar deposits of the relevant amount for the relevant Interest Period for such LIBOR Loans are not available or that, by reason of circumstances affecting such market, adequate and reasonable means do not exist for ascertaining the LIBOR rate applicable to such Interest Period, as the case may be, Lender shall promptly give notice of such determination to the Borrower and (i) any notice of new LIBOR Loans (or conversion of existing loans to LIBOR Loans) previously given by the Borrower and not yet borrowed (or converted, as the case may be) shall be deemed a notice to make loans bearing interest at the Default Option, and (ii) the Borrower shall be obligated either to prepay or to convert any outstanding LIBOR Loans on the last day of the then current Interest Period or Periods with respect thereto, as Borrower shall elect. Without prejudice to any other provisions of this Note, the Borrower agrees to indemnify Lender against any loss or expense which Lender may sustain or incur as a consequence of any default by the Borrower in payment when due of any amount due hereunder in respect of any LIBOR Loan, including, but not limited to, any loss of profit, premium or penalty incurred by Lender in respect of funds borrowed by it for the purpose of making or maintaining such LIBOR Loan, as determined by Lender in the exercise of its sole but reasonable discretion. A certificate as to any such loss or expense shall be promptly submitted by Lender to the Borrower and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. If at any time any new law, treaty or regulation enacted after the date hereof, or any change after the date hereof in any existing law, treaty or regulation, or any interpretation thereof after the date hereof by any governmental or other regulatory authority charged with the administration thereof, shall make it unlawful for Lender to fund any LIBOR Loans which it is committed to make hereunder with moneys obtained in the Eurodollar market, the commitment of Lender to fund LIBOR Loans shall, upon the happening of such event forthwith be suspended for the duration of such illegality, and Lender shall by written notice to the Borrower declare that the commitment with respect to such loans has been so suspended and, if and when such illegality ceases to exist, such suspension shall cease and Lender shall similarly notify the Borrower. If any such change shall make it unlawful for Lender to continue in effect the funding in the applicable Eurodollar market of any LIBOR Loan previously made by it hereunder, Lender shall, upon the happening of such event, notify the Borrower in writing stating the reasons therefor, and the Borrower shall, on the earlier of (i) the last day of the then current Interest Period or (ii) if required by such law, regulation or interpretation, on such date as shall be specified in such notice, either convert all LIBOR Loans to loans bearing interest at the Default Option or prepay all LIBOR Loans to Lender in full, as Borrower shall elect. Lender may, but shall not be required to, make LIBOR Loans hereunder with funds obtained outside the United States. 2. Except as expressly modified by this Addendum, all of the terms and conditions of the Note continue unchanged and in full force and effect. Dated with effect as of the date of the Note. CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION By: /s/ Nancy Pierce ---------------------------------------- Nancy Pierce, CFO Treasurer/Secretary AGREEMENT TO PROVIDE INSURANCE
- -------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $5,000,000.00 07-02-1999 07-02-2000 078105 328 1518454676 00410 - --------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- Borrower: CARRIER ACCESS CORPORATION, Lender: Bank One, Colorado, NA A DELAWARE CORPORATION Corporate Lending - Boulder 5395 PEARL PARKWAY 1125 17th Street BOULDER,CO 80301 Denver, CO 80217 ================================================================================ INSURANCE REQUIREMENTS. CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION ("Grantor") understands that insurance coverage is required in connection with the extending of a loan or the providing of other financial accommodations to Grantor by Lender. These requirements are set forth in the security documents. The following minimum insurance coverages must be provided on the following described collateral (the "Collateral"): Collateral: All inventory, chattel paper, accounts, equipment, general intangibles, excluding patents. Type. All risks, including fire, theft and liability. Amount. Full insurable value. Basis. Replacement value. Endorsements. Lender's loss payable clause with stipulation that coverage will not be cancelled or diminished without a minimum of thirty (30) days' prior written notice to Lender. INSURANCE COMPANY. Grantor may obtain insurance from any insurance company Grantor may choose that is reasonably acceptable to Lender. Grantor understands that credit may not be denied solely because insurance was not purchased through Lender. INSURANCE MAILING ADDRESS. All documents and other materials relating to insurance for this loan should be mailed, delivered or directed to the following address: Banc One Comml Loan Servicing P O Box 63124 AZ1-2570 Phoenix, AZ 85082-3124 FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, no later than on or before closing, evidence of the required insurance as provided above, with an effective date of July 2, 1998, or earlier. Grantor acknowledges and agrees that if Grantor fails to provide any required insurance or fails to continue such insurance in force, Lender may do so at Grantor's expense as provided in the applicable security document. The cost of any such insurance, at the option of Lender, shall be payable on demand or shall be added to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS. AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor authorizes Lender to provide to any person (including any insurance agent or company) all information Lender deems appropriate, whether regarding the Collateral, the loan or other financial accommodations, or both. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JULY 2, 1998. GRANTOR: CARRIER ACCESS CORPORATION, A DELAWARE CORPORATION By: /s/ Nancy Pierce ----------------------------------------------- NANCY PIERCE, CFO TREAS/SECRETARY - -------------------------------------------------------------------------------- FOR LENDER USE ONLY INSURANCE VERIFICATION DATE: PHONE: --------------- -------------- AGENT'S NAME: ------------------------------------------------------------------- INSURANCE COMPANY: -------------------------------------------------------------- POLICY NUMBER: ------------------------------------------------------------------ EFFECTIVE DATES: ---------------------------------------------------------------- COMMENTS: ----------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EX-23.1 3 CONSENT OF KPMG LLP Exhibit 23.1 Consent of Independent Auditors The Board of Directors Carrier Access Corporation: We consent to incorporation by reference in the registration statement (No. 333- 71209) on Form S-8 of Carrier Access Corporation of our reports dated January 21, 2000, relating to the consolidated balance sheets of Carrier Access Corporation and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1999, and the related financial statement schedule, which reports appear in the December 31, 1999, annual report on form 10-K of Carrier Access Corporation. KPMG LLP Denver, Colorado March 27, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 25,517 39,861 23,553 1,099 9,444 101,320 8,743 1,854 108,401 11,193 0 0 0 29 97,179 108,401 108,815 108,815 45,499 30,210 (2,330) 0 0 35,436 11,871 23,564 0 0 0 23,564 0.98 0.93
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