| 1 |
In January 2003, the FASB issued FIN No. No. 46 (“FIN No. 46”), which is
an interpretation of Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” and addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. FIN No. 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after Ju |
| 2 | FIN No. No. 46 (“FIN No. 46”), which is
an interpretation of Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” and addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. FIN No. 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a vari |
| 3 | , “Consolidated
Financial Statements,” and addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. FIN No. 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN No. 46 applies to public enterprises as of the beginning |
| 4 | e statements may be
identified with such words as “we expect”, “we believe”, “we anticipate”, or
similar indications of future Rule 10b-5 of the Exchange Act
during the period between
18
Table of Contents
expectations. These statements are neither promises nor guarantees, and
involve risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. Such risks and uncertainties
include, among other things, the factors discussed below under “Cautionary
Statements” and elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward looking statements, which speak only as of the
date hereof. We expressly disclaim any obligation to publicly update or revise
any such statements to reflect any change in these fo |
| 5 | 8;, or
similar indications of future Rule 10b-5 of the Exchange Act
during the period between
18
Table of Contents
expectations. These statements are neither promises nor guarantees, and
involve risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. Such risks and uncertainties
include, among other things, the factors discussed below under “Cautionary
Statements” and elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward looking statements, which speak only as of the
date hereof. We expressly disclaim any obligation to publicly update or revise
any such statements to reflect any change in these forward-looking statements,
or in events, conditions, or circumstances on which any such statements may be
based, or that |
| 6 | T
In January 2003, the FASB issued FIN No. No. 46 (“FIN No. 46”), which is
an interpretation of Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” and addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest
29
Table of Contents
or combination of interests that
effectively recombines risks that were previously dispersed. FIN No. 46
applies immediately to variable interest entities |
| 7 | FIN No. No. 46 (“FIN No. 46”), which is
an interpretation of Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” and addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest
29
Table of Contents
or combination of interests that
effectively recombines risks that were previously dispersed. FIN No. 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an |
| 8 | ties to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest
29
Table of Contents
or combination of interests that
effectively recombines risks that were previously dispersed. FIN No. 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN No. 46 applies to public enterprises as of the beginning |
| 9 | ormance or statements of our plans
and objectives. These forward-looking statements may be contained in, among
other things, SEC filings, including this quarterly report on Form 10-Q, and
press releases made by us and in oral statements made by our officers. Actual
results could differ materially from those contained in such forward-looking
statements. Important factors that could cause our actual results to differ
from those contained in such forward-looking statement include, among other
things, the risks described below and the risks described below in our Form
10-K for the transition period ended December 29, 2002 filed with the SEC on
November 26, 2002.
Risks Related to our Financial Results and Condition
Although
settled, the lingering effects of the SEC investigation and our
accounting restatements could materially harm our business, operating results
and financial condition
|
| 10 |
Risks Related to our Financial Results and Condition
Although
settled, the lingering effects of the SEC investigation and our
accounting restatements could materially harm our business, operating results
and financial condition
& |
| 11 | ses made by us and in oral statements made by our officers. Actual
results could differ materially from those contained in such forward-looking
statements. Important factors that could cause our actual results to differ
from those contained in such forward-looking statement include, among other
things, the risks described below and the risks described below in our Form
10-K for the transition period ended December 29, 2002 filed with the SEC on
November 26, 2002.
Risks Related to our Financial Results and Condition
Although
settled, the lingering effects of the SEC investigation and our
accounting restatements could materially harm our business, operating results
and financial condition
On January 31, 2002, we learned that the SEC had opened a formal order of
investigation into the financial accounting and reporting practices of us and
|
| 12 | y telecommunications, exposes our investments to
increased risk, particularly if these industries continue to be adversely
affected by the worldwide economic slowdown. At September 28, 2002, these
investments totaled approximately $46.3 million. During the three-month and
nine-month period ended September 28, 2002, we recorded impairment losses of
$2.6 million and $15.2 million, respectively, relating to these investments.
Risks Related to the Markets for our Products
There is intense competition in the market for enterprise network
equipment, which could prevent us from increasing our revenue and achieving
profitability
The network communications market is dominated by a small number of
competitors, some of which, Cisco Systems in particular, have substantially
greater resources and market share than |
| 13 | bilities that our products do not have. We must anticipate and adapt to
customer requirements and offer products that meet those demands in a timely
manner. Our failure to develop products that satisfy evolving customer
requirements could seriously harm our ability to achieve or maintain market
acceptance for our products and prevent us from recovering our product
development investments.
Our focus on sales to enterprise customers subjects us to risks that may
be greater than those for providers with a more diverse customer base
We focus principally on sales of products and services to enterprises,
such as large corporations and government agencies that rely on network
communications for many important aspects of their operations. This focus
subjects us to risks that are particular to this customer segment. For example,
many of our current and potential customers are health care, education |
| 14 | vestments.
Our focus on sales to enterprise customers subjects us to risks that may
be greater than those for providers with a more diverse customer base
We focus principally on sales of products and services to enterprises,
such as large corporations and government agencies that rely on network
communications for many important aspects of their operations. This focus
subjects us to risks that are particular to this customer segment. For example,
many of our current and potential customers are health care, education and
governmental agencies, all of whom are generally slower to incorporate
information technology into their business practices due to the regulatory and
privacy issues that must be addressed with respect to the sharing of their
information. In addition, the use and growth of the Internet is critical to
enterprises, which often have electronic networks, applications and other
mi |
| 15 | ell their products to both enterprises and
service providers, which are companies who provide Internet-based services to
businesses and individuals. In the future, the demand for network
communications products from enterprises may not grow as rapidly as the demand
from service providers. Enterprises may turn to service providers to supply
them with services that obviate the need for enterprises to implement many of
our solutions. Because we sell our products primarily to enterprises, our
exposure to these risks is greater than that of vendors that sell to a more
diversified customer base.
Risks Related to our Products
Our products are very complex, and undetected defects may increase our
costs, harm our reputation with our customers and lead to costly litigation
Our network communications products are extremely complex and must |
| 16 | als. In the future, the demand for network
communications products from enterprises may not grow as rapidly as the demand
from service providers. Enterprises may turn to service providers to supply
them with services that obviate the need for enterprises to implement many of
our solutions. Because we sell our products primarily to enterprises, our
exposure to these risks is greater than that of vendors that sell to a more
diversified customer base.
Risks Related to our Products
Our products are very complex, and undetected defects may increase our
costs, harm our reputation with our customers and lead to costly litigation
Our network communications products are extremely complex and must operate
successfully with complex products of other vendors.
36
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| 17 |
Risks Related to our Manufacturing and Components
We use several key components for our products that we purchase from
single or limited sources, and we could lose sales if these sources fail to
fulfill our needs
We currently work with third parties to manufacture our key proprietary
application-specific integrated circuits, which are custom designed circuits
built to perform a specif |
| 18 | transition year 2001 and
$42.3 million was incurred for the first nine months of transition year 2001.
With respect to sudden increases in demand, we may be unable to satisfy this
demand with our products, thereby forfeiting revenue opportunities and damaging
our customer relationships, and with respect to sudden decreases in demand, we
may find ourselves with excess finished goods inventory, which could expose us
to high manufacturing costs compared to our revenue in a financial quarter and
increased risks of inventory obsolescence.
Other Risks Related to our Business
Our significant sales outside the United States subject us to increasing
foreign political and economic risks, including foreign currency fluctuations
Our sales to customers outside of North America accounted for
approximately 44% and 42% of our revenue in th |
| 19 | ear 2001.
With respect to sudden increases in demand, we may be unable to satisfy this
demand with our products, thereby forfeiting revenue opportunities and damaging
our customer relationships, and with respect to sudden decreases in demand, we
may find ourselves with excess finished goods inventory, which could expose us
to high manufacturing costs compared to our revenue in a financial quarter and
increased risks of inventory obsolescence.
Other Risks Related to our Business
Our significant sales outside the United States subject us to increasing
foreign political and economic risks, including foreign currency fluctuations
Our sales to customers outside of North America accounted for
approximately 44% and 42% of our revenue in the three and nine months ended
September 28, 2002, respectively. We are seeking to
expand our |
| 20 | ith respect to sudden decreases in demand, we
may find ourselves with excess finished goods inventory, which could expose us
to high manufacturing costs compared to our revenue in a financial quarter and
increased risks of inventory obsolescence.
Other Risks Related to our Business
Our significant sales outside the United States subject us to increasing
foreign political and economic risks, including foreign currency fluctuations
Our sales to customers outside of North America accounted for
approximately 44% and 42% of our revenue in the three and nine months ended
September 28, 2002, respectively. We are seeking to
expand our international presence by establishing arrangements with
distribution partners as well as through strategic relationships in
international markets. Consequently, we anticipate that sales outside of th |
| 21 | ion of our
revenues in future periods.
The sales of our products are denominated primarily in United States
dollars. As a result, increases in the value of the United States dollar
relative to foreign currencies could cause our products to become less
competitive in international markets and could result in reductions in sales
and profitability. To the extent our prices or expenses are denominated in
foreign currencies, we will be exposed to increased risks of currency
fluctuations.
Our international presence subjects us to risks, including:
•
political and economic instability and changi |
| 22 |
Our international presence subjects us to risks, including:
•
political and economic instability and changing regulatory
environments in foreign countries;
|