| C-COR INC Item 1A Risk Factors OUR BUSINESS AND FINANCIAL RESULTS ARE DEPENDENT ON THE LEVEL OF CAPITAL SPENDING BY CABLE NETWORK OPERATORS Historically, most of our sales have been network access and transport equipment, on demand content management and operations support systems, and services to cable network operators in the United States and internationally |
| We expect this to continue for the foreseeable future |
| Demand for our offerings depends significantly upon the size and timing of capital spending by cable network operators for building, upgrading, and maintaining network infrastructures and for automated solutions for managing complex services delivered over their networks |
| We cannot accurately predict the patterns of cable network operators’ spending, but we believe that these patterns will continue to be affected in the near future by a variety of factors, including: • ongoing assessment by cable operators of capital spending requirements with the objective of balancing subscriber demand for advanced services with the financial market expectation of solid financial results and, in particular, an emphasis on generating positive cash flow and increasing revenue generated per subscriber; • the transition of most major domestic operations from large-scale network upgrades to more targeted capital investment tied to the roll-out of advanced services over small network segments; • timing of spending based on economic conditions in the international markets for network upgrades to support two-way capability for advanced video, voice, and data services; and • consolidation of cable equipment suppliers providing network products and services to global broadband operators |
| A decline in capital spending, which has historically been cyclical, would adversely affect our business and results of operations |
| WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS IN A SINGLE INDUSTRY Most of our sales have been to relatively few customers |
| Sales to our ten largest customers accounted for approximately 63prca of net sales in fiscal year 2006, 58prca of net sales in fiscal year 2005, and 64prca of net sales in fiscal year 2004 |
| The loss of, or any reduction in orders from, a significant customer would harm our business |
| In recent years, there has been significant consolidation of ownership of cable systems, particularly in the United States |
| As a result, we expect that the concentration of our sales among a limited number of customers will continue |
| Almost all of our sales are made on a purchase order basis (some of which may be governed by master agreements) and none of our customers have entered into long-term agreements requiring them to purchase our products |
| We expect that any further consolidation of our customer base may result in delays in receiving new orders or a reduction in the size of orders for our products which may harm our business |
| WE COULD BE ADVERSELY AFFECTED IF NEW TECHNOLOGIES REPLACE THE BROADBAND PRODUCTS THAT WE OFFER Historically, sales of network access and transport equipment for hybrid fiber coax networks have represented the majority of our sales |
| Hybrid fiber coax networks can be used for high speed Internet access, telephony, video on demand, high definition television, and digital cable television |
| Demand for our products depends primarily on our customers’ desire and ability to upgrade their existing networks to offer these services, in addition to basic video service |
| There are, however, technologies that compete with hybrid fiber coax networks in providing high speed Internet access, telephony, video on demand, high definition television, and digital cable television to end users such as direct broadcast satellite, digital subscriber line, and local multipoint distribution services |
| Improvements in a competing technology could result in significant price and/or performance advantages for that technology which, in turn, could reduce demand for our offerings |
| 12 ______________________________________________________________________ [37]Table of Contents It is difficult for us to accurately predict the future growth rate, size, and technological direction of the broadband communications market |
| As this market evolves, it is possible that hybrid fiber coax network operators, telephone companies, or other suppliers of broadband wireless and satellite services will decide to adopt alternative technologies or standards that are incompatible with our products |
| If we are unable to design, manufacture, and market offerings that incorporate or are compatible with these new technologies or standards, our business would suffer |
| IF WE ARE UNABLE TO INCREASE OUR CONTENT MANAGEMENT SYSTEMS AND OPERATIONS SUPPORT SYSTEMS SOFTWARE REVENUE TO GENERATE ADEQUATE PROFITABILITY, OUR FINANCIAL RESULTS WOULD BE ADVERSELY AFFECTED Our ability to increase the revenue generated by our content management and operations support systems depends on many factors that are beyond our control |
| For example: • our customers may decide to continue to manage their networks by focusing on limited, individual elements of the network rather than managing their entire network integrity and service delivery processes using a suite of software application modules such as those offered by our Solutions group; • failure of software products; • new and better products developed by competitors; • claims of intellectual property infringement; • our customers may decide to use internally developed software tools to manage their networks rather than license software from us; • the software business is volatile and we may not be able to effectively utilize our resources and meet the needs of our customers if we are unable to forecast the future demands of such customers; • if our customers increase the amount of spending on automated network, service, and content management tools, new suppliers of these tools may enter the market and successfully capture market share; and • we may be unable to hire and retain enough qualified technical and management personnel to support our growth plans |
| On-demand content management systems and operations support software have been our fastest growing and highest margin product lines |
| If we are unable to continue to grow revenues in these areas it would limit our ability to increase earnings and likely have an adverse affect on our stock price |
| FLUCTUATIONS IN OUR CONTENT MANAGEMENT SYSTEMS SOFTWARE SALES RESULT IN GREATER VOLATILITY IN OUR OPERATING RESULTS The level of our content management systems software sales fluctuates significantly quarter to quarter and results in greater volatility of our operating results than has been typical in the past, when the main source of volatility was the high proportion of quick-turn equipment sales |
| The timing of revenue recognition on software and system sales is based on specific contract terms and, in certain cases, is dependent upon completion of certain activities and customer acceptance which are difficult to forecast accurately |
| Because the gross margins associated with software and systems sales are substantially higher than our average gross margins, fluctuations in quarterly software sales have a disproportionate effect on operating results and earnings per share and could result in our operating results falling short of the expectations of securities analysts and investors |
| 13 ______________________________________________________________________ [38]Table of Contents WE MAY BE UNABLE TO ACCURATELY FORECAST THE DEMAND LEVEL FOR OUR PRODUCTS IN THE LONG TERM The major domestic cable operators have upgraded their networks to enable two-way communications |
| We cannot accurately forecast the level of demand for our products in the long term |
| We expect the future level of demand for our products to be heavily influenced by the penetration rates of such consumer offerings as video on demand, high definition television, digital television, high speed Internet, and telephony over hybrid fiber coax networks, which are beyond our control |
| A reduction in future demand would result in lower revenues and earnings and potentially even operating losses |
| Such reduction could also result in an impairment and write-off of goodwill and other long-lived assets as well as increased charges for excess inventory |
| IF WE ARE UNABLE TO DESIGN, MANUFACTURE, AND MARKET NEW OFFERINGS IN A TIMELY MANNER, WE MAY NOT REMAIN COMPETITIVE The broadband communications market is characterized by continuing technological advancement, changes in customer requirements, and evolving industry standards |
| To compete successfully, we must design, manufacture, and market new offerings that provide increasingly higher levels of performance and reliability |
| Our inabilities to design, manufacture, and market these products or to achieve broad commercial acceptance of these products would have an adverse effect on our business |
| WE MAY PURSUE ACQUISITIONS AND INVESTMENTS THAT COULD ADVERSELY AFFECT OUR BUSINESS In the past, we have made acquisitions of and investments in businesses, products, and technologies to complement or expand our business |
| While we have no plans for additional acquisitions in the near term, future acquisitions may occur |
| If we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses, products, or technologies with our existing business and products |
| Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization expenses, and substantial goodwill |
| IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL OR RECRUIT ADDITIONAL KEY PERSONNEL IN THE FUTURE, WE MAY BE UNABLE TO EFFECTIVELY EXECUTE OUR BUSINESS STRATEGY Our success depends on our ability to hire, retain, and motivate highly qualified personnel |
| Competition for qualified technical and other personnel is intense, and we may not successfully attract or retain such personnel |
| Competitors and others in the past have recruited our employees and may do so in the future |
| While we require our employees to sign customary agreements concerning confidentiality and ownership of inventions, we generally do not have employment contracts or non-competition agreements with our personnel |
| If we lose any of our key personnel, are unable to attract qualified personnel, or are delayed in hiring required personnel, particularly engineers and other technical personnel, our business could be negatively affected |
| OUR RELIANCE ON SEVERAL KEY COMPONENTS, SUBASSEMBLIES, AND MODULES USED IN OUR PRODUCTS AND SYSTEMS COULD RESTRICT PRODUCTION AND RESULT IN HIGHER UNIT COSTS We obtain many components, subassemblies, and modules for our products from a single supplier or a limited group of suppliers |
| Our reliance on single or limited group of suppliers, particularly foreign suppliers, and our increasing reliance on subcontractors, involves several risks |
| These risks include a potential inability to obtain an adequate supply of required components, subassemblies, or modules, and reduced control over pricing, quality, and timely delivery of these components, subassemblies, or modules |
| We do not generally maintain long-term agreements with any of our suppliers or subcontractors |
| An inability to obtain adequate deliveries or any other circumstances requiring us to seek alternative sources of supply could affect our ability to ship our products on a timely basis, which could damage our relationships with current and prospective customers, harm our business resulting in a loss of market share, and reduce quarterly revenues and income |
| 14 ______________________________________________________________________ [39]Table of Contents We generally maintain low inventory levels and do not make binding long-term commitments to suppliers |
| As a result, it may be difficult in the future to obtain components required for our products or to increase the volume of components, subassemblies, or modules if demand for our products increases |
| The lower level of commitments to our suppliers may also adversely affect our unit costs which are in many cases based upon volume discounts |
| CHANGES IN INTERNATIONAL TRADE LAWS, REGULATIONS, OR THE POLITICAL CLIMATE IN MEXICO COULD HINDER OUR PRODUCTION CAPACITY During fiscal year 2006, we transferred certain manufacturing processes from Wallingford, Connecticut to our Tijuana, Mexico facility |
| As a result, most of the optical headends, nodes and radio frequency amplifiers that we sell are made in our manufacturing facility in Tijuana, Mexico |
| This operation is exposed to certain risks as a result of its location, including: • changes in international trade laws, such as the North American Free Trade Agreement, affecting our import and export activities; • changes in, or expiration of, the Mexican government’s Maquiladora program, which provides economic benefits to us; • changes in labor laws and regulations affecting our ability to hire and retain employees; • fluctuations of foreign currency and exchange controls; • potential political instability and changes in the Mexican government; • potential regulatory changes; and • general economic conditions in Mexico |
| Any of these risks could interfere with the operation of this facility and result in reduced production, increased costs, or both |
| In the event that production capacity of this facility is reduced, we could fail to ship products on schedule and could face a reduction in future orders from dissatisfied customers |
| If our costs to operate this facility increase, our margins would decrease |
| Reduced shipments and margins would have an adverse effect on our financial results |
| CHANGES IN THE REGULATORY, POLITICAL, AND ECONOMIC ENVIRONMENTS IN EUROPE AND ASIA COULD ADVERSELY AFFECT OUR SALES AND ADMINISTRATIVE SUPPORT OPERATIONS IN VARIOUS COUNTRIES IN WHICH WE HAVE INTERNATIONAL OPERATIONS We have operations in India, The Netherlands, Spain, Portugal, the United Kingdom, France, Germany, and China |
| These operations mainly perform sales and administrative activities that support the delivery of localized versions of products and services in Europe and Asia |
| These facilities and operations are subject to certain risks as a result of their location, including: • changes in international trade laws that could affect doing business in the European Common Market; • changes in labor laws and regulations affecting our ability to hire and retain employees; • potential political instability and changes in the government; • potential regulatory changes; • potential changes in tax structures and rates; • foreign currency fluctuations; and • general economic conditions in Europe and Asia |
| 15 ______________________________________________________________________ [40]Table of Contents OUR COMPETITORS, SOME OF WHOM ARE LARGER AND MORE ESTABLISHED, MAY HAVE A COMPETITIVE ADVANTAGE OVER US The market for network transmission equipment, content and operations management systems, and services is extremely competitive and is characterized by rapid technological change |
| Our current competitors include significantly larger companies with greater financial, technical, marketing, and other resources |
| Additional competition could come from new entrants in our markets |
| These existing and potential competitors may be in a better position to withstand a significant reduction in capital spending by cable network operators and to keep pace with changes in technology |
| We cannot assure that we will be able to compete successfully in the future or that competition will not harm our business |
| Competitive pressures are likely to increase in the current capital spending environment as our competitors attempt to maintain revenue levels by increasing market share |
| This may result in increased price competition that could adversely affect our margins |
| Also, it could result in consolidation among our competitors which would have an unpredictable effect on our competitive position |
| Cisco Systems, Inc |
| acquired a major competitor of ours, Scientific-Atlanta, Inc, in an acquisition that was completed in February 2006 |
| In addition, there have recently been announcements of several acquisitions of video on demand vendors by our competitors, including Cisco Systems, Motorola and Harmonic |
| The ability of larger combined companies to offer a more comprehensive system solution than we can, and their larger capital and personnel resources, may put us at a competitive disadvantage |
| This could result in a loss of market share and reduced sales and earnings |
| WE DEPEND ON INTERNATIONAL SALES AND ARE SUBJECT TO CERTAIN RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Sales to customers outside of the US accounted for 30prca, 36prca, and 28prca of 2006, 2005, and 2004 consolidated net sales, respectively, and we expect international sales to comprise a significant percentage of our sales in the future |
| Our sales to international customers are subject to a number of risks, including: • import and export license requirements, duties, tariffs, and taxes; • the burden of complying with various foreign laws and regulations, technical standards, and treaties; • difficulty in staffing and managing foreign operations; • difficulty in collecting accounts receivable; • changes in foreign regulations and telecommunications standards; and • fluctuations in foreign exchange rates |
| If we are unable to maintain and grow our international sales, there would be an adverse effect on earnings and financial position |
| WE DEPEND ON CHANNEL PARTNERS TO SELL OUR PRODUCTS IN CERTAIN AREAS AND ARE SUBJECT TO RISKS ASSOCIATED WITH THESE ARRANGEMENTS We utilize distributors, value-added resellers, system integrators, and manufacturers’ representatives to sell our products to certain customers and in certain geographic regions, and we expect a growing proportion of our sales to come through such channel partners in the future |
| Our sales through channel partners are subject to a number of risks, including: • ability of our selected channel partners to effectively sell our products to end customers; • our ability to continue channel partner arrangements into the future since most are for a limited term and subject to mutual agreement to extend; 16 ______________________________________________________________________ [41]Table of Contents • a reduction in gross margins realized on sale of our products; and • diminution of contact with end customers which, over time, could aversely impact our ability to develop new products that meet customers’ evolving requirements |
| WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND MAY NOT BE ABLE TO SECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US We have incurred operating losses for the last two fiscal years that negatively impacted cash flow from operations, and it may do so in the future |
| We currently anticipate that our existing capital resources, including available cash, will be sufficient to meet our operating needs for the next 12 to 18 months |
| If our cash flows are less than expected, we may need to borrow or raise additional funds sooner to respond to unforeseen technological or marketing hurdles, satisfy unforeseen liabilities, or take advantage of unanticipated opportunities |
| A future acquisition could require significant amounts of capital |
| If we are unable to obtain adequate funds on acceptable terms, we may not be able to take advantage of market opportunities, develop new products, or otherwise respond to competitive pressures |
| We may also need to borrow or raise additional funds to pay the principal of our 3dtta5prca senior unsecured convertible notes (the “Notes”) which mature on December 31, 2009 |
| We may need to refinance all or a portion of our indebtedness under the Notes on or before maturity |
| We may not be able to refinance the Notes, if necessary, on commercially reasonable terms or at all |
| IF OUR SALES FORECASTS ARE NOT REALIZED IN A GIVEN PERIOD OR IF OUR OPERATING RESULTS FLUCTUATE IN ANY GIVEN QUARTER, OUR STOCK PRICE MAY FALL While we receive periodic forecasts from our customers as to their future requirements, these forecasts may not accurately reflect future purchase orders for our products |
| Sales of equipment are typically based on purchase orders and a substantial proportion of equipment sales are quick-turn orders that are received and fulfilled in the same quarter |
| Revenue recognition of software and system sales is based on specific contract terms and, in certain cases, is dependent upon completion of certain activities and customer acceptance which are difficult to forecast accurately |
| In addition, the sales cycles of many of our products, particularly our software products and our newer products sold internationally, are typically unpredictable and usually involve: • a significant technical evaluation by our customers; • a commitment of capital and other resources by network operators; • delays associated with network operators’ internal procedures to approve large capital expenditures; • time required to engineer the deployment of new technologies or services within broadband networks; and • testing and acceptance of new technologies that affect key operations |
| For these and other reasons, our sales cycles generally last three to six months, but can last up to 12 months |
| In addition, because a limited number of large customers account for a significant portion of our sales, the timing of their orders can cause significant fluctuation in our quarterly operating results |
| A substantial portion of our expenses are fixed in the short term and are based on expected sales |
| If sales are below expectations in any given quarter, the negative impact on our operating results may be increased if we are unable to adjust our spending to compensate for the lower sales |
| Accordingly, variations in the timing of sales can cause significant fluctuation in our quarterly operating results and may result in a decline in the price of our common stock |
| 17 ______________________________________________________________________ [42]Table of Contents WE MAY BE HARMED IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, PATENT APPLICATIONS, AND NON-EXCLUSIVE LICENSES FOR UNITED STATES PATENTS We intend to continue to file patent applications in the future, where we believe appropriate, and to pursue such applications with United States and foreign patent authorities, but we cannot be sure that patents will be issued on such applications or that our patents will not be contested |
| Also, because issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents will provide significant commercial protection |
| We also rely on trade secrets, technical know-how, copyright, and other unpatented proprietary information relating to our product development and manufacturing activities |
| We try to protect this information with confidentiality agreements with our employees and other parties |
| We cannot be sure that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others |
| Particular aspects of our technology could be found to infringe on the claims of other existing or future patents |
| Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our business which could prevent us from developing new products |
| We cannot predict the extent to which we may be required to seek licenses, or the extent to which they will be available to us on acceptable terms, if at all |
| WE MAY EXPERIENCE INCREASES IN OUR TAX EXPENSE IF WE BECOME MORE PROFITABLE We have a substantial amount of net operating loss carryforwards that will be utilized only if there is income |
| In fiscal year 2003, we established a full valuation allowance against our deferred tax assets in most jurisdictions as the operating losses realized in fiscal years 2001 through 2003 raised doubts about our ability to utilize those deferred tax assets in the future |
| As a result, our operating cash flow, reported net income (loss), and earnings (loss) per share reflect a relatively low effective tax rate |
| If we generate taxable income in a jurisdiction on a consistent basis for multiple consecutive quarters, we might eliminate or reduce the deferred tax asset valuation allowance for that jurisdiction which will have the effect of increasing the amount of income tax expense recorded in the future and decreasing the reported net income and earnings per share |
| WE MAY INCUR SIGNIFICANT LIABILITIES IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS OR IF WE DID NOT COMPLY WITH THESE REGULATIONS IN THE PAST We are subject to a variety of Federal, state, and local governmental regulations related to the use, storage, discharge, and disposal of toxic or otherwise hazardous chemicals used in our manufacturing process |
| Although we believe that our activities conform to environmental regulations, the failure to comply with present or future regulations could result in fines being imposed on us, suspension of production, or a cessation of operations |
| We cannot assure that we have not in the past violated applicable laws or regulations which could result in required remediation or other liabilities |
| WE ARE SUBJECT TO INCREASED COSTS OF COMPLYING WITH NEW REGULATIONS ON CORPORATE GOVERNANCE AND DISCLOSURE STANDARDS AND OUR SHARE PRICE COULD BE ADVERSELY AFFECTED IF WE FAIL TO COMPLY Complying with changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations, and Nasdaq Stock Market rules, is requiring a substantial amount of management and employee time and ongoing expense |
| Section 404 of the Sarbanes-Oxley Act requires management’s annual review and evaluation of our internal control over financial reporting, and attestation of the effectiveness of our internal control over financial reporting by management and our independent registered public accounting firm in connection with the filing of the annual report on Form 10-K for each fiscal year |
| We have documented and tested our internal control systems and procedures and no 18 ______________________________________________________________________ [43]Table of Contents known material weaknesses exist at this time |
| However, it is possible that a material weakness may be found in the future and if this occurs, investors may lose confidence in our financial statements, and the price of our stock may suffer |