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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 the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ To _______
Commission File Number: 0-31093
VINA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0432782
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
39745 Eureka Drive, Newark, CA 94560 (510) 492-0800
(Address of principal executive offices) (Registrant's telephone number,
including area code)
Securities registered to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required 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 (Section 229.405 of this chapter) 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. [ ]
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq National Market on March 20, 2001) was
approximately $69,200,000.00. As of March 20, 2001, there were 36,912,420 shares
of Common Stock, $0.0001 per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by
reference information from the registrant's proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 2001 Annual Meeting of Stockholders to be held on
May 22, 2001.
VINA TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page
PART I................................................................................................2
Item 1. Business....................................................................................2
Item 2. Properties.................................................................................16
Item 3. Legal Proceedings..........................................................................16
Item 4. Submission of Matters to a Vote of Security Holders........................................16
PART II..............................................................................................18
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................18
Item 6. Selected Consolidated Financial Data.......................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................42
Item 8. Consolidated Financial Statements and Supplementary Data...................................43
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.......63
PART III.............................................................................................63
Item 10. Directors and Executive Officers of the Registrant........................................63
Item 11. Executive Compensation....................................................................63
Item 12. Security Ownership of Certain Beneficial Owners and Management............................63
Item 13. Certain Relationships and Related Transactions............................................63
PART IV..............................................................................................64
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K.............64
PART I
Item 1. Business
When used in this report, the words "may," "intend," "might," "will,"
"should," "could," "would," "expect," "believe," "estimate," "predict,"
"potential," or the negative of these terms, and similar expressions are
intended to identify forward-looking statements. These statements reflect our
current views with respect to future events and are based on assumptions and
subject to risks and uncertainties. Given these risks and uncertainties, you
should not place undue reliance on these forward-looking statements.
Forward-looking statements include, but are not limited to, statements about:
marketing and commercialization of our products under development; our estimates
regarding our capital requirements and our needs for additional financing; plans
for future products and services and for enhancements of existing products and
services; our patent applications and licensed technology; our ability to
attract customers and establish collaboration and licensing agreements; and
sources of revenues and anticipated revenues, including contributions from
corporate collaborations, license agreements and other collaborative efforts,
and the continued viability and duration of those agreements and efforts.
Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. These
risks and uncertainties include, but are not limited to, the risks set forth
below under Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Other Factors That May Affect Results." These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
In the sections of this report entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Other Factors That May Affect Results," all references to "VINA" "we," "us,"
"our" or the "Company" mean VINA Technologies, Inc. and its subsidiaries, except
where it is made clear that the term means only the parent company.
T1 Integrator, VINA, VINA Technologies, eLink 100, MBX and Business Office
Exchange are our registered trademarks. We have filed applications to register
the following trademarks: VINA HDSL Integrator, DSL eLink, VINA Multiservice
Xchange, Simplifying the First Mile, and The Leading Architect of the First
Mile. We also refer to trademarks of other corporations and organizations in
this document.
Overview
VINA Technologies develops and markets multiservice broadband access
products that enable telecommunications service providers to deliver bundled
voice and data services. Our products integrate various broadband access
technologies, including both circuit- and packet-based technologies, onto a
single platform to alleviate capacity constraints in the first mile of
communications networks. We believe that by integrating voice and data services,
our solutions decrease network access equipment costs and operating expenses for
our service provider customers. Our products also create additional revenue
opportunities for service providers by enabling them to deliver enhanced
services. These services include local and long distance telephone services, as
well as high-speed data services, such as Internet access, business-to-business
electronic commerce, extended local area networks, outsourced applications
services and messaging. By supporting both circuit- and packet-based
technologies, our products protect service providers' investments in prevailing
circuit-based networks and offer them a cost-effective migration path to
emerging packet-based networks. They also facilitate seamless and remote
upgrades and service provisioning by our customers.
We sell our products to competitive local exchange carriers, interexchange
carriers and incumbent local exchange carriers through our sales force and
value-added resellers and as an original equipment manufacturer. Our original
equipment manufacturer and largest service provider customers include Lucent
Technologies, Allegiance Telecom and Nuvox Communications (formerly Gabriel
Communications and Trivergent).
Industry Background
Increasing Demand for Broadband Access
The volume of Internet and other data traffic has grown quickly over the
past several years, due primarily to increased numbers of users and the
proliferation of bandwidth intensive applications such as business-to-business
electronic commerce, web hosting and remote access for telecommuters. According
to the Yankee Group, in 2002, over 50% of public communications network traffic
in the United States will be data traffic, surpassing the amount of voice
traffic on the public network for the first time. Moreover, Ryan Hankin Kent, a
market research and consulting firm, projects North American Internet traffic to
grow at a rate of approximately 300% per year between 2001 and 2003. Electronic
business applications have become critical business tools and, as a result,
businesses of all sizes increasingly require their telecommunications service
provider to deliver constant broadband connections at affordable rates.
The First Mile Bottleneck
Although service providers have deployed emerging packet-based technologies
to expand the speed and capacity of long distance networks, more limited
investment has been made in local networks, or the first mile, to address the
substantial increase in traffic. As a result, the first mile has become the
telecommunication infrastructure's principal bottleneck, limiting the ability of
service providers to deliver broadband services to the market.
Deregulation is Accelerating Competition and the Introduction of Broadband
Access
Historically, in the United States, dominant telephone companies,
principally Regional Bell Operating Companies, were the exclusive operators of
first mile communications networks. The U.S. Telecommunications Act of 1996
opened the local communications market to new entrants. The 1996 Act required
the dominant local carriers, known as incumbent local exchange carriers, or
ILECs, to lease portions of their networks to other carriers to compete in the
first mile. These new entrants are referred to as competitive local exchange
carriers, or CLECs. Expanded competition has accelerated the deployment of new
technologies, including digital subscriber line, or DSL, digital cable and
broadband fixed wireless, into the local market. To date, these broadband
solutions have been introduced as parallel data networks, co-existing alongside
the voice infrastructure controlled by ILECs, complicating the network.
While both CLECs and ILECs have introduced services in the market to
address competition and the need for broadband access, each of them faces
significant challenges in their respective markets.
CLECs. CLECs have targeted the large business market in particular and have
gained market share from ILECs in recent years. Most CLECs have provided either
voice or data services and are facing numerous challenges as they attempt to
achieve profitability. CLECs are seeking to decrease network expense by
improving bandwidth management and reducing customer turnover. They are also
seeking to increase revenue per customer by introducing bundled suites of
enhanced voice and data services, such as long distance, local call routing,
Internet access, business-to-business electronic commerce and web hosting. CLECs
have also taken the lead in offering bundled voice and data services to small to
medium size businesses, a market which we believe has been dominated, but
underserved, by ILECs. These businesses often do not have the financial or
technical resources of large businesses to invest in and manage costly parallel
voice and data networks. We believe that small to medium size businesses present
an opportunity for CLECs to substantially grow their customer base. According to
the Yankee Group, in the U.S. there were approximately 9.8 million small to
medium size businesses with two to 499 employees in 1999.
ILECs. Historically, ILECs have faced strict regulations limiting their
investment returns in the voice market by tying those returns to their
infrastructure and other costs. ILECs now seek to introduce new enhanced data
services in deregulated markets where their returns are not so constrained.
Although ILECs have traditionally dominated the first mile market, they have
lost substantial market share to CLECs in the large business market and have
begun to lose market share in the small to medium size business market because
CLECs have been able to deliver more cost-effective services. In order to defend
their customer base in the small to medium size business market, ILECs are
seeking to provide bundled voice and data services to their customers. ILECs are
also experiencing a copper wire telecommunication lines shortage in major
metropolitan areas because there has been an increase in the number of phone
lines installed in customer premises for a variety of applications. Due to this
shortage, ILECs face pressure to more efficiently utilize their copper wires to
meet the increasing demand for voice and high-speed data access.
Convergence of Voice and Data Networks
Voice and data networks have evolved into parallel networks as broadband
access networks include both circuit-based networks utilizing time division
multiplexing, or TDM, and packet-based networks utilizing various protocols such
as asynchronous transfer mode, or ATM, internet protocol, or IP, and frame
relay. The deployment of equipment dedicated to circuit-based networks and
packet-based networks has resulted in the creation of a highly complex
telecommunications infrastructure comprised of multiple networks dedicated to
support various protocols. As a result, service providers are subject to high
network operating costs due to the redundancy of operating parallel networks and
limited equipment compatibility. In order for service providers to deliver
cost-effective, bundled voice and data services, we believe these parallel
networks need to be integrated and simplified.
Limitations Constraining the Deployment of Converged Next-Generation
Network Solutions
While many service providers desire to provide bundled voice and data
services, they have been limited in their ability to deliver their services by
the following:
o Uncertain migration path. Service providers have invested billions
of dollars in circuit-based networks. They recognize that separate
voice and data networks must be converged because separate
networks are not cost-effective in the long term. Service
providers require products that support both networks and offer a
cost-effective migration path from circuit-based networks to
emerging packet-based networks.
o Multiple Equipment and Protocol Types. Addressing multiple
protocols has historically required service providers to tap
multiple vendors and equipment types, and has resulted in
confusion as well as unnecessary network complexity and expense.
Service providers require multiservice access solutions that
integrate readily into their existing networks, maintain
compatibility with other components of their network and provide
remote, dynamic bandwidth and service provisioning, eliminating
the need for expensive manual provisioning and installation.
o Inefficient use of network bandwidth. The rapid increase in demand
for bandwidth and the limited capacity available in the first mile
of telecommunications networks have strained the level of services
provided to end users. Service providers require more efficient
multiservice access solutions that minimize network expense,
maximize bandwidth and are deliverable over a single copper line.
o Operational challenges to infrastructure deployment. The scope and
complexity of existing communication networks pose unique
challenges to service providers in recruiting and training the
necessary personnel to deploy, scale, provision and maintain the
network. Simplified network solutions are needed to help reduce
the number of personnel and technical expertise required.
In order to address these challenges, several communications equipment
companies have introduced broadband integrated access devices, or IADs. First
generation IADs are circuit-based. As service providers plan their converged
next-generation networks, they have become increasingly reluctant to invest in
communication equipment that cannot support asynchronous transfer mode or
Internet protocol traffic. In response, several vendors have introduced
packet-based IADs. However, we believe these new products have not been widely
adopted because service providers have invested billions of dollars in their
circuit-based networks, which they are unwilling to abandon. The transition to
converged, next-generation networks is a costly and complex process that will
take many years to complete. Therefore, service providers are seeking broadband
access solutions that operate in both circuit- and packet-based environments,
enabling them to protect their investment in existing equipment while ensuring a
cost-effective migration path to converged, packet-based networks. This solution
must be affordable, scalable and easy to install and operate.
The VINA Solution
We develop and market broadband access communications equipment that
offers, in one product, access to circuit- and packet-based networks. Our
products enable service providers to offer a complete suite of bundled voice and
data services to end users, including voice, video, data and Internet services,
such as business-to-business electronic commerce and web hosting. Using our
products, service providers may remotely and dynamically customize the services
they deliver to individual customers. Furthermore, our products allow service
providers to cost-effectively deliver bundled offerings from a single vendor
with a single bill. Our products require little or no information technology
expertise on the end users' part and allow service providers to deliver products
for the first mile which reduce the cost and complexity associated with
purchasing, operating and maintaining their networks.
We believe that our products offer service providers the following
benefits:
o Defined Network Migration Path. Our products offer a seamless path
from the circuit-based network environment to packet-based voice
and data network environment. We utilize software to migrate our
products to packet-based networks, minimizing or eliminating
costly equipment upgrades. Our equipment is currently being
installed in both circuit- and packet-based networks.
o Reduced Network Complexity and Operating Costs. Our platform-based
solution integrates multiple products, such as routers, firewalls,
channel banks, modems and features of private branch exchanges, or
PBXs, which reduce the operating costs and the complexity of
delivering bundled voice and data services. Service providers are
able to operate more responsively and to roll out services on a
cost-effective basis through our software-based remote bandwidth
and service provisioning.
o Increased Value-Added Services. Our solution allows service
providers to enhance revenue derived from their installed customer
base by selling additional software-enabled services, such as a
firewall or local call routing. Our platform-based solution is
designed to work with a broad range of first mile transport
technologies.
o Ease of Deployment. Our hardware products incorporate a
software-based management system, including a graphical user
interface to facilitate installation and use and to allow our
service provider customers to remotely manage their product
offerings and upgrades. Our product solution, combined with our
extensive service program, simplifies and accelerates the
deployment of bundled voice and data services.
o Robust Service Platform. Our products provide telecommunications
grade quality and reliability. We offer robust solutions that have
been designed to navigate the unpredictable course of technology
and standards development. We design our products to allow
software-based upgrades for anticipated future network transport
technologies.
Our solution accepts multiple transport services into a single broadband
access product. By incorporating various functions, such as firewall, channel
bank and features of a private branch exchange onto a single platform, we enable
our service provider customers to reduce their equipment costs and network
complexity, ease migration from circuit- to packet-based networks, and enhance
revenue opportunity from their installed customer base.
Our Products
We offer a family of products for the first mile designed to allow service
providers to deliver a complete suite of bundled voice and data services
cost-effectively over a reduced number of network connections.
Multiservice T1 Integrator and HDSL Integrator
Our Multiservice T1 Integrator and HDSL Integrator are hardware platform
solutions that allow service providers to integrate their customers' voice,
data, video and Internet requirements onto a single T1 line or high-bit rate
digital subscriber line, or HDSL. These multiservice broadband access products
provide toll-quality voice service in both circuit- and packet-based networks.
In addition, they support software-based value-added features including
intelligent local call routing, firewalls, service level agreement statistics
and Business OfficeXchange, which enables our products to operate as stand-alone
PBX systems. Consequently, our multiservice broadband access products not only
lower deployment costs and streamline provisioning, but also enable our service
providers to differentiate themselves in the market and address end users'
service requirements.
Our T1 Integrator's channel bank function converts a T1 digital line into
24 individual analog telephone circuits. In addition, its integrated
multiplexing and routing functionality allows the allocation of channels for
video and personal computers, or PCs, as well as high-speed, dedicated Internet
and frame relay access. The T1 Integrator also supports standard channel bank
functionality and local call routing, which enables 911, 411 and local toll-free
calls to be switched to the ILEC and provides redundancy in the event of an
interruption in T1 service.
Multiservice Xchange product family
Our Multiservice Xchange product family includes the MX-500, MX-550 and
MX-400. The MX-500 and MX-550 are compact, multiservice broadband access
platforms that deliver circuit- and packet-based voice, data, video and Internet
access services. The MX-500 supports up to a maximum of two T1 lines and the
MX-550 supports an international equivalent, E1 line. The MX-500 and MX-550
provide support for the circuit- based TDM network to deliver voice and data
access services. The MX-500 and MX-550 also support asynchronous transfer mode,
or ATM, voice and data services. Accordingly, the MX-500 and MX-550 meets the
needs of both service providers who have implemented ATM networks, as well as
providers who intend to migrate from existing circuit- to ATM packet-based
networks. The MX-500 provides toll-quality voice service in both circuit- and
packet-based networks. The MX-550 also supports telecommunication protocols used
in major international markets. Consequently, the MX-500 and MX-550 enable our
service provider customers to realize savings in deployment, facility and
maintenance costs, streamline provisioning and expand the range of services our
customers are able to offer to end users.
We recently introduced the MX-400, a product originally developed by
Woodwind Communications Systems. The MX-400 is designed to provide a single
point of connectivity for the delivery of integrated network services. These
services include broadband access, continuous Internet access, public and
private voice/facsimile services and private data services using Frame Relay,
ATM, switching or IP over SDSL or T1 delivery technologies. The MX-400 also
enables Voice over IP, or VoIP, with Media Gateway Control Protocol, or MGCP.
The ability to offer MGCP functionality allows service providers to take
advantage of the revenue generating benefits of deploying VoIP services to the
small and medium sized business market. To date, we have not sold any MX-400
products.
eLink product family
Our eLink product family includes the eLink-100 and eLink-200. The
eLink-100 was also originally developed by Woodwind Communications Systems. The
eLink-100 is an eight-port platform addresses the needs of one of the largest
segment of the Digital Subscriber Line, or DSL, market and provides high-speed,
continuous Internet access, public voice/facsimile services and Local Area
Network interconnect using ATM, and Frame Relay over SDSL delivery technologies.
The eLink 100 supports advanced voice services such as local station-to-station,
voice compression, silence suppression and echo cancellation, as well as
web-based system configuration and system version download. The eLink-100
replaces the DSL eLink product, which was supplied to us by Polycom. To date, we
have not sold any eLink-100 or DSL eLink products.
Our eLink-200 supports TDM and integrates eight analog ports for voice and
one Ethernet port for data on the same T1 line. The space-saving device also
forms a complete solution in one box by marrying a channel bank, DHCP server and
IP router with NAT functionality and firewall support. The eLink-200 began
shipping in the fourth quarter of 2000.
Multiservice Broadband Xchange
The Multiservice Broadband Xchange, or MBX, is a central office-based
multiservice platform that is designed to enable service providers to deploy
bundled broadband voice and data services to the first mile or edge of the
network. The MBX platform provides a software-based migration path from TDM
technology to ATM switching. This platform is design for options that include
DSL, fiber optics and service mediation with IP services.
The MBX platform consolidates the voice concentration functionality of a
digital loop carrier, the data aggregation and switching capabilities of a
multiservice ATM switch, and the voice/data interworking functions of a media
gateway. The MBX provides flexibility in its support of traditional
concentration of voice lines with the added support of frame relay switching. To
date this product is still under development. We expect to be in a position to
commence shipments of this product in the third quarter of 2001.
Sales and Marketing
Sales
We sell our products to service providers directly through our sales force,
and indirectly through our original equipment manufacturers (OEM) customer and
value added resellers (VARs). We have established an OEM customer and other
marketing relationships in order to serve particular markets and provide our
service provider customers with opportunities to purchase our products in
conjunction with complementary products and services.
o Direct. Direct sales have represented, and we believe will
continue to represent, the majority of our sales. We believe that
direct interaction with service providers offers us the best
understanding of the business models and technical requirements of
our customers. Further, we believe that the competitive nature of
the telecommunications equipment industry requires us to reduce
costs by eliminating intermediate steps in the distribution chain.
o OEM. OEM sales through Lucent are an important distribution
channel for us in the United States. We believe Lucent's
relationships with CLECs, ILECs and small independent operating
companies will continue to enhance our ability to reach this large
customer base. The OEM customer uses our products to deliver
complete, end-to-end solutions that are installed and
field-serviced by their technical support organizations. We plan
to initiate and develop relationships with additional leaders in
the communications equipment industry as potential OEM customers.
o Value-Added Resellers. In addition to direct sales and our OEM
customer, we have existing relationships with VARs focused on the
service provider market. We intend to leverage our existing VAR
relationships to seek new opportunities for the deployment of our
products. In addition to the VARs we work with in the United
States, we are developing relationships with VARs in Europe.
Whether we ship our products directly or through our OEM customer or VARs,
maintaining a direct relationship with each of our service provider customers is
an important part of our sales strategy. Since establishing a strong working
relationship with our customers is critical to sales success and future product
development, we strive to maintain strong visibility across our service provider
customer base, regardless of the distribution channel. As of December 31, 2000,
our sales organization consisted of 52 employees.
Marketing
Our marketing objectives include building market awareness and acceptance
of our company and our products, as well as generating qualified customer leads.
To accomplish these objectives, our marketing activities include public
relations, communications, research, sales support, direct marketing, a web
presence, product marketing, as well as channel marketing. We work directly with
service providers to help them develop business models and introduce product
packages, promotional programs and pricing strategies, all designed to promote
the delivery of multiple voice and data services over a single broadband access
facility. In addition, we actively work with a number of industry and trade
publications and industry analysts to educate service providers on how to
deploy, and the benefits of, multiservice broadband access networks.
We have developed an extensive co-marketing initiative targeting our
customers. Our QuickStart implementation program educates our customers on our
products and services through sales support programs, joint marketing and lead
generation activities, joint sales initiatives, and technical support. The tools
and resources available through our QuickStart program enable our customers to
quickly understand our product solutions, expand their customer base and create
new revenue opportunities for their installed base. As of December 31, 2000, our
marketing organization consisted of 17 employees.
Customer Service and Support
Our customer service organization maintains and supports products sold to
service providers and offers technical support to our OEM customer and VARs. We
also assist our OEM customer and VARs in offering installation, maintenance and
support services to their customers for our products. We handle questions and
problems over the Internet, telephone and e-mail. We continually update our
website to enable our direct and indirect customers to download the latest
technical information and tips, along with firmware, software and product
manuals.
Customers
We primarily sell to CLECs, ILECs and smaller independent operating
companies through direct sales and indirectly through our OEM customer and VARs.
The following is a list of some of our direct and indirect service provider
customers:
2nd Century Communications CapRock Communications North American Telephone
Allegiance Telecom Intermedia Communications Nuvox Communications
ATG Technologies KMC Telecom Pacific Bell
Birch Telecom MCI Worldcom TelePacific Communications
Broadwing Media One Group Time Warner Telecom
For the year ended December 31, 2000, sales to Lucent account for 31% of
our net revenue. Five customers, including Lucent Technologies, accounted for
approximately 75% of our net revenue for the year ended December 31, 2000, of
which sales to Lucent, Gabriel Communications and Trivergent Communications
accounted for 31%, 16% and 13% of our net revenue, respectively.
For the year ended December 31, 1999, sales to Lucent account for 46% of
our net revenue. Five customers, including Lucent, accounted for approximately
80% of our net revenue for the year ended December 31, 1999.
For the year ended December 31, 1998, sales to Walker and Associates
accounted for 57% of our net revenue. Five customers, including Walker,
accounted for approximately 87% of our net revenue for the year ended December
31, 1998, of which sales to Walker and Lucent accounted for 57% and 17% of our
net revenue respectively.
Strategic Relationships
A key element of our plan is to expand our sales, marketing and
distribution channels through strategic relationships. We have established, and
will continue to pursue, these strategic relationships in order to grow net
revenues, and to provide indirect sales and marketing of our solutions.
Lucent Technologies. In May 1998, we entered into an OEM agreement with
Lucent, which we restated in May 1999. The Lucent agreement expires in May 2002
and can be renewed for a one year period. The agreement may be terminated by
Lucent at any time upon 60 days' notice. Our working relationship with Lucent
offers each of us a number of strategic advantages. Lucent uses our products to
offer a complete end-to-end solution for the first mile integrating voice and
data traffic. In turn, we have the opportunity to leverage Lucent's extensive
sales force and marketing relationships to reach new customers and markets.
Lucent incorporates our T1 Integrator and MX into its ConnectReach product
family. ConnectReach consists of our Multiservice T1 Integrator and a seamless
connection to Lucent's SLC-2000 Access System, a digital loop carrier, enabling
the two products to function as a single, integrated voice and data access
system. ConnectReach also interconnects with the AnyMedia Access System, a
next-generation digital loop carrier. Lucent's ConnectReach Plus consists of our
MX with a seamless connection with either Lucent's SLC-2000 Access System or
AnyMedia access system. Designed to offer cost-effective enhanced bundled
services to branch offices and small and medium sized businesses, the
ConnectReach Plus seamlessly integrates voice, data, video, and Internet access
over a common T1, E1 or DSL network connection. The ConnectReach Plus can be
deployed today in a TDM network to provide support for existing services such as
TDM voice, data, and Internet access. The same ConnectReach Plus chassis can be
configured for voice over ATM, providing a smooth migration path for service
providers.
Interoperability Relationships
Maintaining product compatibility with a broad range of equipment vendors
and central office gateway protocols is critical to our success as a supplier of
first mile solutions. These relationships allow us to work with other vendors to
develop solutions that continue to simplify the network and enhance our market
position with service providers. We have entered into interoperability
agreements with three vendors in the voice over DSL market--CopperCom, Jetstream
and Tollbridge. We also have relationships with developers of SS7 gateways to
accelerate the deployment of asynchronous transfer mode, or ATM-based local
exchange carrier services, including relationships with Convergent Networks,
Tachion and TeraBridge. These relationships help minimize the technology risk to
our service provider customers.
Technology
Our products and technology enable multiservice access over a single
broadband network with an open architecture. The open nature of our products
allows our solution to be seamlessly integrated into the existing TDM
infrastructure to deliver enhanced bundled services while offering the ability
to migrate the network through hardware or software upgrades, to an asynchronous
transfer mode, or ATM network, and subsequently to an Internet protocol, or IP
network. We have developed extensive core competencies.
Asynchronous Transfer Mode and Frame Relay Expertise
We have developed expertise in packetized voice and data technology. The
two widely deployed and proven packet-based technologies that can be utilized to
integrate voice and data over a single line are ATM and frame relay. Our
expertise with packet-based technology stems from developing advanced system
functions such as digital signal processing, echo cancellation, dynamic call
setup and virtual circuit switching, as well as class of service management
capabilities.
Digital Subscriber Line Expertise
DSL has emerged as the most attractive first mile access technology for
providing high bandwidth data access over existing copper telephone lines. In
addition to high-speed access, DSL technology lowers access costs, compared to
equivalent T1 lines. Several versions of DSL are being implemented for differing
applications, including synchronous digital subscriber line (SDSL), high-bit
rate digital subscriber line, or HDSL, and HDSL2 for business applications. We
have designed our products to scale quickly and easily add new transmission
technologies. We have implemented HDSL in our T1 Integrator product line and
implemented SDSL in our eLink 100 product line.
Internet and Internet Protocol Expertise
Demand for Internet services has grown exponentially. These services
require an all IP infrastructure, especially in the access network for Web
applications and use, e-commerce and email. Our products incorporate an IP
router which offers firewall options that include circuit level security
technology and packet filtering, as well as network address translation, or NAT,
and a software-based dynamic host control protocol, or DHCP, to provide dynamic
IP address management. These IP elements are necessary to ensure reliable and
secure Internet access. Our products offer our customers a fully integrated
Internet access solution.
Time Division Multiplexing Expertise
Most carrier networks use high bit rate digital systems employing
time-division multiplexing, or TDM. With extensive deployment of T1, digital
local offices and optical transmission, TDM became economically viable in the
1980s and 1990s. The existing telephone network is predominantly based on
digital time division switching, transmission and signaling over the out-of-band
control network. Our family of products has been designed to allow seamless
integration into existing TDM networks and to offer a migration path to emerging
technologies such as ATM or IP.
Hardware Design
Our customers favor telecommunications grade hardware designs. Thus we have
avoided hardware design technology commonly used in the PC industry. Instead our
designs incorporate microprocessors specifically developed for communications
applications and for high reliability and high availability environments. We
utilize design techniques which result in over-design of our digital circuitry,
analog circuitry, cooling and power systems. We incorporate field programmable
gate array logic components where possible to simplify designs and improve
reliability. Our interface designs incorporate popular standard chipsets in
order to assure compatibility with other carrier equipment. Our hardware designs
include many maintenance features which reduce operating costs for our
customers. For example, our service provider customers can use our equipment to
test their analog lines while the line is not inoperable. We perform extensive
environmental testing on all of our products and most of our products are
designed for and meet network equipment building systems, or NEBs, requirements
adopted by most carriers. Our products are also designed to meet the European
telecommunications and physical standards. We believe that all our designs meet
applicable underwriters labs and Federal Communications Commission standards.
Research and Development
We believe that our success is, to a large extent, dependent upon our
responsiveness to the continued technological migration of our customers'
networks. Our research and development group works closely with our OEM
customer, our customer steering committee, and our marketing department for
product definition and to assure compatibility with central office equipment.
Research and development expenses, including all product development,
system testing and documentation, were approximately $4.2 million in 1998, $6.7
million in 1999 and $12.6 million in 2000. All of our product development costs
have been expensed as incurred. We have licensed certain commercially available
software from third parties. We conduct the majority of our research and
development at our Newark, California headquarters and are in the process of
establishing additional centers in the United States and internationally. As of
December 31, 2000, we had 75 full-time employees in research and development.
While we develop some custom products for our OEM customer, most of our
research and development efforts are focused on standard products. We have
significant hardware and software expertise in both TDM and ATM network
technologies. We place heavy emphasis on our design verification processes which
include extensive testing at our Newark facilities and significant
interoperability testing at partner sites.
Manufacturing
We outsource our manufacturing operations. We are currently negotiating an
agreement with Benchmark Electronics to replace Flextronics International as our
primary contract manufacturer. Benchmark is located in Angleton, Texas. We
believe outsourcing our manufacturing enables us to benefit from the component
purchasing capabilities of a global contract manufacturer that can accommodate
significant increases in production volume and product mix, as necessary. We use
a rolling 12-month forecast based on anticipated product orders to determine our
product requirements. We, in turn, provide these forecasts to the contract
manufacturer, which purchases the components for our products and assembles them
to our specifications. We intend to utilize Benchmark's resources and expertise
to assist us in manufacturing, engineering, repair and product testing.
Our current manufacturer, Flextronics International, performs board
assembly, systems configuration and testing and product shipping. We have
developed comprehensive inspection tests and use statistical process controls to
assure the reliability and quality of our products. Our manufacturing engineers
develop all test procedures and design and build all equipment and stations
required to test our products. We integrate these manufacturing tests with our
contract manufacturer's build processes. Our manufacturing personnel work
closely with our design engineers to design for manufacturability, and to ensure
that our test methods remain current as broadband access technologies evolve.
We obtain several of the key components used in our products from single or
limited sources of supply. We have encountered, and expect in the future to
encounter, difficulty in obtaining these components from our suppliers. In the
fourth quarter of 1999, we experienced a severe shortage of components,
particularly subscriber line interface circuits, which jeopardized our ability
to deliver our products in a timely fashion. The suppliers of our components
range from small vendors to large established companies. Components for which we
currently have only a single source include subscriber line interface circuits
that we purchase from Advanced Micro Devices, and microprocessors that we
purchase from Motorola Corporation. Components for which we currently have
limited sources include digital signal processors, DSL modules and flash memory.
We purchase most components on a purchase order basis and do not have guaranteed
supply arrangements with most of our key suppliers. We or our contract
manufacturer may not be able to obtain necessary supplies in a timely manner.
We select manufacturers and suppliers on the basis of technology,
manufacturing capacity, materials management, quality and cost. We may, in the
future, seek additional manufacturers and suppliers to meet our anticipated
requirements and lower the cost of our products. We obtained International
Standards Organization, or ISO, 9001 certification in 2000.
Competition
The market for multiservice broadband access products is extremely
competitive. We believe that competition will increase substantially as the
introduction of new technologies, deployment of broadband access networks, and
potential regulatory changes create new opportunities for established and
emerging companies. Furthermore, DSL- and T1-based solutions compete with
broadband wireless and cable offers. We face competition primarily in two areas:
equipment manufacturers, such as Accelerated Networks, ADTRAN, Carrier Access
Corporation, Efficient Networks (to be acquired by Siemens), Polycom and Zhone
Technologies and diversified equipment manufacturers such as Cisco Systems,
Lucent and Nortel Networks. In addition, we may in the future compete with SS7
gateway suppliers as well as Voice-over-DSL (VoDSL) suppliers.
The principal competitive factors for products utilized in our markets
include:
o pricing;
o product features;
o reliability and scalability;
o performance;
o compatibility with other products;
o ease of installation and use;
o customer relationships, service and support; and
o brand recognition.
Some of our competitors have greater financial and other resources than do
we. With greater resources, our competitors may be able to take better advantage
of new competitive opportunities, including offering lease and other financing
programs. In addition, the rapid technological developments in our industry can
result in frequent changes to our group of competitors. Consolidation in our
industry may also affect our ability to compete. Acquisitions may strengthen our
competitors' financial, technical and marketing resources and provide greater
access to customers or new technologies. As a result, these competitors may be
able to devote greater resources than we can to the development, promotion, sale
and support of their products
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect our
trade secrets and know-how. We currently have three patent applications pending,
and another patent application in process, but no issued patents. Although we
employ a variety of intellectual property in the development and manufacturing
of our products, we believe that none of our intellectual property is
individually critical to our current operations. However, taken as a whole, we
believe our intellectual property rights are significant and that the loss of
all or a substantial portion of such rights could have a material adverse effect
on our results of operations. Our intellectual property protection measures may
be insufficient to prevent misappropriation of our technology. From time to
time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies, processes or rights that are
important to our business. For example, we recently received letters from Sonoma
Systems alleging that one of our products infringes a patent owned by them and
inviting us to discuss licensing their patent. We believe that we do not
infringe Sonoma Systems' patent. These assertions may result in litigation
requiring us to pay substantial damages or to redesign or stop selling our
products. Also, even if we were to prevail, litigation could be time-consuming
and expensive and could divert our time and attention. In addition, the laws of
many foreign countries do not protect our intellectual properties to the same
extent as the laws of the United States. We may desire or be required to renew
or to obtain licenses from others in order to further develop and market
commercially viable products effectively. Any necessary licenses may not be
available on reasonable terms.
Employees
As of December 31, 2000, we employed 178 full-time employees including 69
in sales and marketing, 11 in operations, 75 in research and development, and 23
in finance and administration. Our employees are not covered by any
collective-bargaining agreements, and we consider our relations with our
employees to be good.
Item 2. Properties
VINA's headquarters are in Newark, California, where it leases
approximately 52,000 square feet of space. VINA also operates facilities in
Richardson, Texas and Berkshire, England. As of December 31, 2000, VINA had
sublease and lease agreements covering approximately 60,000 square feet that
expire on various dates ranging from September 2001 to July 2007. The Company
believes that its current facilities are adequate to support its current and
anticipated near-term operations and believes that it can obtain additional
space it may need in the future on commercially reasonable terms.
Item 3. Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of the ordinary course of business. As of the date of this report,
there are no material legal proceedings pending or, to our knowledge, threatened
against us.
Item 4. Submission of Matters to a Vote of Security Holders
We did not have any matters submitted to a vote of security holders during
the fourth quarter ended December 31, 2000.
EXECUTIVE OFFICERS
Set forth below is information concerning our executive officers who report
under Section 16 of the Securities Exchange Act of 1934, as amended, and their
ages as of March 20, 2001.
Name Age Position(s)
- ---- --- -----------
Steven M. Bauman............ 56 President, Chief Executive Officer and Director
Joshua W. Soske............. 42 Executive Vice President, Chief Technical Officer and Director
T. Diane Pewitt............. 44 Executive Vice President, Research & Development and Operations
Gaymond W. Schultz.......... 60 Executive Vice President
Stanley E. Kazmierczak...... 41 Vice President, Finance and Administration, Chief Financial
Officer and Secretary
Thomas J. Barsi............. 33 Vice President, Business Development
Julie P. Cotton............. 54 Vice President, Human Resources
Kay E. Kienast.............. 51 Vice President, Marketing
John W. Neese............... 51 Vice President, Engineering
C. Reid Thomas.............. 39 Vice President, Sales
Steven M. Bauman has served as our President, Chief Executive Officer and
as a director since August 1999. Mr. Bauman was a principal at GeoPartners
Research, a Cambridge, Massachusetts-based consultancy from February 1998 to
August 1999. He was Vice President/General Manager, Network Systems Division and
then Vice President of Virtual Private Networks of 3Com, a supplier of network
systems, from October 1995 to February 1998. Mr. Bauman was Vice President and
General Manager, Software Group, Farallon Communications (now Netopia) from 1993
until September 1995.
Joshua W. Soske has served as our Executive Vice President and Chief
Technology Officer since August 1999, as a director since our inception and was
one of our founders. Mr. Soske served as our President and Chief Executive
Officer from inception until August 1999. He has been President and founder of
International Design and Research, a communications consulting firm which
provides management, architectural design and contract manufacturing services
dealing primarily with telephone, data network, and television technologies
since March 1979.
T. Diane Pewitt has served as our Executive Vice President, Research &
Development and Operations since March 2001. Ms. Pewitt was our Vice President,
Operations from March 2000 until March 2001. She served as Vice President of
Messaging for the service provider line of business for Lucent Technologies from
June 1999 to March 2000. She also served as the Vice President of Operations for
Lucent Technologies' Octel Messaging Division from January 1998 to June 1999.
Ms. Pewitt was also Director of Operations for Lucent from June 1994 to January
1998.
Gaymond W. Schultz has served as our Executive Vice President since July
1996 and was one of our founders. Mr. Schultz was our Chief Financial Officer
from March 1997 until July 1999. Mr. Schultz was a partner at International
Design and Research from 1994 to June 1996. Additionally, Mr. Schultz was a
founder and served as Vice President of Engineering of StrataCom, a provider of
wide area data networking equipment, from 1985 to 1999.
Stanley E. Kazmierczak has served as our Vice President, Finance and
Administration, Chief Financial Officer and Secretary since July 1999. Mr.
Kazmierczak served as Chief Financial Officer and Vice President, Finance and
Operations of Digital Link, a supplier of networking products, from January 1999
to July 1999, and as Chief Financial Officer from December 1992 to July 1999. He
was Vice President, Finance and Administration of Digital Link from March 1996
to January 1999.
Thomas J. Barsi has served as our Vice President, Business Development
since January 2000. Mr. Barsi served as our Director of Marketing until December
1999 and our Director of Sales from January 1999 to December 1999. Prior to
joining us, he was Director of Marketing responsible for the product line of
high-end business products for Pacific Bell Internet from June 1995 to July 1996
and a product manager at Pacific Bell Internet from September 1994 to June 1995.
Julie P. Cotton has served as our Vice President, Human Resources since
June 2000. Ms. Cotton was Vice President, Human Resources at Pilot Network
Services, an Internet security company, from April 1999 to June 2000. She worked
as a management consultant from April 1998 to April 1999. Ms. Cotton was also
Director of Organizational Effectiveness for Applied Materials, a manufacturer
of semiconductor capital equipment, from October 1995 to April 1998. For a year
prior to her position with Applied Materials, Ms. Cotton worked as an
independent consultant.
Kay E. Kienast has served as our Vice President, Marketing since March
2000. Ms. Kienast was Vice President, NSA Marketing at Newbridge Networks, a
manufacturer of telecommunications equipment from August 1998 to June 1999. She
was Vice President, Marketing at Cincinnati Bell Information Systems from
January 1998 to August 1998 and was Director of Marketing at Unisys, a
telecommunications equipment manufacturer, from November 1995 to January 1998.
She was Manager, Strategy, Planning and Research at Digital Equipment
Corporation from mid 1993 to November 1995.
John W. Neese has served as our Vice President, Engineering since March
2000. Mr. Neese was our Engineering Director from August 1996 to February 2000
and Chief Financial Officer and Secretary from August 1996 to March 1997. He was
Engineering Director at Corsair Communications, a manufacturer of cellular fraud
detection products, from August 1995 to August 1996.
C. Reid Thomas has served as our Vice President, Sales since April 2000.
Mr. Thomas served as Managing Director, Sales for Lucent Technologies, where he
was responsible for AT&T Markets from August 1996 to April 2000. Prior to his
employment with Lucent, Mr. Thomas was Group Manager, Strategy and Alliances for
Octel Communications, from January 1995 to August 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock has been traded on the Nasdaq National Market ("Nasdaq")
under the symbol "VINA" since our initial public offering. The following table
sets forth, for the periods indicated, the range of high and low sales prices of
our common stock on Nasdaq as reported in its consolidated transaction reporting
system.
Fiscal Year 2000 High Low
---------------- ---- ---
Third Quarter (from August 10, 2000)........ $24.000 $12.250
Fourth Quarter.............................. $14.250 $ 3.063
The last reported sale of our common stock on Nasdaq was $1.875 on March
20, 2001. As of March 20, 2001, the common stock was held by 460 stockholders of
record.
We have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends in the foreseeable future.
On August 9, 2000, the SEC declared effective our Registration Statement on
Form S-1 (No. 333-36398), relating to the initial public offering of our common
stock. The managing underwriters in the offering were Lehman Brothers Inc.,
Thomas Weisel Partners LLC and U.S. Bancorp Piper Jaffray Inc. The offering
commenced on August 10, 2000, and was closed on August 15, 2000, after we had
sold all of the 3,000,000 shares of common stock registered under the
Registration Statement. On September 15, 2000, the underwriters purchased
450,000 shares from us in connection with the exercise of the underwriters'
over-allotment option. The initial public offering price was $12 per share for
an aggregate initial public offering of $41.4 million (including the 450,000
shares sold to the underwriters upon exercise of the over-allotment option),
netting proceeds of approximately $36.4 million to us after underwriting fees of
approximately $2.9 million and other offering expenses of approximately $2.1
million. None of these fees and expenses was paid to any of our directors,
officers, or general partners or their associates, persons owning 10% or more of
any class of our equity securities or any affiliate of VINA.
From August 10, 2000, the effective date of our Registration Statement, to
December 31, 2000, the ending date of the reporting period, we have not used any
of our net proceeds from our initial public offering. For more information, see
Item 7 of this report on page 21, "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with our consolidated financial statements and
related notes to consolidated financial statements included in this Annual
Report on Form 10-K. The consolidated statements of operations for each of the
years in the three-year period ended December 31, 2000, and the consolidated
balance sheet data at December 31, 1999 and 2000, are derived from consolidated
financial statements which are included in the Form 10-K. The consolidated
statement of operation data set forth below for the period from June 21, 1996
(inception) through December 31, 1996 and for the fiscal year ended December 31,
1997 and the consolidated balance sheet data as of December 31, 1996, 1997 and
1998 have been derived from our consolidated financial statements not included
in this Form 10-K. The historical operating results are not necessarily
indicative of future operating results.
Period from
June 21, 1996
(inception)
through Years Ended December 31,
December 31, ---------------------------------------------------------------
1996 1997 1998 1999 2000
-------------- ------------ --- ------------ -- ------------- --- ------------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenue ................................... $ -- $ 579 $ 4,393 $ 12,700 $ 32,078
Cost of revenue ............................... 542 2,054 7,713 19,240
-------- -------- -------- -------- --------
Gross profit .................................. -- 37 2,339 4,987 12,838
-------- -------- -------- -------- --------
Costs and expenses:
Research and development ................... 499 1,906 4,174 6,690 12,609
Selling, general and
administrative ...................... 342 2,532 6,414 10,881 21,124
Stock-based
compensation* .......................... 79 154 4,715 24,169
-------- -------- -------- -------- --------
Total costs and expenses ............... 841 4,517 10,742 22,286 57,902
-------- -------- -------- -------- --------
Loss from operations .......................... (841) (4,480) (8,403) (17,299) (45,064)
Interest income, net .......................... 9 165 413 223 1,732
-------- -------- -------- -------- --------
Net loss ...................................... $ (832) $ (4,315) $ (7,990) $(17,076) $(43,332)
======== ======== ======== ======== ========
Net loss per share, basic and
diluted (1)
N/A $ (4.83) $ (2.63) $ (3.30) $ (2.63)
======== ======== ======== ======== ========
Shares used in computation, basic
and diluted (1) ........................... -- 894 3,038 5,169 16,467
======== ======== ======== ======== ========
- ---------------------------
* Stock-based compensation:
Cost of revenue...................... $ -- $ -- $ 2 $ 152 $ 1,855
Research and development............. -- 36 78 1,098 7,985
Selling, general and
administrative................ -- 43 74 3,465 14,329
---------- ---------- ---------- ---------- ----------
$ -- $ 79 $ 154 $ 4,715 $ 24,169
========== ========== ========== ========== ==========
As of December 31,
-----------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and
Short-term investments.................. $ 5,049 $ 3,543 $ 11,359 $ 2,568 $ 44,499
Working capital (deficit)................... 4,842 2,896 11,058 (492) 40,657
Total assets................................ 5,314 4,524 14,456 6,673 58,536
Long-term debt, less current portion........ 129 400 655 534 0
Total stockholders' equity.................. 4,917 3,233 11,549 348 44,829
- --------------------------------------------------------------------------------
(1) The diluted net loss per share computation excludes potential shares of
common stock issuable pursuant to convertible preferred stock and options
to purchase common stock, as well as common stock subject to repurchase
rights held by us, as their effect would be antidilutive. See Notes 1 and 7
of notes to consolidated financial statements for a detailed explanation of
the determination of the shares used in computing basic and diluted net
loss per share.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in forward looking statements for many
reasons, including but not limited to the risks discussed in this report under
the heading "Other Factors That May Affect Results." The following discussion
and analysis should be read in conjunction with "Selected Consolidated Financial
Data" and the Consolidated Financial Statements and related notes included
elsewhere in this Annual Report on Form 10-K.
Recent Developments
On February 27, 2001, we acquired Woodwind Communications Systems, Inc.
("Woodwind"), a provider of voice-over-broadband network edge access solutions.
The aggregate acquisition price consisted of approximately 4.1 million shares of
VINA common stock, $7.5 million in cash and the assumption of Woodwind options
to purchase approximately 1.4 million shares of common stock. The transaction
will be accounted for as a purchase.
Overview
VINA Technologies is a leading developer of multiservice broadband access
communications equipment that enables communications service providers to
deliver bundled voice and data services. Our products integrate various
broadband access technologies, including existing circuit-based and emerging
packet-based networks, onto a single platform to alleviate capacity constraints
in communications networks.
From our inception in June 1996 through February 1997, our operating
activities related primarily to developing and testing prototype products,
commencing the staffing of our sales and customer service organizations and
establishing relationships with our customers. We began shipments of our
Multiservice T1 Integrator product family in March 1997. In May 1999, we began
shipping our Multiservice Xchange product. Since inception, we have incurred
significant losses, and as of December 31, 2000, we had an accumulated deficit
of $73.5 million.
We market and sell our products directly to communications service
providers and through an OEM customer and value-added resellers, or VARs. Our
net revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed and
determinable, and collectibility is reasonably assured. This generally occurs
upon commercial shipment of our products at which time we have no further
performance obligations to our customers. We also record a provision at the time
we recognize net revenue primarily for warranty costs. No net revenue is
recognized on products shipped on a trial basis. We recognize extended warranty
and other service net revenue ratably over the respective service periods. This
service net revenue has not been significant to date.
Our customer base is highly concentrated. A relatively small number of
customers have accounted for a significant portion of our historical net
revenue. For the year ended December 31, 2000, sales to our five largest
customers accounted for approximately 75% of our net revenue, of which sales to
Lucent Technologies, Gabriel Communications and Trivergent Communications
accounted for 31%, 16% and 13% of our net revenue, respectively. While the level
of sales to any specific customer is anticipated to vary from period to period,
we expect that we will continue to experience significant customer concentration
for the foreseeable future. To date, international sales have not been
significant. International sales have been denominated solely in U.S. dollars
and, accordingly, we have not been exposed to significant fluctuations in
foreign currency exchange rates.
Cost of revenue consists primarily of costs of products manufactured by a
third-party contract manufacturer, component costs, depreciation of property and
equipment, personnel related costs to manage the contract manufacturer and
warranty costs, and excludes amortization of deferred stock compensation. We
conduct program management, manufacturing engineering, quality assurance and
documentation control at our facility in Newark, California. Currently, we
outsource our manufacturing and testing requirements to Flextronics
International Ltd. Accordingly, a significant portion of our cost of revenue
consists of payments to this contract manufacturer.
We expect our gross margin to be affected by many factors, including
competitive pricing pressures, fluctuations in manufacturing volumes, costs of
components and sub-assemblies, costs from our contract manufacturers and the mix
of products or system configurations sold. Additionally, our gross margin may
fluctuate due to changes in our mix of distribution channels. Currently, we
derive the majority of our net revenue from sales made to our OEM customer. A
significant increase in the proportion of net revenue derived from an OEM
customer would adversely impact or reduce our gross margin.
Research and development expenses consist primarily of personnel and
related costs, consulting expenses and prototype costs related to the design,
development, testing and enhancement of our multiservice broadband access
products, and excludes stock-based compensation. We expense all of our research
and development expenses as incurred.
Selling, general and administrative expenses consist primarily of personnel
and related costs, including salaries and commissions for personnel engaged in
direct and indirect selling and marketing and other administrative functions and
promotional costs, including advertising, trade shows and related costs, and
excludes stock-based compensation.
For the years ended December 31, 1998, 1999 and 2000, we recorded an
aggregate of $54.6 million in deferred stock compensation to be amortized over
the vesting period. In addition, we recorded an aggregate of $734,000 in
stock-based compensation related to stock options granted to non-employees for
services. The deferred stock compensation recorded represents the difference
between the deemed fair market value of our common stock at the time of option
grants during these periods and the exercise prices of these options. As there
was no public market for our common stock, the fair market value of our common
stock on option grant dates was determined by our board of directors prior to
our initial public offering. The board of directors in their determination of
fair market value took into consideration many factors including, but not
limited to, our financial performance, current economic trends, actions by
competitors, market maturity, emerging technologies, near-term backlog and, in
some circumstances, valuation analyses performed by independent appraisers using
generally accepted valuation methodologies such as the income and market
approaches. We are amortizing deferred stock compensation using a multiple
option award valuation approach over the vesting periods of the applicable
options, which is generally four years. The amortization of deferred stock
compensation, based upon options granted through December 31, 2000, is expected
to be $16.6 million in 2001, $7.1 million in 2002, $2.4 million in 2003 and
$286,000 thereafter.
Interest income, net, consists primarily of interest earned on our cash,
cash equivalent and short-term investment balances partially offset by interest
expense associated with our debt obligations.
From inception through December 31, 2000, we incurred net losses for
federal and state income tax purposes and have not recognized any income tax
provision or benefit. As of December 31, 2000, we had $40.8 million of federal
and $26.5 million of state net operating loss carryforwards to offset future
taxable income that expire in varying amounts through 2020 and 2005,
respectively. Given our limited operating history and losses incurred to date,
coupled with difficulty in forecasting future results, a full valuation
allowance has been provided. Furthermore, as a result of changes in our equity
ownership from our preferred stock offerings and initial public offering,
utilization of net operating losses and tax credits may be subject to
substantial annual limitations due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. The annual limitation
may result in the expiration of net operating losses and tax credits before
utilization.
Results of Operations
The following table sets forth selected consolidated statements of
operations data as a percentage of net revenue for the periods indicated. For
purposes of this table, cost of revenue, gross profit, research and development,
and selling, general and administrative amounts do not include stock-based
compensation.
Years Ended December 31,
-----------------------------------------------
1998 1999 2000
----------- ------------ -------------
Net revenue.............................. 100.0% 100.0% 100.0%
Cost of revenue.......................... 46.8 60.7 60.0
----------- ------------ -------------
Gross profit............................. 53.2 39.3 40.0
----------- ------------ -------------
Costs and expenses:
Research and development.............. 95.0 52.7 39.3
Selling, general and administrative... 146.0 85.7 65.9
Stock-based compensation.............. 3.5 37.1 75.3
----------- ------------ -------------
Total costs and expenses................. 244.5 175.5 180.5
----------- ------------ -------------
Loss from operations..................... (191.3) (136.2) (140.5)
Interest income, net..................... 9.4 1.8 5.4
----------- ------------ -------------
Net loss................................. (181.9)% (134.4)% (135.1)%
=========== ============ =============
Fiscal Years Ended December 31, 2000, 1999 and 1998
Net revenue. Net revenue was $32.1 million in 2000, $12.7 million in 1999
and $4.4 million in 1998. The 152% increase in net revenues in 2000 over 1999
was primarily due to increased unit sales to existing customers and sales to new
customers. The increase in net revenue in 1999 over 1998 was primarily
attributable to sales of our Multiservice Xchange products introduced in the
second quarter of 1999 and increased unit sales of other products, offset by
price reductions effected in the second quarter of 1999. In 1999, net revenue
would have been $4.7 million higher absent these price reductions.
Cost of revenue. Cost of revenue was $19.2 million in 2000, $7.7 million in
1999 and $2.1 million in 1998. Gross profit increased to $12.8 million in 2000
from $5.0 million in 1999 and $2.3 million in 1998. Gross margin increased to
40.0% in 2000 from 39.3% in 1999 due primarily to cost reductions on existing
products and higher margins on new products. Gross margin decreased to 39.3% in
1999 from 53.2% in 1998, primarily due to price reductions effected in the
second quarter of 1999. We anticipate that our gross margin may continue to
fluctuate due to many factors, including competitive pricing pressures,
fluctuations in manufacturing volumes, costs of components and sub-assemblies,
costs from our contract manufacturers, the mix of products or system
configurations sold and changes in our mix of distribution channels.
Research and development expenses. Research and development expenses
increased to $12.6 million in 2000 from $6.7 million in 1999 and $4.2 million in
1998. These increases were primarily a result of additional personnel costs,
higher prototype expenses and higher consulting costs associated with our
continuing research and development efforts. We believe that continued
investment in research and development is critical to attaining our strategic
product and cost reduction objectives, and as a result, we expect these research
and development expenses to increase in absolute dollars in the future. Research
and development expenses decreased as a percentage of net revenue from 95.0% in
1998 to 52.7% in 1999 and 39.3% in 2000. These decreases were a result of net
revenue increasing at a rate faster than research and development expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $21.1 million in 2000 from $10.9 million in
1999 and $6.4 million in 1998. These increases were primarily attributable to
increased personnel costs, including hiring of additional sales and key
management personnel, as well as increased recruiting costs and increased
promotional expenses, including trade shows and advertising. Selling, general
and administrative expenses decreased as a percentage of net revenue from 146.0%
in 1998, to 85.7% in 1999 and 65.9% in 2000. These decreases were a result of
net revenue increasing at a rate faster than selling, general and administrative
expenses. We intend to actively participate in marketing, business development
activities and selling and promotional programs, substantially expand our field
sales operations and customer support organizations and build our infrastructure
to support our anticipated business growth and operation as a public company. As
a result, we expect expenses related to these programs to continue to increase
substantially in absolute dollars in the future.
Stock-based compensation. We recorded deferred stock compensation of $36.4
million in 2000, $17.8 million in 1999 and $394,000 in 1998 for which
amortization of deferred stock compensation was $23.5 million in 2000, $4.6
million in 1999 and $154,000 in 1998. Stock-based compensation related to
options issued to non-employees for services was $99,000 in 1999 and $635,000 in
2000.
Interest income, net. Interest income, net increased to $1.7 million in
2000 from $223,000 in 1999. This increase was primarily attributable to higher
cash balances resulting in higher interest income earned offset by interest
expense on bank loans. Interest income decreased to $223,000 in 1999 from
$413,000 in 1998. This decrease was primarily attributable to lower cash balance
resulting in lower interest income earned.
Liquidity and Capital Resources
Since inception, we have satisfied our cash requirements primarily through
private sales of convertible preferred stock which generated gross proceeds of
approximately $48.8 million prior to our initial public offering. In August
2000, we completed an initial public offering of 3,450,000 shares of common
stock at a price of $12.00 per share, resulting in proceeds of approximately
$36.4 million net of underwriters discount and offering expenses. As of December
31, 2000, we had cash, cash equivalents and short-term investments of $44.5
million.
Net cash used in operating activities was $18.1 million in 2000, $9.1
million in 1999, and $8.1 million in 1998. Cash used in operating activities
resulted primarily from net losses from operations offset by stock-based
compensation and increases in accrued liabilities and accounts payable in each
period.
Net cash used in investing activities was $39.3 million in 2000 and $4.7
million in 1998, primarily reflecting purchases of short-term investments and
property plant and equipment. Net cash provided by investing activities was $3.1
million in 1999 primarily due to proceeds from the sale of investments.
Cash provided by financing activities was $62.5 million in 2000, $1.2
million in 1999 and $16.6 in 1998. In 2000, cash provided by financing
activities was due primarily to proceeds from our initial public offering in
August 2000 and the sale of convertible preferred stock in 2000. In 1999, cash
provided by financing activities was primarily due to issuance of common stock
and proceeds from issuance of long-term debt in 1998, cash provided by financing
activities was primarily due to issuance of convertible preferred stock.
We currently have no significant commitments for capital expenditures. We
anticipate that we will increase our capital expenditures consistently with our
anticipated growth in personnel and infrastructure, including facilities and
systems.
We expect to experience significant growth in our operating expenses for
the foreseeable future. As a result, we anticipate that operating expenses will
constitute a material use of our cash resources. In addition, we may use cash
resources to fund acquisitions, such as our acquisition of Woodwind
Communications Systems, Inc. or invest in complementary businesses, technologies
or products. We believe that our cash on hand will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 12
months.
We anticipate that we will need to obtain additional funding during 2002,
and we may seek to sell additional equity or debt securities or secure a bank
line of credit. Currently, we have no other immediately available sources of
liquidity. The sale of additional equity or other securities could result in
additional dilution to our stockholders. Arrangements for additional financing
may not be available in amounts or on terms acceptable to us, if at all.
New Accounting Standard
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
No. 133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company will adopt SFAS No. 133
effective January 1, 2001. Management has concluded its analysis of the effects
of adopting SFAS No. 133 and the adoption will not have a significant impact on
the financial position, results of operations, or cash flows of the Company.
In December 1999, the Securities and Exchange (SEC) released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarized certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying accounting principles generally accepted in
the United States of America to revenue recognition in financial statements. The
adoption of SAB No. 101 in 2000 had no impact on the Company's financial
position, results of operations or cash flows.
RISKS FACTORS
Risks Related to Our Business
Because we have a limited operating history and operate in a new and rapidly
evolving telecommunications market, you may have difficulty assessing our
business and predicting our future financial results.
We were incorporated in June 1996 and did not begin shipping our products
until March 1997. Due to our limited operating history, it is difficult or
impossible for us to predict our future results of operations.
We have a history of losses, we expect future losses, and we may not be able to
generate sufficient net revenue in the future to achieve or sustain
profitability.
We have incurred significant losses since inception and expect that our net
losses and negative cash flow from operations will continue for the foreseeable
future. We incurred net losses of approximately $8.0 million in 1998, $17.1
million in 1999 and $43.3 million in 2000. As of December 31, 2000, we had an
accumulated deficit of approximately $73.5 million. To achieve profitability, we
will need to generate and sustain substantially higher net revenue while
maintaining reasonable cost and expense levels. We have large fixed expenses and
expect to continue to incur significant and increasing expenses for research and
development, sales and marketing, customer support, developing direct sales and
distribution channels, and general and administrative expenses.
We rely on a small number of telecommunications customers for substantial
portions of our net revenue. If we lose one of our customers or experience a
delay or cancellation of a significant order or a decrease in the level of
purchases from any of our customers, our net revenue could decline and our
operating results and business could be harmed.
We derive almost all of our net revenue from direct sales to a small number
of telecommunications customers and our indirect sales through our major
original equipment manufacturer, or OEM, customer that sells and markets our
products. If we lose one of our customers or experience a delay or cancellation
of a significant order or a decrease in the level of purchases from any of our
customers, our net revenue could decline and our operating results and business
could be harmed. Our five largest customers accounted for approximately 75% of
our net revenue for the fiscal year ended December 31, 2000, of which sales to
Lucent Technologies, Gabriel Communications and Trivergent accounted for 31%,
16% and 13% of our net revenue, respectively. We expect that the
telecommunications industry will continue to experience consolidation. If any of
our customers is acquired by a company that is one of our competitors'
customers, we may lose its business. In addition, if our OEM customer is
acquired, we could lose that customer. For example, Intermedia Communications,
one of our service provider customers, was recently acquired by MCI Worldcom.
Also, the ultimate business success of our direct service provider customers,
our OEM customer and value-added resellers, or VARs, and our indirect customers
who purchase our products through an OEM customer and VARs, could affect the
demand for our products. In addition, any difficulty in collecting amounts due
from one or more of our key customers could harm our operating results and
financial condition. If any of these events occur, our net revenue could decline
and our operating results and business could be harmed.
The difficulties experienced by many of our current customers have had and are
expected to continue to have an adverse effect on our business.
To date, we have sold the majority of our products to CLEC customers. In
recent months, CLECs have experienced extreme difficulties in obtaining
financing for their businesses. As a result, CLECs have been forced to scale
back their operations or terminate their operations. If our customers become
unable to pay for shipped products, we may be required to write-off significant
amounts of our accounts receivable. Similarly, if our customers order products
and then suspend or cancel the orders prior to shipping, we will not generate
revenues from the products we build. In such circumstances, our inventories may
increase and our expenses will increase. Further, we may incur substantially
higher inventory carrying costs and excess inventory that could become obsolete
over time. We expect that our business will continue to be significantly and
negatively affected until there is substantial improvement in the ability of
CLECs to finance their businesses.
Our net revenue could decline significantly if our relationship with our major
OEM customer deteriorates.
A significant portion of our net revenue is derived from sales to our major
OEM customer. Our agreement with our OEM customer is not exclusive and does not
contain minimum volume commitments. Our OEM agreement with Lucent expires in May
2002. Lucent may terminate the agreement earlier upon 60 days' notice. At any
time or after a short period of notice, our OEM customer could elect to cease
marketing and selling our products. They may so elect for a number of reasons,
including the acquisition by an OEM customer of one or more of our competitors
or their technologies, or because one or more of our competitors introduces
superior or more cost-effective products. In addition, we intend to develop and
market new products that may compete directly with the products of our OEM
customer, which may also harm our relationships with this customer. For example,
our MBX product may compete with our OEM customer which could adversely affect
our relationship with that customer. Our existing relationships with our OEM
customer could make it harder for us to establish similar relationships with our
OEM customer's competitors. Any loss, reduction, delay or cancellation in
expected sales to our OEM customer, or our inability to establish similar
relationships with new OEM customers in the future, would hurt our business and
our ability to increase net revenues and could cause our quarterly results to
fluctuate significantly.
If we do not predict our manufacturing requirements accurately, we could incur
additional costs and suffer manufacturing delays.
We currently provide forecasts of our demand to our contract manufacturer
12 months prior to scheduled delivery of products to our customers. Lead times
for the materials and components that we order vary significantly and depend on
numerous factors, including the specific supplier, contract terms and demand for
a component at a given time. If we overestimate our manufacturing requirements
or a product in our manufacturing forecast becomes obsolete, our contract
manufacturer may have purchased excess or obsolete inventory. For those parts
that are unique to our products, we could be required to pay for these excess or
obsolete parts and recognize related inventory write-down costs. If we
underestimate our requirements, our contract manufacturer may have an inadequate
inventory, which could interrupt manufacturing of our products and result in
delays in shipments and net revenue.
The telecommunications industry is characterized by rapidly changing
technologies. If we are unable to develop and maintain strategic relationships
with vendors of emerging technologies, we may not be able to meet the changing
needs of our customers.
Our success will depend on our ability to develop and maintain strategic
relationships with vendors of emerging technologies such as Jetstream and
Tachion. We depend on these relationships for access to information on technical
developments and specifications that we need to develop our products. We also
may not be able to predict which existing or potential partners will develop
leading technologies or industry standards. We may not be able to maintain or
develop strategic relationships or replace strategic partners that we lose. If
we fail to develop or maintain strategic relationships with companies that
develop necessary technologies or create industry standards, our products could
become obsolete. We could also be at a competitive disadvantage in attempting to
negotiate relationships with those potential partners in the future. In
addition, if any strategic partner breaches or terminates its relationship with
us, we may not be able to sustain or grow our business.
Our failure to enhance our existing products or develop and introduce new
products that meet changing customer requirements and technological advances
would limit our ability to sell our products.
Our ability to increase net revenue will depend significantly on whether we
are able to anticipate or adapt to rapid technological innovation in the
telecommunications industry and to offer, on a timely and cost-effective basis,
products that meet changing customer demands and industry standards. If the
standards adopted are different from those which we have chosen to support,
market acceptance of our products may be significantly reduced or delayed.
Developing new or enhanced products is a complex and uncertain process and
we may not have sufficient resources to successfully and accurately anticipate
technological and market trends, or to successfully manage long development
cycles. We must manage the transition from our older products to new or enhanced
products to minimize disruption in customer ordering patterns and ensure that
adequate supplies of new products are available for delivery to meet anticipated
customer demand. Any significant delay or failure to release new products or
product enhancements on a timely and cost-effective basis could harm our
reputation and customer relationships, provide a competitor with a
first-to-market opportunity or allow a competitor to achieve greater market
share.
Telecommunications networks are comprised of multiple hardware and software
products from multiple vendors. If our products are not compatible with other
companies' products within our customers' networks, orders will be delayed or
cancelled.
Many of our customers require that our products be designed to work with
their existing networks, each of which may have different specifications and
utilize multiple protocols that govern the way devices on the network
communicate with each other. Our customers' networks may contain multiple
generations of products from different vendors that have been added over time as
their networks have grown and evolved. Our products may be required to work with
these products as well as with future products in order to meet our customers'
requirements. In some cases, we may be required to modify our product designs to
achieve a sale, which may result in a longer sales cycle, increased research and
development expense, and reduced operating margins. If our products are not
compatible with existing equipment in our customers' networks, whether open or
proprietary, installations could be delayed, orders for our products could be
cancelled.
If we fail to win contracts at the beginning of our telecommunications
customers' deployment cycles, we may not be able to sell products to those
customers for an extended period of time, which could inhibit our growth.
Our existing and potential telecommunications customers generally select a
limited number of suppliers at the beginning of a deployment cycle. As a result,
if we are not selected as one of these suppliers, we may not have an opportunity
to sell products to that customer until its next purchase cycle, which may be an
extended period of time. In addition, if we fail to win contracts from existing
and potential customers that are at an early stage in their design cycle, our
ability to sell products to these customers in the future may be adversely
affected because they may prefer to continue purchasing products from their
existing vendor. Since we rely on a small number of customers for the majority
of our sales, our failure to capitalize on limited opportunities to win
contracts with these customers could severely harm us.
Since the telecommunications industry is characterized by large purchase orders
placed on an irregular basis, it is difficult to accurately forecast the timing
and size of orders. Accordingly, our net revenue and operating results may vary
significantly and unexpectedly from quarter to quarter.
We may receive purchase orders for significant dollar amounts on an
irregular basis depending upon the timing of our customers' network deployment
and sales and marketing efforts. Because orders we receive may have short lead
times, we may not have sufficient inventory to fulfill these orders, and we may
incur significant costs in attempting to expedite and fulfill these orders. In
addition, orders expected in one quarter could shift to another because of the
timing of our customers' purchase decisions and order reductions or
cancellations. Under our OEM agreement, our OEM customer has the right to delay
previously placed orders for any reason. The time required for our customer to
incorporate our products into their own can vary significantly and generally
exceeds several months, which further complicates our planning processes and
reduces the predictability of our operating results. Accordingly, our net
revenue and operating results may vary significantly and unexpectedly from
quarter to quarter.
Our customers have in the past built, and may in the future build,
significant inventory in order to facilitate more rapid deployment of
anticipated major projects or for other reasons. After building a significant
inventory of our products, these parties may be faced with delays in these
anticipated major projects for various reasons. As a result, Lucent may be
required to maintain a significant inventory of our products for longer periods
than they originally anticipated, which would reduce further purchases. These
reductions, in turn, could cause fluctuations in our future results of
operations and severely harm our business and financial condition.
Since the sales cycle for our products is typically long and unpredictable, we
have difficulty predicting future net revenues and our net revenue and operating
results may fluctuate significantly.
A customer's decision to purchase our products often involves a significant
commitment of its resources and a lengthy evaluation and product qualification
process. Our sales cycle typically lasts from nine months to one year. As a
result, we may incur substantial sales and marketing expenses and expend
significant management effort without any assurance of a sale. A long sales
cycle also subjects us to other risks, including customers' budgetary
constraints, internal acceptance reviews and order reductions or cancellations.
Even after deciding to purchase our products, our customers often deploy our
products slowly.
We have a limited order backlog. If we do not obtain substantial orders in a
quarter, we may not meet our net revenue objectives for that quarter.
Since inception, our order backlog at the beginning of each quarter has not
been significant, and we expect this trend to continue for the foreseeable
future. Our backlog as of December 31, 2000 was approximately $3.3 million.
Accordingly, we must obtain substantial additional orders in a quarter for
shipments in that quarter to achieve our net revenue objectives. Our sales
agreements allow purchasers to delay scheduled delivery dates without penalty.
Our customer purchase orders also allow purchasers to cancel orders within
negotiated time frames without significant penalty. In addition, due in part to
factors such as the timing of product release dates, purchase orders and product
availability, significant volume shipments of our products could occur near the
end of our fiscal quarters. If we fail to ship products by the end of a quarter,
our operating results could be adversely affected for that quarter.
We depend upon a single contractor for most of our manufacturing needs.
Termination of this relationship could impose significant costs on us and could
harm or interfere with our ability to meet scheduled product deliveries.
We do not have internal manufacturing capabilities and have generally
relied primarily on a contract manufacturer, Flextronics International Limited
to build our products. Effective April 1, 2001, we plan to transfer primary
manufacturing responsibility of our products from Flextronics to Benchmark
Electronics. We do not yet have a signed definitive manufacturing contract with
Benchmark. We expect to have a signed formal contract by June 2001. If we
execute a formal contract with Benchmark, we anticipate that Benchmark will be
able to cancel the contract on short notice and will not obligated to supply
products to us for any specific period, in any specific quantity or at any
specific price, except as may be provided in a particular purchase order. Our
reliance on Benchmark involves a number of risks, including the lack of
operating history between us and Benchmark, the current absence of any written
contract, absence of control over our manufacturing capacity, the unavailability
of, or interruptions in, access to process technologies and reduced control over
component availability, delivery schedules, manufacturing yields and costs. If
we are unable to successfully negotiate a contract with Benchmark that will meet
our manufacturing needs, we will not have a primary manufacturing contract with
any third party. With the move to Benchmark, we do not expect any significant
increase in costs or any significant interference with our ability to meet
scheduled product deliveries. We will have to immediately identify and qualify
one or more acceptable alternative manufacturers, which could result in
substantial manufacturing delays and cause us to incur significant costs. It is
possible that an alternate source may not be available to us when needed or be
in a position to satisfy our production requirements at acceptable prices and
quality. Any significant interruption in manufacturing would harm our ability to
meet our scheduled product deliveries to our customers, harm our reputation and
could cause the loss of existing or potential customers, any of which could
seriously harm our business and operating results.
We depend on sole source and limited source suppliers for key components. If we
are unable to buy components on a timely basis, we will not be able to deliver
our products to our customers on time which could cause us to lose customers. If
we purchase excess components to reduce this risk, we may incur significant
inventory costs.
We obtain several of the key components used in our products, including
interface circuits, microprocessors, digital signal processors, digital
subscriber line modules and flash memory, from single or limited sources of
supply. We have encountered, and expect in the future to encounter, difficulty
in obtaining these components from our suppliers. For example, in the fourth
quarter of 1999, we experienced a severe shortage of components, particularly
subscriber line interface circuits, which jeopardized our ability to deliver our
products in a timely fashion. We purchase most components on a purchase order
basis and we do not have guaranteed supply arrangements with most of our key
suppliers. Financial or other difficulties faced by our suppliers or significant
changes in demand for these components could limit the availability of these
components to us at acceptable prices and on a timely basis, if at all. Any
interruption or delay in the supply of any of these components, or our inability
to obtain these components from alternate sources at acceptable prices and
within a reasonable amount of time, would limit our ability to meet scheduled
product deliveries to our customers or force us to reengineer our products,
which may hurt our gross margins and our ability to deliver products on a timely
basis, if at all. A substantial period of time could be required before we would
begin receiving adequate supplies from alternative suppliers, if available. In
addition, qualifying additional suppliers is time consuming and expensive and
exposes us to potential supplier production difficulties or quality variations.
The competition for qualified personnel is particularly intense in our industry
and in Northern California. If we are unable to attract and retain key
personnel, we may not be able to sustain or grow our business.
Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, marketing, engineering and
management personnel, many of whom would be difficult to replace. None of our
officers or key employees is bound by an employment agreement for any specific
term, and we do not have "key person" life insurance policies covering any of
our employees. The competition for qualified personnel is particularly intense
in our industry and in Northern California, where there is a high concentration
of established and emerging growth technology companies. This competition makes
it more difficult to retain our key personnel and to recruit new highly
qualified personnel. To attract and retain qualified personnel, we may be
required to grant large option or other stock-based incentive awards, which may
be highly dilutive to existing shareholders. We may also be required to pay
significant base salaries and cash bonuses to attract and retain these
individuals, which payments could harm our operating results. In particular, we
have experienced difficulty in hiring software, hardware and system test
engineers and engineers with voice and data experience. We believe that we will
continue to experience difficulty in recruiting and retaining qualified
personnel in the future. If we are not able to attract and retain the necessary
personnel, we could face delays in developing our products and implementing our
sales and marketing plans, and we may not be able to grow our business.
We plan to invest a significant amount of our resources to fund the development,
marketing and sale of our products; however, if we are unable to expand our
sales and marketing operations, we will not be able to achieve brand awareness
for our products and generate additional sales.
We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations,
broaden our customer support capabilities and develop new distribution channels.
We also plan to expand our general and administrative capabilities to address
the demands resulting from this offering and the expected continued growth of
our business. Our operating expenses are largely based on anticipated personnel
requirements and net revenue trends, and a high percentage of our expenses are,
and will continue to be, fixed. In addition, we may be required to spend more
for research and development than originally budgeted in order to respond to
industry trends. As a result, any delay in generating or recognizing net revenue
could cause significant variations in our operating results from quarter to
quarter and could result in substantial operating losses.
We have rapidly and significantly expanded our operations in recent periods. Our
business will be harmed if we fail to manage effectively the growth of our
operations.
We have rapidly and significantly expanded our operations in recent
periods. This expansion significantly strains our managerial, operational and
financial resources. Some of our senior management personnel joined us within
the last 12 months. Our Vice President of Marketing, Executive Vice President of
Research and Development and Operations, Vice President of Human Resources and
Vice President of Sales have all joined us since January 2000. To manage the
expected growth of our operations and personnel, we will be required to:
o improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
o hire, train, motivate and manage additional qualified personnel;
o expand access to additional manufacturing capacity;
o effectively manage multiple relationships with our customers, suppliers,
distributors and other third parties; and
o coordinate our domestic and international operations and establish the
necessary infrastructure to implement our international strategy.
If we are not able to manage the growth of our operations in an efficient
and timely manner, our business will be severely harmed.
The telecommunications market is becoming increasingly global. While we plan to
expand internationally, we have limited experience operating in international
markets. In our efforts to expand internationally, we could become subject to
new risks which could hamper our ability to establish and manage our
international operations.
We have sales and customer support personnel in the United Kingdom and have
initiated distribution relationships in Europe. We intend to further expand our
international operations and enter new markets. This expansion will require
significant management attention and financial resources. We have limited
experience in marketing and distributing our products internationally and in
developing versions of our products that comply with local standards. In
addition, our international operations will be subject to other inherent risks,
including:
o the failure to adopt regulatory changes that facilitate the provisioning of
competitive communications services;
o difficulties adhering to international protocol standards;
o expenses associated with customizing products for other countries;
o protectionist laws and business practices that favor local competition;
o reduced protection for intellectual property rights in some countries;
o difficulties enforcing agreements through other legal systems and in
complying with foreign laws;
o fluctuations in currency exchange rates;
o political and economic instability; and
o import or export licensing requirements.
Our products require substantial investment over a long product development
cycle, and we may not realize any return on our investment.
The development of new or enhanced products is a complex and uncertain
process. We and our OEM manufacturers have in the past and may in the future
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. For example, we had expected to begin shipments of our MBX product
in the second quarter of 2001 which has been delayed to the third quarter of
2001 because of continued development issues. Development costs and expenses are
incurred before we generate any net revenues from sales of products resulting
from these efforts. Our total research and development expenses were
approximately $12.6 million in the year ended December 31, 2000. We intend to
continue to incur substantial research and development expenses, which could
have a negative impact on our earnings in future periods.
If our products contain undetected software or hardware errors, we could incur
significant unexpected expenses, experience product returns and lost sales and
be subject to product liability claims.
Our products are highly technical and are designed to be deployed in very
large and complex networks. While our products have been tested, because of
their nature, they can only be fully tested when deployed in networks that
generate high amounts of voice or data traffic. Because of our short operating
history, our products have not yet been broadly deployed. Consequently, our
customers may discover errors or defects in our products after they have been
broadly deployed. In addition, our customers may use our products in conjunction
with products from other vendors. As a result, when problems occur, it may be
difficult to identify the source of the problem. Any defects or errors in our
products discovered in the future, or failures of our customers' networks,
whether caused by our products or another vendor's products, could result in
loss of customers or decrease in net revenue and market share.
We may be subject to significant liability claims because our products are
used in connection with critical communications services. Our agreements with
customers typically contain provisions intended to limit our exposure to
li