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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, 2002
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: 0-31903
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq SmallCap Market on June 28, 2002) was
approximately $5,435,329.
As of March 6, 2003, there were 62,189,930 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 2003 Annual Meeting of Stockholders.
VINA TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I..............................................................................................3
Item 1. Business...................................................................................3
Item 2. Properties................................................................................11
Item 3. Legal Proceedings.........................................................................11
Item 4. Submission of Matters to a Vote of Security Holders.......................................11
PART II............................................................................................13
Item 5. Market Registrant's Common Equity and Related Stockholder Matters.........................13
Item 6. Selected Consolidated Financial Data......................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................32
Item 8. Consolidated Financial Statements.........................................................33
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure......55
PART III...........................................................................................55
Item 10. Directors and Executive Officers of the Registrant.......................................55
Item 11. Executive Compensation...................................................................56
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................56
Item 13. Certain Relationships and Related Transactions...........................................56
PART IV............................................................................................56
Item 14. Controls and Procedures..................................................................56
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................56
Signatures.....................................................................................59
Certifications.................................................................................60
2
PART I
Item 1. Business
When used in this report the words "may," "will," "could" and similar
expressions are intended to identify forward-looking statements. These are
statements that relate to future periods and include statements as to expected
net losses, expected decline in product orders, expected cash flows, expected
expenses, expected capital expenditures, expected deferred stock compensation,
the extent of fluctuations in gross margins, the adequacy of capital resources,
growth in operations, the ability to integrate companies and operations that we
may acquire, expected reduction of operation costs, our ability to raise
additional funding within the first six months of 2003, our strategy with regard
to protecting our proprietary technology, the ability to compete and respond to
rapid technological change, the extent to which we can develop new products,
expected customer concentration, ability to execute our business plan, the
extent to which we can maintain relationships with vendors of emerging
technologies, the extent to which and at what rate demand for our services
increases, the extent to which the telecommunications industry experiences
consolidation, our ability to expand our international operations and enter into
new markets, the extent to which we and our ability to actively participate in
marketing, business development and other programs, the extent to which we can
expand our field sales operations and customer support organizations and build
our infrastructure, the extent we can build market awareness of our company and
our products, and the performance and utility of products and services.
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 loss of or lower net
revenue to customers in a highly concentrated customer base, our ability to
execute our business plan, our ability to raise funding within the first six
months of 2003, the extent to which the current economic environment affects our
current and potential customers' demand for our products, the effects of
competition, competitive pricing and alternative technological advances, the
extent to which our current and future products compete with the products of our
customers, our ability to implement successfully and achieve the goals of our
corporate restructuring plan, our ability to design, market and manufacture
successfully products that address market demands, our ability to accurately
predict our manufacturing requirements, our ability to maintain relationships
with vendors of emerging technologies, changes in our business plans, our
ability to retain highly skilled engineers, and the risks set forth below under
Item 2, "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. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
In this report, 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.
This Form 10-K includes the following registered trademarks as well as
filed applications to register trademarks of VINA Technologies including:
Integrator-300, VINA, VINA Technologies, Multiservice Broadband Xchange, MX-500,
MX-550, MX-600, and Multiservice Xchange. All other trademarks and trade names
appearing in this Form 10-K are the property of their respective holders; for
example, SLC, ConnectReach and AnyMedia are trademarks and trade names of Lucent
Technologies. The inclusion of other companies' brand names and products in this
Form 10-K is not an endorsement of VINA.
Overview
VINA Technologies, Inc. is a leading developer of multi-service 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 shipping our
Multi-service Integrator-300 product family in March 1997, our Multiservice
Xchange product in May 1999, our eLink product in November 2000 and our MBX
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product in September 2001. Since inception, we have incurred significant losses,
and as of December 31, 2002 we had an accumulated deficit of $177.6 million.
We market and sell our products and services directly to communications
service providers and through OEM customers and value-added resellers, or VARs.
Our customer base is highly concentrated. A relatively small number of customers
have accounted for a significant portion of our historical net revenue. Our
three largest customers accounted for approximately 71% of our net revenue in
fiscal year ended December 31, 2002. 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 and we have not
been exposed to significant fluctuations in foreign currency exchange rates.
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. 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.
Difficulty of Profitably Connecting Customers to Metro Access Networks
In the past, carriers have lacked the technological means to concentrate
voice and data in the same platform. Instead, they purchased separate pieces of
equipment for each, resulting in an increased burden that multiplied their
hardware costs and consumption of precious space in co-locations and central
office facilities. Further aggravating the companies' capital expenditures was
the longstanding need to invest extensively in specialized telecommunications
devices such as digital loop carriers, digital access cross-connect systems and
Frame Relay switches. To regain control over expenses, service providers have
focused on limiting the concentration of their voice and data to a relatively
few large locations such as central offices and thus minimizing their number of
purchases devices. But the decision to locate the equipment in sites that lie
far from customer premises compounded the carriers' requirements for backhaul
transport and all its associated costs.
Increasing Competition expands the need for 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. This Act introduced new entrants 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 Small Medium 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
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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.
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, and more recently long distance
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.
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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 Internet protocol or asynchronous
transfer mode 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 customer premise, 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
customer premise products allow service providers to cost-effectively deliver
bundled offerings from a single vendor with a single bill. Our customer premise
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 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 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.
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.
Our customer premise solutions accept 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 carriers
to cost-effectively and quickly deliver bundled voice and data services over
broadband connections in the local loop and in metro access networks.
Consequently, the 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.
6
Integrator-300
Our Integrator-300 is a hardware platform solution that allows service
providers to integrate their customers' voice, data, video and Internet
requirements onto a single T1 connection. In addition, it supports
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.
Multiservice Xchange product family
Our Multiservice Xchange product family includes the MX-500, MX-550 and
MX-600. 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 and MX-550 provide support for the circuit- based
TDM network to deliver voice and data access services. The MX-550 also supports
telecommunication protocols used in major international markets. The MX-600 is a
flexible access platform that integrates TDM voice, data, video and Internet
access services.
eLink product family
Our eLink product family of integrated access devices includes the
eLink-208, -216 and -224 and the eRouter. VINA's eLink family converges parallel
voice, data, video and Internet transmissions over TDM and Frame Relay on a
single T1 connection. Each of the eLink-208, -216 and -224 comes with an
Ethernet port for data and form a complete solution in one space-saving
footprint by marrying a channel bank, IP router, DHCP server, CSU/DSU and
firewall with Network Address Translation.
Multiservice Broadband Xchange
Designed for installation in sites such as central offices or co-locations,
the Multiservice Broadband Xchange, or MBX, is a multiservice platform designed
to allow providers to deploy bundled voice and data services over T1 connections
in metro access networks.
The MBX platform is designed to consolidate 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.
Sales and Marketing
Sales
We sell our products to service providers directly through our sales force,
and indirectly through our original equipment manufacturer, or OEM, customers
and value added resellers, or VARs. We have established OEM customers 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, in particular with 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. Lucent 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.
7
o Value-Added Resellers. In addition to direct sales and our OEM
customers, 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, Latin America and
South America.
Whether we ship our products directly or through our OEM customers 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, 2002,
our sales organization consisted of 24 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 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. As of December 31, 2002,
our marketing organization consisted of 8 employees.
Customer Service and Support
Our customer service organization maintains and supports products sold to
service providers and offers technical support to our OEM customers 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 independent operating companies
through direct sales and indirectly through our OEM customers and VARs.
For the year ended December 31, 2002, sales to our three largest customers
accounted for approximately 71% of our net revenue, of which sales to Allegiance
Telecom, Lucent Technologies, and Nuvox Communications, accounted for 37%, 18%
and 16% of our net revenue, respectively.
For the year ended December 31, 2001, sales to Lucent accounted for 44% of
our net revenue. Five customers, including Lucent Technologies, accounted for
approximately 88% of our net revenue for the year ended December 31, 2001, of
which sales to Lucent and Nuvox Communications accounted for 44% and 21% of our
net revenue, respectively.
For the year ended December 31, 2000, sales to Lucent accounted for 31% of
our net revenue. Five customers, including Lucent, accounted for approximately
75% of our net revenue for the year ended December 31, 2000, of which sales to
Lucent and Nuvox Communications accounted for 31% and 28% 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 renewed most recently in August 2002 to include the eLink
product line. The Lucent agreement expires in May 2003. The agreement may be
terminated by Lucent at any time upon 60 days notice. Our working relationship
8
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.
This agreement allows Lucent to purchase our products which they use under
its ConnectReach product family. ConnectReach consists of our Integrator-300 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.
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.
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.
Frame Relay and Asynchronous Transfer Mode 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.
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.
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 customers,
our customer steering committee, and our marketing department for product
definition and to assure compatibility with central office equipment.
Research and development expenses, including stock-based compensation, all
product development, system testing and documentation, were approximately $20.6
million in 2000, $23.3 million in 2001 and $15.1 million in 2002. 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 in Newark, California and Nashua, New
Hampshire. As of December 31, 2002, we had 46 full-time employees in research
and development.
The majority of our research and development efforts are focused on
standard products. We have significant hardware and software expertise in both
TDM and IP network technologies. We place heavy emphasis on our design
verification processes, which include extensive testing at our Newark,
California facilities and significant interoperability testing at partner sites.
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Manufacturing
We outsource our manufacturing operations to Benchmark Electronics.
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.
Benchmark 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. The
suppliers of our components range from small vendors to large established
companies. Components for which we currently have limited sources include
digital signal processors, subscriber line interface circuits mirco 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 Adtran, Carrier Access Corporation, Verilink
and Zhone Technologies and diversified equipment manufacturers such as Cisco
Systems, Lucent, Siemens, and Alcatel.
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.
10
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 four 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. 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, 2002, we employed 98 full-time employees including 32 in
sales and marketing, 9 in operations, 46 in research and development, and 11 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
Our headquarters are in Newark, California, where we lease approximately
26,000 square feet of space. We also operate a facility in Nashua, New
Hampshire. We currently have sublease and lease agreements covering
approximately 35,000 square feet that expire on various dates ranging from June
2003 to July 2007. We believe that our current facilities are adequate to
support our current and anticipated near-term operations and believe that we can
obtain additional space we 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, 2002.
11
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 6, 2003:
Name Age Position(s)
- --------------------- ---- ----------------------------------------------------------------------
W. Michael West 52 Chairman of the Board and Chief Executive Officer
Stanley E. Kazmierczak 42 Vice President, Finance and Administration, Chief Financial Officer and
Secretary
Darrell R. Furlong 45 Vice President, Engineering
C. Reid Thomas 41 Executive Vice President, Sales and Product Marketing
W. Michael West has served as our Chief Executive Officer since April 2002.
Mr. West has served as our Chairman of the Board of Directors since June 1999.
He served as Executive Vice President for Lucent Technologies from September
1997 to January 1998. Mr. West was President, Chief Operating Officer and a
director of Octel Communications from January 1995 to August 1997, after having
served as Executive Vice President from September 1986 to January 1995. Mr. West
held multiple positions with Rolm Corporation from 1979 to September 1986, most
recently as General Manager of the National Sales Division. Mr. West currently
serves as a director of Media Arts Group, Inc.
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.
Darrell R. Furlong has served as our Vice President, Engineering since
September 2001. Mr. Furlong was Senior Vice President of Research and
Development and Chief Technology Officer for METRObility Optical Systems from
October 1997 to September 2001. Mr. Furlong served as a Director of the router
division of Bay Networks/Wellfleet (acquired by Nortel Networks) from June 1992
to October 1997. He also directed all hardware development activities at Concord
Communications from May 1986 to June 1992.
C. Reid Thomas has served as our Executive Vice President, Sales and
Product Marketing since July 2001. Mr. Thomas served as our Vice President,
Sales from April 2000 until July 2001. He 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.
12
PART II
Item 5. Market Registrant's Common Equity and Related Stockholder Matters
Since our initial public offering until September 19, 2002, our common
stock traded on the Nasdaq National Market ("Nasdaq") under the symbol "VINA."
On September 20, 2002, the listing of our common stock was transferred from
Nasdaq to the Nasdaq SmallCap Market where our stock continues to trade under
the symbol "VINA." The following table sets forth, for the periods indicated,
the high and low sales prices per share of our common stock on Nasdaq as
reported in its consolidated transaction reporting system.
2001 2002
---- ----
High Low High Low
---- --- ---- ---
First Quarter................$ 6.00 $ 1.25 $ 1.40 $ 0.71
Second Quarter............... 2.34 1.00 0.75 0.21
Third Quarter................ 1.85 0.52 0.29 0.01
Fourth Quarter............... 2.05 0.54 0.43 0.12
The last reported sale price of our common stock on the Nasdaq SmallCap
Market was $0.14 per share on March 6, 2003. As of March 6, 2003 our common
stock was held by approximately 416 stockholders of record.
We have never declared or paid any cash dividends on our capital stock, and
we do not currently intend to pay any cash dividends on our common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any.
13
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data has been derived from
the audited consolidated financial statements. When you read this selected
consolidated financial data, it is important that you also read the consolidated
financial statements and related notes included in this Form 10-K, as well as
the section of this Form 10-K entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Our historical results are not
necessarily indicative of our future results.
Years Ended December 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
---------- ----------- ----------- ----------- --------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenue ...................................... $ 4,393 $ 12,700 $ 32,078 $ 45,112 $ 25,143
Cost of revenue (excluding stock-based
compensation) ................................. 2,054 7,713 19,240 28,714 17,534
-------- -------- -------- -------- --------
Gross profit (excluding stock-based
compensation) ................................. 2,339 4,987 12,838 16,398 7,609
Costs and expenses:
Research and development (excluding
stock-based compensation) ..................... 4,174 6,690 12,609 18,841 13,931
Selling, general and administrative
(excluding stock-based compensation) .......... 6,414 10,881 21,124 22,697 14,515
Stock-based compensation, net (*) ............. 154 4,715 24,169 10,570 1,276
In-process research and development ........... -- -- -- 5,081 --
Amortization of intangible assets ............. -- -- -- 8,243 789
Impairment of goodwill and intangible
assets ...................................... -- -- -- -- 29,783
Restructuring expenses (excluding stock-
based compensation) .......................... -- -- -- 991 2,941
-------- -------- -------- -------- --------
Total costs and expenses .................. 10,742 22,286 57,902 66,423 63,235
-------- -------- -------- -------- --------
Loss from operations ............................. (8,403) (17,299) (45,064) (50,025) (55,626)
Other income, net ................................ 413 223 1,732 1,383 196
-------- -------- -------- -------- --------
Net loss ......................................... $ (7,990) $(17,076) $(43,332) $(48,642) $ (55,430)
======== ======== ======== ======== ========
Net loss per share, basic and diluted(1) ......... $ (2.63) $ (3.30) $ (2.63) $ (1.31) $ (0.90)
======== ======== ======== ======== ========
Shares used in computation, basic and ............ 3,038 5,169 16,467 37,121 61,643
diluted(1) ======== ======== ======== ======== ========
(*) Stock-based compensation, net:
Cost of revenue .................................. $ 2 $ 152 $ 1,855 $ 1,016 $ 520
Research and development ......................... 78 1,098 7,985 4,446 1,135
Selling, general and administrative .............. 74 3,465 14,329 7,677 1,930
Restructuring benefit ............................ -- -- -- (2,569) (2,309)
-------- -------- -------- -------- --------
Total ............................................ $ 154 $ 4,715 $ 24,169 $ 10,570 $ 1,276
======== ======== ======== ======== ========
December 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
---------- ----------- ----------- ----------- --------
Consolidated Balance Sheet Data: (in thousands)
Cash, cash equivalents and short-term
investments ...................................... $ 11,359 $ 2,568 $ 44,499 $ 16,305 $ 4,617
Restricted cash .................................. -- -- -- -- 3,500
Working capital (deficit) ........................ 11,058 (492) 40,657 27,812 7,978
Total assets ..................................... 14,456 6,673 58,536 78,964 20,580
Short-term debt .................................. -- -- -- -- 3,000
Long-term debt, less current portion ............. 655 534 -- -- --
Total stockholders' equity ....................... 11,549 348 44,829 65,528 11,372
14
- --------------
(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 2 and
10 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
As of December 31, 2002, we had a certificate of deposit for $3.0 million that
secured a $3.0 million committed revolving line of credit. In January 2003, we
remitted full payment for the $3.0 million revolving line of credit.
During January 2003 we announced and completed a restructuring plan intended to
better align our operations with the changing market conditions. This plan was
designed to focus on profit contribution and reduce expenses. This restructuring
includes a workforce reduction and other operating reorganization.
On February 17, 2003, we granted 2,601,982 option grants as part of the Stock
Option Exchange Program approved by the Board of Directors in May 2002. Under
this program, eligible employees were able to make an election to exchange
certain outstanding stock option grants with an exercise price greater than or
equal to $1.00 for a new option to purchase the same number of shares of VINA
Technologies Inc. common stock. The replacement option was issued per the Option
Exchange Program at least six months and one day after the cancellation date of
August 15, 2002. The new options were issued from our 2000 Stock Option Plan and
are non-statutory stock options. The individuals participating in this program
were employees of VINA Technologies, Inc. on the replacement grant date making
them eligible to receive the new stock options. No consideration for the
canceled stock options was provided to individuals terminating employment prior
to the replacement grant date. The new option has an exercise price of $0.16,
which is equal to VINA Technologies Inc. common stock's closing price on the
date prior to the replacement grant. The new stock options will continue to vest
on the same schedule as the canceled options.
In February 2003, we reached a settlement agreement to terminate the lease on
our Maryland facility. Prior to this settlement agreement, we had estimated that
we would pay the remaining portion of the lease through termination. As a result
of the settlement, we have lowered our estimate by approximately $318,000.
Therefore, we have decreased net loss for 2002 by approximately $318,000 as
compared to the press release dated January 28, 2003. The effects of this
settlement agreement have been reflected in the financial statements of this
Annual Report on Form 10-K.
In February 2003, we established an asset secured credit line with a bank for up
to $3.5 million. We need to meet monthly financial covenants to be able to
borrow against this credit line and can meet them currently. The credit line has
a one-year duration and has terms of prime rate plus 2%. We currently do not
have any outstanding balance on this credit line.
Overview
VINA Technologies, Inc. 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.
15
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 shipping our
Multiservice Integrator-300 product family in March 1997, our Multiservice
Xchange product in May 1999, our eLink product family in November 2000, and our
MBX product in September 2001. Since inception, we have incurred significant
losses, and as of December 31, 2002, we had an accumulated deficit of $177.6
million.
We market and sell our products and services directly to communications
service providers and through OEM customers and value-added resellers, or VARs.
We recognize revenue 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. Product revenue is generated from the
sale of communications equipment embedded with software that is essential to its
functionality, and accordingly, we account for these transactions in accordance
with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, and Statement of Position (SOP) 97-2, Software Revenue
Recognition. Product revenue is recognized when all SAB No. 101 and SOP 97-2
criteria are met which generally occurs at the time of shipment. In multiple
element arrangements where there are undelivered elements at the time of
shipment, product revenue is recognized at the time of shipment as the residual
value of the arrangement after allocation of fair value to the undelivered
elements based on vendor specific objective evidence (VSOE). Service revenue is
generated from the sale of installation, training and postcontract customer
support (PCS) agreements related to the communications equipment. We also
account for these transactions in accordance with SAB No. 101 and SOP 97-2, and
as such recognizes revenue when all of the related revenue recognition criteria
are met which is: (i) at the time the installation or training service is
delivered; and (ii) ratably over the term of the PCS agreement. In multiple
element arrangements where these services are undelivered when the
communications equipment is shipped, we defer the fair value of these
undelivered elements based on VSOE and recognizes revenue as the services are
delivered. We additionally record a provision for estimated sales returns and
warranty costs at the time the product revenue is recognized.
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, 2002, sales to our three largest
customers accounted for approximately 71% of our net revenue, of which sales to
Allegiance Telecom, Lucent Technologies, and Nuvox Communications, accounted for
37%, 18% and 16% 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. Any decrease in sales or reduces pricing or products sold to
these customers will substantially reduce our net revenue. To date,
international sales have not been significant. International sales have been
denominated primarily 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. We outsource our
manufacturing and testing requirements to Benchmark Electronics. 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, inventory
obsolescence, 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 a significant portion of our revenue
from sales made to our OEM customers. A significant increase in revenue to these
OEM customers would adversely affect our gross margin percentage.
Research and development expenses consist primarily of personnel and
related costs, depreciation expenses and prototype costs related to the design,
development, testing and enhancement of our products, and exclude amortization
of deferred stock 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
professional costs and exclude amortization of deferred stock compensation.
16
Stock-based compensation consists of the fair value of stock options
granted to non-employees for services and the amortization of deferred stock
compensation on stock options granted to employees. Deferred stock compensation
represents the difference between the deemed fair market value of our common
stock at the time of the grant of the option and the exercise prices of these
options. 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, 2002, was $1.3 million in 2002
and is expected to be $283,000 in 2003, $23,000 in 2004 and $9,000 thereafter.
Other 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, 2002, 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, 2002, we had $98.0 million of federal
and $36.0 million of state net operating loss carry forwards to offset future
taxable income that expire in varying amounts through 2022 and 2014,
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 against deferred tax assets. 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 as defined by Section 382 of 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.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. We believe
the following critical accounting policies, among others, affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition - We recognize revenue 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.
Product revenue is generated from the sale of communications equipment embedded
with software that is essential to its functionality, and accordingly, we
account for these transactions in accordance with SEC Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, and Statement of
Position (SOP) 97-2, Software Revenue Recognition.
Product revenue is recognized when all SAB No. 101 and SOP 97-2 criteria
are met, which generally occurs at the time of shipment. In multiple element
arrangements where there are undelivered elements at the time of shipment,
product revenue is recognized at the time of shipment as the residual value of
the arrangement after allocation of fair value to the undelivered elements based
on vendor specific objective evidence (VSOE).
Service revenue is generated from the sale of installation, training and
post contract customer support (PCS) agreements related to the communications
equipment. We also account for these transactions in accordance with SAB No. 101
and SOP 97-2, and as such recognize revenue when all of the related revenue
recognition criteria are met which is (i) at the time the installation or
training service is delivered; and (ii) ratably over the term of the PCS
Agreement respectively. In multiple element arrangements where these services
are undelivered when the communications equipment is shipped, we defer the fair
value of these undelivered elements based on VSOE and recognize revenue as the
services are delivered. We also record a provision for estimated sales returns
and warranty costs at the time the product revenue is recognized.
Allowance for Doubtful Accounts - We continuously monitor collections and
payments from our customers and maintain a provision for estimated credit losses
based upon the age of outstanding invoices and any specific customer collection
issues that we have identified. Since our accounts receivable are concentrated
in a relatively few number of customers, a significant change in the financial
position of any one of these customers could have a material adverse impact on
the collectability of our accounts receivable, which would require that
additional allowances be recorded.
Inventory Reserves - We regularly review the volume and composition of our
inventory on hand and compare it to our estimated forecast of product demand and
production requirements. We record write downs for estimated obsolescence or
17
unmarketable inventory for the difference between the cost and the estimated
market value based upon these reviews. If actual future demand or market
conditions are less favorable than our estimates, then additional write-downs
may be required.
Restructuring Accrual - The current accounting for restructuring costs
requires us to record provisions and charges when we have a formal and committed
plan. In connection with these plans, we have recorded estimated expenses for
severance and outplacement costs, lease cancellations, asset write-offs and
other restructuring costs. Given the significance of, and the timing of the
execution of such activities, this process is complex and involves periodic
reassessments of estimates made at the time the original decisions were made. We
continually evaluate the adequacy of the remaining liabilities under our
restructuring initiatives. Although we believe that these estimates accurately
reflect the costs of our restructuring plans, actual results may differ, thereby
requiring us to record additional provisions or reverse a portion of such
provisions.
Valuation and Impairment of Goodwill and Other Acquisition-Related
Intangible Assets - We operate in one reportable segment, the design,
development, marketing and sale of multi-service broadband access communications
equipment, and have only one reporting unit, VINA consolidated, therefore, our
measurement of the fair value for goodwill is our market capitalization. We
evaluate the fair value of our company as determined by its market
capitalization against its carrying value, net assets, to evaluate if any
impairment has occurred in the balance of the goodwill and intangible assets.
Stock-based compensation - The Company accounts for employee stock plans
under the intrinsic value method prescribed by Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and Financial
Accounting Standards Board Interpretation ("FIN") No. 44, Accounting for Certain
Transactions Involving Stock Compensation (an Interpretation of APB No. 25) and
has adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. The Company accounts for stock-based compensation
relating to equity instruments issued to non-employees based on the fair value
of options or warrants estimated using the Black-Scholes model on the date of
grant in compliance with the Emerging Issues Task Force No. 96-18, Accounting
for Equity Instruments that are issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. Compensation expense resulting
from non-employee options is amortized using the multiple option approach in
compliance with FIN No. 28, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans.
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 and restructuring expenses do
not include stock-based compensation.
Years Ended December 31,
------------------------
2000 2001 2002
---- ---- ----
Net revenue ................................... 100.0% 100.0% 100.0%
Cost of revenue (excluding stock-based
compensation) .............................. 60.0 63.7 69.7
----- ----- -----
Gross profit (excluding stock-based
compensation) .............................. 40.0 36.3 30.3
----- ----- -----
Costs and expenses:
Research and development (excluding stock-
based compensation) ..................... 39.3 41.7 55.4
Selling, general and administrative
(excluding stock-based compensation) .... 65.9 50.3 57.7
Stock-based compensation, net (*) .......... 75.3 23.4 5.1
In-process research and development ........ -- 11.3 --
Amortization of intangible assets .......... -- 18.3 3.1
Impairment of goodwill and intangible assets -- -- 118.5
Restructuring expenses (excluding stock-
based compensation) .................... -- 2.2 11.7
----- ----- -----
Total costs and expenses ...................... 180.5 147.2 251.5
----- ----- -----
18
Loss from operations .......................... (140.5) (110.9) (221.2)
----- ----- -----
Other income, net ............................. 5.4 3.1 0.7
----- ----- -----
Net loss ...................................... (135.1)% (107.8)% (220.5)%
===== ===== =====
(*) Stock-based compensation, net:
Cost of revenue........................... 5.8% 2.3% 2.1%
Research and development.................. 24.9% 9.8% 4.5%
Selling, general and administrative....... 44.6% 17.0% 7.7%
Restructuring expenses.................... -- (5.7%) (9.2%)
------ ------- -------
Total..................................... 75.3% 23.4% 5.1%
======= ======= =======
Fiscal Years Ended December 31, 2002, 2001 and 2000
Net revenue. Net revenue decreased 44% to $25.1 million in 2002 from $45.1
million in 2001. This decrease in net revenue was primarily due to decreased
unit sales to existing customers and lower average selling prices on our
Integrator-300 and eLink products.. Net revenue increased 41% to $45.1 million
in 2001 from $32.1 million in 2000. This increase in net revenue was primarily
due to increased unit sales of Integrator-300's and eLink products to existing
customers. For the year ended December 31, 2001, sales to Lucent accounted for
44% of our net revenue. Five customers, including Lucent Technologies, accounted
for approximately 88% of our net revenue for the year ended December 31, 2001,
of which sales to Lucent and Nuvox Communications accounted for 44% and 21% of
our net revenue, respectively.
For the year ended December 31, 2002, sales to our three largest customers
accounted for approximately 71% of our net revenue, of which sales to Allegiance
Telecom, Lucent Technologies and Nuvox Communications accounted for 37%, 18% and
16% of our net revenue, respectively. We believe that we have been the primary
supplier of integrated access devices to Allegiance in the past. Allegiance has
advised us that it is now pursuing a two vendor strategy in this product
category, which will reduce our opportunity for sales to Allegiance in future
periods and will create additional competitive pricing pressures. As a result,
we do not expect to receive any significant revenue from Allegiance in the first
quarter of 2003 as Allegiance begins purchasing from the second vendor, and we
expect our net revenue from Allegiance in 2003 to decrease significantly from
2002 levels. Our concentrated customer base continues to expose us to risks
resulting from potential adverse changes in these relationships and risks
resulting from the financial condition of these customers.
Cost of revenue. Cost of revenue including stock-based compensation was $18.1
million in 2002, $29.7 million in 2001, and $21.1 million in 2000. Gross profit
including stock-based compensation decreased to $7.1 million in 2002 from $15.4
million in 2001. Gross profit including stock-based compensation increased to
$15.4 million in 2001 from $11.0 million in 2000. Gross margin including
stock-based compensation decreased to 28% in 2002 from 34% in 2001. This
decrease in gross margin was a result of lower revenue that caused fixed
overhead costs to be a higher percentage of cost in 2002 as well as decreased
average selling prices on our Integrator-300 and eLink products. Gross margin
including stock-based compensation remained flat at 34% in 2001 and 2000
primarily due to a reduction in stock-based compensation to $1.0 million in 2001
compared to $1.9 million in 2000 offset by a $1.8 million charge for excess
inventory purchase commitment incurred in the first quarter of 2001. The
provision for the excess inventory purchase commitments was primarily the result
of a shift in one of our customer's demands from next generation network
equipment to traditional Time Division Multiplex, or TDM network equipment. We
anticipate that our gross margin may continue to fluctuate due to many factors,
including competitive pricing pressures, fluctuations in manufacturing volumes,
costs from our contract manufacturers and the mix of products sold.
Research and development expenses. Research and development expenses
including stock-based compensation decreased to $15.1 million in 2002 from $23.3
million in 2001. These decreases were primarily a result of decreased personnel
costs, and to a lesser extent stock-based compensation and prototype expenses.
Research and development expenses including stock-based compensation increased
to $23.3 million in 2001 from $20.6 million in 2000. 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. Research and development expenses including stock-based compensation
have changed as a percentage of net revenue from 64% in 2000 to 52% in 2001 to
60% in 2002. The decrease from 2000 to 2001 was due primarily due to a decrease
in stock-based compensation expense. The increase from 2001 to 2002 was
primarily due to expenses decreasing at a lesser rate than net revenue.
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Selling, general and administrative expenses. Selling, general and
administrative expenses including stock based compensation decreased to $16.4
million in 2002 from $30.4 million in 2001 due to decreases in stock-based
compensation, employee costs and consulting costs. Selling, general and
administrative expenses including stock based compensation decreased to $30.4
million in 2001 from $35.5 million in 2000 due to a decrease in stock-based
compensation partially offset by an increase in other general costs. Selling,
general and administrative expenses including stock-based compensation decreased
as a percentage of net revenue from 111% in 2000 to 67% in 2001 and 65% in 2002.
The decrease in 2001 was a result of net revenue increasing at a rate faster
than selling, general and administrative expenses. The decrease in 2002 was
primarily a result of lower stock-based compensation expenses as a percentage of
net revenue.
Stock-based compensation. Stock-based compensation expense decreased to
$1.3 million for 2002 from $10.6 million for 2001 and $24.2 million for 2000.
The decrease from 2000 to 2001 and 2002 is due to using the multiple-award
approach for amortizing stock-based compensation coupled with the net
restructuring benefit of $2.6 million in 2001 and $2.3 million in 2002
associated with the reversal of prior period estimated stock compensation
expense on previously amortized unvested stock options. Based on stock options
granted through December 31, 2002, we expect to record amortization of stock
compensation expense of $283,000 and $23,000 in 2003 and 2004, respectively, and
$9,000 thereafter.
In-process research and development. On February 27, 2001, we completed the
acquisition of Woodwind Communications Systems, Inc., or Woodwind. In 2001 we
recorded a one-time charge of $5.1 million for the purchased in-process
technology related to development projects that had not reached technological
feasibility, had no alternative future use, and for which successful development
was uncertain. The conclusion that the in-process development effort, or any
material sub-component, had no alternative future use was reached in
consultation with our management, and Woodwind's management.
Impairment of goodwill and intangible assets. As VINA operates in one
reportable segment, the design, development, marketing and sale of multi-service
broadband access communications equipment, and has only one reporting unit, VINA
consolidated, the measurement of the fair value for our goodwill is our market
capitalization. The deterioration of the telecom industry and the decline in our
current product sales in the first quarter of 2002 required us to evaluate the
fair value of the company's goodwill. We evaluated the fair value of our company
as determined by our market capitalization against our carrying value, net
assets, and determined that goodwill was impaired. In addition, under SFAS No.
144 "Accounting for the Impairment of Disposal of Long-Lived Assets" we
evaluated our intangible assets for impairment and determined a portion of the
intangible assets were impaired. As a result, we recorded a $29.8 million
impairment charge in 2002. The amount was comprised of $27.3 million of
goodwill, in the first quarter of 2002, and $2.0 million and $500,000 of
intangible assets, in the first and third quarters of 2002, respectively.
Restructuring expenses. Restructuring expenses, excluding the impact of
stock-based compensation, were $2.9 million and $991,000 for the years ended
December 31, 2002 and 2001, respectively. These resulted primarily from
severance, disposition of excess capital equipment and abandonment of facilities
costs associated with the workforce reduction plans in the third quarter of 2001
and the second and third quarters of 2002. Including the impact of stock-based
compensation, we recorded a net restructuring expense of $632,000 and a net
restructuring benefit of $1.6 million for the years ended December 31, 2002 and
2001, respectively.
Other income, net. Interest and other income, net, decreased to $196,000 in
2002 from $1.4 million in 2001. This decrease was primarily attributable to
lower cash balances resulting in lower interest income earned offset by interest
expense on bank loans incurred in 2002. Interest and other income, net decreased
to $1.4 million, in 2001 from $1.7 million in 2000. This decrease was primarily
due to lower cash balances resulting in lower interest earned.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2002 were $4.6 million, compared
to $15.8 million at December 31, 2001. The decrease of $11.2 million was
attributable to cash provided by financing activities of $9.7 million offset by
cash used by investing activities of $698,000 and cash used in operating
activities of $20.3 million. Cash provided by financing activities was
attributable to net proceeds from the sale of common stock. Cash used by
investing activities was primarily attributable to purchases of property and
equipment. Cash used in operating activities consisted primarily of the net loss
of $55.4 million, a decrease in accounts payable of $4.8 million, a decrease in
other liabilities of $2.4 million, partially offset by a $2.4 million decrease
in inventory, a $4.7 million decrease in accounts receivable, as well as
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non-cash charges of $4.7 million for depreciation and amortization, $29.8
million for impairment of goodwill and intangible assets, and $1.3 million for
stock-based compensation.
Our contract manufacturer has obtained or has on order substantial amounts
of inventory to meet our revenue forecasts. If future shipments do not utilize
the committed inventory, the contract manufacturer has the right to bill us for
any excess component and finished goods inventory. We also have a non-cancelable
purchase order with a major chip supplier for one of our critical components. As
of December 31, 2002, the estimated purchase commitments and non-cancelable
purchase orders to those companies was $1.6 million. In August 2002, we placed
$1.0 million on deposit with our contract manufacturer as security against these
purchase commitments.
As of December 31, 2002, we had $3,500,000 in restricted cash. This cash
was comprised of two separate restricted cash items. We had a certificate of
deposit for $3.0 million, this amount is not available to fund operations, as it
secured a $3.0 million committed revolving line of credit that had been utilized
at December 31, 2002. We also have an irrevocable letter of credit of $500,000
that is used as collateral for the lease on the Newark, California facility.
We currently have lease commitments of $1.8 million for leases on two
properties, which expire by July 30, 2007. Future annual obligations under our
operating leases are as follows: $259,000 in 2003; $337,000 in 2004; $430,000 in
2005; $491,000 in 2006; $292,000 in 2007.
In February 2003, we established an asset secured credit line with a bank
for up to $3.5 million. We need to meet monthly covenants to be able to borrow
against this credit line and can meet them currently. The credit line has a
one-year duration and terms of prime plus 2%. We currently do not have any
outstanding balance on this credit line.
We will need to obtain additional funding during the first six months of
2003. We will from time to time review and may pursue additional financing
opportunities, including sales of additional equity or debt securities, or
utilizing our credit line. 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. Further, our recent transfer from the Nasdaq National Market to
the Nasdaq SmallCap Market may make it even more difficult for us to raise
funds. The factors described above indicate that we may be unable to continue as
a going concern for the foreseeable future.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will be tested at least
annually for impairment. We adopted SFAS No. 142 for our fiscal year beginning
January 1, 2002. Upon adoption of SFAS No. 142, we stopped the amortization of
intangible assets with indefinite lives (goodwill, which includes the reclass of
workforce-in-place and tradenames) with a net carrying value of $27.6 million at
December 31, 2001 and annual amortization of $8.8 million that resulted from
business combinations initiated prior to the adoption of SFAS No. 141. The
deterioration of the telecom industry and the decline of our product sales in
2002 were factors that required us to evaluate goodwill, determine it to be
impaired, and record a $27.3 million impairment charge during 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement is effective for us on January 1,
2002. The deterioration of the telecom industry and the decline of our product
sales in 2002 were factors that required us to evaluate intangibles, determine
them to be impaired, and record a $2.5 million impairment charge during 2002.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal activities" ("SFAS 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination
Benefits and other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". SFAS No. 146 requires that a liability for a cost
21
associated with an exit or disposal activity to be recognized when the liability
is incurred. Under EITF 94-3, a liability for an exit cost as generally defined
in EITF 94-3 was recognized at the date of the commitment to an exit plan. SFAS
No. 146 states that a commitment to a plan, by itself, does not create an
obligation that meets the definition of a liability. Therefore, SFAS No. 146
eliminates the definition and requirements for recognition of exit costs in EITF
94-3. It also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. We do not expect
the adoption of SFAS No. 146 to have a material effect on our consolidated
financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the guarantor
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. It also elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued and to be made in regard
of product warranties. Disclosures required under FIN 45 are already included in
these financial statements, however, the initial recognition and initial
measurement provisions of this FIN are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. We do not expect the
adoption of FIN 45 to have a material effect on our consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. This Statement also amends the disclosure provision of
SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements. We
have elected to continue accounting for employee stock option plans according to
APB No. 25, and we adopted the disclosure requirements under SFAS No. 148
commencing on December 31, 2002.
FACTORS THAT MAY AFFECT RESULTS
The risks and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations. If
any of the following risks actually occur, our business, financial condition and
results of operations could be materially and adversely affected.
Risks Related To Our Business
We will need to obtain additional funding during the first six months of 2003.
If we are unable to raise more capital, we may not have sufficient funds to
continue operations at the current level, if at all.
During the year ended December 31, 2002, we used cash in operating
activities of $20.3 million. As of December 31, 2002, we had cash and cash
equivalents of $4.6 million and an accumulated deficit of $177.6 million. We
will need to obtain additional funding during the first six months of 2003. If
additional funds are raised through the issuance of equity securities, the
percentage of equity ownership of our existing stockholders will be reduced. In
addition, holders of these equity securities may have rights, preferences or
privileges senior to those of the holders of our common stock. If additional
funds are raised through the issuance of debt securities, we may incur
significant interest charges, and these securities would have rights,
preferences and privileges senior to holders of common stock. The terms of these
securities could also impose restrictions on our operations. Additional
financing may not be available when needed on terms favorable to us or at all.
Our recent move from the Nasdaq National Market to the Nasdaq SmallCap Market
may make it even more difficult for us to raise funds. If we are unable to raise
additional capital, we will not have sufficient funds to continue operations.
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 would decline and our
operating results and business would 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 Lucent
Technologies, one of our original equipment manufacturers, or OEM, customers
22
that sell and market 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 would decline and our
operating results and business would be harmed. For the year ended December 31,
2002, sales to our three largest customers accounted for approximately 71% of
our net revenue, of which sales to Allegiance Telecom, Lucent Technologies and
Nuvox Communications accounted for 37%, 18% and 16% of our net revenue,
respectively. We believe that we have been the primary supplier of integrated
access devices to Allegiance in the past. Allegiance has advised us that it is
now pursuing a two vendor strategy in this product category, which will reduce
our opportunity for sales to Allegiance in future periods and will create
additional competitive pricing pressures. As a result, we do not expect to
receive any significant revenue from Allegiance in the first quarter of 2003 as
Allegiance begins purchasing from the second vendor, and we expect our net
revenue from Allegiance in 2003 to decrease significantly from 2002 levels. Our
concentrated customer base continues to expose us to risks resulting from
potential adverse changes in these relationships and risks resulting from the
financial condition of these customers.
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. Also, the ultimate
business success of our direct service provider customers, our OEM customers 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. For example, Advanced Telecom Group, one of our largest customers,
declared bankruptcy in May 2002, and we are no longer shipping any product to
them. In addition, any difficulty in collecting amounts due from one or more of
our key customers would harm our operating results and financial condition. If
any of these events occur, our net revenue would decline and our operating
results and business would be harmed.
The difficulties experienced by many of our current and potential CLEC customers
have had and may continue to have an adverse effect on our business.
To date, we have sold the majority of our products to competitive local
exchange carrier, or CLEC, customers, either directly or through our OEM
customers. 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. For example, our CLEC customer,
Advanced Telecom Group, recently filed for bankruptcy protection. In light of
the financial and economic difficulties facing our customers, we expect to see a
continued decline in orders from many of our major customers as they reduce
growth and spending and diversify their suppliers of critical components and as
we experience increased pricing pressure on our products. 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 unless and until there is substantial
improvement in the ability of CLECs to finance their businesses.
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 $17.1 million in 1999, $43.3
million in 2000, $48.6 million in 2001 and $55.4 million in 2002. As of December
31, 2002, we had an accumulated deficit of approximately $177.6 million. To
achieve profitability, we will need to generate and sustain higher net revenue
while lowering our cost and expense levels.
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. 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.
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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 would be adversely affected for that quarter.
Our products are subject to price reduction and margin pressures. If our average
selling prices decline and we fail to offset that decline through cost
reductions, our gross margins and potential profitability could be seriously
harmed.
Competitive pressures have forced us to reduce the prices of our products.
We expect similar price reductions to occur in the future in response to
competitive pressures. In addition, our average selling prices decline when we
negotiate volume price discounts with customers and utilize indirect
distribution channels. If our average selling prices decline and we fail to
offset that decline through cost reductions, our gross margins and potential
profitability would be seriously harmed.
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 to build our products. Currently,
our primary contract manufacturer is Benchmark Electronics. Under our agreement
with Benchmark, Benchmark may cancel the contract on short notice and is 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, 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 our agreement or
relationship with Benchmark is terminated, we will not have a primary
manufacturing contract with any third party. 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.
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. For example, under our OEM agreement with Lucent Technologies,
Lucent has the right to delay previously placed orders for any reason. The time
required for our customers 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. For example, Lucent may be
required to maintain a significant inventory of our products for longer periods
than they originally anticipated, which would reduce future purchases. These
reductions, in turn, could cause fluctuations in our future results of
operations and severely harm our business and financial condition.
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.
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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 we adopted are different from those 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.
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 customers, 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. Development costs and expenses are incurred before we generate any
net revenue from sales of products resulting from these efforts. We intend to
continue to incur substantial research and development expenses, which could
have a negative impact on our earnings in future periods.
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
four to six 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. Our contract manufacturer has obtained
or has on order substantial amounts of inventory to meet our revenue forecasts.
If future shipments do not utilize the committed inventory, the contract
manufacturer has the right to bill us for any excess component and finished
goods inventory. We also have a non-cancelable purchase order with a major chip
supplier for one of our critical components. As of December 31, 2002, the
estimated purchase commitments and non-cancelable purchase orders to those
companies is $1.6 million. In August 2002, we placed $1.0 million on deposit
with our contract manufacturer as security against these purchase commitments.
If we overestimate our manufacturing requirements, demand for our products is
lower than forecasted, or a product in our manufacturing forecast becomes
obsolete, our contract manufacturer may have purchased excess or obsolete
inventory. For example, in March 2001 we expensed $1.8 million for excess
inventory purchase commitments and in March 2002 we expensed $1.7 million for
excess 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-offs. 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, which could
negatively affect our net revenue in such 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 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,
some of 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. For example, following deployment of our MBX, products it was
discovered that the MBX failed to meet all of its specified applications. We
then temporarily suspended deployment of the MBX. The MBX is now fully available
to customers for all applications. There can be no assurance that additional
defects or errors may not arise or be discovered in the future. 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.
25
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
liability claims. However, these limitations may not preclude all potential
claims resulting from a defect in one of our products. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. Any of these claims, whether or not successful, could
seriously damage our reputation and business.
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 Lucent
Technologies, one of our OEM customers. Our agreement with Lucent is not
exclusive and does not contain minimum volume commitments. Lucent Technologies
accounted for approximately 18% of our net revenue for the year ended December
31, 2002. Our OEM agreement with Lucent expires in May 2003, and we can give no
assurances that we will be able to extend the term of our contract or enter into
a new contract with Lucent. Lucent may terminate the agreement earlier upon 60
days notice. At any time or after a short period of notice, Lucent could elect
to cease marketing and selling our products. They may so elect for a number of
reasons, including the acquisition by Lucent 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 Lucent, which
may also harm our relationships with this customer. For example, our MBX product
may compete with products offered by our OEM customers, including Lucent, which
could adversely affect our relationship with that customer. Our existing
relationship with Lucent could make it harder for us to establish similar
relationships with Lucent's competitors. Any loss, reduction, delay or
cancellation in expected sales to our OEM customers, the inability to extend our
contract or enter into a new contract with Lucent on favorable terms would hurt
our business and our ability to increase net revenue and could cause our
quarterly results to fluctuate significantly.
Telecommunications networks are comprised of multiple hardware and software
products from multi