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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 or organization)
39745 Eureka Drive, Newark, CA 94560
(Address of principal executive offices)
(510) 492-0800
(Registrant's telephone number, including area code)
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 [ ]
The number of outstanding shares of the registrant's Common Stock, $0.0001 par
value, was 61,988,975 as of June 30, 2002.
VINA TECHNOLOGIES, INC.
INDEX
Page
----
PART I: FINANCIAL INFORMATION.............................................................3
Item 1 Condensed Consolidated Financial Statements....................................3
Condensed Consolidated Balance Sheets.........................................3
Condensed Consolidated Statements of Operations...............................4
Condensed Consolidated Statements Of Cash Flows...............................5
Notes to Condensed Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................30
PART II: OTHER INFORMATION...............................................................31
Item 1. Legal Proceedings.............................................................31
Item 2. Changes in Securities and Use of Proceeds.....................................31
Item 4. Submission of Matters to a Vote of Security Holders...........................31
Signatures.............................................................................32
2
PART I: FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
VINA TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
December 31, June 30,
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 15,805 $ 10,666
Restricted cash ................................................... 500 3,550
Common stock subscription receivable ............................. 9,589 --
Accounts receivable, net .......................................... 8,059 4,997
Inventories ....................................................... 5,733 4,062
Prepaid expenses and other ........................................ 1,562 2,157
--------- ---------
Total current assets .......................................... 41,248 25,432
Property and equipment, net ......................................... 5,271 4,395
Other assets ........................................................ 356 350
Acquired intangibles, net ........................................... 5,663 2,184
Goodwill, net ....................................................... 26,426 --
--------- ---------
Total assets .................................................. $ 78,964 $ 32,361
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 7,798 $ 4,608
Accrued compensation and related benefits ......................... 2,234 1,926
Accrued warranty .................................................. 696 577
Other current liabilities ......................................... 2,708 3,164
Short-term debt ................................................... -- 3,000
--------- ---------
Total current liabilities ..................................... 13,436 13,275
--------- ---------
Stockholders' equity:
Convertible preferred stock; $0.0001 par value; 5,000,000 shares
authorized; none issued and outstanding .............................
Common stock; $0.0001 par value; 125,000,000 shares authorized;
shares outstanding: 2001, 62,013,759; 2002, 61,988,975 6 6
Additional paid-in capital ....................................... 194,814 190,476
Deferred stock compensation ...................................... (7,106) (2,635)
Accumulated deficit .............................................. (122,186) (168,761)
--------- ---------
Total stockholders' equity .................................... 65,528 19,086
--------- ---------
Total liabilities and stockholders' equity .................... $ 78,964 $ 32,361
========= =========
See notes to condensed consolidated financial statements
3
VINA TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------- -------
2001 2002 2001 2002
---- ---- ---- ----
Net revenue ....................................................$ 11,882 $ 6,624 $ 22,911 $ 13,063
Cost of revenue ................................................
(excluding stock-based compensation) ......................... 7,070 4,161 15,316 10,286
------- -------- -------- --------
Gross profit ...................................................
(excluding stock-based compensation) ......................... 4,812 2,463 7,595 2,777
------- -------- -------- --------
Costs and expenses:
Research and development
(excluding stock-based compensation) ....................... 4,839 3,762 9,544 9,185
Selling, general and administrative
(excluding stock-based compensation) ....................... 6,295 4,015 12,806 8,818
Stock-based compensation* .................................... 3,482 (1,503) 8,326 150
Purchased process technology ................................. -- -- 5,081 --
Amortization of intangible assets ............................ 2,574 180 3,404 504
Impairment of goodwill and intangible assets ................. -- -- -- 29,276
Restructuring expenses ....................................... -- 1,575 -- 1,575
------- -------- -------- --------
Total costs and expenses ................................. 17,190 8,029 39,161 49,508
------- -------- -------- --------
Loss from operations ........................................... (12,378) (5,566) (31,566) (46,731)
Interest income, net ........................................... 380 84 992 156
------- -------- -------- --------
Net loss .......................................................($11,998) ($ 5,482) ($30,574) ($46,575)
======== ======== ======== ========
Net loss per share, basic and diluted ..........................($ 0.34) ($ 0.09) ($ 0.89) ($0.76)
======== ======== ======== ========
Shares used in computation, basic and diluted .................. 35,589 61,546 34,186 61,539
======== ======== ======== ========
---------------------------------
* Stock-based compensation:
Cost of revenue ............................................$ 255 $ 127 $ 614 $ 285
Research and development ................................... 1,438 (1,156) 3,027 (755)
Selling, general and administrative ........................ 1,789 (474) 4,685 620
------- -------- -------- ---------
$ 3,482 $ (1,503) $ 8,326 $ 150
======== ======== ======== =========
See notes to condensed consolidated financial statements
4
VINA TECHNOLOGIES, INC.
Condensed Consolidated Statements Of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
June 30,
2001 2002
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $(30,574) $(46,575)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 4,285 1,617
Disposal of property and equipment ............................ -- 307
Impairment of goodwill and intangible assets .................. -- 29,276
Stock-based compensation ........................................ 8,326 150
In-process research and development ............................. 5,081 --
Provision for inventory order commitment ........................ 1,800 1,700
Changes in operating assets and liabilities:
Accounts receivable ............................................. (2,838) 3,062
Inventories ..................................................... (4,286) (29)
Prepaid expenses and other ...................................... 374 (595)
Other assets .................................................... (65) 6
Accounts payable ................................................ 3,627 (3,190)
Accrued compensation and related benefits ....................... (921) (308)
Accrued warranty ................................................ 80 (119)
Other current liabilities ....................................... (1,077) 456
-------- --------
Net cash used in operating activities .......................... (16,188) (14,242)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................... (756) (543)
Acquisition of business, net of cash acquired ..................... (454) --
Purchases of short-term investments ............................... (550) --
Proceeds from sales/maturities of short-term investments .......... 15,693 --
-------- --------
Net cash provided by (used in) investing activities ............ 13,933 (543)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt ......................... -- 3,000
Restricted cash ................................................... -- (3,050)
Proceeds from sale of common stock ................................ 822 9,803
Repurchase of common stock ........................................ (540) (107)
-------- --------
Net cash provided by financing activities ...................... 282 9,646
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................. (1,973) (5,139)
CASH AND CASH EQUIVALENTS, Beginning of period ...................... 7,740 15,805
-------- --------
CASH AND CASH EQUIVALENTS, End of period ............................ $ 5,767 $ 10,666
======== ========
5
VINA TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Un-audited Interim Financial Information
Business - VINA Technologies, Inc. (the Company or VINA), incorporated in June
1996, designs, develops, markets and sells multi-service broadband access
communications equipment that enables telecommunications service providers to
deliver bundled voice and data services. The Company has incurred significant
losses since inception and expects that net losses and negative cash flows from
operations will continue for the foreseeable future.
Basis of Presentation -- The condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
inter company accounts and transactions have been eliminated in consolidation.
The accompanying interim financial information is un-audited and has been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, it does not include all of the information and
notes required by generally accepted accounting principles for annual financial
statements. In the opinion of management, such un-audited information includes
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the interim information. Operating results for the
three-months ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002. For further
information, refer to the Company's reports filed with the Securities and
Exchange Commission, including its Annual Report on Form 10-K for the year ended
December 31, 2001, as amended.
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.
Going Concern - The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, during the six months ended June 30, 2002, the Company
used cash in operating activities of $ 14.2 million. As of June 30, 2002, the
Company had cash and cash equivalents of $10.7 million and its accumulated
deficit was $ 168.8 million. These factors among others indicate that the
Company may be unable to continue as a going concern for a reasonable period of
time. The Company has implemented, and is continuing to pursue, aggressive cost
cutting programs in order to preserve available cash.
We will from time to time review and may pursue additional financing
opportunities. We will need to obtain additional funding during the next six
months and we may seek to sell additional equity or debt securities or secure a
bank line of credit. Currently, we have no other immediately available sources
of liquidity. The sale of additional equity or other securities could result in
additional dilution to our stockholders. Arrangements for additional financing
may not be available in amounts or on terms acceptable to us, if at all.
Revenue Recognition - The Company recognizes 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. The
Company generates revenue from sale of products and related services to
communications service providers and through original equipment manufacturers
and value added resellers.
Product revenue is generated from the sale of communications equipment embedded
with software that is essential to its functionality, and accordingly, the
Company accounts 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
6
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). There is no VSOE on the sales of communications equipment due
to the wide range in customer discounts provided by the Company.
Service revenue is generated from the sale of installation, training and post
contract customer support (PCS) agreements related to the communications
equipment. The Company also accounts 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, the Company defers the fair value
of these undelivered elements based on VSOE and recognizes revenue as the
services are delivered. VSOE of these elements is based on stand-alone sales
(including renewal rates of PCS agreements) of the services. For all periods
presented service revenue has been less than 10% of total net revenue.
The Company additionally records a provision for estimated sales returns and
warranty costs at the time the product revenue is recognized.
Comprehensive Loss - Comprehensive loss for the three and six months ended June
30, 2001 was $12.1 million and $30.6 million respectively, and included net loss
for the respective periods as well as $56,000 and $4,000, respectively, of net
unrealized losses on available for sale investments. Comprehensive loss for the
three and six months ended June 30, 2002 was the same as net loss.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations and Statement of Financial Accounting Standards
(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. The Company adopted SFAS No. 142 on
January 1, 2002. Upon adoption of SFAS No. 142, the Company has stopped the
amortization of intangible assets with indefinite lives (goodwill, which
includes the re-class of workforce-in-place) with a net carrying value of $27.3
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 Company evaluated goodwill under SFAS No. 142 upon adoption, on January
1, 2002, and determined that there was no impairment. However, in accordance
with SFAS No. 142, the Company was required to reevaluate goodwill and other
intangibles for impairment in March 2002 because events and circumstances
changed that more likely than not would reduce the fair value of the reporting
unit below its carrying amount (See Note 4).
Recent Accounting Standards - 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 the Company on January 1, 2002. The adoption of this statement did
not have an impact on the financial position, results of operations or cash
flows of the Company.
In November 2001, consensus was reached by the Emerging Issues Task Force (EITF)
on EITF No. 01-09, Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products. EITF No. 01-09 addresses the accounting
consideration given by a vendor to a customer. The EITF is effective for the
Company on January 1, 2002. The adoption of this statement will result in the
7
reclassification of sales and marketing expenses to revenue in 2001 totaling
$473,000. There were no amounts reclassified in the first quarter of 2001. In
the second quarter of 2001, $146,000 was reclassified as a decrease to selling,
general and administrative expenses and a corresponding decrease to net revenue.
The amounts to be reclassified in the third and fourth quarter of 2001 are
$166,000 and $161,000 respectively.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and reporting
for costs associated with exit or disposal activities and supersedes Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
as defined in Issue 94-3 was recognized at the date of an entity's commitment to
an exit plan. This statement also establishes that the liability should
initially be measured and recorded at fair value. The Company will adopt the
provisions of SFAS No. 146 for exit or disposal activities that are initiated
after December 31, 2002 and the adoption will not have an impact on the
historical results of operations, financial position or liquidity of the
Company.
2. Inventories
Inventories consist of the following (in thousands):
December 31, June 30,
2001 2002
----------- -------
Raw materials and subassemblies.... $1,783 $1,548
Finished goods..................... 3,950 2,514
------ ------
Inventories........................ $5,733 $4,062
====== ======
3. Net loss per share
The following is a calculation of the denominators used for the basic and
diluted net loss per share computations (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------
2001 2002 2001 2002
---- ---- ---- ----
Weighted average common shares
outstanding ........................... 36,848 62,064 35,510 62,136
Weighted average common shares
outstanding subject to repurchase ..... (1,259) (518) (1,324) (597)
------ ---- ------ ------
Shares used in computation, basic and
diluted ............................... 35,589 61,546 34,186 61,539
====== ====== ====== ======
During the three months and six months ended June 30, 2001 and 2002, the Company
had securities outstanding which could potentially dilute basic earnings per
share in the future, but were excluded in the computation of diluted earnings
per shares in such periods, as their effect would have been anti-dilutive due to
the net loss reported in such periods. Such outstanding securities consist of
the following at: June 30, 2001, 1,120,484 shares of common stock subject to
repurchase, options to purchase 13,424,812 shares of common stock; June 30,
2002, 460,726 shares of common stock subject to repurchase and options to
purchase 11,931,414 shares of common stock, and warrants to purchase 7,090,000
shares of common stock.
4. 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 goodwill of the Company is its market capitalization. The deterioration of
the telecom industry and the decline in our current product sales in the first
quarter were factors that required the Company to evaluate the fair value of the
8
goodwill. Management evaluated the fair value of the Company as determined by
its market capitalization against its 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" the Company evaluated the
intangible assets for impairment and determined a portion of the intangible
assets were impaired. The Company recorded a $29.3 million impairment charge
during the quarter ended March 31, 2002. The amount was comprised of $27.3
million of goodwill and $2.0 million of intangible assets.
Intangible assets consist of the following (in thousands):
Dec. 31, 2001 June 30, 2002
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated Impairment
Period Amount Amortization Net Amount Amortization Loss Net
--------- ---------------------------------------------------------------------------------
Core technology 4 years $ 3,022 $ (630) $2,392 $2,898 $ (883) $ (1,457) $ 558
Current technology 4 years 310 (64) 246 310 (83) (227) -
Trade name 4 years 346 (73) 273 346 (73) (273) -
Intellectual property 4 years 1,859 - 1,859 1,859 (233) - $ 1,626
Workforce-in-place 3 years 1,236 (343) 893 - - - -
---------------------------------------------------------------------------------
Total $ 6,773 $(1,110) $5,663 $5,413 $ (1,272) $ (1,957) $ 2,184
=================================================================================
All of VINA's intangible assets are subject to amortization except for
workforce-in-place and tradename. Workforce in place was recorded as goodwill as
of January 1, 2002.
Estimated future amortization expense is as follows (in thousands):
Fiscal year Total
-----
(Remaining six months) 2002 $ 337
2003 674
2004 674
2005 499
------------------
Total Amortization $ 2,184
==================
The changes in the carrying amount of goodwill for the six months ended June 30,
2002 are as follows (in thousands):
Balance as of January 1, 2002 $ 27,319
Impairment loss (27,319)
-----------
Balance as of June 30, 2002 $ -
===========
Had the provision of FAS No. 142 been applied beginning on January 1, 2001 our
net loss and net loss per share would have been as follows (in thousands except
per share amounts):
Three Months Ended Six Months Ended
------------------- -----------------
June 30, June 30,
------- -------
2001 2002 2001 2002
---- ---- ---- ----
Net loss as reported ........................ $(11,998) $ (5,482) $(30,574) $(46,575)
Add back amortization:
Goodwill ................................ 2,241 -- 2,961 --
Workforce-in-place ...................... 103 -- 137 --
Tradename .............................. 22 -- 29 --
------------------------------------------------------------
9
------------------------------------------------------------
Adjusted net loss ........................... $ (9,632) $ (5,482) $(27,447) $(46,575)
============================================================
EPS - basic and diluted, as reported ........ $ (0.34) $ (0.09) $ (0.89) $ (0.76)
Goodwill, workforce-in-place and ............ 0.07 -- 0.09 --
tradename amortization
------------------------------------------------------------
Adjusted EPS ................................ $ (0.27) $ (0.09) $ (0.80) $ (0.76)
============================================================
5. Acquisition
On February 27, 2001, the Company completed the acquisition of Woodwind
Communications Systems, Inc (Woodwind), a provider of voice-over-broadband
network edge solutions. The acquisition was accounted for as a purchase. To
acquire Woodwind, the Company paid $7.5 million in cash, issued 4.15 million
shares of VINA common stock with a fair value of $39.5 million, and converted
all outstanding Woodwind options into options to purchase 1.1 million of VINA
common stock with a fair value of $2.6 million. In addition, the Company assumed
certain operating assets and liabilities of Woodwind and incurred acquisition
expenses of $726,000. In connection with the acquisition, the Company recorded
$43.6 million of goodwill and intangible assets, which were amortized over
useful lives of three to four years. As described in note 5, the outstanding
balance of the intangible assets is $2.2 million as of June 30, 2002. The
Company also recorded a one-time charge of $5.1 million in 2001 for purchased
in-process technology.
Pro Forma Financial Results
The following selected unaudited pro forma combined results of operations for
the six months ended June 30, 2001 of the Company and Woodwind have been
prepared assuming that the acquisition occurred at the beginning of the periods
presented. The following pro forma financial information is not necessarily
indicative of the results that would have occurred had the acquisition been
completed at the beginning of the period indicated nor is it indicative of
future operating results (in thousands, except per share data):
Six Months Ended
June 30,
2001
----
Net revenue $ 22,913
Net loss ($30,244)
Net loss per share ($0.85)
Shares used in calculation of net loss per share 35,523
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles, goodwill and deferred stock
compensation associated with the acquisition. The $5.1 million charge for
purchased in-process research and development has been excluded from the pro
forma results, as it is a material non-recurring charge.
6. Restructuring
During April 2002, the Company announced and completed a restructuring plan
intended to better align its operations with the changing market conditions.
This plan was designed to prioritize VINA's high growth areas of business, focus
on profit contribution and reduce expenses. This restructuring includes a
workforce reduction and other operating reorganization. As a result of the
restructuring efforts, the Company reduced its workforce by approximately 23%.
A summary of the restructuring benefit and expenses for the six months ended
June 30, 2002 were as follows (in thousands):
10
Balance at Balance at
December 31, Restructuring June 30,
2001 Provision Utilized 2002
----------------------------------------------------------------
Capital equipment $ - $ 340 $ - $ 340
Stock compensation benefit - (1,547) 1,547 -
Workforce reduction 46 835 (708) 173
Abandonment of facilities - 400 (30) 370
----------------------------------------------------------------
Restructuring charge, net $ 46 $ 28 $ 809 $ 883
================================================================
Capital equipment - As a result of the closing of our Maryland facility and our
reduction in headcount, we determined that we had excess capital equipment with
total book values substantially less than marketable value. We expect to
finalize the disposition by the fourth quarter of 2002.
Stock compensation benefit - In connection with the workforce reduction, the
Company recorded a net benefit of $ 1,547,000. This net benefit resulted from a
$1,577,000 benefit for the reversal of prior period estimated stock compensation
expense on forfeited stock options offset by $30,000 of stock compensation
expense resulting from the acceleration of unvested stock options in accordance
with employee separation agreements.
Workforce reduction - The restructuring program resulted in the reduction 43
employees across all functions. As of June 30, 2002, the Company made $ 708,000
in severance payments. We expect to disburse the remaining balance of $173,000
related to severance by the fourth quarter of 2002.
Abandonment of facilities - Part of the restructuring included the closure of
our engineering facility in Maryland. The remaining balance of $370,000 related
to abandonment of facilities will be disbursed over the term of the remaining
lease ending October 30, 2004.
7. Commitments and Contingencies
VINA's 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 June 30, 2002, the estimated purchase commitments and non-cancelable purchase
orders to those companies is $3.8 million.
The high technology and telecommunications industry in which the Company
operates is characterized by frequent claims and related litigation regarding
patent and other intellectual property rights. The Company is not a party to any
such litigation; however any such litigation in the future could have a material
adverse effect on the Company's consolidated operations and cash flows.
8. Short-term Debt
As of June 30, 2002, we had $3.0 million in short-term debt. This debt is a $3.0
million committed revolving line of credit. This debt was secured by a
certificate of deposit for $3.0 million
9. Subsequent Events
As of June 30, 2002, we had a certificate of deposit for $3.0 million that
secured a $3.0 million committed revolving line of credit. In July 2002, the
Company remitted full payment for the $3.0 million revolving line of credit. The
revolving line of credit was not available to the Company after it was repaid in
July 2002.
In July 2002, the Company announced a restructuring plan intended to better
align its operations with changing market conditions. The Company expects to
reduce its operating cost structure through a 26% reduction of employees and
11
other expense. As a result of this restructuring plan, the Company estimates it
will record cash charges of approximately $700,000 in the third quarter of 2002.
These charges will primarily relate to severance for terminated employees and
excludes stock-based compensation expenses.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 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, the timing and magnitude of cost reductions and
associated charges resulting from our restructuring plan, our ability to reach a
cash flow break-even position, 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 ability to
resolve the software issues and related applications deficiencies of our MBX
product and the expected date to ship the MBX products, 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 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 integrate the former
employees of Metrobility Optical Systems, Inc. into our company, our ability to
retain and attract highly skilled engineers for our research and development
activities, our ability to execute our business plan, 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.
This Form 10-Q includes the following registered trademarks as well as
filed applications to register trademarks of VINA Technologies including:
Integrator-300, VINA, VINA Technologies, eLink-100, Multiservice Broadband
Xchange, MX-500, MX-550, and Multiservice Xchange. All other trademarks and
trade names appearing in this Form 10-Q 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-Q is not an endorsement of VINA.
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto set forth in Item
1 of this quarterly report. We also urge readers to review and consider our
disclosures describing various factors that could affect our business, including
the disclosures under Management's Discussion and Analysis of Financial
Condition and Results of Operations and Risk Factors and the audited financial
statements and notes thereto contained in our Annual Report on Form 10-K, filed
with the Securities and Exchange Commission for the year ended December 31,
2001, as amended.
13
Recent Developments
In July 2002, we announced a restructuring plan intended to better align
our operations with changing market conditions. We expect to reduce operating
cost structure through a 26 % reduction of employees and other expense
reductions. As a result of this restructuring plan, we estimate we will record
cash charges of approximately $700,000 in the third quarter of 2002. These
charges will primarily relate to severance and other benefits for impacted
employees.
In July 2002, we remitted full payment for the $3.0 million short-term
loan. We had a certificate of deposit for $3.0 million that secured a $3.0
million committed revolving line of credit that had been utilized at June 30,
2002. The revolving line of credit was not available to the Company after it was
repaid in July 2002.
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 and our MBX product in September 2001. Since
inception, we have incurred significant losses, and as of June 30, 2002, we had
an accumulated deficit of $168.8 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 77% of our net revenue for
the year ended December 31, 2001, specifically sales to Lucent Technologies,
Nuvox Communications, and Advanced Telecom Group accounted for 44%, 21% and 12%,
respectively. While the level of sales to any specific customer is anticipated
to vary from period to period, we expect that we will continue to experience
significant customer concentration for the foreseeable future. To date,
international sales have not been significant. International sales have been
denominated 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 reduce our gross margin percentage.
Research and development expenses consist primarily of personnel and
related costs, consulting expenses and prototype costs related to the design,
development, testing and enhancement of our multiservice broadband access
14
products, and excludes 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
promotional costs, including trade shows and related costs, and excludes
amortization of deferred stock compensation.
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 amortize deferred stock compensation using a multiple option award
valuation approach over the vesting periods of the applicable options, which is
generally four years.
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. As such the measurement of fair
value is our market capitalization. We evaluated the fair value of our company
as determined by our market capitalization against our carrying value, net
assets, and determined that certain long-lived assets were impaired.
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.
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 its more
significant judgments and estimates used in the preparation of its 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. 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 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 receivables 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
15
the collectability of our accounts receivables, 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
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.
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 of the Company 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.
Results of Operations
Three and Six Months Ended June 30, 2002 and 2001
Net revenue. Net revenue decreased to $13.1 million for the six months
ended June 30, 2002 from $22.9 million for the six months ended June 30, 2001.
Net revenue decreased to $6.6 million for the three months ended June 30, 2002
from $11.9 million for the three months ended June 30, 2001. These decreases in
net revenue are primarily due to decreased unit sales to existing customers and
lower average selling prices on our Integrator-300 and eLink products.
Cost of revenue. Cost of revenue including stock-based compensation
decreased to $10.6 million for the six months ended June 30, 2002 from $15.9
million for the six months ended June 30, 2001 and decreased to $4.3 million for
the three months ended June 30, 2002 from $7.3 million from the three months
ended June 30, 2001. These decreases were the result of lower direct material
costs from lower unit sales for three and six, month periods ended June 30,
2002. Gross profit including stock-based compensation decreased to $2.5 million
for the six months ended June 30, 2002 from $7.0 million for the six months
ended June 30, 2001. Gross profit including stock-based compensation decreased
to $ 2.3 million for the three months ended June 30, 2002 from $ 4.6 million for
the three months ended June 30, 2001. These decreases were the result of lower
revenue for the six and three month periods ended June 30, 2002. Gross profit
including stock-based compensation as a percentage of net revenue decreased to
19% for the six months ended June 30, 2002 from 30% for the six months ended
June 30, 2001. Gross profit including stock-based compensation as a percentage
of net revenue decreased to 35% for the three months ended June 30, 2002 from
38% for the three months ended June 30, 2001. These decreases were the result of
lower revenue for the six and three month periods ended June 30, 2002, which
caused fixed overhead and inventory costs to be a higher percentage of cost in
the period as well as decreased average selling prices on our Integrator-300 and
eLink products.
Research and development expenses. Research and development expenses
including stock-based compensation decreased to $8.4 million for the six months
ended June 30, 2002, from $12.6 million for the six months ended June 30, 2001
and also decreased to $2.6 million for the three months ended June 30, 2002 from
$6.3 million for the three months ended June 30, 2001. The decreases in absolute
dollar amounts were primarily a result of decreases in stock-based compensation
expense of $3.8 million for the six month period and $2.6 million for the three
month period and other decreased personnel and consulting costs. Research and
development expenses including stock-based compensation as a percentage of net
revenue increased to 65% in the first six months of 2002 to 55% in the first six
months of 2001, conversely they decreased to 39% for the three months ended June
30, 2002 to 53% for the three months ended June 30, 2001 as our revenue
decreased at a faster rate than research and development expenses. We believe
that continued investment in research and development is critical to attaining
our strategic product enhancement.
16
Selling, general and administrative expenses. Selling, general and
administrative expenses including stock-based compensation decreased to $9.4
million for the six months ended June 30, 2002 from $17.5 million for the six
months ended June 30, 2001and decreased to $3.5 million for the three months
ended June 30, 2002 from $8.1 million for the three months ended June 30, 2001.
These decreases were primarily attributable a decrease in stock-based
compensation expense of $4.1 million for the six month period and $2.3 million
for the three month period and other decreased personnel, consulting and
professional costs. Selling, general and administrative expenses including
stock-based compensation as a percentage of net revenue decreased to 72% for the
first six months of 2002 from 76% for the first six months of 2001 and decreased
to 53% for the three months ended June 30, 2002 from 68% for the three months
ended June 30, 2001, primarily due to a decrease in stock-based compensation.
Stock-based compensation. Stock-based compensation expense decreased to
$150,000 for the six months ended June 30, 2002 from $8.3 million for the six
months ended June 30, 2001. Stock-based compensation benefit for the three
months ended June 30, 2002 was $1.5 million as compared to a stock compensation
expense of $3.5 million for the three months ended June 30, 2001. These
decreases were due primarily to the reversal of prior period estimated stock
compensation expense on forfeited stock options.
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 $29.3 million impairment charge during the quarter
ended March 31, 2002. The amount was comprised of $27.3 million of goodwill and
$2.0 million of intangible assets.
Restructuring expenses. Restructuring expenses, excluding the impact of
stock-based compensation, of $1.6 million for the three and six months ended
June 30, 2002 resulted primarily from severance and outplacement costs,
abandonment of facilities costs and excess capital equipment costs associated
with the workforce reduction plan in the second quarter of 2002. Including the
impact of stock-based compensation, we recorded a net restructuring benefit of
$30,000 for the three and six months ended June 30, 2002. As of June 30, 2002,
we made $708,000 in severance and $30,000 in abandonment of facilities payments.
The remaining balance of $513,000 related severance and excess capital equipment
costs are expected to be disbursed in full by the end of the fourth quarter of
2002. The remaining balance of $370,000 related abandonment of facilities costs
is expected to be disbursed over the term of the remaining lease ending October
30, 2004.
Interest income, net. Interest income, net for the six months ended June
30, 2002 decreased to $156,000 from $1.0 million for the six months ended June
30, 2001. Interest income, net for the three months ended June 30, 2002
decreased to $84,000 from $380,000 for the three months ended June 30, 2001.
These decreases were primarily attributable to interest earned on lower average
cash balances throughout the relevant period.
Liquidity and Capital Resources
Net cash used in operating activities for the six months ended June 30,
2002 was $14.2 million and $16.2 million for the six months ended June 30, 2001.
Cash used in operating activities for the six months ended June 30, 2002
resulted primarily from the net loss from operations of $46.6 million, an
increase in other assets, and accounts payable of $590,000, and $3.2 million,
respectively, off-set by a net decrease in accounts receivable of $3.1 million
and non-cash activities including depreciation, disposal, and amortization of
fixed assets, goodwill and intangible assets of $1.9 million, an inventory
commitment purchase charge of $1.7 million, and a write down of goodwill and
17
intangible assets due to impairment of $29.3 million.
Net cash used by investing activities was $543,000 for the six months ended
June 30, 2002 and net cash provided in investing activities was $13.9 million
for the six months ended June 30, 2001. Cash used by investing activities for
the six months ended June 30, 2002 was due to the purchase of property and
equipment of $543,000.
Net cash provided by financing activities was $9.6 million for the six
months ended June 30, 2002 and $282,000 for the six months ended June 30, 2001.
Cash provided by financing activities for the six months ended June 30, 2002 was
due to $9.8 million from issuances of common stock.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the six months ended June 30, 2002, we used cash in operating
activities of $ 14.2 million. As of June 30, 2002, we had cash and cash
equivalents of $10.7 million and its accumulated deficit was $ 168.8 million.
These factors among others may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time. The Company has
implemented, and is continuing to pursue, aggressive cost cutting programs in
order to preserve available cash.
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 June 30, 2002, the estimated purchase commitments and non-cancelable purchase
orders to those companies is $3.8 million. We have lease commitments of $5.4
million for leases on 4 properties, which expire by September 30, 2007.
As of June 30, 2002, we had $3,550,000 in restricted cash. This cash is
comprised of three 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 June 30, 2002. The company also has an irrevocable letter of credit of
$500,000 that is used as collateral for the lease on the Newark, California
facility and a $50,000 certificate of deposit that is used as security for our
bank merchant account.
We will from time to time review and may pursue additional financing
opportunities. We will need to obtain additional funding during the next six
months and we may seek to sell additional equity or debt securities or secure a
bank line of credit. Currently, we have no other immediately available sources
of liquidity. The sale of additional equity or other securities could result in
additional dilution to our stockholders. Arrangements for additional financing
may not be available in amounts or on terms acceptable to us, if at all.
In July 2002 after careful consideration, we announced a restructuring plan
intended to better align our operations with changing market conditions. We
expect to reduce our operating cost structure through a 26 percent reduction of
employees and other expense reductions.
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.
18
Risks Related To Our Business
Because we have a limited operating history and operate in a new and rapidly
evolving telecommunications market, you may have difficulty assessing our
business and predicting our future financial results.
We were incorporated in June 1996 and did not begin shipping our products
until March 1997. Due to our limited operating history, it is difficult or
impossible for us to predict our future results of operations.
We have a history of losses, we expect future losses, and we may not be able to
generate sufficient net revenue in the future to achieve or sustain
profitability.
We have incurred significant losses since inception and expect that our net
losses and negative cash flow from operations will continue for the foreseeable
future. We incurred net losses of approximately $17.1 million in 1999, $43.3
million in 2000, $48.6 million in 2001 and $46.6 million in the six months ended
June 30, 2002. As of June 30, 2002, we had an accumulated deficit of
approximately $168.8 million. To achieve profitability, we will need to generate
and sustain substantially higher net revenue while maintaining reasonable cost
and expense levels. We expect to continue to incur significant expenses for
research and development, sales and marketing, customer support, and general and
administrative expenses.
We may not have sufficient cash to continue operations for the next 12 months.
If we are unable to reduce our expenses significantly and increase our revenues,
or are unable to raise more capital, we may not have sufficient funds to
continue operations at the current level, or at all.
During the six months ended June 30, 2002, we used cash in operating
activities of $14.2 million. As of June 30, 2002, we had cash and cash
equivalents of $10.7 million and an accumulated deficit of $ 168.8 million. We
may not have sufficient cash to continue operations for the next 12 months. If
we are unable to reduce our expenses significantly and increase our revenues, or
if we are unable to raise more capital, we may not have sufficient funds to
continue operations at the current level, or at all.
We rely on a small number of telecommunications customers for substantial
portions of our net revenue. If we lose one of our customers or experience a
delay or cancellation of a significant order or a decrease in the level of
purchases from any of our customers, our net revenue could decline and our
operating results and business could be harmed.
We derive almost all of our net revenue from direct sales to a small number
of telecommunications customers and our indirect sales through Lucent
Technologies, one of our original equipment manufacturers, or OEM, customers
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 could decline and our
operating results and business could be harmed. Our three largest customers
accounted for approximately 77% of our net revenue for the year ended December
31, 2001, specifically sales to Lucent Technologies, Nuvox Communications, and
Advanced Telecom Group accounted for 44%, 21% and 12%, respectively. We expect
that the telecommunications industry will continue to experience consolidation.
If any of our customers is acquired by a company that is one of our competitors'
customers, we may lose its business. In addition, if an OEM customer is
acquired, we could lose that customer. For example, Intermedia Communications,
one of our service provider customers, was acquired by MCI WorldCom, which has
recently declared bankruptcy. 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, recently declared
bankruptcy, 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 could
harm our operating results and financial condition. If any of these events
occur, our net revenue could decline and our operating results and business
could be harmed.
The difficulties experienced by many of our current and potential CLEC customers
19
have had and are expected to continue to have an adverse effect on our business.
To date, we have sold the majority of our products to 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, two of our customers, MCI
Worldcom and Advanced Telecom Group, recently filed for bankruptcy protection.
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.
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.
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.
Our customer purchase orders also allow purchasers to cancel orders within
negotiated time frames without significant penalty. In addition, due in part to
factors such as the timing of product release dates, purchase orders and product
availability, significant volume shipments of our products could occur near the
end of our fiscal quarters. If we fail to ship products by the end of a quarter,
our operating results could be adversely affected for that quarter.
Our products require substantial investment over a long product development
cycle, and we may not realize any return on our investment.
20
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. For example, we expected to begin shipment of our MBX product in
the second quarter of 2001, but the schedule for these shipments was delayed to
the third quarter of 2001 because of continued development issues and then
suspended temporarily due to the MBX's failure to meet all of its specified
applications. 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
12 months prior to scheduled delivery of products to our customers. Lead times
for the materials and components that we order vary significantly and depend on
numerous factors, including the specific supplier, contract terms and demand for
a component at a given time. VINA's 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 June 30, 2002, the estimated purchase commitments
and non-cancelable purchase orders to those companies is $3.8 million. If we
overestimate our manufacturing requirements, demand for our products are 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 are designed to be deployed in very
large and complex networks. While our products have been tested, because of
their nature, they can only be fully tested when deployed in networks that
generate high amounts of voice or data traffic. Because of our short operating
history, 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 product it
was discovered that the our Multiservice Broadband Xchange, 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.
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.
21
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 44% of our net revenue for the year ended December
31, 2001. 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, or our
inability to establish similar relationships with new OEM customers in the
future, 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 multiple vendors. If our products are not compatible with other
companies' products within our customers' networks, orders will be delayed or
cancelled.
Many of our customers require that our products be designed to work with
their existing networks, each of which may have different specifications and
utilize multiple protocols that govern the way devices on the network
communicate with each other. Our customers' networks may contain multiple
generations of products from different vendors that have been added over time as
their networks have grown and evolved. Our products may be required to work with
these products as well as with future products in order to meet our customers'
requirements. In some cases, we may be required to modify our product designs to
achieve a sale, which may result in a longer sales cycle, increased research and
development expense, and reduced operating margins. If our products are not
compatible with existing equipment in our customers' networks, whether open or
proprietary, installations could be delayed, or orders for our products could be
cancelled.
Our failure to enhance our existing products or develop and introduce new
products that meet changing customer requirements and technological advances
would limit our ability to sell our products.
Our ability to increase net revenue will depend significantly on whether we
are able to anticipate or adapt to rapid technological innovation in the
telecommunications industry and to offer, on a timely and cost-effective basis,
products that meet changing customer demands and industry standards. If the
standards adopted are different from those which we have chosen to support,
market acceptance of our products may be significantly reduced or delayed.
Developing new or enhanced products is a complex and uncertain process and
we may not have sufficient resources to successfully and accurately anticipate
technological and market trends, or to successfully manage long development
cycles. We must manage the transition from our older products to new or enhanced
products to minimize disruption in customer ordering patterns and ensure that
adequate supplies of new products are available for delivery to meet anticipated
customer demand. Any significant delay or failure to release new products or
product enhancements on a timely and cost-effective basis could harm our
reputation and customer relationships, provide a competitor with a
first-to-market opportunity or allow a competitor to achieve greater market
share.
If we fail to win contracts at the beginning of our telecommunications
customers' deployment cycles, we may not be able to sell products to those
22
customers for an extended period of time, which could inhibit our growth.
Our existing and potential telecommunications customers generally select a
limited number of suppliers at the beginning of a deployment cycle. As a result,
if we are not selected as one of these suppliers, we may not have an opportunity
to sell products to that customer until its next purchase cycle, which may be an
extended period of time. In addition, if we fail to win contracts from existing
and potential customers that are at an early stage in their design cycle, our
ability to sell products to these customers in the future may be adversely
affected because they may prefer to continue purchasing products from their
existing vendor. Since we rely on a small number of customers for the majority
of our sales, our failure to capitalize on limited opportunities to win
contracts with these customers could severely harm us.
Since the sales cycle for our products is typically long and unpredictable, we
have difficulty predicting future net revenue and our net revenue and operating
results may fluctuate significantly.
A customer's decision to purchase our products often involves a significant
commitment of its resources and a lengthy evaluation and product qualification
process. Our sales cycle varies from a few months to over a year. As a result,
we may incur substantial sales and marketing expenses and expend significant
management effort without any assurance of a sale. A long sales cycle also
subjects us to other risks, including customers' budgetary constraints, internal
acceptance reviews and order reductions or cancellations. Even after deciding to
purchase our products, our customers often deploy our products slowly.
The telecommunications industry is characterized by rapidly changing
technologies. If we are unable to develop and maintain strategic relationships
with vendors of emerging technologies, we may not be able to meet the changing
needs of our customers.
Our success will depend on our ability to develop and maintain strategic
relationships with vendors of emerging technologies. We depend on these
relationships for access to information on technical developments and
specifications that we need to develop our products. We also may not be able to
predict which existing or potential partners will develop leading technologies
or industry standards. We may not be able to maintain or develop strategic
relationships or replace strategic partners that we lose. If we fail to develop
or maintain strategic relationships with companies that develop necessary
technologies or create industry standards, our products could become obsolete.
We could also be at a competitive disadvantage in attempting to negotiate
relationships with those potential partners in the future. In addition, if any
strategic partner breaches or terminates its relationship with us, we may not be
able to sustain or grow our business.
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. Effective
April 1, 2001, we transferred primary manufacturing responsibility of our
products from Flextronics International Limited to 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
23
would harm our ability to meet our scheduled product deliveries to our
customers, harm our reputation and could cause the loss of existing or potential
customers, any of which could seriously harm our business and operating results.
We depend on sole source and limited source suppliers for key components. If we
are unable to buy components on a timely basis, we will not be able to deliver
our products to our customers on time which could cause us to lose customers. If
we purchase excess components to reduce this risk, we may incur significant
inventory costs.
We obtain several of the key components used in our products, including
interface circuits, microprocessors, digital signal processors, digital
subscriber line modules and flash memory, from single or limited sources of
supply. We have encountered, and expect in the future to encounter, difficulty
in obtaining these components from our suppliers. We purchase most components on
a purchase order basis and we do not have guaranteed supply arrangements with
most of our key suppliers. Financial or other difficulties faced by our
suppliers or significant changes in demand for these components could limit the
availability of these components to us at acceptable prices and on a timely
basis, if at all. Any interruption or delay in the supply of any of these
components, or our inability to obtain these components from alternate sources
at acceptable prices and within a reasonable amount of time, would limit our
ability to meet scheduled product deliveries to our customers or force us to
reengineer our products, which may hurt our gross margins and our ability to
deliver products on a timely basis, if at all. A substantial period of time
could be required before we would begin receiving adequate supplies from
alternative suppliers, if available. In addition, qualifying additional
suppliers is time consuming and expensive and exposes us to potential supplier
production difficulties or quality variations.
The telecommunications market is becoming increasingly global. While we plan to
expand internationally, we have limited experience operating in international
markets. In our efforts to expand internationally, we could become subject to
new risks which could hamper our ability to establish and manage our
international operations.
We have sales and customer support personnel covering the United Kingdom
and Latin America and have initiated distribution relationships in Europe. We
have limited experience in marketing and distributing our products
internationally and in developing versions of our products that comply with
local standards. In addition, our international operations will be subject to
other inherent risks, including:
o the failure to adopt regulatory changes that facilitate the
provisioning of competitive communications services;
o difficulties adhering to international protocol standards;
o expenses associated with customizing products for other countries;
o protectionist laws and business practices that favor local
competition;
o reduced protection for intellectual property rights in some countries;
o difficulties enforcing agreements through other legal systems and in
complying with foreign laws;
o fluctuations in currency exchange rates;
o political and economic instability; and
o import or export licensing requirements.
The complex nature of our telecommunications products requires us to provide our
customers with a high level of service and support by highly trained personnel.
If we do not expand our customer service and support organization, we will not
be able to meet our customers' demands.
We currently have a small customer service and support organization, and we
will need to increase these resources to support any increase in the needs of
our existing and new customers. Hiring customer service and support personnel in
our industry is very competitive due to the limited number of people available
with the necessary technical skills and understanding of our technologies. If we
are unable to expand or maintain our customer service and support organization,
our customers may become dissatisfied and we could lose customers and our
24
reputation could be harmed. A reputation for poor service would prevent us from
increasing sales to existing or new customers.
The competition for qualified personnel has been intense in our industry and in
Northern California. If we are unable to attract and retain key personnel, we
may not be able to sustain or grow our business.
Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, marketing, engineering and
management personnel, many of whom would be difficult to replace. None of our
officers or key employees is bound by an employment agreement for any specific
term, and we do not have "key person" life insurance policies covering any of
our employees. The competition for qualified personnel has been strong in our
industry and in Northern California, where there is a high concentration of
established and emerging growth technology companies. This competition could
make it more difficult to retain our key personnel and to recruit new highly
qualified personnel. Our Chief Executive Officer resigned April 1, 2002. W.
Michael West, Chairman of the Board of Directors, has been appointed interim
Chief Executive Officer. We are currently undertaking a search for a permanent
Chief Executive Officer; however, we do not know when, or if, we will find a
suitable candidate. To attract and retain qualified personnel, we may be
required to grant large option or other stock-based incentive awards, which may
be highly dilutive to existing shareholders. We may also be required to pay
significant base salaries and cash bonuses to attract and retain these
individuals, which payments could harm our operating results. If we are not able
to attract and retain the necessary personnel, we could face delays in
developing our products and implementing our sales and marketing plans and we
may not be able to grow our business.
We rely on a combination of patent, copyright, trademark and trade secret laws,
as well as confidentiality agreements and licensing arrangements, to establish
and protect our proprietary rights. Failure to protect our intellectual property
will limit our ability to compete and result in a loss of a competitive
advantage and decreased net revenue.
Our success and ability to compete depend substantially on our proprietary
technology. Any infringement of our proprietary rights could result in
significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased net
revenue. We presently have four U.S. patent applications pending, but no issued
patents. Despite our efforts to protect our proprietary rights, existing
copyright, trademark and trade secret laws afford only limited protection. In
addition, the laws of many foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States. Attempts may be
made to copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may not be able to
protect our proprietary rights against unauthorized third party copying or use.
Furthermore, policing the unauthorized use of our products is difficult.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. This litigation could result in substantial
costs and diversion of resources and may not ultimately be successful.
We may be subject to intellectual property infringement claims that are costly
to defend and could limit our ability to use some technologies in the future.
Our industry is characterized by frequent intellectual property litigation
based on allegations of infringement of intellectual property rights. From time
to time, third parties have asserted, and may assert in the future, patent,
copyright, trademark and other intellectual property rights to technologies or
rights that are important to our business. In addition, our agreements may
require that we indemnify our customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third parties. Any claims asserting that our products infringe or may infringe
the proprietary rights of third parties, with or without merit, could be
time-consuming, result in costly litigation and divert the efforts of our
technical and management personnel. These claims could cause us to stop selling,
incorporating or using our products that use the challenged intellectual
property and could also result in product shipment delays or require us to
redesign or modify our products or enter into licensing agreements. These
25
licensing agreements, if required, could increase our product costs and may not
be available on terms acceptable to us, if at all.
If necessary licenses of third-party technology are not available to us or are
very expensive, we may be unable to develop new products or product
enhancements.
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. These third-party
licenses may not be available to us on commercially reasonable terms, if at all.
Our inability to obtain necessary third-party licenses may force us to obtain
substitute technology of lower quality or performance standards or at greater
cost, any of which could seriously harm the competitiveness of our products.
Because our headquarters are located in Northern California, which is a region
containing active earthquake faults if a natural disaster occurs or the power
energy crisis continues, our business could be shut down or severely impacted.
Our business and operations depend on the extent to which our facility and
products are protected against damage from fire, earthquakes, power loss and
similar events. Despite precautions taken by us, a natural disaster or other
unanticipated problem could, among other things, hinder our research and
development efforts, delay the shipment of our products and affect our ability
to receive and fulfill orders.
Risks Associated With The Multiservice Broadband Access Industry
Intense competition in the market for our telecommunications products could
prevent us from increasing or sustaining our net revenue and prevent us from
achieving or sustaining profitability.
The market for multiservice broadband access products is highly
competitive. We compete directly with numerous companies, including Accelerated
Networks, Adtran, Alcatel, Carrier Access, Cisco Systems, Lucent Technologies,
Siemens, Zhone Technologies and Polycom. Many of our current and potential
competitors have longer operating histories, greater name recognition,
significantly greater selling and marketing, technical, manufacturing,
financial, customer support, professional services and other resources,
including vendor-sponsored financing programs. As a result, these competitors
are able to devote greater resources to the development, promotion, sale and
support of their products to leverage their customer bases and broaden product
offerings to gain market share. In addition, our competitors may foresee the
course of market developments more accurately than we do and could develop new
technologies that compete with our products or even render our products
obsolete. We may not have sufficient resources to continue to make the
investments or achieve the technological advances necessary to compete
successfully with existing or new competitors. In addition, due to the rapidly
evolving markets in which we compete, additional competitors with significant
market presence and financial resources, including other large
telecommunications equipment manufacturers, may enter our markets and further
intensify competition.
We believe that our existing OEM customers continuously evaluate whether to
offer their own multiservice broadband access devices. If our OEM customers
decide to internally design and sell their own multiservice broadband access
devices, or acquire one or more of our competitors or their broadband access
technologies, they could eliminate or substantially reduce their purchases of
our products. One of our OEM customers, Lucent Technologies, accounted for
approximately 44% of our net revenue for the year ended December 31, 2001. In
addition, growth of our business may cause our OEM customers, including Lucent,
to view us as greater competition. Our OEM relationships could also be harmed as
we develop and market new products that may compete directly with the products
of our OEM customer. For example, our MBX product may compete with products
offered by Lucent, which could adversely affect our relationship with that
customer. We cannot assure you that our OEM customers will continue to rely, or
expand their reliance, on us as an external source of supply for their
multiservice broadband access devices. Because we rely on one OEM customer for a
substantial portion of our net revenue, a loss of sales to this OEM customer
could seriously harm our business, financial condition and results of
operations.
26
Because our industry is characterized by consolidation, we could potentially
lose customers, which would harm our business.
The markets in which we compete are characterized by increasing
consolidation, as exemplified by the acquisitions of Sonoma Systems by Nortel
Networks, Efficient Networks by Siemens and PairGain Technologies by ADC
Telecommunications. We cannot predict how industry consolidation will affect our
competitors and we may not be able to compete successfully in an increasingly
consolidated industry.
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.
In the past, competitive pressures have forced us to reduce the prices of
our products. In the second quarter of 1999, we reduced the price of our T1
Integrator product, now known as the Integrator-300, product in response to
competition, which reduced our gross margins in subsequent periods. 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.
Sales of our products depend on the widespread adoption of multiservice
broadband access services and if the demand for multiservice broadband access
services does not develop, then our results of operations and financial
condition could be harmed.
Our business will be harmed if the demand for multiservice broadband access
services does not increase as rapidly as we anticipate, or if our customers'
multiservice broadband access service offerings are not well received in the
marketplace. Critical factors affecting the development of the multiservice
broadband access services market include:
o the development of a viable business model for multiservice broadband
access services, including the capability to market, sell, install and
maintain these services;
o the ability of competitive local exchange carriers, or CLECs, to
obtain sufficient funding and to successfully grow their businesses.
o cost constraints, such as installation, space and power requirements
at the central offices of incumbent local exchange carriers, or ILECs;
o compatibility of equipment from multiple vendors in service provider
networks;
o evolving industry standards for transmission technologies and
transport protocols;
o varying and uncertain conditions of the communications network
infrastructure, including quality and complexity, electrical
interference, and crossover interference with voice and data
telecommunications services;
o domestic and foreign government regulation; and
The market for multiservice broadband access devices may fail to develop
for these or other reasons or may develop more slowly than anticipated, which
could harm our business.
If we fail to comply with regulations and evolving industry standards, sales of
our existing and future products could be harmed.
The markets for our products are characterized by a significant number of
communications regulations and standards, some of which are evolving as new
technologies are deployed. Our customers may require our products to comply with
various standards, including those promulgated by the Federal Communications
Commission, or FCC, standards established by Underwriters Laboratories and
Telcordia Technologies or proprietary standards promoted by our competitors. In
addition, our key competitors may establish proprietary standards which they
27
might not make available to us. As a result, we may not be able to achieve
compatibility with their products. Internationally, we may also be required to
comply with standards established by telecommunications authorities in various
countries as well as with recommendations of the International
Telecommunications Union.
Our customers are subject to government regulation, and changes in current or
future laws or regulations that negatively impact our customers could harm our
business.
The jurisdiction of the FCC extends to the entire communications industry,
including our customers. Future FCC regulations affecting the broadband access
industry, our customers or their service offerings may harm our business. For
example, FCC regulatory policies that affect the availability of data and
Internet services may impede our customers' penetration into markets or affect
the prices that they are able to charge. In addition, international regulatory
bodies are beginning to adopt standards and regulations for the broadband access
industry. If our customers are hurt by laws or regulations regarding their
business, products or service offerings, demand for our products may decrease.
Additional Risks That May Affect Our Stock Price
We may engage in future acquisitions or strategic investments that we may not be
able to successfully integrate or manage, which could hurt our business. These
acquisitions or strategic investments may also dilute our stockholders and cause
us to incur debt and assume contingent liabilities.
We may review acquisition prospects and strategic investments that could
complement our current product offerings, augment our market coverage, enhance
our technical capabilities or otherwise offer growth opportunities. For example,
in February 2001 we acquired Woodwind Communications Systems, Inc., a provider
of voice-over-broadband network edge access solutions, and in December 2001 we
acquired certain assets of Metrobility Optical Systems, Inc., in both cases in
exchange for shares of our common stock. The issuance of equity securities in
connection with future acquisitions or investments could significantly dilute
our investors. If we incur or assume debt in connection with future acquisitions
or investments, we may incur interest charges that could increase our net loss.
We have little experience in evaluating, completing, managing or integrating
acquisitions and strategic investments. Acquisitions and strategic investments
may entail numerous integration risks and impose costs on us, including:
o difficulties in assimilating acquired operations, technologies or
products including the loss of key employees;
o unanticipated costs;
o diversion of management's attention from our core business concerns;
o adverse effects on business relationships with our suppliers and
customers or those of the acquired businesses;
o risks of entering markets in which we have no or limited prior
experience;
o assumption of contingent liabilities;
o incurrence of significant amortization expenses related to intangible
assets; and
o incurrence of significant write-offs.
Our stock has traded at or below $1.00 for more than 90 consecutive days, and as
a result, our stock may be delisted from the Nasdaq National Market.
Our common stock has recently traded at or below $1.00. In April 2002, we
received notification from Nasdaq that for 30 consecutive days, our common stock
had closed below the minimum $1.00 per share requirement for continued listing
on the Nasdaq National Market. To return to compliance, the bid price of our
common stock must have closed at or above $1.00 for at least 10 consecutive
trading days by July 3, 2002, which it failed to do. On July 5, 2002 we received
further notification from Nasdaq that we had failed to comply with the minimum
bid price requirement for continued listing on the Nasdaq National Market and
that our common stock was therefore subject to delisting from the Nasdaq
National Market. We have requested a hearing before the Nasdaq Listing
Qualifications Panel to appeal the delisting determination. Our common stock
will continue to trade on the Nasdaq National Market pending the appeal, which
is scheduled for August 22, 2002, and the Nasdaq Listing Qualifications Panel's
28
final decision. If our stock is delisted from the Nasdaq National Market, our
stockholders would find it more difficult to dispose of, and obtain, accurate
quotations as to the market value of, their shares, and the market price of our
stock would likely decline further.
We may need to raise more capital, but the availability of additional financing
is uncertain. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures, which could negatively impact our product development and sales.
In the quarter ended December 31, 2001 we sold 22,150,369 shares of our
common stock and warrants to purchase 7,090,000 shares of our common stock for
approximately $14.2 million. If our capital requirements vary significantly from
those currently planned, we may require additional financing sooner than
anticipated. If additional funds are raised through the issuance of equity
securities, the percentage 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.
If adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our products and services, take advantage of
future opportunities or respond to competitive pressures, which could negatively
impact our product development and sales.
Our stock price may be volatile, and you may not be able to resell our shares at
or above the price you paid, or at all.
In August 2000 we completed our initial public offering. Prior to our
initial public offering there had not been a public market for our common stock.
The stock market in general, and the Nasdaq National Market and technology
companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of companies. The trading prices and valuations of many technology companies are
substantially above historical levels. These trading prices and valuations may
not be sustainable. These broad market and industry factors may decrease the
market price of our common stock, regardless of our actual operating
performance.
Substantial future sales of our common stock in the public market could cause
our stock price to fall.
Additional sales of our common stock in the public market after this
offering, or the perception that such sales could occur, could cause the market
price of our common stock to decline.
Many corporate actions would be controlled by officers, directors and affiliated
entities, if they acted together, regardless of the desire of other investors to
pursue an alternative course of action.
As of March 31, 2002, our directors, executive officers and their
affiliated entities beneficially owned approximately 71.1% of our outstanding
common stock after giving effect to the stockholders agreement executed by
Jeffrey Drazan and certain entities affiliated with Sierra Ventures. These
stockholders, if they acted together, could exert control over matters requiring
approval by our stockholders, including electing directors and approving mergers
or other business combination transactions. This concentration of ownership may
also discourage, delay or prevent a change in control of our company, which
could deprive our stockholders of an opportunity to receive a premium for their
stock as part of a sale of our company and might reduce our stock price. These
actions may be taken even if they are opposed by our other stockholders,
including those who purchase shares in this offering.
Delaware law, our corporate charter and bylaws and our stockholder rights plan
contain anti-takeover provisions that would delay or discourage take over
attempts that stockholders may consider favorable.
29
Provisions in our restated certificate of incorporation and bylaws may have
the effect of delaying or preventing a change of control or changes in our
management. These provisions include:
o the right of the board of directors to elect a director to fill a
vacancy created by the expansion of the board of directors;
o the ability of the board of directors to alter our bylaws without
obtaining stockholder approval;
o the establishment of a classified board of directors;
o the ability of the board of directors to issue, without stockholder
approval, up to five million shares of preferred stock with terms set
by the board of directors which rights could be senior to those of
common stock; and
o the elimination of the right of stockholders to call a special meeting
of stockholders and to take action by written consent.
Each of these provisions could discourage potential take over attempts and
could lower the market price of our common stock.
We have adopted a stockholder rights plan and declared a dividend
distribution of one right for each outstanding share of common stock to
stockholders of record as of August 6, 2001. Each right, when exercisable,
entitles the registered holder to purchase from VINA one one-thousandth of a
share of a new series of preferred stock, designated as Series A Participating
Preferred Stock, at a price of $35.00 per one one-thousandth of a share, subject
to adjustment. The rights will generally separate from the common stock and
become exercisable if any person or group acquires or announces a tender offer
to acquire 20% or more of our outstanding common stock without the consent of
our board of directors. Because the rights may substantially dilute the stock
ownership of a person or group attempting to take us over without the approval
of our board of directors, our stockholder rights plan could make it more
difficult for a third party to acquire us (or a significant percentage of our
outstanding capital stock) without first negotiating with our board of directors
regarding such acquisition.
In addition, because we are incorporated in Delaware, we are governed by
the provisions of Section 203 of the Delaware General Corporation Law. These
provisions may prohibit large stockholders, in particular those owning 15% or
more of our outstanding voting stock, from merging or combining with us. These
provisions in our charter, bylaws and under Delaware law could reduce the price
that investors might be willing to pay for shares of our common stock in the
future and result in the market price being lower than it would be without these
provisions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks related to interest rates and
foreign currency exchange rates. Our investments in commercial paper and debt
obligations are subject to interest rate risk, but due to the short-term nature
of these investments, interest rate changes would not have a material impact on
their value as of December 31, 2001 or at March 31, 2002. To date, our
international sales have been denominated primarily in U.S. dollars, and
accordingly, a hypothetical change of 10% in the foreign currency exchange rates
would not have a material impact on our consolidated financial position or the
results of operations. The functional currency of our subsidiary in the United
Kingdom is the U.S. dollar and as the local accounts are maintained in British
pounds, we are subject to foreign currency exchange rate fluctuations associated
with remeasurement to U.S. dollars. A hypothetical change of 10% in the foreign
currency exchange rates would not have a material impact on our consolidated
financial position or the results of operations.
30
PART II: OTHER INFORMATION
Item 1. 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 2. Changes in Securities and Use of Proceeds
(d) On August 9, 2000, the SEC declared effective our Registration
Statement on Form S-1 (No. 333-36398), relating to the initial public offering
of our common stock. The managing underwriters in the offering were Lehman
Brothers, Inc., Thomas Weisel Partners LLC and U.S. Bancorp Piper Jaffray, Inc.
The offering commenced on August 10, 2000, and was closed on August 15, 2000,
after we sold all of the 3,000,000 shares of common stock registered under the
Registration Statement. On September 15, 2000, the underwriters purchased
450,000 shares from us in connection with the exercise of the underwriters'
over-allotment option. The initial public offering price was $12 per share for
an aggregate initial public offering of $41.4 million (including the 450,000
shares sold to the underwriters upon exercise of the over-allotment option),
netting proceeds of approximately $36.5 million to us after underwriting fees of
approximately $2.9 million and other offering expenses of approximately $2.0
million. None of these fees and expenses were paid to any director, officer,
general partner of the Company or their associates, persons owning 10% or more
of any class of equity securities of the Company or an affiliate of the Company.
The net proceeds were predominately held in a money market fund and
commercial paper and bonds as of March 31, 2002. Of the net proceeds
approximately $7.5 million was used towards partial consideration of the
purchase of Woodwind Communications Systems, Inc. and $17.1 million was used
towards operating expenses of the business.
Item 4. Submission of Matters to a Vote of Security Holders.
VINA held its annual meeting of stockholders on June 6, 2002. At that
meeting, two of our incumbent Class II directors were reelected to office by the
following vote:
Name Votes For Votes Withheld
---- --------- --------------
John F. Malone 51,592,239 72,804
W. Michael West 51,592,239 72,804
The stockholders also ratified the appointment of Deloitte & Touche LLP as
independent auditors for VINA's current fiscal year, (with 51,542,327 votes for,
108,839 votes against, 13,877 votes abstaining and 0 broker non-votes).
The stockholders also approved amendments to VINA's Restated Certificate of
Incorporation to effect, alternatively, as determined by the Board of Directors
in its discretion, a 1-for-4 reverse stock split, (with 51,273,183 votes for,
375,599 votes against, 16,260 votes abstaining and 0 broker non-vote), 1-for-5
reverse stock split (with 50,975,254 votes for, 665,505 votes against, 24,283
votes abstaining and 1 broker non-vote) or 1-for-6 reverse stock split of the
issued and outstanding shares of VINA's common stock (with 50,954,357 votes for,
694,050 votes against, 16,635 votes abstaining and 1 broker non-vote).
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VINA TECHNOLOGIES, INC.
Date: August 19, 2002 By: /s/ W. Michael West
----------------------
W. Michael West
Chief Executive Officer
(Principal Executive Officer)
Date: August 19, 2002 By: /s/ Stanley E. Kazmierczak
-----------------------------
Stanley E. Kazmierczak
Chief Financial Officer
(Principal Financial and Accounting
Officer)
32