Back to GetFilings.com
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 September 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 62,070,636 as of September 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..........29
PART II: OTHER INFORMATION...................................................31
Item 1. Legal Proceedings...................................................31
Item 2. Changes in Securities and Use of Proceeds...........................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, September 30,
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 15,805 $ 7,169
Restricted cash ................................................. 500 3,500
Common stock subscription receivable ............................ 9,589 --
Accounts receivable, net ........................................ 8,059 3,234
Inventories ..................................................... 5,733 3,687
Prepaid expenses and other ...................................... 1,562 2,924
--------- ---------
Total current assets ........................................ 41,248 20,514
Property and equipment, net ....................................... 5,271 2,646
Other assets ...................................................... 356 324
Acquired intangibles, net ......................................... 5,663 1,510
Goodwill, net ..................................................... 26,426 --
--------- ---------
Total assets ................................................ $ 78,964 $ 24,994
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 7,798 $ 3,895
Accrued compensation and related benefits ....................... 2,234 1,428
Accrued warranty ................................................ 696 503
Other current liabilities ....................................... 2,708 2,972
Short-term debt ................................................. -- 3,000
--------- ---------
Total current liabilities ................................... 13,436 11,798
Stockholders' equity:
Convertible preferred stock; $0.0001 par value; 5,000,000 shares
authorized; none issued and outstanding ........................... -- --
Common stock; $0.0001 per value; 125,000,000 shares authorized; shares
outstanding: December 31, 2001, 62,013,759; September 30, 2002,
62,070,636 ...................................................... 6 6
Additional paid-in capital ...................................... 194,814 189,395
Deferred stock compensation ..................................... (7,106) (510)
Accumulated deficit ............................................. (122,186) (175,695)
--------- ---------
Total stockholders' equity .................................. 65,528 13,196
--------- ---------
Total liabilities and stockholders' equity .................. $ 78,964 $ 24,994
========= =========
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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Net revenue ................................................$ 12,844 $ 6,035 $ 35,755 $ 19,098
Cost of revenue
(excluding stock-based compensation) ..................... 7,799 3,555 23,115 13,841
-------- -------- -------- --------
Gross profit
(excluding stock-based compensation) ..................... 5,045 2,480 12,640 5,257
-------- -------- -------- --------
Costs and expenses:
Research and development
(excluding stock-based compensation) ................... 4,244 2,649 13,788 11,834
Selling, general and administrative
(excluding stock-based compensation) ................... 4,832 3,546 17,638 12,364
Stock-based compensation* ................................. 55 1,030 8,381 1,180
Purchased process technology .............................. -- -- 5,081 --
Amortization of intangible assets ......................... 2,419 169 5,823 673
Impairment of goodwill and intangible assets .............. -- 507 -- 29,783
Restructuring expenses
(excluding stock-based compensation) .................. 991 1,536 991 3,111
-------- -------- -------- --------
Total costs and expenses ............................. 12,541 9,437 51,702 58,945
-------- -------- -------- --------
Loss from operations ....................................... (7,496) (6,957) (39,062) (53,688)
Interest income, net ....................................... 277 23 1,269 179
-------- -------- -------- --------
Net loss ...................................................($ 7,219) ($ 6,934) ($37,793) ($53,509)
======== ======== ======== ========
Net loss per share, basic and diluted ......................($ 0.20) ($ 0.11) ($ 1.08) ($0.87)
======== ======== ======== ========
Shares used in computation, basic and diluted .............. 36,139 61,623 34,837 61,567
======== ======== ======== ========
__________________________________
* Stock-based compensation:
Cost of revenue......................................$ 219 $ 234 $ 833 $ 519
Research and development............................. 897 570 3,924 1,099
Selling, general and administrative.................. 1,508 988 6,193 1,871
Restructuring benefit................................ (2,569) (762) (2,569) (2,309)
-------- -------- -------- --------
$ 55 $ 1,030 $ 8,381 $ 1,180
======== ======== ======== ========
See notes to condensed consolidated financial statements
4
VINA TECHNOLOGIES, INC.
Condensed Consolidated Statements Of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-------------
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $(37,793) $(53,509)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 7,182 2,302
Disposal of property and equipment .............................. -- 1,603
Impairment of goodwill and intangible assets .................... -- 29,783
Stock-based compensation ........................................ 8,381 1,180
In-process research and development ............................. 5,081 --
Provision for inventory order commitment ........................ 1,800 1,700
Changes in operating assets and liabilities:
Accounts receivable ............................................. (4,182) 4,825
Inventories ..................................................... (4,426) 346
Prepaid expenses and other ...................................... 729 (1,362)
Other assets .................................................... (226) 32
Accounts payable ................................................ 1,345 (3,903)
Accrued compensation and related benefits ....................... (1,218) (806)
Accrued warranty ................................................ 106 (193)
Other current liabilities ....................................... (616) 264
-------- --------
Net cash used in operating activities .......................... (23,837) (17,738)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................... (983) (608)
Acquisition of business, net of cash acquired ..................... (454) --
Purchases of short-term investments ............................... (1,050) --
Proceeds from sales/maturities of short-term investments .......... 37,261 --
-------- --------
Net cash provided by (used in) investing activities ............ 34,774 (608)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt ......................... -- 3,000
Restricted cash ................................................... -- (3,000)
Proceeds from sale of common stock ................................ 1,016 9,817
Repurchase of common stock ........................................ (578) (107)
-------- --------
Net cash provided by financing activities ...................... 438 9,710
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................. 11,375 (8,636)
CASH AND CASH EQUIVALENTS, Beginning of period ...................... 7,740 15,805
-------- --------
CASH AND CASH EQUIVALENTS, End of period ............................ $ 19,115 $ 7,169
======== ========
5
VINA TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Unaudited 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 September 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 nine months ended September 30, 2002, the
Company used cash in operating activities of $17.7 million. As of September 30,
2002, the Company had cash and cash equivalents of $7.2 million and its
accumulated deficit was $175.7 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
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
6
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 nine months ended
September 30, 2001 was $7.3 million and $37.8 million respectively, and included
$44,000 and $48,000, respectively, of net unrealized losses on available for
sale investments. Comprehensive loss for the three and nine months ended
September 30, 2002 was the same as net loss.
Recent Accounting Standards - In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite lives
will not be amortized, but will be tested at least annually for impairment. 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).
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
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 and third quarters of 2001, $146,000 and $166,000 respectively were
reclassified as decreases to selling, general and administrative expenses and
corresponding decreases to net revenue. The amount to be reclassified in the
fourth quarter of 2001 is $161,000.
7
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, September 30,
2001 2002
---- ----
Raw materials and subassemblies... $ 1,783 $ 1,373
Finished goods.................... 3,950 2,314
------- --------
Inventories....................... $ 5,733 $ 3,687
======= ========
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 Nine Months Ended
September 30, September 30,
------------------------------------------------------
2001 2002 2001 2002
---- ---- ---- ----
Weighted average common shares
outstanding .................................. 37,133 62,043 36,051 62,105
Weighted average common shares outstanding
subject to repurchase ........................ (994) (420) (1,214) (538)
------ ------- ------ ------
Shares used in computation, basic and
diluted ...................................... 36,139 61,623 34,837 61,567
====== ====== ====== ======
During the three and nine months ended September 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 share 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: September 30, 2001, 877,874 shares of common stock subject to
repurchase and options to purchase 13,554,695 shares of common stock; September
30, 2002, 380,666 shares of common stock subject to repurchase and options to
purchase 7,497,142 shares of common stock, and warrants to purchase 7,090,000
shares of common stock.
4. Goodwill and Intangible Assets
As 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, the measurement of the fair value for
goodwill is our 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 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" we evaluated the intangible assets
for impairment and determined a portion of the intangible assets were impaired.
We recorded a $29.8 million impairment charge during the nine months ended
8
September 30, 2002. The amount was comprised of $27.3 million of goodwill, in
the first quarter of 2002, and $2.0 million and $500,000 of intangible assets,
in the first and third quarters of 2002, respectively.
Intangible assets consist of the following (in thousands):
December 31, 2001 September 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 $ (935) $ (1,963) -
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 (349) - $ 1,510
Workforce-in-place 3 years 1,236 (343) 893 - - - -
---------------------------------------------------------------------------------
Total $ 6,773 $ (1,110) $ 5,663 $ 5,413 $ (1,440) $ (2,463) $ 1,510
=================================================================================
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 three months) 2002 $ 116
2003 465
2004 465
2005 464
------------------
Total Amortization $ 1,510
==================
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows (in thousands):
Balance as of January 1, 2002 $ 27,319
Impairment loss (27,319)
-----------
Balance as of September 30, 2002 $ -
===========
Had the provisions 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 Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
---- ---- ---- ----
Net loss as reported ..................... $(7,219) $ (6,934) $(37,793) $(53,509)
Add back amortization:
Goodwill ............................. 2,086 -- 5,047 --
Workforce-in-place ................... 103 -- 240 --
Tradename ........................... 22 -- 51 --
Adjusted net loss ........................ $(5,008) $ (6,934) $(32,455) $(53,509)
==========================================================
EPS - basic and diluted, as reported ..... $ (0.20) $ (0.11) $ (1.08) $ (0.87)
Goodwill, workforce-in-place and .........
tradename amortization ................... 0.06 -- 0.15 --
----------------------------------------------------------
Adjusted EPS ............................. $ (0.14) $ (0.11) $ (0.93) $ (0.87)
==========================================================
9
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 $1.5 million as of September 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 nine months ended September 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):
Nine Months Ended
September 30,
2001
----
Net revenue $ 35,757
Net loss ($37,491)
Net loss per share ($1.05)
Shares used in calculation of net loss per share 35,728
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 and July 2002, the Company announced and completed restructuring
plans intended to better align its operations with the changing market
conditions. The plans was designed to prioritize VINA's growth areas of
business, focus on profit contribution and reduce expenses. The restructurings
includes a workforce reduction and other operating reorganizations. As a result
of the restructuring efforts, the Company reduced its workforce by approximately
23% and 26% in April and July 2002, respectively.
A summary of the restructuring accrual as of September 30, 2002 were as follows
(in thousands):
Stock
Workforce Compensation Abandonment of Capital
Reductions Benefit Facilities Equipment Total
---------------------------------------------------------------------
2001 remaining provision $ 46 $ - $ - $ - $ 46
April 2002 provision 835 (1,547) 400 340 28
July 2002 provision 602 (762) 35 945 820
Net provision utilized (1,483) 2,309 (102) (1,285) (561)
---------------------------------------------------------------------
Balance at September 30, 2002 $ 0 $ 0 $ 333 $ 0 333
=====================================================================
10
Workforce reduction - These restructuring programs resulted in the reduction of
80 employees across all functions (43 in April of 2002 and 37 in July 2002). As
of September 30, 2002, we have disbursed the total amount related to the 2002
severance, $1,437,000, and have reversed $46,000 pertaining to the remaining
balance from the 2001 workforce reduction.
Stock compensation benefit - In connection with the April 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. The July workforce reduction
resulted in a benefit of $762,000 for the reversal of prior period estimated
stock compensation expense on forfeited stock options.
Abandonment of facilities - Part of the restructuring included the closure of
our engineering facilities in Maryland and Texas in April 2002 and July 2002,
respectively. The remaining balance of $333,000 related to abandonment of
facilities will be disbursed over the term of the remaining leases ending in
2004.
Capital equipment - As a result of the closing of our Maryland and Texas
facilities and our reductions in headcount, we determined that we had excess
capital equipment with total book values substantially less than marketable
value. We finalized the dispositions in September of 2002.
7. 2002 Stock Option Exchange Program
In May 2002, our Board of Directors approved a Stock Option Exchange Program.
Under this program, eligible employees may elect to exchange certain outstanding
stock option grant with an exercise price greater than or equal to $1.00 for a
new option to purchase the same number of shares of VINA Technologies Inc.
common stock. The replacement option will be issued at least six months and one
day after the cancellation date. The new options will be issued from VINA
Technologies, Inc. 2000 Stock Option Plan and will be non-statutory stock
options. The individuals participating in this program must be employees of VINA
Technologies, Inc. on the replacement grant date to be eligible to receive the
new stock options. No consideration for the canceled stock options will be
provided to individuals terminating employment prior to the replacement grant
date. The new option will have an exercise price equal to VINA Technologies Inc.
common stock's closing price on the date prior to the replacement grant. The new
stock options will vest on the same schedule as the canceled options. At the
expiration date of this program, August 15, 2002, the Company had accepted for
exchange options to purchase 2,692,082 shares of common stock, representing
approximately 38% of the options that were eligible to be tendered.
8. Commitments and Contingencies
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 September 30, 2002, the estimated purchase commitments and non-cancelable
purchase orders to those companies is $3.0 million. In August 2002, VINA placed
$1.0 million on deposit with our contract manufacturer as security against these
purchase commitments.
As of September 30, 2002, we had $3,500,000 in restricted cash. This cash is
comprised of two separate restricted cash items. We had a certificate of deposit
for $3.0 million, this amount is not available to fund operations, as it secured
a $3.0 million committed revolving line of credit that had been utilized at
September 30, 2002. We also have an irrevocable letter of credit of $500,000
that is used as collateral for the lease on the Newark, California facility.
As of September 30, 2002, we have lease commitments of $5.0 million for leases
on four properties, which expire by September 30, 2007.
11
The high technology and telecommunications industry in which we operate is
characterized by frequent claims and related litigation regarding patent and
other intellectual property rights. We are not a party to any such litigation;
however any such litigation in the future could have a material adverse effect
on our consolidated operations and cash flows.
9. Short-term Debt
As of September 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 (see note 10).
10. Subsequent Events
As of September 30, 2002, we had a certificate of deposit for $3.0 million that
secured a $3.0 million committed revolving line of credit. In October 2002, the
Company remitted full payment for the $3.0 million revolving line of credit.
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, 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 identify and resolve software issues
and related applications deficiencies of our Multiservice Broadband Exchange
(MBX) product and the market acceptance of 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.
Recent Developments
As of September 30, 2002, we had a certificate of deposit for $3.0 million
that secured a $3.0 million committed revolving line of credit. In October 2002,
we remitted full payment for the $3.0 million revolving line of credit.
13
Overview
VINA Technologies, Inc. is a leading developer of multi-service broadband
access communications equipment that enables communications service providers to
deliver bundled voice and data services. Our products integrate various
broadband access technologies, including existing circuit-based and emerging
packet-based networks, onto a single platform to alleviate capacity constraints
in communications networks.
From our inception in June 1996 through February 1997, our operating
activities related primarily to developing and testing prototype products,
commencing the staffing of our sales and customer service organizations and
establishing relationships with our customers. We began shipping our
Multi-service Integrator-300 product family in March 1997, our Multiservice
Xchange product in May 1999, our eLink product family in November 2000, and our
MBX product in September 2001. Since inception, we have incurred significant
losses, and as of September 30, 2002, we had an accumulated deficit of $175.7
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 73% of our net revenue for
the nine months ended September 30, 2002. While the level of sales to any
specific customer is anticipated to vary from period to period, we expect that
we will continue to experience significant customer concentration for the
foreseeable future. To date, international sales have not been significant.
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 customer. A significant increase in revenue to these
OEM customer 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 multi-service broadband access
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
14
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
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 our company is it's 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.
15
Results of Operations
Three and Nine Months Ended September 30, 2002 and 2001
Net revenue. Net revenue decreased to $19.1 million for the nine months
ended September 30, 2002 from $35.8 million for the nine months ended September
30, 2001. Net revenue decreased to $6.0 million for the three months ended
September 30, 2002 from $12.8 million for the three months ended September 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 $14.4 million for the nine months ended September 30, 2002 from
$23.9 million for the nine months ended September 30, 2001 and decreased to $3.8
million for the three months ended September 30, 2002 from $8.0 million for the
three months ended September 30, 2001. These decreases were the result of lower
direct material costs from lower unit sales for three and nine, month periods
ended September 30, 2002. Gross profit including stock-based compensation
decreased to $4.7 million for the nine months ended September 30, 2002 from
$11.8 million for the nine months ended September 30, 2001. Gross profit
including stock-based compensation decreased to $2.2 million for the three
months ended September 30, 2002 from $4.8 million for the three months ended
September 30, 2001. These decreases were the result of lower revenue for the
nine and three month periods ended September 30, 2002. Gross profit including
stock-based compensation as a percentage of net revenue decreased to 25% for the
nine months ended September 30, 2002 from 33% for the nine months ended
September 30, 2001. Gross profit including stock-based compensation as a
percentage of net revenue decreased to 37% for the three months ended September
30, 2002 from 38% for the three months ended September 30, 2001. These decreases
were the result of lower revenue for the nine and three month periods ended
September 30, 2002, which caused fixed overhead 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 $12.9 million for the nine
months ended September 30, 2002, from $17.7 million for the nine months ended
September 30, 2001 and also decreased to $3.2 million for the three months ended
September 30, 2002 from $5.1 million for the three months ended September 30,
2001. The decreases in absolute dollar amounts were primarily a result of
decreases in stock-based compensation expense of $2.8 million for the nine month
period and $327,000 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 68% in the first nine
months of 2002 from 50% in the first nine months of 2001, and to 53% for the
three months ended September 30, 2002 from 40% for the three months ended
September 30, 2001 as our revenue decreased at a faster rate than research and
development expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses including stock-based compensation decreased to $14.2
million for the nine months ended September 30, 2002 from $23.8 million for the
nine months ended September 30, 2001 and decreased to $4.5 million for the three
months ended September 30, 2002 from $6.3 million for the three months ended
September 30, 2001. These decreases were primarily attributable a decrease in
stock-based compensation expense of $4.0 million for the nine month period and
$520,000 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 increased to 75% for the
first nine months of 2002 from 67% for the first nine months of 2001 and to 75%
for the three months ended September 30, 2002 from 49% for the three months
ended September 30, 2001, as our revenue decreased at a faster rate than
selling, general and administrative expenses.
Stock-based compensation. Stock-based compensation expense decreased to
$1.2 million for the nine months ended September 30, 2002 from $8.4 million for
the nine months ended September 30, 2001. The decrease is due primarily to our
use of the multiple option award approach for the amortizing deferred stock
compensation, which resulted in accelerated amortization. Stock-based
compensation expense for the three months ended September 30, 2002 was $1.0
million as compared to a stock compensation expense of $55,000 for the three
months ended September 30, 2001. This increase was primarily due to the higher
16
restructuring benefit in the three months ended September 30, 2001, offset
slightly by higher amortization of stock-based compensation in the three months
ending September 30, 2001.
Goodwill and intangible assets. As VINA operates in one reportable segment,
the design, development, marketing and sale of multi-service broadband access
communications equipment, and has only one reporting unit, VINA consolidated,
the measurement of the fair value for our goodwill is our market capitalization.
The deterioration of the telecom industry and the decline in our current product
sales in the first quarter of 2002 required us to evaluate the fair value of the
company's goodwill. We evaluated the fair value of our company as determined by
our market capitalization against our carrying value, net assets, and determined
that goodwill was impaired. In addition, under SFAS No. 144 "Accounting for the
Impairment of Disposal of Long-Lived Assets" we evaluated our intangible assets
for impairment and determined a portion of the intangible assets were impaired.
As a result, we recorded a $29.8 million impairment charge during the nine
months ended September 30, 2002. The amount was comprised of $27.3 million of
goodwill, in the first quarter of 2002, and $2.0 million and $500,000 of
intangible assets, in the first and third quarters of 2002, respectively.
Restructuring expenses. Restructuring expenses, excluding the impact of
stock-based compensation, of $1.5 million and $3.1 million for the three and
nine months ended September 30, 2002 resulted primarily from severance and
outplacement costs, abandonment of facilities costs and excess capital equipment
costs associated with the workforce reduction plans in the second and third
quarters of 2002. Including the impact of stock-based compensation, we recorded
a net restructuring charge of $774,000 and $802,000 for the three and nine
months ended September 30, 2002. As of September 30, 2002, we made $1.4 million
in severance and $102,000 in abandonment of facilities payments. The remaining
balance of $333,000 related abandonment of facilities will be disbursed over the
term of the remaining leases ending in 2004.
Interest income, net. Interest income, net for the nine months ended
September 30, 2002 decreased to $179,000 from $1.3 million for the nine months
ended September 30, 2001. Interest income, net for the three months ended
September 30, 2002 decreased to $23,000 from $277,000 for the three months ended
September 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 nine months ended September
30, 2002 was $17.7 million and $23.8 million for the nine months ended September
30, 2001. Cash used in operating activities for the nine months ended September
30, 2002 resulted primarily from the net loss from operations of $53.5 million,
an increase in other assets, a decrease in accounts payable and other accruals
of $1.4 million and $4.6 million, respectively, off-set by a net decrease in
accounts receivable of $4.8 million and non-cash activities including
depreciation, disposal, and amortization of fixed assets, goodwill and
intangible assets of $3.9 million, an inventory commitment purchase charge of
$1.7 million, and a write down of goodwill and intangible assets due to
impairment of $29.8 million.
Net cash used by investing activities was $608,000 for the nine months
ended September 30, 2002 and net cash provided in investing activities was $34.8
million for the nine months ended September 30, 2001. Cash used by investing
activities for the nine months ended September 30, 2002 was due to the purchase
of property and equipment of $608,000.
Net cash provided by financing activities was $9.7 million for the nine
months ended September 30, 2002 and $438,000 for the nine months ended September
30, 2001. Cash provided by financing activities for the nine months ended
September 30, 2002 was primarily 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 nine months ended September 30, 2002, we used cash in
operating activities of $17.7 million. As of September 30, 2002, we had cash and
cash equivalents of $7.2 million and our accumulated deficit was $175.7 million.
These factors among others may indicate that we will be unable to continue as a
17
going concern for a reasonable period of time. We have implemented, and are
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 September 30, 2002, the estimated purchase commitments and non-cancelable
purchase orders to those companies is $3.0 million. In August 2002, VINA placed
$1.0 million on deposit with our contract manufacturer as security against these
purchase commitments.
As of September 30, 2002, we had $3,500,000 in restricted cash. This cash
is comprised of two separate restricted cash items. We had a certificate of
deposit for $3.0 million, this amount is not available to fund operations, as it
secured a $3.0 million committed revolving line of credit that had been utilized
at September 30, 2002. We also have an irrevocable letter of credit of $500,000
that is used as collateral for the lease on the Newark, California facility.
As of September 30, 2002, we have lease commitments of $5.0 million for
leases on four properties, which expire by September 30, 2007.
We will need to obtain additional funding during the next six months. We
will from time to time review and may pursue additional financing opportunities,
including sales of additional equity or debt securities or securing 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.
Further, our recent transfer from the Nasdaq National Market to the Nasdaq
SmallCap Market may make it even more difficult for us to raise funds.
FACTORS THAT MAY AFFECT RESULTS
The risks and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations. If
any of the following risks actually occur, our business, financial condition and
results of operations could be materially and adversely affected.
Risks Related To Our Business
We will need to obtain additional funding during the next six 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 nine months ended September 30, 2002, we used cash in operating
activities of $17.7 million. As of September 30, 2002, we had cash and cash
equivalents of $7.2 million and an accumulated deficit of $175.7 million. We
will need to obtain additional funding during the next six months. Our recent
move from the Nasdaq National Market to the Nasdaq SmallCap Market may make it
even more difficult for us to raise funds. If we are unable to 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.
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
18
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 $53.5 million in the nine months
ended September 30, 2002. As of September 30, 2002, we had an accumulated
deficit of approximately $175.7 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 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 73% of our net revenue for the nine months ended
September 30, 2002. 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. 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
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,
19
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 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 we adopted are different from those we have chosen to support, market
acceptance of our products may be significantly reduced or delayed.
Developing new or enhanced products is a complex and uncertain process and
we may not have sufficient resources to successfully and accurately anticipate
technological and market trends, or to successfully manage long development
cycles. We must manage the transition from our older products to new or enhanced
products to minimize disruption in customer ordering patterns and ensure that
adequate supplies of new products are available for delivery to meet anticipated
customer demand. Any significant delay or failure to release new products or
product enhancements on a timely and cost-effective basis could harm our
reputation and customer relationships, provide a competitor with a
first-to-market opportunity or allow a competitor to achieve greater market
share.
Our products require substantial investment over a long product development
cycle, and we may not realize any return on our investment.
The development of new or enhanced products is a complex and uncertain
process. We, and our OEM customers have in the past and may in the future
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. 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
20
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. VINA's
contract manufacturer limits inventory purchases within their parameters of
risk. These limits could cause shortages or long-lead item delays, which could
affect our abiilty to ship product effectively. 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 September 30, 2002, the estimated purchase commitments and
non-cancelable purchase orders to those companies is $3.0 million. In August
2002, VINA placed $1.0 million on deposit with our contract manufacturer as
security against these purchase commitments. If we overestimate our
manufacturing requirements, demand for our products 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 designed to be deployed in very large
and complex networks. While our products have been tested, because of their
nature, they can only be fully tested when deployed in networks that generate
high amounts of voice or data traffic. Because of our short operating history,
some of our products have not yet been broadly deployed. Consequently, our
customers may discover errors or defects in our products after they have been
broadly deployed. For example, following deployment of our MBX, products it was
discovered that the MBX failed to meet all of its specified applications. We
then temporarily suspended deployment of the MBX. The MBX is now fully available
to customers for all applications, and we are currently working on enhancing the
MBX to make it easier to install and use. 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.
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
21
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.
If we fail to win contracts at the beginning of our telecommunications
customers' deployment cycles, we may not be able to sell products to those
customers for an extended period of time, which could inhibit our growth.
Our existing and potential telecommunications customers generally select a
limited number of suppliers at the beginning of a deployment cycle. As a result,
if we are not selected as one of these suppliers, we may not have an opportunity
to sell products to that customer until its next purchase cycle, which may be an
extended period of time. In addition, if we fail to win contracts from existing
and potential customers that are at an early stage in their design cycle, our
ability to sell products to these customers in the future may be adversely
affected because they may prefer to continue purchasing products from their
existing vendor. Since we rely on a small number of customers for the majority
of our sales, our failure to capitalize on limited opportunities to win
contracts with these customers could severely harm us.
Since the 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
22
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. Currently,
our primary contract manufacturer is Benchmark Electronics. Under our agreement
with Benchmark, Benchmark may cancel the contract on short notice and is not
obligated to supply products to us for any specific period, in any specific
quantity or at any specific price, except as may be provided in a particular
purchase order. Our reliance on Benchmark involves a number of risks, including
the lack of operating history between us and Benchmark, absence of control over
our manufacturing capacity, the unavailability of, or interruptions in, access
to process technologies and reduced control over component availability,
delivery schedules, manufacturing yields and costs. If our agreement or
relationship with Benchmark is terminated, we will not have a primary
manufacturing contract with any third party. We will have to immediately
identify and qualify one or more acceptable alternative manufacturers, which
could result in substantial manufacturing delays and cause us to incur
significant costs. It is possible that an alternate source may not be available
to us when needed or be in a position to satisfy our production requirements at
acceptable prices and quality. Any significant interruption in manufacturing
would harm our ability to meet our scheduled product deliveries to our
customers, harm our reputation and could cause the loss of existing or potential
customers, any of which could seriously harm our business and operating results.
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, enclosure, microprocessors, digital signal processors,
digital subscriber line modules and flash memory, from single or sole 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 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
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
23
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. These 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
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.
24
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.
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.
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 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
25
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 20% of our net revenue for the nine months ended September 30,
2002. 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.
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
26
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 that they
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
Because our stock has traded at or below $1.00 for more an extended period of
time, we transferred the listing of our stock from the Nasdaq National Market to
the Nasdaq SmallCap Market. However, if our stock continues to trade below
$1.00, our stock may be subject to delisting from the Nasdaq SmallCap Market.
Our common stock has recently traded at or below $1.00 and was subject to
delisting from the Nasdaq National Market. After an oral hearing before the
Nasdaq Listing Qualifications Panel, on September 20, 2002, the listing of our
common stock was transferred from the Nasdaq National Market to the Nasdaq
SmallCap Market. Similar to the requirements of the Nasdaq National Market, one
of the continued listing requirements for the Nasdaq SmallCap Market is the
$1.00 minimum bid price requirement. On October 2, 2002, Nasdaq granted us a
180-day grace period, until March 30, 2003, to meet the $1.00 minimum bid price
requirement. If shares of our common stock do not meet the minimum $1.00 per
share closing bid price requirement on or before March 30, 2003, our stock could
be delisted from the Nasdaq Stock Market. If our stock is delisted from the
Nasdaq Stock 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 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
27
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.
We may not have sufficient funds to continue operations for the next 12 months.
We will need to obtain additional funding during the next six months, 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 continue
operations or at least 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. We anticipate that we will need to obtain additional funding during
the next six months. If additional funds are raised through the issuance of
equity securities, the percentage of equity ownership of our existing
stockholders will be reduced. In addition, holders of these equity securities
may have rights, preferences or privileges senior to those of the holders of our
common stock. If additional funds are raised through the issuance of debt
securities, we may incur significant interest charges, and these securities
would have rights, preferences and privileges senior to holders of common stock.
The terms of these securities could also impose restrictions on our operations.
Additional financing may not be available when needed on terms favorable to us
or at all. Our recent move from the Nasdaq National Market to the Nasdaq
SmallCap Market may make it more difficult for us to raise funds. If adequate
funds are not available or are not available on acceptable terms, we may be
unable to continue operations or at least 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
28
affiliated entities, if they acted together, regardless of the desire of other
investors to pursue an alternative course of action.
As of September 30, 2002, our directors, executive officers and their
affiliated entities beneficially owned approximately 63.5% 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.
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 ofdirectors 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 September 30, 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
29
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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Company's principal executive officer and principal financial officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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.
Of the net proceeds approximately $7.5 million was used towards partial
consideration of the purchase of Woodwind Communications Systems, Inc. and the
remainder was used towards operating expenses of the business.
31
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: November 13, 2002 By: /s/ W. Michael West
--------------------------------
W. Michael West
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2002 By: /s/ Stanley E. Kazmierczak
--------------------------------
Stanley E. Kazmierczak
Chief Financial Officer
(Principal Financial and Accounting
Officer)
32
CERTIFICATIONS
I, W. Michael West, certify that:
1. I have reviewed this quarterly report on Form 10-Q of VINA Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ W. Michael West
---------------------------
W. Michael West
Chief Executive Officer
33
I, Stanley E. Kazmierczak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of VINA Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Stanley E. Kazmierczak
----------------------------------
Stanley E. Kazmierczak
Chief Financial Officer
34