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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _______ To _______
Commission File Number: 0-31903
VINA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0432782
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
39745 Eureka Drive, Newark, CA 94560 (510) 492-0800
(Address of principal executive offices) (Registrant's telephone number,
including area code)
Securities registered to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq SmallCap Market on June 28, 2002) was
approximately $5,435,329.
As of March 6, 2003, there were 62,189,930 shares of Common Stock, $0.0001
per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by
reference information from the registrant's proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 2003 Annual Meeting of Stockholders.
VINA TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I..............................................................................................3
Item 1. Business...................................................................................3
Item 2. Properties................................................................................11
Item 3. Legal Proceedings.........................................................................11
Item 4. Submission of Matters to a Vote of Security Holders.......................................11
PART II............................................................................................13
Item 5. Market Registrant's Common Equity and Related Stockholder Matters.........................13
Item 6. Selected Consolidated Financial Data......................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................32
Item 8. Consolidated Financial Statements.........................................................33
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure......55
PART III...........................................................................................55
Item 10. Directors and Executive Officers of the Registrant.......................................55
Item 11. Executive Compensation...................................................................56
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................56
Item 13. Certain Relationships and Related Transactions...........................................56
PART IV............................................................................................56
Item 14. Controls and Procedures..................................................................56
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................56
Signatures.....................................................................................59
Certifications.................................................................................60
2
PART I
Item 1. Business
When used in this report the words "may," "will," "could" and similar
expressions are intended to identify forward-looking statements. These are
statements that relate to future periods and include statements as to expected
net losses, expected decline in product orders, expected cash flows, expected
expenses, expected capital expenditures, expected deferred stock compensation,
the extent of fluctuations in gross margins, the adequacy of capital resources,
growth in operations, the ability to integrate companies and operations that we
may acquire, expected reduction of operation costs, our ability to raise
additional funding within the first six months of 2003, our strategy with regard
to protecting our proprietary technology, the ability to compete and respond to
rapid technological change, the extent to which we can develop new products,
expected customer concentration, ability to execute our business plan, the
extent to which we can maintain relationships with vendors of emerging
technologies, the extent to which and at what rate demand for our services
increases, the extent to which the telecommunications industry experiences
consolidation, our ability to expand our international operations and enter into
new markets, the extent to which we and our ability to actively participate in
marketing, business development and other programs, the extent to which we can
expand our field sales operations and customer support organizations and build
our infrastructure, the extent we can build market awareness of our company and
our products, and the performance and utility of products and services.
Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. These
risks and uncertainties include, but are not limited to loss of or lower net
revenue to customers in a highly concentrated customer base, our ability to
execute our business plan, our ability to raise funding within the first six
months of 2003, the extent to which the current economic environment affects our
current and potential customers' demand for our products, the effects of
competition, competitive pricing and alternative technological advances, the
extent to which our current and future products compete with the products of our
customers, our ability to implement successfully and achieve the goals of our
corporate restructuring plan, our ability to design, market and manufacture
successfully products that address market demands, our ability to accurately
predict our manufacturing requirements, our ability to maintain relationships
with vendors of emerging technologies, changes in our business plans, our
ability to retain highly skilled engineers, and the risks set forth below under
Item 2, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Other Factors That May Affect Results." These forward-looking
statements speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
In this report, all references to "VINA" "we," "us," "our" or the "Company"
mean VINA Technologies, Inc. and its subsidiaries, except where it is made clear
that the term means only the parent company.
This Form 10-K includes the following registered trademarks as well as
filed applications to register trademarks of VINA Technologies including:
Integrator-300, VINA, VINA Technologies, Multiservice Broadband Xchange, MX-500,
MX-550, MX-600, and Multiservice Xchange. All other trademarks and trade names
appearing in this Form 10-K are the property of their respective holders; for
example, SLC, ConnectReach and AnyMedia are trademarks and trade names of Lucent
Technologies. The inclusion of other companies' brand names and products in this
Form 10-K is not an endorsement of VINA.
Overview
VINA Technologies, Inc. is a leading developer of multi-service broadband
access communications equipment that enables communications service providers to
deliver bundled voice and data services. Our products integrate various
broadband access technologies, including existing circuit-based and emerging
packet-based networks, onto a single platform to alleviate capacity constraints
in communications networks.
From our inception in June 1996 through February 1997, our operating
activities related primarily to developing and testing prototype products,
commencing the staffing of our sales and customer service organizations and
establishing relationships with our customers. We began shipping our
Multi-service Integrator-300 product family in March 1997, our Multiservice
Xchange product in May 1999, our eLink product in November 2000 and our MBX
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product in September 2001. Since inception, we have incurred significant losses,
and as of December 31, 2002 we had an accumulated deficit of $177.6 million.
We market and sell our products and services directly to communications
service providers and through OEM customers and value-added resellers, or VARs.
Our customer base is highly concentrated. A relatively small number of customers
have accounted for a significant portion of our historical net revenue. Our
three largest customers accounted for approximately 71% of our net revenue in
fiscal year ended December 31, 2002. While the level of sales to any specific
customer is anticipated to vary from period to period, we expect that we will
continue to experience significant customer concentration for the foreseeable
future. To date, international sales have not been significant and we have not
been exposed to significant fluctuations in foreign currency exchange rates.
Industry Background
Increasing Demand for Broadband Access
The volume of Internet and other data traffic has grown quickly over the
past several years, due primarily to increased numbers of users and the
proliferation of bandwidth intensive applications such as business-to-business
electronic commerce, web hosting and remote access for telecommuters. Electronic
business applications have become critical business tools and, as a result,
businesses of all sizes increasingly require their telecommunications service
provider to deliver constant broadband connections at affordable rates.
The First Mile Bottleneck
Although service providers have deployed emerging packet-based technologies
to expand the speed and capacity of long distance networks, more limited
investment has been made in local networks, or the first mile, to address the
substantial increase in traffic. As a result, the first mile has become the
telecommunication infrastructure's principal bottleneck, limiting the ability of
service providers to deliver broadband services to the market.
Difficulty of Profitably Connecting Customers to Metro Access Networks
In the past, carriers have lacked the technological means to concentrate
voice and data in the same platform. Instead, they purchased separate pieces of
equipment for each, resulting in an increased burden that multiplied their
hardware costs and consumption of precious space in co-locations and central
office facilities. Further aggravating the companies' capital expenditures was
the longstanding need to invest extensively in specialized telecommunications
devices such as digital loop carriers, digital access cross-connect systems and
Frame Relay switches. To regain control over expenses, service providers have
focused on limiting the concentration of their voice and data to a relatively
few large locations such as central offices and thus minimizing their number of
purchases devices. But the decision to locate the equipment in sites that lie
far from customer premises compounded the carriers' requirements for backhaul
transport and all its associated costs.
Increasing Competition expands the need for Broadband Access
Historically, in the United States, dominant telephone companies,
principally Regional Bell Operating Companies, were the exclusive operators of
first mile communications networks. The U.S. Telecommunications Act of 1996
opened the local communications market to new entrants. The 1996 Act required
the dominant local carriers, known as incumbent local exchange carriers, or
ILECs, to lease portions of their networks to other carriers to compete in the
first mile. This Act introduced new entrants referred to as competitive local
exchange carriers, or CLECs. Expanded competition has accelerated the deployment
of new technologies, including digital subscriber line, or DSL, digital cable
and broadband fixed wireless, into the local market. To date, these broadband
solutions have been introduced as parallel data networks, co-existing alongside
the voice infrastructure controlled by ILECs, complicating the network.
While both CLECs and ILECs have introduced services in the market to
address competition and the need for broadband access, each of them faces
significant challenges in their respective markets.
CLECs. CLECs have targeted the Small Medium business market in particular
and have gained market share from ILECs in recent years. Most CLECs have
provided either voice, or data services and are facing numerous challenges as
they attempt to achieve profitability. CLECs are seeking to decrease network
expense by improving bandwidth management and reducing customer turnover. They
are also seeking to increase revenue per customer by introducing bundled suites
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of enhanced voice and data services, such as long distance, local call routing,
Internet access, business-to-business electronic commerce and web hosting. CLECs
have also taken the lead in offering bundled voice and data services to small to
medium size businesses, a market which we believe has been dominated, but
underserved, by ILECs. These businesses often do not have the financial or
technical resources of large businesses to invest in and manage costly parallel
voice and data networks. We believe that small to medium size businesses present
an opportunity for CLECs to substantially grow their customer base.
ILECs. Historically, ILECs have faced strict regulations limiting their
investment returns in the voice market by tying those returns to their
infrastructure and other costs. ILECs now seek to introduce new enhanced data
services in deregulated markets where their returns are not so constrained.
Although ILECs have traditionally dominated the first mile market, they have
lost substantial market share to CLECs in the large business market and have
begun to lose market share in the small to medium size business market because
CLECs have been able to deliver more cost-effective services. In order to defend
their customer base in the small to medium size business market, ILECs are
seeking to provide bundled voice and data, and more recently long distance
services to their customers. ILECs are also experiencing a copper wire
telecommunication lines shortage in major metropolitan areas because there has
been an increase in the number of phone lines installed in customer premises for
a variety of applications. Due to this shortage, ILECs face pressure to more
efficiently utilize their copper wires to meet the increasing demand for voice
and high-speed data access.
Convergence of Voice and Data Networks
Voice and data networks have evolved into parallel networks as broadband
access networks include both circuit-based networks utilizing time division
multiplexing, or TDM, and packet-based networks utilizing various protocols such
as asynchronous transfer mode, or ATM, internet protocol, or IP, and frame
relay. The deployment of equipment dedicated to circuit-based networks and
packet-based networks has resulted in the creation of a highly complex
telecommunications infrastructure comprised of multiple networks dedicated to
support various protocols. As a result, service providers are subject to high
network operating costs due to the redundancy of operating parallel networks and
limited equipment compatibility. In order for service providers to deliver
cost-effective, bundled voice and data services, we believe these parallel
networks need to be integrated and simplified.
Limitations Constraining the Deployment of Converged Next-Generation
Network Solutions
While many service providers desire to provide bundled voice and data
services, they have been limited in their ability to deliver their services by
the following:
o Uncertain migration path. Service providers have invested billions of
dollars in circuit-based networks. They recognize that separate voice
and data networks must be converged because separate networks are not
cost-effective in the long term. Service providers require products
that support both networks and offer a cost-effective migration path
from circuit-based networks to emerging packet-based networks.
o Multiple Equipment and Protocol Types. Addressing multiple protocols
has historically required service providers to tap multiple vendors
and equipment types, and has resulted in confusion as well as
unnecessary network complexity and expense. Service providers require
multiservice access solutions that integrate readily into their
existing networks, maintain compatibility with other components of
their network and provide remote, dynamic bandwidth and service
provisioning, eliminating the need for expensive manual provisioning
and installation.
o Inefficient use of network bandwidth. The rapid increase in demand for
bandwidth and the limited capacity available in the first mile of
telecommunications networks have strained the level of services
provided to end users. Service providers require more efficient
multiservice access solutions that minimize network expense, maximize
bandwidth and are deliverable over a single copper line.
o Operational challenges to infrastructure deployment. The scope and
complexity of existing communication networks pose unique challenges
to service providers in recruiting and training the necessary
personnel to deploy, scale, provision and maintain the network.
Simplified network solutions are needed to help reduce the number of
personnel and technical expertise required.
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In order to address these challenges, several communications equipment
companies have introduced broadband integrated access devices, or IADs. First
generation IADs are circuit-based. As service providers plan their converged
next-generation networks, they have become increasingly reluctant to invest in
communication equipment that cannot support Internet protocol or asynchronous
transfer mode traffic. In response, several vendors have introduced packet-based
IADs. However, we believe these new products have not been widely adopted
because service providers have invested billions of dollars in their
circuit-based networks, which they are unwilling to abandon. The transition to
converged, next-generation networks is a costly and complex process that will
take many years to complete. Therefore, service providers are seeking broadband
access solutions that operate in both circuit- and packet-based environments,
enabling them to protect their investment in existing equipment while ensuring a
cost-effective migration path to converged, packet-based networks. This solution
must be affordable, scalable and easy to install and operate.
The VINA Solution
We develop and market broadband access communications equipment that
offers, in one product, access to circuit- and packet-based networks. Our
products enable service providers to offer a complete suite of bundled voice and
data services to end users, including customer premise, voice, video, data and
Internet services, such as business-to-business electronic commerce and web
hosting. Using our products, service providers may remotely and dynamically
customize the services they deliver to individual customers. Furthermore, our
customer premise products allow service providers to cost-effectively deliver
bundled offerings from a single vendor with a single bill. Our customer premise
products require little or no information technology expertise on the end users'
part and allow service providers to deliver products for the first mile which
reduce the cost and complexity associated with purchasing, operating and
maintaining their networks.
We believe that our products offer service providers the following
benefits:
o Reduced Network Complexity and Operating Costs. Our platform-based
solution integrates multiple products, such as routers, firewalls,
channel banks, modems and features of private branch exchanges, or
PBXs, which reduce the operating costs and the complexity of
delivering bundled voice and data services. Service providers are able
to operate more responsively and to roll out services on a
cost-effective basis through our software-based remote bandwidth and
service provisioning.
o Ease of Deployment. Our hardware products incorporate a software-based
management system, including a graphical user interface to facilitate
installation and use and to allow our service provider customers to
remotely manage their product offerings and upgrades. Our product
solution, combined with our extensive service program, simplifies and
accelerates the deployment of bundled voice and data services.
o Robust Service Platform. Our products provide telecommunications grade
quality and reliability. We offer robust solutions that have been
designed to navigate the unpredictable course of technology and
standards development. We design our products to allow software-based
upgrades for anticipated future network transport technologies.
o Increased Value-Added Services. Our solution allows service providers
to enhance revenue derived from their installed customer base by
selling additional software-enabled services, such as a firewall or
local call routing. Our platform-based solution is designed to work
with a broad range of first mile transport technologies.
Our customer premise solutions accept multiple transport services into a
single broadband access product. By incorporating various functions, such as
firewall, channel bank and features of a private branch exchange onto a single
platform, we enable our service provider customers to reduce their equipment
costs and network complexity, ease migration from circuit- to packet-based
networks, and enhance revenue opportunity from their installed customer base.
Our Products
We offer a family of products for the first mile designed to allow carriers
to cost-effectively and quickly deliver bundled voice and data services over
broadband connections in the local loop and in metro access networks.
Consequently, the multiservice broadband access products not only lower
deployment costs and streamline provisioning, but also enable our service
providers to differentiate themselves in the market and address end users'
service requirements.
6
Integrator-300
Our Integrator-300 is a hardware platform solution that allows service
providers to integrate their customers' voice, data, video and Internet
requirements onto a single T1 connection. In addition, it supports
software-based value-added features including intelligent local call routing,
firewalls, service level agreement statistics and Business OfficeXchange, which
enables our products to operate as stand-alone PBX systems.
Multiservice Xchange product family
Our Multiservice Xchange product family includes the MX-500, MX-550 and
MX-600. The MX-500 and MX-550 are compact, multiservice broadband access
platforms that deliver circuit- and packet-based voice, data, video and Internet
access services. The MX-500 and MX-550 provide support for the circuit- based
TDM network to deliver voice and data access services. The MX-550 also supports
telecommunication protocols used in major international markets. The MX-600 is a
flexible access platform that integrates TDM voice, data, video and Internet
access services.
eLink product family
Our eLink product family of integrated access devices includes the
eLink-208, -216 and -224 and the eRouter. VINA's eLink family converges parallel
voice, data, video and Internet transmissions over TDM and Frame Relay on a
single T1 connection. Each of the eLink-208, -216 and -224 comes with an
Ethernet port for data and form a complete solution in one space-saving
footprint by marrying a channel bank, IP router, DHCP server, CSU/DSU and
firewall with Network Address Translation.
Multiservice Broadband Xchange
Designed for installation in sites such as central offices or co-locations,
the Multiservice Broadband Xchange, or MBX, is a multiservice platform designed
to allow providers to deploy bundled voice and data services over T1 connections
in metro access networks.
The MBX platform is designed to consolidate the voice concentration
functionality of a digital loop carrier, the data aggregation and switching
capabilities of a multiservice ATM switch, and the voice/data interworking
functions of a media gateway. The MBX provides flexibility in its support of
traditional concentration of voice lines with the added support of frame relay
switching.
Sales and Marketing
Sales
We sell our products to service providers directly through our sales force,
and indirectly through our original equipment manufacturer, or OEM, customers
and value added resellers, or VARs. We have established OEM customers and other
marketing relationships in order to serve particular markets and provide our
service provider customers with opportunities to purchase our products in
conjunction with complementary products and services.
o Direct. Direct sales have represented, and we believe will continue to
represent, the majority of our sales. We believe that direct
interaction with service providers offers us the best understanding of
the business models and technical requirements of our customers.
Further, we believe that the competitive nature of the
telecommunications equipment industry requires us to reduce costs by
eliminating intermediate steps in the distribution chain.
o OEM. OEM sales, in particular with Lucent, are an important
distribution channel for us in the United States. We believe Lucent's
relationships with CLECs, ILECs and small independent operating
companies will continue to enhance our ability to reach this large
customer base. Lucent uses our products to deliver complete,
end-to-end solutions that are installed and field-serviced by their
technical support organizations. We plan to initiate and develop
relationships with additional leaders in the communications equipment
industry as potential OEM customers.
7
o Value-Added Resellers. In addition to direct sales and our OEM
customers, we have existing relationships with VARs focused on the
service provider market. We intend to leverage our existing VAR
relationships to seek new opportunities for the deployment of our
products. In addition to the VARs we work with in the United States,
we are developing relationships with VARs in Europe, Latin America and
South America.
Whether we ship our products directly or through our OEM customers or VARs,
maintaining a direct relationship with each of our service provider customers is
an important part of our sales strategy. Since establishing a strong working
relationship with our customers is critical to sales success and future product
development, we strive to maintain strong visibility across our service provider
customer base, regardless of the distribution channel. As of December 31, 2002,
our sales organization consisted of 24 employees.
Marketing
Our marketing objectives include building market awareness and acceptance
of our company and our products, as well as generating qualified customer leads.
To accomplish these objectives, our marketing activities include public
relations, communications, research, sales support, direct marketing, a web
presence, product marketing, as well as channel marketing. We work directly with
service providers to help them develop business models and introduce product
packages, promotional programs and pricing strategies, all designed to promote
the delivery of multiple voice and data services over a single broadband access
facility. In addition, we work with a number of industry and trade publications
and industry analysts to educate service providers on how to deploy, and the
benefits of, multiservice broadband access networks. As of December 31, 2002,
our marketing organization consisted of 8 employees.
Customer Service and Support
Our customer service organization maintains and supports products sold to
service providers and offers technical support to our OEM customers and VARs. We
also assist our OEM customer and VARs in offering installation, maintenance and
support services to their customers for our products. We handle questions and
problems over the Internet, telephone and e-mail. We continually update our
website to enable our direct and indirect customers to download the latest
technical information and tips, along with firmware, software and product
manuals.
Customers
We primarily sell to CLECs, ILECs and independent operating companies
through direct sales and indirectly through our OEM customers and VARs.
For the year ended December 31, 2002, sales to our three largest customers
accounted for approximately 71% of our net revenue, of which sales to Allegiance
Telecom, Lucent Technologies, and Nuvox Communications, accounted for 37%, 18%
and 16% of our net revenue, respectively.
For the year ended December 31, 2001, sales to Lucent accounted for 44% of
our net revenue. Five customers, including Lucent Technologies, accounted for
approximately 88% of our net revenue for the year ended December 31, 2001, of
which sales to Lucent and Nuvox Communications accounted for 44% and 21% of our
net revenue, respectively.
For the year ended December 31, 2000, sales to Lucent accounted for 31% of
our net revenue. Five customers, including Lucent, accounted for approximately
75% of our net revenue for the year ended December 31, 2000, of which sales to
Lucent and Nuvox Communications accounted for 31% and 28% of our net revenue,
respectively.
Strategic Relationships
A key element of our plan is to expand our sales, marketing and
distribution channels through strategic relationships. We have established, and
will continue to pursue, these strategic relationships in order to grow net
revenues, and to provide indirect sales and marketing of our solutions.
Lucent Technologies. In May 1998, we entered into an OEM agreement with
Lucent, which we renewed most recently in August 2002 to include the eLink
product line. The Lucent agreement expires in May 2003. The agreement may be
terminated by Lucent at any time upon 60 days notice. Our working relationship
8
with Lucent offers each of us a number of strategic advantages. Lucent uses our
products to offer a complete end-to-end solution for the first mile integrating
voice and data traffic. In turn, we have the opportunity to leverage Lucent's
extensive sales force and marketing relationships to reach new customers and
markets.
This agreement allows Lucent to purchase our products which they use under
its ConnectReach product family. ConnectReach consists of our Integrator-300 and
a seamless connection to Lucent's SLC-2000 Access System, a digital loop
carrier, enabling the two products to function as a single, integrated voice and
data access system. ConnectReach also interconnects with the AnyMedia Access
System, a next-generation digital loop carrier.
Technology
Our products and technology enable multiservice access over a single
broadband network with an open architecture. The open nature of our products
allows our solution to be seamlessly integrated into the existing TDM
infrastructure to deliver enhanced bundled services while offering the ability
to migrate the network through hardware or software upgrades, to an asynchronous
transfer mode, or ATM network, and subsequently to an Internet protocol, or IP
network. We have developed extensive core competencies.
Time Division Multiplexing Expertise
Most carrier networks use high bit rate digital systems employing
time-division multiplexing, or TDM. With extensive deployment of T1, digital
local offices and optical transmission, TDM became economically viable in the
1980s and 1990s. The existing telephone network is predominantly based on
digital time division switching, transmission and signaling over the out-of-band
control network.
Frame Relay and Asynchronous Transfer Mode Expertise
We have developed expertise in packetized voice and data technology. The
two widely deployed and proven packet-based technologies that can be utilized to
integrate voice and data over a single line are ATM and frame relay. Our
expertise with packet-based technology stems from developing advanced system
functions such as digital signal processing, echo cancellation, dynamic call
setup and virtual circuit switching, as well as class of service management
capabilities.
Internet and Internet Protocol Expertise
Demand for Internet services has grown exponentially. These services
require an all IP infrastructure, especially in the access network for Web
applications and use, e-commerce and email. Our products incorporate an IP
router which offers firewall options that include circuit level security
technology and packet filtering, as well as network address translation, or NAT,
and a software-based dynamic host control protocol, or DHCP, to provide dynamic
IP address management. These IP elements are necessary to ensure reliable and
secure Internet access. Our products offer our customers a fully integrated
Internet access solution.
Research and Development
We believe that our success is, to a large extent, dependent upon our
responsiveness to the continued technological migration of our customers'
networks. Our research and development group works closely with our customers,
our customer steering committee, and our marketing department for product
definition and to assure compatibility with central office equipment.
Research and development expenses, including stock-based compensation, all
product development, system testing and documentation, were approximately $20.6
million in 2000, $23.3 million in 2001 and $15.1 million in 2002. All of our
product development costs have been expensed as incurred. We have licensed
certain commercially available software from third parties. We conduct the
majority of our research and development in Newark, California and Nashua, New
Hampshire. As of December 31, 2002, we had 46 full-time employees in research
and development.
The majority of our research and development efforts are focused on
standard products. We have significant hardware and software expertise in both
TDM and IP network technologies. We place heavy emphasis on our design
verification processes, which include extensive testing at our Newark,
California facilities and significant interoperability testing at partner sites.
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Manufacturing
We outsource our manufacturing operations to Benchmark Electronics.
Benchmark is located in Angleton, Texas. We believe outsourcing our
manufacturing enables us to benefit from the component purchasing capabilities
of a global contract manufacturer that can accommodate significant increases in
production volume and product mix, as necessary.
Benchmark performs board assembly, systems configuration and testing and
product shipping. We have developed comprehensive inspection tests and use
statistical process controls to assure the reliability and quality of our
products. Our manufacturing engineers develop all test procedures and design and
build all equipment and stations required to test our products. We integrate
these manufacturing tests with our contract manufacturer's build processes. Our
manufacturing personnel work closely with our design engineers to design for
manufacturability, and to ensure that our test methods remain current as
broadband access technologies evolve.
We obtain several of the key components used in our products from single or
limited sources of supply. We have encountered, and expect in the future to
encounter, difficulty in obtaining these components from our suppliers. The
suppliers of our components range from small vendors to large established
companies. Components for which we currently have limited sources include
digital signal processors, subscriber line interface circuits mirco processors,
DSL modules and flash memory. We purchase most components on a purchase order
basis and do not have guaranteed supply arrangements with most of our key
suppliers. We, or our contract manufacturer may not be able to obtain necessary
supplies in a timely manner.
We select manufacturers and suppliers on the basis of technology,
manufacturing capacity, materials management, quality and cost. We may, in the
future, seek additional manufacturers and suppliers to meet our anticipated
requirements and lower the cost of our products. We obtained International
Standards Organization, or ISO, 9001 certification in 2000.
Competition
The market for multiservice broadband access products is extremely
competitive. We believe that competition will increase substantially as the
introduction of new technologies, deployment of broadband access networks, and
potential regulatory changes create new opportunities for established and
emerging companies. Furthermore, DSL- and T1-based solutions compete with
broadband wireless and cable offers. We face competition primarily in two areas:
equipment manufacturers, such as Adtran, Carrier Access Corporation, Verilink
and Zhone Technologies and diversified equipment manufacturers such as Cisco
Systems, Lucent, Siemens, and Alcatel.
The principal competitive factors for products utilized in our markets
include:
o pricing;
o product features;
o reliability and scalability;
o performance;
o compatibility with other products;
o ease of installation and use;
o customer relationships, service and support; and
o brand recognition.
Some of our competitors have greater financial and other resources than do
we. With greater resources, our competitors may be able to take better advantage
of new competitive opportunities, including offering lease and other financing
programs. In addition, the rapid technological developments in our industry can
result in frequent changes to our group of competitors. Consolidation in our
industry may also affect our ability to compete. Acquisitions may strengthen our
competitors' financial, technical and marketing resources and provide greater
access to customers or new technologies. As a result, these competitors may be
able to devote greater resources than we can to the development, promotion, sale
and support of their products.
10
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect our
trade secrets and know-how. We currently have four patent applications pending,
and another patent application in process, but no issued patents. Although we
employ a variety of intellectual property in the development and manufacturing
of our products, we believe that none of our intellectual property is
individually critical to our current operations. However, taken as a whole, we
believe our intellectual property rights are significant and that the loss of
all or a substantial portion of such rights could have a material adverse effect
on our results of operations. Our intellectual property protection measures may
be insufficient to prevent misappropriation of our technology. From time to
time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies, processes or rights that are
important to our business. These assertions may result in litigation requiring
us to pay substantial damages or to redesign or stop selling our products. Also,
even if we were to prevail, litigation could be time-consuming and expensive and
could divert our time and attention. In addition, the laws of many foreign
countries do not protect our intellectual properties to the same extent as the
laws of the United States. We may desire or be required to renew or to obtain
licenses from others in order to further develop and market commercially viable
products effectively. Any necessary licenses may not be available on reasonable
terms.
Employees
As of December 31, 2002, we employed 98 full-time employees including 32 in
sales and marketing, 9 in operations, 46 in research and development, and 11 in
finance and administration. Our employees are not covered by any
collective-bargaining agreements, and we consider our relations with our
employees to be good.
Item 2. Properties
Our headquarters are in Newark, California, where we lease approximately
26,000 square feet of space. We also operate a facility in Nashua, New
Hampshire. We currently have sublease and lease agreements covering
approximately 35,000 square feet that expire on various dates ranging from June
2003 to July 2007. We believe that our current facilities are adequate to
support our current and anticipated near-term operations and believe that we can
obtain additional space we may need in the future on commercially reasonable
terms.
Item 3. Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of the ordinary course of business. As of the date of this report,
there are no material legal proceedings pending or, to our knowledge, threatened
against us.
Item 4. Submission of Matters to a Vote of Security Holders
We did not have any matters submitted to a vote of security holders during
the fourth quarter ended December 31, 2002.
11
Executive Officers
Set forth below is information concerning our executive officers who report
under Section 16 of the Securities Exchange Act of 1934, as amended, and their
ages as of March 6, 2003:
Name Age Position(s)
- --------------------- ---- ----------------------------------------------------------------------
W. Michael West 52 Chairman of the Board and Chief Executive Officer
Stanley E. Kazmierczak 42 Vice President, Finance and Administration, Chief Financial Officer and
Secretary
Darrell R. Furlong 45 Vice President, Engineering
C. Reid Thomas 41 Executive Vice President, Sales and Product Marketing
W. Michael West has served as our Chief Executive Officer since April 2002.
Mr. West has served as our Chairman of the Board of Directors since June 1999.
He served as Executive Vice President for Lucent Technologies from September
1997 to January 1998. Mr. West was President, Chief Operating Officer and a
director of Octel Communications from January 1995 to August 1997, after having
served as Executive Vice President from September 1986 to January 1995. Mr. West
held multiple positions with Rolm Corporation from 1979 to September 1986, most
recently as General Manager of the National Sales Division. Mr. West currently
serves as a director of Media Arts Group, Inc.
Stanley E. Kazmierczak has served as our Vice President, Finance and
Administration, Chief Financial Officer and Secretary since July 1999. Mr.
Kazmierczak served as Chief Financial Officer and Vice President, Finance and
Operations of Digital Link, a supplier of networking products, from January 1999
to July 1999, and as Chief Financial Officer from December 1992 to July 1999. He
was Vice President, Finance and Administration of Digital Link from March 1996
to January 1999.
Darrell R. Furlong has served as our Vice President, Engineering since
September 2001. Mr. Furlong was Senior Vice President of Research and
Development and Chief Technology Officer for METRObility Optical Systems from
October 1997 to September 2001. Mr. Furlong served as a Director of the router
division of Bay Networks/Wellfleet (acquired by Nortel Networks) from June 1992
to October 1997. He also directed all hardware development activities at Concord
Communications from May 1986 to June 1992.
C. Reid Thomas has served as our Executive Vice President, Sales and
Product Marketing since July 2001. Mr. Thomas served as our Vice President,
Sales from April 2000 until July 2001. He served as Managing Director, Sales for
Lucent Technologies, where he was responsible for AT&T Markets from August 1996
to April 2000. Prior to his employment with Lucent, Mr. Thomas was Group
Manager, Strategy and Alliances for Octel Communications, from January 1995 to
August 1996.
12
PART II
Item 5. Market Registrant's Common Equity and Related Stockholder Matters
Since our initial public offering until September 19, 2002, our common
stock traded on the Nasdaq National Market ("Nasdaq") under the symbol "VINA."
On September 20, 2002, the listing of our common stock was transferred from
Nasdaq to the Nasdaq SmallCap Market where our stock continues to trade under
the symbol "VINA." The following table sets forth, for the periods indicated,
the high and low sales prices per share of our common stock on Nasdaq as
reported in its consolidated transaction reporting system.
2001 2002
---- ----
High Low High Low
---- --- ---- ---
First Quarter................$ 6.00 $ 1.25 $ 1.40 $ 0.71
Second Quarter............... 2.34 1.00 0.75 0.21
Third Quarter................ 1.85 0.52 0.29 0.01
Fourth Quarter............... 2.05 0.54 0.43 0.12
The last reported sale price of our common stock on the Nasdaq SmallCap
Market was $0.14 per share on March 6, 2003. As of March 6, 2003 our common
stock was held by approximately 416 stockholders of record.
We have never declared or paid any cash dividends on our capital stock, and
we do not currently intend to pay any cash dividends on our common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any.
13
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data has been derived from
the audited consolidated financial statements. When you read this selected
consolidated financial data, it is important that you also read the consolidated
financial statements and related notes included in this Form 10-K, as well as
the section of this Form 10-K entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Our historical results are not
necessarily indicative of our future results.
Years Ended December 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
---------- ----------- ----------- ----------- --------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenue ...................................... $ 4,393 $ 12,700 $ 32,078 $ 45,112 $ 25,143
Cost of revenue (excluding stock-based
compensation) ................................. 2,054 7,713 19,240 28,714 17,534
-------- -------- -------- -------- --------
Gross profit (excluding stock-based
compensation) ................................. 2,339 4,987 12,838 16,398 7,609
Costs and expenses:
Research and development (excluding
stock-based compensation) ..................... 4,174 6,690 12,609 18,841 13,931
Selling, general and administrative
(excluding stock-based compensation) .......... 6,414 10,881 21,124 22,697 14,515
Stock-based compensation, net (*) ............. 154 4,715 24,169 10,570 1,276
In-process research and development ........... -- -- -- 5,081 --
Amortization of intangible assets ............. -- -- -- 8,243 789
Impairment of goodwill and intangible
assets ...................................... -- -- -- -- 29,783
Restructuring expenses (excluding stock-
based compensation) .......................... -- -- -- 991 2,941
-------- -------- -------- -------- --------
Total costs and expenses .................. 10,742 22,286 57,902 66,423 63,235
-------- -------- -------- -------- --------
Loss from operations ............................. (8,403) (17,299) (45,064) (50,025) (55,626)
Other income, net ................................ 413 223 1,732 1,383 196
-------- -------- -------- -------- --------
Net loss ......................................... $ (7,990) $(17,076) $(43,332) $(48,642) $ (55,430)
======== ======== ======== ======== ========
Net loss per share, basic and diluted(1) ......... $ (2.63) $ (3.30) $ (2.63) $ (1.31) $ (0.90)
======== ======== ======== ======== ========
Shares used in computation, basic and ............ 3,038 5,169 16,467 37,121 61,643
diluted(1) ======== ======== ======== ======== ========
(*) Stock-based compensation, net:
Cost of revenue .................................. $ 2 $ 152 $ 1,855 $ 1,016 $ 520
Research and development ......................... 78 1,098 7,985 4,446 1,135
Selling, general and administrative .............. 74 3,465 14,329 7,677 1,930
Restructuring benefit ............................ -- -- -- (2,569) (2,309)
-------- -------- -------- -------- --------
Total ............................................ $ 154 $ 4,715 $ 24,169 $ 10,570 $ 1,276
======== ======== ======== ======== ========
December 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
---------- ----------- ----------- ----------- --------
Consolidated Balance Sheet Data: (in thousands)
Cash, cash equivalents and short-term
investments ...................................... $ 11,359 $ 2,568 $ 44,499 $ 16,305 $ 4,617
Restricted cash .................................. -- -- -- -- 3,500
Working capital (deficit) ........................ 11,058 (492) 40,657 27,812 7,978
Total assets ..................................... 14,456 6,673 58,536 78,964 20,580
Short-term debt .................................. -- -- -- -- 3,000
Long-term debt, less current portion ............. 655 534 -- -- --
Total stockholders' equity ....................... 11,549 348 44,829 65,528 11,372
14
- --------------
(1) The diluted net loss per share computation excludes potential shares of
common stock issuable pursuant to convertible preferred stock and options
to purchase common stock, as well as common stock subject to repurchase
rights held by us, as their effect would be antidilutive. See Notes 2 and
10 of notes to consolidated financial statements for a detailed explanation
of the determination of the shares used in computing basic and diluted net
loss per share.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in forward looking statements for many
reasons, including but not limited to the risks discussed in this report under
the heading "Other Factors That May Affect Results." The following discussion
and analysis should be read in conjunction with "Selected Consolidated Financial
Data" and the Consolidated Financial Statements and related notes included
elsewhere in this Annual Report on Form 10-K.
Recent Developments
As of December 31, 2002, we had a certificate of deposit for $3.0 million that
secured a $3.0 million committed revolving line of credit. In January 2003, we
remitted full payment for the $3.0 million revolving line of credit.
During January 2003 we announced and completed a restructuring plan intended to
better align our operations with the changing market conditions. This plan was
designed to focus on profit contribution and reduce expenses. This restructuring
includes a workforce reduction and other operating reorganization.
On February 17, 2003, we granted 2,601,982 option grants as part of the Stock
Option Exchange Program approved by the Board of Directors in May 2002. Under
this program, eligible employees were able to make an election to exchange
certain outstanding stock option grants with an exercise price greater than or
equal to $1.00 for a new option to purchase the same number of shares of VINA
Technologies Inc. common stock. The replacement option was issued per the Option
Exchange Program at least six months and one day after the cancellation date of
August 15, 2002. The new options were issued from our 2000 Stock Option Plan and
are non-statutory stock options. The individuals participating in this program
were employees of VINA Technologies, Inc. on the replacement grant date making
them eligible to receive the new stock options. No consideration for the
canceled stock options was provided to individuals terminating employment prior
to the replacement grant date. The new option has an exercise price of $0.16,
which is equal to VINA Technologies Inc. common stock's closing price on the
date prior to the replacement grant. The new stock options will continue to vest
on the same schedule as the canceled options.
In February 2003, we reached a settlement agreement to terminate the lease on
our Maryland facility. Prior to this settlement agreement, we had estimated that
we would pay the remaining portion of the lease through termination. As a result
of the settlement, we have lowered our estimate by approximately $318,000.
Therefore, we have decreased net loss for 2002 by approximately $318,000 as
compared to the press release dated January 28, 2003. The effects of this
settlement agreement have been reflected in the financial statements of this
Annual Report on Form 10-K.
In February 2003, we established an asset secured credit line with a bank for up
to $3.5 million. We need to meet monthly financial covenants to be able to
borrow against this credit line and can meet them currently. The credit line has
a one-year duration and has terms of prime rate plus 2%. We currently do not
have any outstanding balance on this credit line.
Overview
VINA Technologies, Inc. is a leading developer of multiservice broadband access
communications equipment that enables communications service providers to
deliver bundled voice and data services. Our products integrate various
broadband access technologies, including existing circuit-based and emerging
packet-based networks, onto a single platform to alleviate capacity constraints
in communications networks.
15
From our inception in June 1996 through February 1997, our operating
activities related primarily to developing and testing prototype products,
commencing the staffing of our sales and customer service organizations and
establishing relationships with our customers. We began shipping our
Multiservice Integrator-300 product family in March 1997, our Multiservice
Xchange product in May 1999, our eLink product family in November 2000, and our
MBX product in September 2001. Since inception, we have incurred significant
losses, and as of December 31, 2002, we had an accumulated deficit of $177.6
million.
We market and sell our products and services directly to communications
service providers and through OEM customers and value-added resellers, or VARs.
We recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the price is fixed and determinable
and collectibility is reasonably assured. Product revenue is generated from the
sale of communications equipment embedded with software that is essential to its
functionality, and accordingly, we account for these transactions in accordance
with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, and Statement of Position (SOP) 97-2, Software Revenue
Recognition. Product revenue is recognized when all SAB No. 101 and SOP 97-2
criteria are met which generally occurs at the time of shipment. In multiple
element arrangements where there are undelivered elements at the time of
shipment, product revenue is recognized at the time of shipment as the residual
value of the arrangement after allocation of fair value to the undelivered
elements based on vendor specific objective evidence (VSOE). Service revenue is
generated from the sale of installation, training and postcontract customer
support (PCS) agreements related to the communications equipment. We also
account for these transactions in accordance with SAB No. 101 and SOP 97-2, and
as such recognizes revenue when all of the related revenue recognition criteria
are met which is: (i) at the time the installation or training service is
delivered; and (ii) ratably over the term of the PCS agreement. In multiple
element arrangements where these services are undelivered when the
communications equipment is shipped, we defer the fair value of these
undelivered elements based on VSOE and recognizes revenue as the services are
delivered. We additionally record a provision for estimated sales returns and
warranty costs at the time the product revenue is recognized.
Our customer base is highly concentrated. A relatively small number of
customers have accounted for a significant portion of our historical net
revenue. For the year ended December 31, 2002, sales to our three largest
customers accounted for approximately 71% of our net revenue, of which sales to
Allegiance Telecom, Lucent Technologies, and Nuvox Communications, accounted for
37%, 18% and 16% of our net revenue, respectively. While the level of sales to
any specific customer is anticipated to vary from period to period, we expect
that we will continue to experience significant customer concentration for the
foreseeable future. Any decrease in sales or reduces pricing or products sold to
these customers will substantially reduce our net revenue. To date,
international sales have not been significant. International sales have been
denominated primarily in U.S. dollars and, accordingly, we have not been exposed
to significant fluctuations in foreign currency exchange rates.
Cost of revenue consists primarily of costs of products manufactured by a
third-party contract manufacturer, component costs, depreciation of property and
equipment, personnel related costs to manage the contract manufacturer and
warranty costs, and excludes amortization of deferred stock compensation. We
conduct program management, manufacturing engineering, quality assurance and
documentation control at our facility in Newark, California. We outsource our
manufacturing and testing requirements to Benchmark Electronics. Accordingly, a
significant portion of our cost of revenue consists of payments to this contract
manufacturer.
We expect our gross margin to be affected by many factors, including
competitive pricing pressures, fluctuations in manufacturing volumes, inventory
obsolescence, costs of components and sub-assemblies, costs from our contract
manufacturers and the mix of products or system configurations sold.
Additionally, our gross margin may fluctuate due to changes in our mix of
distribution channels. Currently, we derive a significant portion of our revenue
from sales made to our OEM customers. A significant increase in revenue to these
OEM customers would adversely affect our gross margin percentage.
Research and development expenses consist primarily of personnel and
related costs, depreciation expenses and prototype costs related to the design,
development, testing and enhancement of our products, and exclude amortization
of deferred stock compensation. We expense all of our research and development
expenses as incurred.
Selling, general and administrative expenses consist primarily of personnel
and related costs, including salaries and commissions for personnel engaged in
direct and indirect selling and marketing and other administrative functions and
professional costs and exclude amortization of deferred stock compensation.
16
Stock-based compensation consists of the fair value of stock options
granted to non-employees for services and the amortization of deferred stock
compensation on stock options granted to employees. Deferred stock compensation
represents the difference between the deemed fair market value of our common
stock at the time of the grant of the option and the exercise prices of these
options. We are amortizing deferred stock compensation using a multiple option
award valuation approach over the vesting periods of the applicable options,
which is generally four years. The amortization of deferred stock compensation,
based upon options granted through December 31, 2002, was $1.3 million in 2002
and is expected to be $283,000 in 2003, $23,000 in 2004 and $9,000 thereafter.
Other income, net, consists primarily of interest earned on our cash, cash
equivalent and short-term investment balances partially offset by interest
expense associated with our debt obligations.
From inception through December 31, 2002, we incurred net losses for
federal and state income tax purposes and have not recognized any income tax
provision or benefit. As of December 31, 2002, we had $98.0 million of federal
and $36.0 million of state net operating loss carry forwards to offset future
taxable income that expire in varying amounts through 2022 and 2014,
respectively. Given our limited operating history and losses incurred to date,
coupled with difficulty in forecasting future results, a full valuation
allowance has been provided against deferred tax assets. Furthermore, as a
result of changes in our equity ownership from our preferred stock offerings and
initial public offering, utilization of net operating losses and tax credits may
be subject to substantial annual limitations due to the ownership change
limitations as defined by Section 382 of the Internal Revenue Code and similar
state provisions. The annual limitation may result in the expiration of net
operating losses and tax credits before utilization.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. We believe
the following critical accounting policies, among others, affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition - We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured.
Product revenue is generated from the sale of communications equipment embedded
with software that is essential to its functionality, and accordingly, we
account for these transactions in accordance with SEC Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, and Statement of
Position (SOP) 97-2, Software Revenue Recognition.
Product revenue is recognized when all SAB No. 101 and SOP 97-2 criteria
are met, which generally occurs at the time of shipment. In multiple element
arrangements where there are undelivered elements at the time of shipment,
product revenue is recognized at the time of shipment as the residual value of
the arrangement after allocation of fair value to the undelivered elements based
on vendor specific objective evidence (VSOE).
Service revenue is generated from the sale of installation, training and
post contract customer support (PCS) agreements related to the communications
equipment. We also account for these transactions in accordance with SAB No. 101
and SOP 97-2, and as such recognize revenue when all of the related revenue
recognition criteria are met which is (i) at the time the installation or
training service is delivered; and (ii) ratably over the term of the PCS
Agreement respectively. In multiple element arrangements where these services
are undelivered when the communications equipment is shipped, we defer the fair
value of these undelivered elements based on VSOE and recognize revenue as the
services are delivered. We also record a provision for estimated sales returns
and warranty costs at the time the product revenue is recognized.
Allowance for Doubtful Accounts - We continuously monitor collections and
payments from our customers and maintain a provision for estimated credit losses
based upon the age of outstanding invoices and any specific customer collection
issues that we have identified. Since our accounts receivable are concentrated
in a relatively few number of customers, a significant change in the financial
position of any one of these customers could have a material adverse impact on
the collectability of our accounts receivable, which would require that
additional allowances be recorded.
Inventory Reserves - We regularly review the volume and composition of our
inventory on hand and compare it to our estimated forecast of product demand and
production requirements. We record write downs for estimated obsolescence or
17
unmarketable inventory for the difference between the cost and the estimated
market value based upon these reviews. If actual future demand or market
conditions are less favorable than our estimates, then additional write-downs
may be required.
Restructuring Accrual - The current accounting for restructuring costs
requires us to record provisions and charges when we have a formal and committed
plan. In connection with these plans, we have recorded estimated expenses for
severance and outplacement costs, lease cancellations, asset write-offs and
other restructuring costs. Given the significance of, and the timing of the
execution of such activities, this process is complex and involves periodic
reassessments of estimates made at the time the original decisions were made. We
continually evaluate the adequacy of the remaining liabilities under our
restructuring initiatives. Although we believe that these estimates accurately
reflect the costs of our restructuring plans, actual results may differ, thereby
requiring us to record additional provisions or reverse a portion of such
provisions.
Valuation and Impairment of Goodwill and Other Acquisition-Related
Intangible Assets - We operate in one reportable segment, the design,
development, marketing and sale of multi-service broadband access communications
equipment, and have only one reporting unit, VINA consolidated, therefore, our
measurement of the fair value for goodwill is our market capitalization. We
evaluate the fair value of our company as determined by its market
capitalization against its carrying value, net assets, to evaluate if any
impairment has occurred in the balance of the goodwill and intangible assets.
Stock-based compensation - The Company accounts for employee stock plans
under the intrinsic value method prescribed by Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and Financial
Accounting Standards Board Interpretation ("FIN") No. 44, Accounting for Certain
Transactions Involving Stock Compensation (an Interpretation of APB No. 25) and
has adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. The Company accounts for stock-based compensation
relating to equity instruments issued to non-employees based on the fair value
of options or warrants estimated using the Black-Scholes model on the date of
grant in compliance with the Emerging Issues Task Force No. 96-18, Accounting
for Equity Instruments that are issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. Compensation expense resulting
from non-employee options is amortized using the multiple option approach in
compliance with FIN No. 28, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans.
Results of Operations
The following table sets forth selected consolidated statements of
operations data as a percentage of net revenue for the periods indicated. For
purposes of this table, cost of revenue, gross profit, research and development,
and selling, general and administrative amounts and restructuring expenses do
not include stock-based compensation.
Years Ended December 31,
------------------------
2000 2001 2002
---- ---- ----
Net revenue ................................... 100.0% 100.0% 100.0%
Cost of revenue (excluding stock-based
compensation) .............................. 60.0 63.7 69.7
----- ----- -----
Gross profit (excluding stock-based
compensation) .............................. 40.0 36.3 30.3
----- ----- -----
Costs and expenses:
Research and development (excluding stock-
based compensation) ..................... 39.3 41.7 55.4
Selling, general and administrative
(excluding stock-based compensation) .... 65.9 50.3 57.7
Stock-based compensation, net (*) .......... 75.3 23.4 5.1
In-process research and development ........ -- 11.3 --
Amortization of intangible assets .......... -- 18.3 3.1
Impairment of goodwill and intangible assets -- -- 118.5
Restructuring expenses (excluding stock-
based compensation) .................... -- 2.2 11.7
----- ----- -----
Total costs and expenses ...................... 180.5 147.2 251.5
----- ----- -----
18
Loss from operations .......................... (140.5) (110.9) (221.2)
----- ----- -----
Other income, net ............................. 5.4 3.1 0.7
----- ----- -----
Net loss ...................................... (135.1)% (107.8)% (220.5)%
===== ===== =====
(*) Stock-based compensation, net:
Cost of revenue........................... 5.8% 2.3% 2.1%
Research and development.................. 24.9% 9.8% 4.5%
Selling, general and administrative....... 44.6% 17.0% 7.7%
Restructuring expenses.................... -- (5.7%) (9.2%)
------ ------- -------
Total..................................... 75.3% 23.4% 5.1%
======= ======= =======
Fiscal Years Ended December 31, 2002, 2001 and 2000
Net revenue. Net revenue decreased 44% to $25.1 million in 2002 from $45.1
million in 2001. This decrease in net revenue was primarily due to decreased
unit sales to existing customers and lower average selling prices on our
Integrator-300 and eLink products.. Net revenue increased 41% to $45.1 million
in 2001 from $32.1 million in 2000. This increase in net revenue was primarily
due to increased unit sales of Integrator-300's and eLink products to existing
customers. For the year ended December 31, 2001, sales to Lucent accounted for
44% of our net revenue. Five customers, including Lucent Technologies, accounted
for approximately 88% of our net revenue for the year ended December 31, 2001,
of which sales to Lucent and Nuvox Communications accounted for 44% and 21% of
our net revenue, respectively.
For the year ended December 31, 2002, sales to our three largest customers
accounted for approximately 71% of our net revenue, of which sales to Allegiance
Telecom, Lucent Technologies and Nuvox Communications accounted for 37%, 18% and
16% of our net revenue, respectively. We believe that we have been the primary
supplier of integrated access devices to Allegiance in the past. Allegiance has
advised us that it is now pursuing a two vendor strategy in this product
category, which will reduce our opportunity for sales to Allegiance in future
periods and will create additional competitive pricing pressures. As a result,
we do not expect to receive any significant revenue from Allegiance in the first
quarter of 2003 as Allegiance begins purchasing from the second vendor, and we
expect our net revenue from Allegiance in 2003 to decrease significantly from
2002 levels. Our concentrated customer base continues to expose us to risks
resulting from potential adverse changes in these relationships and risks
resulting from the financial condition of these customers.
Cost of revenue. Cost of revenue including stock-based compensation was $18.1
million in 2002, $29.7 million in 2001, and $21.1 million in 2000. Gross profit
including stock-based compensation decreased to $7.1 million in 2002 from $15.4
million in 2001. Gross profit including stock-based compensation increased to
$15.4 million in 2001 from $11.0 million in 2000. Gross margin including
stock-based compensation decreased to 28% in 2002 from 34% in 2001. This
decrease in gross margin was a result of lower revenue that caused fixed
overhead costs to be a higher percentage of cost in 2002 as well as decreased
average selling prices on our Integrator-300 and eLink products. Gross margin
including stock-based compensation remained flat at 34% in 2001 and 2000
primarily due to a reduction in stock-based compensation to $1.0 million in 2001
compared to $1.9 million in 2000 offset by a $1.8 million charge for excess
inventory purchase commitment incurred in the first quarter of 2001. The
provision for the excess inventory purchase commitments was primarily the result
of a shift in one of our customer's demands from next generation network
equipment to traditional Time Division Multiplex, or TDM network equipment. We
anticipate that our gross margin may continue to fluctuate due to many factors,
including competitive pricing pressures, fluctuations in manufacturing volumes,
costs from our contract manufacturers and the mix of products sold.
Research and development expenses. Research and development expenses
including stock-based compensation decreased to $15.1 million in 2002 from $23.3
million in 2001. These decreases were primarily a result of decreased personnel
costs, and to a lesser extent stock-based compensation and prototype expenses.
Research and development expenses including stock-based compensation increased
to $23.3 million in 2001 from $20.6 million in 2000. These increases were
primarily a result of additional personnel costs, higher prototype expenses and
higher consulting costs associated with our continuing research and development
efforts. Research and development expenses including stock-based compensation
have changed as a percentage of net revenue from 64% in 2000 to 52% in 2001 to
60% in 2002. The decrease from 2000 to 2001 was due primarily due to a decrease
in stock-based compensation expense. The increase from 2001 to 2002 was
primarily due to expenses decreasing at a lesser rate than net revenue.
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Selling, general and administrative expenses. Selling, general and
administrative expenses including stock based compensation decreased to $16.4
million in 2002 from $30.4 million in 2001 due to decreases in stock-based
compensation, employee costs and consulting costs. Selling, general and
administrative expenses including stock based compensation decreased to $30.4
million in 2001 from $35.5 million in 2000 due to a decrease in stock-based
compensation partially offset by an increase in other general costs. Selling,
general and administrative expenses including stock-based compensation decreased
as a percentage of net revenue from 111% in 2000 to 67% in 2001 and 65% in 2002.
The decrease in 2001 was a result of net revenue increasing at a rate faster
than selling, general and administrative expenses. The decrease in 2002 was
primarily a result of lower stock-based compensation expenses as a percentage of
net revenue.
Stock-based compensation. Stock-based compensation expense decreased to
$1.3 million for 2002 from $10.6 million for 2001 and $24.2 million for 2000.
The decrease from 2000 to 2001 and 2002 is due to using the multiple-award
approach for amortizing stock-based compensation coupled with the net
restructuring benefit of $2.6 million in 2001 and $2.3 million in 2002
associated with the reversal of prior period estimated stock compensation
expense on previously amortized unvested stock options. Based on stock options
granted through December 31, 2002, we expect to record amortization of stock
compensation expense of $283,000 and $23,000 in 2003 and 2004, respectively, and
$9,000 thereafter.
In-process research and development. On February 27, 2001, we completed the
acquisition of Woodwind Communications Systems, Inc., or Woodwind. In 2001 we
recorded a one-time charge of $5.1 million for the purchased in-process
technology related to development projects that had not reached technological
feasibility, had no alternative future use, and for which successful development
was uncertain. The conclusion that the in-process development effort, or any
material sub-component, had no alternative future use was reached in
consultation with our management, and Woodwind's management.
Impairment of goodwill and intangible assets. As VINA operates in one
reportable segment, the design, development, marketing and sale of multi-service
broadband access communications equipment, and has only one reporting unit, VINA
consolidated, the measurement of the fair value for our goodwill is our market
capitalization. The deterioration of the telecom industry and the decline in our
current product sales in the first quarter of 2002 required us to evaluate the
fair value of the company's goodwill. We evaluated the fair value of our company
as determined by our market capitalization against our carrying value, net
assets, and determined that goodwill was impaired. In addition, under SFAS No.
144 "Accounting for the Impairment of Disposal of Long-Lived Assets" we
evaluated our intangible assets for impairment and determined a portion of the
intangible assets were impaired. As a result, we recorded a $29.8 million
impairment charge in 2002. The amount was comprised of $27.3 million of
goodwill, in the first quarter of 2002, and $2.0 million and $500,000 of
intangible assets, in the first and third quarters of 2002, respectively.
Restructuring expenses. Restructuring expenses, excluding the impact of
stock-based compensation, were $2.9 million and $991,000 for the years ended
December 31, 2002 and 2001, respectively. These resulted primarily from
severance, disposition of excess capital equipment and abandonment of facilities
costs associated with the workforce reduction plans in the third quarter of 2001
and the second and third quarters of 2002. Including the impact of stock-based
compensation, we recorded a net restructuring expense of $632,000 and a net
restructuring benefit of $1.6 million for the years ended December 31, 2002 and
2001, respectively.
Other income, net. Interest and other income, net, decreased to $196,000 in
2002 from $1.4 million in 2001. This decrease was primarily attributable to
lower cash balances resulting in lower interest income earned offset by interest
expense on bank loans incurred in 2002. Interest and other income, net decreased
to $1.4 million, in 2001 from $1.7 million in 2000. This decrease was primarily
due to lower cash balances resulting in lower interest earned.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2002 were $4.6 million, compared
to $15.8 million at December 31, 2001. The decrease of $11.2 million was
attributable to cash provided by financing activities of $9.7 million offset by
cash used by investing activities of $698,000 and cash used in operating
activities of $20.3 million. Cash provided by financing activities was
attributable to net proceeds from the sale of common stock. Cash used by
investing activities was primarily attributable to purchases of property and
equipment. Cash used in operating activities consisted primarily of the net loss
of $55.4 million, a decrease in accounts payable of $4.8 million, a decrease in
other liabilities of $2.4 million, partially offset by a $2.4 million decrease
in inventory, a $4.7 million decrease in accounts receivable, as well as
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non-cash charges of $4.7 million for depreciation and amortization, $29.8
million for impairment of goodwill and intangible assets, and $1.3 million for
stock-based compensation.
Our contract manufacturer has obtained or has on order substantial amounts
of inventory to meet our revenue forecasts. If future shipments do not utilize
the committed inventory, the contract manufacturer has the right to bill us for
any excess component and finished goods inventory. We also have a non-cancelable
purchase order with a major chip supplier for one of our critical components. As
of December 31, 2002, the estimated purchase commitments and non-cancelable
purchase orders to those companies was $1.6 million. In August 2002, we placed
$1.0 million on deposit with our contract manufacturer as security against these
purchase commitments.
As of December 31, 2002, we had $3,500,000 in restricted cash. This cash
was comprised of two separate restricted cash items. We had a certificate of
deposit for $3.0 million, this amount is not available to fund operations, as it
secured a $3.0 million committed revolving line of credit that had been utilized
at December 31, 2002. We also have an irrevocable letter of credit of $500,000
that is used as collateral for the lease on the Newark, California facility.
We currently have lease commitments of $1.8 million for leases on two
properties, which expire by July 30, 2007. Future annual obligations under our
operating leases are as follows: $259,000 in 2003; $337,000 in 2004; $430,000 in
2005; $491,000 in 2006; $292,000 in 2007.
In February 2003, we established an asset secured credit line with a bank
for up to $3.5 million. We need to meet monthly covenants to be able to borrow
against this credit line and can meet them currently. The credit line has a
one-year duration and terms of prime plus 2%. We currently do not have any
outstanding balance on this credit line.
We will need to obtain additional funding during the first six months of
2003. We will from time to time review and may pursue additional financing
opportunities, including sales of additional equity or debt securities, or
utilizing our credit line. The sale of additional equity or other securities
could result in additional dilution to our stockholders. Arrangements for
additional financing may not be available in amounts or on terms acceptable to
us, if at all. Further, our recent transfer from the Nasdaq National Market to
the Nasdaq SmallCap Market may make it even more difficult for us to raise
funds. The factors described above indicate that we may be unable to continue as
a going concern for the foreseeable future.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will be tested at least
annually for impairment. We adopted SFAS No. 142 for our fiscal year beginning
January 1, 2002. Upon adoption of SFAS No. 142, we stopped the amortization of
intangible assets with indefinite lives (goodwill, which includes the reclass of
workforce-in-place and tradenames) with a net carrying value of $27.6 million at
December 31, 2001 and annual amortization of $8.8 million that resulted from
business combinations initiated prior to the adoption of SFAS No. 141. The
deterioration of the telecom industry and the decline of our product sales in
2002 were factors that required us to evaluate goodwill, determine it to be
impaired, and record a $27.3 million impairment charge during 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement is effective for us on January 1,
2002. The deterioration of the telecom industry and the decline of our product
sales in 2002 were factors that required us to evaluate intangibles, determine
them to be impaired, and record a $2.5 million impairment charge during 2002.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal activities" ("SFAS 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination
Benefits and other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". SFAS No. 146 requires that a liability for a cost
21
associated with an exit or disposal activity to be recognized when the liability
is incurred. Under EITF 94-3, a liability for an exit cost as generally defined
in EITF 94-3 was recognized at the date of the commitment to an exit plan. SFAS
No. 146 states that a commitment to a plan, by itself, does not create an
obligation that meets the definition of a liability. Therefore, SFAS No. 146
eliminates the definition and requirements for recognition of exit costs in EITF
94-3. It also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. We do not expect
the adoption of SFAS No. 146 to have a material effect on our consolidated
financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the guarantor
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. It also elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued and to be made in regard
of product warranties. Disclosures required under FIN 45 are already included in
these financial statements, however, the initial recognition and initial
measurement provisions of this FIN are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. We do not expect the
adoption of FIN 45 to have a material effect on our consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. This Statement also amends the disclosure provision of
SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements. We
have elected to continue accounting for employee stock option plans according to
APB No. 25, and we adopted the disclosure requirements under SFAS No. 148
commencing on December 31, 2002.
FACTORS THAT MAY AFFECT RESULTS
The risks and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations. If
any of the following risks actually occur, our business, financial condition and
results of operations could be materially and adversely affected.
Risks Related To Our Business
We will need to obtain additional funding during the first six months of 2003.
If we are unable to raise more capital, we may not have sufficient funds to
continue operations at the current level, if at all.
During the year ended December 31, 2002, we used cash in operating
activities of $20.3 million. As of December 31, 2002, we had cash and cash
equivalents of $4.6 million and an accumulated deficit of $177.6 million. We
will need to obtain additional funding during the first six months of 2003. If
additional funds are raised through the issuance of equity securities, the
percentage of equity ownership of our existing stockholders will be reduced. In
addition, holders of these equity securities may have rights, preferences or
privileges senior to those of the holders of our common stock. If additional
funds are raised through the issuance of debt securities, we may incur
significant interest charges, and these securities would have rights,
preferences and privileges senior to holders of common stock. The terms of these
securities could also impose restrictions on our operations. Additional
financing may not be available when needed on terms favorable to us or at all.
Our recent move from the Nasdaq National Market to the Nasdaq SmallCap Market
may make it even more difficult for us to raise funds. If we are unable to raise
additional capital, we will not have sufficient funds to continue operations.
We rely on a small number of telecommunications customers for substantial
portions of our net revenue. If we lose one of our customers or experience a
delay or cancellation of a significant order or a decrease in the level of
purchases from any of our customers, our net revenue would decline and our
operating results and business would be harmed.
We derive almost all of our net revenue from direct sales to a small number
of telecommunications customers and our indirect sales through Lucent
Technologies, one of our original equipment manufacturers, or OEM, customers
22
that sell and market our products. If we lose one of our customers or experience
a delay or cancellation of a significant order or a decrease in the level of
purchases from any of our customers, our net revenue would decline and our
operating results and business would be harmed. For the year ended December 31,
2002, sales to our three largest customers accounted for approximately 71% of
our net revenue, of which sales to Allegiance Telecom, Lucent Technologies and
Nuvox Communications accounted for 37%, 18% and 16% of our net revenue,
respectively. We believe that we have been the primary supplier of integrated
access devices to Allegiance in the past. Allegiance has advised us that it is
now pursuing a two vendor strategy in this product category, which will reduce
our opportunity for sales to Allegiance in future periods and will create
additional competitive pricing pressures. As a result, we do not expect to
receive any significant revenue from Allegiance in the first quarter of 2003 as
Allegiance begins purchasing from the second vendor, and we expect our net
revenue from Allegiance in 2003 to decrease significantly from 2002 levels. Our
concentrated customer base continues to expose us to risks resulting from
potential adverse changes in these relationships and risks resulting from the
financial condition of these customers.
We expect that the telecommunications industry will continue to experience
consolidation. If any of our customers is acquired by a company that is one of
our competitors' customers, we may lose its business. Also, the ultimate
business success of our direct service provider customers, our OEM customers and
value added resellers, or VARs, and our indirect customers who purchase our
products through an OEM customer and VARs, could affect the demand for our
products. For example, Advanced Telecom Group, one of our largest customers,
declared bankruptcy in May 2002, and we are no longer shipping any product to
them. In addition, any difficulty in collecting amounts due from one or more of
our key customers would harm our operating results and financial condition. If
any of these events occur, our net revenue would decline and our operating
results and business would be harmed.
The difficulties experienced by many of our current and potential CLEC customers
have had and may continue to have an adverse effect on our business.
To date, we have sold the majority of our products to competitive local
exchange carrier, or CLEC, customers, either directly or through our OEM
customers. CLECs have experienced extreme difficulties in obtaining financing
for their businesses. As a result, CLECs have been forced to scale back their
operations or terminate their operations. For example, our CLEC customer,
Advanced Telecom Group, recently filed for bankruptcy protection. In light of
the financial and economic difficulties facing our customers, we expect to see a
continued decline in orders from many of our major customers as they reduce
growth and spending and diversify their suppliers of critical components and as
we experience increased pricing pressure on our products. If our customers
become unable to pay for shipped products, we may be required to write-off
significant amounts of our accounts receivable. Similarly, if our customers
order products and then suspend or cancel the orders prior to shipping, we will
not generate revenues from the products we build. In such circumstances, our
inventories may increase and our expenses will increase. Further, we may incur
substantially higher inventory carrying costs and excess inventory that could
become obsolete over time. We expect that our business will continue to be
significantly and negatively affected unless and until there is substantial
improvement in the ability of CLECs to finance their businesses.
Because we have a limited operating history and operate in a new and rapidly
evolving telecommunications market, you may have difficulty assessing our
business and predicting our future financial results.
We were incorporated in June 1996 and did not begin shipping our products
until March 1997. Due to our limited operating history, it is difficult or
impossible for us to predict our future results of operations.
We have a history of losses, we expect future losses, and we may not be able to
generate sufficient net revenue in the future to achieve or sustain
profitability.
We have incurred significant losses since inception and expect that our net
losses and negative cash flow from operations will continue for the foreseeable
future. We incurred net losses of approximately $17.1 million in 1999, $43.3
million in 2000, $48.6 million in 2001 and $55.4 million in 2002. As of December
31, 2002, we had an accumulated deficit of approximately $177.6 million. To
achieve profitability, we will need to generate and sustain higher net revenue
while lowering our cost and expense levels.
We have a limited order backlog. If we do not obtain substantial orders in a
quarter, we may not meet our net revenue objectives for that quarter.
Since inception, our order backlog at the beginning of each quarter has not
been significant, and we expect this trend to continue for the foreseeable
future. Accordingly, we must obtain substantial additional orders in a quarter
for shipments in that quarter to achieve our net revenue objectives. Our sales
agreements allow purchasers to delay scheduled delivery dates without penalty.
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Our customer purchase orders also allow purchasers to cancel orders within
negotiated time frames without significant penalty. In addition, due in part to
factors such as the timing of product release dates, purchase orders and product
availability, significant volume shipments of our products could occur near the
end of our fiscal quarters. If we fail to ship products by the end of a quarter,
our operating results would be adversely affected for that quarter.
Our products are subject to price reduction and margin pressures. If our average
selling prices decline and we fail to offset that decline through cost
reductions, our gross margins and potential profitability could be seriously
harmed.
Competitive pressures have forced us to reduce the prices of our products.
We expect similar price reductions to occur in the future in response to
competitive pressures. In addition, our average selling prices decline when we
negotiate volume price discounts with customers and utilize indirect
distribution channels. If our average selling prices decline and we fail to
offset that decline through cost reductions, our gross margins and potential
profitability would be seriously harmed.
We depend upon a single contractor for most of our manufacturing needs.
Termination of this relationship could impose significant costs on us and could
harm or interfere with our ability to meet scheduled product deliveries.
We do not have internal manufacturing capabilities and have generally
relied primarily on a contract manufacturer to build our products. Currently,
our primary contract manufacturer is Benchmark Electronics. Under our agreement
with Benchmark, Benchmark may cancel the contract on short notice and is not
obligated to supply products to us for any specific period, in any specific
quantity or at any specific price, except as may be provided in a particular
purchase order. Our reliance on Benchmark involves a number of risks, including
the lack of operating history between us and Benchmark, absence of control over
our manufacturing capacity, the unavailability of, or interruptions in, access
to process technologies and reduced control over component availability,
delivery schedules, manufacturing yields and costs. If our agreement or
relationship with Benchmark is terminated, we will not have a primary
manufacturing contract with any third party. We will have to immediately
identify and qualify one or more acceptable alternative manufacturers, which
could result in substantial manufacturing delays and cause us to incur
significant costs. It is possible that an alternate source may not be available
to us when needed or be in a position to satisfy our production requirements at
acceptable prices and quality. Any significant interruption in manufacturing
would harm our ability to meet our scheduled product deliveries to our
customers, harm our reputation and could cause the loss of existing or potential
customers, any of which could seriously harm our business and operating results.
Since the telecommunications industry is characterized by large purchase orders
placed on an irregular basis, it is difficult to accurately forecast the timing
and size of orders. Accordingly, our net revenue and operating results may vary
significantly and unexpectedly from quarter to quarter.
We may receive purchase orders for significant dollar amounts on an
irregular basis depending upon the timing of our customers' network deployment
and sales and marketing efforts. Because orders we receive may have short lead
times, we may not have sufficient inventory to fulfill these orders, and we may
incur significant costs in attempting to expedite and fulfill these orders. In
addition, orders expected in one quarter could shift to another because of the
timing of our customers' purchase decisions and order reductions or
cancellations. For example, under our OEM agreement with Lucent Technologies,
Lucent has the right to delay previously placed orders for any reason. The time
required for our customers to incorporate our products into their own can vary
significantly and generally exceeds several months, which further complicates
our planning processes and reduces the predictability of our operating results.
Accordingly, our net revenue and operating results may vary significantly and
unexpectedly from quarter to quarter.
Our customers have in the past built, and may in the future build,
significant inventory in order to facilitate more rapid deployment of
anticipated major projects or for other reasons. After building a significant
inventory of our products, these parties may be faced with delays in these
anticipated major projects for various reasons. For example, Lucent may be
required to maintain a significant inventory of our products for longer periods
than they originally anticipated, which would reduce future purchases. These
reductions, in turn, could cause fluctuations in our future results of
operations and severely harm our business and financial condition.
Our failure to enhance our existing products or develop and introduce new
products that meet changing customer requirements and technological advances
would limit our ability to sell our products.
24
Our ability to increase net revenue will depend significantly on whether we
are able to anticipate or adapt to rapid technological innovation in the
telecommunications industry and to offer, on a timely and cost-effective basis,
products that meet changing customer demands and industry standards. If the
standards we adopted are different from those we have chosen to support, market
acceptance of our products may be significantly reduced or delayed. Developing
new or enhanced products is a complex and uncertain process and we may not have
sufficient resources to successfully and accurately anticipate technological and
market trends, or to successfully manage long development cycles. We must manage
the transition from our older products to new or enhanced products to minimize
disruption in customer ordering patterns and ensure that adequate supplies of
new products are available for delivery to meet anticipated customer demand. Any
significant delay or failure to release new products or product enhancements on
a timely and cost-effective basis could harm our reputation and customer
relationships, provide a competitor with a first-to-market opportunity or allow
a competitor to achieve greater market share.
Our products require substantial investment over a long product development
cycle, and we may not realize any return on our investment.
The development of new or enhanced products is a complex and uncertain
process. We, and our OEM customers, have in the past and may in the future
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. Development costs and expenses are incurred before we generate any
net revenue from sales of products resulting from these efforts. We intend to
continue to incur substantial research and development expenses, which could
have a negative impact on our earnings in future periods.
If we do not predict our manufacturing requirements accurately, we could incur
additional costs and suffer manufacturing delays.
We currently provide forecasts of our demand to our contract manufacturer
four to six months prior to scheduled delivery of products to our customers.
Lead times for the materials and components that we order vary significantly and
depend on numerous factors, including the specific supplier, contract terms and
demand for a component at a given time. Our contract manufacturer has obtained
or has on order substantial amounts of inventory to meet our revenue forecasts.
If future shipments do not utilize the committed inventory, the contract
manufacturer has the right to bill us for any excess component and finished
goods inventory. We also have a non-cancelable purchase order with a major chip
supplier for one of our critical components. As of December 31, 2002, the
estimated purchase commitments and non-cancelable purchase orders to those
companies is $1.6 million. In August 2002, we placed $1.0 million on deposit
with our contract manufacturer as security against these purchase commitments.
If we overestimate our manufacturing requirements, demand for our products is
lower than forecasted, or a product in our manufacturing forecast becomes
obsolete, our contract manufacturer may have purchased excess or obsolete
inventory. For example, in March 2001 we expensed $1.8 million for excess
inventory purchase commitments and in March 2002 we expensed $1.7 million for
excess inventory. For those parts that are unique to our products, we could be
required to pay for these excess or obsolete parts and recognize related
inventory write-offs. If we underestimate our requirements, our contract
manufacturer may have an inadequate inventory, which could interrupt
manufacturing of our products and result in delays in shipments, which could
negatively affect our net revenue in such periods.
If our products contain undetected software or hardware errors, we could incur
significant unexpected expenses, experience product returns and lost sales and
be subject to product liability claims.
Our products are highly technical and designed to be deployed in very large
and complex networks. While our products have been tested, because of their
nature, they can only be fully tested when deployed in networks that generate
high amounts of voice or data traffic. Because of our short operating history,
some of our products have not yet been broadly deployed. Consequently, our
customers may discover errors or defects in our products after they have been
broadly deployed. For example, following deployment of our MBX, products it was
discovered that the MBX failed to meet all of its specified applications. We
then temporarily suspended deployment of the MBX. The MBX is now fully available
to customers for all applications. There can be no assurance that additional
defects or errors may not arise or be discovered in the future. In addition, our
customers may use our products in conjunction with products from other vendors.
As a result, when problems occur, it may be difficult to identify the source of
the problem. Any defects or errors in our products discovered in the future, or
failures of our customers' networks, whether caused by our products or another
vendor's products, could result in loss of customers or decrease in net revenue
and market share.
25
We may be subject to significant liability claims because our products are
used in connection with critical communications services. Our agreements with
customers typically contain provisions intended to limit our exposure to
liability claims. However, these limitations may not preclude all potential
claims resulting from a defect in one of our products. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. Any of these claims, whether or not successful, could
seriously damage our reputation and business.
Our net revenue could decline significantly if our relationship with our major
OEM customer deteriorates.
A significant portion of our net revenue is derived from sales to Lucent
Technologies, one of our OEM customers. Our agreement with Lucent is not
exclusive and does not contain minimum volume commitments. Lucent Technologies
accounted for approximately 18% of our net revenue for the year ended December
31, 2002. Our OEM agreement with Lucent expires in May 2003, and we can give no
assurances that we will be able to extend the term of our contract or enter into
a new contract with Lucent. Lucent may terminate the agreement earlier upon 60
days notice. At any time or after a short period of notice, Lucent could elect
to cease marketing and selling our products. They may so elect for a number of
reasons, including the acquisition by Lucent of one or more of our competitors
or their technologies, or because one or more of our competitors introduces
superior or more cost-effective products. In addition, we intend to develop and
market new products that may compete directly with the products of Lucent, which
may also harm our relationships with this customer. For example, our MBX product
may compete with products offered by our OEM customers, including Lucent, which
could adversely affect our relationship with that customer. Our existing
relationship with Lucent could make it harder for us to establish similar
relationships with Lucent's competitors. Any loss, reduction, delay or
cancellation in expected sales to our OEM customers, the inability to extend our
contract or enter into a new contract with Lucent on favorable terms would hurt
our business and our ability to increase net revenue and could cause our
quarterly results to fluctuate significantly.
Telecommunications networks are comprised of multiple hardware and software
products from 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, in particular with our MBX
product, 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'
26
budgetary constraints, internal acceptance reviews and order reductions or
cancellations. Even after deciding to purchase our products, our customers often
deploy our products slowly.
The telecommunications industry is characterized by rapidly changing
technologies. If we are unable to develop and maintain strategic relationships
with vendors of emerging technologies, we may not be able to meet the changing
needs of our customers.
Our success will depend on our ability to develop and maintain strategic
relationships with vendors of emerging technologies. We depend on these
relationships for access to information on technical developments and
specifications that we need to develop our products. We also may not be able to
predict which existing or potential partners will develop leading technologies
or industry standards. We may not be able to maintain or develop strategic
relationships or replace strategic partners that we lose. If we fail to develop
or maintain strategic relationships with companies that develop necessary
technologies or create industry standards, our products could become obsolete.
We could also be at a competitive disadvantage in attempting to negotiate
relationships with those potential partners in the future. In addition, if any
strategic partner breaches or terminates its relationship with us, we may not be
able to sustain or grow our business.
We depend on sole source and limited source suppliers for key components. If we
are unable to buy components on a timely basis, we will not be able to deliver
our products to our customers on time which could cause us to lose customers. If
we purchase excess components to reduce this risk, we may incur significant
inventory costs.
We obtain several of the key components used in our products, including
interface circuits, microprocessors, digital signal processors, digital
subscriber line modules and flash memory, from single or limited sources of
supply. We have encountered, and expect in the future to encounter, difficulty
in obtaining these components from our suppliers. We purchase most components on
a purchase order basis and we do not have guaranteed supply arrangements with
most of our key suppliers. Financial or other difficulties faced by our
suppliers or significant changes in demand for these components could limit the
availability of these components to us at acceptable prices and on a timely
basis, if at all. Any interruption or delay in the supply of any of these
components, or our inability to obtain these components from alternate sources
at acceptable prices and within a reasonable amount of time, would limit our
ability to meet scheduled product deliveries to our customers or force us to
reengineer our products, which may hurt our gross margins and our ability to
deliver products on a timely basis, if at all. A substantial period of time
could be required before we would begin receiving adequate supplies from
alternative suppliers, if available. In addition, qualifying additional
suppliers is time consuming and expensive and exposes us to potential supplier
production difficulties or quality variations.
The 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
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 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. In addition, our Vice President of Business Development and Marketing
Communications and our Vice President of Human Resources both resigned in
27
January 2003. We currently are not planning on re-hiring for these two
positions. 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, and one patent
issued. 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.
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 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;
28
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 Corporation, Cisco Systems, Lucent Technologies,
Siemens, Verilink, and Zhone Technologies. Many of our current and potential
competitors have longer operating histories, greater name recognition,
significantly greater selling and marketing, technical, manufacturing,
financial, customer support, professional services and other resources,
including vendor-sponsored financing programs. As a result, these competitors
are able to devote greater resources to the development, promotion, sale and
support of their products to leverage their customer bases and broaden product
offerings to gain market share. In addition, our competitors may foresee the
course of market developments more accurately than we do and could develop new
technologies that compete with our products or even render our products
obsolete. We may not have sufficient resources to continue to make the
investments or achieve the technological advances necessary to compete
successfully with existing or new competitors. In addition, due to the rapidly
evolving markets in which we compete, additional competitors with significant
market presence and financial resources, including other large
telecommunications equipment manufacturers, may enter our markets and further
intensify competition.
We believe that our existing OEM customers continuously evaluate whether to
offer their own multiservice broadband access devices. If our OEM customers
decide to internally design and sell their own multiservice broadband access
devices, or acquire one or more of our competitors or their broadband access
technologies, they could eliminate or substantially reduce their purchases of
our products. One of our OEM customers, Lucent Technologies, accounted for 18%
of our net revenue for the year ended December 31, 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.
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;
29
o the ability of competitive local exchange carriers, or CLECs, to
obtain sufficient funding and to successfully grow their businesses.
o cost constraints, such as installation, space and power requirements
at the central offices of incumbent local exchange carriers, or ILECs;
o compatibility of equipment from multiple vendors in service provider
networks;
o evolving industry standards for transmission technologies and
transport protocols;
o varying and uncertain conditions of the communications network
infrastructure, including quality and complexity, electrical
interference, and crossover interference with voice and data
telecommunications services; and
o domestic and foreign government regulation.
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.
We are currently certified for ISO 9001 per the 1994 standard. Our
registration expires in September 2003. We must be recertified against the new,
2000 ISO 9001 standard. Failure to achieve recertification could affect our
relationships with many of our customers who require or prefer their vendors to
be ISO 9001 certified.
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
Our stock has traded at or below $1.00 for more an extended period of time and
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 could 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.
30
We may engage in future acquisitions or strategic investments that we may not be
able to successfully integrate or manage, which could hurt our business. These
acquisitions or strategic investments may also dilute our stockholders and cause
us to incur debt and assume contingent liabilities.
We may review acquisition prospects and strategic investments that could
complement our current product offerings, augment our market coverage, enhance
our technical capabilities or otherwise offer growth opportunities. For example,
in February 2001 we acquired Woodwind Communications Systems, Inc., a provider
of voice-over-broadband network edge access solutions, and in December 2001 we
acquired certain assets of Metrobility Optical Systems, Inc., in both cases in
exchange for shares of our common stock. The issuance of equity securities in
connection with future acquisitions or investments could significantly dilute
our investors. If we incur or assume debt in connection with future acquisitions
or investments, we may incur interest charges that could increase our net loss.
We have little experience in evaluating, completing, managing or integrating
acquisitions and strategic investments. Acquisitions and strategic investments
may entail numerous integration risks and impose costs on us, including:
o difficulties in assimilating acquired operations, technologies or
products including the loss of key employees;
o unanticipated costs;
o diversion of management's attention from our core business concerns;
o adverse effects on business relationships with our suppliers and
customers or those of the acquired businesses;
o risks of entering markets in which we have no or limited prior
experience;
o assumption of contingent liabilities;
o incurrence of significant amortization expenses related to intangible
assets; and
o incurrence of significant write-offs.
Our stock 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 Stock 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 below historical levels. These broad market and industry factors
may further decrease the market price of our common stock, regardless of our
actual operating performance.
Many corporate actions would be controlled by officers, directors and affiliated
entities, if they acted together, regardless of the desire of other investors to
pursue an alternative course of action.
As of December 31, 2002, our directors, executive officers and their
affiliated entities beneficially owned approximately 65% 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.
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;
31
o the ability of the board of directors to issue, without stockholder
approval, up to five million shares of preferred stock with terms set
by the board of directors which rights could be senior to those of
common stock; and
o the elimination of the right of stockholders to call a special meeting
of stockholders and to take action by written consent.
Each of these provisions could discourage potential take over attempts and
could lower the market price of our common stock.
We have adopted a stockholder rights plan and declared a dividend
distribution of one right for each outstanding share of common stock to
stockholders of record as of August 6, 2001. Each right, when exercisable,
entitles the registered holder to purchase from VINA one one-thousandth of a
share of a new series of preferred stock, designated as Series A Participating
Preferred Stock, at a price of $35.00 per one one-thousandth of a share, subject
to adjustment. The rights will generally separate from the common stock and
become exercisable if any person or group acquires or announces a tender offer
to acquire 20% or more of our outstanding common stock without the consent of
our board of directors. Because the rights may substantially dilute the stock
ownership of a person or group attempting to take us over without the approval
of our board of directors, our stockholder rights plan could make it more
difficult for a third party to acquire us (or a significant percentage of our
outstanding capital stock) without first negotiating with our board of directors
regarding such acquisition.
In addition, because we are incorporated in Delaware, we are governed by
the provisions of Section 203 of the Delaware General Corporation Law. These
provisions may prohibit large stockholders, in particular those owning 15% or
more of our outstanding voting stock, from merging or combining with us. These
provisions in our charter, bylaws and under Delaware law could reduce the price
that investors might be willing to pay for shares of our common stock in the
future and result in the market price being lower than it would be without these
provisions.
Item 7A. 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, 2002. To date, our international sales have been
denominated primarily in U.S. dollars, and accordingly, a hypothetical change of
10% in the foreign currency exchange rates would not have a material impact on
our consolidated financial position or the results of operations. The functional
currency of our subsidiary in the United Kingdom is the U.S. dollar and as the
local accounts are maintained in British pounds, we are subject to foreign
currency exchange rate fluctuations associated with remeasurement to U.S.
dollars. A hypothetical change of 10% in the foreign currency exchange rates
would not have a material impact on our consolidated financial position or the
results of operations.
32
Item 8. Consolidated Financial Statements
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report ............................................................. 34
Consolidated Balance Sheets as of December 31, 2001 and 2002 ............................. 35
Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002 36
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the Years Ended
December 31, 2000, 2001 and 2002 ........................................................ 37
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002 39
Notes to Consolidated Financial Statements ............................................... 40
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
VINA Technologies, Inc.
Newark, California
We have audited the accompanying consolidated balance sheets of VINA
Technologies and subsidiaries (the Company) as of December 31, 2001 and 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedule listed in the Index at
Item 15 (a) (2). These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of VINA Technologies and subsidiaries
as of December 31, 2001 and 2002 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets".
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
San Jose, California
January 22, 2003
(February 28, 2003 as to Note 15)
34
VINA TECHNOLOGIES, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31,
2001 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 15,805 $ 4,567
Restricted cash ............................................................. -- 3,500
Short-term investments ...................................................... 500 50
Common stock subscription receivable ........................................ 9,589 --
Accounts receivable, less of allowance for doubtful accounts
of $457 in 2001 and $245 in 2002 ......................................... 8,059 3,348
Inventories ................................................................. 5,733 3,367
Deposits .................................................................... 69 1,042
Prepaid expenses and other .................................................. 1,493 1,312
--------- ---------
Total current assets ................................................... 41,248 17,186
Property and equipment, net .................................................... 5,271 1,968
Other assets ................................................................... 356 32
Acquired intangibles, net ...................................................... 5,663 1,394
Goodwill, net .................................................................. 26,426 --
--------- ---------
Total assets ........................................................... $ 78,964 $ 20,580
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 7,798 $ 2,979
Accrued compensation and related benefits .................................... 2,234 900
Accrued warranty ............................................................. 696 414
Other current liabilities .................................................... 2,708 1,915
Short-term debt .............................................................. -- 3,000
--------- ---------
Total current liabilities .................................................... 13,436 9,208
Commitments and Contingencies (Note 9)
Stockholders' equity:
Convertible preferred stock; $0.0001 par value; 5,000,000 shares
authorized; none outstanding ............................................. -- --
Common stock; $0.0001 par value; 125,000,000 shares authorized: 2001 and 2002,
shares outstanding: 2001, 62,013,759; 2002, 62,080,636 ................... 6 6
Additional paid-in capital ................................................... 194,814 189,297
Deferred stock compensation .................................................. (7,106) (315)
Accumulated deficit .......................................................... (122,186) (177,616)
--------- ---------
Total stockholders' equity ............................................. 65,528 11,372
--------- ---------
Total liabilities and stockholders' equity ............................. $ 78,964 $ 20,580
========= =========
See notes to consolidated financial statements
35
VINA TECHNOLOGIES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years Ended
December 31,
------------
2000 2001 2002
---- ---- ----
Net revenue .................................................... $ 32,078 $ 45,112 $ 25,143
Cost of revenue (excluding stock-based compensation) ........... 19,240 28,714 17,534
-------- -------- --------
Gross profit (excluding stock-based compensation) .............. 12,838 16,398 7,609
-------- -------- --------
Costs and expenses:
Research and development (excluding stock-based compensation) 12,609 18,841 13,931
Selling, general and administrative (excluding stock-based
compensation) ............................................. 21,124 22,697 14,515
Stock-based compensation, net (*) ........................... 24,169 10,570 1,276
In-process research and development ......................... -- 5,081 --
Amortization of intangible assets ........................... -- 8,243 789
Impairment of goodwill and intangible assets ................ -- -- 29,783
Restructuring expenses (excluding stock-based compensation) . -- 991 2,941
-------- -------- --------
Total costs and expenses ............................... 57,902 66,423 63,235
-------- -------- --------
Loss from operations ........................................... (45,064) (50,025) (55,626)
Interest income ................................................ 1,757 1,486 207
Interest expense ............................................... (25) -- (11)
Other (expense) ................................................ -- (103) --
-------- -------- --------
Net loss ....................................................... $( 43,332) $(48,642) $(55,430)
======== ======== ========
Net loss per share, basic and diluted .......................... $ (2.63) $ (1.31) $ (0.90)
======== ======== ========
Shares used in computation, basic and diluted .................. 16,467 37,121 61,643
======== ======== ========
* Stock-based compensation, net:
Cost of revenue .......................................... $ 1,855 $ 1,016 $ 520
Research and development ................................. 7,985 4,446 1,135
Selling, general and administrative ...................... 14,329 7,677 1,930
Restructuring benefit .................................... -- (2,569) (2,309)
-------- -------- --------
Total ................................................. $ 24,169 $ 10,570 $ 1,276
======== ======== ========
See notes to consolidated financial statements
36
VINA TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(In thousands, except share amounts)
Convertible
Preferred Stock Common Stock
------------------------- ------------------------- Additional Deferred
Paid-In Stock
Shares Amount Shares Amount Capital Compensation
------ ------ ------ ------ ------- ------------
Balances, December 31, 1999........ 14,290,517 1 8,746,081 1 44,081 (13,523)
Comprehensive loss:
Net loss........................ -- -- -- -- -- --
Other comprehensive
income, net of tax:
Unrealized gain on available-for-
sale investments............... -- -- -- -- -- --
Comprehensive loss................ -- -- -- -- -- --
Exercise of stock options.......... -- -- 3,081,973 -- 3,573 --
Repurchase of common stock......... -- -- (425,866) -- (231) --
Sale of Series E convertible preferred
stock (net of issuance of costs of $8) 3,404,140 1 -- -- 23,820 --
Issuance of common stock (net of
issuance costs of $4,967)....... -- -- 3,450,000 -- 36,433 --
Issuance of non-employee stock option
for services.................... -- -- -- -- 635 --
Conversion of convertible preferred
stock.............................. (17,694,657) (2) 17,694,657 2 -- --
Deferred stock compensation........ -- -- -- -- 36,397 (36,397)
Amortization of deferred stock
compensation.................... -- -- -- -- -- 23,534
---------- ------ ---------- ---- -------- --------
Balances, December 31, 2000........ -- -- 32,546,845 3 144,708 (26,386)
Comprehensive loss:
Net loss........................ -- -- -- -- -- --
Other comprehensive
loss, net of tax:
Reclassification adjustment for
gains included in net income.... -- -- -- -- -- --
Comprehensive loss................. -- -- -- -- -- --
Exercise of stock options.......... -- -- 1,018,448 -- 485 --
Sale of common stock under
employee stock purchase plan.... -- -- 287,749 -- 760 --
Repurchase of common stock......... -- -- (355,924) -- (706) --
Issuance of common stock in
acquisition..................... -- -- 4,148,745 1 42,643 (588)
Issuance of common stock
for asset purchase.............. -- -- 2,217,527 -- 2,549 --
Private placement of common stock
(net of issuance costs of $505). -- -- 22,150,369 2 11,721 --
Sale of warrants attached to common
stock in private placement...... -- -- -- -- 1,952 --
Stock-based compensation associated
with private placement.......... -- -- -- -- 289 --
Issuance of non-employee stock option
for services.................... -- -- -- -- 4 --
Net reversal of deferred stock
compensation from forfeitures... -- -- -- -- (9,591) 9,591
Amortization of deferred stock
compensation.................... -- -- -- -- -- 10,277
--------- --------- ------------ ---- -------- --------
Balances, December 31, 2001 -- -- 62,013,759 6 194,814 (7,106)
Comprehensive loss:
Net loss........................ -- -- -- -- -- --
Exercise of stock options.......... -- -- 213,948 -- 96 --
Repurchase of common stock......... -- -- (78,982) -- (107) --
Sale of common stock under
employee stock purchase plan..... -- -- 194,707 -- 133 --
Close of Woodwind purchase escrow
return of held shares........... -- -- (262,796) -- (124) --
Net reversal of deferred stock
compensation from forfeitures... -- -- -- -- (5,515) 5,515
Amortization of deferred stock
compensation.................... -- -- -- -- -- 1,276
--------- --------- ------------ ---- -------- --------
Balances, December 31, 2002........ -- $ -- 62,080,636 $ 6 $ 189,297 $ (315)
========= ========= ============ ======== ========= =========
See notes to consolidated financial statements
37
VINA TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(In thousands, except share amounts)
Accumulated
Other Total
Accumulated Comprehensive Stockholders' Comprehensive
Deficit Income Equity Loss
------- ------ ------ ----
Balances, December 31, 1999.................... (30,212) -- 348
Comprehensive loss:
Net loss...................................... (43,332) -- (43,332) $(43,332)
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
investments................................. -- 48 48 48
--------
Comprehensive loss............................. -- -- -- $(43,284)
========
Exercise of stock options...................... -- -- 3,573
Repurchase of common stock..................... -- -- (231)
Sale of Series E convertible preferred
stock (net of issuance costs of $8)........... -- -- 23,821
Issuance of common stock (net of
(issuance costs of $4,967).................... -- -- 36,433
Issuance of non-employee stock
options for services.......................... -- -- 635
Conversion of convertible preferred stock...... -- -- --
Deferred stock compensation.................... -- -- --
Amortization of deferred stock
compensation.................................. -- -- 23,534
--------- ----- ---------
Balances, December 31, 2000.................... (73,544) 48 44,829
Comprehensive loss:
Net loss...................................... (48,642) -- (48,642) $(48,642)
Other comprehensive loss, net of tax:
Reclassification adjustment for
gains included in net income.................. -- (48) (48) (48)
--------
Comprehensive loss............................. -- -- -- $(48,690)
========
Exercise of stock options...................... -- -- 485
Sale of common stock under
employee stock purchase plan.................. -- -- 760
Repurchase of common stock..................... -- -- (706)
Issuance of common stock in acquisition........ -- -- 42,056
Issuance of common stock
for asset purchase.......................... -- -- 2,549
Private placement of common stock
(net of issuance costs of $505)............. -- -- 11,723
Sale of warrants attached to common
stock in private placement.................. -- -- 1,952
Stock-based compensation associated
with private placement...................... -- -- 289
Issuance of non-employee stock option
for services................................ -- -- 4
Net reversal of deferred stock
compensation from forfeitures............... -- -- --
Amortization of deferred stock
compensation, net of forfeitures............ -- -- 10,277
--------- ----- ---------
Balances, December 31, 2001 (122,186) -- 65,528
Comprehensive loss:
Net loss.................................... (55,430) -- (55,430) $(55,430)
========
Exercise of stock options...................... -- -- 96
Repurchase of common stock..................... -- -- (107)
Sale of common stock under
employee stock purchase plan................. -- -- 133
Close of Woodwind purchase escrow
return of held shares....................... -- -- (124)
Net reversal of deferred stock
compensation from forfeitures............... -- -- --
Amortization of deferred stock compensation.... -- -- 1,276
--------- ----- ---------
Balances, December 31, 2002.................... $(177,616) $ -- $ 11,372
========= ===== =========
See notes to consolidated financial statements
38
VINA TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
--------------------------------------
2000 2001 2002
----------- ----------- ----------
Cash flows from operating activities:
Net loss................................................................ $(43,332) $(48,642) $(55,430)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization......................................... 1,042 10,080 2,792
Disposal of property and equipment.................................... -- -- 1,947
Impairment of goodwill and intangible assets.......................... -- -- 29,783
Stock-based compensation, net......................................... 24,169 10,570 1,276
In-process research and development................................... -- 5,081 --
Accrued interest income on short-term investments..................... (1,180) 797 --
Changes in operating assets and liabilities, net of effects from
acquisition in 2001:
Accounts receivable............................................... (2,774) (2,810) 4,711
Inventories....................................................... (1,877) (3,416) 2,366
Prepaid expenses and other........................................ (2,483) 1,215 (792)
Other assets...................................................... (58) (220) 324
Accounts payable.................................................. 5,015 (1,294) (4,819)
Accrued compensation and related benefits......................... 1,697 (898) (1,334)
Accrued warranty.................................................. 237 10 (282)
Other current liabilities......................................... 1,455 (853) (793)
-------- -------- --------
Net cash used in operating activities......................... (18,089) (30,380) (20,251)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment................................... (3,782) (1,108) (648)
Purchases of short-term investments................................... (50,499) (1,050) (50)
Proceeds from sales/maturities of short-term investments.............. 15,000 36,432 --
Net cash from acquisition............................................. -- (454) --
-------- -------- -------
Net cash provided by (used in) investing activities................... (39,281) 33,820 (698)
-------- -------- -------
Cash flows from financing activities:
Net proceeds from sale of convertible preferred stock................. 23,821 -- --
Net proceeds from sale of common stock................................ 36,433 4,086 9,589
Proceeds from the sale of stock under employee stock purchase and stock
option plans...................................................... 3,573 1,245 229
Repurchase of common stock............................................ (231) (706) (107)
Proceeds from the issuance of short-term debt......................... -- -- 3,000
Restricted cash related to short-term debt............................ -- -- (3,000)
Proceeds from issuance of long-term debt.............................. 375 -- --
Repayments of long-term debt.......................................... (1,429) -- --
-------- -------- --------
Net cash provided by financing activities..................... 62,542 4,625 9,711
-------- -------- --------
Net change in cash and cash equivalents................................... 5,172 8,065 (11,238)
Cash and cash equivalents, Beginning of year.............................. 2,568 7,740 15,805
-------- -------- --------
Cash and cash equivalents, End of year.................................... $ 7,740 $ 15,805 $ 4,567
======== ======== ========
Noncash investing and financing activities:
Deferred stock compensation, net of forfeitures....................... $ 36,397 $ (9,591) $ --
======== ======== ========
Conversion of convertible preferred stock into common stock........... $ 48,120 $ -- $ --
======== ======== ========
Changes in unrealized gain on available-for-sale investments $ 80 $ (80) $ --
======== ======== ========
Common stock subscription receivable.................................. $ -- $ 9,589 $ --
======== ======== ========
Issuance of common stock in acquisition............................... $ -- $ 42,056 $ --
======== ======== ========
Issuance of common stock for asset purchase........................... $ -- $ 2,549 $ --
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest............................................. $ 64 $ -- $ 11
======== ======== ========
Cash paid for taxes............................................... $ 10 $ 19 $ 21
======== ======== ========
See notes to consolidated financial statements
39
VINA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 2001 and 2002
1. 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 year ended December 31, 2002, the Company used cash in
operating activities of $20.3 million. As of December 31, 2002, the Company had
cash and cash equivalents of $4.6 million and an accumulated deficit of $177.6
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. The Company is also evaluating other sources
of funding, such as the line of credit secured in February 2003. (See Note 15).
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
2. Business and Significant Accounting Policies
Business - VINA Technologies, Inc. (the Company or VINA), incorporated in
June 1996, designs, develops, markets and sells multiservice 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 consolidated financial statements include the
accounts of VINA Technologies, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
net revenues and expenses during the reporting period. Such management estimates
include an allowance for doubtful accounts receivable, reserves for sales
returns, provisions for inventory to reflect the net realizable value, valuation
allowances against deferred income taxes, restructuring reserves and accruals
for product warranty and other liabilities. Actual results could differ from
those estimates.
Certain Significant Risks and Uncertainties - Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash equivalents, short-term investments and accounts receivable.
The Company only invests its cash in highly liquid and high investment grade
instruments. The Company sells its products to distributors and end users
primarily in the United States and generally does not require its customers to
provide collateral or other security to support accounts receivable. To reduce
credit risk, management performs ongoing credit evaluations of its customers'
financial condition and maintains allowances for estimated potential bad debt
losses. The Company's contract manufacturer has obtained or has on order
substantial amounts of inventory to meet its 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. The
Company also has a non-cancelable purchase order with a major chip supplier for
one of its critical components. (See Note 9)
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future consolidated financial position, results of operations
or cash flows: advances, trends in new technologies and developing industry
standards; competitive pressures in the form of new products or price reductions
on current products; changes in the overall demand for products offered by the
Company; changes in certain strategic relationships or customer relationships;
litigation or claims against the Company based on intellectual property, patent,
product, regulatory or other factors; risk associated with changes in domestic
and international economic and/or political conditions or regulations; the
Company's ability to obtain additional capital to support operations; the
Company's ability to integrate acquired businesses and the Company's ability to
attract and retain employees necessary to support its growth.
40
Certain components and subassemblies used in the Company's products are
purchased from a sole supplier or a limited group of suppliers. In addition, the
Company outsources the production and manufacture of its access integration
devices to a sole turnkey manufacturer. Any manufacturing disruption, shortage
of supply of products or components, or the inability of the Company to procure
products or components from alternative sources on acceptable terms could have a
material adverse effect on the Company's business, consolidated financial
position and results of operations.
Cash Equivalents - The Company classifies all investments in highly liquid
debt instruments with maturities at the date of purchase of three months or less
as cash equivalents.
Restricted Cash - Restricted cash consists of cash and a certificate of
deposit (CD) with a maturity of less than one year. This cash and CD are carried
at fair value and are restricted as collateral for specified obligations under
certain line of credit and lease agreements.
Short-Term Investments - Short-term investments consist of various
instruments with investment grade credit ratings. All of the Company's
short-term investments are classified as "available-for-sale" based on the
Company's intended use and are stated at fair market value based on quoted
market prices. The difference between amortized cost and fair value representing
unrealized holding gains or losses is recorded as a component of stockholders'
equity, net of tax, as accumulated other comprehensive income. Gains and losses
on sales are determined on a specific identification basis.
Fair Value of Financial Instruments - The Company's financial instruments
include cash equivalents and short-term investments. Cash equivalents are stated
at cost which approximates fair market value based on quoted market prices.
Short-term investments are stated at fair market value based on quoted market
prices.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Deposits - Deposits consist of money deposited with specific vendors and
landlords as security. The carrying amounts are the values to be returned upon
cessation of security requirements.
Prepaid and other assets - Prepaid and other assets consists of various
interest and other non-revenue receivables, prepaid licenses and royalties.
Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over estimated useful lives of three to five years.
Amortization of leasehold improvements is computed over the shorter of the lease
term or the estimated useful lives of the related assets.
Long-Lived Assets - The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be recognized when the
sum of the undiscounted future net cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying amount. Such
impairment loss would be measured as the difference between the carrying amount
of the asset and its fair value based on the present value of estimated future
cash flows.
Short-term debt - Short-term debt consists of a committed revolving line of
credit with a term of one year, which bears interest at a rate of the Prime rate
plus two percent. The line is secured by $3 million of restricted cash as of
December 31, 2002. The line of credit is carried at fair value. The entire
balance was repaid in January 2003.
Income Taxes - The Company accounts for income taxes under an asset and
liability approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. A valuation allowance is provided to reduce net deferred tax
assets to an amount that is more likely than not to be realized.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
41
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
and to nonemployees using the fair value method in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. See Note 10 for discussion of assumptions used in computing fair
values and the pro forma results of operations, had the Company accounted for
employee stock-based compensation in accordance with SFAS No. 123.
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 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
postcontract 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.
Research and Development - Costs incurred in research and development are
charged to operations as incurred.
Foreign Currency - The functional currency of the Company's foreign
subsidiary is the U.S. dollar. Transaction and remeasurement gains and losses
were not significant for any of the periods presented.
Net Loss per Share - Basic earnings per share (EPS) excludes dilution and
is computed by dividing net loss attributable to common stockholders by the
weighted average number of common shares outstanding for the period excluding
the weighted average common shares subject to repurchase. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock (convertible preferred stock, common stock options and
warrants using the treasury stock method) were exercised or converted into
common stock. Potential common shares in the diluted EPS computation are
excluded in net loss periods, as their effect would be antidilutive.
Comprehensive Loss - In accordance with SFAS No. 130, Reporting
Comprehensive Income, the Company reports by major components and as a single
total, the change in its net assets during the period from nonowner sources in a
consolidated statement of comprehensive loss, which has been included with the
consolidated statements of stockholders' equity.
Related Party Transactions - The Company accounts for related party
transactions as arm's length agreements in the normal course of business. In
2002, the Company incurred consulting expenses of $100,000 from a director of
the Company. As of December 31, 2002, $20,000 of such expense is included in
accrued liabilities.
New Accounting Standards - In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method and addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. SFAS No. 142
42
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 for
its fiscal year beginning January 1, 2002. Upon adoption of SFAS No. 142, the
Company stopped the amortization of intangible assets with indefinite lives
(goodwill, which includes the reclass of workforce-in-place, and tradenames)
with a net carrying value of $27.6 million at December 31, 2001 and annual
amortization of $8.8 million that resulted from business combinations initiated
prior to the adoption of SFAS No. 141. The deterioration of the telecom industry
and the decline of our product sales in 2002 were factors that required the
Company to evaluate goodwill, determine it to be impaired, and record a $27.3
million impairment charge during 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets. " SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement is effective for the
Company on January 1, 2002. The deterioration of the telecom industry and the
decline of our product sales in 2002 were factors that required the Company to
evaluate intangibles, determine them to be impaired, and record a $2.5 million
impairment charge during 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the guarantor
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. It also elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued and to be made in regard
of product warranties. Disclosures required under FIN 45 are already included in
these financial statements, however, the initial recognition and initial
measurement provisions of this FIN are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company does not
expect the adoption of FIN 45 to have a material effect on its consolidated
financial statements.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination
Benefits and other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity to be recognized when the liability
is incurred. Under EITF 94-3, a liability for an exit cost as generally defined
in EITF 94-3 was recognized at the date of the commitment to an exit plan. SFAS
No. 146 states that a commitment to a plan, by itself, does not create an
obligation that meets the definition of a liability. Therefore, SFAS No. 146
eliminates the definition and requirements for recognition of exit costs in EITF
94-3. It also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The Company does
not expect the adoption of SFAS No. 146 to have a material effect on its
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. This Statement also amends the disclosure provision of
SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Company has elected to continue accounting for employee stock option plans
according to APB No. 25, and the Company adopted the disclosure requirements
under SFAS No. 148 commencing on December 31, 2002.
3. Short-Term Investments
The Company's short-term investments at December 31, 2002 and 2001 consists
of certificates of deposit in the amount of $50,000 and $500,000, respectively.
The amortized cost of the investments is equivalent to the fair value at
December 31, 2002 and 2001.
Available-for-sale debt securities and certificates of deposit are
classified as current assets as all maturities are within one year.
43
4. Inventories
Inventories consist of the following (in thousands):
December 31,
------------
2001 2002
---- ----
Raw materials and subassemblies..... $1,783 $1,684
Finished goods...................... 3,950 1,683
------ ------
Inventories......................... $5,733 $3,367
====== ======
5. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
------------
2001 2002
---- ----
Computer equipment and software........... $ 3,066 $ 1,531
Machinery and equipment................... 4,449 3,415
Furniture and fixtures.................... 989 671
Leasehold improvements.................... 540 268
------- -------
9,044 5,885
Accumulated depreciation and amortization. (3,773) (3,917)
------- -------
Property and equipment, net............... $ 5,271 $ 1,968
======= =======
6. Acquisitions
Woodwind Communications
On February 27, 2001, the Company completed the acquisition of Woodwind
Communications Systems, Inc. (Woodwind), a provider of voice-over-broadband
network edge access solutions, based in Germantown, Maryland. The acquisition
was accounted for as a purchase in accordance with APB No. 16. Under the terms
of the merger agreement, the Company acquired all outstanding capital stock of
Woodwind by paying $7.5 million in cash and issuing 4,148,745 shares of the
Company's common stock. The Company assumed Woodwind's outstanding stock
options, which, if fully vested and exercised, would result in the issuance of
an additional 1,106,892 shares of the Company's common stock. The total purchase
price as of February 27, 2001 has been allocated to the assets acquired and
liabilities assumed based on their respective fair values as follows (in
thousands):
Total purchase price:
Cash consideration........... $ 7,500
Common stock................. 39,465
Options assumed.............. 2,591
Acquisition expenses......... 726
--------
$ 50,282
========
Purchase price allocation:
Fair market value
of net tangible assets
acquired at February 27, 2001.. $ 6,728
44
Economic
Life
----
Intangible assets acquired:
Workforce-In-Place........... 1,236 3
Tradename.................... 346 4
Core technology.............. 3,022 4
Current technology........... 310 4
In-process research
and development.............. 5,081 -
Goodwill..................... 35,525 4
Deferred tax liabilities..... (1,966) -
-------
$ 50,282
========
The Company recorded a one-time charge of $5.1 million in the first quarter
of 2001 for purchased in-process research and development related to development
projects that had not reached technological feasibility, had no alternative
future use, and for which successful development was uncertain. The conclusion
that the in-process research and development effort, or any material
sub-component, had no alternative future use was reached in consultation with
the Company's and Woodwind's management.
Significant assumptions that were used to determine the value of in-process
technology, include the following: first, an income approach that focused on the
income producing capability of the acquired technology, and best represented the
presented value of the future economic benefits the Company expected to derive
from them; second, forecasted net cash flows that the Company expected might
result from the development effort were determined using projections prepared by
the Company's management; third, a discount rate of 25% was used, based upon the
estimated weighted average rate of return for Woodwind, which is consistent with
the implied transaction discount rate; and fourth, a premium of 10% for the
in-process technology was added to reflect the additional risk of the in-process
technology, thus resulting in the use of an overall 35% discount rate.
In accordance with FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, the Company recorded the intrinsic
value, measured as the difference between the grant price and fair market value
on the acquisition consummation date, of unvested options assumed in the
acquisition as deferred stock compensation. Such deferred stock compensation,
which aggregated $588,000, is recorded as a separate component of stockholders'
equity and will be amortized over the vesting term of the related options. For
the years ended December 31, 2001 and 2002, the Company amortized $125,000 and
$32,000, respectively, as stock-based compensation related to these options in
the accompanying consolidated statements of operations.
The operating results of Woodwind have been included in the accompanying
consolidated statements of operations since the date of acquisition. The
following selected unaudited pro forma combined results of operations for the
years ended December 31, 2000 and 2001 of the Company and Woodwind have been
prepared assuming that the acquisition had occurred at the beginning of the
periods presented. The following unaudited pro forma financial information is
not necessarily indicative of the actual 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):
Pro Forma
December 31,
---------------------
2000 2001
---- ----
Net revenue........................................ $ 32,299 $ 45,112
Net loss........................................... $ (61,469) $ (48,340)
Net loss per share................................. $ (2.98) $ (1.28)
Shares used in calculation of net loss per share... 20,616 37,790
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 nonrecurring charge.
Intellectual Property and Related Assets
In December 2001, the Company purchased optical concentrator technology and
related equipment from a related party by issuing 2,217,527 shares of the
Company's common stock valued at $2.5 million on the purchase date. In addition,
the Company incurred approximately $676,000 in direct acquisition expenses. The
total purchase price of $3.2 million was allocated on a fair value basis
resulting in $1.9 million of intellectual property (intangible assets) and $1.3
million of fixed assets. The acquired assets are being amortized over their
useful lives ranging from three to four years.
45
7. Acquired Intangibles and Goodwill, Net
As the Company operates in one reportable segment, the design, development,
marketing and sale of multi-service broadband access communications equipment,
and has only one reporting unit, VINA consolidated, the measurement of the fair
value for goodwill is its market capitalization. The deterioration of the
telecom industry and the decline in our current product sales in the first
quarter, were factors that required the Company to evaluate the fair value of
the intangible assets and goodwill. Management evaluated the fair value of the
Company as determined by its market capitalization against its carrying value,
net assets, and determined that the intangible assets and goodwill were
impaired. In addition, under SFAS No. 144 "Accounting for the Impairment of
Disposal of Long-Lived Assets" the Company evaluated the intangible assets for
impairment and determined a portion of the intangible assets were impaired.
Also, under SFAS No. 142 "Goodwill and Other Intangible Assets" the Company
evaluated the goodwill for impairment and determined that it was impaired. The
Company recorded a $29.8 million impairment charge during 2002. The amount was
comprised of $27.3 million of goodwill and $2.5 million intangible assets.
Intangible assets consist of the following (in thousands):
December 31, 2001 December 31, 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 (465) - $ 1,394
Workforce-in-place 3 years 1,236 (343) 893 - - - -
---------------------------------------------------------------------------------
Total $ 6,773 $ (1,110) $ 5,663 $ 5,413 $ (1,556) $ (2,463) $ 1,394
=================================================================================
All of VINA's intangible assets are subject to amortization except for
workforce-in-place and tradename. Workforce in place was reallocated to goodwill
as of January 1, 2002.
Estimated future amortization expense is as follows (in thousands):
Fiscal year Total
-----
2003 $ 465
2004 465
2005 464
------------------
Total Amortization $ 1,394
==================
The changes in the carrying amount of goodwill, including workforce in
place, for the year ended December 31, 2002 are as follows (in thousands):
Balance as of January 1, 2002 $ 27,319
Impairment loss (27,319)
-----------
Balance as of December 31, 2002 $ -
===========
46
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):
Year Ended December 31,
-----------------------
2001
----
Net loss as reported $ (48,642)
Add back amortization:
Goodwill 7,133
Workforce-in-place 343
Tradename 73
---------------------------
Adjusted net loss $ (41,093)
===========================
EPS - basic and diluted, $ (1.31)
as reported
Goodwill, 0.20
workforce-in-place and
tradename amortization
---------------------------
Adjusted EPS $ (1.11)
===========================
8. Restructurings
During the year ended December 31, 2001, the Company announced and
completed a restructuring plan that included a workforce reduction and other
operating reorganizations. As a result of the restructuring efforts, the Company
reduced its workforce by approximately 20%. (See Note 15)
During April and July 2002, the Company announced and completed
restructuring plans intended to better align its operations with the changing
market conditions. These plans were 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 benefit and expenses for the year ended
December 31, 2002 is as follows (in thousands):
Stock
Workforce Compensation Abandonment of Capital
Reductions Benefits Facilities Equipment Total
2000 remaining provision .............. $ -- $ -- $ -- $ -- $ --
July 2001 provision ................... 991 (2,569) -- -- (1,578)
Net provision utilized ................ (945) 2,569 -- -- 1,624
------- ------- ------- ------- -------
2001 remaining provision .............. 46 -- -- -- 46
April 2002 provision .................. 835 (1,547) 400 340 28
July 2002 provision ................... 602 (762) 35 945 820
December 2002 provision ............... -- -- 148 -- 148
Net provision utilized ................ (1,483) 2,309 (485) (1,285) (944)
------- ------- ------- ------- -------
Balance at December 31, 2002 .......... $ -- $ -- $ 98 $ -- $ 98
======= ======= ======= ======= =======
Workforce reductions - These restructuring programs resulted in the reduction of
80 employees across all functions (43 in April of 2002 and 37 in July 2002). The
2001 restructuring program resulted in the reduction of approximately 40
employees across all functions. As of December 31, 2002, the Company has
disbursed the total amount related to the 2002 severance, $1,437,000, $945,000
related to the 2001 severance and have reversed $46,000 pertaining to the
remaining balance from the 2001 workforce reduction.
Stock compensation benefits - In connection with the April 2002 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 2002 workforce
reduction resulted in a benefit of $762,000 for the reversal of prior period
estimated stock compensation expense on forfeited stock options. The July 2001
workforce reduction resulted in a benefit of $2,569,000. This net benefit
resulted froma $3.0 million benefit for the reversal of prior period estimated
stock compensation expense on forfeited stock options, offset by $431,000 of
stock compensation expense resulting from the acceleration of unvested stock
options in accordance with employee separation agreements.
47
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. In December 2002, the Company incurred an additional restructuring
charge of $148,000 for the remaining portion of the Maryland lease. (See Note
15). There were no facilities closed as part of the July 2001 restructuring and
therefore there were no associated costs.
Capital equipment - As a result of the closing of our Maryland and Texas
facilities and our reductions in headcount, the Company determined that it had
excess capital equipment with total book values substantially less than market
value. The Company finalized the dispositions in September of 2002. There was no
excess capital equipment related to the 2001 restructuring.
9. Commitments and Contingencies
Leases - The Company leases office space under various noncancelable,
operating leases that expire through 2007. The Company has an option to renew
the primary facility lease for an additional five years at the then current
market rent. Future obligations under the Company's operating leases are as
follows (in thousands):
Years Ending December 31:
2003........................... $ 467
2004........................... 337
2005........................... 430
2006........................... 491
2007........................... 292
-------
Lease commitments.............. $ 2,017
=======
Rent expense incurred under the operating leases for, 2000, 2001 and 2002
was $703,000, $1.4 million, and $1.7 million, respectively.
The Company records rent expense under non-cancelable operating leases
using a straight-line method after consideration of increases in rental payments
over the lease term, and records the difference between actual payments and rent
expense as deferred rent included within the caption other current liabilities
in the accompanying consolidated balance sheets.
Litigation - The high technology and telecommunications industry in which
the Company operates is characterized by frequent claims and related litigation
regarding patent and other intellectual property rights. The Company is not a
party to any such litigation; however any such litigation in the future could
have a material adverse effect on the Company's consolidated financial position,
results of operations and cash flows.
Purchase Commitments - The Company's contract manufacturer has obtained or
has on order substantial amounts of inventory to meet their revenue forecasts.
If future shipments do not utilize the committed inventory, the contract
manufacturer has the right to bill for any excess component and finished goods
inventory. The Company also has a non-cancelable purchase order with a major
chip supplier for one of its critical components. As of December 31, 2002, the
estimated purchase commitments and non-cancelable purchase orders to those
companies is $1.6 million. In August 2002, the Company placed $1.0 million on
deposit with its contract manufacturer as security against these purchase
commitments.
Warranty - The Company provides a full 60-month parts and factory labor
warranty against defects in materials and workmanship for all VINA Integrated
Access Device (IAD) product lines. A 12-month parts and factory labor warranty
against defects in materials and workmanship is provided for all VINA Integrated
Multi-Service Access Platform (IMAP) product lines. All VINA-supplied software
is also covered by a 60-month warranty for IAD products, and a 12-month warranty
for IMAP products. The Company accounts for warranty liability by taking a
charge in the period of shipment for the estimated warranty costs that will be
incurred related to shipments. A weighted average of the cost per warranty
transaction per product line is developed taking into consideration: the costs
of freight, replacement, rework and repair. Estimated returns over time are
calculated taking into account experience by product line. A warranty liability
is calculated by applying the number of units under warranty against a factor
representing the likelihood of a return and the estimated cost per return
transaction. Actual warranty charges are tracked and reported separately from
other transactions.
48
The changes in the warranty reserve balances during the years ended
December 31, 2002 and 2001 are as follows (in $ thousands):
2001 2002
---- ----
Balance at beginning of year ........................... $ 686 $ 696
Payments made under the warranty ....................... (58) (228)
Product warranty issued for new sales .................. 88 (18)
Changes in accrual in respect of warranty periods ending (20) (36)
----- -----
Balance at the end of year ............................. $ 696 $ 414
===== =====
10. Stockholders' Equity
Public Offering
In August 2000, the Company completed its initial public offering of
3,450,000 shares of common stock at $12.00 per share, for net proceeds of $36.4
million.
Convertible Preferred Stock
In 1998, the Company issued 4,167 shares of Series D convertible preferred
stock at $6.00 per share, for which the proceeds were not payable until 1999,
and accordingly, the Company established a $25,000 subscription receivable at
December 31, 1998.
In 1999, the Company issued an additional 10,746 shares of Series D
convertible preferred stock at $6.00 per share resulting in proceeds of $65,000.
In 2000, the Company issued 3,404,140 shares of Series E convertible
preferred stock at $7.00 per share resulting in net proceeds of $23.8 million.
Upon completion of the initial public offering, 7,500,000 convertible
preferred shares of Series A, 3,000,000 convertible preferred shares of Series
B, 3,000,000 convertible preferred shares of Series C, 790,517 convertible
preferred shares of Series D and 3,404,140 convertible preferred shares of
Series E were converted into common stock on a one-to-one basis, resulting in
the issuance of 17,694,657 shares of common stock to the then convertible
preferred stockholders.
Restricted Common Stock
Restricted common stock issued under certain stock purchase agreements is
subject to repurchase by the Company. The number of shares subject to repurchase
is generally reduced over a four-year vesting period. At December 31, 2000,
2001, and 2002, 433,334 shares, 260,000 shares, and 141,940 shares respectively,
were subject to repurchase.
Stockholders' Rights Plan
During 2001, the Company's Board of Directors declared a dividend of one
preferred share purchase right (a Right) for each outstanding share of common
stock, of the Company. Each Right entitles the registered holder to purchase
from the Company one one-thousandth of a share of Series A Preferred Stock, of
the Company, at a price of $35.00 per one one-thousandth of a share, subject to
certain antidilution adjustment provisions. The Rights, as amended, are
exercisable in the event that a person, entity or group acquires beneficial
ownership of 20% or more of the outstanding shares of VINA's common stock. The
Rights will expire on the earlier of (i) July 25, 2011, (ii) consummation of a
merger transaction meeting certain requirements, or (iii) redemption or exchange
of the Rights by the Company. At December 31, 2002 62,080,636 Rights were
outstanding.
Common Stock - Private Placement
During the fourth quarter of 2001, the Company completed a $14.2 million
private placement equity financing. Under the subscription agreement, the
Company issued 22,150,369 shares of common stock at a weighted average price of
$0.64 per share. In addition, warrants to acquire 7,090,000 shares of the
Company's common stock were attached to the common stock. The warrants are
immediately exercisable at $1.00 per share and expire three years from the date
of issuance or upon the Company's stock price exceeding predefined trading
prices. All such warrants were outstanding at December 31, 2002.
The Company allocated $2.0 million of the sales price to the warrants based
on the relative fair value of the warrants. The fair value for the warrants was
determined using the Black-Scholes option pricing model over the contractual
term of the warrants using the following assumptions: stock volatility, 75%;
risk free interest rate, 3.6% and no dividends during the expected term.
49
Certain employees participated in the private placement and purchased
375,742 common shares with 120,050 attached warrants at a price below fair
market value. The Company recorded the associated $289,000 of intrinsic value as
stock-based compensation in 2001. The intrinsic value was measured as the
difference between the equity issuance prices and their fair market values on
the date of issuance.
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):
Years Ended December 31,
------------------------
2000 2001 2002
---- ---- ----
Weighted average common shares outstanding .......... 18,927 38,239 62,098
Weighted average common shares outstanding subject to
repurchase ....................................... (2,460) (1,118) (455)
------- ------- -------
Shares used in computation, basic and diluted ....... 16,467 37,121 61,643
======= ======= =======
During all periods presented, the Company had securities outstanding, which
could potentially dilute basic EPS in the future, but were excluded in the
computation of diluted EPS in such periods, as their effect would have been
antidilutive due to the net loss reported in such periods. Such outstanding
securities consist of the following at: December 31, 2000, 1,859,680 shares of
common stock subject to repurchase and options to purchase 10,692,788 shares of
common stock; December 31, 2001, 915,461 shares of common stock subject to
repurchase and options to purchase 13,353,743 shares of common stock and
warrants to purchase 7,090,000 shares of common stock; December 31, 2002,
141,940 shares of common stock subject to repurchase and options to purchase
5,625,010 shares of common stock and warrants to purchase 7,090,000 shares of
common stock.
Stock Plans
In July 2000, the Company adopted the 2000 Stock Incentive Plan. The 2000
Stock Incentive Plan serves as the successor equity incentive program to the
Company's 1996 Stock Option/Stock Issuance Plan and the 1998 Stock Incentive
Plan, as amended (the Predecessor Plans). Options outstanding under the
Predecessor Plans on July 11, 2000 (9,071,061 shares) were incorporated into the
2000 Stock Incentive Plan. Such incorporated options continue to be governed by
their existing terms, which are similar to the 2000 Stock Incentive Plan. Under
the 2000 Stock Incentive Plan, the Company is authorized to provide awards in
the form of restricted shares, stock units, options or stock appreciation
rights. The number of shares reserved under this plan was 7,301,873 shares which
can be increased for repurchases of unvested common shares issued under the
Predecessor Plans up to a total share reserve of 10,000,000 shares. The share
reserve is automatically increased on January 1 of each calendar year, beginning
in 2001, by an amount equal to the lesser of: (i) 2,500,000 shares; (ii) 4% of
the outstanding shares of stock of the Company on such date; or (iii) a lesser
amount determined by the Company's Board of Directors (2,480,550 shares on
January 1, 2002).
Under the 2000 Stock Incentive Plan, the Company may grant options to
purchase or directly issue common stock to employees, outside directors and
consultants at prices not less than the fair market value at the date of grant
for incentive stock options and not less than par value at the date of grant for
non-statutory stock options. These options generally expire ten years from the
date of grant and are generally immediately exercisable. The Company has a right
to repurchase (at the option exercise price) common stock issued under option
exercises for unvested shares. The right of repurchase generally expires 25%
after the first 12 months from the date of grant and then ratably over a
36-month period. Settlement and vesting terms for awards of restricted stock,
stock appreciation rights, and stock units are governed by individual
agreements. There were no awards of restricted stock, stock appreciation rights
or stock units in 2000, 2001 and 2002.
In May 2002, the Board of Directors approved a Stock Option Exchange
Program. Under this program, eligible employees could elect to exchange certain
outstanding stock options with an exercise price greater than or equal to $1.00
for a new option to purchase the same number of shares of the Company's common
stock. The replacement options are to be issued at least six months and one day
after the cancellation date, August 15, 2002, and will be issued from the 2000
Stock Option Plan. The new options will be non-statutory stock options and will
have an exercise price equal to closing price of the Company's common stock on
the date prior to the replacement date. The new options will vest according to
the same schedule as the cancelled options. As of the cancellation date, the
Company had accepted 2,692,082 shares for exchange under the Program. (See Note
15 for replacement options granted after year end.)
50
Stock option activity under the stock plan is summarized as follows:
OUTSTANDING OPTIONS
-------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- -----
Balances at January 1, 2000 (1,163,408 shares vested at a
weighted average exercise price of $0.33 per share) .... 7,540,482 $ 0.64
Granted (weighted average fair value of $6.53 per share) .. 7,555,391 3.47
Canceled .................................................. (1,321,112) 1.58
Exercised ................................................. (3,081,973) 1.16
----------
Balances at December 31, 2000 (1,463,399 shares vested at a
weighted average exercise price of $0.643 per share) ... 10,692,788 2.37
Granted (weighted average fair value of $1.46 per share) .. 6,802,243 1.51
Canceled .................................................. (3,122,840) 2.74
Exercised ................................................. (1,018,448) 0.48
----------
Balances at December 31, 2001 (3,656,376 shares vested at a
weighted average exercise price of $1.85 per share) .... 13,353,743 1.99
Granted (weighted average fair value of $0.37 per share) .. 1,770,375 0.40
Canceled .................................................. (9,285,160) 2.20
Exercised ................................................. (213,948) 0.45
----------
Balances at December 31, 2002 ............................. 5,625,010 $ 1.21
==========
At December 31, 2002, the Company had 13,427,116 shares available for
future grants under the 2000 Stock Incentive Plan.
Additional information regarding options outstanding at December 31, 2002
is as follows:
OPTIONS OUTSTANDING VESTED OPTIONS
------------------------------------------------ ---------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE
-------------- ----------- ----------- ------- ------ -------
$0.13 - $0.36 1,168,964 7.8 $ 0.30 624,900 $ 0.20
$0.40 - $0.61 1,335,027 8.0 0.59 900,292 0.57
$0.70 - $1.00 1,177,303 7.1 0.98 965,422 0.99
$1.03 - $1.92 1,396,082 8.3 1.55 642,193 1.64
$2.00 - $6.50 547,634 7.6 4.31 359,303 4.00
--------- ---------
$0.13 - $6.50 5,625,010 7.8 $ 1.21 3,492,110 $ 1.17
========= =========
Employee Stock Purchase Plan
In July 2000, the Company adopted the 2000 Employee Stock Purchase Plan
(the ESPP). Under the ESPP, eligible employees are allowed to have salary
withholdings of up to 10% of their base compensation to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of defined purchase periods. Offering periods
commence on February 1 and August 1 of each year. One million eighty thousand
shares of common stock are reserved for issuance under ESPP and will be
increased on the first day of each fiscal year, the lesser of: (a) 80,000
shares; (b) 1% of the Company's outstanding common stock on the day of the
increase; or (c) a lesser number of shares determined by the Company's Board of
Directors (80,000 shares on January 1, 2002).
51
Shares issued under the ESPP were 194,707 in 2002 at a weighted average
price of $0.68 per share. There were 677,544 shares available for future
issuance under this plan at December 31, 2002.
Stock-Based Compensation
As discussed in Note 2, the Company accounts for employee stock plans under
the intrinsic value method prescribed by Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and Financial
Accounting Standards Board Interpretation ("FIN") No. 44, Accounting for Certain
Transactions Involving Stock Compensation (an Interpretation of APB No. 25) and
has adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. The Company accounts for stock-based compensation
relating to equity instruments issued to non-employees based on the fair value
of options or warrants estimated using the Black-Scholes model on the date of
grant in compliance with the Emerging Issues Task Force No. 96-18, Accounting
for Equity Instruments that are issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. Compensation expense resulting
from non-employee options is amortized using the multiple option approach in
compliance with FIN No. 28, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans.
Pursuant to FIN No. 44, options assumed in a purchase business combination
are valued at the date of acquisition at their fair value calculated using the
Black-Scholes option pricing model. The fair value of the assumed options is
included as part of the purchase price. The intrinsic value attributable to the
unvested options is recorded as unearned stock-based compensation and amortized
over the remaining vesting period of the related options. Options assumed by the
Company related to the business combination made on behalf of the Company
subsequent to July 1, 2000 (the effective date of FIN No. 44) have been
accounted for pursuant to FIN No. 44.
The Company's calculations of fair value for employee stock-based
compensation were made using the Black-Scholes option pricing model, which
requires subjective assumptions, including expected time to exercise and future
stock price volatility, which greatly affects the calculated values. The
following weighted average assumptions were used to calculate the fair value of
employee awards under the Company's option plans: expected life, 3.2 years in
2000, 2001 and 2002; volatility, 29% in 2000, 75% in 2001 and 154% in 2002; risk
free interest rate, 6.4% in 2000, 4.2% in 2001 and 3.1% in 2002; and no
dividends during the expected term. The Company's fair value calculations on
stock-based awards under the ESPP in 2001 and 2002 were also made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, six months; volatility, 75% in 2001 and 154% in
2002; risk free interest rate of 3.74 in 2001 and 3.05% in 2002; and no
dividends during the expected term. The Company's calculations are based on a
multiple option award valuation and amortization approach, which results in
accelerated amortization of the expense. Forfeitures are recognized as they
occur.
52
For purposes of pro forma disclosure under SFAS No. 123, the estimated fair
value of the options is assumed to be amortized to expense over the options'
vesting period, using the multiple option method. Pro forma information is as
follows (in thousands, except per share amounts):
Years Ended December 31,
------------------------------------------------
2000 2001 2002
---- ---- ----
Net loss, as reported ........................................... $ (43,332) $ (48,642) $ (55,430)
Add: Stock-based compensation included in reported net loss,
net of related tax effects ................................ 23,534 9,747 1,273
Less: Stock-based compensation expense determined under the fair
value method for all awards, net of related tax effects ... (24,426) (15,503) (1,019)
------------- ------------- -------------
Pro forma net loss .............................................. $ (44,224) $ (54,398) $ (55,176)
============= ============= =============
Net loss per share, as reported - basic and diluted ............. $ (2.63) $ (1.31) $ (0.90)
============= ============= =============
Pro forma net loss per share - basic and diluted ................ $ (2.69) $ (1.47) (0.90)
============= ============= =============
11. Income Taxes
The Company recorded no income tax benefit or provision in any of the
periods presented. The difference between the recorded amounts is reconciled to
the federal statutory rate as follows (in thousands):
2000 2001 2002
---- ---- ----
Federal statutory tax benefit at 35%.................. $ (15,166) $ (17,025) $ (19,401)
State tax benefit..................................... (2,490) (800) (1,123)
Research and development credits...................... (774) (400) --
Nondeductible stock compensation...................... 9,848 4,249 447
In process research and development................... -- 2,043 --
Amortization of goodwill and intangible assets........ -- 3,313 --
Impairment of goodwill -- -- 9,562
Change in valuation allowance......................... 8,973 8,040 11,463
Other................................................. (391) 580 (948)
--------- --------- ----------
Income taxes.......................................... $ -- $ -- $ --
========= ========= =========
The components of net deferred tax assets are as follows (in thousands):
December 31,
2001 2002
----------- --------
Deferred tax assets:
Accruals and reserves not currently deductible... $ 2,730 $ 1,661
Net operating loss carryforwards................. 26,492 37,313
Tax credit carryforwards......................... 2,423 2,769
Identified acquisition intangibles............... (1,626) --
Other............................................ 937 676
--------- ---------
30,956 42,419
Valuation allowance............................... (30,956) (42,419)
--------- -----------
Net deferred tax assets........................... $ -- $ --
========= =========
Due to the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by approximately $11.5 million during 2002.
53
As of December 31, 2002, the Company had available for carryforward net
operating losses for federal and state income tax purposes of approximately
$98.0 million and $36.0 million, respectively. Net operating losses of
approximately $1.3 million and $800,000 for federal and state tax purposes,
respectively, attributable to the tax benefit relating to the exercise of
nonqualified stock options and disqualifying dispositions of incentive stock
options are excluded from the components of deferred income tax assets. The tax
benefit associated with this net operating loss will be recorded as an
adjustment to stockholders' equity when the Company generates taxable income.
Federal net operating loss carryforwards will expire, if not utilized, in 2011
through 2022. State net operating loss carryforwards will expire, if not
utilized, in 2006 through 2014.
As of December 31, 2002, the Company had available for carryforward
research and experimentation tax credits for federal and state income tax
purposes of approximately $1.5 million and $1.6 million, respectively. Federal
research and experimentation tax credit carryforwards expire in 2011 through
2022. The Company also had approximately $300,000 in California manufacturers
investment credits.
Current federal and California tax laws include substantial restrictions on
the utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Use of approximately $14.0 million of the
net operating loss carryforward of Woodwind from periods prior to the merger
with the Company is limited to approximately $2.7 million per year. The
Company's ability to utilize other net operating loss and tax credit
carryforwards may be further limited as a result of an ownership change. Such a
limitation could result in the expiration of carryforwards before they are
utilized.
12. Customer Concentrations
The following table summarizes net revenue and accounts receivable for
customers which accounted for 10% or more of accounts receivable or net revenue:
Accounts Receivable Net Revenue
------------------- -----------
December 31, Years Ended December 31,
------------ ------------------------
CUSTOMER 2001 2002 2000 2001 2002
------------- ------ ------ ------ ------ ------
A............... 23% -- -- -- --
B............... 12% 27% 31% 44% 18%
C............... -- 17% -- -- --
D............... 32% 21% -- -- 37%
E............... 28% 26% 28% 21% 16%
F............... -- -- -- 12% --
13. Employee Benefit Plan
The Company has a 401(k) tax deferred savings plan to provide for
retirement of employees meeting certain eligibility requirements. Employee
contributions are limited to 20% of their annual compensation subject to IRS
annual limitations. The Company may make contributions at the discretion of the
Board of Directors. There were no discretionary employer contributions to the
401(k) plan in 2000, 2001, or 2002.
14. Segment Information
As defined by the requirements of SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information, the Company operates in one reportable
segment: the design, development, marketing and sale of multiservice broadband
access communications equipment. International sales were insignificant for all
periods presented. The Company's chief operating decision maker is its chief
executive officer.
15. Subsequent Events
As of December 31, 2002, the Company had a certificate of deposit for $3.0
million that secured a $3.0 million committed revolving line of credit. In
January 2003, the Company remitted full payment for the $3.0 million revolving
line of credit.
In January 2003, the Company announced and completed a restructuring plan
intended to better align its operations with the continued decline in the
telecommunications market. This plan was designed to focus on profit
contribution and reduce expenses. The restructuring includes a workforce
reduction with related severance and outplacement of approximately $296,000. The
restructuring has been accounted for in accordance with the provisions of SFAS
No. 146.
54
On February 17, 2003, the Company granted 2,601,982 option grants as part of the
Stock Option Exchange Program approved by the Board of Directors in May 2002.
Under this program, eligible employees were able to make an election to exchange
certain outstanding stock option grants with an exercise price greater than or
equal to $1.00 for a new option to purchase the same number of shares of VINA
Technologies Inc. common stock. The replacement option was issued per the Option
Exchange Program at least six months and one day after the cancellation date of
August 15, 2002. The new options were issued from the Company's 2000 Stock
Option Plan and are non-statutory stock options. The individuals participating
in this program were employees of VINA Technologies, Inc. on the replacement
grant date making them eligible to receive the new stock options. No
consideration for the canceled stock options was provided to individuals
terminating employment prior to the replacement grant date. The new option has
an exercise price of $0.16, which is equal to VINA Technologies Inc. common
stock's closing price on the date prior to the replacement grant. The new stock
options will continue to vest on the same schedule as the canceled options.
In February 2003, the Company reached a settlement agreement to terminate the
lease for its Maryland facility. Actual lease termination costs are $98,000,
which has resulted in a change in estimate of the restructuring charges
originally accrued as of December 31, 2002. The decrease in restructuring
reserves of $318,000 has been reflected in the consolidated financial statements
as of December 31, 2002.
In February 2003, the Company established an asset secured credit line with a
bank for up to $3.5 million. The Company needs to meet monthly covenants to be
able to borrow against this credit line and can meet them currently. The credit
line has a one-year duration and has terms of prime plus 2%. There is no
outstanding balance on this credit line.
16. Selected Consolidated Quarterly Financial Results (Unaudited)
The following tables set forth selected unaudited quarterly results of
operations for the years ended December 31, 2001 and 2002 (in thousands, except
per share amounts). In the opinion of management, such un-audited information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information.
Quarter Ended
---------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2001 2001 2001 2001 2002 2002 2002 2002
------- ------- -------- -------- ------- ------- -------- --------
Net revenue .....................$ 11,029 $ 12,028 $ 13,010 $ 9,045 $ 6,439 $ 6,624 $ 6,035 $ 6,045
Gross profit (excluding
stock-based compensation) .... 2,783 4,958 5,211 3,446 314 2,463 2,480 2,352
Loss from operations ............ (19,188) (12,378) (7,496) (10,963) (41,165) (5,566) (6,957) (1,938)
Net loss ........................ (18,576) (11,998) (7,219) (10,849) (41,093) (5,482) (6,934) (1,921)
Net loss per share, basic and
diluted ......................$ (0.57) $ (0.34) $ (0.20) $ (0.25) $ (0.67) $ (0.09) $ (0.11) $ (0.03)
Shares used in computation, basic
and diluted .................. 32,783 35,589 36,139 43,974 61,531 61,546 61,623 61,871
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item (with respect to identification of
directors and with respect to delinquent filers pursuant to Item 405 of
Regulation S-K) is incorporated by reference from the information under the
caption "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance," respectively, contained in the Company's Proxy Statement
to be filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Company's 2003 Annual Meeting of Stockholders
(the "Proxy Statement"). For information with respect to the executive officers
of the Company, see "Executive Officers" at the end of Part I of this report.
55
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors -- Compensation of
Directors," and "Executive Compensation" contained in the Company's Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
information under the captions "Security Ownership of Certain Beneficial Owners
and Management" contained in the Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Company's Proxy Statement
PART IV
Item 14. 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 Annual Report
on Form 10-K, 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.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements
Reference is made to the Index to Consolidated Financial Statements of VINA
Technologies, Inc., under Item 8 of Part II hereof.
(2) Consolidated Financial Statement Schedule
The following consolidated financial statement is filed as part of this
registration statement and should be read in conjunction with the consolidated
financial statements.
Page
----
Schedule II-- Valuation & Qualifying Accounts 62
Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the consolidated financial statements or the notes thereto.
(3) Exhibits
See Item 15(c) below. Each management contract or compensatory plan or
arrangement required to be filed has been identified.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fiscal quarter ended
December 31, 2002.
56
(c)
Exhibit
Number Description of Document
------ -----------------------
2.1 Agreement and Plan of Merger, dated as of October 30, 2000, by and
among the Registrant, WCS Acquisition Subsidiary, Inc. and Woodwind
Communications Systems, Inc. (incorporated by reference to Exhibit 2.1
to the Company's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on March 5, 2001 (File No.
000-31903)).
2.2 Agreement and Plan of Merger, dated as of October 17, 2001 by and
between the Registrant and MOS Acquisition Corporation (incorporated
by reference to the exhibit of the same number to the Company's
Registration Statement of Form S-1 filed with the Securities and
Exchange Commission on February 15, 2002 (File No. 833-82870)).
3(i) Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3(i).2 to the Company's
Registration Statement on Form S-1 (File No. 333-36398)).
3(ii) Bylaws of the Registrant, as amended (incorporated by reference to
Exhibit 3(ii).2 to the Company's Registration Statement on Form S-1
(File No. 333-36398)).
4.1 Form of Common Stock Certificate (incorporated by reference to the
exhibit of the same number to the Company's Registration Statement on
Form S-1 (File No. 333-36398)).
4.2.1 Rights Agreement dated as of July 25, 2001 by and between the
Registrant and American Stock Transfer & Trust Company (incorporated
by reference to Exhibit 4.1 of the Company's Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on July 25,
2001 (File No. 000-31903)).
4.2.2 Amendment No. 1 to Rights Agreement dated as of October 17, 2001 by
and between the Registrant and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 4.1 to the Company's Amendment
No. 1 to Registration Statement on Form 8-A filed with the Securities
and Exchange Commission on October 24, 2001 (File No. 000-31903)).
4.3.1 Securities Purchase Agreement dated as of October 17, 2001 by and
among the Registrant and the Investors named therein (incorporated by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 24, 2001
(File No. 000-31903)).
4.3.2 Securities Purchase Agreement dated as of October 19, 2001 by and
between the Registrant and Whitman Partners, L.P. (incorporated by
reference to Exhibit 99.3 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 24, 2001
(File No. 000-31903)).
4.4 Stockholders' Agreement dated as of October 17, 2001 by and among the
Company and the stockholders listed on the signature pages thereto
(incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission
on October 24, 2001 (File No. 000-31903)).
4.5 Form of Common Stock Purchase Warrant issued to investors in
connection with the securities purchase agreements (incorporated by
reference to Exhibit 99.5 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 24, 2001
(File No. 000-31903)).
10.1* 1996 Stock Plan and form of agreements thereunder (incorporated by
reference to the exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 333-36398)).
10.1.2* Amended and Restated 1998 Stock Plan and form of agreements
thereunder (incorporated by reference to the exhibit of the same
number to the Company's Registration Statement on Form S-1 (File No.
333-36398)).
10.1.3* 2000 Employee Stock Purchase Plan (incorporated by reference to the
exhibit of the same number to the Company's Registration Statement on
Form S-1 (File No. 333-36398)).
10.1.4* 2000 Stock Incentive Plan (incorporated by reference to the exhibit
of the same number to the Company's Registration Statement on Form S-1
(File No. 333-36398)).
10.1.5* Agreement under the 2000 Stock Incentive Plan (incorporated by
reference to the exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 333-36398)).
57
10.2+ General Agreement for the Procurement of Products and Service and the
Licensing of Software dated April 28, 1999 between the Registrant and
Lucent Technologies, Inc. (incorporated by reference to the exhibit of
the same number to the Company's Registration Statement on Form S-1
(File No. 333-36398)).
10.3* Indemnification Agreement between the Registrant and its officers and
directors (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-36398)).
10.4.1* Offer letter by and between the Registrant and Thomas J. Barsi
dated July 1, 1996 (incorporated by reference to the exhibit of the
same number to the Company's Registration Statement of Form S-1 filed
with the Securities and Exchange Commission on February 15, 2002 (File
No. 833-82870)).
10.4.2* Offer letter by and between the Registrant and Stanley E.
Kazmierczak dated May 24, 1999 (incorporated by reference to the
exhibit of the same number to the Company's Registration Statement of
Form S-1 filed with the Securities and Exchange Commission on February
15, 2002 (File No. 833-82870)).
10.4.3* Offer letter by and between the Registrant and Steven M. Bauman
dated August 16, 1999 (incorporated by reference to the exhibit of the
same number to the Company's Registration Statement of Form S-1 filed
with the Securities and Exchange Commission on February 15, 2002 (File
No. 833-82870)).
10.4.4* Offer letter by and between the Registrant and T. Diane Pewitt
dated January 21, 2000 (incorporated by reference to the exhibit of
the same number to the Company's Registration Statement of Form S-1
filed with the Securities and Exchange Commission on February 15, 2002
(File No. 833-82870)).
10.4.5* Offer letter by and between the Registrant and C. Reid Thomas dated
April 7, 2000 (incorporated by reference to the exhibit of the same
number to the Company's Registration Statement of Form S-1 filed with
the Securities and Exchange Commission on February 15, 2002 (File No.
833-82870)).
10.4.6* Offer letter by and between the Registrant and Julie P. Cotton
dated June 8, 2000 (incorporated by reference to the exhibit of the
same number to the Company's Registration Statement of Form S-1 filed
with the Securities and Exchange Commission on February 15, 2002 (File
No. 833-82870)).
10.5* Settlement Agreement and Release by and between the Registrant and
Joshua W. Soske dated July 17, 2001 (incorporated by reference to the
exhibit of the same number to the Company's Registration Statement of
Form S-1 filed with the Securities and Exchange Commission on February
15, 2002 (File No. 833-82870)).
24.1 Power of Attorney (see page 59 of this Form 10-K).
+ Confidential treatment has been granted with respect to certain portions of
this agreement.
* Indicates management contract or compensatory plan or arrangement.
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
58
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newark,
State of California on the 17th day of March 2003.
VINA TECHNOLOGIES, INC.
By /s/ W. MICHAEL WEST
-------------------------------
W. Michael West
Chairman of the Board and
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints W. Michael West and Stanley E.
Kazmierczak, and each of them, his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ W. Michael West Chairman of the Board and Chief Executive March 17, 2003
- ----------------------------- Officer (Principal Executive Officer)
W. Michael West
/s/ Stanley E. Kazmierczak Vice President, Finance and Administration March 17, 2003
- ----------------------------- and Chief Financial Officer (Principal
Stanley E. Kazmierczak Financial and Accounting Officer)
/s/ Jeffrey M. Drazan Director March 17, 2003
- -----------------------------
Jeffrey M. Drazan
/s/ John F. Malone Director March 17, 2003
- -----------------------------
John F. Malone
/s/ Philip J. Quigley Director March 17, 2003
- -----------------------------
Philip J. Quigley
/s/ Paul Scott Director March 17, 2003
- -----------------------------
Paul Scott
/s/ Joshua W. Soske Director March 17, 2003
- -----------------------------
Joshua W. Soske
59
Certifications
I, W. Michael West, certify that:
1. I have reviewed this annual report on Form 10-K of VINA Technologies,
Inc.;
2. Based on my knowledge, this annual 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 anual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 17, 2003
By: /s/ W. Michael West
--------------------
W. Michael West
Chief Executive Officer
(Principal Executive Officer)
60
I, Stanley E. Kazmierczak, certify that:
1. I have reviewed this annual report on Form 10-K of VINA Technologies,
Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 17, 2003
By: /s/ Stanley E. Kazmierczak
--------------------------
Stanley E. Kazmierczak
Chief Financial Officer
(Principal Financial and Accounting Officer)
61
VINA TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to Deductions-
beginning of costs and write-offs Balance at
period expenses of account end of period
------------ ----------- ----------------------------
Allowance for doubtful accounts and sales returns
Year ended
December 31, 2002 $ 457 $ 272 $ 484 $ 245
December 31, 2001 335 222 100 457
December 31, 2000 221 131 17 335
Accrued warranty:
Year ended
December 31, 2002 $ 696 $ (54) $ 228 $ 414
December 31, 2001 686 68 58 696
December 31, 2000 449 393 156 686
Inventory reserves:
Year ended
December 31, 2002 $ 463 $ 60 $ 243 $ 280
December 31, 2001 110 577 224 463
December 31, 2000 90 31 11 110
62