<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number
CLARENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0433687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 Chesapeake Drive
Redwood City, California 94063
(Address of principal executive offices and zip code)
Registrant's telephone number: (650) 306-7511
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 32,525,868 at March 31, 2000.
This report consists of 26 pages of which this page is number 1.
Page 1
<PAGE>
CLARENT CORPORATION
FORM 10-Q/A INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three Month Periods Ended March 31, 2000 and 1999 4
Condensed Consolidated Statement of Cash Flows for the
Three Month Periods ended March 31, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3: Quantitative and Qualitative
Disclosures About Market Risk 14
Item 4: Submission of Matters to a Vote
of Securities Holders 25
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 25
Signatures
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 226,463 $ 238,724
Short-term investments 57,020 45,569
Accounts receivable, net 22,577 24,218
Inventories 9,004 8,404
Prepaid expenses and other current assets 2,202 2,826
Total current assets 317,266 319,741
Property and equipment, net 14,437 12,696
Other assets 4,218 2,931
$ 335,921 $ 335,368
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,449 $ 8,552
Compensation related accruals 2,812 2,991
Deferred revenue 9,901 10,117
Other accrued liabilities 6,191 4,866
Total current liabilities 25,353 26,526
Stockholders' equity:
Common stock 354,910 353,894
Deferred compensation (4,612) (5,990)
Accumulated other comprehensive loss (64) (112)
Accumulated deficit (39,666) (38,950)
Total stockholders' equity 310,568 308,842
$ 335,921 $ 335,368
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
Revenue:
Product and software 22,078 6,128
Services 2,505 586
-------- -------
Total revenue 24,583 6,714
Cost of revenue:
Product and software 8,311 2,786
Services 1,638 495
-------- -------
Total cost of revenue 9,949 3,281
-------- -------
Gross profit 14,634 3,433
-------- -------
Operating expenses:
Research and development 4,340 1,566
Sales and marketing 11,055 4,025
General and administrative 2,441 1,357
Amortization of compensation 1,378 1,980
Amortization of goodwill 226 --
-------- -------
Total operating expenses 19,440 8,928
-------- -------
Loss from operations (4,806) (5,495)
Other income 4,115 16
-------- -------
Loss before provision for income taxes (691) (5,479)
Provision for income taxes (25) --
-------- -------
Net loss $ (716) $(5,479)
-------- -------
Basic and diluted net loss per share $ (0.02) $ (1.00)
Shares used in computing basic and diluted
net loss per share 31,448 5,481
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (716) $ (5,479)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,697 346
Amortization of compensation 1,378 1,980
Amortization of goodwill 213
Changes in operating assets and liabilities:
Accounts receivable 136 (4,065)
Inventories (600) (1,973)
Prepaid expenses and other current assets 624 (180)
Other assets -- (20)
Accounts payable and other accrued liabilities (957) 3,019
Deferred revenue (216) 2,338
--------- ---------
Net cash provided by (used in) operating activities 1,559 (4,034)
--------- ---------
Investing activities :
Purchases of short-term investments (41,808) --
Maturities of short-term investments 30,355 --
Purchases of property and equipment (3,478) (2,191)
--------- ---------
Net cash used in investing activities (14,931) (2,191)
--------- ---------
Financing activities:
Proceeds from line of credit -- 300
Proceeds from issuance of long term debt -- 1,254
Proceeds from issuance of common stock 1,016 22
--------- ---------
Net cash provided by financing activities 1,016 1,576
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents 95 13
--------- ---------
Net decrease in cash and cash equivalents (12,261) (4,636)
Cash and cash equivalents at beginning of period 238,724 11,903
--------- ---------
Cash and cash equivalents at end of period $ 226,463 $ 7,267
--------- ---------
Supplemental disclosure of non-cash investing
activities:
Common stock received in exchange
for settlement of accounts receivable 1,500 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Clarent
Corporation (the Company) as of March 31, 2000 and for the three month periods
ended March 31, 2000 and March 31, 1999 (unaudited) have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, the condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
accruals) that management considers necessary for a fair presentation of the
results of operations for the interim periods shown. The results of operations
for such periods are not necessarily indicative of the results expected for the
full fiscal year or for any future period. These financial statements should be
read in conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K, filed with the Securities
and Exchange Commission on March 28, 2000. Certain prior period balances have
been reclassified to conform to current period presentation.
2. Financial Instruments
Estimated fair values of financial instruments are based on quoted market
prices. The following is a summary of available-for-sale securities (in
thousands) at March 31, 2000.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Money Market Fund $ 25,899 $ - $ (3) $ 25,896
Commercial Paper 152,683 9 (29) 152,663
Government Securities 58,555 3 (39) 58,519
Market Auction Preferred 31,890 - - 31,890
-------- --- ---- --------
$269,027 $12 $(71) $268,968
======== === ==== ========
Classified as:
Cash Equivalents $211,962 $ 8 $(22) $211,948
Short-Term Investments 57,065 4 (50) 57,020
-------- --- ---- --------
$269,027 $12 $(71) $268,968
======== === ==== ========
</TABLE>
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to prepay or call obligations without
prepayment penalties. Realized gains and losses on sales of available-for-sale
securities were immaterial for the three months ended March 31, 2000. There were
no available-for-sale securities at March 31, 1999.
3. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
<S> <C> <C>
Raw materials $7,728 $ 7,347
Finished goods 1,276 1,057
------ -------
$9,004 $ 8,404
====== =======
</TABLE>
4. Comprehensive Loss
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income " (FAS 130). FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components, requiring foreign currency translation adjustments, and
unrealized gains and losses on short and long-term investments which currently
are reported in stockholders' equity, to be included in other comprehensive
income/loss. Prior year financial statements have been reclassified to conform
to the requirements of FAS 130.
The Company's total comprehensive loss is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Net loss, as reported (716) (5,479)
Other comprehensive loss:
Translation adjustments 93 26
Unrealized losses on investments (45) --
Comprehensive loss (668) (5,453)
</TABLE>
Page 6
<PAGE>
5. Income Taxes
The provision for income taxes of approximately $25,000 for the three month
period ending March 31, 2000 consists entirely of foreign income tax provided on
the profits attributable to the Company's foreign operations.
6. Stockholders Equity
On January 31, 2000, the Company increased the authorized number of shares
of common stock authorized for issuance under the 1999 Amended and Restated
Equity Incentive Plan (the 1999 plan) by 792,465 being 2.5% of the Company's
outstanding shares, measured as of that date. This increase was in accordance
with Section 4(a) of the 1999 plan. On February 15, 2000, the Company's
stockholders authorized an amendment to the Restated Certificate of
Incorporation to increase the authorized number of shares of common stock to
200,000,000 from 50,000,000 shares. The Company's stockholders also approved an
amendment to the 1999 plan to increase the aggregate number of shares of Common
Stock authorized for issuance under such plan by 2,641,830 shares. The aggregate
number of shares of Common Stock authorized for issuance under the 1999 plan was
14,792,465 at March 31, 2000.
7. Segments of an Enterprise and Related Information
The Company operates in one industry segment. The Company designs, develops
and sells Internet protocol telephony, or IP telephony systems. Net revenue for
non-U.S. locations are substantially the result of export sales from the U.S.
Net revenue by geographic region based on customer location were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Product and software sales
United States $ 8,352 $ 3,986
Other Americas 596 59
Europe 5,459 185
Asia Pacific 7,671 1,898
------- -------
Total $22,078 $ 6,128
Services
United States $ 1,471 $ 343
Other Americas 53 7
Europe 361 32
Asia Pacific 620 204
------- -------
Total $ 2,505 $ 586
</TABLE>
8. Net Loss Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic and diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period less outstanding shares subject to a right of
repurchase by the Company. Outstanding shares subject to repurchase are not
included in the computations of basic and diluted net loss per share until the
time-based vesting restrictions have lapsed. Common equivalent shares from stock
options and warrants (using the treasury stock method) are excluded from the
computation of diluted net loss per share as their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------
2000 1999
------ -------
(in thousands,
except per
share amounts)
<S> <C> <C>
Net loss (numerator)......................................... $ (716) $(5,479)
====== =======
Shares used in computing basic and diluted net loss per share
(denominator):
Weighted average common shares outstanding................... 31,898 7,281
Less shares subject to repurchase............................ (450) (1,800)
------ -------
Denominator for basic and diluted net loss per share......... 31,448 5,481
====== =======
Basic and diluted net loss per share......................... $(0.02) $ (1.00)
====== =======
</TABLE>
The Company has excluded all convertible preferred stock, warrants for
convertible preferred stock and common stock, outstanding stock options and
shares subject to repurchase from the calculation of diluted loss per common
share because all such securities are anti-dilutive for all periods presented.
The total number of shares excluded from the calculations of diluted net loss
per share were 8,680,168 and 24,324,862 for the three months ended March 31,
2000 and 1999, respectively.
9. Other Investments
At March 31, 2000 the Company reduced its accounts receivable by accepting
common stock with a value of $1.5 million in one of its privately held
customers as an alternative to cash payment. At March 31, 2000 the Company's
investment is recorded at cost and is included in Other Assets. Revenues from
this customer totaled $3.5 million in the three months ended March 31, 2000
and were recorded at the value of the products and services sold.
Page 7
<PAGE>
10. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on the
Company's results of operations or financial condition when adopted as the
Company holds no derivative financial instruments and does not currently engage
in hedging activities.
In December 1998, the AICPA issued Statement of Position 98-9, "
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9"). SOP 98-9 requires use of the "residual method" for
recognition of revenue when vendor-specific objective evidence (VSOE) exists for
undelivered elements but does not exist for delivered elements of a software
arrangement. The Company adopted the provisions of SOP 98-9 for transactions
entered into beginning January 1, 2000. The adoption of SOP 98-9 did not have a
material impact on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 is effective for years beginning
after December 15, 1999 and is required to be reported beginning in the
quarter ended June 30, 2000. SAB 101 is not expected to have a significant
effect on the Company's consolidated results of operations, financial
position, or cash flows.
11. Subsequent event
On May 1, 2000 the Company announced the signing of a definitive agreement to
acquire ACT Networks, Inc. (Nasdaq:ANET). ACT Networks is a leading provider of
multi-service access and voice/data integration products that enable the
convergence of voice, video and data onto one managed network.
Under the terms of the agreement, each outstanding share of ACT Networks will be
exchanged for 0.2546 of a share of Clarent Common Stock. The exchange ratio will
be subject to a 'collar' providing a maximum and minimum value of Clarent Common
Stock to be exchanged for each share of ACT Networks at Closing of $18.00 and
$14.00, respectively. Based on Clarent's closing price on Monday, May 1st, 2000
the company will issue approximately $189 million of stock for the outstanding
shares of ACT in addition to assuming ACT Networks' outstanding stock options.
The acquisition has been approved by the boards of directors of both companies
and is expected to close in the third quarter of 2000. This transaction is
subject to various closing conditions, including approval by ACT Networks'
stockholders and termination of the necessary waiting period under the
Hart-Scott-Rodino Act.
Page 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with CLARENT
CORPORATION's unaudited condensed consolidated financial statements and notes
thereto. Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes",
"anticipates", "estimates", "expects", and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this
Quarterly Report, and in other documents we file with the SEC.
Overview
We are a leading provider of Internet Protocol (IP) telephony systems. We
were incorporated in California in July 1996 and commenced sales of our products
in March 1997. In July 1999, we reincorporated in the state of Delaware. Since
March 1997 we have expanded our research and development, sales and marketing
and customer support activities. These activities include developing new
products and technologies and enhancing existing products, hiring sales and
marketing personnel, expanding our customer base, developing customer
relationships, marketing the Clarent IP telephony solution, expansion of our
domestic and international distribution channels and hiring customer support
personnel.
We generate revenue from sales of our integrated hardware and software products
and from maintenance and support of those products. We sell our products
primarily through our direct sales force and, to a lesser extent, through
distribution channels. We have sales and support personnel based in Australia,
Belgium, Brazil, Canada, France, Germany, Greece, Hong Kong, Italy, Japan,
Mexico, New Zealand, the People's Republic of China, Singapore, South Korea,
Spain, Taiwan, the United Kingdom and the United States.
Page 9
<PAGE>
Results of Operations
The following table presents certain consolidated statement of operations
data for the periods indicated as a percentage of total net revenue:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
As a Percentage of Net Revenue:
Product and software 89.8% 91.3%
Services 10.2 8.7
Total revenue 100.0 100.0
Product and software 33.8 41.5
Services 6.7 7.4
Total cost of revenue 40.5 48.9
Gross margin 59.5 51.1
Operating expenses:
Research and development 17.7 23.3
Sales and marketing 45.0 59.9
General and administrative 9.9 20.2
Amortization of compensation 5.6 29.5
Amortization of goodwill 0.9 0.0
Total operating expenses 79.1 133.0
Loss from operations (20.0) (82.0)
Interest and other income,net 17.0 1.0
Interest expense 0.0 (1.0)
Total Other income 17.0 0.0
Loss before provision for income taxes (3.0) (82.0)
Provision for income taxes 0.0 0.0
Net loss (3.0)% (82.0)%
</TABLE>
Page 10
<PAGE>
Revenue
Revenue increased 266% to $24.6 million in the three months ended March 31,
2000 from $6.7 million in the three months ended March 31, 1999. The increase in
revenues was primarily attributable to an increase in product and software sales
of 260% to $22.1 million in the three months ended March 31, 2000 from $6.1
million in the same period of 1999. Maintenance and support revenue increased by
327% to $2.5 million in the three months ended March 31, 2000 from $0.6 million
for the same period of 1999 due to a larger customer base and new products.
Cost of Revenue
Cost of revenue increased 203% to $9.9 million in three months ended March
31, 2000 from $3.3 million in the three months ended March 31, 1999. This
increase was primarily attributable to an increase in product and software costs
of 198% to $8.3 million in the three months ended March 31, 2000 from $2.8
million in the same period of 1999. Maintenance and support costs also increased
by 231% to $1.6 million in the three months ended March 31, 2000 from $0.5
million in the same period of 1999 due to the increases in technical support
personnel to service our increased customer base. Gross margin was 60% for the
first quarter, compared to 51% for the corresponding period in 1999. Increased
sales of our software products both in absolute dollars and as a percentage of
revenue positively impacted our gross margin in the three months ended March 31,
2000.
Research and Development Expenses
Research and development expenses increased 177% to $4.3 million in the
three months ended March 31, 2000 from $1.6 million in the three months ended
March 31, 1999. The absolute dollar increases in research and development
expenses from period to period were attributable to increases in the number of
research and development personnel. Research and development expenses decreased
as a percentage of revenue to 18% for the three month period ended March 31,
2000 from 23% for the three month period ended March 31, 1999.
Sales and Marketing Expenses
Sales and marketing expenses increased 175% to $11.1 million in the three
months ended March 31, 2000 from $4.0 million in the three months ended March
31, 1999. The absolute dollar increase in sales and marketing expenses was
primarily attributable to an increase in personnel and related expenses required
to implement our sales and marketing strategy and, to a lesser extent, increased
public relations and other promotional expenses. Sales and marketing expenses
decreased as a percentage of revenue to 45% for the three months ended March
31, 2000 from 60% for the three months ended March 31, 1999.
General and Administrative Expenses
General and administrative expenses increased 80% to $2.4 million in the
three months ended March 31, 2000 from $1.4 million in the three months ended
March 31, 1999. The absolute dollar increase in general and administrative
expenses from period to period was primarily attributable to an increase in
personnel and related expenses required to build the infrastructure to support a
larger organization. General and administrative expenses decreased as a
percentage of revenue to 10% for the three months ended March 31, 2000 from 20%
for the three months ended March 31, 1999.
Page 11
<PAGE>
Amortization of Compensation
We incurred $1.4 million in the three months ended March 31, 2000 in
amortization of compensation associated with the granting of stock options and
warrants to purchase common stock as compared to $2.0 million in the three
months ended March 31, 1999. Amortization of compensation expense includes the
amortization of stock compensation charges resulting from the granting of stock
options at prices below the deemed fair value of our common stock.
Amortization of Goodwill
For the three months ended March 31, 2000 we recorded amortization of
goodwill resulting from a purchase business combination completed in the fourth
quarter of 1999.
Other Income, net
Other income, net increased 25,671% to $4.1 million in the three months
ended March 31, 2000 from $16,000 in the three months ended March 31, 1999.
The increase was attributable to the interest income earned on our cash, cash
equivalents and investments primarily as a result of the funds raised in our
initial and secondary public offerings.
Provision for Income Taxes
For the three months ended March 31, 2000 we recorded provisions for income
taxes of $25,000 related to current foreign income tax provided on the profits
attributable to our foreign operations.
Liquidity and Capital Resources
From inception through June 1999, we financed our operations primarily
through private sales of convertible preferred stock, which totaled $18.9
million in aggregate net proceeds. During 1999 we completed both an initial and
a secondary public offering which resulted in net proceeds of approximately $303
million.
Net cash provided by operating activities was $1.6 million in the first
quarter of 2000 in comparison to $4.0 million used in operating activities in
the same period of 1999. Net cash provided by operating activities for the first
quarter of 2000 was attributable primarily to a reduced net loss of
approximately $716,000 and decreases in trade accounts receivable of $136,000
and prepaids and other current assets of $624,000 as well as depreciation of
$1.7 million, amortization of compensation and goodwill of $1.6 million,
partially offset by an increase in inventories of $600,000 and by decreases in
accounts payable and accrued liabilities of $957,000 and deferred revenue of
$216,000. The increase in inventory for the first quarter was primarily in
anticipation of expected growth in product revenue as well as a greater need for
evaluation units. The decrease in accounts receivable for the first quarter of
2000 is primarily the result of improved collections as well as the conversion
of $1.5 million into an equity investment.
Page 12
<PAGE>
The decrease in deferred revenue for first quarter of 2000 is a result of
the receipt of cash payment from customers where recognition of revenue had
previously been deferred because the fees in these customers arrangements were
not deemed to be fixed and determinable. The decrease was offset by an
increase in deferred support and maintenance revenue of $1.9 million due to
the overall increase in sales. In the first quarter of 2000 we have added
several of the world's leading telecommunications companies to our customer
list. We have also improved our collections process and results.
Net cash used in operating activities for the first quarter of 1999 was
attributable primarily to a net loss of approximately $5.5 million and increases
in trade accounts receivable of $4.1 million and inventory of $2.0 million,
partially offset by depreciation of $346,000, amortization of compensation of
$2.0 million, increases in accounts payable and accrued liabilities of $3.0
million and increases in deferred revenue of $2.3 million. The increase in
inventory for 1999 was primarily in anticipation of expected growth in product
revenue as well as a greater need for evaluation units.
Net cash used in investing activities was approximately $14.9 million in
The first quarter of 2000 as compared to $2.2 million for the same period in
1999. For 2000, $11.5 million of cash used in investing activities was for the
purchase of investment securities net of sales and maturities. The remaining
cash used in investing activities for each year was for purchases of property
and equipment.
Net cash provided by financing activities was $1.0 million in the first
quarter of 2000, as opposed to $1.6 million for the same period in 1999. For the
period ended March 31, 2000, cash provided by financing activities was
attributable primarily to net proceeds from the exercise of common stock
options. For 1999, the cash provided by financing activities was primarily
attributable to proceeds from a bank line of credit and long term debt.
On May 1, 2000 we announced the signing of a definitive agreement to
acquire ACT Networks, Inc. (Nasdaq:ANET), a leading provider of multi-service
access and voice/data integration products that enable the convergence of
voice, video, and data onto a managed network in a stock transaction valued at
approximately $189 million. The acquisition is expected to close in the third
quarter of 2000 subject to various closing conditions.
We believe that our current cash, cash equivalents and short-term
investments balances of $283.5 million at March 31, 2000 will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next 12 months. If cash generated from operations is
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities or obtain borrowings through a line of
credit. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the term of this debt could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders, and
we cannot be certain that additional financing will be available in amounts or
on terms acceptable to us, if at all. If we are unable to obtain this
additional financing, we may be required to reduce the scope of our planned
product development and marketing efforts, which could harm our business,
financial condition and operating results.
Page 13
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Market Risk
Our financial market risk includes risks associated with international
operations and related foreign currencies. We anticipate that international
sales will continue to account for a significant portion of our consolidated
revenue. Our international sales are currently denominated in U.S. dollars and
therefore are not subject to foreign currency exchange risk. Expenses of our
international operations are denominated in each country's local currency and
therefore are subject to foreign currency exchange risk; however, through March
31, 2000 we have not experienced any significant negative impact on our
operations as a result of fluctuations in foreign currency exchange rates. We
do not currently engage in any hedging activities or use derivative financial
instruments.
We have an investment portfolio of fixed income securities, including those
classified as cash equivalents, of $269 million at March 31, 2000. These
securities are subject to interest rate fluctuations and will decrease in market
value if interest rates increase.
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
We invest primarily in high-quality, short-term debt instruments such as U.S.
government securities and instruments issued by high quality financial
institutions and companies including money market instruments and debt issued by
corporations. A hypothetical 100 basis point increase in interest rates would
result in less than a $0.1 million decrease (less than .1%) in the fair market
value of our available-for-sale securities.
Page 14
<PAGE>
RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Factors that have affected our results of operations in the past, and are
likely to affect our results of operations in the future, include the following:
We have a limited operating history, which makes it difficult to evaluate our
prospects.
We are an early-stage company in the emerging IP telephony market. Because
of our limited operating history, we have limited insight into trends that may
emerge in our market and affect our business. The revenue and income potential
of the IP telephony market, and our business in particular, are unproven. As a
result of our limited operating history, we have limited financial data that
you can use to evaluate our business. You must consider our prospects in light
of the risks, expenses and challenges we might encounter because we are at an
early stage of development in a new and rapidly evolving market.
Unless we generate significant revenue growth, our increasing expenses will
significantly harm our financial position.
As of March 31, 2000, we had an accumulated deficit of $39.7 million. We
expect to incur operating losses for the foreseeable future, and these losses
may be substantial. Further, we expect to incur negative operating cash flow in
the future. We expect to continue to increase capital expenditures and our
research and development, sales and marketing and general and administrative
expenses. We will need to generate significant revenue growth to achieve
profitability and maintain a positive operating cash flow. Even if we do achieve
profitability and continue to maintain a positive operating cash flow, we may
not be able to sustain or increase profitability or positive operating cash flow
on a quarterly or annual basis.
We have experienced operating losses in each quarterly and annual period
since inception. The following table shows our operating losses for the periods
indicated:
<TABLE>
<CAPTION>
Operating Loss Period
<S> <C>
( 33,163,000) Year Ended December 31, 1999
( 4,806,000) Three months ended March 31, 2000
( 5,495,000) Three months ended March 31, 1999
</TABLE>
Our operating results are volatile, and an unanticipated decline in revenue may
disproportionately affect our net income or loss in a quarter.
Our quarterly and annual operating results have varied significantly in the
past and will likely vary significantly in the future. As a result, our future
operating results are difficult to predict. Further, we incur expenses in
significant part on our expectations of our future revenue. As a result, we
expect our expense levels to be relatively fixed in the short run. Therefore, an
unanticipated decline in revenue for a particular quarter may disproportionately
affect our net income (loss) in that quarter.
Any of the above factors could harm our business, financial condition and
results of operations. We believe that period-to-period comparisons of our
results of operations are not meaningful, and you should not rely upon them as
indicators of our future performance.
Page 15
<PAGE>
If we do not reduce costs, introduce new products or increase sales volume, our
gross margin may decline.
We have experienced significant erosion in the average selling prices of
our products due to a number of factors, including competitive pricing
pressures, rapid technological change and sales discounts. We anticipate that
the average selling prices of our products will decrease and fluctuate in the
future in response to the same factors. Therefore, to maintain or increase our
gross margin, we must develop and introduce new products and product
enhancements on a timely basis. We must also continually reduce our costs of
production. As our average selling prices decline, we must increase our unit
sales volume to maintain or increase our revenue. To date, the erosion in the
average selling prices has not had a material affect on our business. However,
we cannot be certain that the erosion in the average selling prices will not
affect our business in the future. If our average selling prices decline more
rapidly than our costs of production, our gross margin will decline, which
could seriously harm our business, financial condition and results of
operations.
Our markets are highly competitive, and we cannot assure you that we will be
able to compete effectively.
We compete in a new, rapidly evolving and highly competitive and fragmented
market. We expect competition to intensify in the future. We cannot assure you
that we will be able to compete effectively. We believe that the main
competitive factors in our market are product quality, features, cost and
customer relationships. Our current principal competitors include 3Com
Corporation, Cisco Systems, Inc., Lucent Technologies Inc., Nortel Networks
Corporation and VocalTec Communications, Ltd. Many of our large competitors have
stronger relationships with service providers than we do. In addition, they may
be able to compete more effectively because they will be able to add IP
telephony features to their existing equipment or bundle these features as part
of a broader solution. According to one industry source, our market share in IP
telephony equipment, as measured by ports shipped, fell from 16.7% in 1998
to 4.0% in the first half of 1999. We also expect that other companies may
enter our market with better products and technologies.
We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. To be
competitive, we must continue to invest significant resources in research and
development, sales, marketing and customer support. We cannot be sure that we
will have sufficient resources to make these investments or that we will be able
to make the technological advances necessary to be competitive. Increased
competition is likely to result in price reductions, reduced gross margin and
loss of market share. Our failure to compete successfully against current or
future competitors could seriously harm our business, financial condition and
results of operations.
Our future ability to generate sales depends on the interoperability of our
products with those of other vendors.
While our products currently connect to the traditional system using
standard interfaces, an increasing number of our customers have requested that
our products interoperate with competing IP telephony products from other
vendors. The interoperability standards for IP telephony equipment are evolving.
We have initial interoperable solutions. If we are unable to provide or maintain
our customers' interoperable solutions with other vendors' products, they may
seek vendors who provide greater product interoperability. This could seriously
harm our business, financial condition and results of operations.
Page 16
<PAGE>
If we lose key personnel, we may not be able to successfully operate our
business.
Our future success depends, in large part, on our ability to attract and
retain highly skilled personnel. The loss of the services of any of our key
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring required personnel, particularly engineers, sales personnel
and marketing personnel, may seriously harm our business, financial condition
and results of operations. We will need to expand our sales operations and
marketing operations in order to increase market awareness of our products and
generate increased revenue. New sales personnel and marketing personnel will
require training and take time to achieve full productivity. In addition, the
design and installation of IP telephony solutions can be complex. Accordingly,
we need highly trained professional services and customer support personnel. We
currently have a small professional services and customer support organization
and will need to increase our staff to support new customers and the expanding
needs of existing customers. Competition for personnel is intense, especially in
the San Francisco Bay Area where we maintain our headquarters. We cannot be
certain that we will successfully attract and retain additional qualified
personnel. In addition, our key person life insurance policy, covering some of
our key employees, may be insufficient to cover the costs associated with the
loss of one of these employees.
Our failure to manage our rapid growth effectively could negatively affect our
results of operations.
Since we began commercial shipment of our products in March 1997, we have
experienced a period of rapid growth and expansion that is significantly
straining all of our resources. From March 31, 1999 to March 31, 2000, the
number of our employees increased from approximately 155 to 358. We expect our
anticipated growth and expansion to continue to place strain on our management,
operational and financial resources. Our inability to manage growth effectively
could seriously harm our business, financial condition and results of
operations. We may not be able to install adequate control systems in an
efficient and timely manner, and our current or planned operational systems,
procedures and controls may not be adequate to support our future operations.
Delays in the implementation of new systems or operational disruptions when we
transition to new systems would impair our ability to accurately forecast sales
demand, manage our product inventory and record and report financial and
management information on a timely and accurate basis.
The IP telephony alternative may not achieve widespread acceptance, which could
cause our business to fail.
The IP telephony market is relatively new and evolving rapidly. Less than 1%
of all voice calls worldwide are currently transmitted over IP-based data
networks. Our ability to increase revenue in the future depends on some of both
existing and future circuit-switched telephone network calls moving to IP-based
data networks. The use of IP telephony for voice calls might be hindered by the:
. reluctance of service providers that have invested substantial resources
in the existing telephone network infrastructure to replace or expand their
current networks with this new technology; and
. lack of partnerships between service providers, keeping them from having
global IP telephony network coverage.
Accordingly, in order to achieve commercial acceptance, we will have to
educate prospective customers, including large, established telecommunications
companies, about the benefits and uses of IP telephony solutions in general, our
products in particular, and the need to partner with other IP telephony service
providers to extend the coverage of their networks. If these efforts fail or if
IP telephony does not achieve commercial acceptance, our business, financial
condition and results of operations could be seriously harmed.
Page 17
<PAGE>
Our inability to introduce new products and product enhancements could prevent
us from increasing revenue.
We expect that the IP telephony market will be characterized by rapid
technological change. We also expect that the increased use of IP telephony will
require us to rapidly evolve and adapt our products to remain competitive. The
successful operation of our business depends on our ability to develop and
introduce new products and product enhancements that respond to technological
changes or evolving industry standards on a timely and cost-effective basis. We
cannot be certain that we will successfully develop and market these types of
products and product enhancements. Our failure to produce technologically
competitive products in a cost-effective manner and on a timely basis will
seriously harm our business, financial condition and results of operations.
Future regulation or legislation could restrict our business or increase our
cost of doing business.
At present there are few laws or regulations that specifically address
access to or commerce on the Internet, including IP telephony. We are unable to
predict the impact, if any, that future legislation, legal decisions or
regulations concerning the Internet may have on our business, financial
condition and results of operations. Regulation may be targeted towards, among
other things, assessing access or settlement charges, imposing tariffs or
imposing regulations based on encryption concerns or the characteristics and
quality of products and services, which could restrict our business or increase
our cost of doing business. The increasing growth of the IP telephony market and
popularity of IP telephony products and services heighten the risk that
governments will seek to regulate IP telephony and the Internet. In addition,
large, established telecommunications companies may devote substantial lobbying
efforts to influence the regulation of the IP telephony market, which may be
contrary to our interests.
We depend on new entrants in the service provider market to generate a portion
of our revenue and our operating results may be harmed if these new entrants are
not commercially viable.
We expect to generate a portion of our revenue from new entrants in the
telecommunications service provider market. Failure to generate revenue from
these new entrants could have a negative impact on our business. Examples of
these service providers include traditional, local, international and wholesale
long distance companies, competitive local exchange carriers and Internet
telephony service providers. Many of these new entrants are still building their
infrastructures and rolling out their services. We cannot guarantee that any of
these companies will achieve commercial viability. Given that these new entrants
may be start-up operations with uncertain financial resources, we cannot be sure
that these new entrants will be able to pay their obligations to us for purchase
of our products on a timely basis, or at all. Some of our new entrant customers
have been late in making payments to us. To date, late payments from our
customers have not significantly impacted our operations. However, we cannot be
certain that late payments from our customers will not impact our operations in
the future. The failure of these companies to achieve commercial viability or
pay their obligations to us would, in turn, seriously harm our business,
financial condition and results of operations.
A loss of one or more of our key customers could cause a significant decrease in
our net revenue.
We have historically derived the majority of our revenue from a small number of
customers. For the three months ended March 31, 2000, entities affiliated with
Vitcom accounted for 14% of our revenue, Triumph Technologies accounted for 13%
of our revenue, and Vic Telehome accounted for 12% of revenue. None of our
customers is obligated to purchase additional products or services. Accordingly,
we cannot be certain that present or future customers will not terminate their
purchasing arrangements with us or significantly reduce or delay their orders.
Any termination, change, reduction or delay in orders could seriously harm our
business, financial condition and results of operations.
Page 18
<PAGE>
We may not be able to expand our direct sales and distribution channels, which
would harm our ability to generate revenue.
We believe that our future success is dependent upon our ability to expand
our direct sales force and establish successful relationships with a variety of
international distribution partners. To date, we have entered into agreements
with only a small number of distribution partners that accounted for
approximately 20% of revenue for the first quarter of 2000 and 19% of revenue
for the first quarter of 1999. These distribution agreements typically may be
terminated without cause upon 90 days notice. We cannot be certain that we will
be able to reach agreement with additional distribution partners on a timely
basis or at all, or that these distribution partners will devote adequate
resources to marketing, selling and supporting our products. We must
successfully manage our distributor relationships. We cannot guarantee that we
will successfully manage our distributor relationships in the future. Our
inability to generate revenue from distribution partners may harm our business,
financial condition and results of operations.
Sales to customers based outside the United States have historically accounted
for a significant portion of our revenue, which exposes us to risks inherent in
international operations.
International sales represented approximately 54% for the year ended
December 31, 1999 and 60% the first quarter of 2000 and 34% in the first quarter
of 1999. Our international operations are subject to a variety of risks
associated with conducting business internationally any of which could seriously
harm our business, financial condition and results of operations. These risks
include:
. greater difficulty in accounts receivable collections;
. import or export licensing and product certification requirements;
. tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries;
. potential adverse tax consequences, including restrictions on repatriation
of earnings;
. fluctuations in currency exchange rates;
. seasonal reductions in business activity in some parts of the world;
. unexpected changes in regulatory requirements;
. burdens of complying with a wide variety of foreign laws, particularly
with respect to intellectual property and license requirements;
. difficulties and costs of staffing and managing foreign operations;
. political instability;
. the impact of recessions in economies outside of the United States; and
. limited ability to enforce agreements, intellectual property and other
rights in some foreign countries.
We may not be able to expand our international operations, which would reduce
our ability to increase revenue.
We currently have offices in Australia, Belgium, Brazil, Canada, France,
Germany, Greece, Hong Kong, Italy, Japan, Mexico, New Zealand, the People's
Republic of China, Singapore, South Korea, Spain, Taiwan, the United Kingdom and
the United States. We intend to expand the scope of our international
operations, which will require us to enhance our communications infrastructure
and may include the establishment of overseas assembly operations. If we are
unable to expand our international operations effectively and quickly, we may be
unable to successfully market, sell, deliver and support our products
internationally.
Page 19
<PAGE>
Our sales cycle is typically long and unpredictable, causing us to incur
expenditures prior to the receipt of orders.
We incur research and development, and sales and marketing, including
customer support, expenditures prior to receiving orders for our products from
any given customer. The length of the sales cycle with a particular customer is
influenced by a number of factors, including:
. a customer's experience with sophisticated telecommunications equipment,
such as our product;
. the particular telecommunications market that the customer serves; and
. the cost of purchasing our product, including the cost of converting from
installed equipment, which may be significant.
Before we receive orders, our customers typically test and evaluate our products
for a period of months or, in some cases, over a year.
We cannot be certain that the sales cycle for our products will not lengthen
in the future. In addition, the emerging and evolving nature of the IP telephony
market may cause prospective customers to delay their purchase decisions as they
evaluate new technologies and develop and implement new systems. As the average
order size for our products grows, the process for approving purchases is likely
to become more complex, leading to potential delays in receipt of these orders.
As a result, our long and unpredictable sales cycle contributes to the
uncertainty of our future operating results.
Delays in customer orders could have a negative impact on our results of
operations for any given quarter.
We have historically received a significant portion of our product orders
near the end of a quarter. Accordingly, a delay in an anticipated receipt or
delivery of a given order past the end of a particular quarter may negatively
impact our results of operations for that quarter. These delays may become more
likely given that we expect that the average size of our customer orders may
increase. As a result, a delay in the recognition of revenue, even from just one
customer, may have a significant negative impact on our results of operations
for a given period. Any delay in sales of our products could result in a
significant decrease in cash flow, which, in turn, could severely affect our
ability to make payments as they come due and could cause our operating results
to vary significantly from quarter to quarter.
Our dependence on independent manufacturers may result in product delivery
delays.
We license technology that is incorporated into our products from
independent manufacturers, including AudioCodes, Ltd. and Natural Microsystems.
If these vendors fail to supply us with their components on a timely basis, we
could experience significant delays in shipping our products. Although we
believe there are other sources for this licensed technology, any significant
interruption in the supply or support of any licensed technology could seriously
harm our sales, unless and until we can replace the functionality provided by
this licensed technology. Also, because our products incorporate software
developed and maintained by third parties, we depend on these third parties to
deliver reliable products, support these products, enhance their current
products, develop new products on a timely and cost-effective basis, and respond
to emerging industry standards and other technological changes. The failure of
these third parties to meet these criteria could seriously harm our business,
financial condition and results of operations.
Our business could be harmed if we are unable to forecast our inventory needs
accurately.
Lead times for materials and components used in the assembly of our products
vary significantly. If orders do not match forecasts, we may have excess or
inadequate inventory of some materials and components.
Page 20
<PAGE>
Our strategy to outsource assembly and test functions in the future could delay
our ability to deliver our products on a timely basis.
We assemble and test our products at our facility in Redwood City,
California. Based on volume or customer requirements, we may begin outsourcing
some of our assembly and test functions. This outsourcing strategy involves
risks, including the potential absence of adequate capacity and reduced
control over delivery schedules, manufacturing yields, quality and costs. In
the event that any significant subcontractor were to become unable or
unwilling to continue to manufacture and/or test our products in the required
volumes, we would have to identify and qualify acceptable replacements. This
process could be lengthy, and we cannot be sure that additional sources would
be available to us on a timely basis. Any delay or increase in costs in the
assembly and testing of products by third-party subcontractors, could
seriously harm our business, financial condition and results of operations.
Our facilities are vulnerable to damage from earthquakes and other natural
disasters.
Our assembly facilities are located on or near known earthquake fault zones
and are vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. If such a disaster occurs while
we still assemble our products in-house, our ability to assemble, test and ship
our products would be seriously, if not completely, impaired, which would
seriously harm our business, financial condition and results of operations. We
cannot be sure that the insurance we maintain against fires, floods, earthquakes
and general business interruptions will be adequate to cover our losses in any
particular case.
Fluctuations in the values of foreign currencies could have a negative impact on
our profitability.
Due to our international operations, we incur expenses in a number of
currencies. We do not currently engage in currency hedging activities to limit
the risks of exchange rate fluctuations. Therefore, fluctuations in the value of
foreign currencies could have a negative impact on the profitability of our
global operations, which would seriously harm our business, financial condition
and results of operations. All of our sales, including international sales are
currently denominated in U.S. dollars. However, we do not expect that future
international sales will continue to be denominated in U.S. dollars.
Fluctuations in the value of the U.S. dollar and foreign currencies may make our
products more expensive than local product offerings.
Defects in our products may seriously harm our credibility and harm our
business.
We have detected and may continue to detect errors and product defects in
connection with new product releases and product upgrades. These problems may
affect network uptime and cause us to incur significant warranty and repair
costs and cause significant customer relations problems. Service providers
require a strict level of quality and reliability from telecommunications
equipment suppliers. Traditional telecommunications equipment is expected to
provide a 99.999% level of reliability. IP telephony products are inherently
complex and frequently contain undetected software or hardware errors when first
introduced or as new versions are released. In addition, the detection of errors
in software products requires an unknown level of effort to correct and may
delay the release of new products or upgrades or revisions to existing products,
which could materially affect the market acceptance and sales of our products.
If we deliver products or upgrades with undetected material software errors or
product defects, our credibility and market acceptance and sales of our products
may be harmed. In some of our contracts, we have agreed to indemnify our
customers against certain liabilities arising from defects in our products.
While we carry insurance policies covering this type of liability, these
policies may not provide sufficient protection should a claim be asserted. To
date, product defects have not had a material negative affect on our results of
operations. However, we cannot be certain that product defects will not have a
material negative affect on our results of operations in the future. A material
product liability claim may have significant consequences on our ability to
compete effectively and generate positive cash flow and may seriously harm our
business, financial condition and results of operations.
Page 21
<PAGE>
We may have difficulty identifying the source of the problem when there is a
problem in a network.
Our products must successfully integrate with products from other vendors,
such as traditional telephone systems. As a result, when problems occur in a
network, it may be difficult to identify the source of the problem. The
occurrence of hardware and software errors, whether caused by our products or
another vendor's products, may result in the delay or loss of market
acceptance of our products and any necessary revisions may force us to incur
significant expenses. The occurrence of some of these types of problems may
seriously harm our business, financial condition and results of operations.
We may not have adequate protection for our intellectual property, which may
make it easier for others to sell competing products.
We rely on a combination of copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent misappropriation of our technology. The laws of
some foreign countries do not protect our proprietary rights to as great an
extent as the laws of the United States, and many United States companies have
encountered substantial infringement problems in these countries, some of which
are countries in which we have sold and continue to sell products. If we fail to
adequately protect our intellectual property rights, it would be easier for our
competitors to sell competing products.
Our products may infringe on the intellectual property rights of third parties,
which may result in lawsuits and prohibit us from selling our products.
We believe there is a risk that third parties have filed, or will file
applications for, or have received or will receive, patents or obtain additional
intellectual property rights relating to materials or processes that we use or
propose to use. As a result, from time to time, third parties may assert
exclusive patent, copyright, trademark and other intellectual property rights to
technologies that are important to us. In addition, third parties may assert
claims or initiate litigation against us or our manufacturers, suppliers or
customers with respect to existing or future products, trademarks or other
proprietary rights. Any claims against us or customers that we indemnify against
intellectual property claims, with or without merit, may be time- consuming,
result in costly litigation and diversion of technical and management personnel
or require us to develop non-infringing technology. If a claim is successful, we
may be required to obtain a license or royalty agreement under the intellectual
property rights of those parties claiming the infringement. If we are unable to
obtain the license, we may be unable to market our products. Limitations on our
ability to market our products and delays and costs associated with monetary
damages and redesigns in compliance with an adverse judgment or settlement could
harm our business, financial condition and results of operations.
We may not be able to raise capital as needed to maintain our operations.
We may need to raise additional funds, and additional financing may not be
available on favorable terms, if at all. We may also require additional capital
to acquire or invest in complementary businesses or products or obtain the right
to use complementary technologies. If we cannot raise needed funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, financial condition and
results of operations. If we issue additional equity securities to raise funds,
the ownership percentage of our existing stockholders would be reduced. New
investors may demand rights, preferences or privileges senior to those of
existing holders of our common stock.
Our stock price is highly volatile.
The trading price of our common stock has fluctuated significantly since our
initial public offering in July 1999. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in
Page 22
<PAGE>
operating results, announcements of technological innovations or new products by
us or our competitors, developments with respect to patents or proprietary
rights, announcements of strategic partnerships or new customers by us or our
competitors, changes in financial estimates by securities analysts and other
events or factors. In addition, the stock market has experienced volatility that
has particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
may adversely affect the market price of our common stock.
We may in the future be the target of securities class action or other
litigation, which could be costly and time consuming to defend.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Our
acquisition activity may involve us in disputes from time to time. Litigation
that may arise from these disputes may lead to volatility in our stock price
and/or may result in our being the target of securities class action litigation.
Securities litigation may result in substantial costs and divert management's
attention and resources, which may seriously harm our business, financial
condition and results of operations.
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could delay or prevent a change of control of Clarent.
Certain provisions of our certificate of incorporation and bylaws and
Delaware law may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include:
. authorizing the board of directors to issue additional preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
We are also subject to certain provisions of Delaware law which could delay,
deter or prevent us from entering into an acquisition, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder unless
specific conditions are met.
Substantial future sales of our shares in the public market may cause our stock
price to fall.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon exercise of outstanding options and warrants, in the public
market during a short period of time, our stock price may decline significantly.
These sales also might make it more difficult for us to sell equity or equity
related securities in the future at a time and price that we deem appropriate.
We do not intend to pay dividends.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth. In addition,
pursuant to our bank credit facility, we cannot pay dividends without our bank's
consent, with limited exceptions. Therefore, we do not expect to pay any
dividends in the foreseeable future.
Page 23
<PAGE>
Year 2000 Compliance
We conducted a Year 2000 readiness review for the prior and current versions
of our products. The review included assessment, implementation, including
remediation, modifications, where necessary, of current product versions,
validation testing and contingency planning. As a result, all current versions
of our products are Year 2000 compliant when configured and used in accordance
with the related documentation. We have tested software obtained from third
parties that is incorporated into our products, and is used internally and we
have received assurances from our primary vendors that licensed software is Year
2000 compliant.
Clarent is currently not aware of any Year 2000 problems in any of its
products, critical systems or services.
Page 24
<PAGE>
CLARENT CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Clarent held a special meeting of stockholders on February 15, 2000. At the
meeting the stockholders voted to approve two proposals. The first proposal was
to approve an amendment to our Certificate of Incorporation to increase the
authorized number of shares of Common Stock from 50,000,000 shares to
200,000,000 shares. The second proposal was to approve an amendment to our 1999
Amended and Restated Equity Incentive Plan to increase the aggregate number of
shares of Common Stock authorized for issuance under such plan by 2,641,830
shares, from 11,358,170 to 14,000,000 shares. At the special meeting, our
stockholders approved both proposals. The following table contains the
tabulation of the votes cast for or against each proposal, as well as the
abstentions and broker non-votes with respect to each proposal.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Proposal Votes "For" Votes "Against" Abstained Broker Non-Votes
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proposal 1 20,359,537 3,711,384 5,147 None
-----------------------------------------------------------------------------------------------------
Proposal 2 18,866,177 3,846,871 5,666 1,357,354
-----------------------------------------------------------------------------------------------------
</TABLE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this Form 10-Q/A:
*(a) Exhibit 10.14 Lease dated as of March 31, 2000 by and between
Metropolitan Life Insurance Company and the registrant.
*(b) Exhibit 27.1 Financial Data Schedule.
(c) Reports of Form 8-K. There were no reports on Form 8-K filed by the
Registrant during the first quarter ended March 31, 2000.
* Previously filed on Form 10-Q filed with the Securities and Exchange
Commission on May 15, 2000.
Page 25
<PAGE>
CLARENT CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CLARENT CORPORATION
By /s/ Jerry Shaw-Yau Chang
Jerry Shaw-Yau Chang
Chief Executive Officer,
President and Director
By /s/ Richard J. Heaps
Richard J. Heaps
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 31, 2000
Page 26
