<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 000-30229
------------------------
SONUS NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3387074
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION)
</TABLE>
5 CARLISLE ROAD, WESTFORD, MASSACHUSETTS 01886
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(978) 692-8999
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
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.
(1)Yes /X/ No / /
(2)Yes / / No /X/
ALTHOUGH THE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS, THE REGISTRANT DID NOT BECOME
SUBJECT TO SUCH FILING REQUIREMENTS UNTIL THE REGISTRATION OF CERTAIN SHARES OF
ITS COMMON STOCK PURSUANT TO A REGISTRATION STATEMENT ON FORM S-1 (THE
"REGISTRATION STATEMENT") WHICH WAS DECLARED EFFECTIVE BY THE SECURITIES AND
EXCHANGE COMMISSION ON MAY 24, 2000.
As of July 24, 2000, there were 61,014,358 shares of Common Stock, $0.001
par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Registration Statement on Form S-1 (Registration
No. 333-32206) are incorporated by reference herein.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SONUS NETWORKS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999......................... 1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999
(unaudited)............................................... 2
Condensed Consolidated Statement of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit) for the
Six Months Ended June 30, 2000 (unaudited)................ 3
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (unaudited)........... 4
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Cautionary Statements....................................... 12
Item 3: Quantitative and Qualitative Disclosure About Market Risk... 21
PART II--OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds................... 22
Item 6: Exhibits and Reports on Form 8-K............................ 22
Signature................................................... 23
Exhibit Index........................................................ 24
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SONUS NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $142,987 $ 8,885
Marketable securities..................................... 12,714 14,681
Accounts receivable, net.................................. 2,444 --
Inventories............................................... 7,704 2,210
Other current assets...................................... 761 298
-------- --------
Total current assets.................................... 166,610 26,074
Property and equipment, net................................. 7,794 4,269
Other assets, net........................................... 696 439
-------- --------
$175,100 $ 30,782
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ -- $ 1,336
Accounts payable.......................................... 5,895 1,412
Accrued expenses.......................................... 8,391 2,691
Deferred revenue.......................................... 5,091 1,031
-------- --------
Total current liabilities............................... 19,377 6,470
LONG-TERM OBLIGATIONS, less current portion................. -- 3,402
COMMITMENTS.................................................
REDEEMABLE CONVERTIBLE PREFERRED STOCK...................... -- 46,109
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $0.001 par value, 300,000,000 shares
authorized; 61,270,658 and 21,836,974 issued at June 30,
2000 and December 31, 1999, respectively................ 61 22
Capital in excess of par value............................ 260,872 25,611
Accumulated deficit....................................... (65,311) (33,882)
Stock subscriptions receivable............................ (346) (346)
Deferred compensation..................................... (39,488) (16,604)
Treasury stock, at cost: 257,500 common shares at June 30,
2000.................................................... (65) --
-------- --------
Total stockholders' equity (deficit).................... 155,723 (25,199)
-------- --------
$175,100 $ 30,782
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE>
SONUS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES............................................... $ 6,511 $ -- $ 7,604 $ --
Manufacturing expenses and product costs (1)........... 4,555 349 6,017 572
-------- ------- -------- -------
GROSS PROFIT (LOSS).................................... 1,956 (349) 1,587 (572)
OPERATING EXPENSES:
Research and development (1)......................... 6,355 2,387 11,199 5,071
Sales and marketing (1).............................. 4,381 834 7,739 1,272
General and administrative (1)....................... 1,277 375 1,990 676
Stock-based compensation............................. 6,386 564 13,365 1,081
-------- ------- -------- -------
Total operating expenses........................... 18,399 4,160 34,293 8,100
-------- ------- -------- -------
LOSS FROM OPERATIONS................................... (16,443) (4,509) (32,706) (8,672)
Interest expense....................................... (93) (46) (209) (83)
Interest income........................................ 1,182 138 1,526 295
-------- ------- -------- -------
NET LOSS............................................... $(15,354) $(4,417) $(31,389) $(8,460)
======== ======= ======== =======
NET LOSS PER SHARE (NOTE 1(g)):
Basic and diluted.................................... $ (0.72) $ (1.04) $ (2.15) $ (2.25)
======== ======= ======== =======
Pro forma basic and diluted.......................... $ (0.36) $ (0.15) $ (0.77) $ (0.29)
======== ======= ======== =======
SHARES USED IN COMPUTING NET LOSS PER SHARE (NOTE
1(g)):
Basic and diluted.................................... 21,426 4,234 14,585 3,759
======== ======= ======== =======
Pro forma basic and diluted.......................... 43,091 30,120 41,006 29,621
======== ======= ======== =======
</TABLE>
------------------------
(1) Excludes non-cash, stock-based compensation expense as follows:
<TABLE>
<S> <C> <C> <C> <C>
Manufacturing expenses and product costs......... $ 116 $ 17 $ 189 $ 25
Research and development......................... 2,520 170 6,167 291
Sales and marketing.............................. 2,927 350 5,666 564
General and administrative....................... 823 27 1,343 201
-------- ------- -------- -------
$ 6,386 $ 564 $ 13,365 $ 1,081
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
SONUS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK CAPITAL
------------------------- COMMON STOCK IN STOCK
REDEMPTION ---------------------- EXCESS OF ACCUMULATED SUBSCRIPTIONS
SHARES VALUE SHARES PAR VALUE PAR VALUE DEFICIT RECEIVABLE
----------- ----------- ---------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000............. 12,323,968 $46,109 21,836,974 $22 $ 25,611 $(33,882) $(346)
Issuance of Series D preferred
stock for cash, net of issuance
costs of $40................... 1,509,154 24,750 -- -- -- (40) --
Issuance of common stock to
public, net of issuance costs
of $10,567..................... -- -- 5,750,000 6 121,688 -- --
Issuance of common stock to
employees...................... -- -- 1,288,557 1 6,424 -- --
Conversion of preferred stock to
common stock................... (13,833,122) (70,859) 32,319,074 32 70,827 -- --
Exercise of stock options........ -- -- 76,053 -- 73 -- --
Repurchase of common stock....... -- -- -- -- -- -- --
Compensation associated with the
grant of stock options and sale
of restricted stock to
non-employees.................. -- -- -- -- 2,389 -- --
Deferred compensation related to
stock option grants and sale of
restricted common stock........ -- -- -- -- 33,860 -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (31,389) --
----------- ------- ---------- --- -------- -------- -----
Balance, June 30, 2000............... -- $ -- 61,270,658 $61 $260,872 $(65,311) $(346)
=========== ======= ========== === ======== ======== =====
<S> <C> <C> <C> <C>
TREASURY STOCK TOTAL
STOCKHOLDERS'
DEFERRED ------------------- EQUITY
COMPENSATION SHARES COST (DEFICIT)
------------- -------- -------- --------------
Balance, January 1, 2000............. $(16,604) -- $ -- $(25,199)
Issuance of Series D preferred
stock for cash, net of issuance
costs of $40................... -- -- -- (40)
Issuance of common stock to
public, net of issuance costs
of $10,567..................... -- -- -- 121,694
Issuance of common stock to
employees...................... -- -- -- 6,425
Conversion of preferred stock to
common stock................... -- -- -- 70,859
Exercise of stock options........ -- -- -- 73
Repurchase of common stock....... -- 257,500 (65) (65)
Compensation associated with the
grant of stock options and sale
of restricted stock to
non-employees.................. -- -- -- 2,389
Deferred compensation related to
stock option grants and sale of
restricted common stock........ (33,860) -- -- --
Amortization of deferred
compensation................... 10,976 -- -- 10,976
Net loss......................... -- -- -- (31,389)
-------- ------- ---- --------
Balance, June 30, 2000............... $(39,488) 257,500 $(65) $155,723
======== ======= ==== ========
</TABLE>
The accompanying notes are an integral part of these condensed conolidated
financial statements
3
<PAGE>
SONUS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(31,389) $(8,460)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 1,762 499
Compensation expense associated with the grant of
stock options and issuance of restricted stock to
non-employees....................................... 2,389 27
Amortization of deferred compensation................. 10,976 1,054
Changes in current assets and liabilities:
Accounts receivable............................... (2,444) --
Inventories....................................... (5,494) (920)
Other current assets.............................. (463) (225)
Accounts payable.................................. 4,483 989
Accrued expenses.................................. 5,700 562
Deferred revenue.................................. 4,060 --
-------- -------
Net cash used in operating activities........... (10,420) (6,474)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (5,159) (1,542)
Maturities of marketable securities....................... 19,548 17,973
Purchases of marketable securities........................ (17,581) (5,056)
Other assets.............................................. (385) (82)
-------- -------
Net cash provided by (used in) investing
activities.................................... (3,577) 11,293
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock.................... 128,119 514
Proceeds from exercise of stock options................... 73 10
Net proceeds from issuance of preferred stock............. 24,710 241
Proceeds from long-term obligations....................... 405 727
Payments of long-term obligations......................... (5,143) (200)
Repurchase of common stock................................ (65) --
-------- -------
Net cash provided by financing activities....... 148,099 1,293
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 134,102 6,112
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 8,885 3,584
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $142,987 $ 9,696
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 209 $ 83
======== =======
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTION:
Conversion of redeemable convertible preferred stock into
common stock............................................ $ 70,859 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Sonus Networks, Inc. (the "Company" or "Sonus") and reflect all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary for a fair statement of the results for the
interim periods. The condensed consolidated financial statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission ("SEC"), but omit or condense certain information and footnote
disclosure pursuant to existing SEC rules and regulations. Results for the
interim periods are not necessarily indicative of results for the entire fiscal
year. These statements should be read in conjunction with the financial
statements and related footnotes included in the Company's registration
statement Form S-1 (File No. 333-32206) declared effective by the SEC on
May 24, 2000.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All material intercompany transactions
and balances have been eliminated.
(B) CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents are stated at cost plus accrued interest, which
approximates market value, and have maturities of three months or less at the
date of purchase.
Marketable securities are classified as held-to-maturity, as Sonus has the
intent and ability to hold to maturity. Marketable securities are reported at
amortized cost. Cash equivalents and marketable securities are invested in
high-quality credit instruments, primarily U.S. Government obligations and
corporate obligations with contractual maturities of less than one year. There
have been no gains or losses to date.
(C) CONCENTRATION OF CREDIT RISK AND LIMITED SUPPLIERS
The financial instruments that potentially subject Sonus to concentrations
of credit risk are cash, marketable securities and receivables. Sonus has no
significant off-balance-sheet concentrations such as foreign exchange contracts,
options contracts or other foreign hedging arrangements. Sonus' cash holdings
are diversified between three financial institutions. For the three and six
months ended June 30, 2000, three and four customers each accounted for more
than 10% of revenues. As of June 30, 2000, three customers accounted for more
than 10% of the accounts receivable balance.
Certain components and software licenses from third-parties used in Sonus'
products are procured from a single source. The failure of a supplier, including
a subcontractor, to deliver on schedule could delay or interrupt Sonus' delivery
of products and thereby adversely affect Sonus' revenues and operating results.
(D) REVENUE RECOGNITION
Sonus recognizes revenue from product sales to end users, resellers and
distributors upon shipment, provided there are no uncertainties regarding
acceptance, persuasive evidence of an arrangement exists, the sales price is
fixed or determinable and collection of the related receivable is probable. If
uncertainties exist, Sonus recognizes revenue when those uncertainties are
resolved. In multiple element arrangements, Sonus uses the residual method in
accordance with Statements of Position 97-2 and 98-9. Service revenue is
recognized as the services are provided. Amounts collected prior to satisfying
the revenue recognition
5
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
criteria are reflected as deferred revenue. Warranty costs are estimated and
recorded by Sonus at the time of product revenue recognition.
(E) STOCK BASED COMPENSATION
Sonus uses the intrinsic value-based method of Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, to account for all of
its employee stock-based compensation plans and uses the fair value method to
account for all non-employee stock-based compensation.
(F) COMPREHENSIVE LOSS
Sonus applies Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME.
The comprehensive loss for the period for the three and six months ended
June 30, 2000 and 1999 does not differ from the reported loss.
(G) NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss for the period
by the weighted average number of shares of unrestricted common stock
outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of shares of
unrestricted common stock and potential common stock outstanding during the
period, if dilutive. Potential common stock comprises restricted shares of
common stock and common shares issuable upon the exercise of stock options.
Shares of common stock issuable upon the conversion of Sonus' redeemable
convertible preferred stock have also been excluded from the date of issuance.
Options to purchase 4,198,000 and 869,000 shares of common stock have not
been included in the computation of diluted net loss per share for the three and
six months ended June 30, 2000 and 1999, respectively, as their effects would
have been anti-dilutive.
Pro forma basic and diluted net loss per share for the three and six months
ended June 30, 2000 and 1999 are computed using the weighted average number of
unrestricted common shares outstanding, including the pro forma effects of the
automatic conversion of Sonus' Series A, B, C and D redeemable convertible
preferred stock into shares of Sonus' common stock which occurred upon the
closing of Sonus' Initial Public Offering ("IPO"), as if such conversion
occurred at the date of original issuance. There were no dilutive shares of
potential common stock for these periods as the Company incurred a net loss in
each period.
6
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted net loss
per share and pro forma basic and diluted net loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET LOSS............................................... $(15,354) $(4,417) $(31,389) $(8,460)
======== ======= ======== =======
HISTORICAL-
Weighted average common shares outstanding........... 35,404 18,683 28,857 17,870
Less weighted average restricted common shares
outstanding........................................ (13,978) (14,449) (14,272) (14,111)
-------- ------- -------- -------
Shares used in computing basic and diluted net loss
per share.......................................... 21,426 4,234 14,585 3,759
======== ======= ======== =======
Basic and diluted net loss per share................. $ (0.72) $ (1.04) $ (2.15) $ (2.25)
======== ======= ======== =======
PRO FORMA-
Shares used in computing historical basic and diluted
net loss per share................................. 21,426 4,234 14,585 3,759
Weighted average number of shares assumed upon
conversion of redeemable convertible preferred
stock.............................................. 21,665 25,886 26,421 25,862
-------- ------- -------- -------
Shares used in computing pro forma basic and diluted
net loss per share................................. 43,091 30,120 41,006 29,621
======== ======= ======== =======
Pro forma basic and diluted net loss per share....... $ (0.36) $ (0.15) $ (0.77) $ (0.29)
======== ======= ======== =======
</TABLE>
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market and consist of the following, in thousands:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials........................................... $ 432 $ 305
Work in progress........................................ 3,055 941
Finished goods.......................................... 4,217 964
------ ------
$7,704 $2,210
====== ======
</TABLE>
7
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. LONG-TERM OBLIGATIONS
Sonus had a $7.0 million equipment line of credit with a bank, bearing
interest at the bank's prime rate plus 0.5%, available through June 30, 2000. In
June 2000, $5.1 million, representing all amounts then outstanding under this
line were repaid and the equipment line of credit was terminated.
NOTE 4. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon the completion of the IPO, each share of Series A, B, C and D
redeemable convertible preferred stock was converted into an aggregate of
32,319,074 shares of common stock. Each share of Series A, B and C preferred
stock was converted into 2.5 shares of common stock and each share of Series D
preferred stock was converted into one share of common stock.
NOTE 5. STOCKHOLDERS' EQUITY (DEFICIT)
(A) IPO
On May 31, 2000, the Company completed its IPO of 5,750,000 shares of common
stock, which includes the exercise of the underwriters' over allotment option of
750,000 shares, at $23.00 per share. The proceeds from the IPO were
$121.7 million, after deducting the underwriters' discounts and commissions and
estimated offering expenses paid by us of $10.6 million.
(B) STOCK-BASED COMPENSATION
Stock-based compensation expenses include the amortization of deferred
employee compensation and other equity related expenses for non-employees.
In connection with certain employee stock option grants and the issuance of
employee restricted common stock, the Company recorded deferred stock-based
compensation of $33,860,000 for the six months ended June 30, 2000 and
$25,065,000 for the year ended December 31, 1999. Deferred stock-based
compensation represents the difference between the option exercise price or
purchase price and the fair value of the Company's common stock on the date of
grant or sale for accounting purposes. Deferred compensation will be recognized
as an expense over the vesting period of the underlying stock options and
restricted common stock. Stock-based compensation expense was $6,376,000 and
$559,000 for the three months ended June 30, 2000 and 1999, respectively, and
$10,976,000 and $1,054,000 for the six months ended June 30, 2000 and 1999,
respectively.
Sonus has valued the stock options and the issuances of restricted common
stock to non-employees based upon the fair market value of the services rendered
where Sonus believes the value of these services is more readily determinable
than the value of the options or restricted stock. All other grants of options
and issuances of restricted stock to non-employees are valued based upon the
Black-Scholes option pricing model. As of June 30, 2000, Sonus has 45,000 stock
options and 40,000 shares of restricted common stock outstanding to
non-employees. Sonus has recorded stock-based compensation expense of $10,000
and $5,000 for the grant of options and issuances of restricted stock to
non-employees for the three months ended June 30, 2000 and 1999, respectively
and $2,389,000 and $27,000 for the six months ended June 30, 2000 and 1999,
respectively. In accordance with Emerging Issues Task Force 96-18, Sonus will
record the value at the time the services are provided.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are subject to a number of risks and uncertainties.
These forward-looking statements are based on our current expectations,
assumptions, estimates and projections about ourselves and our industry. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the factors
set forth in "Cautionary Statements" beginning on page 12 of this Quarterly
Report on Form 10-Q. This discussion should be read in conjunction with the
condensed consolidated unaudited financial statements and related notes for the
periods specified. Further reference should be made to the Company's
Registration Statement on Form S-1 (File No. 333-32206).
OVERVIEW
We are a leading provider of voice infrastructure products for the new
public network. We offer a new generation of carrier-class switching equipment
and software that enable voice services to be delivered over packet-based
networks.
Since our inception, we have incurred significant losses and, as of
June 30, 2000, had an accumulated deficit of $65.3 million. We have not achieved
profitability on a quarterly or an annual basis, and anticipate that we will
continue to incur net losses. We have a lengthy sales cycle for our products
and, accordingly, we expect to incur sales and other expenses before we realize
the related revenues. We expect to incur significant sales and marketing,
research and development and general and administrative expenses and, as a
result, we will need to generate significant revenues to achieve and maintain
profitability.
We sell our products through a direct sales force, resellers and
distributors. In the future, we anticipate expanding our sales efforts to
include additional overseas distribution partners. Customers' decisions to
purchase our products to deploy in commercial networks involve a significant
commitment of resources and a lengthy evaluation, testing and product
qualification process. We believe these long sales cycles, as well as our
expectation that customers will tend to sporadically place large orders with
short lead times, will cause our revenues and results of operations to vary
significantly and unexpectedly from quarter to quarter. We expect to recognize
revenues from a limited number of customers for the foreseeable future.
We recognize revenue from product sales to end users, resellers and
distributors upon shipment, provided there are no uncertainties regarding
acceptance, persuasive evidence of an arrangement exists, the sales price is
fixed or determinable and collection of the related receivable is probable. If
uncertainties exist, we recognize revenue when those uncertainties are resolved.
Service revenue is recognized as the services are performed. Amounts collected
prior to satisfying our revenue recognition criteria are reflected as deferred
revenue. We estimate and record warranty costs at the time of product revenue
recognition. In November 1999, we began shipping our products and during the
three months ended March 31, 2000 recognized our first revenues of
$1.1 million. In the three months ended June 30, 2000, we recognized
$6.5 million in revenue. As of June 30, 2000 we had a total of $5.1 million in
deferred revenue that we expect to recognize during the balance of fiscal 2000.
See note 1(d) to our unaudited condensed consolidated financial statements.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Revenues were $6.5 million and $7.6 million for the three and six
months ended June 30, 2000, respectively. No revenues were reported for the
three and six months ended June 30, 1999. We had
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three and four customers, during the three and six months ended June 30, 2000,
each of whom contributed more than 10% of our revenue, respectively.
MANUFACTURING EXPENSES AND PRODUCT COSTS. Manufacturing expenses and
product costs consist primarily of amounts paid to contract manufacturers,
manufacturing and service personnel and related costs. Manufacturing expenses
and product costs were $4.6 million and $6.0 million for the three and six
months ended June 30, 2000, respectively, an increase of $4.2 million and
$5.4 million as compared to the three and six months ended June 30, 1999,
respectively. Both increases are primarily the result of an increase in product
and personnel costs associated with the revenue increase.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and related personnel costs, recruiting expenses
and prototype costs related to the design, development, testing and enhancement
of our products. We expense our research and development costs as incurred.
Research and development expenses increased $4.0 million to $6.4 million for the
three months ended June 30, 2000, compared to $2.4 million for the same period
in fiscal 1999. Research and development expenses increased $6.1 million to
$11.2 million for the six months ended June 30, 2000, compared to $5.1 million
for the same period in fiscal 1999. The increases in expenses were primarily a
result of increases in personnel and personnel-related expenses, offset in part
by lower prototype expenses for the development of our products. Research and
development is essential to our future success and we expect the dollar amounts
of research and development expenses to increase in future periods.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of salaries and related personnel expenses, commissions, travel and
entertainment expenses, promotions, customer evaluations and other marketing
expenses. Sales and marketing expenses increased $3.6 million to $4.4 million
for the three months ended June 30, 2000, compared to $0.8 million for the same
period in fiscal 1999. Sales and marketing expenses increased $6.4 million to
$7.7 million for the six months ended June 30, 2000, compared to $1.3 million
for the same period in fiscal 1999. The increases in expenses were primarily a
result of increases in sales and marketing personnel, sales commissions,
marketing programs, and travel and related expenses. We intend to continue to
expand our domestic and international sales force and marketing efforts, and as
a result, expect that the dollar amounts of sales and marketing expenses will
increase in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and related expenses for executive and
administrative personnel, recruiting expenses and professional fees. General and
administrative expenses increased $0.9 million to $1.3 million for the three
months ended June 30, 2000, compared to $0.4 million for the same period in
fiscal 1999. General and administrative expenses increased $1.3 million to
$2.0 million for the six months ended June 30, 2000, compared to $0.7 million
for the same period in fiscal 1999. The increases reflect costs associated with
being a public company, hiring of additional general and administrative
personnel and for professional services. We expect that the dollar amounts of
general and administrative expenses will increase in future periods as a result
of expansion of business activity and the costs associated with being a publicly
traded company.
STOCK-BASED COMPENSATION EXPENSES. Stock-based compensation expenses
include the amortization of stock compensation charges resulting from the
granting of stock options and the sales of restricted common stock to employees
with exercise or sales prices that may be deemed for accounting purposes to be
below the fair value of our common stock on the date of grant, and compensation
expense associated with the grant of stock options and issuance of restricted
stock to non-employees. Deferred compensation amounts are being amortized over
the vesting periods of the applicable options or restricted stock, which are
four to five years. The compensation expense associated with non-employees is
recorded at the time services are provided. See note 5(b) to our unaudited
condensed consolidated financial statements.
Stock-based compensation expenses were $6.4 million for the three months
ended June 30, 2000, an increase of $5.8 million from $0.6 million for the three
months ended June 30, 1999. Stock-based
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compensation expenses were $13.4 million for the six months ended June 30, 2000,
an increase of $12.3 million from $1.1 million for the same period in fiscal
1999. These increases are due to the amortization of deferred stock-based
compensation resulting from the granting of additional stock options and sale of
restricted common stock to employees and compensation expense associated with
non-employees. Based on the grant of stock options and sale of restricted common
stock through June 30, 2000, we expect stock-based compensation expense to
impact our results through fiscal 2004.
INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense
was $1.1 million and $0.1 million for the three months ended June 30, 2000 and
1999, respectively. Interest income, net of interest expense increased
$1.1 million to $1.3 million for the six months ended June 30, 2000, compared to
$0.2 million for the same period in fiscal 1999. These increases reflect higher
invested balances as a result of our May 2000 IPO and private financings,
partially offset by an increase in interest expense from incurred borrowings.
INCOME TAXES. No provision for income taxes has been recorded for the three
and six months ended June 30, 2000 and 1999, due to accumulated net losses. We
did not record any tax benefits relating to these losses or other tax benefits
due to the uncertainty surrounding the timing of the realization of these future
tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our IPO, we financed our operations primarily through private sales
of redeemable convertible preferred stock totaling $70.7 million in net
proceeds. Upon the closing of our IPO on May 31, 2000, the Company received cash
proceeds, net of underwriters' discount and offering expenses, totaling $121.7,
and all of our redeemable convertible preferred stock converted into 32,319,074
shares of common stock. At June 30, 2000, cash, cash equivalents and marketable
securities totaled $155.7 million.
Net cash used in operating activities was $10.4 million for the six months
ended June 30, 2000, as compared to $6.5 million for the six months ended
June 30, 1999. The increase in net cash used in operating activities compared to
the comparable period of the preceding year reflects increasing net losses and,
to a lesser extent, inventory purchases and accounts receivable, offset in part
by increases in accounts payable, accrued expenses and deferred revenue.
Net cash used in investing activities was $3.6 million for the six months
ended June 30, 2000, as compared to cash provided of $11.3 million for the six
months ended June 30, 1999. Net cash used for investing activities in each
period reflects purchases of property and equipment, primarily computers and
test equipment for our development and manufacturing activities, and net
purchases and maturities of marketable securities. We expect capital
expenditures to increase in the year 2000 to approximately $14.0 million, due to
our expansion and expenditures for software licenses, computers, and test
equipment.
Net cash provided by financing activities was $148.1 million for the six
months ended June 30, 2000 as compared to $1.3 million for the six months ended
June 30, 1999. The increase was primarily a result of the net cash proceeds from
the Company's IPO and the sale of Series D redeemable convertible preferred
stock.
We believe our current cash, cash equivalents and marketable securities will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least 12 months. If our existing resources and cash
generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities. 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 sales and marketing efforts, which
could harm our business, financial condition and operating results.
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CAUTIONARY STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following cautionary statements and elsewhere
in this Quarterly Report on Form 10-Q. If any of the following risks were to
occur, our business, financial condition or results of operations would likely
suffer and the trading price of our common stock would likely decline.
WE EXPECT THAT A MAJORITY OF OUR REVENUES WILL BE GENERATED FROM A LIMITED
NUMBER OF CUSTOMERS, AND OUR REVENUES WILL NOT GROW IF WE DO NOT SUCCESSFULLY
SELL PRODUCTS TO THESE CUSTOMERS
To date, we have shipped our products to a limited number of customers, and
only during the first quarter of fiscal 2000 did we begin to recognize revenues.
We expect that in the foreseeable future, substantially all of our revenues will
depend on sales of our products to a limited number of customers. Our customers
are not contractually committed to purchase any minimum quantities of products
from us. The customers to whom we have shipped are currently using our products
in laboratory testing, internal trials, or in limited deployment in their
commercial networks.
Our customers may not deploy our products in their commercial networks on a
timely basis, or at all, and any delay or failure by our customers to introduce
commercial services based on our products, or a downturn in their business,
would seriously harm our ability to sell products and generate revenues.
WE WILL NOT BE SUCCESSFUL IF WE DO NOT GROW OUR CUSTOMER BASE BEYOND OUR INITIAL
FEW CUSTOMERS
Our future success will depend on our ability to attract additional
customers beyond our current limited number. The growth of our customer base
could be adversely affected by:
- customer unwillingness to implement our new voice infrastructure products;
- any delays or difficulties that we may incur in completing the development
and introduction of our planned products or product enhancements;
- new product introductions by our competitors;
- any failure of our products to perform as expected; or
- any difficulty we may incur in meeting customers' delivery requirements.
If we do not expand our customer base to include additional customers that
deploy our products in operational, commercial networks, our revenues will not
grow significantly, or at all.
THE MARKET FOR VOICE INFRASTRUCTURE FOR THE NEW PUBLIC NETWORK IS NEW AND
EVOLVING AND OUR BUSINESS WILL SUFFER IF IT DOES NOT DEVELOP AS WE EXPECT
The market for our products is rapidly evolving. Packet-based technology may
not be widely accepted as a platform for voice and a viable market for our
products may not develop or be sustainable. If this market does not develop, or
develops more slowly than we expect, we may not be able to sell our products in
significant volumes, or at all.
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WE ARE ENTIRELY DEPENDENT UPON OUR VOICE INFRASTRUCTURE PRODUCTS AND OUR FUTURE
REVENUES DEPEND UPON THEIR COMMERCIAL SUCCESS
Our future growth depends upon the commercial success of our voice
infrastructure products, particularly the GSX9000 Open Services Switch and the
System 9200 Internet offload solution. We intend to develop and introduce new
products and enhancements to existing products in the future. We may not
successfully complete the development or introduction of these products. If our
target customers do not adopt, purchase and successfully deploy our current or
planned products, our revenues will not grow.
BECAUSE OUR PRODUCTS ARE SOPHISTICATED AND DESIGNED TO BE DEPLOYED IN COMPLEX
ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER FULL
DEPLOYMENT, WHICH COULD SERIOUSLY HARM OUR BUSINESS
Our products are sophisticated and are designed to be deployed in large and
complex networks. Because of the nature of our products, they can only be fully
tested when substantially deployed in very large networks with high volumes of
traffic. Some of our customers have only recently begun to commercially deploy
our products and they may discover errors or defects in the software or
hardware, or the products may not operate as expected.
If we are unable to fix errors or other performance problems that may be
identified after full deployment of our products, we could experience:
- loss of, or delay in, revenues;
- loss of customers and market share;
- a failure to attract new customers or achieve market acceptance for our
products;
- increased service, support and warranty costs and a diversion of
development resources; and
- costly and time-consuming legal actions by our customers.
IF WE DO NOT RESPOND RAPIDLY TO TECHNOLOGICAL CHANGES OR TO CHANGES IN INDUSTRY
STANDARDS, OUR PRODUCTS COULD BECOME OBSOLETE
The market for voice infrastructure products for the new public network is
likely to be characterized by rapid technological change and frequent new
product introductions. We may be unable to respond quickly or effectively to
these developments. We may experience difficulties with software development,
hardware design, manufacturing or marketing that could delay or prevent our
development, introduction or marketing of new products and enhancements. The
introduction of new products by competitors, the market acceptance of products
based on new or alternative technologies or the emergence of new industry
standards could render our existing or future products obsolete. If the
standards adopted are different from those that we have chosen to support,
market acceptance of our products may be significantly reduced or delayed. If
our products become technologically obsolete, we may be unable to sell our
products in the marketplace and generate revenues.
WE DEPEND UPON CONTRACT MANUFACTURERS AND ANY DISRUPTION IN THESE RELATIONSHIPS
MAY CAUSE US TO FAIL TO MEET THE DEMANDS OF OUR CUSTOMERS AND DAMAGE OUR
CUSTOMER RELATIONSHIPS
We rely on a small number of contract manufacturers to manufacture our
products according to our specifications and to fill orders on a timely basis.
Our contract manufacturers provide comprehensive manufacturing services,
including assembly of our products and procurement of materials. Each of our
contract manufacturers also builds products for other companies and may not
always have sufficient quantities of inventory available to fill our orders, or
may not allocate their internal resources to fill these orders on a timely
basis. We do not have long-term supply contracts with our manufacturers and they
are
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not required to manufacture products for any specified period. We do not have
internal manufacturing capabilities to meet our customers' demands. Qualifying a
new contract manufacturer and commencing commercial-scale production is
expensive and time consuming and could result in a significant interruption in
the supply of our products. If a change in contract manufacturers results in
delays of our fulfillment of customer orders or if a contract manufacturer fails
to make timely delivery of orders, we may lose revenues and suffer damage to our
customer relationships.
WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME AND YOUR BASIS FOR
EVALUATING US IS LIMITED
We were founded in August 1997, and only during the first quarter of fiscal
2000 did we begin to recognize any revenues. We have a limited meaningful
operating history upon which you may evaluate us and our prospects. Moreover, we
cannot be sure that we have accurately identified all of the risks to our
business. Also, our assessment of the prospects for our success may prove
inaccurate.
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK THAT COULD CAUSE
OUR STOCK PRICE TO FALL
Certain of Sonus' stockholders hold a substantial number of shares of common
stock which are currently subject to lock-up agreements or other restrictive
agreements limiting their ability to sell such shares. These stockholders may be
able to sell such shares in the public market in the near future. Sales of a
substantial number of shares of our common stock in the public market within a
short period of time could cause our stock price to fall significantly. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. Generally, purchases by
service providers of telecommunications equipment from manufacturers have been
unpredictable and clustered, rather than steady, as the providers build out
their networks. The primary factors that may affect our revenues and results
include the following:
- fluctuation in demand for our voice infrastructure products and the timing
and size of customer orders;
- the length and variability of the sales cycle for our products and the
corresponding timing of recognizing revenues and deferred revenues;
- new product introductions and enhancements by our competitors and us;
- changes in our pricing policies, the pricing policies of our competitors
and the prices of the components of our products;
- our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
- the mix of product configurations sold;
- our ability to obtain sufficient supplies of sole or limited source
components;
- our ability to attain and maintain production volumes and quality levels
for our products;
- costs related to acquisitions of complementary products, technologies or
businesses; and
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- general economic conditions, as well as those specific to the
telecommunications, networking and related industries.
As with other telecommunications product suppliers, we may recognize a
substantial portion of our revenue in a given quarter from sales booked and
shipped in the last weeks of that quarter. As a result, a delay in customer
orders is likely to result in a delay in shipments and recognition of revenue
beyond the end of a given quarter, which would have a significant impact on our
operating results for that quarter.
Our operating expenses are largely based on anticipated organizational
growth and revenue trends. As a result, a delay in generating or recognizing
revenues for the reasons set forth above, or for any other reason, could cause
significant variations in our operating results. We believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. It is likely that in some future quarters,
our operating results may be below the expectations of public market analysts
and investors. In this event, the price of our common stock will probably
substantially decrease.
WE MAY NOT BECOME PROFITABLE
We have incurred significant losses since inception and expect to continue
to incur losses in the future. As of June 30, 2000, we had an accumulated
deficit of $65.3 million and had only recognized cumulative revenues since
inception of $7.6 million through the second quarter of fiscal 2000. We have not
achieved profitability on a quarterly or annual basis. Our revenues may not grow
and we may never generate sufficient revenues to achieve or sustain
profitability. We expect to continue to incur significant and increasing sales
and marketing, product development, administrative and other expenses. As a
result, we will need to generate significant revenues to achieve and maintain
profitability.
WE WILL NOT RETAIN CUSTOMERS OR ATTRACT NEW CUSTOMERS IF WE DO NOT ANTICIPATE
AND MEET SPECIFIC CUSTOMER REQUIREMENTS AND IF OUR PRODUCTS DO NOT INTEROPERATE
WITH OUR CUSTOMERS' EXISTING NETWORKS
To achieve market acceptance for our products, we must effectively
anticipate, and adapt in a timely manner to, customer requirements and offer
products and services that meet changing customer demands. Prospective customers
may require product features and capabilities that our current products do not
have. The introduction of new or enhanced products also requires that we
carefully manage the transition from older products in order to minimize
disruption in customer ordering patterns and ensure that adequate supplies of
new products can be delivered to meet anticipated customer demand. If we fail to
develop products and offer services that satisfy customer requirements, or to
effectively manage the transition from older products, our ability to create or
increase demand for our products would be seriously harmed and we may lose
current and prospective customers.
Many of our customers will require that our products be designed to
interface with their existing networks, each of which may have different
specifications. Issues caused by an unanticipated lack of interoperability may
result in significant warranty, support and repair costs, divert the attention
of our engineering personnel from our hardware and software development efforts
and cause significant customer relations problems. If our products do not
interoperate with those of our customers' networks, installations could be
delayed or orders for our products could be cancelled, which would seriously
harm our gross margins and result in loss of revenues or customers.
IF WE FAIL TO COMPETE SUCCESSFULLY, OUR ABILITY TO INCREASE OUR REVENUES OR
ACHIEVE PROFITABILITY WILL BE IMPAIRED
Competition in the telecommunications market is intense. This market has
historically been dominated by large companies, such as Lucent Technologies and
Nortel Networks, both of whom are our direct competitors. We also face
competition from other large telecommunications and networking companies,
including Cisco Systems, Siemens and Tellabs, that have entered our market by
acquiring companies that
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design competing products. In addition, a number of private companies have
announced plans for new products that address the same market opportunity that
we address. Because this market is rapidly evolving, additional competitors with
significant financial resources may enter these markets and further intensify
competition.
Many of our current and potential competitors have significantly greater
selling and marketing, technical, manufacturing, financial and other resources,
including the ability to offer vendor-sponsored financing programs. If we are
unable or unwilling to offer vendor-sponsored financing, prospective customers
may decide to purchase products from one of our competitors who offers this type
of financing. Furthermore, some of our competitors are currently selling
significant amounts of other products to our current and prospective customers.
Our competitors' broad product portfolios coupled with already existing
relationships may cause our customers to buy our competitors' products.
To compete effectively, we must deliver products that:
- provide extremely high reliability and voice quality;
- scale easily and efficiently;
- interoperate with existing network designs and other vendors' equipment;
- provide effective network management;
- are accompanied by comprehensive customer support and professional
services; and
- provide a cost-effective and space-efficient solution for service
providers.
If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, order cancellations, loss of
revenues and reduced gross margins.
WE AND OUR CONTRACT MANUFACTURERS RELY ON SINGLE OR LIMITED SOURCES FOR SUPPLY
OF SOME COMPONENTS OF OUR PRODUCTS AND IF WE FAIL TO ADEQUATELY PREDICT OUR
MANUFACTURING REQUIREMENTS OR IF OUR SUPPLY OF ANY OF THESE COMPONENTS IS
DISRUPTED, WE WILL BE UNABLE TO SHIP OUR PRODUCTS
We and our contract manufacturers currently purchase several key components
of our products, including commercial digital signal processors, from single or
limited sources. We purchase these components on a purchase order basis. If we
overestimate our component requirements, we could have excess inventory, which
would increase our costs. If we underestimate our requirements, we may not have
adequate supply, which could interrupt manufacturing of our products and result
in delays in shipments and revenues.
We currently do not have long-term supply contracts with our component
suppliers and they are not required to supply us with products for any specified
periods, in any specified quantities or at any set price, except as may be
specified in a particular purchase order. In the event of a disruption or delay
in supply, or inability to obtain products, we may not be able to develop an
alternate source in a timely manner or at favorable prices, or at all. A failure
to find acceptable alternative sources could hurt our ability to deliver
high-quality products to our customers and negatively affect our operating
margins. In addition, our reliance on our suppliers exposes us to potential
supplier production difficulties or quality variations. Our customers rely upon
our ability to meet committed delivery dates, and any disruption in the supply
of key components would seriously impact our ability to meet these dates and
could result in legal action by our customers, loss of customers or harm to our
ability to attract new customers.
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IF WE ARE NOT ABLE TO OBTAIN NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY AT
ACCEPTABLE PRICES, OR AT ALL, OUR PRODUCTS COULD BECOME OBSOLETE
We have incorporated third-party licensed technology into our current
products. From time to time, we may be required to license additional technology
from third parties to develop new products or product enhancements. Third-party
licenses may not be available or continue to be available to us on commercially
reasonable terms. The inability to maintain or re-license any third-party
licenses required in our current products, or to obtain any new third-party
licenses to develop new products and product enhancements could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost, and delay or prevent us from making these products or
enhancements, any of which could seriously harm the competitiveness of our
products.
OUR FAILURE TO MANAGE OUR EXPANSION EFFECTIVELY IN A RAPIDLY CHANGING MARKET
COULD INCREASE OUR COSTS, HARM OUR ABILITY TO SELL FUTURE PRODUCTS AND IMPAIR
OUR FUTURE GROWTH
We intend to expand our operations rapidly and plan to hire a significant
number of employees during the remainder of 2000. Our growth has placed, and our
anticipated growth will continue to place, a significant strain on our
management systems and resources. Our ability to successfully offer our products
and implement our business plan in a rapidly evolving market requires effective
planning and management processes. We expect that we will need to continue to
improve our financial, managerial and manufacturing controls and reporting
systems, and will need to continue to expand, train and manage our work force
worldwide. If we fail to implement adequate control systems in an efficient and
timely manner, our costs may be increased and our growth could be impaired and
we may not be able to accurately anticipate and fulfill market demand, the
result of which will be a loss of revenues and customers.
IF WE FAIL TO HIRE AND RETAIN NEEDED PERSONNEL, THE IMPLEMENTATION OF OUR
BUSINESS PLAN COULD SLOW OR OUR FUTURE GROWTH COULD HALT
Competition for highly skilled engineering, sales, marketing and support
personnel is intense because there are a limited number of people available with
the necessary technical skills and understanding of our market. Any failure to
attract, assimilate or retain qualified personnel to fulfill our current or
future needs could impair our growth. The support of our products requires
highly trained customer support and professional services personnel. Once we
hire them, they may require extensive training in our voice infrastructure
products. If we are unable to hire, train and retain our customer support and
professional services personnel, we may not be able to increase sales of our
products.
Our future success depends upon the continued services of our executive
officers who have critical industry experience and relationships that we rely on
to implement our business plan. None of our officers or key employees is bound
by an employment agreement for any specific term. The loss of the services of
any of our officers or key employees could delay the development and
introduction of, and negatively impact our ability to sell, our products.
OUR ABILITY TO COMPETE AND OUR BUSINESS COULD BE JEOPARDIZED IF WE ARE UNABLE TO
PROTECT OUR INTELLECTUAL PROPERTY OR BECOME SUBJECT TO INTELLECTUAL PROPERTY
RIGHTS LITIGATION, WHICH COULD REQUIRE US TO INCUR SIGNIFICANT COSTS
We rely on a combination of patent, 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 unauthorized use of our
technology, particularly in foreign countries where the laws may
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not protect our proprietary rights as fully as in the United States. If
competitors are able to use our technology, our ability to compete effectively
could be harmed.
In addition, we may also become involved in litigation as a result of
allegations that we infringe intellectual property rights of others. Any parties
asserting that our products infringe upon their proprietary rights would force
us to defend ourselves and possibly our customers or contract manufacturers
against the alleged infringement. These claims and any resulting lawsuit, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. Any potential intellectual property
litigation also could force us to do one or more of the following:
- stop selling, incorporating or using our products that use the challenged
intellectual property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
- redesign those products that use any allegedly infringing technology.
Any lawsuits regarding intellectual property rights, regardless of their
success, would be time-consuming, expensive to resolve and would divert our
management's time and attention.
IF WE ARE SUBJECT TO UNFAIR HIRING CLAIMS, WE COULD INCUR SUBSTANTIAL COSTS IN
DEFENDING OURSELVES
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
We may be subject to claims of this kind in the future as we seek to hire
qualified personnel. Those claims may result in material litigation. We could
incur substantial costs defending ourselves or our employees against those
claims, regardless of their merits. In addition, defending ourselves from those
types of claims could divert our management's attention from our operations. If
we are found to have engaged in unfair hiring practices, or our employees are
found to have violated agreements with previous employers, we may suffer a
significant disruption in our operations.
WE MAY FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL EXPANSION THAT COULD IMPAIR
OUR ABILITY TO GROW OUR REVENUES ABROAD
We intend to expand into international markets. This expansion will require
significant management attention and financial resources to successfully develop
direct and indirect international sales and support channels. In addition, we
may not be able to develop international market demand for our products, which
could impair our ability to grow our revenues.
We have limited experience marketing and distributing our products
internationally and, to do so, we expect that we will need to develop versions
of our products that comply with local standards. Furthermore, international
operations are subject to other inherent risks, including:
- greater difficulty collecting accounts receivable and longer collection
periods;
- difficulties and costs of staffing and managing foreign operations;
- the impact of differing technical standards outside the United States;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements and currency exchange rates;
- certification requirements;
- reduced protection for intellectual property rights in some countries; and
- potentially adverse tax consequences.
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ANY INVESTMENTS OR ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY
HARM OUR FINANCIAL CONDITION
Although we have no current agreements to do so, we intend to consider
investing in, or acquiring, complementary products, technologies or businesses.
In the event of any future investments or acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt or assume liabilities;
- incur significant amortization expenses related to goodwill and other
intangible assets; or
- incur large and immediate write-offs.
Our integration of any acquired products, technologies or businesses will
also involve numerous risks, including:
- problems and unanticipated costs associated with combining the purchased
products, technologies or businesses;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have limited or no
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
We may be unable to successfully integrate any products, technologies,
businesses or personnel that we might acquire in the future without significant
costs or disruption to our business.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US,
AND IF IT IS AVAILABLE, MAY DILUTE OWNERS OF OUR COMMON STOCK
We may need to raise additional funds through public or private debt or
equity financings in order to:
- fund ongoing operations;
- take advantage of opportunities, including more rapid expansion or
acquisition of complementary products, technologies or businesses;
- develop new products; or
- respond to competitive pressures.
Any additional capital raised through the sale of equity may dilute an
investor's percentage ownership of our common stock. Furthermore, additional
financings may not be available on terms favorable to us, or at all. A failure
to obtain additional funding could prevent us from making expenditures that may
be required to grow or maintain our operations.
OUR STOCK PRICE MAY BE VOLATILE
The market for technology stocks has been extremely volatile. The following
factors could cause the market price of our common stock to fluctuate
significantly:
- loss of any of our major customers;
- the addition or departure of key personnel;
- variations in our quarterly operating results;
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<PAGE>
- announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, distribution partnerships,
joint ventures or capital commitments;
- changes in financial estimates by securities analysts;
- sales of common stock or other securities by us or by our existing
stockholders in the future;
- changes in market valuations of telecommunications and networking
companies; and
- fluctuations in stock market prices and volumes.
In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of these companies. The trading prices of many technology companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels and may not be sustained. These broad
market and industry trends may materially and adversely affect the market price
of our common stock, regardless of our actual operating performance. In the
past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been initiated against
these companies. Class-action litigation, if initiated, could result in
substantial costs and a diversion of management's attention and resources. All
of these factors could cause the market price of our stock to drop and you may
not be able to sell your shares at or above the initial offering price.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING
AND COULD LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS,
INCLUDING CHANGES OF CONTROL
Our executive officers, directors and entities affiliated with them in the
aggregate, beneficially own a significant portion of our outstanding common
stock. These stockholders, if acting together, would be able to influence
significantly all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions.
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE OF CONTROL
Provisions of our amended and restated certificate of incorporation, amended
and restated by-laws, and Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.
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ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments. We generally place
our marketable security investments in high-quality credit instruments,
primarily U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
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PART II--OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 24, 2000, the Securities and Exchange Commission declared effective
the Company's Registration Statement on Form S-1 (File Number 333-32206),
relating to the initial public offering of the Company's common stock, $0.001
par value. The managing underwriters in the initial public offering were
Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc., J.P. Morgan
Securities Inc. and Lehman Brothers Inc. The offering was completed on May 31,
2000 and all 5,750,000 shares covered by the Registration Statement, which
includes the exercise of the underwriters' over allotment option of 750,000
shares, were sold by the Company at $23.00 per share. The net proceeds from the
initial public offering were approximately $121.7 million, after deducting the
underwriters' discounts and commissions and estimated offering expenses payable
by us of approximately $10.6 million in the aggregate.
We expect to use the net proceeds from this offering for general corporate
purposes, including the funding of operating losses, the expansion of sales,
marketing and product development activities, working capital, and capital
expenditures. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses; however, we currently have
no plans, commitments or agreements with respect to any of these types of
transactions. Pending their use, we have invested the net proceeds in
investment-grade, interest-bearing securities.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------------
<S> <C>
1.1 Underwriting Agreement by and among Goldman, Sachs & Co.,
FleetBoston Robertson Stephens Inc., Lehman Brothers Inc.
and J.P. Morgan Securities Inc. dated March 24, 2000.
3.1 Fourth Amended and Restated Certificate of Incorporation of
the Company.
3.2 Amended and Restated By-Laws of the Company.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the three months
ended June 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
SONUS NETWORKS, INC.
Dated: August 9, 2000 By: /s/ STEPHEN J. NILL
-----------------------------------------
Stephen J. Nill, Chief Financial Officer,
Vice President of Finance and
Administration and Treasurer (authorized
officer and principal financial and
accounting officer)
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Underwriting Agreement by and among Goldman, Sachs & Co.,
FleetBoston Robertson Stephens Inc., Lehman Brothers Inc.
and J.P. Morgan Securities Inc. dated March 24, 2000.
3.1 Fourth Amended and Restated Certificate of Incorporation of
the Company.
3.2 Amended and Restated By-Laws of the Company.
27.1 Financial Data Schedule.
</TABLE>
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