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Filed Pursuant to Rule 424(B)(4)
Registration No. 333-32070
PROSPECTUS
4,000,000 Shares
[SUNRISE LOGO]
Common Stock
This is an initial public offering of common stock by Sunrise Telecom
Incorporated. Sunrise is selling 3,817,428 shares of common stock. The selling
stockholders identified in this prospectus are offering an additional
182,572 shares of common stock. Sunrise will not receive any of the proceeds
from the sale of common stock held by the selling stockholders.
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Sunrise's common stock has been approved for quotation on the Nasdaq National
Market under the symbol SRTI.
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Per Share Total
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Initial public offering price........................... $15.00 $ 60,000,000
Underwriting discounts and commissions.................. $ 1.05 $ 4,200,000
Proceeds to Sunrise, before expenses.................... $13.95 $ 53,253,121
Proceeds to the selling stockholders, before expenses... $13.95 $ 2,546,879
</TABLE>
The selling stockholders have granted the underwriters an option for a period
of 30 days to purchase up to 600,000 additional shares of common stock.
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Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Chase H&Q
CIBC World Markets
U.S. Bancorp Piper Jaffray
July 12, 2000
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Inside front cover
Complete DSL testing solutions
[Illustration of various Sunrise Telecom equipment]
[Sunrise Telecom logo]
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Sunrise Telecom equipment is used throughout the communications network.
[Network diagram illustrating where Sunrise products are used throughout the
communications network.]
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TABLE OF CONTENTS
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Page
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Prospectus Summary.................................................... 3
Risk Factors.......................................................... 7
Forward-Looking Statements............................................ 17
Use of Proceeds....................................................... 18
Dividend Policy....................................................... 18
Capitalization........................................................ 19
Dilution.............................................................. 20
Selected Consolidated Financial Data.................................. 21
Unaudited Pro Forma Consolidated
Condensed Financial Statements....................................... 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 24
Business.............................................................. 35
Management............................................................ 48
Principal and Selling Stockholders.................................... 56
Certain Transactions.................................................. 58
Description of Capital Stock.......................................... 59
Shares Eligible for Future Sale....................................... 62
Underwriting.......................................................... 63
Legal Matters......................................................... 65
Experts............................................................... 65
Where You Can Find More Information................................... 65
Index To Financial Statements......................................... F-1
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including "Risk
Factors" and our consolidated financial statements, before making an investment
decision.
Sunrise Telecom
We manufacture and market service verification equipment to pre-qualify,
verify and diagnose telecommunications and Internet networks. Our products
offer broad functionality, leading-edge technology and compact size to test the
variety of new digital subscriber line, or DSL, services, fiber optics, cable
TV networks and signaling networks. Digital subscriber line technology is a
high-speed, high capacity access service that operates over standard copper
telephone wires. We design our products to maximize technicians' effectiveness
in the field and to provide realistic network simulations for equipment
manufacturers to test their products. Our customers include incumbent local
exchange carriers, competitive local exchange carriers, and other service
providers, network infrastructure suppliers and installers throughout North
America, Latin America, Europe and the Asia/Pacific region. Affiliates of SBC
Communications Inc., which include Pacific Bell Telephone Company, Southwestern
Bell Telephone Company, Ameritech Corporation, Nevada Bell and Southern New
England Telephone, accounted for approximately 40.6% of our net sales in 1999.
According to Ryan Hankin Kent, Inc., the number of DSL lines and cable TV
modems in homes and businesses in the United States and Canada will grow from
2.1 million in 1999 to 24.7 million in 2003. We believe that service
verification products are required for the efficient deployment and maintenance
of broadband networks and that the dramatic growth in broadband service, driven
by the Internet, will accelerate the need for our products. However, our growth
rate may not necessarily correspond with the growth rate of the installation of
DSL lines and cable TV modems. For the year ended December 31, 1999, our net
sales were approximately $61.5 million and our net income was approximately
$10.9 million.
Our service verification products are used for a broad range of
telecommunications transmission and signaling technologies, including:
. DSL. Our new DSL products test the most popular types of DSL service,
including asymmetric DSL, or ADSL, symmetric DSL, or SDSL, high bit-rate
DSL, or HDSL, and integrated services digital network DSL, or IDSL. Our
DSL products have accounted for virtually all of our net sales.
. Cable TV. We recently introduced a new service verification solution for
cable network operators who are converting their analog cable networks
into digital networks capable of providing Internet and voice services.
. Fiber Optics. We recently introduced three new products to verify fiber
optic transmissions in the access network and to analyze services
carried on fiber optics in the central office. Our fiber optic products
allow service providers to verify fiber optic services based on North
American and international transmission standards.
. Signaling. We recently introduced an Internet browser-based remote
testing and surveillance solution for service providers to test and
monitor various and changing signaling protocols.
Our products offer the following key benefits:
. Design Flexibility. We design our products to be flexible and to evolve
as customer needs change. For instance, a flexible design allows the
customer to adapt their SunSet xDSL test set to new DSL services and
applications as network standards evolve, thereby protecting the
customer's investment in the test equipment.
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. Customer Driven Features. Each of our products is highly tailored to our
customers' needs. Our marketing engineers continually interact with our
customers during the design process to ensure that our products are the
best available solution for them.
. Handheld Design. Most of our DSL and fiber optic products weigh less
than three pounds and offer handheld convenience. The compact,
lightweight design of these products enable field technicians to access
problems and verify line operation quickly.
. Rapid and Efficient DSL Deployment. Our products allow field and office
technicians to test DSL lines rapidly and efficiently to ensure that
they are properly connected to the central office and that they can
support a specific type and speed of DSL service. In a single device,
our products can be used to pre-qualify facilities for services,
identify the source of problems and verify the proper operation of newly
installed service before handing service over to customers.
. Improved Network Quality and Reliability. Field and office technicians
use our products to diagnose and locate a variety of problems and
degradations in broadband service. This allows service providers to
identify and repair problems and to restore service efficiently. As a
result, our products support our customers' need to provide high quality
and reliable service.
Our objective is to be a significant provider of service verification test
equipment for a broad range of applications within the global
telecommunications industry. The key elements of our strategy are to maintain
our position in DSL service verification equipment, to penetrate the growing
market for verification test equipment for fiber optics and cable TV, to expand
beyond field verification testing into remote testing, alarm and surveillance
and central office testing applications, to continue to expand internationally,
to pursue strategic acquisitions and joint ventures and to pursue follow-on
sales opportunities by continuing to develop and market hardware modules which
can be inserted into our service verification equipment.
We were incorporated in California as Sunrise Telecom, Inc. in October 1991.
In July 2000, we reincorporated as a Delaware corporation and changed our name
to Sunrise Telecom Incorporated. Our principal executive offices are located at
22 Great Oaks Boulevard, San Jose, California 95119, and our telephone number
is (408) 363-8000. We maintain Web sites at www.sunrisetelecom.com,
www.hukk.com, www.ghepardo.com and www.protel-italy.com. Information contained
on our Web sites does not constitute part of this prospectus.
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The Offering
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Common stock offered by Sunrise..................... 3,817,428 shares
Common stock offered by the selling stockholders.... 182,572 shares
Common stock to be outstanding after this offering.. 49,595,829 shares
Use of proceeds..................................... We may use up to $5.0
million to repay amounts
drawn to finance our
short-term liquidity
needs after March 31,
2000 under our line of
credit. We have not made
other specific
allocations regarding the
remaining net proceeds
and expect to use the
balance to expand our
business generally. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.............. SRTI
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Unless otherwise noted, the information in this prospectus:
. assumes 45,278,400 shares of common stock outstanding at March 31, 2000
after giving effect to a three-for-one stock split of our common stock
on April 10, 2000;
. excludes approximately 8,893,905 shares of common stock reserved for
issuance under our 1993 stock option plan, our 2000 stock plan and our
2000 employee stock purchase plan, of which 2,796,198 shares were
subject to outstanding options at March 31, 2000 issued at a weighted
average exercise price of $3.99 per share; and
. assumes our reincorporation from California to Delaware on July 10,
2000.
The common stock to be outstanding after this offering includes 500,001
shares of common stock issued subject to a put option, which expired on May 22,
2000, as part of the Pro.Tel acquisition.
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Summary Consolidated Financial Information
The table below sets forth summary consolidated financial information for the
periods indicated. It is important that you read this information together with
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the notes to them included elsewhere in this prospectus.
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Three Months
Ended
Year Ended December 31, March 31,
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1995 1996 1997 1998 1999 1999 2000
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(unaudited)
(in thousands, except per share data)
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Consolidated Statement
of Operations:
Net sales............. $10,674 $20,174 $29,064 $28,535 $61,465 $8,090 $19,791
Cost of sales......... 2,880 5,189 7,652 7,590 14,736 2,281 5,588
------- ------- ------- ------- ------- ------ -------
Gross profit........ 7,794 14,985 21,412 20,945 46,729 5,809 14,203
Operating expenses:
Research and
development........ 1,722 3,051 5,892 6,203 10,694 1,706 3,354
Sales and
marketing.......... 2,565 5,444 7,645 7,764 15,215 2,130 5,078
General and
administrative..... 649 1,019 1,632 2,243 3,912 522 1,437
------- ------- ------- ------- ------- ------ -------
Total operating
expenses........... 4,936 9,514 15,169 16,210 29,821 4,358 9,869
------- ------- ------- ------- ------- ------ -------
Income from
operations......... 2,858 5,471 6,243 4,735 16,908 1,451 4,334
Other income, net..... 22 51 112 224 327 71 138
------- ------- ------- ------- ------- ------ -------
Income before income
taxes.............. 2,880 5,522 6,355 4,959 17,235 1,522 4,472
Income taxes.......... 1,107 2,081 1,899 1,588 6,291 476 1,699
------- ------- ------- ------- ------- ------ -------
Net income.......... $ 1,773 $ 3,441 $ 4,456 $ 3,371 $10,944 $1,046 $ 2,773
======= ======= ======= ======= ======= ====== =======
Dividends............. 30 60 89 89 223 223 --
======= ======= ======= ======= ======= ====== =======
Earnings per share:
(1)
Basic............... $ 0.04 $ 0.08 $ 0.10 $ 0.08 $ 0.25 $ 0.02 $ 0.06
======= ======= ======= ======= ======= ====== =======
Diluted............. $ 0.04 $ 0.08 $ 0.10 $ 0.07 $ 0.24 $ 0.02 $ 0.06
======= ======= ======= ======= ======= ====== =======
Shares used in
computing earnings
per share: (1)
Basic............... 45,222 44,954 44,645 44,537 44,667 44,540 45,060
======= ======= ======= ======= ======= ====== =======
Diluted............. 45,269 45,071 44,896 45,003 45,824 45,517 47,032
======= ======= ======= ======= ======= ====== =======
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March 31, 2000
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Actual As Adjusted (2)
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(in thousands, unaudited)
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Consolidated Balance Sheet Data:
Cash and cash equivalents...................... $ 1,761 $ 53,864
Working capital................................ 13,956 66,059
Total assets................................... 49,486 101,589
Notes payable, less current portion............ 959 959
Total stockholders' equity..................... 28,912 86,015
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(1) See Note 1 of the notes to consolidated financial statements of Sunrise for
a detailed explanation of the determination of the number of shares used to
compute basic and diluted earnings per share.
(2) "As Adjusted" reflects the application of the net proceeds from the sale of
3,817,428 shares of our common stock by us at an initial public offering
price of $15.00 per share, after deducting the underwriting discount and
the estimated offering expenses and the expiration on May 22, 2000 of the
put arrangement on the 500,001 shares of common stock issued as part of the
Pro.Tel acquisition. See "Use of Proceeds" and "Capitalization."
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision.
Risks Relating to Our Business
Quarterly Fluctuations--Because our quarterly operating results have fluctuated
significantly in the past and are likely to fluctuate significantly in the
future, our stock price may decline and may be volatile.
In the past, we have experienced significant fluctuations in our quarterly
results due to a number of factors beyond our control. In the future, we expect
that our quarterly operating results may fluctuate significantly and will be
difficult to predict given the nature of our business. Many factors could cause
our operating results to fluctuate from quarter to quarter in the future,
including the following:
. the size and timing of orders from our customers, in each case
exacerbated by the lengthy and unpredictable buying patterns of our
customers, and our ability to ship these orders on a timely basis;
. the degree to which our customers have allocated and spent their yearly
budgets, which has, in some cases, resulted in higher net sales in our
fourth quarter;
. the uneven pace of technology innovation, the development of products
responding to these technology innovations by us and our competitors and
customer acceptance of these products and innovations;
. the varied degree of price, product and technology competition, which
has been buffeted by the rapid changes in the telecommunications
industry and our customers' and competitors' responses to these changes;
. the relative percentages of our products sold domestically and
internationally; and
. the mix of the products we sell and the varied margins associated with
these products.
The factors listed above may affect our business and stock price in several
ways, including the following:
. Given the high fixed costs relating to overhead, research and
development, advertising and marketing, among others, if our net sales
are below our expectations in any quarter, the negative effect may be
magnified by our inability to adjust spending in a timely manner.
. As a result of the above, our stock price may decline and may be
volatile, particularly if public market analysts and investors perceive
these factors to exist, whether or not that perception is accurate.
. Finally, the above factors, taken together may make it more difficult
for us to issue additional equity in the future or raise debt financing
to fund future acquisitions and accelerate growth.
Customer Concentration--A limited number of customers account for a high
percentage of our net sales, and any adverse factor affecting these
customers or our relationship with these customers could cause our net sales
to decrease.
Our customer base is highly concentrated, and a relatively small number of
companies have accounted for a large percentage of our net sales. Net sales
from our top five customers in the United States represented approximately
16.4% of net sales in 1997, 15.9% in 1998 and 49.4% in 1999. Our largest
customers over this period have been affiliates of SBC Communications Inc.,
which include Pacific Bell Telephone Company, Southwestern Bell Telephone
Company, Ameritech Corporation, Nevada Bell and Southern New England Telephone
and which in total accounted for approximately 40.6% of net sales in
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fiscal 1999. No customer is presently obligated to purchase a specific amount
of products or to provide us with binding forecasts of purchases for any
period. We expect that we will continue to depend upon SBC Communications'
affiliates and other major customers for a substantial portion of our net sales
in future periods. We cannot guarantee that our future net sales, including
those from SBC Communications' affiliates, will be comparable to our fiscal
1999 net sales. The loss of a major customer or the reduction, delay or
cancellation of orders from one or more of our significant customers could
cause our net sales and, therefore, profits to decline. In addition, many of
our customers are able to exert substantial negotiating leverage over us. As a
result, they may cause us to lower our prices and negotiate other forms and
provisions that may negatively affect our business and profits.
Dependence on DSL--Substantially all of our sales have been from our DSL
products. If the market for DSL services does not continue to grow as we
anticipate, our net sales could decline.
In 1999, sales of our DSL products represented approximately 97.5% of our net
sales. Currently, our DSL products are primarily used by a limited number of
incumbent local exchange carriers, including the regional Bell operating
companies, and competitive local exchange carriers, who offer DSL services. A
competitive local exchange carrier is a company that, following the
Telecommunications Act of 1996, is authorized to compete in a local
communications services market. These parties, and other Internet service
providers and users, are continuously evaluating alternative high-speed data
access technologies, including cable modems, fiber optics, wireless technology
and satellite technologies, and may at any time adopt these competing
technologies. These competing technologies may ultimately prove to be superior
to DSL services and reduce or eliminate the demand for our DSL products.
In addition, the availability and quality of DSL service may be impaired by
technical limitations and problems of the existing copper wire network on which
DSL service runs, such as:
. the distance of end users from the central office of the incumbent local
exchange carrier, which is typically limited to between 12,000 and
18,000 feet;
. the quality and degree of interference with the copper wire network;
. the configuration of the copper wire network, which may degrade or
prevent DSL service;
. the ability of DSL networks and operational support systems of service
providers to connect and manage a substantial number of online end users
at high speeds, while achieving reliable and high quality service; and
. the vulnerability of the copper wire network to physical damage from
natural disasters and other unanticipated telecommunications failures
and problems.
Accordingly, our future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by these companies, end users of
their services and other Internet service providers and users.
To date, our customers have deployed DSL equipment, including our products,
in substantially larger volumes than their current subscriber count. The
inability of our current or future customers to acquire and retain subscribers
as planned, or to respond to competition for their services or reduced demand
for their services, could cause them to reduce or eliminate their DSL
deployment plans. If our customers are forced to reduce or eliminate their DSL
deployment plans, our sales to them will decline.
Use of Field Technicians--If service providers reduce their use of field
technicians and successfully implement a self-service installation model,
demand for our products could decrease.
To ensure quality service, our major service provider customers, including
SBC Communications, typically send a technician who uses our product into the
field to verify service for installations. However, SBC Communications has
recently announced plans to encourage their customers to install their own DSL
service. U.S. West and Bell Atlantic already encourage customers to install DSL
themselves. By encouraging
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customers to install DSL themselves, these phone companies intend to reduce
their expenses and expedite installation for their customers. To encourage
self-installation, these companies offer financial incentives. If SBC and other
service providers successfully implement these plans or choose to send
technicians into the field only after a problem has been reported, or if
alternative methods of verification become available, such as remote
verification, the need for field technicians and the need for our products
could decrease.
Sales Implementation Cycles--The length and unpredictability of the sales and
implementation cycles for our products makes it difficult to forecast
quarterly revenues.
Sales of our products often entail an extended decision-making process on the
part of prospective customers. We frequently experience delays following
initial contact with a prospective customer and expend substantial funds and
management effort pursuing these sales. Our ability to forecast the timing and
amount of specific sales is therefore limited. As a result, the uneven buying
patterns of our customers may cause fluctuations in our quarterly operating
results, which could cause our stock price to decline. For more information
regarding the length and unpredictability of our sales and implementation
cycles, see "Business--Sales, Marketing and Customer Service."
Other sources of delays that lead to long sales cycles, or even a sales loss,
include: potential customers' internal approval and contracting procedures,
procurement practices, and testing and acceptance processes. As a result, the
sales cycle for larger deployment of selected products typically ranges from
six to 24 months for new deployment of selected product sales, and up to six
months for occasional large selected product sales. The deferral or loss of one
or more significant sales could significantly affect operating results in a
particular quarter, especially if there are significant sales and marketing
expenses associated with the deferred or lost sales.
Product Enhancements--If we are unable to enhance our existing products and
successfully manage the development of new products, our future success may
be threatened.
The market for our products is characterized by rapid technological advances,
changes in customer requirements and preferences, evolving industry and
customer-specific protocol standards and frequent new product enhancements and
introductions. Our existing products and our products currently under
development could be rendered obsolete by the introduction of products for
telecommunications networks involving competing technologies, by the evolution
of alternative technologies or new industry protocol standards and by rival
products introduced by our competitors. These market conditions are made more
complex and challenging by the high degree to which the telecommunications
industry is fragmented.
We believe our future success will depend, in part, upon our ability, on a
timely and cost-effective basis, to continue to:
. anticipate and respond to varied and rapidly changing customer
preferences and requirements, a process made more challenging by our
customers' buying patterns;
. anticipate and develop new products and solutions for networks based on
emerging technologies, such as the asynchronous transfer mode protocol
that packs digital information into cells to be routed across a network,
and Internet telephony, which comprises voice, video, image and data
across the Internet, that are likely to be characterized by continuing
technological developments, evolving industry standards and changing
customer requirements;
. invest in research and development to enhance our existing products and
to introduce new verification and diagnostic products for the
telecommunications, Internet, cable network and other markets; and
. support our products by investing in effective advertising, marketing
and customer support.
We cannot assure you that we will accomplish these objectives, and our failure
to do so could have a material adverse impact on our market share, business and
financial results.
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Potential Product Liability--Our products are complex, and our failure to
detect errors and defects may subject us to costly repairs, product returns
under warranty and product liability litigation.
Our products are complex and may contain undetected defects or errors when
first introduced or as enhancements are released. These errors may occur
despite our testing and may not be discovered until after a product has been
shipped and used by our customers. This risk is compounded by the fact that we
offer over 20 products, with multiple hardware and software modifications,
which makes it more difficult to ensure high standards of quality control in
our manufacturing process. The existence of these errors or defects could
result in costly repairs and/or returns of products under warranty and, more
generally, in delayed market acceptance of the product or damage to our
reputation and business.
In addition, the terms of our customer agreements and purchase orders, which
provide us with protection against unwarranted claims of product defect and
error, may not protect us adequately from unwarranted claims against us, unfair
verdicts if a claim were to go to trial, settlement of these kinds of claims or
future regulation or laws regarding our products. Our defense against these
claims in the future, regardless of their merit, could result in substantial
expense to us, diversion of management time and attention, damage to our
business reputation and hurt our ability to retain existing customers or
attract new customers.
Managing Growth--We may have difficulties managing our expanding operations,
which could reduce our chances of maintaining our profitability.
We have recently experienced rapid growth in revenues and in our business
generally that has placed, and we expect will continue to place, a significant
strain on our management and operations. For example, our revenues have
increased from $28.5 million in 1998 to $61.5 million in 1999, our number of
employees has increased from 118 at December 31, 1998 to 228 at March 31, 2000,
and we have made two important acquisitions, that of Hukk Engineering and
Pro.Tel. As a result of our historical and expected growth, we face several
risks, including:
. the need to improve our operational, financial, management,
informational and control systems;
. the need to hire, train and retain highly skilled personnel in a market
where there are already severe shortages of these kinds of personnel, as
we discuss below; and
. the possibility that our management's attention will be diverted from
running our business to the needs of managing a public company.
We cannot assure you that we will be able to manage this growth profitably.
Competition--Competition could reduce our market share and decrease our net
sales.
The market for our products is fragmented and intensely competitive both in
and outside the United States, and is subject to rapidly evolving industry
standards and varied and changing customer preferences and requirements. Our
principal competitors are described in "Business--Competition." Many of these
competitors have longer operating histories, larger installed customer bases,
longer relationships with customers, wider name recognition and product
offerings and greater financial, technical, marketing, customer service and
other resources than we do. On May 23, 2000, Dynatech, Inc. and Wavetek Wandel
Goltermann, Inc announced the completion of the merger of TTC, a division of
Dynatech, and Wavetek, which could make the combined company a more formidable
competitor.
We expect that, as our industry and market evolves, new competitors or
alliances among competitors with existing and new technologies could emerge and
acquire significant market share. We anticipate that competition in our market
will increase and we will face greater threats to our market share, price
pressure on our products and the likelihood that, over time, our profitability
may decrease. In addition, it is difficult
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to assess accurately the market share of our products or of Sunrise overall
because of the high degree of fragmentation in the market for DSL service
verification equipment, in particular, and for high-speed data access
technology, in general. As a result, it may be difficult for us to forecast
accurately trends in the market, which of our products will be the most
competitive over the longer term and, thus, what is the best use of our human
and other form of capital. We cannot assure you that we will be able to compete
effectively. For discussion of the principal competitive factors in our market,
see "Business--Competition."
Need for New Personnel--If we cannot hire and train the R&D, manufacturing,
sales, and marketing personnel we need to support our anticipated growth,
our plans for continued expansion will be hampered.
Our business requires engineers, technicians and other highly trained and
experienced personnel. In particular, since our products require a
sophisticated selling effort targeted at several key people within our
prospective customers' organizations, we have a special need for experienced
sales personnel as well as specialized engineers. In addition, the complexity
of our products and the difficulty of configuring and maintaining them require
highly trained customer service and support personnel. If we continue to grow,
we will need to hire a significant number of engineering, sales, marketing and
customer service and support personnel in the future, in and outside the United
States. Given that competition for such persons is intense, especially in the
San Francisco Bay Area, we may not be successful in attracting and retaining
these individuals. Our failure to hire, train and keep these kinds of employees
could impair our ability to grow profitably. In addition, if we do hire new
personnel, the addition of significant numbers of new personnel will require us
to incur significant start-up expenses, including procurement of office space
and equipment, initial training costs, and may result in low productivity rates
of these new personnel. These start-up expenses may adversely affect our future
operating results.
Reliance On Non-U.S. Workers--If U.S. immigration policies prevent us from
hiring or retaining the workers we need, our growth may be limited.
In the past we have filled a significant portion of our new personnel needs,
particularly for our engineers, with non-U.S. citizens holding temporary work
visas that allow these persons to work in the United States for a limited
period of time. We rely on these non-U.S. workers because of the shortage of
engineers, technicians and other highly skilled and experienced workers in the
telecommunications industry in the United States, in general, and in the San
Francisco Bay Area, in particular. Regulations of the Immigration and
Naturalization Service permit non-U.S. workers a limited number of extensions
for their visas and also set quotas regarding the number of non-U.S. workers
U.S. companies may hire. As a result, we face the risk that a portion of our
existing employees may not be able to continue to work for us, thereby
disrupting our operations, and that we may not be able to hire the number of
engineers, technicians and other highly skilled and experienced workers that we
need to grow our business. Furthermore, changes in these regulations could
exacerbate these risks.
Dependence on Key Employees--If one or more of our senior managers were to
leave, we could experience difficulties in replacing them and our operating
results could suffer.
Our success depends to a significant extent upon the continued service and
performance of a relatively small number of key senior management, technical,
sales and marketing personnel. The loss of any of our three founders, Paul Ker-
Chin Chang, Paul A. Marshall and Robert C. Pfeiffer, in particular, would
likely harm our business. None of these individuals is bound by an employment
agreement with us, and we do not carry key man life insurance on them. In
addition, competition for senior level personnel with telecommunications
knowledge and experience is intense. If any of our senior managers were to
leave Sunrise, we would need to devote substantial resources and management
attention to replace them. As a result, management attention may be diverted
from managing our business and we may need to pay higher compensation to
replace these employees.
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Risks of International Operations--Our plan to expand sales in international
markets could lead to higher operating expenses and may subject us to
unpredictable regulatory and political systems.
Sales to customers located outside of the United States represented 46% of
our net sales in 1997, 42% in 1998 and 20% in 1999, and we expect international
revenues to continue to account for a significant percentage of net sales for
the foreseeable future. In addition, an important part of our strategy calls
for further expansion into international markets. As a result, we will face
various risks relating to our international operations, including:
. potentially higher operating expenses, resulting from the establishment
of international offices, the hiring of additional personnel and the
localization and marketing of products for particular countries'
technologies;
. the need to establish relationships with government-owned or subsidized
telecommunications providers as well as additional distributors;
. fluctuations in foreign currency exchange rates and the risks of using
hedging strategies to minimize our exposure to these fluctuations, which
have been heightened by our recent acquisition of Pro.Tel, whose
revenues have been and are likely to continue to be in Italian lira; and
. potentially adverse tax consequences related to acquisitions and
operations, including the ability to claim goodwill deductions and a
foreign tax credit against U.S. federal income taxes, especially since
Italy has a higher tax rate.
We cannot assure you that one or more of these factors will not materially and
adversely affect our ability to expand into international markets, our revenues
and profits.
In addition, since the last six months of 1997, the Asia/Pacific region has
experienced instability in many of its economies and significant devaluations
in local currencies. Approximately 20% of our sales in 1998 and 9% of our sales
in 1999 were derived from customers located in this region. These instabilities
may continue or worsen, which could have a materially adverse effect on our
results of operations. If international revenues are not adequate to offset the
additional expense of expanding international operations, our future growth and
profitability could suffer.
Dependence on Sole and Single Source Suppliers--Because we depend on a limited
number of suppliers and some sole and single source suppliers that are not
contractually bound in the long-term, our future supply of product
components is uncertain. This could lead to manufacturing difficulties.
In our manufacturing process, we purchase many key products, such as
microprocessors, bus interface chips, optical components and oscillators, from
a single source or sole supplier and we license certain software from third
parties. We rely exclusively on third-party subcontractors to manufacture some
sub-assemblies, and we have retained, from time to time, third party design
services in the development of our products. We do not have long-term supply
agreements with these vendors. In general, we make advance purchases of some
products and components to ensure an adequate supply, particularly for products
that require lead times of up to six months to manufacture. In the past, we
have experienced supply problems as a result of financial or operational
difficulties of our suppliers, shortages, discontinuations resulting from
component obsolescence or other shortages or allocations of supplies. Our
reliance on these third parties involves a number of risks, including:
. the unavailability of critical products and components on a timely
basis, on commercially reasonable terms or at all;
. if products or software licenses were to become unavailable, the need to
qualify new or alternative products or develop or license new software
for our use and/or to reconfigure our products and manufacturing
process, each of which could be lengthy and expensive;
12
<PAGE>
. the likelihood that, if these products are not available, we would
suffer an interruption in the manufacture and shipment of our products
until the products or alternatives become available;
. reduced control over product quality and cost, risks exacerbated by the
need to respond, at times, to unanticipated changes and increases in
customer orders; and
. the unavailability of, or interruption in, access to some process
technologies.
In addition, the purchase of these components on a sole source basis subjects
us to risks of price increases and potential quality assurance problems. This
dependence magnifies the risk that we may not be able to ship our products on a
timely basis to satisfy customers' orders. We cannot assure you that one or
more of these factors will not cause delays or reductions in product shipments
or increases in product costs, which in turn could have a material adverse
effect on our business. See "Business--Manufacturing."
Acquisitions--We have acquired two companies and intend to pursue further
acquisitions in the future. These activities involve numerous risks,
including the use of cash, amortization of goodwill and the diversion of
management attention.
Recently, we acquired two companies, Hukk Engineering in July 1999, and
Pro.Tel in February 2000. As a result of these acquisitions, we face numerous
risks, including:
. integrating the existing management, sales force, technicians and other
personnel into one existing culture and business;
. combining manufacturing, administrative and management information and
other control systems into our corresponding systems;
. developing and implementing an integrated business strategy from what
had been previously three independent companies; and
. developing compatible or complementary products and technologies from
previously independent operations. For Hukk Engineering, this means
addressing the convergence of telephony and cable products.
The risks stated above will be made more difficult because Hukk Engineering is
located in Norcross, Georgia and Pro.Tel is located in Modena, Italy and
Springfield, Virginia. In addition, if we make future acquisitions, these risks
will be exacerbated by the need to integrate additional operations at a time
when we may not have fully integrated Hukk Engineering and Pro.Tel.
If we pursue further acquisitions, we will face similar risks as those above
and additional risks, including:
. the diversion of our management's attention and the expense of
identifying and pursuing suitable acquisition candidates, whether or not
consummated;
. negotiating and closing these transactions;
. the potential need to fund these acquisitions by dilutive issuances of
equity securities and by incurring debt; and
. the potential negative effect on our financial statements from the
increase in goodwill and other intangibles, the write-off of research
and development costs and the high cost and expenses of completing
acquisitions.
We cannot assure you that we will locate suitable acquisition candidates or
that, if we do, we will be able to acquire them and then integrate them
successfully and efficiently into our business.
13
<PAGE>
Risks of the Telecommunications Industry--We face several risks regarding the
telecommunications industry, including the possible effects of its rapid and
unpredictable growth, the possible effects of consolidation among our
principal customers and the risk that deregulation will slow.
Since the passage of the Telecommunication Act of 1996, the
telecommunications industry has experienced rapid growth. This has and will
likely continue to lead to great innovations in technology, intense
competition, short product life cycles and, to some extent, regulatory
uncertainty in and outside the United States. The course of the development of
the telecommunications industry is, however, difficult to predict. As a result,
companies who operate in this industry have a difficult time forecasting future
trends and developments and the acceptance of competing technologies. One
possible effect of this uncertainty is that there may be, in the future, a
delay or a reduction in these companies' investment in their business and
purchase of related equipment, such as our products, and a reduction in their
and our access to capital. Moreover, in the short-term, deregulation may result
in a delay or a reduction in the procurement cycle because of the general
uncertainty involved with the transition period of businesses.
The telecommunications industry has been experiencing consolidation among its
primary participants, such as incumbent local exchange carriers and competitive
local exchange carriers, several of whom are our primary customers. For
example, in recent years, SBC acquired Pacific Bell and Ameritech, both of
which were customers of ours. Continued consolidation may cause delay or cause
cancellation of orders for our products. In addition, the consolidation of our
customers will likely provide them with greater negotiating leverage with us
and may lead them to pressure us to lower the prices of our products.
Because the market for our products has grown with the deregulation of
portions of the telecommunications industry, we face the risk that these trends
may slow or may be reversed. For example, in the United States, there is
litigation pending that challenges the validity of the Telecommunications Act
of 1996 and the local telephone competition rules adopted by the Federal
Communications Commission to implement that act. If deregulation in
international markets and in the United States were to slow or to take an
unanticipated course, the telecommunications industry might suffer the
following effects:
. greater consolidation of providers of high-speed access technologies,
which may not favor the development of DSL technology and which might
provide these companies with greater negotiating leverage regarding the
prices and other terms of the DSL products and services they purchase;
. uncertainty regarding judicial and administrative proceedings, which may
affect the pace at which investment and deregulation continue to occur;
. a general slowdown in economic activity relating to the
telecommunications industry and a consequent multiplier effect on the
general economy;
. reduced investment in the telecommunications industry in general and in
DSL technology in particular due to increased uncertainty regarding the
future of the industry and this technology; and
. delay in purchase orders of service verification equipment, such as our
products, if they were to reduce their investment in new high-speed
access technologies.
Intellectual Property Risks--Policing any unauthorized use of our intellectual
property by third parties and defending any intellectual property
infringement claims against us could be expensive and disrupt our business.
Our intellectual property and proprietary technology is an important part of
our business, and we depend on the development and use of various forms of
intellectual property and proprietary technology. As a result, we are subject
to several related risks, including the risks of unauthorized use of our
intellectual property and the costs of protecting our intellectual property.
14
<PAGE>
Much of our intellectual property and proprietary technology is not protected
by patents. If unauthorized persons were to copy, obtain or otherwise
misappropriate our intellectual property or proprietary technology without our
approval, the value of our investment in research and development would
decline, our reputation and brand could be diminished and we would likely
suffer a decline in revenue. We believe these risks, which are present in any
business in which intellectual property and proprietary technology play an
important role, are exacerbated by the difficulty in finding unauthorized use
of intellectual property in our business, the increasing incidence of patent
infringement in our industry in general and the difficulty of enforcing
intellectual property rights in some foreign countries.
In addition, litigation has in the past been, and may in the future be,
necessary to enforce our intellectual property rights. This kind of litigation
is time-consuming and expensive to prosecute or resolve, and results in
substantial diversion of management resources. We cannot assure you that we
will be successful in that litigation, that our intellectual property rights
will be held valid and enforceable in any litigation or that we will otherwise
be able to protect our intellectual property and proprietary technology. See
"Business--Intellectual Property and Proprietary Technology."
Risks Relating to this Offering
Concentration of Control--Our executive officers and directors will retain
significant control over us after this offering, which will allow them to
decide the outcome of matters submitted to stockholders for approval. This
influence may not be beneficial to all stockholders.
Upon completion of the offering, Mr. Chang, Mr. Marshall and Mr. Pfeiffer
will beneficially own 26.8%, 24.5% and 13.0% of our outstanding shares of
common stock (26.3%, 24.0% and 12.8%, if the underwriters' over-allotment
options are exercised in full). Consequently, these three individuals, acting
together, will be able to control the election of our directors and the
approval of significant corporate transactions that must be submitted to a vote
of stockholders. In addition, Mr. Chang, Mr. Marshall and Mr. Pfeiffer will
constitute three of the six members of the board of directors and will have
significant influence in directing the actions taken by the directors. The
interests of these persons may conflict with your interests as stockholders,
and the actions they take or approve may be contrary to those desired by other
stockholders. This concentration of ownership and control of the management and
affairs of our company may also have the effect of delaying or preventing a
change in control of our company that stockholders may consider desirable. See
"Management" and "Principal and Selling Stockholders."
Anti-takeover Provisions--Anti-takeover provisions in our charter documents
could prevent or delay a change of control, and as a result, negatively
impact our stockholders.
Some provisions of our certificate of incorporation and bylaws may have the
effect of discouraging, delaying or preventing a change in control of our
company or unsolicited acquisition proposals that you, as a stockholder, may
consider favorable. These provisions provide for:
. authorizing the issuance of "blank check" preferred stock;
. a classified board of directors with staggered, three-year terms;
. prohibiting cumulative voting in the election of directors;
. requiring super-majority voting to effect certain amendments to our
certificate of incorporation and by-laws;
. 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 to
the board of directors or for proposing matters that can be acted upon
at stockholders meetings.
15
<PAGE>
Some provisions of Delaware law and our stock incentive plans may also have the
effect of discouraging, delaying or preventing a change in control of our
company or unsolicited acquisition proposals. These provisions also could limit
the price that some investors might be willing to pay in the future for shares
of our common stock. See "Management--Benefit Plans," "Description of Capital
Stock--Delaware Anti-Takeover Law and Charter and Bylaw Provisions" and
"Description of Capital Stock--Indemnification Provisions."
No Prior Public Market--There has been no prior public market for our common
stock, and our stock price may be volatile, resulting in potential
litigation.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price for the common stock has been determined by
negotiations between our company and the underwriters, and may not be
representative of the price that will prevail in the open market. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. In addition, the public markets have experienced
volatility that has particularly affected the market prices of securities of
many technology and telecommunications companies for reasons that have been
unrelated to their operating results. As a result, you may face the following
risks:
. the market price of our common stock may decline below the initial
offering price;
. an active trading market for our common stock may not develop, which may
result in your not being able to sell the shares you purchase at
attractive prices or at all; and
. volatility and a lack of liquidity for our common stock may impede our
ability to raise additional capital to expand our business.
In addition, if our stock price is volatile, we could face securities class
action litigation. In the past, following periods of volatility in the market
price of their stock, many companies have been the subjects of securities class
action litigation. If we were sued in a securities class action, it could
result in substantial costs and a diversion of management's attention and
resources and could cause our stock prices to fall further.
Sale of Shares--The sale of a substantial number of shares of our common stock
after this offering may adversely affect our stock price.
Beginning 180 days after the date of this prospectus, approximately
45,080,153 shares of our common stock held by existing stockholders will become
available for resale under Rule 144 and Rule 701 of the Securities Act. The
market price of our common stock could decline as a result of sales of
substantial amounts of common stock in the public market upon the expiration of
lockup agreements between the existing stockholders and the underwriters or the
perception that substantial sales could occur. These sales might also make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. See "Shares Eligible for Future Sale."
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which may be deemed to
include, but are not limited to, our business strategy, timing of and plans for
the introduction of new products and enhancements, plans for hiring additional
personnel, timing of and plans for opening new offices and the adequacy of
anticipated sources of cash, including the proceeds from this offering, to fund
our operations. Words such as "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
Actual results could differ materially from those projected in any forward-
looking statements for the reasons detailed in the "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" portions of this prospectus or elsewhere in this prospectus.
17
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $52.1 million from the sale of
shares of common stock by us in this offering at an initial public offering
price of $15.00 per share after deducting underwriting commissions and
discounts and estimated offering expenses. We will not receive any of the
proceeds from the sale of shares by the selling stockholders.
The principal purpose of this offering is to increase our equity capital, to
create a public market for our common stock, to facilitate our future access to
public equity markets, to provide liquidity for certain of our existing
stockholders, to improve the effectiveness of our stock option plan in
attracting and retaining key employees and to provide increased visibility of
Sunrise in a marketplace where many of our competitors are publicly held
companies.
We may use up to $5.0 million to repay amounts drawn to finance our short-
term liquidity needs after March 31, 2000 under our line of credit. Our line of
credit bears interest at 0.25% less than the bank's prime rate, which was 9.0%
at March 31, 2000, and expires in May 2001. We have not made other specific
allocations regarding the remaining net proceeds, and we expect to use the net
proceeds from this offering to expand our business generally, including to fund
the following:
. general corporate purposes, including sales and marketing, research and
development and general and administrative expenses;
. working capital;
. up to approximately $15.0 million for the construction of our new
facility in San Jose, California, which we are building to accommodate
our need for an increase in manufacturing capacity and employees; and
. the acquisition of businesses, products and technologies which are
complementary with or support our business, product offerings and
strategy.
Pending any use, the net proceeds will be invested in short-term, interest-
bearing securities.
DIVIDEND POLICY
We have declared and paid cash dividends on our common stock since 1994. In
the future, our board of directors will determine whether we will pay dividends
on our common stock. Our line of credit limits the payment of dividends on our
common stock.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at March 31, 2000:
. on an actual basis; and
. on an as adjusted basis to give effect to the receipt of the estimated
net proceeds from the sale of 3,817,428 shares of common stock offered
by us in this offering at an initial public offering price of $15.00 per
share, after deducting underwriting discounts and commissions and
estimated offering expenses, and to give effect to the expiration on May
22, 2000 of the put arrangement on the 500,001 shares of common stock
issued as part of the Pro.Tel acquisition.
The number of shares of common stock listed in the following table excludes
the following:
. approximately 8,893,905 shares of common stock reserved for issuance
under our 1993 stock option plan, our 2000 stock plan and our 2000
employee stock purchase plan, of which 2,796,198 shares were subject to
outstanding options at March 31, 2000 issued at a weighted average
exercise price of $3.99 per share.
The information below is qualified by, and should be read in conjunction
with, our consolidated financial statements and the notes to those statements
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
--------------------
Actual As Adjusted
------- -----------
(in thousands,
unaudited)
<S> <C> <C>
Notes payable, less current portion....................... $ 959 $ 959
------- -------
Stock issued in acquisition subject to put arrangement.... 5,000 --
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $0.001 par value; 175,000,000 shares
authorized; 45,278,400 shares outstanding, actual; and
49,595,829 shares outstanding, as adjusted 45 50
Additional paid-in capital.............................. 10,785 67,883
Deferred stock-based compensation....................... (8,255) (8,255)
Retained earnings....................................... 26,349 26,349
Accumulated other comprehensive income (loss)........... (12) (12)
------- -------
Total stockholders' equity............................ 28,912 86,015
------- -------
Total capitalization................................ $34,871 $86,974
======= =======
</TABLE>
19
<PAGE>
DILUTION
At March 31, 2000, our actual net tangible book value was approximately $17.4
million or $0.38 per share. Actual net tangible book value per share represents
the amount of total actual tangible assets less total actual liabilities,
divided by the shares of common stock outstanding at March 31, 2000. After
giving effect to the sale of the 3,817,428 shares of common stock we are
offering, after deducting the underwriting discounts and commissions and
estimated offering expenses, our adjusted net tangible book value at March 31,
2000 would have been $69.5 million, or $1.40 per share. This represents an
immediate increase in as adjusted net tangible book value of $1.02 per share to
existing stockholders and an immediate dilution of $13.60 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $15.00
Net tangible book value per share at March 31, 2000.......... $0.38
Increase per share attributable to new investors............. 1.02
-----
Pro forma net tangible book value per share after the
offering...................................................... 1.40
------
Dilution per share to new investors............................ $13.60
======
</TABLE>
The following table sets forth, on a pro forma basis, at March 31, 2000 the
difference between the number of shares of common stock purchased, the total
consideration paid and the average price per share paid by the existing
stockholders and the new investors purchasing shares of common stock in this
offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 45,778,401 92.3% $ 1,060,630 1.8% $ 0.02
New investors.......... 3,817,428 7.7 57,261,420 98.2 15.00
---------- ----- ----------- -----
Total................ 49,595,829 100.0% $58,322,050 100.0%
========== ===== =========== =====
</TABLE>
The discussion and tables above assume no exercise of the following:
. approximately 8,893,905 shares of common stock reserved for issuance
under our 1993 stock option plan, our 2000 stock plan and our 2000
employee stock purchase plan, of which 2,796,198 shares were subject to
outstanding options at March 31, 2000 issued at a weighted average
exercise price of $3.99 per share.
Sales by the selling stockholders in this offering will reduce the number of
shares of common stock held by existing stockholders to 49,595,829 or
approximately 91.9% (44,995,829 shares, or approximately 90.7%, if the
underwriters' over-allotment option is exercised in full) of the total number
of shares of common stock outstanding upon the closing of this offering and
will increase the number of shares held by new public investors to 4 million or
approximately 8.1% (4,600,000 shares, or approximately 9.3%, if the
underwriters' over-allotment option is exercised in full) of the total number
of shares of common stock outstanding after this offering. See "Principal and
Selling Stockholders."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1997, 1998 and
1999 and for each of the years in the three-year period ended December 31, 1999
have been derived from our consolidated financial statements audited by KPMG
LLP, independent auditors, and, except for the consolidated balance sheet as of
December 31, 1997, are included elsewhere in this prospectus. The selected
consolidated financial data as of and for each of the years in the two-year
period ended December 31, 1996 except for share and earnings per share data,
which is unaudited, have been derived from our audited consolidated financial
statements, which were audited by other auditors, and are not included in this
prospectus. The statement of operations and earnings per share data for the
three months ended March 31, 1999 and 2000 and the balance sheet data as of
March 31, 2000 have been derived from our unaudited financial statements
included elsewhere in this prospectus. In the opinion of management, these
unaudited statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
our financial position and results of operations for these periods. See Note 1
of the notes to consolidated financial statements of Sunrise for a detailed
explanation of the determination of the number of shares used to compute basic
and diluted earnings per share. You should read the data presented below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our consolidated financial statements and the notes
to them appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
--------------------------------------- --------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------ -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations:
Net sales............. $10,674 $20,174 $29,064 $28,535 $61,465 $8,090 $19,791
Cost of sales......... 2,880 5,189 7,652 7,590 14,736 2,281 5,588
------- ------- ------- ------- ------- ------ -------
Gross profit........ 7,794 14,985 21,412 20,945 46,729 5,809 14,203
Operating expenses:
Research and
development........ 1,722 3,051 5,892 6,203 10,694 1,706 3,354
Sales and
marketing.......... 2,565 5,444 7,645 7,764 15,215 2,130 5,078
General and
administrative..... 649 1,019 1,632 2,243 3,912 522 1,437
------- ------- ------- ------- ------- ------ -------
Total operating
expenses........... 4,936 9,514 15,169 16,210 29,821 4,358 9,869
------- ------- ------- ------- ------- ------ -------
Income from
operations......... 2,858 5,471 6,243 4,735 16,908 1,451 4,334
Other income, net..... 22 51 112 224 327 71 138
------- ------- ------- ------- ------- ------ -------
Income before income
taxes.............. 2,880 5,522 6,355 4,959 17,235 1,522 4,472
Income taxes ......... 1,107 2,081 1,899 1,588 6,291 476 1,699
------- ------- ------- ------- ------- ------ -------
Net income.......... $ 1,773 $ 3,441 $ 4,456 $ 3,371 $10,944 $1,046 $ 2,773
======= ======= ======= ======= ======= ====== =======
Dividends............. 30 60 89 89 223 223 --
======= ======= ======= ======= ======= ====== =======
Earnings per share:
Basic............... $ 0.04 $ 0.08 $ 0.10 $ 0.08 $ 0.25 $ 0.02 $ 0.06
======= ======= ======= ======= ======= ====== =======
Diluted............. $ 0.04 $ 0.08 $ 0.10 $ 0.07 $ 0.24 $ 0.02 $ 0.06
======= ======= ======= ======= ======= ====== =======
Shares used in
computing earnings
per share:
Basic............... 45,222 44,954 44,645 44,537 44,667 44,540 45,060
======= ======= ======= ======= ======= ====== =======
Diluted............. 45,269 45,071 44,896 45,003 45,824 45,517 47,032
======= ======= ======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------- March 31,
1995 1996 1997 1998 1999 2000
----- ------ ------ ------ ------ -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents...... $ 597 $ 638 $2,409 $5,030 $8,615 $ 1,761
Working capital................ 2,568 4,832 8,087 10,164 16,029 13,956
Total assets................... 6,246 11,260 14,678 17,193 38,266 49,486
Notes payable, less current
portion....................... -- -- -- -- 638 959
Total stockholders' equity..... 3,223 6,402 10,462 13,570 25,471 28,912
</TABLE>
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS
We have prepared the following unaudited pro forma consolidated condensed
income statements from our historical income statements included elsewhere in
this prospectus. The unaudited pro forma consolidated condensed income
statements for the year ended December 31, 1999 and the three months ended
March 31, 2000 are adjusted as if we had acquired Pro.Tel as of January 1,
1999.
You should read the unaudited pro forma consolidated condensed income
statements below in conjunction with our audited consolidated financial
statements and related notes as of December 31, 1999 and 1998 and for each of
the years in the three years ended December 31, 1999, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements of Pro.Tel included elsewhere in this prospectus.
The unaudited pro forma consolidated condensed income statements below do not
purport to represent what our results of operations or financial position would
have been had the Pro.Tel acquisition occurred on the date specified below or
to project our results of operations or financial position for any future
periods or date. The pro forma adjustments are based upon available information
and assumptions that we believe are reasonable. In our opinion, we have made
all adjustments that are necessary to present fairly the pro forma data
presented below. The actual amounts could differ from those stated below.
Sunrise Telecom, Inc. & Subsidiaries
Unaudited Pro Forma Consolidated Condensed Income Statement
Year Ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Sunrise Pro.Tel Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................. $61,465 $1,893 -- $63,358
Cost of sales............. 14,736 1,348 $ 146 (A) 16,230
------- ------ ------- -------
Gross profit............ 46,729 545 (146) 47,128
Operating expenses:
Research and
development............ 10,694 28 684 (A) 11,406
Sales and marketing..... 15,215 190 325 (A) 15,730
General and
administrative......... 3,912 311 470 (A) 6,576
1,883 (B)
------- ------ ------- -------
Total operating
expenses............... 29,821 529 3,362 33,712
------- ------ ------- -------
Income (loss) from
operations............... 16,908 16 (3,508) 13,416
Other income, net......... 327 108 (195) (C) 240
------- ------ ------- -------
Income before income
taxes.................. 17,235 124 (3,703) 13,656
Income taxes.............. 6,291 73 (1,352) (D) 5,012
------- ------ ------- -------
Net income.............. $10,944 $ 51 $(2,351) $ 8,644
======= ====== ======= =======
Earnings per share:
Basic................... $ 0.25 $ 0.19
======= =======
Diluted................. $ 0.24 $ 0.19
======= =======
</TABLE>
(A) To reflect the increase in amortization expense due to the amortization of
deferred stock-based compensation expense, on a straight-line basis over
the four-year vesting period, related to options issued to certain Pro.Tel
employees to purchase common stock at exercise prices deemed to be below
fair market value.
(B) To reflect increase in amortization expense due to the amortization of
intangibles and goodwill on a straight line basis over five years.
(C) To reflect the decrease in interest income as a result of the reduction in
cash paid as partial consideration for the purchase of Pro.Tel assuming a
rate of return of 5%.
(D) To reflect the income tax effect of the adjustments at the effective tax
rate of 36.5%.
22
<PAGE>
Sunrise Telecom, Inc. & Subsidiaries
Unaudited Pro Forma Consolidated Condensed Income Statement
Three Months Ended March 31, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Sunrise Pro. Tel* Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $19,791 $244 $ -- $20,035
Cost of sales..................... 5,588 64 37 (A) 5,689
------- ---- ----- -------
Gross profit.................... 14,203 180 (37) 14,346
Operating expenses:
Research and development........ 3,354 87 171 (A) 3,612
Sales and marketing............. 5,078 25 81 (A) 5,184
General and administrative...... 1,437 43 118 (A) 1,598
471 (B) 471
------- ---- ----- -------
Total operating expenses........ 9,869 155 841 10,865
------- ---- ----- -------
Income (loss) from operations..... 4,334 25 (878) 3,481
Other income, net................. 138 5 (49)(C) 94
------- ---- ----- -------
Income before income taxes...... 4,472 30 (927) 3,575
Income taxes...................... 1,699 15 (352)(D) 1,362
------- ---- ----- -------
Net income...................... $ 2,773 $ 15 $(575) $ 2,213
======= ==== ===== =======
Earnings per share:
Basic........................... $ 0.06 $ 0.05
======= =======
Diluted......................... $ 0.06 $ 0.05
======= =======
</TABLE>
* Reflects the results of operations of Pro.Tel for the period from January
1, 2000 to February 22, 2000. The results of operations of Pro.Tel from
February 23, 2000 to March 31, 2000 are included in the historical income
statements of Sunrise for the three months ended March 31, 2000.
(A) To reflect the increase in amortization expense due to the amortization of
deferred stock-based compensation expense, on a straight-line basis over
the four-year vesting period, related to options issued to certain Pro.Tel
employees to purchase common stock at exercise prices deemed to be below
fair market value.
(B) To reflect increase in amortization expense due to the amortization of
intangibles and goodwill on a straight line basis over five years.
(C) To reflect the decrease in interest income as a result of the reduction in
cash paid as partial consideration for the purchase of Pro.Tel assuming a
rate of return of 5%.
(D) To reflect the income tax effect of the adjustments at the effective tax
rate of 38%.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the related notes appearing at the end of this
prospectus.
Overview
We manufacture and market service verification equipment to pre-qualify,
verify and diagnose telecommunications and Internet networks. We design our
products to maximize technicians' effectiveness in the field and to provide
realistic network simulations for equipment manufacturers to test their
products. Our customers include incumbent local exchange carriers, competitive
local exchange carriers, and other service providers, network infrastructure
suppliers and installers throughout North America, Latin America, Europe and
the Asia/Pacific region.
Sources of Net Sales
We sell our products predominantly to large telecommunications service
providers. These prospective customers generally commit significant resources
to an evaluation of our and our competitors' products and require each vendor
to expend substantial time, effort and money educating the prospective customer
about the value of the proposed solutions. Delays associated with potential
customers' internal approval and contracting procedures, procurement practices,
testing and acceptance processes are common and may cause potential sales to be
delayed or foregone. As a result of these and related factors, the sales cycle
of new products for large customers typically ranges from six to 24 months.
Substantially all of our sales are made on the basis of purchase orders rather
than long-term agreements or requirements contracts. As a result, we commit
resources to the development and production of products without having received
advance or long-term purchase commitments from customers.
To date, a significant portion of our net sales has resulted from a small
number of relatively large orders from a limited number of customers. In 1999,
we sold approximately $25.0 million of our products to affiliates of SBC
Communications, which represented approximately 40.6% of our net sales. We
anticipate that our operating results for any given period will continue to be
dependent to a significant extent on large purchase orders, which can be
delayed or cancelled by our customers without penalty. In addition, we
anticipate that our operating results for a given period will continue to be
dependent on a small number of customers.
Currently, competition in the telecommunications equipment market is intense
and is characterized by declining prices due to increased competition, new
products and increasing unit volumes. Due to competition and potential pricing
pressures from large customers in the future, we expect that the average
selling price and gross margins for our products will decline over time. If we
fail to reduce our production costs accordingly, our gross margins will
correspondingly decline. See "Risk Factors--Competition and --Risks of the
Telecommunications Industry."
During the last three years, a substantial portion of our net sales were
derived from customers located outside of the United States, and we believe
that continued growth will require expansion of our sales in international
markets. Currently, we maintain a procurement support and manufacturing
facility in Taipei, Taiwan, a representative liaison office in Beijing, China,
a foreign sales corporation in Barbados and manufacturing, research and
development and sales facilities in Modena, Italy and expect to establish
additional international sales and other offices in the future. Prior to our
acquisition of Pro.Tel, international sales have been denominated solely in
U.S. dollars and, accordingly, we have not been exposed to fluctuations in non-
U.S. currency exchange rates related to these sales activities. We have been
exposed, however, to fluctuations in non-U.S. currency exchange rates related
to our procurement activities in Taiwan. In the future, we expect that a
portion of international sales may be denominated in currencies
24
<PAGE>
other than U.S. dollars, thereby exposing us to gains and losses on non-U.S.
currency transactions. We may choose to limit such exposure by entering into
various hedging strategies. See Note 14 of notes to consolidated financial
statements of Sunrise and "Risk Factors--Risks Relating to Our Business--Risks
of International Operations."
We recognize product sales upon shipment to customers. We offer a three-year
warranty covering parts and labor on our DSL and fiber optic products sold in
the United States and a one-year warranty covering parts and labor for those
products sold overseas with a two-year extended warranty option at time of
sale. Our cable TV and signaling products are covered by a one-year warranty.
Sales of extended warranties are deferred and recognized over the extended
warranty term, which is generally two years. We charge estimated warranty costs
to cost of sales when the related sales are recognized. We recognize revenue
for out-of-warranty repair when we ship the repaired product.
Cost of Sales
Our cost of sales consist primarily of:
. direct material costs of product components, manuals, product
documentation and product accessories sold;
. production wages, taxes and benefits;
. production allocated occupancy costs;
. warranty costs;
. the costs of board level assembly by third party contract manufacturers;
and
. scrapped material used in the production process.
Our industry is characterized by limited supply chains and long lead times
for materials and components we use in the manufacture of our products. If we
underestimate our requirements, we may have inadequate inventory, resulting in
additional costs to our products to expedite delivery of certain long lead time
components. An increase in the cost of components could result in lower
margins.
Additionally, these long lead times have in the past, and may in the future,
cause us to attempt to mitigate these lead times by purchasing larger
quantities of some parts, increasing our investment in inventory and the risk
of the parts' obsolescence. Any subsequent write-off of inventory could also
result in lower margins. See "Risk Factors--Risks Relating to Our Business--
Dependence on Sole and Single Source Suppliers" and "Business--Manufacturing."
We recognize direct cost of sales as we ship product. We expense scrapped
materials, wages, taxes, benefits and allocated occupancy costs as incurred.
Operating Costs
We classify our operating expenses into three general operational categories:
sales and marketing, research and development and general and administrative.
Our operating expenses also include stock-based compensation and amortization
of goodwill and other intangible assets. We classify all charges to the sales
and marketing, research and development and general and administrative expense
categories based on the nature of the expenditures. Although each of these
three categories includes expenses that are unique to the category type, there
are commonly recurring expenditures that are typically included in these
categories, such as salaries, amortization of stock-based compensation,
employee benefits, travel and entertainment costs, allocated communication,
rent and facilities costs and third party professional service fees. The sales
and marketing category of operating expenses also includes expenditures
specific to the sales and marketing group, such as those relating to
commissions, public relations and advertising, trade shows and marketing
materials.
We allocate the total cost of overhead and facilities to each of the
functional areas that use overhead and facilities based upon the facilities
square footage used by each of these areas. These allocated charges
25
<PAGE>
include facility rent and utilities for the corporate office, communications
charges and depreciation expense for office furniture and equipment.
In 1999, we recorded amortization of deferred compensation expense of
$205,000 related to the grant of options to purchase our common stock at
exercise prices subsequently deemed to be below fair market value. Total
compensation expense related to options granted in 1999 will be amortized on a
straight-line basis to the departments in which the employees received these
below market option grants over the respective four-year vesting periods of the
options. In 1999, we allocated amortization of deferred compensation expense of
$17,000 to cost of sales, $111,000 to research and development expense, $58,000
to sales and marketing expense and $18,000 to general and administrative
expense. At December 31, 1999, $2,065,000 of deferred compensation expense
remained to be amortized at a rate not exceeding $142,000 per quarter.
Acquisitions
Recently, we purchased two companies, Hukk Engineering and Pro.Tel. In July
1999, we acquired Hukk Engineering, a manufacturer of digital cable testing
equipment. We accounted for the Hukk Engineering acquisition as a purchase and
recorded goodwill and other intangibles of approximately $2.5 million to be
amortized on a straight-line basis over the next five years. In February 2000,
we acquired Pro.Tel, an Italian manufacturer of distributed network signaling
analysis equipment, and its U.S. affiliate and the assets of an unrelated U.S.
distributor. We accounted for the Pro.Tel acquisition as a purchase and
recorded goodwill and other intangibles of approximately $9.4 million to be
amortized on a straight-line basis over the next five years. In addition, we
expect to record stock-based compensation for stock options granted to
employees of Pro.Tel subsequent to December 31, 1999 in the amount of $6.5
million to be amortized on a straight-line basis over their four year vesting
period. We believe that acquisitions and joint ventures may be an important
part of our growth and competitive strategy. See Note 11 of notes to
consolidated financial statements of Sunrise and "Risk Factors--Risks Relating
to Our Business--Acquisitions."
Results of Operations
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
Percentage of Net Sales
---------------------------------
Three
Months
Year Ended Ended March
December 31, 31,
------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 26.3 26.6 24.0 28.2 28.2
----- ----- ----- ----- -----
Gross profit............................... 73.7 73.4 76.0 71.8 71.8
Operating expenses:
Research and development................... 20.3 21.7 17.4 21.1 16.9
Sales and marketing........................ 26.3 27.2 24.7 26.3 25.7
General and administrative................. 5.6 7.9 6.4 6.5 7.3
----- ----- ----- ----- -----
Total operating expenses................... 52.2 56.8 48.5 53.9 49.9
----- ----- ----- ----- -----
Income from operations..................... 21.5 16.6 27.5 17.9 21.9
Other income, net............................ 0.4 0.8 0.5 0.9 0.7
----- ----- ----- ----- -----
Income before income taxes................. 21.9 17.4 28.0 18.8 22.6
Income taxes................................. 6.5 5.6 10.2 5.9 8.6
----- ----- ----- ----- -----
Net income................................... 15.4% 11.8% 17.8% 12.9% 14.0%
===== ===== ===== ===== =====
</TABLE>
26
<PAGE>
Comparison of Quarters Ended March 31, 1999 and 2000
Net Sales. Net sales increased approximately 145% from $8.1 million in the
first quarter of 1999 to $19.8 million in the same period in 2000. Sales of our
xDSL products accounted for approximately $9.6 million of the net sales
increase, our new fiber optics products accounted for approximately $1.3
million of the net sales increase, and our new signaling products accounted for
approximately $552,000 of the net sales increase. We expect that sales growth
in the near future will be primarily from our xDSL, fiber optics and signaling
products.
Sales to customers in North America, Europe, Asia and Latin America were $5.6
million, $948,000, $1.3 million and $246,000 in the first quarter of 1999,
respectively, and $15.8 million, $1.9 million, $1.6 million and $547,000 in the
first quarter of 2000, respectively. The strong increase in North American
sales is primarily due to the increase in sales to affiliates of SBC
Communications. Sales to SBC Communications affiliates increased from $1.3
million or 16.5% of total net sales in the first quarter of 1999 to $9.0
million or 45.5% of total net sales in the first quarter of 2000, primarily due
to purchases of our xDSL products.
Cost of Sales. Cost of sales consists primarily of direct material, warranty
and personnel costs related to the manufacturing of our products and allocated
overhead. Cost of sales increased approximately 145% from $2.3 million in the
first quarter of 1999 to $5.6 million in the same period in 2000. The increase
in absolute dollars is primarily due to the increase in net sales. Cost of
sales represented approximately 28.2% of net sales in both the first quarter of
1999 and the first quarter of 2000.
Research and Development. Research and development expenses consist primarily
of the costs of payroll and benefits for engineers, equipment and consulting
services. Research and development expenses increased approximately 97% from
$1.7 million in the first quarter of 1999 to $3.4 million in the same period in
2000. The increase in absolute dollars was primarily due to costs associated
with increased staffing dedicated to research and development activities. These
research and development expenses represented approximately 21.1% of net sales
during the first quarter of 1999 and approximately 16.9% in the same period in
2000. The decrease as a percentage of net sales in 2000 was primarily
attributable to increased product sales relative to research and development
expenditures. We expect that research and development expenses will increase in
absolute dollars for the foreseeable future as we intend to continue to invest
in product development.
Sales and Marketing. Sales and marketing expenses consist primarily of
manufacturers' representatives and direct sales commissions, personnel, travel
and facilities expenses related to sales and marketing, and trade show and
advertising expenses. Sales and marketing expenses increased approximately 138%
from $2.1 million in the first quarter of 1999 to $5.1 million in the same
period in 2000. The increase in absolute dollars in 2000 was primarily related
to increased staffing to support expanded product offerings, increased
marketing and promotional activities and an increase in commissions paid to the
independent manufacturers' representatives. These sales and marketing expenses
represented approximately 26.3% of net sales in the first quarter of 1999 and
approximately 25.7% in the same period in 2000. The slight decrease as a
percentage of net sales during the first quarter of 2000 was primarily due to
our ability to leverage our base of resources to support a larger organization
which led to lower advertising and promotion, occupancy, and salary and related
expenses as a percentage of sales. We expect that sales and marketing expenses
will increase in absolute dollars for the foreseeable future as we intend to
continue to invest in our sales and marketing capabilities.
General and Administrative. General and administrative expenses consist
primarily of personnel, facilities and other costs of our finance and
administrative departments, amortization of goodwill and other intangibles as
well as legal and accounting expenses. General and administrative expenses
increased approximately 175% from $522,000 in the first quarter of 1999 to $1.4
million in the same period in 2000.
27
<PAGE>
These general and administrative expenses represented approximately 6.5% of net
sales in the first quarter of 1999 and approximately 7.3% in the same period in
2000. The increase in both absolute dollars and as a percentage of sales was
primarily related to increased staffing and related costs associated with the
growth of our business, amortization of goodwill and other intangible assets
related to recent business acquisitions and deferred compensation amortization.
We anticipate that general and administrative expenses will continue to
increase in absolute dollars for the foreseeable future as we accommodate our
growth, add related infrastructure and incur expenses related to being a public
company.
Other Income, Net. Other income, net represents primarily interest earned on
cash balances. Other income, net increased from $71,000 in the first quarter of
1999 to $138,000 in the same period in 2000. The increase resulted from
increased interest earned on higher average balances of cash and cash
equivalents held during the quarter, partially offset by interest expense
incurred on a note payable related to the Hukk acquisition and from borrowings
under our line of credit.
Income Taxes. Income taxes consist of federal, state and international income
taxes. We recorded income tax expense of $476,000 in the first quarter of 1999
and $1.7 million in the same period in 2000. Our effective income tax rates
were 31.3% in the first quarter of 1999 and 38.0% for the same period in 2000.
The effective income tax rate was higher in 2000 than in 1999 primarily due to
higher levels of income as well as an increased concentration of sales in local
jurisdictions with higher tax rates.
Comparison of Years Ended December 31, 1998 and 1999
Net Sales. Net sales increased approximately 115.4% from $28.5 million in
1998 to $61.5 million in 1999. Sales of our xDSL products accounted for
approximately $30.0 million of the $33.0 million increase in net sales in 1999.
Sales to affiliates of SBC Communications represented approximately $22.8
million of the increase in 1999. We also introduced two new products in the
second half of 1999, the SunSet OCx and SS500, to address the fiber optic
transmissions testing market.
Cost of Sales. Cost of sales increased approximately 94.2% from $7.6 million
in 1998 to $14.7 million in 1999. Cost of sales represented approximately 26.6%
of net sales in 1998 and approximately 24.0% in 1999. The decrease as a
percentage of net sales during 1999 resulted primarily from an increase in
domestic sales, which have higher gross margins than international sales as a
percentage of net sales and lower manufacturing costs due to volume discounts.
Research and Development. Research and development expenses increased
approximately 72.4% from $6.2 million in 1998 to $10.7 million in 1999. The
increase in absolute dollars was primarily due to costs associated with
increased staffing dedicated to research and development activities. These
research and development expenses represented approximately 21.7% of net sales
during 1998 and approximately 17.4% in 1999. The decrease as a percentage of
net sales in 1999 was primarily attributable to increased product sales
relative to research and development expenditures.
Sales and Marketing. Sales and marketing expenses increased approximately
96.0% from $7.8 million in 1998 to $15.2 million in 1999. The increase in
absolute dollars in 1999 was primarily related to increased staffing to support
expanded product offerings, increased marketing and promotional activities and
an increase in commissions paid to the independent manufacturers'
representatives. These sales and marketing expenses represented approximately
27.2% of net sales during 1998 and approximately 24.7% in 1999. The decrease as
a percentage of net sales during 1999 was primarily due to relatively higher
growth in sales in North America as a percentage of net sales.
28
<PAGE>
General and Administrative. General and administrative expenses increased
approximately 74.4% from $2.2 million in 1998 to $3.9 million in 1999. The
increase in absolute dollars was primarily related to increased staffing and
related costs associated with the growth of our business and professional and
legal fees associated with our successful patent lawsuit against Electrodata,
Inc. These general and administrative expenses represented approximately 7.9%
of net sales during 1998 and approximately 6.4% in 1999. The slight decrease as
a percentage of net sales during 1999 was primarily due to relatively higher
growth in net sales and our ability to leverage our base of resources to
support a larger organization.
Other Income, Net. Other income, net increased from $224,000 in 1998 to
$327,000 in 1999. The increase in 1999 resulted from increased interest earned
on higher balances of cash and cash equivalents resulting from increased cash
flow from operations, partially offset by interest expense attributable to
notes payable.
Income Taxes. We recorded income tax expense of $1.6 million in 1998 and $6.3
million in 1999. Our effective income tax rates were 32.0% in 1998 and 36.5% in
1999. The effective income tax rate was higher in 1999 than in 1998 primarily
due to higher levels of income as well as an increased concentration of sales
in local jurisdictions with higher tax rates.
Comparison of Years Ended December 31, 1997 and 1998
Net Sales. Net sales decreased 1.8% from $29.1 million in 1997 to $28.5
million in 1998. The decrease in sales from 1997 to 1998 was primarily due to
the consolidation of two of our large customers, which resulted in delays in
orders for certain of our products as they integrated their purchasing
practices, a downturn in global economies, especially in Asia, deregulation in
Europe and privatization in Latin America.
Cost of Sales. Cost of sales decreased approximately 0.8% from $7.7 million
in 1997 to $7.6 million in 1998. Cost of sales represented approximately 26.3%
of net sales in 1997 and 26.6% in 1998. The decrease in absolute dollars and
the slight increase as a percentage of net sales during 1998 resulted primarily
from the change in product mix and lower volume of new products sold in 1998
compared to 1997. Overall decreases in material costs were assisted by the
organization of Taiwan Sunrise Telecom Company Limited in 1998 to manage local
procurement activities in Taiwan. The material cost reductions were partially
offset by lower prices on our products in Asia and other countries during 1998
as well as start-up manufacturing, materials and integration expenses
associated with the initial release of SunLite E1, SunLite BRI, SunSet E8,
SunSet PDH, SunSet E20 and the SunSet xDSL. Quality standards and procedures
were also increased in 1998 as a result of ISO 9001 certification, which we
received in September 1998. The increased effort to maintain ISO 9001
certification, documentation and procedures increased additional expense to the
overall cost of goods sold.
Research and Development. Research and development expenses increased
approximately 5.3% from $5.9 million in 1997 to $6.2 million in 1998. The
increase in both absolute dollars and as a percentage of net sales was
primarily due to costs associated with increased staffing dedicated to research
and development activities. These expenses represented approximately 20.3% of
net sales in 1997 and approximately 21.7% in 1998.
Sales and Marketing. Sales and marketing expenses increased approximately
1.6% from $7.6 million in 1997 to $7.8 million in 1998. The increase in
absolute dollars in 1998 was primarily related to increased staffing as we
expanded product offerings and increased marketing and promotional activities.
These expenses represented approximately 26.3% of net sales during 1997 and
approximately 27.2% in 1998. The increase as a percentage of net sales during
1998 was primarily due to advertising and promotional expenses for new products
as well as an increase in travel expenses for expanded sales activities.
29
<PAGE>
General and Administrative. General and administrative expenses increased
approximately 37.4% from $1.6 million in 1997 to $2.2 million in 1998. The
increase in absolute dollars was primarily related to increased staffing and
related costs associated with the growth of our business. These expenses
represented approximately 5.6% of net sales during 1997 and approximately 7.9%
in 1998. The increase as a percentage of net sales during 1998 was primarily
due to increased staffing and related costs incurred in anticipation of future
growth as well as an increase in legal and professional fees associated with
our successful patent lawsuit against Electrodata, Inc.
Other Income, Net. Other income, net increased from $112,000 in 1997 to
$224,000 in 1998. The increase in 1998 resulted from increased interest earned
on higher balances of cash and cash equivalents resulting from increased cash
flow from operations, partially offset by interest expense attributable to
notes payable.
Income Taxes. We recorded income tax expense of $1.9 million in 1997 and $1.6
million in 1998. Our effective income tax rates were 30% in 1997 and 32% in
1998. The effective income tax rate was higher in 1998 than in 1997 primarily
due to reduced foreign sales corporation export benefits due to a reduction in
international sales as a percentage of net sales and research and development
tax credit benefits.
30
<PAGE>
Selected Quarterly Results of Operations
The following table sets forth certain quarterly financial data for the nine
quarters ended March 31, 2000. This quarterly information is unaudited, has
been prepared on the same basis as our annual financial statements, and, in our
opinion, reflects all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the information for periods
presented. Operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $5,956 $7,831 $7,499 $7,249 $8,090 $16,410 $14,511 $22,454 $19,791
Cost of sales........... 1,750 2,124 2,096 1,620 2,281 4,001 3,463 4,991 5,588
------ ------ ------ ------ ------ ------- ------- ------- -------
Gross profit............ 4,206 5,707 5,403 5,629 5,809 12,409 11,048 17,463 14,203
Operating expenses:
Research and
development........... 1,389 1,582 1,574 1,658 1,706 2,813 2,793 3,382 3,354
Sales and marketing.... 1,676 2,080 1,938 2,070 2,130 4,157 3,645 5,283 5,078
General and
administrative........ 447 480 534 782 522 1,040 1,100 1,250 1,437
------ ------ ------ ------ ------ ------- ------- ------- -------
Total operating
expenses.............. 3,512 4,142 4,046 4,510 4,358 8,010 7,538 9,915 9,869
------ ------ ------ ------ ------ ------- ------- ------- -------
Income from
operations............ 694 1,565 1,357 1,119 1,451 4,399 3,510 7,548 4,334
Other income, net....... 43 49 52 80 71 39 99 118 138
------ ------ ------ ------ ------ ------- ------- ------- -------
Income before income
taxes................. 737 1,614 1,409 1,199 1,522 4,438 3,609 7,666 4,472
Income taxes............ 258 565 523 242 476 1,404 1,149 3,262 1,699
------ ------ ------ ------ ------ ------- ------- ------- -------
Net income.............. $ 479 $1,049 $ 886 $ 957 $1,046 $ 3,034 $ 2,460 $ 4,404 $2,773
====== ====== ====== ====== ====== ======= ======= ======= =======
<CAPTION>
As a Percentage of Net Sales
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 29.4 27.1 28.0 22.3 28.2 24.4 23.9 22.2 28.2
------ ------ ------ ------ ------ ------- ------- ------- -------
Gross profit............ 70.6 72.9 72.0 77.7 71.8 75.6 76.1 77.8 71.8
Operating expenses:
Research and
development........... 23.3 20.2 21.0 22.9 21.1 17.1 19.2 15.1 16.9
Sales and marketing.... 28.2 26.6 25.8 28.5 26.3 25.3 25.1 23.5 25.7
General and
administrative........ 7.5 6.1 7.1 10.8 6.5 6.4 7.6 5.6 7.3
------ ------ ------ ------ ------ ------- ------- ------- -------
Total operating
expenses.............. 59.0 52.9 53.9 62.2 53.9 48.8 51.9 44.2 49.9
------ ------ ------ ------ ------ ------- ------- ------- -------
Income from
operations............ 11.6 20.0 18.1 15.5 17.9 26.8 24.2 33.6 21.9
Other income, net....... 0.7 0.6 0.7 1.1 0.9 0.2 0.7 0.5 0.7
------ ------ ------ ------ ------ ------- ------- ------- -------
Income before income
taxes................. 12.3 20.6 18.8 16.6 18.8 27.0 24.9 34.1 22.6
Income taxes............ 4.3 7.2 7.0 3.4 5.9 8.5 7.9 14.5 8.6
------ ------ ------ ------ ------ ------- ------- ------- -------
Net income.............. 8.0% 13.4% 11.8% 13.2% 12.9% 18.5% 17.0% 19.6% 14.0%
====== ====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
Our operating results have fluctuated from quarter to quarter due to a
variety of reasons. We note below some of the larger changes in various line
items in the table above.
Net Sales. Net sales increased significantly during the quarter ended June
30, 1999 as compared to the first and third quarters of 1999. This was
primarily due to an increase in shipments of our SunSet xDSL product to Pacific
Bell, an affiliate of SBC Communications, as Pacific Bell began to accelerate
the installation of their ADSL service. Shipments in the third quarter of 1999
remained relatively level and then increased once again in the fourth quarter
of 1999 as Pacific Bell's year end orders increased.
Gross Profit. Gross profit increased to 77.7% of net sales during the quarter
ended December 31, 1998 and increased again to 77.8% of net sales during the
quarter ended December 31, 1999, primarily due to an increase in domestic sales
as a percentage of net sales and the mix of product shipped during the quarter,
each of which led to higher gross profit. Gross profit decreased to 71.8% of
net sales during the quarter ended March 31, 2000, primarily due to a change in
the mix of product shipped during the quarter, which led to lower gross profit.
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Research and Development. During the quarters ended September 30, 1998 and
September 30, 1999, research and development expenses decreased in absolute
dollars due to the reduction in bonus accruals during the quarter,
corresponding with net sales declines during the third quarters of 1998 and
1999.
Sales and Marketing. Sales and marketing expenses increased in absolute
dollars during the second and fourth quarters ended June 30, 1999 and December
31, 1999 due to increased spending in advertising and promotion of new products
during the quarters. Additional fluctuation in sales and marketing expense can
occur due to the geographical location of sales because we incur commission
expense on domestic sales whereas we incur a reduced sales price net of
distributor mark up on international sales.
General and Administrative. General and administrative expenses generally
increased in absolute dollars during the nine quarters ended March 31, 2000
primarily due to increases in personnel and related costs required to support
our growth. The increase in general and administrative expense during the
quarters ended December 31, 1998 and June 30, 1999 through September 30, 1999
was related primarily to legal and professional expenses relating to our
successful patent litigation against Electrodata. During the quarters ended
December 31, 1999 and March 31, 2000, general and administrative expenses
increased due to a full quarter of amortization associated with the Hukk
Engineering acquisition and due to amortization expenses associated with the
Pro.Tel acquisition, respectively.
We believe that quarterly revenues and operating results are likely to vary
significantly in the future and that quarter-to-quarter comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. We cannot assure you that our net
sales will increase or be sustained or that we will be profitable in any future
period. Further, it is likely that there will be quarter to quarter
fluctuations in our operating results some of which may be below the
expectations of public market analysts and investors. For a discussion of the
factors that could affect our quarterly operating results and the possible
effects of these changes, see "Risk Factors--Risks Relating to Our Business--
Quarterly Fluctuations" and "Selected Consolidated Financial Data."
Backlog
Our backlog of customer orders at December 31, 1999 was approximately $11.0
million. Variations in the size and delivery schedules of purchase orders that
we receive, as well as changes in customers' delivery requirements may result
in substantial fluctuations in the amount of backlog orders for our products
from quarter to quarter. Accordingly, we believe that our backlog cannot be
considered a meaningful indicator of our future financial results.
Seasonality
We believe that our sales are seasonal in nature with the largest portion of
quarterly sales tied to the buying patterns of our customers which usually
increase during the last calendar quarter of the year as customers spend the
unused portion of their yearly budget. As a result, our first quarter sales
tend to decrease from the prior quarter.
Liquidity and Capital Resources
Historically, we have financed our operations and satisfied our capital
expenditure requirements primarily through cash flow from operations. As of
December 31, 1999 and March 31, 2000, we had working capital of $16.0 million
and $14.0 million, respectively, and cash and cash equivalents of $8.6 million
and $1.8 million, respectively.
Cash provided by operating activities was $2.4 million in 1997, $4.5 million
in 1998 and $10.1 million in 1999. Cash used in operating activities was $1.1
million for the three months ended March 31, 2000. Operating cash flows
decreased during the first quarter of 2000, primarily as a result of increases
in accounts receivable from our largest customer and increases in inventory
required to meet our expected future sales targets. Operating cash flows in
1999 increased primarily due to increased levels of income from operations,
partially offset by increases in accounts receivable due to increased sales
late in the period and increases in inventory.
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Cash used in investing activities was $227,000 in 1997, $1.7 million in 1998,
$6.2 million in 1999 and $5.8 million for the three months ended March 31,
2000. For the quarter ended March 31, 2000, cash used in investing activities
included $4.1 million for the acquisition of Pro.Tel in February 2000 and
$1.7 million for capital expenditures. Cash used for capital expenditures
increased in the first quarter of 2000 primarily as a result of $400,000 used
for the purchase of the assets of Pro.Tel USA, $500,000 used to purchase
research and development equipment and $300,000 used to meet our demonstration
equipment requirements for the introduction of new products and an increase in
the number of our distribution channels. Our use of cash in investing
activities in 1999 was primarily related to a $2.7 million cash deposit for the
purchase of land for and construction of our new facility, a $782,000 payment
relating to the Hukk Engineering acquisition and $2.7 million of purchases of
property and equipment. We believe that capital expenditures in 2000 will
include approximately $15.0 million relating to the construction of our new
facility in San Jose, California, which we are building to accommodate our need
for an increase in manufacturing capacity and employees, and approximately $5.0
million for equipment, furniture and fixtures relating to the new facility. In
addition, due to anticipated growth in our operations and the increased
capacity afforded by our new facility, we believe that capital expenditures for
the acquisition of property and equipment relating to our ongoing business
activities will increase to a total of approximately $5.0 million in 2000.
Cash used in financing activities was $396,000 in 1997, $263,000 in 1998 and
$311,000 in 1999. For the quarter ended March 31, 2000, cash provided by
financing activities included $370,000 received from the exercise of stock
options, partially offset by $288,000 for repayments of notes payable. Our use
of cash in financing activities in 1999 was primarily related to the repurchase
of $202,000 of our common stock and cash dividends of $223,000, offset by
proceeds from the exercise of stock options.
Currently, we have a line of credit from Bank of America, N.A. for up to $9.0
million in borrowings at the bank's prime rate less 0.25% and expires on May 1,
2001. If this offering is not completed by August 2001, the borrowing limit
will be reduced to $6.0 million. At December 31, 1999 and March 31, 2000, there
were no balances outstanding under the line of credit. Borrowings under the
line of credit are secured by our inventory and accounts receivable. The
agreement governing the line of credit contains covenants, which we were in
compliance with at December 31, 1999 and March 31, 2000, that, among other
things:
. requires us to maintain various financial covenants, including
profitability and current ratios;
. limits capital expenditures;
. restricts the payment of dividends on our common stock, including that
offered by this prospectus, to dividends payable in common stock and to
$750,000 payable in any one fiscal year or $1.0 million payable in any
one fiscal year after this offering; and
. restricts our ability to redeem our common stock beyond 20% of our net
income for the prior fiscal year.
We believe that the net proceeds received by us from this offering, together
with current cash balances, cash flows from operations and available borrowings
under our line of credit will be sufficient to meet our anticipated cash needs
for working capital, capital expenditures and other activities for at least the
next 12 months. After that, if current sources are not sufficient to meet our
needs, we may seek additional equity or debt financing. In addition, any
material acquisition of complementary businesses, products or technologies or
material joint venture could require us to obtain additional equity or debt
financing. We cannot assure you that such additional financing would be
available on acceptable terms, if at all.
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Qualitative and Quantitative Disclosure about Market Risk
We sell our products in North America, Asia, Latin America and Europe. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates. As all sales are currently made in U.S.
dollars, a strengthening of the dollar could make our services less competitive
in foreign markets. Prior to the acquisition of Pro.Tel in February 2000, we
had not used derivative instruments to hedge our foreign exchange risks. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, particularly since the majority of our investments are in money market
accounts. Due to the nature of our investments, we anticipate no material
market risk exposure.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Currently, we do not
hold any derivative instrument, so we expect that the adoption of SFAS No. 133
will not have a material impact on our financial position, results of
operations or cash flows. We will be required to implement SFAS No. 133 during
the year ending December 31, 2001.
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BUSINESS
Overview
We manufacture and market service verification equipment that enables service
providers to pre-qualify facilities for services, verify newly installed
services and diagnose problems relating to the new DSL services, fiber optics,
cable TV networks and signaling networks. We design our products to maximize
technicians' effectiveness in the field and to provide realistic network
simulations for equipment manufacturers to test their products. Our customers
include incumbent local exchange carriers, competitive local exchange carriers,
and other service providers, network infrastructure suppliers and installers
throughout North America, Latin America, Europe and the Asia/Pacific region.
Our objective is to be a significant provider of service verification test
equipment for a broad range of applications within the global
telecommunications industry. The key elements of our strategy are to maintain
our position in DSL service verification equipment, to penetrate the growing
market for verification test equipment for fiber optics and cable TV, to expand
beyond field verification testing into remote testing, alarm and surveillance
and central office testing applications, to continue to expand internationally,
to pursue strategic acquisitions and joint ventures and to pursue follow-on
sales opportunities by continuing to develop and market hardware modules which
can be inserted into the chassis of our service verification equipment.
We were incorporated in California as Sunrise Telecom, Inc. in October 1991.
Prior to the closing of this offering, we intend to reincorporate as a Delaware
corporation and change our name to Sunrise Telecom Incorporated.
"Sunrise Telecom," "SunSet," and "SunLite" are trademarks of Sunrise Telecom
Incorporated. This prospectus also includes references to registered service
marks and trademarks of other entities.
Industry Background
Demand for High-Speed Data Access
The telecommunications industry is undergoing fundamental change and growth
worldwide. Following the Telecommunications Act of 1996, competitive local
exchange carriers in the United States have been allowed to compete with
incumbent local exchange carriers, including the regional Bell operating
companies, for local carrier services. The regulatory developments in the
telecommunications industry have coincided with a surge in demand for high-
speed Internet access and data transmission service. According to Ryan Hankin
Kent, Inc., data traffic in the United States and Canada has surpassed the
amount of voice traffic carried on the existing telephone network. At the end
of 1999, data traffic had reached 350,000 terabytes per month, approximately
seven times the level of voice traffic. Further, the research indicates that
streaming media or other large, multi-media intensive files account for ten
percent of all Internet traffic, while voice and fax over Internet protocol
represents two to three percent of all traffic. Consumers are seeking higher-
speed access to bandwidth intensive content and services, such as highly
graphical Web sites, audio, video and software downloads. As an increasing
number of Internet users access more and different content, the ability to
connect to and receive data from the Internet at high speeds has become and
will continue to be more important. Businesses have even greater requirements
for high-speed access to implement e-commerce strategies, to access the
Internet for a variety of purposes and to provide employees with effective
telecommuting capabilities. Outside the United States, there is evidence to
suggest that deregulation and the availability of broadband service will
continue and will follow the general trends in the United States.
Service providers are responding to the increased demand with the deployment
of reliable high-speed, digital networks. One primary investment area is the
redesign of the access network to support broadband access to end users. This
portion of the network between the customer's premise and the service
provider's central office is also known as the "last-mile." The last mile
typically consists of copper wires that operate at
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substantially lower transmission speeds than those offered in the long-haul
segment of a network or by some available broadband alternatives. These copper
wires were originally intended to carry only analog circuit-switched, low-speed
voice signals and, as a result, have become a bottleneck that limits high-speed
data transmission. Several access technologies are being deployed to support
higher-speed Internet access in the networks, including digital subscriber
lines, digital cable TV, fiber optics and broadband wireless. In addition, the
signaling portion of the network is essential to the integration of new
broadband services into the existing telecommunications network. We summarize
some of these technologies below.
Digital Subscriber Line Technology. Digital subscriber line technology,
commonly known as DSL, today transmits data up to 50 times faster than a
conventional dial-up modem using the existing copper telephone wires. Various
implementations of DSL are being developed and deployed, including asymmetric
DSL, known as ADSL, symmetric DSL, know as SDSL, high bit-rate DSL, know as
HDSL, and integrated services digital network DSL, known as IDSL. Service
providers deploying DSL technology include incumbent local exchange carriers,
such as SBC Communications, Inc. and Bell Atlantic Corporation, as well as
competitive local exchange carriers, such as Rhythms NetConnections Inc., Covad
Communications Group, Inc. and Northpoint Communications Group, Inc.
Cable TV Networks. Cable TV operators use two-way cable, cable modems
installed in the home, cable modem termination systems installed at major cable
concentration points and network headend equipment designed to interface their
cable TV networks to video feeds and other networks. Several cable companies
are currently offering broadband access services across two-way cable,
including Excite@Home, Road Runner, Softnet Systems, Inc., High Speed Access
Corporation and TimeWarner. In addition, we believe that as a result of AT&T's
recent acquisition of Tele-Communications, Inc. and the proposed merger of
America Online, Inc. and Time Warner, cable TV networks will be used
increasingly for voice and high-speed data services.
Fiber Optics. Fiber optic cables use pulses of light to transmit digital
information. Because fiber optic cables support thousands of high-speed, local
digital connections onto a single higher-speed connection to the central office
or the central side of the cable TV network where the video signals emanate,
they offer virtually unlimited bandwidth capacity. Due to their high capacity,
fiber optic cables are being used increasingly in the access network in both
telecommunications and cable TV applications.
Signaling. Telephone systems require a signaling mechanism to set up and end
phone calls. These signals serve three basic functions: supervising or
monitoring the status of a line on circuit to see if it is busy, idle or
requesting service; alerting or indicating the arrival of an incoming call;
addressing or transmitting routing and destination signals over the network.
Signaling Systems 7, or SS7, is the standard signaling system used by telecom
networks worldwide. Signaling networks must support new access technologies to
ensure interoperability with the existing telephone network.
We believe that the increasing demand for high-speed bandwidth access and the
increasing development and availability to end users of technologies, such as
those described above, that support this access will propel the continued
growth of the Internet and of network service providers. According to Ryan
Hankin Kent, Inc., at the end of 1999, 625,000 households and businesses in the
United States and Canada used DSL for broadband access and another 1.5 million
households used cable TV modems. Further, by 2003, the research indicates that
there will be 13.6 million DSL connections and 11.1 million cable TV modem
connections.
Challenges of High-Speed Data Services Deployment
Regardless of the type of technology, the successful deployment of high-speed
broadband services poses several major challenges to service providers.
Physical impairments in cable TV lines and the copper telephone wires upon
which DSL technology depends can degrade the quality of the broadband access
and,
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in some cases, prevent any service from being delivered. Examples of physical
impairments include the following:
. shorts, which occur when the twisted pair conductors are touching each
other or when one of them comes into contact with a grounded piece of
metal;
. opens, which occur in a variety of ways including when a splice joining
two cable segments fails or when a construction crew cuts through a
buried cable;
. power crosses, which occur when the telephone wire comes into contact
with a live AC power source; and
. wet cables, which occur when the aerial cable is subjected to rain or
when the underground cable comes into contact with ground water and the
pressurization system (if any) is inadequate to handle the leakage.
In addition to the challenges stated above, asymmetric DSL, or ADSL, service
for residential end users faces its own particular challenges. ADSL is designed
to share the existing copper telephone wires using splitters or microfilters at
the customer premises and central office to break the single line into two
service appearances. Although a customer may have a working voice line, several
line impairments can kill ADSL service. These impairments include:
. load coils, which are inductors sometimes placed at 6000 foot intervals
on telephone lines to optimize voice transmission;
. bridge taps, which occur when an existing spare telephone line to one
customer location is "tapped" into prior to its endpoint to provide
service to another location that has exhausted its supply of existing
copper telephone lines, with the result that the line then has two
separate customer ends, one at the original location and the other at
the new location;
. AM radio interference, where the AM radio spectrum covers the same
frequencies used in ADSL, high bit-rate DSL, or HDSL, high speed
symmetric DSL, or SDSL, and T1 frequencies; and
. intra-cable crosstalk between high frequency service twisted pairs,
where the twisted pairs act as long antennas placed in the same cable
bundles, effectively transmitting onto one another creating excessive
levels of background noise.
Because these problems may only be diagnosed and repaired effectively in the
field, many DSL service providers send field technicians to verify every line
before they hand over service to their customers.
Cable TV and fiber optic networks face similar challenges. The cable TV
network was used originally to support one-way analog transmission of video
images. Now, digital cable TV networks also support voice and interactive high-
speed data services and customers require the same level of reliability as
provided by the existing telephone network. Potential problems for reliable and
high quality broadband access through cable TV lines include signal return path
interference and downstream signal degradation. As a result, cable TV providers
believe that cable plant pre-qualification and verification is a prerequisite
for the successful implementation of the technology. The widespread deployment
of fiber optic technologies into the cable TV and telecommunications access
networks also requires field verification equipment to verify and diagnose
service problems with these links.
The Need for Service Verification Equipment
In order to deploy successfully and maintain the new broadband networks,
service providers rely on sophisticated service verification equipment. This
equipment allows service providers to pre-qualify facilities for services,
verify proper operation of newly installed services and diagnose problems. In
addition, equipment manufacturers use service verification equipment to test
simulated networks during equipment
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development and verify the successful production of equipment. Service
verification equipment can be grouped into three types: field verification,
remote testing and alarm and surveillance.
Field Verification Equipment. Field verification equipment is used by all
service providers to probe the actual wires, cables or airwaves to verify that
a service works. In the case of a service malfunction, a field technician can
use the equipment to locate the exact fault so that repairs can be made.
Research and development labs, manufacturing departments and central office
technicians also use field verification equipment in their day-to-day
operations. Of the three types of service verification equipment, field
verification equipment delivers the most detailed service information and is
essential to the successful deployment of broadband networks. Service providers
have found field verification to be the most effective method to ensure that
the lines work as promised before they hand over service to their customers.
Remote Test Equipment. Remote test equipment can help verify services and
identify certain types of service malfunctions from a centralized location. The
equipment is typically controlled by a centralized test system that automates
much of the remote testing process. It is commonly used to determine which
section within a 3,000 mile circuit has malfunctioned and to diagnose quickly
the nature of a customer's complaint. Due to its centralized and automated
nature, remote test equipment is an efficient way to complement field test
equipment in the deployment and maintenance of broadband networks.
Alarm and Surveillance Equipment. Alarm and surveillance equipment constantly
monitors the telephone network, searching for facility or service degradations,
including outages. When a problem is noticed, a report may be sent immediately
to an automated trouble diagnostic system or to a human operator who interprets
the message and decides what further action is required. Corrective action
typically involves field verification or remote test equipment to identify and
correct specific problems.
Because the competition for subscribers for high-speed bandwidth access is
intense, the quality and reliability of network service has become critical to
service providers because of the expense, loss of customers and negative
publicity resulting from poor service. Field technicians who use service
verification equipment allow service providers to verify and repair service
problems effectively and, thus, increase the quality and reliability of the
network. We believe that as broadband services are deployed further and as
competition for subscribers proliferates, service providers will increasingly
depend on advanced field test and monitoring solutions.
The Sunrise Solution
We design and manufacture service verification equipment that enables service
providers to pre-qualify facilities for services, verify newly installed
services and diagnose problems relating to the new DSL services, fiber optic
and cable TV and signaling networks. Our products also enable equipment
manufacturers to test simulated networks during equipment development and
verify the successful production of equipment. Our products offer the following
features:
. Design Flexibility. We design our products to be flexible and to evolve
as customer needs change. Our SunSet xDSL line, for example, allows
field technicians the ability to upgrade their equipment easily through
a variety of plug-in hardware modules. This flexible design allows the
customer to adapt the test set to new DSL services and applications as
network standards evolve, thereby protecting the customer's investment
in the test equipment.
. Customer Driven Features. Each of our products is highly tailored to our
customers' needs. Our marketing engineers continually interact with our
customers during the design process to ensure that our products are the
best available solution for them. For example, based on conversations
with our customers, we delivered a pinging method for the technician to
verify that a DSL line works the entire distance from the customer's
premise to the Internet service provider.
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. Handheld Design. We design most of our products to be used in the field.
Most of our DSL and fiber optic products weigh less than three pounds
and offer handheld convenience. The compact, lightweight design of these
products enable field technicians to access problems and verify line
operation quickly. The SunSet OCx for example, is the first handheld
asynchronous transfer mode or ATM-compatible fiber optic field test set
for SONET, or synchronous optical network, which is the North American
standard for transmissions using fiber optics. Similarly, our new SunSet
SDH will offer the same flexibility as the SunSet OCx for different
international standards.
Because of the design and functionality of our products, we provide the
following benefits to our customers:
. Rapid and Efficient DSL Deployment. Our products allow field and office
technicians to test DSL lines rapidly and efficiently to ensure that
they are properly connected to the central office and that they can
support a specific type and speed of DSL service. In a single device,
our products can be used to pre-qualify facilities for services,
identify the source of problems and verify the proper operation of newly
installed service before handing service over to customers.
. Improved Network Quality and Reliability. Field and office technicians
use our products to diagnose and locate a variety of problems and
degradations in broadband service. For example, our xDSL products allow
extensive diagnosis and analysis of the physical layers of the copper
wire network. This allows service providers to identify and repair
problems and to restore service efficiently. As a result, our products
support our customers' need to provide high quality and reliable
service.
Strategy
Our objective is to be a significant provider of service verification test
equipment for a broad range of applications within the global
telecommunications industry. The following are the key elements of our
strategy:
. Maintain Our Position in DSL Service Verification Equipment. We intend
to maintain our position in DSL service verification equipment by
continuing to enhance the features and functionality of our existing
products to serve our customers' rapidly changing needs. In particular,
we expect to introduce additional products to address new DSL
technologies. We also plan to expand our relationships with the top DSL
service providers in the United States and in international markets. In
addition, we have recently begun to supply Lucent Technologies with a
customized copper loop test head for their Stinger DSL Access
Multiplexor product, which will provide service providers with a DSL
test solution for DSL line deployment, maintenance and diagnostics
functions.
. Penetrate the Growing Market for Fiber Optic Cable Verification Testing
Equipment. We plan to capitalize on the expanding use of fiber optic
cable in the telecommunications industry. For example, we have just
introduced three new products to support testing of higher bandwidth
fiber optic networks and plan to continue to increase the data rates
supported by our optical products and develop additional products to
support new network applications and technologies based on gigabit
optical rates.
. Provide New Cable TV Verification Solutions. We intend to penetrate the
growing market for verification equipment for cable TV by adding
features and functionality to increase the applicability of our product
offerings. For example, we have recently introduced our CR1200R, which
provides for testing digital networks with Internet capabilities, and we
expect to add new features in the future. Similarly, we intend to
further address the convergence of voice and data across cable TV
networks.
. Expand Beyond Field Verification Testing. We intend to leverage our
expertise in field verification testing to expand into remote testing,
alarm and surveillance and central office testing applications. Our
Ghepardo signaling products allow technicians to remotely access
signaling probes distributed throughout the network. In addition, our
Ghepardo products provide alarm and surveillance
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monitoring and enable equipment developers to exercise and evaluate
their network elements' signaling capabilities. We have also introduced
products aimed at central office testing that are a natural extension of
our field testing products. For example, the SS500 is a complete SONET
service tester that offers a new combination of bi-directional protocol
analysis and service verification for the central office, and our xDSL
products offer the industry's only rack-mount verification solution for
central office technicians.
. Grow Internationally. We plan to expand from our presence in over 60
countries to meet the growing demand for high-speed access solutions and
increase our brand recognition internationally. We believe existing
service providers in Asia, Europe and Latin America will gradually
convert their installed base of analog voice equipment to more efficient
DSL equipment due to the advantages of the technology, its superior
economics compared to readily available alternatives and the increasing
demand for it. We plan to introduce a new fiber optics testing product,
the Sunset SDH, which provides a combination of SONET/SDH for testing
international gateway areas. We intend to add features to our existing
products to make our solutions more attractive to service providers in
other countries.
. Pursue Strategic Acquisitions. We plan to continue to make acquisitions
and enter into joint ventures on a selected basis. We expect that
acquisitions and joint ventures may provide an efficient way of
expanding our business, product offerings and access to different
customers and market niches.
. Pursue Follow-On Sales Opportunities. We plan to continue to develop
hardware modules that allow our customers to increase the functionality
of the products which they have purchased from us. For example, our xDSL
products allow technicians to add hardware cartridges to test different
types of DSL service. This feature allows customers to protect their
investment in test equipment and generates follow-on sales opportunities
as we develop new modules in the future.
Products
We currently offer two main categories of service verification products:
broadband access service verification products and signaling testing products.
Broadband Access Service Verification Products
Our broadband access service verification products support a wide range of
access technologies, including DSL, cable TV and fiber optics, and within each
of these technologies, different transmission types, frequencies or speeds and
protocols for U.S. and international standards.
We design our products to enable technicians to verify if a broadband service
has been properly installed and to help identify and correct problems in case
of an error. Our products are designed to be carried into the field by a
technician and offer a large graphical display, menu-driven functionality and
an easy-to-use interface. In addition, most of our DSL and fiber optic products
weigh less than three pounds, allowing field technicians to carry them easily.
Many of our new models support plug-in hardware modules that enable technicians
to upgrade our handheld test sets quickly and easily while in the field.
Sales of our DSL products accounted for 100% of our net sales in 1997 and
1998 and approximately 97.5% in 1999. Although we have recently introduced or
acquired fiber optic, cable TV and signaling products, we expect that sales of
DSL products will continue to account for a substantial majority of our net
sales for the foreseeable future.
We offer a three-year warranty on our DSL and fiber optic products sold in
the United States and a one-year warranty for those sold overseas with a two-
year extended warranty option at the time of sale. We offer a one-year warranty
on our cable TV and signaling products.
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Within our broadband access testing products, we manufacture service
verification equipment for three main technologies: DSL, cable TV and fiber
optics. We describe our major products in each product category below.
DSL Products
Global DSL Global DSL products allow worldwide telecommunications
service providers to install and troubleshoot digital
copper-based circuits and services. The xDSL series
finds data transmission rates and noise margins that can
be supported by the line. This series employs modules to
test DSL and other digital transmission types, such as
T1 which is used by large businesses for broadband
access. Our modular architecture allows technicians to
use a single unit to test a variety of DSL services. In
addition, the flexibility of the modular architecture
protects a customer's investment in the test equipment.
SunSet xDSL . Handheld unit for DSL service verification that also
Full Chassis supports the testing of lines for physical
impairments. This module supports all Sunrise DSL
modules to allow field technicians to test various
types of DSL technologies with a single product.
SunSet xDSL . Handheld unit for DSL service verification only. This
Light Chassis product supports all Sunrise DSL modules to allow
field technicians to test various types of DSL
technologies.
xDSL RAM . Rack-mount unit to be used in central office
applications by central office technicians and frame
technicians. The xDSL RAM holds up to six DSL modules
for DSL service verification and supports the testing
of lines for physical impairments.
SunSet ISDN, . These products support analysis and service
SunLite BRI verification for the integrated services digital
network, known as ISDN. ISDN is an enhanced digital
network that offers more bandwidth than the
traditional telephone network.
--------------------------------------------------------------------------------
North American We design our North American DSL products specifically
for the North American market and support applications
common to this market such as T1, a standard for digital
transmission in North America used by large businesses
for broadband access.
SunSet T1 . Handheld unit that supports transmission testing for
T1, including service verification for voice
services.
SunSet T10 . Handheld unit that supports transmission testing for
T1, with service verification and diagnostics for
multiple data protocols and voice services.
SunSet T3 . Handheld unit that offers the versatility to test
multiple transmission types in a single unit and
support areas that have international and North
American standards. It also offers service
verification and diagnostics for integrated services
digital network, known as ISDN, and voice services.
SunSet STS-1 . Handheld unit that supports transmission testing for
all levels of electrical digital transmission testing
for traditional applications and newer SONET
applications. SONET, synchronous optical network, is
a family of fiber optic transmission rates that also
encompases electrical digital signals with different
capacities.
41
<PAGE>
DSL Products
International We design international DSL products specifically for
testing lines outside the North American market and to
support protocols common to the international market
such as E1, a standard for international digital
transmission used by large businesses for broadband
access.
SunLite E1 . Handheld unit that supports transmission testing in a
small test set for E1.
SunSet E1, E1e, . Handheld unit that supports transmission testing and
E8 service verification for E1 and voice services.
SunSet E10, E20 . Handheld unit that supports transmission testing for
E1, and service verification for data protocols,
voice and other signaling protocols.
SunSet PDH . Handheld unit that supports transmission testing for
E1 and higher transmission rates.
Cable TV Product
CR1200R . Portable unit being introduced to support field
transmission analysis for digital and analog cable TV
networks for both inbound and outbound signals. It
also finds common transmission problems in cable TV
digital networks that would inhibit the networks' use
for Internet services. The unit is water resistant,
portable and can be used without additional
equipment.
Fiber Optic Products
SunSet OCx . Handheld unit that supports transmission testing for
SONET, synchronous optical network, a family of fiber
optic transmission rates with many electrical digital
signals with different capacities. It includes both
electrical and optical signal testing and performs
service verification for various services such as
asynchronous transfer mode, a very high speed
transmission technology, which allows telephone
companies to mix formerly incompatible signals, such
as voice, video, and data. The SunSet OCx is
currently the smallest multi-rate optical test set
available.
SS500 . Central office based SONET and asynchronous transfer
mode testing device, with service verification for
various protocols such as integrated services digital
network, or ISDN, and voice. It combines service
verification functionality with central office
transmission and signaling testing in a single unit.
SunSet SDH . Handheld unit that supports fiber optic transmission
types, such as SONET and synchronous digital
hierarchy, a set of international fiber-optic
standards, as well as traditional North American and
international digital transmission types. Also
supports testing for asynchronous transfer mode. The
SunSet SDH offers the ability to test SONET and
synchronous digital hierarchy in a single unit and
facilitates testing in areas where international and
U.S. standards co-exist.
42
<PAGE>
Signaling Testing Products
We recently introduced Ghepardo, a new product line for signaling testing and
analysis. Our signaling products are designed for the central office to analyze
major signaling protocols, including SS7, and standard data communication
protocols. We design our products on an open platform with hardware and
software that users can customize easily. Our web-based user interface allows
users to control our products, including customization of test functions, from
anywhere in the world through standard web-browser software.
Customers
Our customers include telecommunications service providers, network
infrastructure suppliers and installers, technicians and engineers in North
America, Latin America, Europe and the Asia/Pacific region. The following is a
selected list of companies who purchased in excess of $500,000 of our products
during 1999. Each of these companies accounted for 1% or more of our net sales
in 1999.
AT&T Corp./TCI Communications, Rhythms NetConnections Inc.
Inc. SBC Communications Inc.
Bell Atlantic Corporation (consisting of Ameritech
BellSouth Telecom, Inc. Corporation, Nevada Bell,
Chunghwa Telecom Co., Ltd. Pacific Bell, Southern New
France Telecom England Telephone and
Korea Telecom Southwestern Bell Telephone
Nippon Telegraph and Telephone Company)
Corporation Sprint Corporation
NorthPoint Communications Group, Teligent, Inc.
Inc. Telkom SA, Ltd.
As of March 31, 2000, we had sold versions of our products to over 1,800
customers in over 60 countries. In 1999, affiliates of SBC Communications
accounted for approximately 40.6% of our net sales. Besides SBC Communications
in 1999, no individual customer accounted for 10% or more of our net sales in
1997, 1998 or 1999. We expect that we will continue to depend upon a relatively
limited number of customers for substantially all of our revenues in future
periods. See "Risk Factors--Risks Relating to Our Business--Customer
Concentration."
Sales, Marketing and Customer Service
Sales. We sell our products to telecommunications service providers, network
infrastructure suppliers and installers, technicians and engineers through
manufacturers' representatives, independent distributor organizations and our
direct sales force.
In the United States, we sell our products through 13 manufacturers'
representatives companies who are supported by our in-house direct sales force.
Manufacturers' representatives are paid on a commission basis to sell our
products and have exclusive rights in their respective regions. Our
manufacturers' representatives solicit orders from the customer, and we ship
our products directly to the customer. We pay commissions once payment is
received from the customer. Our direct sales force consists of 13 employees who
focus on sales in the United States, including a team of regional sales
managers who direct the efforts of our manufacturers' representatives, regional
account managers who focus on specific accounts within a region and our Vice
President of North American Sales, who directs the sales effort in North
America.
Outside the United States, we sell our products through 64 independent
distributor organizations, which are directed by our regional directors of
marketing and sales. Once a sale is made, we sell our product to the
distributor who then resells the product to the end user. We sell our products
to our independent distributor organizations at a discount off our list price.
The Asia/Pacific region is directed by our Vice President of Strategic
Marketing. International sales were $13.5 million or approximately 46% of our
net sales in 1997, $12.0 million or approximately 42% in 1998 and $12.2 million
or approximately 20% in 1999.
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<PAGE>
We expect that international sales will continue to account for a significant
portion of our net sales in future periods. In addition to our network of
international distributors, we have sales people located in Beijing, China and
Modena, Italy and plan to open new offices in other locations in the future.
See "Risk Factors--Risks Relating to Our Business--Risks of International
Operations." For information regarding export sales and international
operations, see Note 14 of notes to consolidated financial statements of
Sunrise.
We sell our products predominantly to large telecommunications service
providers. These prospective customers generally commit significant resources
to an evaluation of our and our competitors' products and require each vendor
to expend substantial time, effort and money educating the prospective customer
about the value of the vendor's solutions. Consequently, sales to this type of
customer generally require an extensive sales effort throughout the prospective
customer's organization and final approval by an executive officer or other
senior level employee. The result is lengthy sales and implementation cycles,
which make sales forecasting difficult. In addition, even after a large
telecommunications service provider has approved our product for purchase,
their future purchases are uncertain because we do not enter into long-term
supply agreements or requirements contracts with those parties. Delays
associated with potential customers' internal approval and contracting
procedures, procurement practices, testing and acceptance processes are common
and may cause potential sales to be delayed or foregone. As a result of these
and related factors, the sales cycle of new products for large customers
typically ranges from six to 24 months.
Marketing. We market and promote sales of our products by the following
activities:
. Our product marketing group researches new opportunities, prepares
product definitions with our research and development group and defines
new features to create new products;
. The overall marketing group hosts a variety of seminars several times a
year in the United States, Asia, Europe and Latin America to improve the
sales effectiveness of our manufacturers' representatives and
international distributors;
. Our product marketing engineers, regional sales managers and account
managers travel extensively with our manufacturers' representatives and
international distributors to develop new product opportunities with
customers and to support their presentations;
. The marketing communications group maintains a public Web site,
publishes brochures and specification sheets and generates press
releases and publicity to increase our recognition in the
telecommunications industry;
. Our technical publications group prepares user's manuals, field manuals,
quick reference guides, and product operation videos to serve the needs
of our users;
. Our training department prepares customer training presentations and
sponsors Sunrise University, a factory-based xDSL training program for
our customers.
Customer Service. We believe that customer service following the sale of our
products is a critical ingredient to our success. We provide customer service
in numerous ways, including:
. providing rapid instrument repair services;
. operating a 24 hour per day telephone support line to help customers who
are having difficulty using our products in their particular
application;
. maintaining a proprietary Web site containing on-line, up-to-the-minute
product repair information for our distributors' international repair
centers, with a factory-certified technician training program for our
distributors' international repair center technicians; and
. measuring the satisfaction of our customers and communicating this
information to our quality group.
44
<PAGE>
Research and Development
We have assembled a team of highly skilled engineering professionals who are
experienced at designing telecommunications service verification test
equipment. Our engineering personnel have expertise in a number of fields,
including interfacing test equipment with digital loop carrier, voice and data
switching technology, local loop equipment and operations support systems. We
spent approximately $5.9 million on research and development in 1997, $6.2
million in 1998 and $10.7 million in 1999. Research and development represents
our largest direct employment expense. At March 31, 2000, we had a total of 89
employees engaged in research and development in San Jose, California;
Norcross, Georgia; Springfield, Virginia; and Modena, Italy.
We believe that our continued success depends on our ability to anticipate
and respond to changes in the telecommunications industry and anticipate and
satisfy our customers preferences and requirements. Accordingly, we
continually review and evaluate technological and regulatory changes affecting
the telecommunications industry and seek to offer products and capabilities
that solve customers' operational challenges and improve their efficiency. In
general, we spend anywhere from two months to four years developing a new
product.
Regulations and Industry Standards
Our products are designed to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the Federal Communications Commission and Underwriters
Laboratories as well as industry standards established by Telcordia
Technologies, Inc., formerly Bellcore, and the American National Standards
Institute. Internationally, our products must comply with standards
established by the European Committee for Electrotechnical Standardization,
the European Committee for Standardization, the European Telecommunications
Standards Institute, telecommunications authorities in various countries as
well as with recommendations of the International Telecommunications Union.
The failure of our products to comply, or delays in compliance, with the
various existing and evolving standards could negatively impact our ability to
sell our products.
Manufacturing
Our production process consists of planning, procurement, fabrication,
rework, system assembly, system final test, software option customization and
shipping. We purchase substantially all parts, including resistors, integrated
circuit boards, LCDs and printed circuit boards, from distributors and
manufacturers worldwide. We package these parts into kits and send them to
contract manufacturers to assemble them into printed circuit boards. We
perform substantially all remaining manufacturing operations. We maintain
sourcing and manufacturing operations in San Jose, California; Norcross,
Georgia; Taipei, Taiwan and Modena, Italy. In 1999, we performed the majority
of sourcing and nearly all contract manufacturing and final assembly in San
Jose, California. We have obtained ISO-9001 certification for our San Jose
operations.
In 1998, we formed a subsidiary in Taiwan, Taiwan Sunrise Telecom Company
Limited, as a turn-key manufacturer and local procurement operation. We also
own an equity interest of approximately fifteen percent in Top Union, an
assembly company located in Taipei, Taiwan that performs module assembly as
part of the Taiwan Sunrise Telecom turn-key operation. We intend to increase
the use of outsource manufacturing for our more mature products. We believe
that outsourcing will lower our manufacturing costs, in particular our labor
costs, provide us with more flexibility to scale our operations to meet
changing demand and allow us to focus our engineering resources on new product
development and product enhancements.
In our manufacturing process, we purchase many key products, such as
microprocessors, bus interface chips, optical components and oscillators, from
a single source or from that product's sole supplier. We rely exclusively on
third-party subcontractors to manufacture certain sub-assemblies and we have
retained, from time to time, third party design services in the development of
our products. We do not have long-term
45
<PAGE>
supply agreements with these vendors. In general, we make advance purchases of
some products and components to ensure an adequate supply, particularly for
products that require lead times of up to six months to manufacture. For a
discussion of the risks associated with our reliance on these third parties,
see "Risk Factors--Risks Relating to Our Business--Dependence on Sole and
Single Source Suppliers."
Competition
The market for field verification test equipment is fragmented and intensely
competitive, both in and outside the United States, and is subject to rapid
technological change, evolving industry standards and regulatory developments.
We compete with a number of United States and international suppliers that vary
in size and in the scope and breadth of the products and services offered. The
following table sets forth our principal competitors in each of our product
categories.
<TABLE>
<CAPTION>
Product Category Principal Competitors
---------------- ---------------------
<S> <C>
Digital Subscriber Line TTC (a division of Dynatech, Inc.) and Agilent Technologies, Inc.
Fiber Optics SONET/SDH Digital Lightwave, Inc., TTC and Agilent Technologies, Inc.
Cable TV Wavetek Wandel Golterman, Inc. and Agilent Technologies, Inc.
Signaling Inet Technologies, Inc. and GN Nettest
</TABLE>
On February 14, 2000, Dynatech and Wavetek announced the merger of TTC to
Wavetek, which could have the effect of making the combined company a more
formidable competitor. We expect that, as our industry and market evolves, new
competitors or alliances among competitors could emerge and acquire significant
market share. We anticipate that competition in our market will increase with
the result that we will face greater threats to our market share, price
pressure on our products and the likelihood that, over time, our profitability
may decrease.
We believe that the principal competitive factors in our market include:
. a continued high level of investment in research and development and
marketing;
. speed of new product introductions to market;
. depth of product functionality;
. ease of installation, integration and use;
. system reliability and performance;
. price and financing terms;
. technical support and customer service;
. size and stability of the vendor's operations; and
. compliance with government and industry standards.
Intellectual Property and Proprietary Technology
Our intellectual property, including our proprietary technology, processes
and know-how, trade secrets, patents, trademarks and copyrights, is important
to our business and to our continued success. We have one patent for a handheld
communications tester, and we have filed several applications for additional
patents with the U.S. Patent and Trademark Office. Our research and development
and manufacturing process typically involves the use and development of a
variety of forms of intellectual property and proprietary technology, although
no one form of this intellectual property and proprietary technology is
material to our business. In addition, we incorporate software that we license
from several third party sources into our products. These licenses generally
renew automatically on an annual basis. We believe that alternative
technologies for this licensed software are available both domestically and
internationally.
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<PAGE>
We protect our proprietary technology by:
. relying on intellectual property law, including patent, trade secret,
copyright and trademark law and by initiating litigation where necessary
to enforce our rights;
. limiting access to our software, documentation and other proprietary
information; and
. entering into confidentiality agreements with our employees.
We may receive in the future notices from holders of patents that raise
issues as to possible infringement by our products. As the number of
telecommunications test, measurement, and network management products increases
and the functionality of these products further overlaps, we believe that we
may become subject to allegations of infringement given the nature of the
telecommunications industry and the high incidence of these kinds of claims.
Questions of infringement and the validity of patents in the field of
telecommunications technologies involve highly technical and subjective
analyses. These kinds of proceedings are time consuming and expensive to defend
or resolve, result in substantial diversion of management resources, cause
product shipment delays or could force us to enter into royalty or license
agreements rather than dispute the merits of the proceeding initiated against
us. For more information regarding the risks to our intellectual property, see
"Risk Factors--Risks Relating to Our Business--Intellectual Property Risks."
Employees
At March 31, 2000, we had a total of 228 full-time employees, consisting of
184 in the United States, 21 in Taiwan and 23 in Italy, and approximately 35
temporary employees. Of the total permanent employees, 89 were engaged in
research and development, 50 were engaged in sales, marketing and customer
support, 62 were engaged in operations and 27 were engaged in administration
and finance. None of our employees is subject to a collective bargaining
agreement. The employees of our Pro.Tel subsidiary are protected by certain
provisions of Italian law. We believe that our relations with our employees are
good. See "Risk Factors--Risks Relating to Our Business--Need for New
Personnel" and "--Dependence on Key Employees."
Legal Proceedings
We are not currently a party to any material legal proceedings. In September
1999, the United States District Court for the Northern District of California
entered final judgment against Electrodata, Inc. stating that it had literally
infringed our U.S. Patent No. 5,619,489, entitled Handheld Communications
Tester. The court also entered judgment against Electrodata that the claims at
issue were valid and the patent was enforceable. Electrodata has filed a notice
of appeal with the United States Court of Appeals for the Federal Circuit. We
do not believe that the outcome of this appeal will materially impact our
business.
Facilities
Our current headquarters and manufacturing facility occupies approximately
47,000 square feet in San Jose, California under a lease that expires in
November 2004. We have contracted to build near our current headquarters a new
91,700 facility, which we are building to accommodate our need for an increase
in manufacturing capacity and employees. The new facility is scheduled for
completion in late 2000. We also lease approximately 7,500 square feet of
office and manufacturing space in Norcross, Georgia; approximately 7,300 square
feet of office space in Springfield, Virginia, approximately 10,000 square feet
of office and manufacturing space in Modena, Italy, 10,000 square feet of
office space in Taipei, Taiwan and a liaison office in Beijing, China.
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<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The names and ages of our executive officers, directors and key employees as
of the date of this prospectus are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Paul Ker-Chin Chang......... 42 Chief Executive Officer, President and Director
Paul A. Marshall............ 42 Chief Operating Officer, Vice President Marketing and Director
Robert C. Pfeiffer.......... 37 Chief Technology Officer, Vice President Engineering,
Secretary and Director
Peter L. Eidelman........... 34 Chief Financial Officer and Treasurer
Robert H. King.............. 38 Vice President North American Sales
Raymond L. Chong............ 43 Vice President Strategic Marketing
Dennis K. Koo............... 40 Vice President Quality Group
Patrick Peng-Koon Ang 40
(1)(2)..................... Director
Henry P. Huff (1)(2)........ 56 Director
Jennifer J. Walt (1)(2)..... 43 Director
</TABLE>
---------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Paul Ker-Chin Chang co-founded Sunrise in October 1991 and has served as
Chief Executive Officer, President and Chairman since that time. From 1984 to
1991, Mr. Chang was employed as Engineering Supervisor for the Wiltron division
of Anritsu Corporation, a manufacturer of communications test equipment. Mr.
Chang holds an M.S. in Electrical Engineering from the University of Kansas at
Lawrence and a B.S. in Physics from Tunghai University in Taiwan.
Paul A. Marshall co-founded Sunrise in October 1991 and has served as Chief
Operating Officer since December 1999, as Vice President of Marketing since
March 1992 and as a director since October 1991. Mr. Marshall also served as
Chief Financial Officer of Sunrise until December 1999. From 1980 to 1992,
Mr. Marshall held various positions with the Wiltron division of Anritsu
Corporation, most recently as Marketing Staff Engineer. Mr. Marshall holds an
M.B.A. from the Harvard Business School and a B.S. in Mechanical Engineering
from the University of California at Davis.
Robert C. Pfeiffer co-founded Sunrise in October 1991 and has served as Vice
President of Engineering, Secretary and a director since that time. Mr.
Pfeiffer has also served as Chief Technology Officer of Sunrise since December
1999. From June 1989 to October 1991, Mr. Pfeiffer was employed as a
Telecommunication R&D Engineer for the Wiltron division of Anritsu Corporation.
Mr. Pfeiffer holds an M.B.A. and a B.S. in Electrical Engineering from Santa
Clara University.
Peter L. Eidelman joined Sunrise in July 1997 and has served as Chief
Financial Officer and Treasurer since December 1999. Mr. Eidelman served as
Sunrise's Treasurer and Director of Finance and Administration from January
1999 to December 1999 and as Director of Tax, Finance and Accounting from July
1997 to January 1999. Mr. Eidelman was employed as a Manager of Tax, Accounting
and Compliance for Amdahl Corporation, an enterprise solution company, from
July 1994 to July 1997. From November 1988 to July 1993, Mr. Eidelman was
employed as a Tax Manager at Coopers & Lybrand, an international accounting
firm. Mr. Eidelman holds a B.B.A. in Accounting from the University of
Massachusetts at Amherst. Mr. Eidelman is a member of the A.I.C.P.A. and Tax
Executive Institute.
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<PAGE>
Robert H. King joined Sunrise in September 1997 and has served as Vice
President North American Sales since January 2000. From February 1997 to
September 1997, Mr. King was employed as Regional Sales Manager for Bosch
Telecom, a telecommunications equipment company. From April 1995 to February
1997, Mr. King was an independent sales representative for various
telecommunications equipment companies. Mr. King was employed as Regional Sales
Manager for Ameritech Corporation, a telecommunications equipment company, from
September 1985 to April 1995. Mr. King also served as Regional Sales Manager
for CXR Halcyon, Inc., a telecommunications equipment company, from December
1983 to September 1985.
Raymond L. Chong joined Sunrise in February 1996 and has served as Vice
President Strategic Marketing since January 2000. From May 1988 to February
1996, Mr. Chong was employed as Account Manager of the Communication
Instruments Group at Hewlett Packard, a computer and office equipment company.
Mr. Chong was employed as a Product Marketing Manager at Tektronix Inc., a test
and measurement solutions company, in their Portable Instruments Division from
April 1984 to May 1988. Mr. Chong holds an M.S. in Electrical Engineering from
the University of California at Davis and an M.B.A. from Santa Clara
University.
Dennis K. Koo joined Sunrise in June 1997 and has served as Vice President
Quality Group since January 2000. From June 1989 to June 1997, Mr. Koo was
employed as Manufacturing Engineering Manager for Anritsu Corporation. Mr. Koo
holds a B.S. in Electrical Engineering from the University of British Columbia
in Canada.
Patrick Peng-Koon Ang has served as a director of Sunrise since March 2000.
Mr. Ang has served as President of Digicom Systems Inc., a manufacturer of
high-speed communications products, since December 1998. From December 1993 to
November 1997, Mr. Ang was employed as Division President for OPTi, Inc., a
supplier of semiconductor products for the personal computer market. Mr. Ang
holds a B.S. in Electrical Engineering from the National University of
Singapore.
Henry P. Huff has served as a director of Sunrise since March 2000. Mr. Huff
served as the Vice President, Finance and Chief Financial Officer of NorthPoint
Communications Group Inc. from June 1998 until his retirement in April 2000.
Mr. Huff served as the Chief Financial Officer of Fabrik Communications, Inc.,
a messaging service provider, from October 1996 until June 1998 and as the
Chief Financial Officer of Sierra Ventures, a Menlo Park-based venture capital
firm, from February 1992 to September 1996. From August 1986 to February 1992,
Mr. Huff was the Chief Financial Officer of Centex Telemanagement, Inc.
Jennifer J. Walt has served as a director of Sunrise since March 2000. Ms.
Walt has been an attorney at the law firm of Littler Mendelson, P.C. since 1983
and is currently a shareholder of that firm. Ms. Walt holds a B.A. in history
from Stanford University and a J.D. from U.C. Hastings College of the Law.
Board Composition
Our board of directors currently has six members. In accordance with the
terms of our certificate of incorporation to be filed prior to this offering in
connection with our reincorporation in Delaware, the board of directors will be
divided into three classes, each serving staggered three-year terms: Class I,
whose initial term will expire at the annual meeting of stockholders held in
2001; Class II, whose initial term will expire at the annual meeting of
stockholders in 2002; and Class III, whose initial term will expire at the
annual meeting of stockholders in 2003. As a result, only one class of
directors will be elected at each annual meeting of our stockholders, with the
other classes continuing for the remainder of their respective terms. Robert C.
Pfeiffer and Jennifer J. Walt have been designated as Class I directors; Paul
A. Marshall and Patrick Peng-Koon Ang have been designated as Class II
directors; and Paul Ker-Chin Chang and Henry P. Huff have been designated as
Class III directors. These provisions in our certificate of incorporation may
have the effect of delaying or preventing changes in control or management of
Sunrise. The executive
49
<PAGE>
officers serve at the discretion of the Board of Directors. There are no family
relationships among any of the directors or executive officers of Sunrise.
Board Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at board meetings and the grant of stock options, employee directors
are not compensated for their services as directors. Directors who are not our
employees receive compensation for their services as directors at a rate of
$30,000 per year plus $1,000 per board meeting attended. Directors who are our
employees are eligible to participate in our 2000 stock plan and, beginning in
2000, they will also be eligible to participate in our 2000 employee stock
purchase plan. Beginning in 2000, directors who are not our employees will
receive annual options to purchase $25,000 worth of shares of our common stock
under our 2000 stock plan based on the initial public offering price and
thereafter based on the fair market value of our common stock on the date of
our annual meeting of stockholders. See "--Benefit Plans."
Board Committees
In March 2000, the board established the Audit Committee and Compensation
Committee. The Audit Committee reviews our annual audit and meets with our
independent auditors to review our internal controls and financial management
practices. The Board's Audit Committee currently consists of Patrick Peng-Koon
Ang, Henry P. Huff and Jennifer J. Walt. The Compensation Committee recommends
compensation for certain of our personnel to the board and administers our
stock plans. The Compensation Committee currently consists of Patrick Peng-Koon
Ang, Henry P. Huff and Jennifer J. Walt.
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee are currently Patrick Peng-Koon
Ang, Henry P. Huff and Jennifer J. Walt. None of Patrick Peng-Koon Ang, Henry
P. Huff or Jennifer J. Walt has at any time been an officer or employee of
Sunrise or any subsidiary of Sunrise. During 1999, we retained the law firm of
Littler Mendelson to perform legal services for us. Ms. Walt, a director of
Sunrise and a member of the Compensation Committee, is a shareholder in Littler
Mendelson. Mr. Huff was the Chief Financial Officer of NorthPoint
Communications until April 2000. During 1999, we sold approximately $590,000 of
products to NorthPoint Communications.
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<PAGE>
Executive Compensation
The following table provides summary information concerning the compensation
received for services rendered to us during the three fiscal years ended
December 31, 1999 by the Chief Executive Officer and each of the other three
most highly compensated executive officers, each of whose aggregate
compensation during our last fiscal year exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation(1) Awards
--------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)
--------------------------- ---- ---------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Paul Ker-Chin Chang...... 1999 $513,945 $1,204,629 -- $22,548(2)
Chief Executive Officer 1998 513,945 50,325 -- 13,406(3)
and President 1997 513,945 727,720 -- --
Paul A. Marshall......... 1999 481,140 1,117,851 -- 18,391(4)
Chief Operating Officer, 1998 481,140 46,402 -- 9,395(5)
Vice President Marketing 1997 481,140 681,269 -- --
Robert C. Pfeiffer....... 1999 354,051 819,213 -- 18,244(6)
Chief Technology
Officer, 1998 354,051 33,315 -- 11,555(7)
Vice President 1997 354,051 501,486 -- --
Engineering and
Secretary
Peter L. Eidelman........ 1999 127,500 117,300 60,000 15,103(8)
Chief Financial Officer 1998 108,600 12,945 30,000 6,856(9)
and Treasurer 1997(10) 46,212 16,741 60,000 --
</TABLE>
---------------------
(1) Excludes certain perquisites and other benefits which did not exceed 10%
of any officer's total salary and bonus.
(2) Includes $12,800 in deferred profit sharing, $4,110 in paid out vacation,
$5,000 of company contributions to Sunrise's 401(k) plan and life
insurance premiums of $638 paid on behalf of such officer.
(3) Includes $4,000 in deferred profit sharing, $3,994 in paid out vacation,
$5,000 of company contributions to Sunrise's 401(k) plan and life
insurance premiums of $412 paid on behalf of such officer.
(4) Includes $12,800 in deferred profit sharing, $5,000 of company
contributions to Sunrise's 401(k) plan and life insurance premiums of $591
paid on behalf of such officer.
(5) Includes $4,000 in deferred profit sharing, $5,000 of company
contributions to Sunrise's 401(k) plan and life insurance premiums of $395
paid on behalf of such officer.
(6) Includes $12,800 in deferred profit sharing, $5,000 of company
contributions to Sunrise's 401(k) plan and life insurance premiums of $444
paid on behalf of such officer.
(7) Includes $4,000 in deferred profit sharing, $2,555 in paid out vacation
and $5,000 of company contributions to Sunrise's 401(k) plan.
(8) Includes $10,200 in deferred profit sharing, $4,781 of company
contributions to Sunrise's 401(k) plan and life insurance premiums of $122
paid on behalf of such officer.
(9) Includes $2,715 in deferred profit sharing, $4,073 of company
contributions to Sunrise's 401(k) plan and life insurance premiums of $68
paid on behalf of such officer.
(10) Mr. Eidelman joined Sunrise in July 1997.
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<PAGE>
Option Grants
The following table provides summary information regarding stock options
granted to the officers listed in the summary compensation table during the
fiscal year ended December 31, 1999. The options were granted pursuant to
Sunrise's 1993 stock option plan.
Option Grants During Fiscal 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual
Rates of Stock Price
Appreciation for
Individual Grants Potential Option Term (2)
------------------------------------------------ Realiazable ---------------------
Number of Value at
Securities Percent of Initial
Underlying Total Options Offering
Options Granted to Exercise or Price of
Granted Employees in Base Price Expiration $15.00
Name (#)(1) Fiscal Year(%) ($/Sh) Date ($/Sh) 5% ($) 10%($)
---- ---------- -------------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul Ker-Chin Chang..... -- -- -- -- -- -- --
Paul A. Marshall........ -- -- -- -- -- -- --
Robert C. Pfeiffer...... -- -- -- -- -- -- --
Peter L. Eidelman....... 21,000 2.0 $1.50 03/23/09 $283,500 $ 481,602 $ 785,529
15,000 1.4 2.17 10/08/09 192,500 334,001 551,092
24,000 2.3 2.17 11/17/09 308,000 534,402 881,747
</TABLE>
---------------------
(1) All options granted to Mr. Eidelman vest annually in four equal
installments beginning one year after the date of grant.
(2) Realizable values are reported net of the option exercise price. The dollar
amounts under these columns are the result of calculations at the 5% and
10% rates (determined from the initial offering price of $15.00, not the
stock's current market value) set by the Securities and Exchange Commission
and therefore are not intended to forecast possible future appreciation, if
any, of Sunrise's stock price. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock as
well as the optionholder's continued employment through the vesting period.
The potential realizable value calculation assumes that the optionholder
waits until the end of the option term to exercise the option.
Option Exercises and Holdings
The following table provides summary information concerning the shares of
common stock acquired in 1999, the value realized upon exercise of stock
options in 1999, and the year end number and value of unexercised options with
respect to each of the officers listed in the summary compensation table as of
December 31, 1999. The value was calculated by determining the difference
between the fair market value of underlying securities and the exercise price.
The fair market value of our common stock at December 31, 1999 was assumed to
be $5.00 per share.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at Fiscal In-the-Money Options
Shares Year-End(#) at Fiscal Year-End($)
Acquired On Value ------------------------- -------------------------
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Paul Ker-Chin Chang..... -- -- -- --
Paul A. Marshall........ -- -- -- --
Robert C. Pfeiffer...... -- -- -- --
Peter L. Eidelman....... 7,500 $29,250 142,500/0 $495,750/0
</TABLE>
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<PAGE>
Benefit Plans
1993 Stock Option Plan. Our 1993 stock option plan was adopted by our board
of directors in December 1993 and approved by our stockholders in April 1994.
In 1995, our board amended and restated the 1993 stock option plan and our
stockholders approved the amended and restated plan in April 1996. Our 1993
stock option plan provides for the granting to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code and of
nonstatutory stock options. A total of 5,250,000 shares has been reserved for
issuance under the 1993 stock option plan. As of March 31, 2000, options to
purchase an aggregate of 2,796,198 shares of our common stock were outstanding
under our 1993 stock option plan. Nonqualified options generally become vested
and exercisable over a four year period in equal annual installments and expire
ten years from the date of grant. Incentive stock options generally are
exercisable upon grant; provided, however, that no incentive stock options are
still outstanding from a prior grant. In the event of a stock split or stock
dividend the board may appropriately adjust the number, kind and price of the
shares subject to outstanding options to reflect such a change. In the event of
an acquisition of Sunrise, including a merger or sale of assets, options will
generally terminate, unless the merger agreement provides for the assumption of
the stock option agreements executed pursuant to the plan. Upon the exercise of
an option, shares may be subject to transfer restrictions, as defined in the
stock option agreement, including the right of first refusal and the right to
repurchase the stock. Our board of directors has determined that no further
options will be granted under the 1993 stock option plan after this offering.
2000 Stock Plan. Our 2000 stock plan was adopted by our board of directors
and approved by our stockholder in April 2000. The 2000 stock plan will become
effective upon our initial public offering. At that time, all outstanding
shares reserved under our 1993 stock option plan will be merged into the
reserved share pool of the 2000 stock plan. All outstanding options under the
1993 stock option plan will continue to be administered according to the terms
and conditions of the stock option agreements issued pursuant to that plan. In
the event that an option expires after this offering without being exercised,
any remaining shares reserved for the option grant under the 1993 stock option
plan will return to the reserved share pool of the 2000 stock plan.
The 2000 stock plan provides for the discretionary grant of incentive stock
options to employees, including officers and employee directors, and for the
discretionary grant of nonstatutory stock options and stock purchase rights to
employees, directors and consultants. The 2000 stock plan also provides for the
periodic automatic grant of nonstatutory stock options to non-employee
directors.
The total shares of common stock currently reserved for issuance under the
2000 stock plan equals 3,750,000 shares of common stock plus the number of
shares that remain reserved for issuance under the 1993 stock option plan as of
the date the 2000 stock plan became effective.
In addition, commencing on the first day of our next fiscal year, shares will
be added to the 2000 stock plan annually equal to the least of
. 2 1/2% of the outstanding shares on the last day of the prior fiscal
year;
. 1,300,000 shares; and
. such lower amount as the board may determine.
Unless terminated sooner, the 2000 stock plan will terminate automatically 10
years from its effective date.
Our compensation committee, which generally administers our 2000 stock plan,
has the power to determine the terms of the options or stock purchase rights
granted, including the exercise price of the option or restricted stock grant;
the number of shares subject to each option or restricted stock grant; the
vesting and exercise forms of each option or stock purchase right; and the form
of consideration payable upon the exercise of each option or stock purchase
right.
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<PAGE>
Under the 2000 stock plan non-employee directors receive annual grants of
nonstatutory stock options. As of the date of this prospectus non-employee
directors will receive a grant of an option to purchase shares with a fair
market value of $25,000 on the grant date. Non-employee directors who first
join our board after the date of this prospectus will receive an initial grant
when they join the board. In addition, all non-employee directors will receive
a grant of an option to purchase shares with a fair market value equal to
$25,000 on the grant date at each subsequent annual meeting, provided they will
continue to serve on the board after such annual meeting. Non-employee director
options will have a term of ten years but will expire within 90 days of the
directors termination of service or one year if such termination is due to
death or disability. Non-employee director options vest one year from the date
of grant, provided the director continues to serve as a director at that time.
In addition, the board has the authority to amend, suspend or terminate the
2000 stock plan, so long as no such action affects any shares of common stock
previously issued and sold or any option previously granted under the plan. The
maximum number of option shares each optionee may be granted during a fiscal
year is 600,000 shares. However, in connection with an optionee's initial
service with us, such optionee may be granted up to a total of 900,000 shares
during the initial fiscal year of service. Restricted stock grants are limited
to 75,000 shares per person in any fiscal year.
Options and restricted stock granted under our 2000 stock plan are generally
not transferable by the participant, and each option is exercisable during the
lifetime of the optionee and only by such optionee.
In the case of restricted stock, unless the compensation committee determines
otherwise, the restricted stock purchase agreement shall grant Sunrise a
repurchase option exercisable after the purchaser's employment or consulting
relationship with Sunrise has ended for any reason, including death or
disability. The purchase price for shares repurchased pursuant to the
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to Sunrise. The repurchase option shall lapse at a rate determined by the
compensation committee.
The exercise price of all incentive stock options and nonstatutory stock
options granted automatically to non-employee directors must be at least equal
to the fair market value of the common stock on the date of grant. The exercise
price of other nonstatutory stock options and stock purchase rights granted
under the 2000 stock plan is determined by the administrator, but with respect
to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue
Code, the exercise price must be at least equal to the fair market value of our
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must at least equal 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the 2000 stock plan may not exceed ten years.
The 2000 stock plan provides that in the event that we are acquired by
another corporation, or sell substantially all of our assets, each option and
stock purchase right may be assumed or an equivalent option substituted for by
the successor corporation. If the outstanding options and stock purchase rights
are not assumed or substituted for by the successor corporation, the stock
option agreements made under the 2000 stock plan may provide that the option
holder will fully vest in and have the right to exercise the option as to all
of the optioned stock, or that the repurchase option of a restricted stock
grant may lapse, including shares to which the holder would not otherwise be
entitled.
2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan was
adopted by our board of directors and approved by our stockholder in April
2000. A total of 600,000 shares of our common stock has been reserved for
issuance under the 2000 purchase plan, plus annual increases equal to the least
of
. 0.75% of the outstanding shares on the last day of the prior fiscal
year;
54
<PAGE>
. 300,000 shares; and
. such lower amount as the board may determine.
Under the 2000 purchase plan, which is intended to qualify under Section 423
of the Internal Revenue Code, our board of directors may determine the duration
and frequency of stock purchase periods. Initially the plan will operate using
consecutive, overlapping, twenty-four month offering periods. Each offering
period will include four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 15 and November 15 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this offering and ends on
the last trading day on or before November 14, 2000.
Employees of Sunrise or of any participating subsidiaries are eligible to
participate. However, employees may not be granted an option to purchase stock
under the 2000 purchase plan if they, immediately after the grant, own stock
possessing 5% or more of the total combined voting power or value of all
classes of our capital stock.
The 2000 purchase plan permits participants to purchase our common stock
through payroll deductions of up to 15% of their total base compensation,
excluding bonuses, commissions and overtime, not to exceed $25,000 in any plan
year. In addition, no more than 0.5% of the outstanding shares of the company
may be sold under the plan on any purchase date, and no more than 1% of the
outstanding shares may be sold in any calendar year.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 purchase plan is generally 85% of the lower of the
fair market value of the common stock either at the beginning of the offering
period or at the end of the purchase period. Rights to purchase stock under the
2000 purchase plan expire on the earlier of
. 27 months after the date of grant;
. the option period as determined by the board at the time of grant; or
. the employee's termination of employment.
In the event the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. Participants
may end their participation at specified times during an offering period, and
they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with Sunrise.
Rights granted under the 2000 purchase plan are not transferable by a
participant other than upon death or by a special determination by the plan
administrator. Each outstanding option under the 2000 purchase plan will be
subject to the acquisition agreement in the event we merge with or into another
corporation or sell substantially all of our assets.
Our board of directors has the authority to amend or terminate the 2000
purchase plan at any time and for any reason. If the board of directors
terminates the plan during an offering period, the board may terminate all
outstanding rights either upon termination of the plan, upon completion of the
purchase of shares on the next purchase date, or may elect to permit rights to
expire according to their terms. Notwithstanding anything to the contrary, the
board of directors may in its sole discretion amend the 2000 purchase plan to
the extent necessary and desirable to avoid unfavorable financial accounting
consequences by altering the purchase price for any offering period, shortening
any offering period or allocating remaining shares among the participants.
Unless earlier terminated by our board of directors, the 2000 purchase plan
will terminate automatically ten years from its effective date.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of March 31, 2000 and as adjusted to reflect the sale of
the common stock offered by Sunrise by this prospectus by:
. each of our directors and the officers listed in the summary
compensation table;
. all directors and executive officers as a group;
. each person who is known to us to own beneficially more than 5% of its
common stock; and
. each of the selling stockholders.
Except as otherwise noted, the address of each person listed in the table is
c/o Sunrise Telecom Incorporated, 22 Great Oaks Boulevard, San Jose, California
95119. The table includes all shares of common stock issuable within 60 days of
March 31, 2000 upon the exercise of options and other rights beneficially owned
by the indicated stockholders on that date. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. To our knowledge,
except under applicable community property laws or as otherwise indicated, the
persons named in the table have sole voting and sole investment control
regarding all shares beneficially owned. The applicable percentage of ownership
for each stockholder is based on 45,778,401 shares of common stock outstanding
as of March 31, 2000, together with applicable options for that stockholder.
Shares of common stock issuable upon exercise of options and other rights
beneficially owned were deemed outstanding for the purpose of computing the
percentage ownership of the person holding these options and other rights, but
are not deemed outstanding for computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering Number of Owned After Offering (1)
------------------------------ Shares -------------------------------
Holders Number Percent Offered Number Percent
------- -------------- --------------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Paul Ker-Chin Chang..... 13,281,000(2) 29.0% --(3) 13,281,000 26.8%
Paul A. Marshall........ 12,120,000(4) 26.5 --(5) 12,120,000 24.5
Robert C. Pfeiffer...... 6,465,000 14.1 --(6) 6,465,000 13.0
Peter L. Eidelman....... 150,000(7) * -- 150,000 *
Patrick Peng-Koon Ang... -- -- -- 272,000(8) *
Henry P. Huff........... -- -- -- 2,000(9) *
Jennifer J. Walt........ 440,250 1.0 -- 440,250 *
All directors and
executive officers as a
group (seven persons).. 32,456,250(7) 70.7 -- 32,730,250 65.8
Selling Stockholders:
Marshall Family Trust
U/T/A dtd. 3/26/91..... 624,000 1.4 6,000 618,000 1.2
Antao Lin & Cathy Ko
Yuen Chang............. 1,537,500 3.4 15,000 1,522,500 3.1
George Butzler.......... 555,000 1.2 22,643 532,357 1.1
Shao-Hwa Wu............. 600,000 1.3 22,643 577,357 1.2
Jack Posnick & Ella J.
Posnick Revocable
Living Trust........... 399,000 * 22,643 376,357 *
Helfrich Family Trust
U/T/A dtd. 4/9/82...... 420,000 * 60,000 360,000 *
Ko-Wen Chang Tam........ 778,500 1.7 22,643 755,857 1.5
William Dougherty....... 472,500 1.0 5,000 467,500 *
Shirley Siegel.......... 54,000 * 6,000 48,000 *
</TABLE>
---------------------
* Less than one percent of the outstanding shares of common stock.
56
<PAGE>
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 31,800 shares held as custodian for minor child.
(3) Mr. Chang has granted the underwriters an option to purchase up to 250,000
shares of our common stock to cover over-allotments, if any. If the over-
allotment option is exercised in full, Mr. Chang would own 13,031,000
shares or 26.3% of the outstanding shares.
(4) Includes 1,200 shares held as custodian for minor child.
(5) Mr. Marshall has granted the underwriters an option to purchase up to
228,240 shares of our common stock to cover over-allotments, if any. If the
over-allotment option is exercised in full, Mr. Marshall would own
11,891,760 shares or 24.0% of the outstanding shares.
(6) Mr. Pfeiffer has granted the underwriters an option to purchase up to
121,760 shares of our common stock to cover over-allotments, if any. If the
over-allotment option is exercised in full, Mr. Pfeiffer would own
6,343,240 shares or 12.8% of the outstanding shares.
(7) Includes 133,500 shares issuable upon exercise of outstanding options,
which are exercisable within 60 days of March 31, 2000.
(8) Creative Technologies Ltd., the parent of Digicom Systems Inc., has been
allocated 270,000 shares in the initial public offering. Mr. Ang is the
President of Digicom Systems Inc. and may be deemed to be the beneficial
owner of the 270,000 shares. Mr. Ang has also been allocated 2,000 shares
pursuant to the directed share program.
(9) Mr. Huff has been allocated 2,000 shares pursuant to the directed share
program.
We will pay all costs and expenses of the offering, other than the
underwriting discount relating to shares sold by the selling stockholders, the
fees and disbursements of legal counsel and other advisors to the selling
stockholders and stock transfer and other taxes attributable to the sale of
shares by the selling stockholders, which will be paid by the selling
stockholders.
57
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1997, we have not been involved in any transaction or series
of similar transactions to which we were or are a party in which the amount
involved exceeded or exceeds $60,000 and in which any of our directors or
executive officers, any holder of more than 5% of any class of our voting
securities or any member of the immediate family of any of the foregoing
persons had or will have a direct or indirect material interest, other than the
transactions described below.
Insider Transactions
Paul Ker-Chin Chang, our Chief Executive Officer and President, is the owner
of Telecom Research Center. We purchased equipment from Telecom Research Center
used in our manufacturing process totaling $58,000 in 1999, $84,000 in 1998 and
$81,000 in 1997. At December 31, 1999, 1998 and 1997, there was no accounts
payable due to Telecom Research Center. The terms of these transactions were
negotiated at arms length and are similar to those of unrelated parties.
In June 1997, we repurchased shares of our common stock at a price of $1.10
per share from certain of our stockholders, including:
. 3,000 shares from Bruce and Molly Mastic, a brother-in-law and sister of
Paul Marshall, our Chief Operating Officer;
. 60,000 shares from Robert and Pat Pfeiffer, the parents of Robert C.
Pfeiffer, our Chief Technology Officer; and
. 15,000 shares from Ann Filson, a sister of Paul Marshall, our Chief
Operating Officer.
In May 1998, we repurchased shares of our common stock at a price of $1.43
per share from certain of our stockholders, including:
. 15,000 shares from Andrew and Mary Marshall, the parents of Paul
Marshall, our Chief Operating Officer; and
. 52,500 shares from Bryant Blewett and Ellen Marshall, a brother-in-law
and a sister of Paul Marshall, our Chief Operating Officer.
During 1997, 1998 and 1999, we retained the law firm of Littler Mendelson to
perform legal services for us. Ms. Walt, a director of Sunrise and a member of
the Compensation Committee, is a shareholder in Littler Mendelson.
Mr. Huff, a director of Sunrise, was the Chief Financial Officer of
NorthPoint Communications from June 1998 until April 2000. We sold
approximately $590,000 of products to NorthPoint Communications in 1999 and
$192,000 in 1998.
Creative Technologies Ltd., the parent of Digicom Systems Inc., has been
allocated 270,000 shares in the initial public offering. Patrick Peng-Koon Ang,
a director of Sunrise, is the President of Digicom Systems Inc.
Agreements with Management
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Description of Capital Stock--
Indemnification Provisions."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, Sunrise will be authorized to issue
175,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of undesignated preferred stock, $.001 par value per share.
Common Stock
At March 31, 2000, there were 45,778,401 shares of common stock outstanding,
which includes 500,001 shares of common stock issued subject to a put option,
which expired on May 22, 2000, as part of the Pro.Tel acquisition, held of
record by 90 stockholders. Options to purchase 2,796,198 shares of common stock
were also outstanding. There would be 49,595,829 shares of common stock
outstanding as of March 31, 2000 (assuming no exercise of outstanding options
under Sunrise's stock option plans after March 31, 2000) after giving effect to
the sale of the shares offered hereby.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of liquidation, dissolution or
winding up of Sunrise, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to the
prior distribution rights of any outstanding preferred stock. The common stock
has no preemptive or conversion rights or other subscription rights.
Preferred Stock
There are currently no outstanding shares of preferred stock. Upon the
closing of this offering, the Board of Directors will have the authority,
without further action by the stockholders, to issue up to 10,000,000 shares of
preferred stock, $.001 par value, in one or more series. The Board of Directors
will also have the authority to designate the rights, preferences, privileges
and restrictions of each such series, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of Sunrise without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
certain circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. Sunrise currently
has no plans to issue any shares of preferred stock.
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
Provisions of Delaware law and our charter documents could make the
acquisition of our company and the removal of incumbent officers and directors
more difficult. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of our company to negotiate with it first.
We believe that the benefits of increased protection of its potential ability
to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure Sunrise outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
Section 203. We are subject to the provisions of Section 203 of the Delaware
law. In general, the statute prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person
59
<PAGE>
became an interested stockholder is approved in a prescribed manner. Generally,
a "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's voting stock. These provisions may have the effect of delaying,
deferring or preventing a change in control of Sunrise without further action
by the stockholders.
Special Stockholder Meetings. Our restated certificate of incorporation
provides that special meetings of the stockholders for any purpose or purposes,
unless required by law, may only be called by the board of directors, the
Chairman of the Board, if any, and the President. This limitation on the
ability to call a special meeting could make it more difficult for stockholders
to initiate actions that are opposed by the board. These actions could include
the removal of an incumbent director or the election of a stockholder nominee
as a director. They could also include the implementation of a rule requiring
stockholder ratification of specific defensive strategies that have been
adopted by the board with respect to unsolicited takeover bids. In addition,
the limited ability to call a special meeting of stockholders may make it more
difficult to change the existing board and management.
Classified Board of Directors. Our board will be divided into three classes
of directors serving staggered three-year terms. As a result, approximately
one-third of the board of directors will be elected each year. These provision
are likely to increase the time required for stockholders to change the
composition of our board of directors. For example, in general at least two
annual meetings will be necessary for stockholders to effect a change in the
majority of our board of directors. Subject to the rights of the holders of any
outstanding series of preferred stock, the certificate of incorporation
authorizes only the board of directors to fill vacancies, including newly
created directorships. The certificate of incorporation also provides that
directors may be removed by stockholders only for cause and only by affirmative
vote of holders of two-thirds of the outstanding shares of voting stock.
Supermajority Vote to Amend Charter and Bylaws. Our restated certificate of
incorporation and restated bylaws each provide that our bylaws may only be
amended by a two-thirds vote of the outstanding shares. In addition, our
certificate of incorporation provides that its provisions related to bylaw
amendments, staggered board and indemnification may only be amended by a two-
thirds vote of the outstanding shares.
No Stockholder Action by Written Consent. Our restated certificate of
incorporation provides that stockholder action can be taken only at an annual
or special meeting of stockholders and may not be taken by written consent.
Advance Notice Procedures. Our restated bylaws provide for an advance notice
procedure for the nomination, other than by or at the direction of our board of
directors, of candidates for election as directors as well as for other
stockholder proposals to be considered at annual meetings of stockholders.
Indemnification Provisions
As permitted by the Delaware General Corporation Law, our certificate of
incorporation eliminates the personal liability of our officers and directors
for monetary damages for breach or alleged breach of their fiduciary duties as
officers or directors, other than in cases of fraud or other willful
misconduct. In addition, our by-laws provide that we are required to indemnify
our officers and directors even when indemnification would otherwise be
discretionary, and we are required to advance expenses to our officers and
directors as incurred in connection with proceedings against them for which
they may be indemnified. We have entered into indemnification agreements with
our officers and directors containing provisions that are, in some respects,
broader than the specific indemnification provisions contained in the Delaware
General Corporation Law. The indemnification agreements require us to indemnify
our officers and directors against liabilities that may arise by reason of
their status or service as officers and directors and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.
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<PAGE>
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of Sunrise in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for
indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust
Company, Inc. The transfer agent's address and telephone number is 12039 W.
Alameda Parkway, Suite Z2, Lakewood, Colorado 80228 and (303) 984-4110.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 49,595,829 shares
of common stock based upon shares outstanding at March 31, 2000. Excluding the
4,000,000 shares of common stock offered hereby and assuming no exercise of the
underwriters' over-allotment option, as of the effective date of the
registration statement, there will be 45,595,829 shares of common stock
outstanding, all of which are "restricted" shares under the Securities Act of
1933.
The following table indicates approximately when the 45,595,829 shares of our
common stock that are not being sold in the offering but which will be
outstanding at the time the offering is complete will be eligible for sale into
the public market:
Eligibility of Restricted Shares For Sale in the Public Market
<TABLE>
<S> <C>
At the date of this prospectus.................................. 15,675
180 days after the date of this prospectus...................... 45,080,153
Thereafter upon expiration of one year holding periods ......... 500,001
</TABLE>
Most of the restricted shares that will become available for sale in the
public market beginning 180 days after the effective date will be subject to
volume and other resale restrictions pursuant to Rule 144 under the Securities
Act of 1933 because the holders are our affiliates. The general provisions of
Rule 144 are described below.
In general, under Rule 144, any of our affiliates, or person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of:
. 1% of the then outstanding shares of the common stock, approximately
495,958 shares immediately after this offering, or
. the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
In addition, sales pursuant to Rule 144 are subject to requirements relating to
manner of sale, notice and availability of current public information about us.
A person, or persons whose shares are aggregated, who is not deemed to have
been one of our affiliates at any time during the 90 days immediately preceding
the sale and who has beneficially owned his or her shares for at least two
years is entitled to sell such shares pursuant to Rule 144(k) without regard to
the limitations described above.
As of March 31, 2000, 4,543,905 shares were reserved for issuance under our
1993 stock option plan, of which options to purchase 2,796,198 shares were then
outstanding, all of which were exercisable. We intend to file, within 180 days
after the date of this prospectus, a registration statement under the
Securities Act of 1933 to register the 8,293,905 shares under our 2000 stock
option plan, including the shares from the 1993 stock option plan, and the
600,000 shares of common stock reserved for issuance under our employee stock
purchase plan. Upon registration, all of these shares will be freely tradeable
when issued, subject to Rule 144 volume limitations applicable to affiliates
and lock-up agreements.
Lock-Up Agreements
Substantially all of the holders of common stock and options to purchase
common stock, including our executive officers and directors and the selling
stockholders, have agreed, pursuant to "lock-up" agreements with Chase
Securities Inc., that they will not offer, sell, contract to sell, pledge,
grant any option to sell, or otherwise dispose of, directly or indirectly, any
shares of common stock or securities convertible or exchangeable for common
stock, or warrants or other rights to purchase common stock for a period of
180 days after the date of this prospectus without the prior written consent of
Chase Securities Inc.. Chase Securities Inc. may release the shares subject to
the lock-up agreements in whole or in part at any time with or without notice.
Currently, Chase Securities Inc. has no plans, however, to do so.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc.,
CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray Inc. have severally
agreed to purchase from Sunrise and the selling stockholders the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Chase Securities Inc. .................. 1,475,000
CIBC World Markets Corp. ............... 737,500
U.S. Bancorp Piper Jaffray Inc.......... 737,500
FleetBoston Robertson Stephens Inc...... 100,000
Bear, Stearns & Co. Inc................. 100,000
Dain Rauscher Wessels................... 100,000
Deutsche Banc Alex. Brown............... 100,000
Lehman Brothers Inc..................... 100,000
PaineWebber Incorporated................ 100,000
Wit SoundView Corporation............... 100,000
Thomas Weisel Partners LLC.............. 100,000
Gerard Klauer Mattison & Co., LLC....... 50,000
Parker/Hunter Incorporated.............. 50,000
The Robinson-Humphrey Company, LLC...... 50,000
Sands Brothers & Co., Ltd............... 50,000
C.E. Unterberg, Towbin.................. 50,000
---------
Total................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to specified conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
accountants. The underwriters are committed to purchase all of the shares of
common stock offered by us and the selling stockholders if they purchase any
shares.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares.
Underwriting Discounts and Commissions
<TABLE>
<CAPTION>
With Without
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Per Share.................................. $ 1.05 $ 1.05
Total...................................... $4,830,000 $4,200,000
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1,150,000.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to selected dealers at that price less a concession not in
excess of $0.63 per share. The underwriters may allow and these dealers may
reallow a concession not in excess of $0.10 per share to other dealers. After
the initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters. The underwriters have informed us
that they do not intend to confirm discretionary sales of more than 5% of the
shares of common stock offered in this offering.
The selling stockholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the
63
<PAGE>
initial public offering price, less the underwriting discount set forth on the
cover page of this prospectus. To the extent that the underwriters exercise
this option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of shares which the number of shares of
common stock to be purchased by it shown in the above table bears to the total
number of shares of common stock offered hereby. The selling stockholders will
be obligated, pursuant to the option, to sell shares to the underwriters to
the extent the option is exercised. The underwriters may exercise this option
only to cover over-allotments made in connection with the sale of shares of
common stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
We and the selling stockholders have each agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, and to contribute to payments the underwriters may be
required to make in respect of these liabilities.
Our stockholders, including executive officers, directors and the selling
stockholders, have agreed not to, without the prior written consent of Chase
Securities Inc., offer, sell or otherwise dispose of any shares of common
stock or options to acquire shares of common stock or securities exchangeable
for or convertible into shares of common stock owned by them during the 180-
day period following the date of this prospectus. We have agreed that we will
not, without the prior written consent of Chase Securities Inc., offer, sell
or otherwise dispose of any shares of common stock or options to acquire
shares of common stock or securities exchangeable for or convertible into
shares of common stock during the 180-day period following the date of this
prospectus, except that we may issue shares upon the exercise of options
granted prior to the date hereof. We may grant additional options under our
stock option plans. Without the prior written consent of Chase Securities
Inc., the additional options shall not be exercisable during this 180-day
period.
The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise
affect the market price of the common stock at levels above those which might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids. A
stabilizing bid means the placing of any bid or the effecting of any purchase,
for the purpose of pegging, fixing or maintaining the price of the common
stock. A syndicate covering transaction means the placing of any bid on behalf
of the underwriting syndicate or the effecting of any purchase to reduce a
short position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from
a syndicate member in connection with the offering when shares of common stock
sold by the syndicate member are purchased in syndicate covering transactions.
Such transactions may be effected on the Nasdaq National Market, in the over-
the-counter market, or otherwise. Stabilizing, if commenced, may be
discontinued at any time.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock has been
determined by negotiation among us and the representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, our revenues and earnings, market valuations
of other companies engaged in activities similar to our business operations
and management.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
64
<PAGE>
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
. the Public Offers of Securities Regulations 1995 (as amended),
. the Financial Services Act 1986, and
. the Financial Services Act 1986, (Investment Advertisements)
(Exemptions) Order 1996 (as amended).
With respect to the offer, sale or delivery of the shares and related offering
materials outside the United Kingdom, each underwriter has represented that it
has compiled and will comply with all applicable laws and regulations in
connection with the offer, sale or delivery of the shares of common stock and
related offering materials in any jurisdiction in which it, or its affiliates,
makes, or make, any offer, sale or delivery of these shares. Persons who come
into possession of this prospectus in jurisdictions outside the United States
are required to inform themselves about and to observe any restrictions as to
this offering and the distribution of this prospectus applicable to that
jurisdiction.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Sunrise by Orrick, Herrington & Sutcliffe LLP, San Francisco, California.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Simpson Thacher & Bartlett, New York, New York and Palo
Alto, California.
EXPERTS
The consolidated financial statements of Sunrise as of December 31, 1998 and
1999 and for each of the years in the three-year period ended December 31,
1999, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent auditors, appearing elsewhere in this
prospectus, and upon the authority of said firm as experts in accounting and
auditing. The consolidated financial statements of Pro.Tel as of December 31,
1998 and 1999 and for each of the years in the two-year period ended December
31, 1999, have been included herein and in the registration statement in
reliance upon the report of KPMG S.p.A., independent auditors, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Sunrise has filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act of 1933 for the common stock
offered by this prospectus. This prospectus does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules. For further information regarding Sunrise and the common stock
offered by this prospectus, we refer you to the Registration Statement and to
the exhibits and schedules. With respect to each such document filed as an
exhibit to the Registration Statement, we refer you to the exhibit for a more
complete description of the matter involved. The Registration Statement and
the exhibits and schedules may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Securities and Exchange Commission located at Seven World Trade Center,
13th Floor, New York, New York 10048 and the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
part of the Registration Statement may be obtained from the Securities and
Exchange Commission's offices upon payment of fees prescribed by the
Securities and Exchange Commission. The Securities and Exchange Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
site is http://www.sec.gov.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Consolidated Financial Statements of Sunrise Telecom Incorporated
Report of Independent Auditors.......................................... F-2
Consolidated balance sheets as of December 31, 1998 and 1999 and March
31, 2000 (unaudited)................................................... F-3
Consolidated statements of net income for the years ended December 31,
1997, 1998
and 1999 and for the three months ended March 31, 1999 and 2000
(unaudited)............................................................ F-4
Consolidated statements of stockholders' equity for the years ended
December 31, 1997,
1998 and 1999 and for the three months ended March 31, 2000
(unaudited)............................................................ F-5
Consolidated statements of cash flows for the years ended December 31,
1997, 1998
and 1999 and for the three months ended March 31, 1999 and 2000
(unaudited)............................................................ F-6
Notes to consolidated financial statements.............................. F-7
Audited Consolidated Financial Statements of Pro.Tel. Srl
Report of Independent Auditors.......................................... F-22
Consolidated balance sheets as of December 31, 1998 and 1999............ F-23
Consolidated statements of operations for the years ended December 31,
1998 and 1999.......................................................... F-24
Consolidated statements of changes of quotaholders' equity for the years
ended
December 31, 1998 and 1999............................................. F-25
Consolidated statements of cash flows for the years ended December 31,
1998 and 1999.......................................................... F-26
Notes to consolidated financial statements.............................. F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sunrise Telecom, Inc.
We have audited the accompanying consolidated balance sheets of Sunrise
Telecom, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of net income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sunrise
Telecom, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Mountain View, California
February 29, 2000, except as to Note 15,
which is as of April 22, 2000
F-2
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
--------------- -----------
1998 1999 2000
ASSETS ------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 5,030 $ 8,615 $ 1,761
Accounts receivable, net of allowance for
doubtful accounts of $220, $252, and $312,
respectively................................... 4,749 9,524 12,307
Inventories..................................... 2,914 7,612 11,306
Prepaid expenses and other assets............... 106 214 809
Deferred income taxes........................... 906 2,050 2,342
------- ------- -------
Total current assets.............................. 13,705 28,015 28,525
Property and equipment, net....................... 2,799 4,417 5,916
Minority investment............................... 607 646 646
Intangible assets, net of accumulated amortization
of $0, $222, and $547, respectively.............. 31 2,324 11,519
Other assets...................................... 51 2,864 2,880
------- ------- -------
Total assets...................................... $17,193 $38,266 $49,486
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 403 $ 1,701 $ 3,274
Commissions payable............................. 568 1,344 1,951
Accrued compensation and related benefits....... 1,014 3,399 2,966
Current portion of notes payable................ -- 219 507
Other accrued expenses.......................... 406 2,098 2,301
Income taxes payable............................ 707 2,814 3,132
Deferred revenue................................ 443 411 438
------- ------- -------
Total current liabilities......................... 3,541 11,986 14,569
------- ------- -------
Deferred income taxes............................. 82 171 46
Notes payable, less current portion............... -- 638 959
Stock issued in acquisition subject to put
arrangement...................................... -- -- 5,000
Stockholders' equity:
Preferred stock, $0.001 par value per share;
10,000,000 authorized shares; none issued and
outstanding.................................... -- -- --
Common stock, $0.001 par value per share;
175,000,000 shares authorized; 44,518,605,
44,913,000, and 45,278,000 shares issued and
outstanding as of December 31, 1998 and 1999
and March 31, 2000, respectively............... 45 45 45
Additional paid-in capital...................... 481 3,915 10,785
Deferred stock-based compensation............... -- (2,065) (8,255)
Retained earnings............................... 13,044 23,576 26,349
Accumulated other comprehensive loss............ -- -- (12)
------- ------- -------
Total stockholders' equity........................ 13,570 25,471 28,912
------- ------- -------
Total liabilities and stockholders' equity........ $17,193 $38,266 $49,486
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
-------------------------------- ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 29,064 $ 28,535 $ 61,465 $ 8,090 $ 19,791
Cost of sales........... 7,652 7,590 14,736 2,281 5,588
---------- ---------- ---------- ---------- ----------
Gross profit.......... 21,412 20,945 46,729 5,809 14,203
---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and
development.......... 5,892 6,203 10,694 1,706 3,354
Sales and marketing... 7,645 7,764 15,215 2,130 5,078
General and
administrative....... 1,632 2,243 3,912 522 1,437
---------- ---------- ---------- ---------- ----------
Total operating
expenses............. 15,169 16,210 29,821 4,358 9,869
---------- ---------- ---------- ---------- ----------
Income from
operations........... 6,243 4,735 16,908 1,451 4,334
Other income, net....... 112 224 327 71 138
---------- ---------- ---------- ---------- ----------
Income before income
taxes................ 6,355 4,959 17,235 1,522 4,472
Income taxes............ 1,899 1,588 6,291 476 1,699
---------- ---------- ---------- ---------- ----------
Net income............ $ 4,456 $ 3,371 $ 10,944 $ 1,046 $ 2,773
========== ========== ========== ========== ==========
Earnings per share:
Basic................. $ 0.10 $ 0.08 $ 0.25 $ 0.02 $ 0.06
========== ========== ========== ========== ==========
Diluted............... $ 0.10 $ 0.07 $ 0.24 $ 0.02 $ 0.06
========== ========== ========== ========== ==========
Shares used in computing
earnings per share:
Basic................. 44,645,271 44,536,911 44,666,646 44,540,418 45,060,339
========== ========== ========== ========== ==========
Diluted............... 44,895,759 45,002,796 45,823,980 45,516,654 47,031,546
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Deferred Other Total
-------------- Paid-in Stock-based Retained Comprehensive Stockholders'
Shares Amount Capital Compensation Earnings Loss Equity
------ ------ ---------- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... 44,868 $45 $ 463 $ -- $ 5,894 $ -- $ 6,402
Exercise of stock
options................ 46 -- 18 -- -- -- 18
Repurchase of common
stock.................. (298) -- (14) -- (311) -- (325)
Cash dividend of $.006
per share.............. -- -- -- -- (89) -- (89)
Net income.............. -- -- -- -- 4,456 -- 4,456
------ --- ------- ------- ------- ----- -------
Balances, December 31,
1997................... 44,616 45 467 -- 9,950 -- 10,462
Exercise of stock
options................ 39 -- 21 -- -- -- 21
Repurchase of common
stock.................. (136) -- (7) -- (188) -- (195)
Cash dividend of $.006
per share.............. -- -- -- -- (89) -- (89)
Net income.............. -- -- -- -- 3,371 -- 3,371
------ --- ------- ------- ------- ----- -------
Balances, December 31,
1998................... 44,519 45 481 -- 13,044 -- 13,570
Exercise of common stock
options................ 229 -- 177 -- -- -- 177
Repurchase of common
stock.................. (135) -- (13) -- (189) -- (202)
Issuance of stock in
connection with Hukk
acquisition............ 300 -- 1,000 -- -- -- 1,000
Deferred stock-based
compensation........... -- -- 2,270 (2,270) -- -- --
Amortization of deferred
stock- based
compensation........... -- -- -- 205 -- -- 205
Cash dividend of $.015
per share.............. -- -- -- -- (223) -- (223)
Net income.............. -- -- -- -- 10,944 -- 10,944
------ --- ------- ------- ------- ----- -------
Balances, December 31,
1999................... 44,913 45 3,915 (2,065) 23,576 -- 25,471
Exercise of common stock
options (unaudited).... 365 -- 370 -- -- -- 370
Deferred stock-based
compensation
(unaudited)............ -- -- 6,500 (6,500) -- -- --
Amortization of deferred
stock-based
compensation
(unaudited)............ -- -- -- 310 -- -- 310
Cumulative translation
adjustment
(unaudited)............ -- -- -- -- -- (12) (12)
Net income (unaudited).. -- -- -- -- 2,773 -- 2,773
------ --- ------- ------- ------- ----- -------
Balances, March 31, 2000
(unaudited)............ 45,278 $45 $10,785 $(8,255) $26,349 $ (12) $28,912
====== === ======= ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Years Ended Ended
December 31, March 31,
------------------------- ---------------
1997 1998 1999 1999 2000
------- ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activi-
ties:
Net income...................... $ 4,456 $ 3,371 $10,944 $1,046 $ 2,773
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization... 575 739 1,205 237 687
Amortization of deferred stock-
based compensation............. -- -- 205 8 310
Gain on the sale of property and
equipment...................... (16) (21) 156 -- --
Deferred income taxes........... (340) (1) (1,055) -- (436)
Changes in operating assets and
liabilities:
Accounts receivable............. (634) 1,246 (4,721) (878) (2,092)
Inventories..................... (425) (406) (4,536) (910) (3,443)
Prepaid expenses and other as-
sets........................... (205) 44 (259) (65) (503)
Income tax receivable........... (317) 317 -- -- --
Accounts and commissions pay-
able........................... (437) (118) 2,040 316 1,681
Accrued compensation and related
benefits....................... 452 (1,663) 2,368 640 (477)
Other accrued expenses.......... (301) 162 1,704 171 64
Income taxes payable............ (455) 472 2,107 458 268
Deferred revenue................ 41 400 (32) 37 27
------- ------- ------- ------ -------
Net cash provided by (used in) op-
erating activities............... 2,394 4,542 10,126 1,060 (1,141)
------- ------- ------- ------ -------
Cash flows from investing activi-
ties:
Purchase of long-term invest-
ment........................... -- (607) (39) -- --
Sale or maturity of short-term
investments.................... 1,122 -- -- -- --
Capital expenditures, net....... (1,494) (1,094) (2,734) (292) (1,679)
Proceeds from sale of property
and equipment.................. 145 43 -- -- --
Acquisitions of Hukk and Pro.
Tel, net of cash acquired...... -- -- (782) -- (4,104)
Deposit on land and building.... -- -- (2,675) -- --
------- ------- ------- ------ -------
Net cash used in investing activi-
ties............................. (227) (1,658) (6,230) (292) (5,783)
------- ------- ------- ------ -------
Cash flows from financing activi-
ties:
Payments on notes payable....... -- -- (63) -- (288)
Repurchase of common stock...... (325) (195) (202) -- --
Cash dividends.................. (89) (89) (223) (223) --
Proceeds from exercise of stock
options........................ 18 21 177 59 370
------- ------- ------- ------ -------
Net cash provided by (used in) fi-
nancing activities............... (396) (263) (311) (164) 82
------- ------- ------- ------ -------
Effect of exchange rates on cash.. -- -- -- -- (12)
Net increase (decrease) in cash
and cash equivalents............. 1,771 2,621 3,585 604 (6,854)
Cash and cash equivalents, begin-
ning of year/period ............. 638 2,409 5,030 5,030 8,615
------- ------- ------- ------ -------
Cash and cash equivalents, end of
year/period...................... $ 2,409 $ 5,030 $ 8,615 $5,634 $ 1,761
======= ======= ======= ====== =======
Supplement disclosures of cash
flow information:
Cash paid during the year/period:
Interest........................ $ 2 $ 2 $ 2 $ -- $ 24
======= ======= ======= ====== =======
Income taxes.................... $ 2,671 $ 799 $ 5,365 $ 17 $ 1,864
======= ======= ======= ====== =======
Noncash investing and financing
activities:
Stock issued for acquisition of
Hukk........................... $ -- $ -- $ 1,000 $ -- $ --
======= ======= ======= ====== =======
Deferred stock-based compensa-
tion........................... $ -- $ -- $ 2,270 $ 371 $ 6,500
======= ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 2000 and for the three-month periods
ended March 31, 1999 and 2000 is unaudited)
(1) Business and Significant Accounting Policies
(a) Business
Sunrise Telecom, Inc. and subsidiaries (the Company) was incorporated in
California on October 1, 1991. The Company manufactures and markets service
verification equipment to pre-qualify, verify and diagnose
telecommunications and Internet networks. The Company markets and
distributes its products via a worldwide network of manufacturers,
representatives and independent distributor organizations. The Company has
wholly owned subsidiaries in Norcross, Georgia; Taipei, Taiwan; a
representative liaison office in Beijing, China; and a foreign sales
corporation in Barbados.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
(c) Revenue Recognition
Revenue is recognized when earned. The Company recognizes revenue from
product sales upon shipment, assuming collectibility of the resulting
receivable is probable. Revenue from services and support provided under
the Company's extended warranty programs is deferred and recognized on a
straight-line basis over the period of the contract. Deferred revenue
represents amounts received from customers in respect of the extended
warranty program in advance of services and support to be provided.
Provisions are recorded at the time of sale for estimated product returns,
standard warranty and customer support.
(d) Warranty Cost
The Company provides standard warranties covering parts and labor on all
its hardware products. Estimated warranty costs for such standard
warranties are charged to cost of sales when the related sales are
recognized.
(e) Research and Development
Development costs incurred in the research and development of new
products and enhancements to existing products are expensed as incurred
until the product has been completed, tested, and is ready for commercial
manufacturing. To date, hardware and software development projects have
been completed concurrently with the establishment of commercial
manufacturing and technological feasibility in the form of a working model,
respectively. Accordingly, no development costs have been capitalized.
(f) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities at
the date of purchase of three months or less to be cash equivalents. Cash
equivalents are limited to money market mutual funds.
F-7
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Fair Value of Financial Instruments
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, notes payable, and accrued expenses,
recorded amounts approximate fair value due to the relatively short
maturity period.
(h) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(i) Property and Equipment
Equipment, furniture, fixtures, and leasehold improvements are stated at
cost. Depreciation and amortization is computed by the straight-line method
over the shorter of the estimated useful life of the asset or the lease
term. The estimated useful lives of assets are five years.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of property and equipment is
measured by comparison of its carrying amount to the future net cash flows
the property and equipment are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the property and equipment
exceeds its fair market value. To date, the Company has made no adjustments
to the carrying values of its property and equipment.
(j) Intangible Assets
Intangibles include the fair value of issued and pending patents,
technology, noncompete agreements, and goodwill. The Company amortizes such
intangibles on a straight-line basis over four to five years based on
expected lives of patents, technology, noncompete agreements, and goodwill.
The Company reviews intangible assets for impairment based on a
comparison of the fair value of the intangibles relating to the acquisition
to their carrying value.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l) Business and Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash equivalents and
accounts receivable. The Company's cash equivalents are primarily in highly
liquid money market funds. The Company believes no significant
concentrations of credit exist with respect to these financial instruments.
Concentrations of credit risk with respect to trade receivables are limited
as the majority of the Company's sales are derived from large telephone
F-8
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating companies and other telecommunication companies located
throughout the world. The Company performs ongoing credit evaluations of
its customers. Based on management's evaluation of potential credit losses,
the Company believes its allowances for doubtful accounts are adequate. The
Company had one customer that accounted for 9.9%, 7.7%, 40.6%, 16.5% and
45.5% of its net sales for the years ended December 31, 1997, 1998 and
1999, and the three months ended March 31, 1999 and 2000 (unaudited),
respectively, and $301,000, $148,000, $2,833,000, and $5,265,000 of its
accounts receivable as of December 31, 1997, 1998 and 1999, and March 31,
2000 (unaudited), respectively.
The Company's customers are concentrated in the telecommunications
industry. Accordingly, the Company's future success depends upon the buying
patterns of such customers and the continued demand by such customers for
the Company's products. Additionally, the telecommunications equipment
market is characterized by rapidly changing technology, evolving industry
standards, changes in end user requirement, and frequent new product
introductions and enhancements. Furthermore, the telecommunications
industry has experienced and is expected to continue to experience
consolidation. The Company's continued success will depend upon its ability
to enhance existing products and to develop and introduce, on a timely
basis, new products and features that keep pace with technological
developments and emerging industry standards. Furthermore, as a result of
its international sales, the Company's operations are subject to risks of
doing business abroad, including but not limited to, fluctuations in the
value of currency, longer payment cycles, and greater difficulty in
collecting accounts receivable. While to date these factors have not had an
adverse material impact on the Company's consolidated results of
operations, there can be no assurance that there will not be such an impact
in the future.
(m) Net Income per Share
Basic earnings per share (EPS) is computed using the weighted-average
number of common shares outstanding during the period. Diluted EPS is
computed using the weighted-average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of common stock issuable upon exercise of stock options
using the treasury stock method.
The following is a reconciliation of the shares used in the computation
of basic and diluted EPS (in thousands):
<TABLE>
<CAPTION>
Three Months
Years Ended Ended
December 31, March 31,
-------------------- -------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic EPS--weighted-average number of
common shares outstanding............... 44,645 44,537 44,667 44,540 45,060
Effect of dilutive common equivalent
shares:
Stock options outstanding............... 251 466 1,157 977 1,805
Stock issued in acquisition subject to
put arrangement........................ -- -- -- -- 167
------ ------ ------ ------ ------
Diluted EPS--weighted-average number of
common shares and common equivalent
shares outstanding...................... 44,896 45,003 45,824 45,517 47,032
====== ====== ====== ====== ======
</TABLE>
F-9
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, convertible preferred stock and common stock granted for nominal
consideration prior to the anticipated effective date of an initial public
offering (IPO) must be included in the calculation of basic and diluted net
income per share as if they had been outstanding for all periods presented.
To date, the Company has not had any issuances or grants for nominal
consideration.
(n) Stock-Based Compensation
The Company uses the intrinsic-value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock-
Issued to Employees, to account for employee stock-based compensation.
Accordingly, compensation cost is recorded on the date of grant to the
extent the fair value of the underlying share of common stock exceeds the
exercise price for a stock option or the purchase price for a share of
common stock. During 1999, the Company issued stock options to employees
which were subsequently determined to have been issued below the fair value
of the stock on the date of grant. The compensation cost associated with
1999 stock options is amortized as a charge against income on a straight-
line basis over four years vesting period of the options. The Company has
allocated the amortization of deferred stock-based compensation to the
departments in which the related employee's services are charged. Pursuant
to Statement of Financial Accounting Standards (SFAS) No. 123, the Company
discloses the pro forma effect of using the fair value method of accounting
for employee stock-based compensation arrangements.
(o) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the period. Accordingly, actual results could differ from those
estimates.
(p) Foreign Currency Translation
The functional currency for the Company's foreign subsidiary located in
Taiwan is the U.S. dollar. Accordingly, the Company remeasures monetary
assets and liabilities of this foreign subsidiary at year-end exchange
rates while nonmonetary items are remeasured at historical rates. Income
and expense accounts are remeasured at the average rates in effect during
the year, except for depreciation which is remeasured at historical rates.
Remeasurement adjustments and transaction gains and losses are recognized
in income in the year of occurrence.
The functional currency for the Company's foreign subsidiary located in
Italy is the local currency. Accordingly, the Company applies the current
exchange rate to translate the subsidiary's assets and liabilities and the
weighted average exchange rate to translate the subsidiary's revenues,
expenses, gains and losses into U.S. dollars. Translation adjustments are
included as a separate component of comprehensive income within
stockholders' equity in the accompanying consolidated financial statements.
(q) Other Comprehensive Income
Comprehensive income comprises net income and other comprehensive
income. Other comprehensive income includes certain changes in equity of
the Company that are excluded from net income, including foreign currency
translation adjustments.
F-10
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(r) Advertising Expense
The cost of advertising is expensed as incurred. Such costs are included
in selling and marketing expense and totaled approximately $743,000,
$848,000, and $1,023,000 during the years ended December 31, 1997, 1998,
and 1999, respectively, and approximately $263,000 and $341,000 for the
three months ended March 31, 1999 and 2000 (unaudited).
(s) Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Interments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards, requiring that
every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133, as recently
amended, is effective for fiscal years beginning after June 30, 2000.
Management believes the adoption of SFAS No. 133 will not have a material
effect on the Company's financial position or results of operations.
(t)Unaudited Balances
The accompanying unaudited financial statements for the three months
ended March 31, 1999 and 2000 include all adjustments (consisting of only
normal recurring adjustments) that management considers necessary for a
fair presentation of the financial position and results of operations as of
the date and for the periods indicated.
(2) Related Party Transactions
One of the significant stockholders of the Company is also the owner of
Telecom Research Center. During 1997, 1998, and 1999, the Company purchased
equipment used in its manufacturing process totaling $81,000, $84,000, and
$58,000, respectively, from Telecom Research Center. As of December 31, 1997,
1998, and 1999, there were no accounts payable due to Telecom Research Center.
The terms of these transactions were similar to those of unrelated parties.
During 1999, the Company issued an employee a promissory note in an aggregate
principal amount of $50,000. The note bears interest at 7.75% per annum and is
payable monthly with the final payment due in December 2004. As of December 31,
1999, the outstanding balance totaled $44,034.
(3) Financial Statement Details
Inventories
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
------------- -----------
1998 1999 2000
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Raw material.......................................... $1,530 $2,553 $ 6,333
Work in process....................................... 940 2,704 3,533
Finished goods........................................ 444 2,355 1,440
------ ------ -------
$2,914 $7,612 $11,306
====== ====== =======
</TABLE>
F-11
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
------------- -----------
1998 1999 2000
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Equipment............................................ $3,881 $6,352 $8,067
Furniture and fixtures............................... 419 494 208
Leasehold improvements............................... 150 171 618
------ ------ ------
4,450 7,017 8,893
Less accumulated depreciation and amortization....... 1,651 2,600 2,977
------ ------ ------
$2,799 $4,417 $5,916
====== ====== ======
Other Accrued Expenses
Other accrued expenses consisted of the following (in thousands):
<CAPTION>
December 31, March 31,
------------- -----------
1998 1999 2000
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Sales tax payable.................................... $ 43 $ 857 $ 815
Accrued warranty..................................... 174 733 774
Other accrued expenses............................... 189 508 712
------ ------ ------
$ 406 $2,098 $2,301
====== ====== ======
</TABLE>
(4) Valuation and Qualifying Accounts
A summary of valuation and qualifying accounts are as follows (in thousands):
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts:
1997.............................. $ -- $ 32 $11 $ 21
1998.............................. 21 202 3 220
1999.............................. 220 32 -- 252
</TABLE>
(5) Minority Investment
During 1998 the Company acquired 1,666,667 shares (approximately 16.4%) of
the common stock of Top Union Electronics (Top Union), a Taiwan R.O.C.
corporation, for a purchase price of $606,612. Top Union is a subcontractor
manufacturer utilized by the Company for the manufacture of certain products.
During 1999, the Company invested an additional $39,000 in Top Union as part of
one of two external rounds of third-party financing obtained by Top Union. This
investment by the Company was less than 16.4% of the total financing raised by
Top Union and, thus, diluted the Company's ownership of Top Union to 14.6%. The
Company accounts for this investment using the cost method of accounting.
During the years ended December 31, 1998 and 1999, the Company purchased
$26,406 and $94,227, respectively, in product from Top Union. As of December
31, 1998 and 1999, the Company had $0 and $36,484, respectively, in
F-12
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounts payable to Top Union. The Company evaluates the fair value of its
investment based on the valuation associated with third party external rounds
of financing. To date no impairment charges have been recognized.
(6) Other Assets and Commitments
Other assets as of December 31, 1999 and March 31, 2000 (unaudited) consisted
principally of a $2,675,000 deposit for the Company's new facility, currently
under construction, which is estimated to be completed in late 2000. The total
cost of the new facility is estimated to be $17,000,000.
(7) Notes Payable and Line of Credit
In connection with the acquisition of Hukk Engineering ("Hukk"), the Company
issued two notes payable, a $450,000 note related to a noncompete agreement due
in quarterly installments of $28,125 through October 2004, and a $450,000 note
due in quarterly installments through October 2004 bearing interest at a rate
of prime plus 2.5%.
In connection with the acquisition of Pro.Tel, the Company issued a $500,000
note related to a non-compete agreement due in quarterly installments of
$31,250 through March 2004. The Company also issued a $100,000 note payable,
related to the Pro.Tel USA acquisition, which is due in May 2000.
The remaining borrowings consisted of borrowings from various Italian
financial institutions, which bear interest at variable rates, ranging from
6.0% to 6.75% at March 31, 2000, based on the ABI prime rate. At March 31,
2000, $77,000 (unaudited) had been drawn down under these facilities.
Generally, these foreign credit lines do not require commitment fees or
compensating balances and are cancelable at the option of the Company or the
financial institutions.
The Company has a $3,000,000 revolving line of credit with a financial
institution that expires on October 1, 2000, bearing interest at the bank's
prime rate (8.5% as of December 31, 1999). The agreement, which is
collateralized by the receivables and inventories of the Company, contains
certain financial covenants and restrictions. As of December 31, 1998 and 1999
and March 31, 2000 (unaudited), there were no balances outstanding under the
line of credit.
(8) Leases
The Company leases its facilities under operating lease agreements, expiring
January 2001 and August 2004. The leases require the Company to pay property
taxes and normal maintenance. Future minimum lease payments, under these
agreements, as of December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000................................................................ $ 639
2001................................................................ 764
2002................................................................ 893
2003................................................................ 928
Thereafter.......................................................... 783
------
$4,007
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998, 1999 and for the
three months ended March 31, 1999 and 2000 (unaudited), was approximately
$405,000, $415,000, $511,000, $114,000 and $125,000, respectively.
F-13
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company intends to sublease its current facility upon the completion of
its new facility.
(9) Capital Stock
Common Stock
In January 1997, the Company's Board of Directors approved the increase of
the authorized common stock to 100,000,000 shares and approved a five-for-one
stock split of its common stock. All share amounts in the accompanying
consolidated financial statements have been retroactively adjusted to reflect
the stock split.
The Company established a program of repurchasing common stock in order to
offer liquidity to its stockholders. Repurchases are offered based on
valuations performed by the Company of the fair value of its stock at the time
of repurchase. During 1997, 1998, and 1999, the Company repurchased
approximately 298,000, 135,000, and 135,000 shares of common stock,
respectively, for $325,000, $195,000, and $202,000, respectively.
Stock Issued in Acquisition Subject to Put Agreement
On February 22, 2000, the Company issued 500,001 shares of its common stock
to the former Pro.Tel shareholders as part of the total purchase price for
Pro.Tel (see Note 11. Acquisitions) and granted those shareholders the right to
"put" their shares back to the Company for cash at $10.00 per share on May 22,
2000. If all of the former Pro.Tel shareholders elect to sell their shares back
to the Company, it will be required to pay them $5.0 million in cash.
(10) Stock Option Plan
Under the terms of the 1993 Employee Stock Option Plan (the Option Plan), the
Company's Board of Directors may grant options to directors, officers, and
employees of the Company to purchase not more than an aggregate of 5,250,000
shares of the Company's common stock.
Options may be granted as incentive stock options or nonstatutory stock
options at the fair market value of such shares on the date of grant as
determined by the Board of Directors. Options granted prior to 1996 expire 5
years from the date of grant and are exercisable in 3 equal annual installments
commencing 1 year from the date of grant. Upon termination of employment, the
optionee may exercise any such vested options within 30 days of termination.
Options granted subsequent to 1996 vest over a 4-year period, and expire at the
end of 10 years from the date of grant, or sooner, if terminated by the Board
of Directors.
The options include a provision whereby the option holder may elect at any
time to exercise the option prior to the full vesting of the option. Unvested
shares so purchased are subject to a repurchase right by the Company at the
original purchase price. Such right shall lapse at a rate equivalent to the
vesting period of the original option. As of December 31, 1997, 1998, 1999 and
March 31, 2000 (unaudited), shares issued and subject to repurchase were 9,000,
6,750, 25,161 and 80,025, respectively.
F-14
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
December 31, Three Months Ended
-------------------------------------------------------------- March 31, 2000
1997 1998 1999 (unaudited)
-------------------- -------------------- -------------------- --------------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Number of Price Per Number of Price Per Number of Price Per Number of Price Per
Options Share Options Share Options Share Options Share
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 478,755 $0.51 1,290,360 $0.91 1,811,145 $1.09 2,453,100 $ 1.46
Granted at market
value.................. 925,500 1.10 663,000 1.43 -- -- 805,998 10.00
Granted at less than
market value........... -- -- -- -- 1,079,100 1.88 -- --
Exercised............... (46,395) 0.39 (38,715) 0.55 (229,095) 0.77 (365,400) 1.01
Canceled................ (67,500) 1.10 (103,500) 1.20 (208,050) 1.14 (97,500) 1.40
--------- --------- --------- ---------
Options at end of
period................. 1,290,360 0.91 1,811,145 1.09 2,453,100 1.46 2,796,198 3.99
========= ========= ========= =========
Weighted-average fair
value of options
granted during the
period with exercise
prices at fair value... $0.11 $0.14 $ -- $ 2.29
===== ===== ===== ======
Weighted-average fair
value of options
granted during the
period with exercise
prices less than market
value at date of
grant.................. $ -- $ -- $2.58 $ --
===== ===== ===== ======
</TABLE>
Information regarding the stock options outstanding as of December 31, 1999,
is summarized in the table below.
<TABLE>
<CAPTION>
Options outstanding Vested Options
--------------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Shares Contractual Exercise Vested Exercise
Prices Outstanding Life (years) Price shares Price
-------- ----------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.25 33,750 5.22 $0.25 33,750 $0.25
0.60 150,000 6.29 0.60 112,500 0.60
1.10-1.50 1,679,250 8.23 1.32 473,625 1.20
2.17 590,100 9.78 2.17 -- 2.17
--------- -------
2,453,100 619,875
========= =======
</TABLE>
The Company uses the intrinsic-value based method to account for its
employees stock-based compensation plan. For options granted in 1997 and 1998,
no compensation cost has been recognized in the accompanying consolidated
financial statements for options granted under this plan as the exercise price
of each option equaled or exceeded the fair value of the underlying common
stock as of the grant date. With respect to options granted in 1999, the
Company has recorded unearned stock-based compensation of approximately
$2,270,000 for the difference at the grant date between the exercise price and
the fair value.
F-15
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The deferred compensation represents the aggregate difference, at the date of
grant, between the respective exercise price of stock options and the estimated
fair value of the underlying common stock. The total unearned stock-based
compensation recorded for all option grants through December 31, 1999, will be
amortized as follows for the years ending December 31: 2000, $567,000; 2001,
$567,000; 2002, $567,000; and 2003, $364,000. The amount of deferred stock
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
If compensation for the Company's stock-based compensation plans had been
determined in a manner consistent with the fair value approach described in
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income
and net income per share, as reported, would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December
31,
---------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Net income applicable to common stock:
As reported......................................... $4,456 $3,371 $10,944
Adjusted pro forma.................................. 4,425 3,318 10,883
Basic net income per share:
As reported......................................... 0.10 0.08 0.25
Adjusted pro forma.................................. 0.10 0.07 0.24
Diluted net income per share:
As reported......................................... 0.10 0.07 0.24
Adjusted pro forma.................................. 0.10 0.07 0.24
</TABLE>
The provisions of SFAS No. 123 are effective for options granted beginning
January 1, 1996. Options vest over several years and new options are generally
granted each year. Because of these factors, the pro forma effect shown above
may not be representative of the pro forma effect of SFAS No. 123 in future
years.
For the purposes of computing pro forma net income, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model. The assumptions used to value the option grant are as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Dividend yield....................................... 2.60% 2.60% None
Expected term........................................ 4 years 4 years 4 years
Risk-free interest rate.............................. 5.45% 5.45% 5.66%
Volatility rate...................................... None None None
</TABLE>
(11) Acquisitions
Hukk
In July 1999, the Company acquired all of the outstanding shares of stock of
Hukk, a developer of cable TV service verification equipment. The Company paid
approximately $800,000 in cash and acquisition costs,
F-16
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$900,000 in notes payable, and 300,000 shares of the Company's common stock
valued at $1,000,000 based on an independent valuation. The transaction has
been accounted for under the purchase method. The results of Hukk and the
estimated fair value of assets acquired and liabilities assumed are included in
the Company's financial statements from the date of acquisition. In connection
with the Hukk acquisition, the purchase price has been allocated to the assets
and liabilities assumed based upon fair values on the date of acquisition, as
follows (in thousands):
<TABLE>
<S> <C>
Current assets...................................................... $ 349
Property and equipment, net......................................... 65
Intangibles and goodwill associated with acquisition................ 2,495
Current liabilities................................................. (209)
-------
$ 2,700
=======
</TABLE>
Intangibles include the fair value of technology and noncompete agreements
with resulting excess purchase price allocated to goodwill. The Company
amortizes such intangibles on a straight-line basis over four to five years
based on expected lives of technologies, noncompete agreements, and goodwill.
If the identified technologies are not successfully developed, the Company may
not utilize the value assigned to intangible assets.
Pro.Tel
On February 22, 2000, the Company acquired all the outstanding shares of
Pro.Tel. Srl and subsidiaries, an Italian manufacturer of distributed network
signal analysis equipment. The Company paid $4,100,000 in cash and acquisition
costs, a note payable related to a non-compete agreement for $500,000, payable
over four years, and 500,001 contingently issuable shares of the Company's
stock valued at $5,000,000. The 500,001 shares of stock in Sunrise were granted
to the former Pro.Tel shareholders with the right to "put" their Sunrise stock
to the Company for cash on May 22, 2000 for $10.00 per share. The "put" feature
represents, in effect, a guarantee of purchase price, which was used in
conjunction with both a discounted cashflow and market-based valuations in
determining the valuation of the shares issued in connection with the
acquisition.
The transaction has been accounted for under the purchase method. The results
of Pro.Tel and the estimated fair value of assets acquired and liabilities
assumed are included in the Company's financial statements from the date of
acquisition. In connection with the Pro.Tel acquisition, the purchase price has
been allocated to the assets and liabilities assumed based upon fair values on
the date of acquisition, as follows (in thousands, unaudited):
<TABLE>
<S> <C> <C>
Current assets................................................ $1,068
Property and equipment, net................................... 177
Intangible assets:
Developed technology........................................ $4,365
Acquired workforce.......................................... 108
Non-compete covenant........................................ 500
Goodwill.................................................... 4,367
------
Total intangible assets..................................... 9,340
Other long term assets........................................ 29
Current liabilities........................................... (998)
------
$9,616
======
</TABLE>
F-17
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company amortizes such intangibles on a straight-line basis over two to
five years based on expected lives of technologies, non-compete agreements,
acquired workforce and goodwill. If the identified technologies are not
successfully developed, the Company may not utilize the value assigned to
intangible assets.
Pro.Tel USA
On February 4, 2000, the Company acquired all of the assets of Pro.Tel USA
for $400,000 cash and a $100,000 note repayable in May 2000. The transaction
has been accounted for under the purchase method. The results of this acquired
entity are included from the date of acquisition and are not material to the
Company's results of operations.
The following summary prepared on an unaudited pro forma basis reflects the
condensed consolidated results of operations for the years ended December 31,
1998 and 1999, assuming Hukk had been acquired at the beginning of the periods
presented (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
<S> <C> <C>
Net revenues................................................ $31,511 $61,823
Net income.................................................. $ 3,393 $10,185
Basic net income per share.................................. $ 0.08 $ 0.23
Shares used in pro forma per share computation.............. 44,838 44,967
</TABLE>
The following summary prepared on an unaudited pro forma basis reflects the
condensed consolidated results of operations for the three months ended March
31, 2000, assuming Hukk and Pro.Tel had been acquired at the beginning of the
period presented (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, 1999 March 31, 2000
----------------- --------------
(unaudited)
<S> <C> <C>
Net revenues.............................. $63,716 $20,035
Net income................................ $ 7,885 $ 2,213
Basic net income per share................ $ 0.17 $ 0.05
Shares used in pro forma per share
computation.............................. 45,317 45,560
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect the synergies that might be achieved from combined operations.
(12) 401(k) Plan
In 1996, the Company adopted a 401(k) Plan (the Plan). Participation in the
Plan is available to all full-time employees. Each participant may elect to
contribute up to 15% of his or her annual salary, but not to exceed the
statutory limit as prescribed by the Internal Revenue Code. The Company may
make discretionary contributions to the Plan. These contributions vest annually
over seven years. Contributions to the Plan of $-0-, $290,638, and $746,954
were made by the Company in 1997, 1998, and 1999, respectively.
F-18
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Income Taxes
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Current:
Federal........................................... $1,981 $1,506 $ 6,394
State............................................. 258 83 952
------ ------ -------
2,239 1,589 7,346
------ ------ -------
Deferred expense (benefit):
Federal........................................... (297) 16 (960)
State............................................. (43) (17) (95)
------ ------ -------
(340) (1) (1,055)
------ ------ -------
$1,899 $1,588 $ 6,291
====== ====== =======
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to pretax income as a result of the following
(in thousands):
<CAPTION>
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Computed "expected" tax............................. $2,224 $1,736 $ 6,032
State taxes, net of federal income tax benefit...... 140 44 557
Foreign sales corporation benefit................... (157) (188) (109)
Research credit..................................... (313) (366) (480)
Nondeductible expenses.............................. 5 362 291
------ ------ -------
$1,899 $1,588 $ 6,291
====== ====== =======
</TABLE>
The types of temporary differences that give rise to significant portions of
the Company's deferred tax assets and liabilities are set out below (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and additional costs capitalized........ $ 118 $ 156
Accrued compensation and vacation.......................... 342 528
Allowance for doubtful accounts............................ 91 108
Other accruals and reserves................................ 317 622
Net operating losses and start-up costs.................... 291 304
Tax credits................................................ -- 240
State income taxes......................................... 28 332
------ ------
Total gross deferred tax assets.............................. 1,187 2,290
------ ------
Deferred tax liabilities:
Property and equipment..................................... (272) (313)
Unrealized exchange gains.................................. (57) (30)
Federal tax cost of net state deferred assets.............. (35) (69)
------ ------
Total deferred tax liabilities............................... (364) (412)
------ ------
Net deferred tax assets...................................... $ 823 $1,878
====== ======
</TABLE>
F-19
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based on the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of such
deferred assets.
(14) Segment Information
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, establishes standards for the manner in which public companies
report information about operating segments, products, services, geographic
areas, and major customers in annual and interim financial statements. The
method of determining what information to report is based on the way that
management organizes the operating segments within the enterprise for making
operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information
about revenue by geographic region for purposes of making operating decisions
and assessing financial performance. The consolidated financial information
reviewed by the CEO is the same as the information presented in the
accompanying consolidated statements of operations. In addition, as the
Company's assets are primarily located in its corporate offices in the United
States and not allocated to any specific segment, the Company does not produce
reports for or measures the performance of its segments based on any asset-
based metrics. Therefore, the Company operates in a single operating segment
the design, manufacture, and sale of digital test equipment for
telecommunications, transmission, and signaling applications.
Revenue information regarding operations in the different geographic regions
is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Years Ended December Ended March
31, 31,
----------------------- --------------
1997 1998 1999 1999 2000
------- ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
North America......................... $15,699 $17,028 $50,168 $5,635 $15,755
Europe................................ 4,840 4,684 4,364 948 1,919
Asia/Pacific.......................... 6,794 5,668 5,742 1,261 1,570
Latin America......................... 1,731 1,155 1,191 246 547
------- ------- ------- ------ -------
Consolidated.......................... $29,064 $28,535 $61,465 $8,090 $19,791
======= ======= ======= ====== =======
</TABLE>
Revenue information by product category is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Years Ended Ended
December 31, March 31,
----------------------- --------------
1997 1998 1999 1999 2000
------- ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Digital Subscriber Line ............ $29,064 $28,535 $59,895 $8,090 $17,945
Cable TV ........................... -- -- 1,334 -- 10
Fiber Optics........................ -- -- 236 -- 1,284
Signaling........................... -- -- -- -- 552
------- ------- ------- ------ -------
$29,064 $28,535 $61,465 $8,090 $19,791
======= ======= ======= ====== =======
</TABLE>
F-20
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Subsequent Events
(a) Recapitalization
On March 7, 2000, the Board of Directors authorized the filing of a
registration statement with the SEC that would permit the Company to sell
shares of the Company's common stock in connection with a proposed
initial public offering. On April 5, 2000, the Company's Board of
Directors approved the reincorporation of the Company into Delaware
effecting the authorization of 175,000,000 shares of $0.001 par value per
share common stock and 10,000,000 shares of $0.001 par value preferred
stock. The Company's stockholders approved the reincorporation on April
22, 2000. The reincorporation will be effective upon the Company's
initial public offering. The Board of Directors also authorized a three-
for-one stock split of its common stock and the change of the name of the
company to Sunrise Telecom Incorporated. The consolidated financial
statements have been adjusted to give effect to the recapitalization.
(b) 2000 Employee Stock Purchase Plan
In April 2000, the Company's Board of Directors approved the adoption of
the 2000 Employee Stock Purchase Plan (the "Purchase Plan") and reserved
600,000 shares of common stock for issuance thereunder. The Purchase Plan
will be effective upon the Company's initial public offering. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions of up to 15% of the employee's total base
compensation, not to exceed $25,000 in any plan year, excluding bonuses,
commissions and overtime at a price equal to 85% of the lower of the fair
market value of the common stock on the first day of the offering period
or on the last day of the purchase period.
(c) 2000 Stock Plan
In April 2000, the Company's Board of Directors approved the adoption of
the 2000 Stock Plan (the "Stock Plan.") The Stock Plan will become
effective upon the Company's initial public offering. The total number of
shares reserved for issuance under the stock plan equals 3,750,000 shares
of common stock plus the number of shares that remain reserved for
issuance under the 1993 stock option plan as of the date the stock plan
becomes effective. All outstanding options under the 1993 stock option
plan will be administered under the 2000 Stock Plan but will continue to
be governed by their existing terms.
(d) Line of Credit
In April 2000, the Company increased their available line of credit from
$3 million to $9 million. The line of credit now expires on May 1, 2001
and continues to be collateralized by the receivables and inventories of
the Company.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Quotaholders of Pro.Tel. Srl
We have audited the accompanying consolidated balance sheets of Pro.Tel. Srl
and its subsidiary as of December 31, 1998 and 1999 and the related
consolidated statements of operations, quotaholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1999. These
financial statements are the responsibility of the management of Pro.Tel. Srl.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the Republic of Italy, which standards are substantially similar in
all material respects to generally accepted auditing standards in the United
States of America. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pro.Tel.
Srl and its subsidiary as of December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the Republic of Italy.
Accounting principles established or adopted by Italian law and the Italian
Accounting Profession, as described in note 1, vary in certain significant
respects from generally accepted accounting principles in the United States of
America. Application of generally accepted accounting principles in the United
States of America would have affected the results of operations for each of the
years in the two-year period ended December 31, 1999 and quotaholders' equity
as of December 31, 1998 and 1999 to the extent summarized in note 26 to the
consolidated financial statements.
/KPMG S.p.A./
Bologna, Italy
February 18, 2000
F-22
<PAGE>
PRO. TEL SRL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(expressed in thousands of Italian Lire and US Dollars)
<TABLE>
<CAPTION>
December 31,
---------------------------------
Note 1998 1999 1999
---- --------- --------- -----------
(L'000) (L'000) ($)
ASSETS (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash.................................. 3 55,032 186,885 97,194
Trade receivables, net................ 4 1,344,629 1,328,145 690,731
Inventories........................... 5 134,050 483,643 251,529
Other current assets.................. 6 77,972 55,773 29,006
--------- --------- ---------
Total current assets.................... 1,611,683 2,054,446 1,068,460
Non current assets:
Plant and equipment................... 326,550 528,466 274,840
Less accumulated depreciation......... (109,361) (187,209) (97,362)
--------- --------- ---------
Plant and equipment, net............ 7 217,189 341,257 177,478
Intangible assets, net................ 8 50,773 31,052 16,149
Other long term assets................ 9 32,531 54,980 28,594
--------- --------- ---------
Total assets............................ 1,912,176 2,481,735 1,290,681
========= ========= =========
<CAPTION>
LIABILITIES AND QUOTAHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Short-term bank borrowings............ 10 85,204 474,966 247,017
Current portion of long-term debt..... 10 145,895 80,152 41,685
Accounts payable--trade............... 11 817,973 957,642 498,043
Accrued expenses and other current
liabilities.......................... 12 159,850 192,264 99,991
Income and other taxes payable........ 13 111,382 97,786 50,856
--------- --------- ---------
Total current liabilities............... 1,320,304 1,802,810 937,592
Long term liabilities:
Long-term debt........................ 107,197 27,047 14,066
Employees' leaving entitlements....... 10 51,103 84,975 44,193
Deferred income taxes................. 14 -- 35,268 18,342
--------- --------- ---------
Total long term liabilities............. 13 158,300 147,290 76,601
--------- --------- ---------
Total liabilities....................... 1,478,604 1,950,100 1,014,193
Quotaholders' equity
Quota capital......................... 15 500,000 500,000 260,036
Retained earnings/(deficit)........... (66,428) 31,635 16,452
--------- --------- ---------
Total quotaholders' equity.............. 433,572 531,635 276,488
--------- --------- ---------
Total liabilities and quotaholders'
equity................................. 1,912,176 2,481,735 1,290,681
========= ========= =========
Commitments and contingent liabilities.. 16 77,404 18,993 9,878
========= ========= =========
</TABLE>
Exchange rate used for the convenience translation of the December 31, 1999
balances is Italian Lire 1,922.810327 to $1.00.
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
PRO.TEL. SRL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in thousands of Italian Lire and US Dollars)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
Note 1998 1999 1999
---- ---------- ---------- -----------
(L'000) (L'000) ($)
(unaudited)
<S> <C> <C> <C> <C>
Net sales............................ 17 2,709,880 3,639,354 1,892,726
Cost of goods sold................... 18 (1,794,743) (2,591,093) (1,347,555)
---------- ---------- ----------
Gross profit....................... 915,137 1,048,261 545,171
Selling, general and administrative
expenses............................ 19 (900,172) (1,016,955) (528,890)
---------- ---------- ----------
Operating income................... 14,965 31,306 16,281
Interest income...................... 20 3,995 4,137 2,152
Interest expense..................... 20 (35,614) (43,628) (22,690)
Foreign exchange gain, net........... 21 9,262 42,818 22,268
Other non operating
income/(expense):................... 22
Grant revenue...................... -- 217,706 113,223
Other income/(expense)............. 7,558 (13,614) (7,080)
---------- ---------- ----------
Profit before income taxes......... 166 238,725 124,154
Income taxes......................... 23 (55,580) (140,662) (73,154)
---------- ---------- ----------
Net profit/(loss).................. (55,414) 98,063 51,000
========== ========== ==========
</TABLE>
Exchange rate used for the convenience translation of the December 31, 1999
balances is Italian Lire 1,922.810327 to $1.00.
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
PRO.TEL. SRL AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF QUOTAHOLDERS' EQUITY
(expressed in thousands of Italian Lire)
<TABLE>
<CAPTION>
Retained Total
Quota earning/ quotaholders'
capital (deficit) equity
------- --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1998 of Pro.Tel. Srl.... 100,000 (3,749) 96,251
Balance at January 1, 1998 of Tel.Mark. Srl... 60,000 (7,265) 52,735
------- ------- -------
Combined balance.............................. 160,000 (11,014) 148,986
Acquisition of Tel. Mark. Srl............... (60,000) -- (60,000)
Capital increase............................ 400,000 -- 400,000
Net loss for the year....................... -- (55,414) (55,414)
------- ------- -------
Consolidated balance at December 31, 1998..... 500,000 (66,428) 433,572
Net profit for the year..................... -- 98,063 98,063
------- ------- -------
Consolidated balance at December 31, 1999..... 500,000 31,635 531,635
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
PRO.TEL. SRL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in thousands of Italian Lire and US Dollars)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1999 1999
---------- -------- -----------
(L'000) (L'000) ($)
(unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net profit/(loss)........... (55,414) 98,063 51,000
Adjustments to reconcile net
profit/(loss) to net cash
provided by/(used in)
operating activities:
Amortization of intangible
assets.................... 20,907 21,283 11,069
Depreciation of plant and
equipment................. 43,087 77,735 40,428
Employees' leaving
entitlement (charge for
the year)................. 37,285 53,236 27,687
Deferred income taxes...... -- 49,312 25,646
Other...................... -- 122 63
Changes in operating assets
and liabilities:
Trade receivables.......... (1,085,356) 16,484 8,573
Inventories................ (87,674) (349,593) (181,814)
Other current assets....... (71,665) 22,199 11,545
Other long-term assets..... (20,631) (22,449) (11,675)
Accounts payable--trade.... 689,298 139,669 72,638
Accrued expenses and other
liabilities............... 110,917 32,414 16,858
Income and other taxes
payable................... 48,629 (27,640) (14,375)
Employees' leaving
entitlement (payments)....... (5,364) (19,364) (10,071)
---------- -------- --------
Net cash provided by/(used
in) operating activities.... (375,981) 91,471 47,572
---------- -------- --------
Cash flows from investing
activities:
Purchases of plant and
equipment................. (63,005) (201,925) (105,016)
Purchases of intangible
assets.................... (4,968) (1,562) (812)
Acquisition of Tel.Mark.
Srl....................... (60,000) -- --
---------- -------- --------
Net cash (used in) investing
activities.................. (127,973) (203,487) (105,828)
---------- -------- --------
Cash flows from financing
activities:
Movements in bank
borrowings:
Proceeds from additional
term debt................. 50,000 -- --
Repayments of term debt.... (129,095) (145,893) (75,875)
Net borrowing under short-
term facilities........... 85,204 389,762 202,704
Increase of quota capital... 400,000 -- --
---------- -------- --------
Net cash provided by
financing activities........ 406,109 243,869 126,829
---------- -------- --------
Net increase/(decrease) in
cash........................ (97,845) 131,853 68,573
Cash at beginning of period.. 152,877 55,032 28,621
---------- -------- --------
Cash at end of period........ 55,032 186,885 97,194
========== ======== ========
</TABLE>
Exchange rate used for the convenience translation of the December 31, 1999
balances is Italian Lire 1,922.810327 to $1.00.
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies
Pro.Tel. Srl (hereafter "Pro.Tel.' or the "Company') was incorporated on July
24, 1996 with a quota capital of L100,000 thousand and is registered in Italy
with limited liability and is regulated by Italian law.
On June 25, 1998 Pro.Tel. purchased 100% of the quota capital of Tel.Mark.
Srl (hereafter "Tel.Mark.') from certain quotaholders of Pro.Tel.. Tel.Mark. is
registered in Italy with limited liability and is regulated by Italian law.
The Extraordinary General Meeting of the quotaholders on June 25, 1998
increased the quota capital of the Company from L100,000 thousand to L500,000
thousand.
Pro.Tel. is a full service telecommunication engineering consulting and
manufacturing company and provides hardware, firmware and software design. In
particular Pro.Tel. is a worldwide company designing both test and network
equipment for the data and telecommunications industry and prototyping products
for the Information Communication market. The volume of sales became
significant at the end of 1998.
Tel.Mark. supplies administrative services, office space, technical
assistance and specific advice concerning data and telecommunication networks
primarily to Pro.Tel. The annual remuneration for these activities provided to
Pro.Tel. is L360 million for the period from October 1, 1999 to October 1,
2000.
The offices and the production site of Pro.Tel. and its subsidiary (hereafter
the "Group') are located in Vaciglio Modena, Italy.
The By-laws of Pro.Tel. and Tel.Mark. contain specific clauses restricting
the transfer or sale of the companies' quota to third parties. In the event of
such a sale or transfer, the existing quotaholders have the right of first
refusal. Otherwise, such a transaction would be subject to the approval of the
majority of the existing quotaholders.
A summary of the significant accounting policies followed by the Group is set
out below:
Principles of preparation and consolidation
The consolidated financial statements of the Company have been prepared for
distribution to its quotaholders in conformity with accounting standards issued
by the "Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri'
(National Boards of Public Accountants in Italy) which include those
established or adopted by the Italian Civil Code, and where these are not
exhaustive, with standards issued by the International Accounting Standard
Committee (I.A.S.C.). Hereafter these have been identified as "Italian GAAP'.
Italian GAAP differ in certain respects from generally accepted accounting
principles in the United States of America ("US GAAP'). A description of these
differences and their effects on net profit/(loss) and quotaholders' equity is
set forth in note 26. The consolidated financial statements have been
reformatted from the original Italian statutory financial statement
presentation to conform more closely with international presentation and
include certain additional disclosures required by the US Securities and
Exchange Commission ("the SEC').
The consolidated financial statements for the years ended December 31, 1998
and 1999, have been prepared on the basis of statutory accounts of Pro.Tel. Srl
and its subsidiary Tel.Mark. Srl. The statutory accounts of the two companies
for the year ended December 31, 1999 have not yet been approved by the Board of
Directors and the Quotaholders' Meeting. The consolidated financial statements
for the years ended December 31, 1998 and 1999 have been approved by the Board
of Directors during the meeting held on February 17, 2000.
F-27
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All significant intercompany balances and transactions have been eliminated
in consolidation.
As noted above, the company acquired 100% of the quota capital of Tel.Mark.
on June 25, 1998 for L60 million. The majority of the quotaholders of Tel.Mark.
were also quotaholders of Pro.Tel. as of January 1, 1998 and the date of
acquisition. Therefore, for purposes of these consolidated financial
statements, the financial position and results of operations of Tel.Mark. prior
to the acquisition date have been combined with Pro.Tel. as of January 1, 1998,
the earliest period presented. No goodwill was recorded as a result of this
transaction.
Cash and bank borrowings
Cash and bank borrowings are stated at nominal value and include accrued
interest.
Accounts receivable and payable
Receivables are stated at nominal value net of an allowance for doubtful
accounts. Payables are stated at face value.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost
is determined using the average purchase cost method.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are expensed as incurred; significant improvements are
capitalized and depreciated over the useful lives of the related assets.
Depreciation is calculated on the straight-line method over the estimated
useful lives of the assets. The following table summarizes the annual
depreciation rates of the Group's plant and equipment:
<TABLE>
<CAPTION>
Annual
rate
------
<S> <C>
Plant and machinery................................................ 12-30%
Industrial and sales tooling/equipment............................. 15-30%
Other.............................................................. 10-25%
</TABLE>
Assets acquired during the year are depreciated at half the annual rate in
order to take into account the average period of utilization thereof.
Assets acquired with a unit cost less than L1 million are charged to the
profit and loss account given their limited estimated useful life.
Assets acquired under capital leases are treated in the same manner as
operating leases, with the purchase of the asset being recorded at the price
paid to acquire title at the end of the lease term.
F-28
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets
Intangible assets are carried at the purchase price and are amortized on the
straight-line method over the estimated useful lives of the assets. The
following table summarizes the estimated useful lives of the Group's intangible
assets:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Incorporation and expansion costs................................... 5
Research and development costs on specific development projects..... 5
Software............................................................ 5
</TABLE>
In addition to the above, intangible assets include leasehold improvements
which are amortized on a straight-line basis over the shorter of the lease term
or estimated life of the asset.
Research and development costs, comprising principally external consultants
employed in that activity, are capitalized as an intangible asset for specific
development projects. The amortization is allocated to cost of goods sold' and
selling, general and administrative expenses' based on their useful life. The
total amount capitalized was L51,506 thousand all of which related to expenses
incurred prior to December 31, 1997. No such costs have been incurred or
capitalized in the years ended December 31, 1998 and 1999 as there have been no
specific development projects that could be capitalized in conformity with
accounting principles generally accepted in the Republic of Italy. All research
and development costs have been expensed as incurred in 1998 and 1999.
Management periodically assesses the recoverability of intangible assets and,
in cases where such an asset is deemed to have no remaining useful economic
life, the carrying value of the asset is written off in full.
Advertising costs
Advertising costs are expensed as incurred.
Income taxes
Current income tax payable by each of the two individual companies included
in the consolidation is calculated according to the tax regulations in force in
Italy and is classified net of the advances paid or withholdings sustained
under "income and other taxes payable'. If the net amount is a debit balance,
it is classified under "other current assets'. In addition, a provision is made
for deferred tax liabilities of the two individual companies, as well as those
deriving from consolidation adjustments, net of deferred tax assets, if any,
where realization of the benefit is considered reasonably certain on the basis
of the Group's forecasted performance.
Deferred income taxes are calculated at the relevant tax rates in force in
Italy at the balance sheet date and are reviewed annually to reflect changes in
the economic circumstances of the companies and in the tax rates.
Revenue and cost recognition
Revenues are recognized when title passes to the customer, usually the date
of shipment or when services are rendered to the independent dealer or other
third party. Costs are recognized on the accrual basis.
F-29
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee benefit plans
Leaving entitlements reflect the liability to employees when they leave their
employment, calculated in conformity with current Italian legislation, and are
based on a percentage of remuneration. The full amount of the employees' vested
benefits is accrued. The liability is adjusted annually by 1.5% plus 75% of the
official inflation. There is no funding requirement associated with this
liability. Employees' leaving entitlements charged in the years ended December
31, 1998 and 1999 amounted to L37,285 thousand and L53,236 thousand,
respectively.
Foreign currencies
Foreign currency transactions are recorded at the exchange rates applicable
at the transaction dates. Assets and liabilities denominated in foreign
currencies are re-measured at exchange rates applicable at the balance sheet
date unless covered by a hedge instrument. Balances denominated in currencies
of the member countries of the European Monetary Union at December 31, 1998 and
1999 have been recorded at their final Euro conversion rates with respect to
the Italian Lire. The resulting gains and losses on assets and liabilities are
recorded in the consolidated statement of operations.
Grants
Grants received for reimbursement of research and development expenses not
capitalized are recorded as non operating income when they become receivable.
Grants are considered receivable when the Company's request is approved by the
governmental institution. The related expenses are recorded in the financial
year when incurred.
Use of estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles in the Republic of Italy and, with respect to
note 26, the United States of America. Actual results could differ from those
estimates.
2. Translations of Italian Lire into US Dollars
The consolidated financial statements are stated in Italian Lire. The
translations of Italian Lire into US Dollars are included solely for the
convenience of the reader, using the noon buying rate in New York on December
31, 1999, which was 1,922.810327 to $1.00. The convenience translations are
unaudited and should not be construed as representations that the Italian Lire
amounts have been, could have been, or could in the future be, converted into
US Dollars at this or any other rate of exchange.
3. Cash
Cash is composed of the following items:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Bank accounts in US Dollars................................. 52,558 184,438
Cash on hand................................................ 2,474 2,447
------ -------
55,032 186,885
====== =======
</TABLE>
F-30
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bank accounts include 30,802 US Dollars and 95,692 US Dollars at December 31,
1998 and 1999, respectively.
4. Trade receivables, net
At December 31, trade receivables, net, were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
--------- ---------
(L'000)
<S> <C> <C>
Trade receivables....................................... 1,337,775 1,329,213
Invoices to be issued................................... -- 5,471
Unaccepted trade bills on bank.......................... 6,854 --
--------- ---------
Trade accounts receivable--gross........................ 1,344,629 1,334,684
Allowance for doubtful accounts......................... -- (6,539)
--------- ---------
Trade accounts receivable--net.......................... 1,344,629 1,328,145
========= =========
</TABLE>
Trade receivables denominated in US Dollars totalled 644,231 US Dollars and
51,727 US Dollars at December 31, 1998 and 1999, respectively.
The Group is potentially subject to concentrations of credit risk principally
on its accounts receivable balances. Management believes, however, that the
loss due to credit risk to be incurred by the Group if parties to these
receivables failed completely to perform according to the terms of the
contracts is not material. The Group does not require collateral and all the
accounts receivable balances are unsecured. While management believes the trade
receivables will ultimately be collected, it anticipates that in the event of
default they will follow normal collection procedures. The Group estimates the
allowance for doubtful accounts on the basis of the credit worthiness of its
customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect estimates of bad debts. As described in
note 17, Pro.Tel.'s products are sold exclusively by independent distributors
pursuant to a distribution agreement with the Company. During the years ended
December 31, 1998 and 1999, two customers/distributors (Pro.Tel. USA in 1998
and 1999; Chevas in 1998; Set-up in 1999) accounted for approximately 89% and
63%, respectively, of net sales for products of the Group. In addition, these
customers, who are unrelated third parties, accounted for 74% and 88%,
respectively, of the trade receivable balance as of December 31, 1998 and 1999.
Sales made to distributors (which are all unrelated third parties) are
recognized on the date of shipment of the goods and are not subject to any
rights of return other than for defects in materials or workmanship, as
described in Note 17. Furthermore, these sales are not contingent upon their
subsequent sale to third parties by the distributors.
F-31
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Inventories
At December 31, inventories were comprised of the following items:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Cases........................................................ 10,440 209,412
Pae-boards................................................... 36,682 210,844
Ghepardo units............................................... 73,385 26,490
Consumables and supplies..................................... 13,543 36,897
------- -------
134,050 483,643
======= =======
</TABLE>
Inventories are comprised of raw materials and purchased components.
No provision is made for slow moving, obsolete or non-saleable items, as
management does not consider such provision necessary.
6. Other current assets
At December 31, other current assets were comprised of the following items:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Guarantee deposits............................................. -- 10,000
Tax receivables................................................ 44,103 13,899
Advances to suppliers.......................................... 20,365 22,137
Other amounts receivable....................................... 384 3
Accrued income and prepaid expenses............................ 13,120 9,734
------ ------
77,972 55,773
====== ======
</TABLE>
Tax receivables are comprised of VAT receivables, withholding taxes on
interest earned by the Group as well as advance corporation tax for those Group
companies which have paid amounts in excess of their tax liability for the
year.
Advances to suppliers comprise for the most part advances paid to suppliers
for services.
F-32
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Plant and equipment, net
At December 31, plant and equipment, net, were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Plant and equipment
Cost..................................................... 181,974 357,234
Accumulated depreciation................................. (50,070) (90,086)
------- -------
Net book value............................................. 131,904 267,148
------- -------
Industrial and sales tooling/equipment
Cost..................................................... 115,400 141,556
Accumulated depreciation................................. (54,955) (91,075)
------- -------
Net book value............................................. 60,445 50,481
------- -------
Other
Cost..................................................... 29,176 29,676
Accumulated depreciation................................. (4,336) (6,048)
------- -------
Net book value............................................. 24,840 23,628
------- -------
217,189 341,257
======= =======
</TABLE>
Depreciation amounted to L43,087 thousand in 1998 and L77,735 thousand in
1999.
Pro.Tel. has entered into capital lease agreements for some personal
computers. The value of these assets amounted to approximately L27,560 thousand
at December 31, 1999. According to the prevailing Italian Civil Code, the lease
installments are charged to the statement of operations on an accrual basis and
the assets are recorded as plant and equipment when the purchase option is
exercised. As such, the commitments for unexpired installments have been
disclosed in note 16. Had these assets been recognized as purchased under
capital leases, the following effects would result on quotaholders' equity at
December 31:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
----- -------
(L'000)
<S> <C> <C>
Plant and equipment:
increase in cost........................................... -- 27,560
increase in accumulated depreciation....................... -- (2,756)
Advances to suppliers........................................ 1,040 --
Obligations under capital leases............................. -- (17,549)
----- -------
Pre-tax effect on quotaholders' equity....................... 1,040 7,255
Tax effect calculated at the effective rates................. (325) (2,267)
----- -------
715 4,988
===== =======
</TABLE>
There are no mortgages and liens on the Group's plant and equipment.
All long-lived assets are located in Italy and comprise only plant and
equipment.
F-33
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Intangible assets, net
At December 31, intangible assets, net, were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Incorporation and expansion costs............................ 9,040 5,320
Research and development costs on specific development
projects.................................................... 27,483 17,181
Software..................................................... 12,139 6,694
Other........................................................ 2,111 1,857
------ ------
50,773 31,052
====== ======
</TABLE>
Amortization amounted to L20,907 thousand in 1998 and L21,283 thousand in
1999. Software relates to the cost of software purchased from independent third
parties.
9. Other long-term assets
At December 31, other long-term assets were comprised of the following items:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Employees' termination fund insurance.......................... 20,631 53,080
Other long-term assets......................................... 11,900 1,900
------ ------
32,531 54,980
====== ======
</TABLE>
Employees' termination fund insurance refers to the employees' leaving
entitlement existing at year-end. Funds were previously paid to an insurance
company (Zurigo SA) as a form of long-term funding and includes matured
interest.
Other long-term assets consist of guarantee deposits for rented properties
and utilities. In the consolidated financial statements at December 31, 1999 an
amount of L10,000 thousand relating to the rental properties, has been
reclassified to other current assets as the rental agreement expires in
November 2000.
10. Borrowings
At December 31, short-term bank borrowings were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Current accounts in Italian Lire.............................. 83,044 472,203
Other (credit card accounts).................................. 2,160 2,763
------ -------
85,204 474,966
====== =======
</TABLE>
F-34
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Current accounts are repayable on demand of the banks and carry interest at
market rates.
At December 31, the Group's long-term debt was comprised as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Current portion............................................ 145,895 80,152
Non-current portion........................................ 107,197 27,047
------- -------
253,092 107,199
======= =======
</TABLE>
Information relating to long-term bank loans at December 31, 1999 may be
analyzed as follows:
<TABLE>
<CAPTION>
Interest
Short- Long- Expiry rate %
Original term term Total date (1)
-------- ------- ------- ------- ---------- --------
(L'000) (L'000) (L'000) (L'000)
<S> <C> <C> <C> <C> <C> <C>
Rolo Banca 1473.......... 50,000 9,789 27,047 36,836 April 2003 5.5
Banca Popolare
dell'Emilia Romagna..... 100,000 28,719 -- 28,719 Dec. 2000 5.5
Banca Popolare
dell'Emilia Romagna..... 145,000 41,644 -- 41,644 Dec. 2000 5.5
------ ------ -------
80,152 27,047 107,199
====== ====== =======
</TABLE>
---------------------
(1)Variable on the basis of the ABI prime rate.
The company has not provided any guarantees relating to the above mentioned
loans.
The term loan repayment schedule provides for up to 2003 with annual
maturities, as below:
<TABLE>
<CAPTION>
At December 31,
1999
---------------
Repayment date
-------------- (L'000)
<S> <C>
By December 31,:
2000..................................................... 80,152
2001..................................................... 10,362
2002..................................................... 10,965
2003..................................................... 5,720
-------
107,199
=======
</TABLE>
11. Accounts payable--trade
At December 31, accounts payable to suppliers were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Accounts payable to Italian suppliers...................... 617,609 634,993
Accounts payable to foreign suppliers...................... 200,364 322,649
------- -------
817,973 957,642
======= =======
</TABLE>
F-35
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts payable includes invoices denominated in US Dollars totalling
109,454 US Dollars and 93,145 US Dollars at December 31, 1998 and 1999,
respectively.
12. Accrued expenses and other current liabilities
At December 31, accrued expenses and other current liabilities were comprised
of the following items:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Accrued wages and salaries................................. 47,434 39,214
Accrued holidays........................................... 31,051 31,694
Social security charges payable............................ 66,126 80,500
Other liabilities.......................................... 6,106 31,439
Deferred income and accrued expenses....................... 9,133 9,417
------- -------
159,850 192,264
======= =======
</TABLE>
13. Income and other taxes payable, deferred income taxes
At December 31, income and other taxes payable and deferred income taxes were
comprised of the following items:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------- ------
(L'000)
<S> <C> <C>
Income and other current tax payable........................ 111,382 83,742
Deferred income taxes--short-term........................... -- 14,044
------- ------
111,382 97,786
======= ======
Deferred income taxes--long-term............................ -- 35,268
------- ------
-- 35,268
======= ======
</TABLE>
Income and other current taxes payable mainly include the income and other
non-income taxes due and withholdings of tax yet to be reimbursed at the
balance sheet date, net of the advances paid or withholdings sustained.
Deferred taxes mainly relate to the grants obtained by Pro.Tel. in 1999 under
the Italian law 140/97 (see note 22). The Italian fiscal authority permits the
taxation of such amounts to be deferred for a period of five years. Deferred
taxes are calculated at the effective IRPEG tax rate of the company at December
31, 1999 (27%) and are classified between short-term and long-term.
F-36
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Employees' leaving entitlements
The accounting policy for this entitlement is outlined in note 1. The
movements in this account were as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Balance at the beginning of the year...................... 17,043 51,103
Combination of Tel.Mark. Srl.............................. 2,139 --
------ -------
Combined balance at the beginning of the year............. 19,182 51,103
Charge for the year....................................... 37,285 53,236
Payments.................................................. (5,364) (19,364)
------ -------
Balance at the end of the year............................ 51,103 84,975
====== =======
</TABLE>
At December 31, 1998 and 1999 the number of employees were 16 and 17,
respectively.
15. Quotaholders' equity
The Extraordinary General Meeting held on June 25, 1998 increased the quota
capital of Pro.Tel. Srl from L100,000 thousand to L500,000 thousand.
Before the increase, the quota capital was held by:
<TABLE>
<CAPTION>
Percentage of
Quota capital Quota capital
------------- -------------
(L'000) (%)
<S> <C> <C>
Franco Messori................................. 51,000 51.00
Paola Vitali................................... 4,000 4.00
Angelo Baccarani............................... 14,000 14.00
Franco Corradini............................... 14,000 14.00
Cristina Gozzi................................. 1,000 1.00
Daniela Iseppi................................. 1,000 1.00
Giuliano Sala.................................. 15,000 15.00
------- ------
100,000 100.00
======= ======
</TABLE>
F-37
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 the quota capital was held by:
<TABLE>
<CAPTION>
Percentage of
Quota capital Quota capital
------------- -------------
(L'000) (%)
<S> <C> <C>
Franco Messori................................. 200,000 40.00
Giuliano Sala.................................. 25,000 5.00
Franco Corradini............................... 25,000 5.00
Angelo Baccarani............................... 25,000 5.00
Lucia Silvani.................................. 25,000 5.00
Gian Piero Brandolini.......................... 128,000 25.60
Pietro Zucchini................................ 16,000 3.20
Aldo Baccarani................................. 40,000 8.00
Franco Montanari............................... 16,000 3.20
------- ------
500,000 100.00
======= ======
</TABLE>
The statutory financial statements of Pro.Tel. Srl, stated in accordance with
Italian civil and tax law, include a legal reserve, amounting to L889 thousand,
which can only be used to cover losses.
Reconciliation of statutory net profit/(loss) and quotaholders' equity of
Pro.Tel. to consolidated net profit/(loss) and quotaholders' equity
The principal adjustments made in the consolidation of Pro.Tel. Srl and its
subsidiary are shown in the following reconciliation of net profit/(loss) and
quotaholders' equity as reported in the statutory financial statements of
Pro.Tel. Srl to those reported in the consolidated financial statements for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Net Net
profit/(loss) profit/(loss)
for the Quotaholders' for the Quotaholders'
year ended equity at year ended equity at
December 31, December 31, December 31, December 31,
1998 1998 1999 1999
------------- ------------- ------------ -------------
(L'000)
<S> <C> <C> <C> <C>
Per the financial
statements of
Pro.Tel................ (47,713) 448,539 90,068 538,607
Adjustments to:
lower investment value
of consolidated
subsidiary with
respect to carrying
value................ (7,701) (14,967) 1,810 (13,157)
eliminate tax-driven
treatments........... -- -- 8,473 8,473
tax effects of the
above in
consolidation
adjustments.......... -- -- (2,288) (2,288)
------- ------- ------ -------
Total consolidation
adjustments............ (7,701) (14,967) 7,995 (6,972)
------- ------- ------ -------
Quotaholders' equity and
net profit/(loss) of
the Group as per the
consolidated financial
statements............. (55,414) 433,572 98,063 531,635
======= ======= ====== =======
</TABLE>
F-38
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax driven treatments relate to the conversion of foreign currency balances
at year-end, which is not recorded in the statutory financial statements of
Pro.Tel. if it's net effect is positive.
16. Commitments and contingent liabilities
The Group has, at December 31, certain commitments, comprised of:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Forward foreign exchange contract.............................. 47,247 --
Residual installments on lease agreements...................... 30,157 18,993
------ ------
77,404 18,993
====== ======
</TABLE>
At December 31, 1998 the Group had one forward foreign exchange contract
outstanding for 28,000 US Dollars which was designated as being for hedging
purposes. The Group uses these contracts to manage its exposure to foreign
currency fluctuations.
There were no other foreign exchange contracts, futures, options or other
financial instruments open at December 31, 1998 and 1999.
The Group is subject to the national agreement for "mechanical engineering
employees' which covers all of its employees. The contract expires in 2001.
Management expects that this agreement will be renewed without any significant
adverse effects to the operations of the Group.
The Group is not involved in any claims or legal actions arising in the
ordinary course of its business.
17. Net sales
The Group operates predominantly in a single industry segment:
telecommunication engineering consulting and manufacturing market, by providing
hardware, firmware and software design. The Group offers a wide product range
of items for sale, manufactured and marketed.
The Group also produces personalized products upon the order of customers.
Warranties are given by the group for labor and material costs for a period
of 14 months from the date of sale. Due to the nature, high quality and
workmanship of Pro. Tel's products, managements does not expect warranty costs
to be significant. For the years ended December 31, 1999 and 1998, the group
incurred insignificant product warranty costs. Therefore, management does not
consider any additional provision to be required as at December 31, 1999 and
1998.
Pro.Tel.'s products are sold exclusively by distributors in Italy, China,
Switzerland, France, Germany, USA, Austria, UK, Japan, Korea and Malaysia.
F-39
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net sales can be analyzed as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1998 1999
--------- ---------
(L'000)
<S> <C> <C>
Sales for products..................................... 2,021,556 2,900,990
Sales for services..................................... 657,137 728,436
Other sales............................................ 31,187 9,928
--------- ---------
2,709,880 3,639,354
========= =========
</TABLE>
Net sales of products can be analyzed by geographic area, based on location
of the customers, as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1998 1999
--------- ---------
(L'000)
<S> <C> <C>
Italy................................................... 32,234 99,988
United States........................................... 977,239 1,756,199
Europe.................................................. 195,633 821,100
Asia.................................................... 816,450 223,703
--------- ---------
2,021,556 2,900,990
========= =========
</TABLE>
18. Cost of goods sold
Cost of goods sold is comprised principally of the cost of materials, parts
and components for production, personnel (both direct and indirect), other
manufacturing costs, variations in inventory and depreciation of the plant and
equipment employed in the production cycle.
19. Selling, general and administrative expenses
Selling, general and administrative expenses comprises principally variable
sales costs, related personnel costs, commercial, advertising and promotion
costs and charges for doubtful accounts. This item also includes depreciation
of the plant and equipment employed in the commercial and administrative areas
of the Group's activities. Advertising and promotion costs of the Group for the
years ended December 31, 1998 and 1999 amounted to L30,211 thousand and L72,812
thousand, respectively.
F-40
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Interest income and expense
The composition of interest income is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Interest on insurance policy................................... 1,449 1,976
Interest earned at banks....................................... 2,046 1,911
Other.......................................................... 500 250
------ ------
3,995 4,137
====== ======
</TABLE>
The composition of interest expense is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Interest on borrowings:
short-term............................................... (3,886) (21,135)
long-term................................................ (22,122) (12,480)
Other financial charges.................................... (9,606) (10,013)
------- -------
(35,614) (43,628)
======= =======
</TABLE>
Interest on short and long-term debt relates to loans granted by credit
institutions (see note 10). Other financial charges mainly relate to bank
charges.
21. Foreign exchange gain, net
The composition of foreign exchange gain is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Foreign exchange gain...................................... 18,114 115,058
Foreign exchange loss...................................... (8,852) (72,240)
------ -------
9,262 42,818
====== =======
</TABLE>
F-41
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. Other non operating income/expenses, net
Other non-operating income/expenses, net comprise:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
1998 1999
----- -------
(L'000)
<S> <C> <C>
Income:
Grants for law 140/97....................................... -- 217,706
Other income................................................ 7,558 780
Other expenses.............................................. -- (14,394)
----- -------
Net........................................................... 7,558 204,092
===== =======
</TABLE>
During 1999, the Company applied for reimbursement of certain research and
development expenditures from the Ministry of Industry and Trade under the
Italian law 140/97.
This application was subsequently approved by the Ministry of Industry and
Trade at which time the Company recorded grant revenue of L217,706 thousand.
The research and development costs were incurred in the year ended December 31,
1998 and related primarily to personnel costs. The grant is recovered through
reductions of the Company's employer withholding taxes and the remaining amount
to be received was L20,942 thousand as of December 31, 1999.
23. Income taxes
The two consolidated Group companies are located in Italy; consequently the
Group's activities are only affected by the income tax regime in Italy. Income
taxes recorded in the consolidated financial statements are IRPEG (national
corporate income tax) and IRAP (regional corporate income tax). IRPEG is
calculated at 37% of taxable income, but a reduced rate can be applied in
certain circumstances, in the presence of an increase of net equity of the
company, applying DIT (dual income tax) regulation. IRAP is levied at 4.25% on
certain components of revenue and expenses, which broadly speaking are all
business revenues less costs for purchases of materials and services and
depreciation and amortization excluding all other production, administration
and selling costs (such as personnel costs and charge for doubtful accounts).
Because of the method of calculation, IRAP is not directly related to pre-tax
income.
Deferred income taxes have been determined on the basis of the effective 1999
tax rate (see note 13).
Income tax charge is composed of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Current taxation.............................................. 55,580 91,350
Deferred taxation............................................. -- 49,312
------ -------
55,580 140,662
====== =======
</TABLE>
For the two consolidated companies all fiscal periods since incorporation are
still open to assessment for both income tax and VAT regulations. At December
31, 1999, there are no claims concerning the fiscal matters of the Group's
entities.
F-42
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
24. Related party transactions
A significant quotaholder of Pro.Tel. holds certain quota capital of Selcom
Elettronica Srl, one of the most important suppliers and customers of Pro.Tel.
The Company purchases principally components for its products and in 1999 sold
to Selcom a software development to integrate Ghepardo in a Selcom's customer
Network Management System (NMS).
All the quotaholders of Pro.Tel. Srl, except one, hold interests in the share
capital of Pro.Tel. Engineering Inc (Springfield, Virginia--USA), which
supplies Pro.Tel. with technical consulting services.
The following table presents a summary of transactions with the related
parties, Selcom Elettronica Srl and Pro.Tel. Engineering Inc, which have been
executed on terms similar with those negotiated with un-related third parties
during the periods presented:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1998 1999
-------- --------
(L'000)
<S> <C> <C>
Sales................................................... 34,862 558,835
Purchases and services.................................. (673,260) (942,783)
</TABLE>
The components of the balances with these related parties at December 31, were
as follows:
<TABLE>
<CAPTION>
Receivable Payable Receivable Payable
December 31, December 31, December 31, December 31,
1998 1998 1999 1999
------------ ------------ ------------ ------------
(L'000)
<S> <C> <C> <C> <C>
Selcom Elettronica Srl..... 29,291 (507,157) 40,456 (494,281)
Pro.Tel. Engineering Inc... -- -- -- --
------ -------- ------ --------
29,291 (507,157) 40,456 (494,281)
====== ======== ====== ========
</TABLE>
25. Subsequent events
At the beginning of year 2000 the terms of an agreement between the
quotaholders of Pro.Tel. and Sunrise Telecom Inc, a company incorporated in the
United States of America, regarding the sale of 100% of the quota capital of
the Company, has been defined but has not yet been signed by the respective
parties. The transaction will be finalized in the first quarter of year 2000
and represents the best opportunity for development and growth for Pro.Tel.
F-43
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
26. Summary of significant differences between generally accepted accounting
principles in the Republic of Italy and the United States of America
The accompanying consolidated financial statements of the Company have been
prepared in conformity with accounting principles established or adopted by
Italian law and the Italian Accounting Profession, as described in note 1
("Italian GAAP'). Those standards differ in certain significant respects from
those generally accepted in the United States ("US GAAP'). Set forth below is a
summary of certain significant differences between Italian and US GAAP which
management believe are relevant to the Group.
(a) Intangible assets
Under Italian GAAP certain costs, principally research and development
expenditures on specific product development projects and incorporation and
expansion costs, are deferred and amortized over the estimated useful lives
of the respective assets. There were no significant increases in intangible
assets for these items under Italian GAAP in 1998 and 1999. Under US GAAP,
such costs are expensed as incurred.
(b) Leasing
Under Italian GAAP, all leases are accounted for as an operating lease,
i.e., plant and equipment acquired under capital leases are not recognized
as equipment along with the obligation under capital lease until the end of
the lease term. Under US GAAP, where the necessary conditions are met, the
plant and equipment are recorded at the present value of minimum lease
payments and the obligation under capital leases is recognized as a
liability. The related assets are then amortized over their useful economic
lives. In certain circumstances, Pro.Tel. has made payments in advance of
delivery of leased assets. Under Italian GAAP, these advance payments are
recognized as an expense in the period in which they are paid and are
recorded in costs of goods sold. Under US GAAP, such advance payments would
be accounted for as a prepaid expense.
(c) Balance sheet reclassification differences
Under Italian GAAP leasehold improvements and purchased software costs
are classified as "other intangible assets' whereas these items would be
classified under "plant and equipment' for US GAAP purposes.
(d) Statement of cash flows
With regard to the consolidated statements of cash flows, differences in
classifications with that presented under Italian GAAP arise not only from
the aforementioned differences in presentation and principle in the
consolidated balance sheet but also from the fact that under US GAAP, the
effect of exchange rate changes on cash are included as a separate line
item of the consolidated statements of cash flows rather than within
operating activities.
F-44
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliation of net profit and quotaholders' equity determined under Italian
GAAP with those under US GAAP.
The calculation of net profit and quotaholders' equity in conformity with US
GAAP is as follows:
Reconciliation of net profit:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Net profit/(loss) under Italian GAAP.......................... (55,414) 98,063
Adjustments increasing (decreasing) reported net profit:
amortization of intangible assets........................... 14,021 14,021
capital leases:.............................................
depreciation of plant and equipment....................... -- (2,756)
cost of goods sold........................................ 1,040 11,439
interest expenses for capital leases...................... -- (2,468)
tax effect of US GAAP adjustments........................... (4,706) (6,324)
------- -------
Net profit/(loss) in conformity with US GAAP.................. (45,059) 111,975
======= =======
</TABLE>
Net profit/(loss) in conformity with US GAAP is also comprehensive income for
the Company.
Reconciliation of quotaholders' equity:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Quotaholders' equity under Italian GAAP..................... 433,572 531,635
Adjustments increasing (decreasing) to reported
quotaholders' equity:
intangible assets......................................... (36,523) (22,501)
capital leases:
plant and equipment..................................... -- 24,804
obligation under capital leases......................... -- (17,549)
prepaid expenses........................................ 1,040 --
tax effect of US GAAP adjustments......................... 11,088 4,764
------- -------
Quotaholders' equity in conformity with US GAAP............. 409,177 521,153
======= =======
</TABLE>
F-45
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated Cash Flows--US GAAP
The following table summarizes the consolidated statements of cash flows as
if they had been presented in accordance with US GAAP:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1998 1999
-------- --------
(L'000)
<S> <C> <C>
Net cash provided by/(used in) operating activities..... (321,058) 348,819
Net cash (used in) investing activities................. (74,000) (143,173)
Net cash provided by/(used in) financing activities..... 297,211 (71,578)
Effect of exchange rate changes on cash................. -- (5,326)
-------- --------
Net increase/(decrease) in cash......................... (97,847) 128,742
======== ========
</TABLE>
Furthermore, the supplemental disclosure for the consolidated statement of
cash flows required by US GAAP is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Cash paid during the year for:
Interest....................................................... 35,112 40,695
====== ======
Income taxes................................................... 22,576 93,074
====== ======
</TABLE>
Income taxes--US GAAP basis
As described in note 23, the two consolidated companies are both located in
Italy. Consequently the profit before income taxes and the income tax expenses
consists only of domestic items which arise from the ordinary operating
activities of the Group.
Income taxes differ from the amounts computed by applying the Italian
statutory income tax rate (37%) to pre-tax income as a result of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------
1998 1999
------- --------
(L'000)
<S> <C> <C>
Computed "expected' tax expense........................... (5,634) (95,815)
Regional corporate income tax (IRAP) (see note 23)........ (54,404) (71,701)
DIT saving (see note 23).................................. 441 25,370
Non-deductible items, net................................. (989) (6,548)
Benefit from tax losses carried forward................... 300 1,708
------- --------
Income tax expense--US GAAP............................... (60,286) (146,986)
======= ========
</TABLE>
F-46
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences give rise to deferred tax
liabilities. Had the consolidated financial statements been prepared under US
GAAP, the detail of deferred tax at December 31 would have been as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
---------------------- -------------------------
Non Non
Current current Total Current current Total
------- ------- ------ ------- ------- -------
(L'000)
<S> <C> <C> <C> <C> <C> <C>
Grants law 140/97 (see note
13)........................ -- -- -- (11,756) (35,268) (47,024)
Consolidation adjustments
(see note 15).............. -- -- -- (2,288) -- (2,288)
Tax effect of US GAAP
adjustments................ 6,324 4,764 11,088 4,764 -- 4,764
----- ----- ------ ------- ------- -------
Deferred tax assets
(liabilities).............. 6,324 4,764 11,088 (9,280) (35,268) (44,548)
===== ===== ====== ======= ======= =======
</TABLE>
Leasing--US GAAP basis
On October 2, 1998 Pro.Tel. signed a leasing contract relating to personal
computers that expires in 2001. Since such machinery was delivered on January
28, 1999, they have been included (together with the related obligations) in
the US GAAP reconciliation starting from 1999. At December 31, 1999, the gross
amount capitalized and related accumulated amortization of this lease amounted
to L27,560 thousand and L2,756 thousand, respectively. Plant and equipment,
net, and the related obligations would be higher by L24,804 thousand and
L17,549 thousand, respectively, as of December 31, 1999.
Future minimum capital lease payments as of December 31, 1999 are:
<TABLE>
<CAPTION>
L'000
------
<S> <C>
Year ending December 31:
2000............................................................... 12,479
2001............................................................... 6,514
------
Total minimum lease payments......................................... 18,993
Less amount representing interest (at a rate of 11.8%)............... (1,444)
------
Present value of net minimum capital lease payments.................. 17,549
------
Current installments................................................. 11,192
Long-term portion.................................................... 6,357
------
17,549
======
</TABLE>
F-47
<PAGE>
Inside back cover
[Sunrise Telecom logo]
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,000,000 Shares
[SUNRISE LOGO]
Common Stock
----------------
PROSPECTUS
----------------
Chase H&Q
CIBC World Markets
U.S. Bancorp Piper Jaffray
----------------
July 12, 2000
----------------
Until August 6, 2000, all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
