UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
000-32743
(Commission File Number)
ZHONE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 22-3509099 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
7195 Oakport Street Oakland, California |
94621 | |
(Address of principal executive offices) | (Zip code) |
(510) 777-7000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 1, 2012, there were approximately 31,115,849 shares of the registrants common stock outstanding.
Page | ||||||
PART I. FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements | 3 | ||||
Unaudited Condensed Consolidated Balance Sheets | 3 | |||||
Unaudited Condensed Consolidated Statements of Comprehensive Loss | 4 | |||||
Unaudited Condensed Consolidated Statements of Cash Flows | 5 | |||||
Notes to Unaudited Condensed Consolidated Financial Statements | 6 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 24 | ||||
Item 4. | Controls and Procedures | 25 | ||||
PART II. OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | 25 | ||||
Item 1A. | Risk Factors | 25 | ||||
Item 5. | Other Information | 25 | ||||
Item 6. | Exhibits | 26 | ||||
Signatures | 27 |
2
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par value)
September 30, 2012 |
December 31, 2011 |
|||||||
Assets | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 10,274 | $ | 18,190 | ||||
Accounts receivable, net of allowances for sales returns and doubtful accounts of $2,230 as of September 30, 2012 and $2,024 as of December 31, 2011 |
26,106 | 31,598 | ||||||
Inventories |
25,379 | 27,393 | ||||||
Prepaid expenses and other current assets |
2,619 | 2,672 | ||||||
|
|
|
|
|||||
Total current assets |
64,378 | 79,853 | ||||||
Property and equipment, net |
637 | 608 | ||||||
Restricted cash |
| 58 | ||||||
Other assets |
214 | 213 | ||||||
|
|
|
|
|||||
Total assets |
$ | 65,229 | $ | 80,732 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 11,663 | $ | 11,797 | ||||
Line of credit |
10,000 | 15,000 | ||||||
Accrued and other liabilities |
8,363 | 10,029 | ||||||
|
|
|
|
|||||
Total current liabilities |
30,026 | 36,826 | ||||||
Other long-term liabilities |
4,018 | 4,379 | ||||||
|
|
|
|
|||||
Total liabilities |
34,044 | 41,205 | ||||||
|
|
|
|
|||||
Stockholders equity: |
||||||||
Common stock, $0.001 par value. Authorized 180,000 shares; issued and outstanding 31,106 and 30,820 shares as of September 30, 2012 and December 31, 2011, respectively |
31 | 31 | ||||||
Additional paid-in capital |
1,072,786 | 1,071,390 | ||||||
Other comprehensive income |
213 | 237 | ||||||
Accumulated deficit |
(1,041,845 | ) | (1,032,131 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
31,185 | 39,527 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 65,229 | $ | 80,732 | ||||
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(In thousands, except per share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net revenue |
$ | 29,198 | $ | 30,204 | $ | 87,095 | $ | 91,070 | ||||||||
Cost of revenue |
20,966 | 19,930 | 61,211 | 59,151 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
8,232 | 10,274 | 25,884 | 31,919 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Research and product development |
5,090 | 5,294 | 14,835 | 16,259 | ||||||||||||
Sales and marketing |
4,976 | 5,557 | 14,516 | 16,450 | ||||||||||||
General and administrative |
2,305 | 2,154 | 6,118 | 6,318 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
12,371 | 13,005 | 35,469 | 39,027 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating loss |
(4,139 | ) | (2,731 | ) | (9,585 | ) | (7,108 | ) | ||||||||
Interest expense |
(26 | ) | (33 | ) | (53 | ) | (110 | ) | ||||||||
Other income (expense), net |
(19 | ) | 29 | (13 | ) | 101 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(4,184 | ) | (2,735 | ) | (9,651 | ) | (7,117 | ) | ||||||||
Income tax provision (benefit) |
14 | 13 | 63 | (33 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (4,198 | ) | $ | (2,748 | ) | $ | (9,714 | ) | $ | (7,084 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive loss foreign currency translation adjustments |
$ | (8 | ) | $ | (30 | ) | $ | (24 | ) | $ | (37 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss |
$ | (4,206 | ) | $ | (2,778 | ) | $ | (9,738 | ) | $ | (7,121 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Basic and diluted net loss per share |
$ | (0.14 | ) | $ | (0.09 | ) | $ | (0.31 | ) | $ | (0.23 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding used to compute basic and diluted net loss per share |
31,086 | 30,701 | 30,927 | 30,645 | ||||||||||||
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended September 30, |
||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (9,714 | ) | $ | (7,084 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
234 | 1,343 | ||||||
Stock-based compensation |
1,266 | 1,454 | ||||||
Provision for sales returns and doubtful accounts |
1,651 | 1,327 | ||||||
Impairment of fixed assets |
61 | | ||||||
Loss on disposal of fixed assets |
5 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
3,841 | 1,567 | ||||||
Inventories |
2,014 | 1,590 | ||||||
Prepaid expenses and other current assets |
53 | (69 | ) | |||||
Other assets |
(1 | ) | 142 | |||||
Accounts payable |
(134 | ) | 279 | |||||
Accrued and other liabilities |
(2,027 | ) | (2,772 | ) | ||||
|
|
|
|
|||||
Net cash used in operating activities |
(2,751 | ) | (2,223 | ) | ||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(329 | ) | (1,227 | ) | ||||
Restricted cash |
58 | | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(271 | ) | (1,227 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options and purchases under the ESPP plan |
130 | 147 | ||||||
Net payments under line of credit |
(5,000 | ) | | |||||
|
|
|
|
|||||
Net cash (used in) provided by financing activities |
(4,870 | ) | 147 | |||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(24 | ) | (37 | ) | ||||
|
|
|
|
|||||
Net decrease in cash and cash equivalents |
(7,916 | ) | (3,340 | ) | ||||
Cash and cash equivalents at beginning of period |
18,190 | 21,174 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 10,274 | $ | 17,834 | ||||
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
Notes to Unaudited Condensed Consolidated Financial Statements
(1) | Organization and Summary of Significant Accounting Policies |
(a) | Description of Business |
Zhone Technologies, Inc. (sometimes referred to, collectively with its subsidiaries, as Zhone or the Company) designs, develops and manufactures communications network equipment for telecommunications, wireless and cable operators worldwide. The Companys products allow network service providers to deliver video and interactive entertainment services in addition to their existing voice and data service offerings. The Company was incorporated under the laws of the state of Delaware in June 1999. The Company began operations in September 1999 and is headquartered in Oakland, California.
(b) | Basis of Presentation |
The condensed consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented in accordance with accounting principles generally accepted in the United States of America (GAAP). All significant inter-company transactions and balances have been eliminated in consolidation. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Form 10-K for the year ended December 31, 2011.
(c) | Risks and Uncertainties |
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has continued to incur losses in 2011 and the nine months ended September 30, 2012. As of September 30, 2012, the Company had approximately $10.3 million in cash and cash equivalents and $10.0 million in current debt outstanding under its revolving line of credit and letter of credit facility (the WFB Facility). The Company currently expects to repay the WFB Facility within the next twelve months. The Company entered into its WFB Facility to provide liquidity and working capital through March 12, 2014, as discussed in Note 6.
The global unfavorable economic and market conditions could impact the Companys business in a number of ways, including:
| Potential deferment of purchases and orders by customers; |
| Customers inability to obtain financing to make purchases from the Company and/or maintain their business; |
| Negative impact from increased financial pressures on third-party dealers, distributors and retailers; |
| Intense competition in the communication equipment market; |
| Commercial acceptance of the Companys SLMS products; and |
| Negative impact from increased financial pressures on key suppliers. |
If the economic, market and geopolitical conditions in the United States and the rest of the world do not continue to improve or if they deteriorate, the Company may experience material adverse impacts on its business, operating results and financial condition.
The Company expects that its operating losses may continue. In order to meet the Companys liquidity needs and finance its capital expenditures and working capital needs for the business, the Company may be required to sell assets, issue debt or equity securities or borrow on unfavorable terms. Continued uncertainty in credit markets may negatively impact the Companys ability to access debt financing or to refinance existing indebtedness in the future on favorable terms, or at all. The Company may be unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all. As a result, the Company may become unable to pay its ordinary expenses, including its debt service, on a timely basis. The Companys current lack of liquidity could harm it by:
| increasing its vulnerability to adverse economic conditions in its industry or the economy in general; |
| requiring substantial amounts of cash to be used for debt servicing, rather than other purposes, including operations; |
| limiting its ability to plan for, or react to, changes in its business and industry; and |
| influencing investor and customer perceptions about its financial stability and limiting its ability to obtain financing or acquire customers. |
6
If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict the Companys ability to operate its business. Likewise, any equity financing could result in additional dilution of the Companys stockholders. If the Company is unable to obtain additional capital or is required to obtain additional capital on terms that are not favorable, it may be required to reduce the scope of its planned product development and sales and marketing efforts beyond the reductions it has previously taken. Based on the Companys current plans and business conditions, it believes that its existing cash, cash equivalents and available credit facilities will be sufficient to satisfy its anticipated cash requirements for the next twelve months.
(d) | Use of Estimates |
The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
(e) | Revenue Recognition |
The Company recognizes revenue when the earnings process is complete. The Company recognizes product revenue upon shipment of product under contractual terms which transfer title to customers upon shipment, under normal credit terms, net of estimated sales returns and allowances at the time of shipment. The Companys arrangements generally do not have any significant post-delivery obligations. If the Companys arrangements include customer acceptance provisions, revenue is recognized upon obtaining the signed acceptance certificate from the customer, unless the Company can objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement prior to obtaining the signed acceptance. In those instances where revenue is recognized prior to obtaining the signed acceptance certificate, the Company uses successful completion of customer testing as the basis to objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement. The Company also considers historical acceptance experience with the customer, as well as the payment terms specified in the arrangement, when revenue is recognized prior to obtaining the signed acceptance certificate. When collectability is not reasonably assured, revenue is recognized when cash is collected.
The Company makes certain sales to product distributors. These customers are given certain privileges to return a portion of inventory. Return privileges generally allow distributors to return inventory based on a percent of purchases made within a specific period of time. The Company recognizes revenue on sales to distributors that have contractual return rights when the products have been sold by the distributors, unless there is sufficient customer specific sales and sales returns history to support revenue recognition upon shipment. In those instances when revenue is recognized upon shipment to distributors, the Company uses historical rates of return from the distributors to provide for estimated product returns. The Company accrues for warranty costs, sales returns and other allowances at the time of shipment based on historical experience and expected future costs.
The Companys products and services qualify as separate units of accounting and are deemed to be non-contingent deliverables as the Companys arrangements typically do not have any significant performance, cancellation, termination and refund type provisions. Products are typically considered delivered upon shipment. Revenue from services is recognized ratably over the period during which the services are to be performed.
7
In most instances, particularly as it relates to products, the Company is not able to establish vendor-specific objective evidence of selling price (VSOE) for all deliverables in an arrangement with multiple elements. This may be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history. When VSOE cannot be established, the Company attempts to establish the selling price of each element based on third-party evidence of selling price (TPE). Generally, the Companys marketing strategy differs from that of the Companys peers and the Companys offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products selling prices are on a stand-alone basis. Therefore, the Company is typically not able to determine TPE for the Companys products.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses best estimate of selling price (BSP). The objective of BSP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The BSP of each deliverable is determined using average discounts from list price from historical sales transactions or cost plus margin approaches based on the factors, including but not limited to, the Companys gross margin objectives and pricing practices plus customer and market specific considerations.
The Company derives revenue primarily from stand-alone sales of its products. In certain cases, the Companys products are sold along with services, which include education, training, installation, and/or extended warranty services. The Company has established TPE for its training, education and installation services. TPE is determined based on competitor prices for similar deliverables when sold separately. These service arrangements are typically short term in nature and are largely completed shortly after delivery of the product. Training and education services are based on a daily rate per person and vary according to the type of class offered. Installation services are based on daily rate per person and vary according to the complexity of the products being installed.
Extended warranty services are priced based on the type of product and are sold in one to five year durations. Extended warranty services include the right to warranty coverage beyond the standard warranty period. In substantially all of the arrangements with multiple deliverables pertaining to arrangements with these services, the Company has used and intends to continue using VSOE to determine the selling price for the services. The Company determines VSOE based on its normal pricing practices for these specific services when sold separately.
(f) | Fair Value of Financial Instruments |
The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entitys pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1 - | Inputs are quoted prices in active markets for identical assets or liabilities. | |
Level 2 - | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. | |
Level 3 - | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
The following financial instruments are not measured at fair value on the Companys condensed consolidated balance sheet as of September 30, 2012 and December 31, 2011, but require disclosure of their fair values: cash and cash equivalents and debt. The estimated fair value of such instruments at September 30, 2012 and December 31, 2011 approximated their carrying value as reported on the condensed consolidated balance sheet. The fair value of cash and cash equivalents would be categorized as Level 1 at September 30, 2012 and December 31, 2011. The fair value of the Companys debt obligations approximated fair value based on Level 2 inputs at September 30, 2012 and December 31, 2011. The fair value of debt is determined using the income approach based on the present value of the estimated cash flows.
The Company had no financial assets and liabilities as of September 30, 2012 recorded at fair value.
8
(g) | Concentration of Risk |
The Companys customers include competitive and incumbent local exchange carriers, competitive access providers, Internet service providers, wireless carriers and resellers serving these markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential doubtful accounts. For the three and nine months ended September 30, 2012, Axtel S.A.B. DE C.V. (Axtel) accounted for 17% and 11% of net revenue, respectively. For the three and nine months ended September 30, 2011, the same customer accounted for 9% and 7% of net revenue, respectively.
As of September 30, 2012, Axtel and Emirates Telecommunications Corporation (Etisalat) accounted for 30% and 17% of net accounts receivable, respectively. As of December 31, 2011, the same customers accounted for 24% and 29% of net accounts receivable, respectively.
As of September 30, 2012 and December 31, 2011, receivables from customers in countries other than the United States represented 75% and 71%, respectively, of net accounts receivable.
(h) | Property and Equipment |
Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives. Useful lives of all property and equipment range from 3 to 5 years. Leasehold improvements are generally amortized over the shorter of their useful lives or the remaining lease term.
(i) | Inventories |
Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. In assessing the net realizable value of inventories, the Company is required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. Once inventory has been written down to its estimated net realizable value, its carrying value cannot be increased due to subsequent changes in demand forecasts. To the extent that a severe decline in forecasted demand occurs, or the Company experiences a higher incidence of inventory obsolescence due to rapidly changing technology and customer requirements, the Company may incur significant charges for excess inventory.
(2) | Cash and Cash Equivalents |
Cash and cash equivalents as of September 30, 2012 and December 31, 2011 consisted of the following (in thousands):
September 30, 2012 |
December 31, 2011 |
|||||||
Cash and Cash Equivalents: |
||||||||
Cash |
$ | 10,274 | $ | 18,124 | ||||
Money Market Funds |
| 66 | ||||||
|
|
|
|
|||||
$ | 10,274 | $ | 18,190 | |||||
|
|
|
|
(3) | Inventories |
Inventories as of September 30, 2012 and December 31, 2011 were as follows (in thousands):
September 30, 2012 |
December 31, 2011 |
|||||||
Inventories: |
||||||||
Raw materials |
$ | 15,126 | $ | 16,770 | ||||
Work in process |
2,441 | 2,985 | ||||||
Finished goods |
7,812 | 7,638 | ||||||
|
|
|
|
|||||
$ | 25,379 | $ | 27,393 | |||||
|
|
|
|
9
(4) | Property and Equipment, net |
Property and equipment, net, as of September 30, 2012 and December 31, 2011 were as follows (in thousands):
September 30, 2012 |
December 31, 2011 |
|||||||
Property and equipment: |
||||||||
Machinery and equipment |
$ | 9,149 | $ | 9,043 | ||||
Computers and acquired software |
4,165 | 4,076 | ||||||
Furniture and fixtures |
248 | 310 | ||||||
Leasehold improvements |
2,067 | 2,067 | ||||||
|
|
|
|
|||||
15,629 | 15,496 | |||||||
Less accumulated depreciation and amortization |
(14,992 | ) | (14,888 | ) | ||||
|
|
|
|
|||||
$ | 637 | $ | 608 | |||||
|
|
|
|
Depreciation and amortization expense associated with property and equipment amounted to $0.2 million and $1.3 million for the nine months ended September 30, 2012 and 2011, respectively.
(5) | Net Loss Per Share |
Basic net loss per share is computed by dividing the net loss applicable to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common equivalent shares are excluded if their effect is antidilutive. Potential common equivalent shares are composed of incremental shares of common equivalent shares issuable upon the exercise of stock options and warrants.
The following tables set forth potential common stock that is not included in the diluted net loss per share calculation because their effect would be anti-dilutive for the periods indicated (in thousands, except exercise price per share data):
Three Months Ended September 30, 2012 |
Weighted Average Exercise Price |
Nine Months Ended September 30, 2012 |
Weighted Average Exercise Price |
|||||||||||||
Warrants |
7 | $ | 116.54 | 7 | $ | 116.54 | ||||||||||
Outstanding stock options and unvested restricted shares |
5,692 | $ | 2.01 | 5,692 | $ | 2.01 | ||||||||||
|
|
|
|
|||||||||||||
5,699 | 5,699 | |||||||||||||||
|
|
|
|
|||||||||||||
Three Months Ended September 30, 2011 |
Weighted Average Exercise Price |
Nine Months Ended September 30, 2011 |
Weighted Average Exercise Price |
|||||||||||||
Warrants |
7 | $ | 116.54 | 7 | $ | 116.54 | ||||||||||
Outstanding stock options and unvested restricted shares |
5,789 | $ | 2.60 | 5,789 | $ | 2.60 | ||||||||||
|
|
|
|
|||||||||||||
5,796 | 5,796 | |||||||||||||||
|
|
|
|
(6) | Debt |
Credit Facility
In March 2012, the Company entered into its $25.0 million WFB Facility with WFB to provide liquidity and working capital through March 12, 2014.
Under the WFB Facility, the Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company is able to borrow under the WFB Facility varies based on eligible accounts receivable, as defined in the agreement, as long as the aggregate amount outstanding does not exceed $25.0 million less the amount committed as security for various letters of credit, which at September 30, 2012 was $11.4 million. To maintain availability of funds under the WFB Facility, the Company pays a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense.
Under the WFB Facility, $10.0 million was outstanding at September 30, 2012. In addition, $11.4 million was committed as security for various letters of credit and the Company had $0.5 million unused availability under the WFB Facility as of September 30, 2012. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin of 3.5%. The interest rate on the WFB Facility was 3.90% at September 30, 2012.
The Companys obligations under the WFB Facility are secured by substantially all of its personal property assets and those of its subsidiaries that guarantee the WFB Facility, including their intellectual property. The WFB Facility contains certain
10
financial covenants, and customary affirmative covenants and negative covenants. If the Company does not comply with the various covenants and other requirements under the WFB Facility, WFB is entitled to, among other things, require the immediate repayment of all outstanding amounts and sell the Companys assets to satisfy the obligations under the WFB Facility. As of September 30, 2012, the Company was in compliance with these covenants.
(7) | Stock-Based Compensation |
As of September 30, 2012, the Company had two types of share-based compensation plans related to stock options and employee stock purchases. The compensation cost that has been charged as an expense in the statement of comprehensive loss for those plans was $1.3 million and $1.5 million for the nine months ended September 30, 2012 and 2011, respectively.
The following table summarizes stock-based compensation expense for the three and nine months ended September 30, 2012 and 2011 (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Compensation expense relating to employee stock options |
$ | 819 | $ | 905 | $ | 1,251 | $ | 1,355 | ||||||||
Compensation expense relating to non-employees |
| | | 61 | ||||||||||||
Compensation expense relating to Employee Stock Purchase Plan |
15 | 26 | 15 | 38 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Stock-based compensation expense |
$ | 834 | $ | 931 | $ | 1,266 | $ | 1,454 | ||||||||
|
|
|
|
|
|
|
|
Stock Options
The Companys stock-based compensation plans are designed to attract, motivate, retain and reward talented employees, directors and consultants and align stockholder and employee interests. The Company has two active stock option plans, the Amended and Restated Special 2001 Stock Incentive Plan and the Amended and Restated 2001 Stock Incentive Plan. Stock options are primarily issued from the Amended and Restated 2001 Stock Incentive Plan. This plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards and other stock-based awards to officers, employees, directors and consultants of the Company. As of September 30, 2012, 0.9 million shares were available for grant under these plans.
The assumptions used to value option grants for the three and nine months ended September 30, 2012 and 2011 are as follows:
Three Months Ended September 30, 2012 |
Three Months Ended September 30, 2011 |
Nine Months Ended September 30, 2012 |
Nine Months Ended September 30, 2011 |
|||||||||||||
Expected term |
4.7 years | 4.7 years | 4.7 years | 4.7 years | ||||||||||||
Expected volatility |
96 | % | 94 | % | 96 | % | 94 | % | ||||||||
Risk free interest rate |
0.62 | % | 0.96 | % | 0.74 | % | 1.20 | % |
The following table sets forth the summary of option activity under the stock option program for the three and nine months ended September 30, 2012 (in thousands, except per share data):
Options Outstanding |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding as of December 31, 2011 |
5,700 | $ | 2.40 | 4.45 | $ | 951 | ||||||||||
Granted |
15 | $ | 1.10 | |||||||||||||
Canceled/Forfeited |
(107 | ) | $ | 14.08 | ||||||||||||
Exercised |
(33 | ) | $ | 0.56 | ||||||||||||
|
|
|||||||||||||||
Outstanding as of March 31, 2012 |
5,575 | $ | 2.18 | 4.19 | $ | 1,584 | ||||||||||
|
|
|||||||||||||||
Granted |
278 | $ | 0.89 | |||||||||||||
Canceled/Forfeited |
(64 | ) | $ | 10.60 | ||||||||||||
Exercised |
(21 | ) | $ | 0.50 | ||||||||||||
|
|
|||||||||||||||
Outstanding as of June 30, 2012 |
5,768 | $ | 2.03 | 4.14 | $ | 416 | ||||||||||
|
|
|||||||||||||||
Granted |
5 | $ | 0.62 | |||||||||||||
Canceled/Forfeited |
(102 | ) | $ | 2.64 | ||||||||||||
Exercised |
(31 | ) | $ | 0.50 | ||||||||||||
|
|
|||||||||||||||
Outstanding as of September 30, 2012 |
5,640 | $ | 2.03 | 3.87 | $ | 282 | ||||||||||
|
|
|||||||||||||||
Vested and expected to vest at September 30, 2012 |
5,557 | $ | 2.08 | 3.88 | $ | 282 | ||||||||||
|
|
|||||||||||||||
Vested and exercisable at September 30, 2012 |
5,168 | $ | 2.08 | 3.91 | $ | 278 | ||||||||||
|
|
11
As of September 30, 2012, there was $0.5 million of unrecognized compensation costs, adjusted for estimated forfeitures related to unvested stock-based payments granted, which are expected to be recognized over a weighted average period of 2.0 years.
On August 9, 2012, the Companys board of directors approved the acceleration of vesting of all unvested options to purchase shares of Zhone common stock that were held by the Companys senior management and employees as of that date. The acceleration for shares held by senior management was effective as of August 9, 2012 and the acceleration of shares held by the general employee group was effective as of September 30, 2012. Options to purchase an aggregate of approximately 0.6 million shares of Zhone common stock were subject to the acceleration and resulted in a compensation charge of $0.7 million which was fully expensed in the three month period ended September 30, 2012. The acceleration of these options was undertaken to partially offset previous reductions in cash compensation and other benefits by the Companys senior management and employees.
(8) | Commitments and Contingencies |
Operating Leases
The Company has entered into operating leases for certain office space and equipment, some of which contain renewal options. Estimated future lease payments under all non-cancelable operating leases with terms in excess of one year, including taxes and service fees, are as follows (in thousands):
Operating Leases | ||||
Year ending December 31: |
||||
2012 (remainder of the year) |
$ | 460 | ||
2013 |
1,254 | |||
2014 |
774 | |||
2015 |
577 | |||
2016 and thereafter |
| |||
|
|
|||
Total minimum lease payments |
$ | 3,065 | ||
|
|
Warranties
The Company accrues for warranty costs based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally one year from the date of shipment. The following table reconciles changes in the Companys accrued warranties and related costs for the nine months ended September 30, 2012 and 2011 (in thousands):
Nine Months Ended September 30, |
||||||||
2012 | 2011 | |||||||
Beginning balance |
$ | 1,546 | $ | 1,683 | ||||
Charged to cost of revenue |
884 | 765 | ||||||
Claims and settlements |
(857 | ) | (932 | ) | ||||
|
|
|
|
|||||
Ending balance |
$ | 1,573 | $ | 1,516 | ||||
|
|
|
|
12
Other Commitments
The Company is currently under audit examination by several state taxing authorities for non-income based taxes. The Company has reserved an estimated amount which the Company believes is sufficient to cover potential claims.
Performance Bonds
In the normal course of operations, the Company arranges for the issuance of various types of surety bonds, such as bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds would have been $7.4 million as of September 30, 2012.
Purchase Commitments
The Company has agreements with various contract manufacturers which include non-cancellable inventory purchase commitments. The Companys inventory purchase commitments typically allow for cancellation of orders 30 days in advance of the required inventory availability date as set by the Company at time of order. The amount of non-cancellable purchase commitments outstanding was $5.0 million as of September 30, 2012.
Royalties
The Company has certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue and is recorded in cost of revenue.
Legal Proceedings
The Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.
(9) | Enterprise-Wide Information |
The Company designs, develops and manufactures communications products for network service providers. The Company derives substantially all of its revenues from the sales of the Zhone product family. The Companys chief operating decision maker is the Companys Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. The Company has determined that it has operated within one discrete reportable business segment since inception. The following tables summarize required disclosures about geographic concentrations and revenue by products and services (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue by Geography: |
||||||||||||||||
United States |
$ | 11,534 | $ | 11,807 | $ | 34,016 | $ | 36,534 | ||||||||
Canada |
676 | 1,264 | 3,151 | 2,951 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total North America |
12,210 | 13,071 | 37,167 | 39,485 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Latin America |
7,500 | 8,520 | 23,149 | 22,683 | ||||||||||||
Europe, Middle East, Africa |
8,757 | 8,010 | 24,859 | 27,951 | ||||||||||||
Asia Pacific |
731 | 603 | 1,920 | 951 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total International |
16,988 | 17,133 | 49,928 | 51,585 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 29,198 | $ | 30,204 | $ | 87,095 | $ | 91,070 | |||||||||
|
|
|
|
|
|
|
|
13
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue by Products and Services: |
||||||||||||||||
Products |
$ | 28,144 | $ | 28,832 | $ | 83,609 | $ | 87,408 | ||||||||
Services |
1,054 | 1,372 | 3,486 | 3,662 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
29,198 | 30,204 | 87,095 | 91,070 | ||||||||||||
|
|
|
|
|
|
|
|
(10) | Income Taxes |
The total amount of unrecognized tax benefits, including interest and penalties, at September 30, 2012 was not material. The amount of tax benefits that would impact the effective rate, if recognized, is not expected to be material. There were no significant changes to unrecognized tax benefits during the quarters ended September 30, 2012 and 2011. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The open tax years for the major jurisdictions are as follows:
Federal |
2008 2011 | |||
California and Canada |
2007 2011 | |||
Brazil |
2006 2011 | |||
Germany |
2005 2011 | |||
United Kingdom |
2007 2011 |
However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to technically closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried forward to open years.
In addition, to the extent the Company is deemed to have a sufficient connection to a particular taxing jurisdiction to enable that jurisdiction to tax the Company but the Company has not filed an income tax return in that jurisdiction for the year(s) at issue, the jurisdiction would typically be able to assert a tax liability for such years without limitation on the number of years it may examine.
The Company is not currently under examination for income taxes in any material jurisdiction.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This report, including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as anticipate, believe, continue, could, estimate, expect, goal, intend, may, plan, project, seek, should, target, will, would, variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; future growth and revenues from our Single Line Multi-Service, or SLMS, products; our ability to refinance or repay our existing indebtedness prior to the applicable maturity date; future economic conditions and performance; anticipated performance of products or services; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified under the heading Risk Factors in Part II, Item 1A elsewhere in this report and our other filings with the Securities and Exchange Commission (the SEC). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, the ability to generate sufficient revenue to achieve or sustain profitability, the ability to raise additional capital to fund existing and future operations or to repay or refinance our existing indebtedness, defects or other performance problems in our products, the economic slowdown in the telecommunications industry that has restricted the ability of our customers to purchase our products, commercial acceptance of our SLMS products, intense competition in the communications equipment market from large equipment companies as well as private companies with products that address the same networks needs as our products, higher than anticipated expenses that we may incur, and other factors identified elsewhere in this report and in our most recent reports on Forms 10-K, 10-Q and 8-K. We undertake no obligation to revise or update any forward-looking statements for any reason.
14
OVERVIEW
We believe that we are the first company dedicated solely to developing the full spectrum of next-generation access network solutions to cost-effectively deliver high bandwidth services while simultaneously preserving the investment in todays networks. Our next-generation solutions are based upon our SLMS architecture. From its inception, this SLMS architecture was specifically designed for the delivery of multiple classes of subscriber services (such as voice, data and video distribution), rather than being based on a particular protocol or media. In other words, our SLMS products are built to support the migration from legacy circuit to packet technologies and from copper to fiber technologies. This flexibility and versatility allows our products to adapt to future technologies while allowing service providers to focus on the delivery of additional high bandwidth services. Because this SLMS architecture is designed to interoperate with existing legacy equipment, service providers can leverage their existing networks to deliver a combination of voice, data and video services today, while they migrate, either simultaneously or at a future date, from legacy equipment to next-generation equipment with minimal interruption. We believe that our SLMS solution provides an evolutionary path for service providers from their existing infrastructures, as well as gives newer service providers the capability to deploy cost-effective, multi-service networks that can support voice, data and video.
Our global customer base includes regional, national and international telecommunications carriers. To date, our products are deployed by over 750 network service providers on six continents worldwide. We believe that we have assembled the employee base, technological breadth and market presence to provide a simple yet comprehensive set of next-generation solutions to the bandwidth bottleneck in the access network and the other problems encountered by network service providers when delivering communications services to subscribers.
Since inception, we have incurred significant operating losses and had an accumulated deficit of $1,041.8 million as of September 30, 2012, and we expect that our operating losses may continue. If we are unable to access or raise the capital needed to meet liquidity needs and finance capital expenditures and working capital, or if the economic, market and geopolitical conditions in the United States and the rest of the world do not continue to improve or deteriorate, we may experience material adverse impacts on our business, operating results and financial condition.
Going forward, our key financial objectives include the following:
| Increasing revenue while continuing to carefully control costs; |
| Continued investments in strategic research and product development activities that will provide the maximum potential return on investment; and |
| Minimizing consumption of our cash and cash equivalents. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates included in our Annual Report on Form 10-K for the year ended December 31, 2011.
15
RESULTS OF OPERATIONS
We list in the table below the historical condensed consolidated statement of comprehensive loss data as a percentage of net revenue for the periods indicated.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net revenue |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of revenue |
72 | % | 66 | % | 70 | % | 65 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
28 | % | 34 | % | 30 | % | 35 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Research and product development |
17 | % | 18 | % | 17 | % | 18 | % | ||||||||
Sales and marketing |
17 | % | 18 | % | 17 | % | 18 | % | ||||||||
General and administrative |
8 | % | 7 | % | 7 | % | 7 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
42 | % | 43 | % | 41 | % | 43 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating loss |
(14 | )% | (9 | )% | (11 | )% | (8 | )% | ||||||||
Interest expense |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Interest income |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Other income, net |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(14 | )% | (9 | )% | (11 | )% | (8 | )% | ||||||||
Income tax provision (benefit) |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
(14 | )% | (9 | )% | (11 | )% | (8 | )% | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive loss foreign currency translation adjustments |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Comprehensive loss |
(14 | )% | (9 | )% | (11 | )% | (8 | )% | ||||||||
|
|
|
|
|
|
|
|
Net Revenue
Information about our net revenue for products and services for the three and nine months ended September 30, 2012 and 2011 is summarized below (in millions):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
2012 | 2011 | Increase (Decrease) |
% Change | 2012 | 2011 | Increase (Decrease) |
% Change | |||||||||||||||||||||||||
Products |
$ | 28.1 | $ | 28.8 | $ | (0.7 | ) | (2 | )% | $ | 83.6 | $ | 87.4 | $ | (3.8 | ) | (4 | )% | ||||||||||||||
Services |
1.1 | 1.4 | (0.3 | ) | (21 | )% | 3.5 | 3.7 | (0.2 | ) | (5 | )% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 29.2 | $ | 30.2 | $ | (1.0 | ) | (3 | )% | $ | 87.1 | $ | 91.1 | $ | (4.0 | ) | (4 | )% | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about our net revenue for North America and international markets for the three and nine months ended September 30, 2012 and 2011 is summarized below (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2012 | 2011 | Increase (Decrease) |
% change | 2012 | 2011 | Increase (Decrease) |
% change | |||||||||||||||||||||||||
Revenue by geography: |
||||||||||||||||||||||||||||||||
United States |
$ | 11.5 | $ | 11.8 | $ | (0.3 | ) | (3 | )% | $ | 34.0 | $ | 36.5 | $ | (2.5 | ) | (7 | )% | ||||||||||||||
Canada |
0.7 | 1.3 | (0.6 | ) | (46 | )% | 3.2 | 3.0 | 0.2 | 7 | % | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total North America |
12.2 | 13.1 | (0.9 | ) | (7 | )% | 37.2 | 39.5 | (2.3 | ) | (6 | )% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Latin America |
7.5 | 8.5 | (1.0 | ) | (12 | )% | 23.1 | 22.7 | 0.4 | 2 | % | |||||||||||||||||||||
Europe, Middle East, Africa |
8.8 | 8.0 | 0.8 | 10 | % | 24.9 | 27.9 | (3.0 | ) | (11 | )% | |||||||||||||||||||||
Asia Pacific |
0.7 | 0.6 | 0.1 | 17 | % | 1.9 | 1.0 | 0.9 | 90 | % | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total International |
17.0 | 17.1 | (0.1 | ) | (1 | )% | 49.9 | 51.6 | (1.7 | ) | (3 | )% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 29.2 | $ | 30.2 | $ | (1.0 | ) | (3 | )% | $ | 87.1 | $ | 91.1 | $ | (4.0 | ) | (4 | )% | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
For the three months ended September 30, 2012, net revenue decreased 3% or $1.0 million to $29.2 million from $30.2 million for the same period last year. For the nine months ended September 30, 2012, net revenue decreased 4% or $4.0 million to $87.1 million from $91.1 million for the same period last year.
For the three months ended September 30, 2012, product revenue decreased 2% or $0.7 million to $28.1 million, compared to $28.8 million for the same period last year. For the nine months ended September 30, 2012, product revenue decreased 4% or $3.8 million to $83.6 million, compared to $87.4 million for the same period last year.
The decreases in net revenue and product revenue during the three months ended September 30, 2012 were primarily due to fewer sales of our products in Latin America compared to the prior year, which were partially offset by increases in sales of our products to customers in the Middle East and Asia. The decreases in net revenue and product revenue for the nine months ended September 30, 2012 were primarily due to fewer sales of our products in the Middle East and the United States compared to the prior year, which were partially offset by increases in sales of our products to customers in Latin America and Asia.
For the three months ended September 30, 2012, service revenue decreased by 21% or $0.3 million to $1.1 million, compared to $1.4 million for the same period last year. For the nine months ended September 30, 2012, service revenue decreased by 5% or $0.2 million to $3.5 million, compared to $3.7 million for the same period last year. Service revenue represents revenue from maintenance and other services associated with product shipments.
International net revenue decreased 1% or $0.1 million to $17.0 million for the three months ended September 30, 2012 from $17.1 million for the same period last year, and represented 58% of total net revenue compared with 57% during the same period last year. For the nine months ended September 30, 2012, international net revenue decreased 3% or $1.7 million to $49.9 million from $51.6 million for the same period last year, and represented 57% of total net revenue for both periods. The decrease in international net revenue during the three months ended September 30, 2012 was primarily due to fewer sales of our products in Latin America, which were partially offset by increases in sales of products to customers in the Middle East. The decrease in international net revenue during the nine months ended September 30, 2012 was primarily due to decreases in sales as compared with the same period last year in the Middle East, partially offset by increases in sales to customers in Asia and Latin America.
For the three and nine months ended September 30, 2012, Axtel S.A.B. DE C.V. (Axtel) represented 17% and 11% of net revenue, respectively. For the three and nine months ended September 30, 2011, the same customer accounted for 9% and 7% of net revenue, respectively. We anticipate that our results of operations in any given period may depend to a large extent on sales to a small number of large accounts. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.
Cost of Revenue and Gross Profit
Total cost of revenue, including stock-based compensation, increased $1.1 million or 5% to $21.0 million for the three months ended September 30, 2012 compared to $19.9 million for the same period last year. Cost of revenue increased $2.0 million or 3% to $61.2 million for the nine months ended September 30, 2012 compared to $59.2 million for the same period last year. The increase in cost of revenue for the three and nine months ended September 30, 2012 was primarily due to changes in product mix. In addition, we had previously recorded $0.7 million and $0.1 million in credits to our income statement in the quarters ended June 30, 2011, and September 30, 2011, respectively, as a result of vendor liabilities identified on the consolidated balance sheet where the applicable statute of limitations had expired. Gross margin decreased for both the three and nine months ended September 30, 2012 as compared with the same periods last year due to greater sales of products with lower gross margin, such as the GPON products. Total cost of revenue was 72% and 66% of net revenue for the three months ended September 30, 2012 and 2011, respectively, and 70% and 65% of net revenue for the nine months ended September 30, 2012 and 2011, respectively.
We expect that in the future our cost of revenue as a percentage of net revenue will vary depending on the mix and average selling prices of products sold. In addition, continued competitive and economic pressures could cause us to reduce our prices, adjust the carrying values of our inventory, or record inventory charges relating to discontinued products and excess or obsolete inventory.
Research and Product Development Expenses
Research and product development expenses decreased 4% or $0.2 million to $5.1 million for the three months ended September 30, 2012, compared to $5.3 million for the three months ended September 30, 2011, and decreased 9% or $1.5 million to $14.8 million from $16.3 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decrease in the three and nine months ended September 30, 2012 was primarily due to decreased depreciation expense as a result of a fixed asset impairment in the fourth quarter of 2011 and decreases in allocated facility costs.
17
Sales and Marketing Expenses
Sales and marketing expenses decreased 11% or $0.6 million to $5.0 million from $5.6 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, and decreased 12% or $1.9 million to $14.5 million from $16.4 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decrease for the three months ended September 30, 2012 was primarily due to a $0.3 million decrease in sales expenses from continued cost reductions in travel and consulting expenses, and decreased commissions, as well as a decrease in marketing and customer service related personnel expenses of $0.2 million. The decrease for the nine months ended September 30, 2012 was primarily due to decreases in sales expense of $1.1 million from continued cost reductions in personnel and consulting expenses, and decreased commissions, as well as decreases of $0.4 million in marketing expenses and $0.3 million in customer service related expenses.
General and Administrative Expenses
General and administrative expenses increased 7% or $0.1 million to $2.3 million from $2.2 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, and decreased 3% or $0.2 million to $6.1 million from $6.3 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase for the three months ended September 30, 2012 was primarily due to an increase of $0.1 million in bad debt expense. The decrease for the nine months ended September 30, 2012 was primarily due a reduction of $0.4 million in depreciation expense as a result of a fixed asset impairment in the fourth quarter of 2011, as well as a decrease of $0.3 million in stock-based compensation expense. These decreases were partially offset by an increase of $0.4 million in bad debt expense.
Income Tax Provision
During the three and nine months ended September 30, 2012 and 2011, no material provision or benefit for income taxes was recorded, due to our recurring operating losses and the significant uncertainty regarding the realization of our net deferred tax assets, against which we have continued to record a full valuation allowance.
18
OTHER PERFORMANCE MEASURES
In managing our business and assessing our financial performance, we supplement the information provided by our GAAP results with adjusted earnings before stock-based compensation, interest, taxes, and depreciation, or Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) non-cash equity-based compensation expense, and (v) material non-recurring non-cash transactions. We believe that the presentation of Adjusted EBITDA enhances the usefulness of our financial information by presenting a measure that management uses internally to monitor and evaluate our operating performance and to evaluate the effectiveness of our business strategies. We believe Adjusted EBITDA also assists investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes the impact of items that we do not believe reflect our core operating performance.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
| Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual requirements; |
| Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; |
| although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and |
| other companies in our industry may calculate Adjusted EBITDA and similar measures differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) or any other performance measures calculated in accordance with GAAP or as a measure of liquidity. Management understands these limitations and compensates for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.
19
Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA, which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net loss |
$ | (4,198 | ) | $ | (2,748 | ) | $ | (9,714 | ) | $ | (7,084 | ) | ||||
Add: |
||||||||||||||||
Interest expense |
26 | 33 | 53 | 110 | ||||||||||||
Provision for taxes |
14 | 13 | 63 | (33 | ) | |||||||||||
Depreciation and amortization |
77 | 447 | 234 | 1,343 | ||||||||||||
Non-cash equity-based compensation expense |
834 | 931 | 1,266 | 1,454 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted EBITDA |
$ | (3,247 | ) | $ | (1,324 | ) | $ | (8,098 | ) | $ | (4,210 | ) | ||||
|
|
|
|
|
|
|
|
20
LIQUIDITY AND CAPITAL RESOURCES
Our operations are financed through a combination of our existing cash, cash equivalents, available credit facilities, and sales of equity and debt instruments, based on our operating requirements and market conditions.
At September 30, 2012, cash and cash equivalents were $10.3 million compared to $18.2 million at December 31, 2011. The $7.9 million decrease in cash and cash equivalents was attributable to net cash used in financing and operating activities of $4.9 million and $2.8 million, respectively.
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2012 was $2.8 million and consisted of a net loss of $9.7 million, adjusted for non-cash charges totaling $3.2 million and a decrease in net operating assets totaling $3.7 million. The most significant components of the changes in net operating assets were a decrease of $3.8 million in accounts receivable and a decrease of $2.0 million in inventories, offset by a decrease of $2.0 million in accrued and other liabilities. The decrease in accounts receivable was primarily the result of significant cash collections from several large customers in the current year period. The decrease in inventories was primarily due to better utilization of inventory in the current year period. The decrease in accrued and other liabilities was comprised of the decrease in the operating lease liability related to our Largo facility of $0.8 million, non-cash decreases in the deferred gain and leasehold improvement allowance of $0.6 million, and reduced personnel accruals of $0.2 million.
Net cash used in operating activities for the nine months ended September 30, 2011 was $2.2 million and consisted of a net loss of $7.1 million, adjusted for non-cash charges totaling $4.1 million and a decrease in operating assets totaling $0.7 million. The most significant components of the changes in net operating assets were decreases of $2.8 million in accrued and other liabilities and offsetting decreases in inventories and accounts receivable of $1.6 million and $1.6 million, respectively. The decrease in accrued and other liabilities was comprised of reduced personnel accruals of $0.6 million, continued reduction of the operating lease liability related to our Largo facility of $1.5 million, a decrease of $0.1 million in other accrual accounts, and the non-cash decreases in the deferred gain and leasehold improvement allowance of $0.6 million from the campus sale-leaseback transaction in the third quarter of 2010 due to continued amortization. The decrease in inventories was primarily due to better utilization of inventory in the current period, and the decrease in accounts receivable was due to significant cash collections in the nine months ended September 30, 2011 which were in excess of the additional receivables booked.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2012 was $0.3 million compared to $1.2 million for the same period last year. Net cash used in investing activities for both periods consisted primarily of purchases of property and equipment.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2012 was $4.9 million and consisted of repayments of debt of $5.0 million, partially offset by proceeds related to exercises of stock options and purchases under our Employee Stock Purchase Plan of $0.1 million. Net cash provided by financing activities for the nine months ended September 30, 2011 consisted of proceeds related to exercises of stock options of $0.1 million.
Cash Management
Our primary source of liquidity comes from our cash and cash equivalents which totaled $10.3 million at September 30, 2012, and our $25.0 million revolving line of credit and letter of credit facility, or the WFB Facility, with Wells Fargo Bank, or WFB. Our cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in our operating accounts. At current revenue levels, we anticipate that some portion of our existing cash and cash equivalents will continue to be consumed by operations.
In March 2012, we entered into our $25.0 million WFB Facility to provide liquidity and working capital through March 12, 2014.
Under the WFB Facility, we have the option of borrowing funds at agreed upon interest rates. The amount that we are able to borrow under the WFB Facility varies based on eligible accounts receivable, as defined in the agreement, as long as the aggregate principal amount outstanding does not exceed $25.0 million less the amount committed as security for various letters of credit, which at September 30, 2012 was $11.4 million. To maintain availability of funds under the WFB Facility, we pay a commitment fee on the unused portion. The commitment fee is 0.25% per annum and is recorded as interest expense.
Under the WFB Facility, $10.0 million was outstanding at September 30, 2012. In addition, $11.4 million was committed as security under various letters of credit and we had $0.5 million unused availability under the WFB Facility as of September 30, 2012. The amounts borrowed under the WFB Facility bear interest, payable monthly, at a floating rate equal to the three-month LIBOR plus a margin of 3.5%. The interest rate on our WFB Facility was 3.90% at September 30, 2012.
21
Our obligations under the WFB Facility are secured by substantially all of our personal property assets and those of our subsidiaries that guarantee the WFB Facility, including our intellectual property. The WFB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If we do not comply with the various covenants and other requirements under the WFB Facility, WFB is entitled to, among other things, require the immediate repayment of all outstanding amounts and sell our assets to satisfy the obligations under the WFB Facility. As of September 30, 2012, we were in compliance with these covenants. We make no assurances that we will be in compliance with these covenants in the future.
22
Future Requirements and Funding Sources
Our fixed commitments for cash expenditures consist primarily of payments under operating leases, inventory purchase commitments, and payments of principal and interest for debt obligations. Our operating lease commitments include $1.9 million of future minimum lease payments spread over the five-year lease term under the lease agreement we entered into in September 2011 with respect to our Oakland, California campus following the sale of our campus in a sale-leaseback transaction.
Our accounts receivable, while not considered a primary source of liquidity, represent a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of September 30, 2012, Axtel and Emirates Telecommunications Corporation (Etisalat) accounted for 30% and 17% of net accounts receivable, respectively, and receivables from customers in countries other than the United States of America represented 75% of net accounts receivable. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt.
We expect that operating losses and negative cash flows from operations may continue. In order to meet our liquidity needs and finance our capital expenditures and working capital needs for our business, we may be required to sell assets, issue debt or equity securities or borrow on unfavorable terms. Continued uncertainty in credit markets may negatively impact our ability to access debt financing or to refinance existing indebtedness in the future on favorable terms, or at all. We may be unable to sell assets, issue securities or access additional indebtedness to meet these needs on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. Likewise, any equity financing could result in additional dilution of our stockholders. If we are unable to obtain additional capital or are required to obtain additional capital on terms that are not favorable to us, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. Based on our current plans and business conditions, we believe that our existing cash, cash equivalents and available credit facilities will be sufficient to satisfy our anticipated cash requirements for the next twelve months.
Contractual Commitments and Off-Balance Sheet Arrangements
At September 30, 2012, our future contractual commitments by fiscal year were as follows (in thousands):
Payments due by period | ||||||||||||||||||||||||
Total | 2012 | 2013 | 2014 | 2015 | 2016 and Thereafter | |||||||||||||||||||
Operating leases |
$ | 3,065 | $ | 460 | $ | 1,254 | $ | 774 | $ | 577 | $ | | ||||||||||||
Purchase commitments |
4,971 | 4,971 | | | | | ||||||||||||||||||
Line of credit (1) |
10,000 | 10,000 | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total future contractual commitments |
$ | 18,036 | $ | 15,431 | $ | 1,254 | $ | 774 | $ | 577 | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The specified payment period reflects our current intent to repay all outstanding borrowings within the current year. However, the maturity date under the WFB Facility is March 12, 2014. |
Operating Leases
The operating lease amounts shown above represent primarily off-balance sheet arrangements. For operating lease commitments, a liability is generally not recorded on our balance sheet unless the facility represents an excess facility for which an estimate of the facility exit costs has been recorded on our balance sheet, net of estimated sublease income. For operating leases that include contractual commitments for operating expenses and maintenance, estimates of such amounts are included based on current rates. Payments made under operating leases will be treated as rent expense for the facilities currently being utilized.
Purchase Commitments
The purchase commitments shown above represent non-cancellable inventory purchase commitments as of September 30, 2012. The inventory purchase commitments typically allow for cancellation of orders 30 days in advance of the required inventory availability date as set by us at time of order.
23
Line of Credit
The line of credit obligation has been recorded as a liability on our balance sheet. The line of credit obligation amount shown above represents the scheduled principal repayment, but not the associated interest payments which may vary based on changes in market interest rates. At September 30, 2012, the interest rate under the WFB Facility was 3.90%.
As of September 30, 2012, we had $10.0 million outstanding under our line of credit under the WFB Facility and an additional $11.4 million committed as security for various letters of credit. See above under Cash Management for further information about the WFB Facility.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Cash and Cash Equivalents
Cash and cash equivalents consisted of the following as of September 30, 2012 and December 31, 2011 (in thousands):
September 30, 2012 |
December 31, 2011 |
|||||||
Cash |
$ | 10,274 | $ | 18,124 | ||||
Money Market Funds |
| 66 | ||||||
|
|
|
|
|||||
$ | 10,274 | $ | 18,190 | |||||
|
|
|
|
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. Cash and cash equivalents consist principally of demand deposit and money market accounts. Cash and cash equivalents are principally held with various domestic financial institutions with high credit standing. We perform ongoing credit evaluations of our customers and generally do not require collateral. Allowances are maintained for potential doubtful accounts. For the three and nine months ended September 30, 2012, Axtel accounted for 17% and 11% of net revenue, respectively. For the three and nine months ended September 30, 2011, the same customer accounted for 9% and 7% of net revenue, respectively.
As of September 30, 2012, Axtel and Etisalat accounted for 30% and 17% of net accounts receivable, respectively. As of December 31, 2011, the same customers accounted for 24% and 29% of net accounts receivable, respectively.
As of September 30, 2012 and December 31, 2011, receivables from customers in countries other than the United States represented 75% and 71%, respectively, of net accounts receivable.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our outstanding debt. As of September 30, 2012, our outstanding debt balance under our WFB Facility was $10.0 million. Interest on the line of credit under our WFB Facility accrues at a floating rate equal to the three-month LIBOR plus a margin of 3.5%. The interest rate on our WFB Facility was 3.90% as of September 30, 2012. Assuming the outstanding balance on our variable rate debt remains constant over a year, a 2% increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.2 million.
Foreign Currency Exchange Risk
We transact business in various foreign countries. Substantially all of our assets are located in the United States. We have sales operations throughout Europe, Asia, the Middle East and Latin America. We are exposed to foreign currency exchange risk associated with foreign currency denominated assets and liabilities, primarily inter-company receivables and payables. Accordingly, our operating results are exposed to changes in exchange rates between the U.S. dollar and those currencies. During 2012 and 2011, we did not hedge any of our foreign currency exposure.
We have performed sensitivity analyses as of September 30, 2012 using a modeling technique that measures the impact arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign exchange loss of $0.3 million at September 30, 2012. This sensitivity analysis assumes a parallel adverse shift in foreign currency exchange rates, which do not always move in the same direction. Actual results may differ materially.
24
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted in this Part I, Item 4, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to Zhone and its consolidated subsidiaries is made known to management, including our Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
We are subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.
Item 1A. | Risk Factors |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011, as updated by our Quarterly Report on Form 10-Q for the three months ended June 30, 2012 and filed with the SEC on August 9, 2012, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2011 (as so updated). The risks described in our Annual Report on Form 10-K (as so updated) are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 5. | Other Information |
On November 13, 2012, we entered into a second amended and restated employment agreement with Morteza Ejabat, our Chief Executive Officer (the Restated Employment Agreement), which, among other matters, amended Mr. Ejabats rights to compensation in the event his employment is terminated by us without cause or by Mr. Ejabat for good reason.
25
The Restated Employment Agreement has an initial term expiring on November 13, 2016, and on each anniversary thereof the term will automatically be extended for one additional year unless either party delivers notice to the other party of its intention not to extend the term. During the term of the Restated Employment Agreement, Mr. Ejabat will serve as Chief Executive Officer of the company, with such duties and responsibilities as are commensurate with the position, and report directly to our Board of Directors. Under the Restated Employment Agreement, Mr. Ejabat will receive certain compensation in the event that his employment is terminated by us without cause or by Mr. Ejabat for good reason. For purposes of Mr. Ejabats Restated Employment Agreement, cause is generally defined to include: (1) his willful or continued failure to substantially perform his duties with the company, (2) his conviction of, guilty plea to, or entry of a nolo contendere plea to a felony, (3) his willful or reckless misconduct that has caused or is reasonably likely to cause demonstrable and material financial injury to the company, or (4) his failure to cure the adverse effects of his willful and material breach of certain sections in the Restated Employment Agreement pertaining to disclosure and assignment of inventions, confidentiality and nonsolicitation within the required time. For purposes of Mr. Ejabats Restated Employment Agreement, good reason is generally defined to include the occurrence of any of the following events without his consent: (1) a material diminution in his base compensation, (2) a material diminution in his authority, duties or responsibilities, (3) a material change in the geographic location at which he must perform his duties, or (4) any other action or inaction that constitutes a material breach by us of our obligations under the Restated Employment Agreement. Specifically, in those events, if such termination occurs prior to a Change in Control (as such term is defined in Zhones Amended and Restated 2001 Stock Incentive Plan), Mr. Ejabat would be entitled to receive a lump sum payment equal to the greater of (1) his annual salary as in effect immediately prior to the date of termination, and (2) two times his 2008 annual salary prior to giving effect to any voluntary salary reduction. If such termination occurs following a Change in Control, Mr. Ejabat would be entitled to receive a lump sum payment equal to the greater of (1) his annual salary as in effect immediately prior to the date of termination and (2) three times his 2008 annual salary prior to giving effect to any voluntary salary reduction.
Mr. Ejabat has agreed to forego his annual base cash compensation effective October 1, 2012 through December 31, 2013, to assist the company in conserving cash for operations. Such voluntary reduction in compensation shall not be considered good reason under the Restated Employment Agreement.
The foregoing description of the Restated Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Restated Employment Agreement, filed as Exhibit 10.1 hereto, and incorporated herein by reference.
Item 6. | Exhibits |
The Exhibit Index on page 28 is incorporated herein by reference as the list of exhibits required as part of this report.
26
Pursuant to the retirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ZHONE TECHNOLOGIES, INC. | ||||
Date: November 14, 2012 | By: | /s/ MORTEZA EJABAT | ||
Name: | Morteza Ejabat | |||
Title: | Chief Executive Officer | |||
By: | /s/ KIRK MISAKA | |||
Name: | Kirk Misaka | |||
Title: | Chief Financial Officer |
27
EXHIBIT INDEX
Exhibit Number |
Description | |
10.1 | Second Amended and Restated Employment Agreement, dated as of November 13, 2012, by and between Zhone Technologies, Inc. and Morteza Ejabat | |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) | |
32.1 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB* | XBRL Taxonomy Extension Labels Linkbase | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
* | Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are otherwise not subject to liability under these sections. |
28
Exhibit 10.1
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (Agreement) is made and entered into on November 13, 2012, by and between Zhone Technologies, Inc., a Delaware corporation (the Company) and Mory Ejabat (Executive).
WHEREAS, the Company and Executive are parties to that certain Amended and Restated Employment Agreement dated as of November 8, 2007 (the Prior Agreement);
WHEREAS, the Company desires to continue to engage Executive as Chief Executive Officer of the Company and Executive desires to continue to be so engaged by the Company in such position, on the terms and conditions set forth and described herein; and
WHEREAS, the parties desire to amend and restate the Prior Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties agree as follows:
1. Employment. The Company hereby agrees to employ Executive, and Executive hereby agrees to serve, subject to the provisions of this Agreement, as an employee of the Company in the position of Chief Executive Officer. Executive shall perform all services and acts necessary to fulfill the duties and responsibilities of his position and shall render such services on the terms set forth herein and shall report to the Companys Board of Directors (the Board of Directors). In addition, Executive shall have such other executive and managerial powers and duties with respect to the Company as may reasonably be assigned to him by the Board of Directors, to the extent consistent with his positions and status as set forth above. Except as otherwise approved by a majority of the Board of Directors, Executive agrees to devote a majority of his business time, attention and energies to the performance of the duties assigned hereunder, and to perform such duties diligently, faithfully and to the best of his abilities. Except as otherwise approved by a majority of the Board of Directors, Executive agrees to refrain from any business activity that does, will or could reasonably be deemed to materially conflict with the best interests of the Company.
2. Term. The term of Executives employment pursuant to this Agreement is for the four-year period (the Term) commencing on the date hereof and terminating on the fourth (4th) anniversary of the date hereof (the Expiration Date), or upon the date of earlier termination of employment pursuant to Section 8 of this Agreement; provided, however, that commencing on the Expiration Date and each anniversary thereafter the Term shall automatically be extended for one additional year unless, not later than ninety (90) days prior to any such anniversary, either party hereto shall have notified the other party in writing hereto that such extension shall not take effect.
3. Place of Performance. The Executive shall perform his duties and conduct his business at the principal executive offices of the Company, except for required travel on the Companys business.
4. Compensation.
(a) Salary. Executives salary shall be determined on at least an annual basis by the Compensation Committee of the Board of Directors (the Annual Salary) and payable in accordance with the Companys regular payroll practices. All applicable withholding taxes shall be deducted from such payments.
(b) Bonus. During each year of the Term, the Board of Directors shall review the Executives performance, and may, in its sole discretion, cause to be paid to Executive a bonus in addition to the Annual Salary.
5. Business Expenses. During the Term, the Company will reimburse Executive for all ordinary and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation in conformance with the Companys normal procedures.
1
6. Vacation, Holidays and Sick Leave. During the Term, Executive shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Companys standard policies for its officers.
7. Benefits. During the Term, Executive shall be eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements (collectively, the Employee Benefits) available to officers of the Company generally.
8. Termination of Employment.
(a) Notwithstanding any provision of this Agreement to the contrary, employment of Executive hereunder shall terminate on the first to occur of the following dates:
(i) the date of Executives death or adjudicated incompetency;
(ii) the date on which Executive shall have experienced a Disability (as defined below), and the Company terminates Executives employment on account of Disability;
(iii) the date on which Executives employment is terminated by the Company for Cause (as defined below);
(iv) expiration of the Term;
(v) the date on which Executives employment is terminated by the Company for any reason other than the reasons set forth in (i) through (iv) above;
(vi) the date on which Executive resigns his employment for Good Reason (as defined below); or
(vii) the date on which Executive resigns his employment for a reason other than Good Reason.
(b) For purposes of this Agreement, Disability shall mean an illness, injury or other incapacitating condition as a result of which Executive is substantially unable to perform the services required to be performed under this Agreement for (i) one hundred eighty (180) consecutive days during the Term; or (ii) a period or periods aggregating more than two hundred forty (240) days in any period of twelve (12) consecutive months during the Term. In the event the Company seeks to terminate Executives employment due to Disability, the Company shall give notice to Executive of the termination of Executives employment for Disability. Executive agrees to submit to such medical examinations as may be necessary to determine whether a Disability exists, pursuant to such reasonable requests made by the Company from time to time. Any determination as to the existence of a Disability shall be made by a physician approved by the Board of Directors and by Executive (or, if Executive is unable to give such approval, by Executives representative), which approval shall not be unreasonably withheld by the Board of Directors or Executive.
(c) For purposes of this Agreement, Cause shall mean the occurrence of any of the following events:
(i) The reasonable determination of the Board of Directors that Executive has willfully or continually failed to substantially perform his duties with the Company.
Notwithstanding the foregoing, Cause shall only exist under this Section 8(c)(i) if:
(A) the Board of Directors has given Executive written notice that it has reasonably determined Executive has willfully or continually failed to substantially perform his duties with the Company, which notice shall identify with specificity the duties the Board of Directors has reasonably determined Executive to have willfully or continually failed to substantially perform; and
2
(B) at the end of the period ending sixty (60) days from the date on which the notice in Section 8(c)(i)(A) is given by the Board of Directors to Executive, the Board of Directors reasonably determines that Executive has failed to cure the willful or continual failure to substantially perform his duties identified with specificity in the written notice described in Section 8(c)(i)(A);
(ii) Executives conviction of, guilty plea to, or entry of a nolo contendere plea to a felony.
(iii) The reasonable determination of the Board of Directors that Executive has engaged in willful or reckless misconduct that has caused or is reasonably likely to cause demonstrable and material financial injury to the Company.
Notwithstanding the foregoing, Cause shall only exist under this Section 8(c)(iii) if:
(A) the Board of Directors has given Executive written notice that the Board of Directors has reasonably determined that Executive has committed willful or reckless misconduct which has caused or is reasonably likely to cause demonstrable and material financial injury to the Company, which notice shall identify with specificity the willful or reckless misconduct the Board of Directors has reasonably determined Executive to have committed; and
(B) at the end of the period ending sixty (60) days after the date on which the notice described in Section 8(c)(iii)(A) is given by the Board of Directors to Executive, the Board of Directors reasonably determines that Executive has failed to cure the willful or reckless misconduct identified with specificity in the notice described in Section 8(c)(iii)(A); or
(iv) Executives willful and material breach of Sections 11, 12, or 13 of this Agreement.
Notwithstanding the foregoing, Cause shall only exist under this Section 8(c)(iv) if:
(A) the Board of Directors has given written notice to Executive of its intent to terminate Executive for Executives willful and material breach of Section 11, 12, or 13 of this Agreement; and
(B) Executive has failed to cure the adverse effects of Executives willful and material breach of Section 11, 12, or 13 of this Agreement within the time period afforded Executive in the Board of Directors notice described in Section 8(c)(iv)(A), which time period shall be no less than sixty (60) days after the Company provides Executive with notice of the Board of Directors intent to terminate Executive for Cause.
For purposes of Sections 8(c)(i), (iii) and (iv), an act on Executives part shall not be deemed willful, reckless, or continual if done by Executive in good faith and with reasonable belief that the act was in the best interest of the Company.
(d) For purposes of this Agreement, Good Reason shall mean the occurrence of any of the following events without the Executives consent:
(i) a material diminution in Executives base compensation;
(ii) a material diminution in Executives authority, duties or responsibilities, including a requirement that Executive report to a corporate officer or employee instead of reporting directly to the Board of Directors;
(iii) a material change in the geographic location at which Executive must perform his duties; or
3
(iv) any other action or inaction that constitutes a material breach by the Company of its obligations to Executive under this Agreement.
Notwithstanding the foregoing, Good Reason shall only exist if Executive shall have provided the Company with ninety (90) days written notice of the initial occurrence of any of the foregoing events or conditions, and the Company fails to eliminate the conditions constituting Good Reason within thirty (30) days after receipt of written notice of such event or condition from Executive. Executives termination by reason of resignation from employment with the Company for Good Reason shall be treated as involuntary. Executives resignation from employment with the Company for Good Reason must occur within two (2) years following the initial existence of the act or failure to act constituting Good Reason.
9. Compensation in Event of Termination. Upon termination of the Term for any reason, the Company shall have no further obligation to Executive except to pay the amounts set forth in this Section 9.
(a) In the event Executives employment is terminated pursuant to Sections 8(a)(i), (ii), (iii) (iv), or (vii) during or at the expiration of the Term, Executive or his estate, conservator or designated beneficiary, as the case may be, shall be entitled to payment of any earned but unpaid Annual Salary through the date of termination, as well as any accrued vested benefits and unreimbursed business expenses to which Executive is entitled. Following any such termination, neither Executive nor his estate, conservator or designated beneficiary shall be entitled to receive any other payment provided for hereunder with respect to any period after such termination, except as Executive may otherwise be entitled pursuant to any employee benefit plan.
(b) In the event Executives employment is terminated pursuant to Section 8(a)(v) or (vi) during the Term and such termination occurs prior to a Change in Control (as such term is defined in the Companys 2001 Stock Incentive Plan, as amended), Executive shall be entitled to receive, as his sole and exclusive remedy, (x) payment of any earned but unpaid Annual Salary through the date of termination, as well as any accrued vested benefits and unreimbursed business expenses to which Executive is entitled and (y) a lump sum payment equal to the greater of (i) Executives Annual Salary as in effect immediately prior to the date of termination or (ii) two (2) times Executives 2008 annual base salary prior to giving effect to any voluntary salary reduction (which annual base salary was $825,000 prior to giving effect to any such reduction), which amount shall be paid in exchange for a standard release of claims. Executive will not receive the severance in this Section 9(b) if he does not sign the release of claims within fifty (50) days following his date of termination, or he revokes the release. The severance will be paid on the eighth (8th) day following the effective date of the release.
(c) In the event Executives employment is terminated pursuant to Section 8(a)(v) or (vi) during the Term and such termination occurs following a Change in Control, Executive shall be entitled to receive, as his sole and exclusive remedy, (x) payment of any earned but unpaid Annual Salary through the date of termination, as well as any accrued vested benefits and unreimbursed business expenses to which Executive is entitled and (y) a lump sum payment equal to the greater of (i) Executives Annual Salary as in effect immediately prior to the date of termination or (ii) three (3) times Executives 2008 annual base salary prior to giving effect to any voluntary salary reduction (which annual base salary was $825,000 prior to giving effect to any such reduction), which amount shall be paid in exchange for a standard release of claims. Executive will not receive the severance in this Section 9(c) if he does not sign the release of claims within fifty (50) days following his date of termination, or he revokes the release. The severance will be paid on the eighth (8th) day following the effective date of the release.
(d) This Agreement is not intended to provide for any deferral of compensation subject to Section 409A of the Internal Revenue Code of 1986, as amended (the Code), and, accordingly, the severance payments payable under Sections 9(b)(y) and 9(c)(y) shall be paid no later than the later of: (i) the fifteenth (15th) day of the third month following Executives first taxable year in which such severance benefit is no longer subject to a substantial risk of forfeiture, and (ii) the fifteenth (15th) day of the third month following the first taxable year of the Company in which such severance benefit is no longer subject to a substantial risk of forfeiture, as determined in accordance with Code Section 409A and any Treasury Regulations and other guidance issued thereunder. To the extent applicable, this Agreement shall be interpreted in accordance with Code Section 409A and Department of Treasury regulations and other interpretive guidance issued thereunder.
4
(e) Notwithstanding anything to the contrary in this Agreement, if at the time of Executives termination of employment with the Company Executive is a specified employee as defined in Code Section 409A, as determined by the Company in accordance with Code Section 409A, to the extent that the payments or benefits under this Agreement are subject to Code Section 409A and the delayed payment or distribution of all or any portion of such amounts to which Executive is entitled under this Agreement is required in order to avoid a prohibited distribution under Code Section 409A(a)(2)(B)(i), then such portion shall be paid or distributed to Executive during the thirty (30) day period commencing on the earlier of (x) the date that is six (6) months following Executives termination of employment with the Company, (y) the date of Executives death, or (z) the earliest date as is permitted under Code Section 409A.
10. Representations.
(a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against the Company in accordance with its terms. The Company acknowledges and agrees that Executive is serving as an executive officer and/or director of DictumNet, Inc. and Ejent Group, LLC, in addition to his position with the Company, and that such other business activities are permissible under the terms of this Agreement.
(b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement.
11. Disclosure and Assignment of Inventions.
(a) Executive has provided on Exhibit A, attached hereto, a list describing all inventions, original works of authorship, developments, improvements, and trade secrets which were made by Executive prior to employment with the Company, which belong to Executive alone or jointly with others, which relate to the Companys proposed business, products or research and development, and which are not assigned to the Company; if none is stated on Exhibit A, Executive therefore represents that there are no such inventions, works of authorship, developments, improvements or trade secrets.
(b) Executive agrees to promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of Company, and hereby assigns to Company all right, title, and interest in and to any and all inventions (and patent rights with respect thereto), original works of authorship (including all copyrights with respect thereto), developments, improvements or trade secrets which Executive may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice during the Term.
(c) Executive understands that the provisions of this Agreement requiring assignment to the Company do not apply to any invention made by an employee of the Company which qualifies fully under the provisions of Section 2870 of the California Labor Code which provides:
(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employers equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employers business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under Subdivision (a), the provision is against the public policy of this state and is unenforceable.
Executive agrees to advise the Company promptly in writing of any inventions that he believes meet the criteria of Section 2870 of the California Labor Code, and will also provide at that time to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not disclose to third parties without Executives consent any confidential information disclosed in writing to the Company relating to inventions that qualify fully under the provisions of Section 2870 of the California Labor Code.
5
12. Confidentiality. Executive acknowledges that in his employment hereunder he will occupy a position of trust and confidence. The Executive covenants and agrees that he will not at any time during and after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) of the Company and its subsidiaries or affiliates. As used herein, Confidential Information means information about the Company and its subsidiaries or affiliates of any kind, nature or description, including but not limited to, any proprietary knowledge, trade secrets, data, formulae, information and client and customer lists and all papers, resumes, and records (including computer records) which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the businesses in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Companys business which were considered by the Executive or the Company during the term of this Agreement. Executive acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Company and its subsidiaries, and that such information gives the Company and its subsidiaries a competitive advantage. Executive agrees to deliver or return to the Company, at the Companys request at any time or upon termination or expiration of his employment or as soon thereafter as possible, all documents, computer tapes and disks, records, lists, data, drawings, prints, notes and written information (and all copies thereof) furnished by the Company and its subsidiaries or affiliates or prepared by Executive during the term of his employment by the Company and its subsidiaries or affiliates.
13. Nonsolicitation.
(a) Customers and Suppliers. During the Term and, for a period of nine (9) months beyond the expiration of the Term, Executive shall not, directly or indirectly, influence or attempt to influence customers or suppliers of the Company or any of its subsidiaries or affiliates to divert their business to any competitor of the Company.
(b) Employees. Executive recognizes that he will possess confidential information about other employees of the Company and its subsidiaries and affiliates relating to their education, experience, skills, abilities, compensation and benefits, and inter-personal relationships with customers of the Company and its subsidiaries and affiliates. Executive recognizes that the information he will possess about these other employees is not generally known, is of substantial value to the Company and its subsidiaries in developing its business and in securing and retaining customers, and will be acquired by him because of his business position with the Company and its subsidiaries and affiliates. Executive agrees that, during the Term and for a period of nine (9) months beyond the expiration of the Term, he will not, directly or indirectly, induce, solicit or recruit any employee of the Company or its subsidiaries or affiliates for the purpose of being employed by him or by any competitor of the Company on whose behalf he is acting as an agent, representative or employee, and that he will not convey any such confidential information or trade secrets about other employees of the Company and its subsidiaries or affiliates to any other person.
(c) Reasonableness of Relief; Blue Penciling. Executive acknowledges and agrees that the covenants and agreements contained herein are reasonable and valid in geographic and temporal scope and in all other respects and are reasonably necessary to protect the Company. If any court determines that any of the covenants and agreements contained herein, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable to the maximum extent permitted by applicable law.
14. Rights and Remedies upon Breach. In the event Executive breaches, or threatens to commit a breach of, any of the provisions of this Agreement, the Company and its subsidiaries, affiliates, successors or assigns shall have the following rights and remedies, each of which shall be independent of the others and severally enforceable, and each of which shall be in addition to, and not in lieu of, any other rights or remedies available to the Company or its subsidiaries, affiliates, successors or assigns at law or in equity under this Agreement or otherwise:
(a) Specific Performance. The right and remedy to have each and every one of the covenants in this Agreement specifically enforced and the right and remedy to obtain injunctive relief, it being agreed that any breach or threatened breach of any of the nonsolicitation or other restrictive covenants and agreements contained herein would cause irreparable injury to the Company and its subsidiaries, affiliates, successors or assigns and that money damages would not provide an adequate remedy at law to the Company and its subsidiaries, affiliates, successors or assigns.
6
(b) Accounting. The right and remedy to require Executive to account for and pay over to the Company and its subsidiaries, affiliates, successors or assigns, as the case may be, all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive that result from any transaction or activity constituting a breach of this Agreement.
(c) Enforceability in all Jurisdictions. Executive intends to and hereby confers jurisdiction to enforce each and every one of the covenants and agreements contained herein upon the courts of any jurisdiction within the geographic scope of such covenants and agreements. If the courts of any one or more of such jurisdictions hold any such covenant or agreement unenforceable by reason of the breadth or such scope or otherwise, it is the intention of Executive and the Company that such determination shall not bar or in any way affect the Companys or any of its subsidiaries, affiliates, successors or assigns right to the relief provided above in the courts of any other jurisdiction within the geographic scope of such covenants and agreements, as to breaches of such covenants and agreements in such other respective jurisdictions, such covenants and agreements as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants and agreements.
15. Intentionally omitted.
16. Binding Agreement. This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. This Agreement shall be binding upon and shall by its terms automatically be assigned to any successor in interest to the Company in a Change in Control, including but not limited to any entity that acquires substantially all of the assets, capital stock or operations of the Company.
17. Return of Company Property. Executive agrees that following the termination of his employment for any reason, he shall return all property of the Company, its subsidiaries, affiliates and any divisions thereof he may have managed which is then in or thereafter comes into his possession, including, but not limited to, documents, contracts, agreements, plans, photographs, books, notes, electronically stored data and all copies of the foregoing as well as any materials or equipment supplied by the Company to Executive.
18. Entire Agreement. This Agreement contains all the understandings between the parties hereto pertaining to the matters referred to herein, and supersedes all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto, including, without limitation, the Prior Agreement. Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise.
19. Amendment or Modification, Waiver. No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by Executive and by a duly authorized officer of the Company. The failure of either party to this Agreement to enforce any of its terms, provisions or covenants shall not be construed as a waiver of the same or of the right of such party to enforce the same. Waiver by either party hereto of any breach or default by the other party of any term or provision of this Agreement shall not operate as a waiver of any other breach or default.
20. Notices. Any notice to be given hereunder shall be in writing and shall be deemed given when delivered personally, sent by courier or fax or registered or certified mail, postage prepaid, return receipt requested, addressed to Executive at the most recent address on the Companys payroll records and to the Company at the address indicated below or to such other address as either party may subsequently give notice of hereunder in writing:
7
To the Company at:
Zhone Technologies, Inc.
7195 Oakport Street
Oakland, CA 94621
Attention: Chief Financial Officer
Fax: (510) 777-7001
Any notice delivered personally or by courier under this Section 20 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed.
21. Severability. In the event that any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remainder of the Agreement shall not in any way be affected or impaired thereby. Moreover, if any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity or subject, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent allowed by applicable law.
22. Survivorship. The respective rights and obligations of the parties hereunder, including but not limited to Executives obligations under Sections 12 and 13, shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.
23. Each Party the Drafter. This Agreement and the provisions contained in it shall not be construed or interpreted for or against any party to this Agreement because that party drafted or caused that partys legal representative to draft any of its provisions.
24. Governing Law. This contract shall be governed by the laws of the State of California as they are applied to contracts between California residents to be performed completely within California.
25. Binding Arbitration. Except as provided in Section 14(a) of this Agreement, the parties agree that any disputes arising out of or related to this Agreement shall be settled by binding arbitration, and judgment upon the award may be entered in any court having jurisdiction. The arbitration shall be in Palo Alto, California and in accordance with the rules of the Judicial Arbitration and Mediation Services/Endispute in San Francisco, California. A single arbitrator shall be selected according to the corresponding arbitration rules within thirty (30) days of submission of the dispute to the arbitrator. The arbitrator shall conduct the arbitration in accordance with the California Evidence Code. Except as expressly provided above, no discovery of any kind shall be taken by either party without the written consent of the other party, provided, however, that any party may seek the arbitrators permission to take any deposition which is necessary to preserve the testimony of a witness who either is, or may become, outside the subpoena power of the arbitrator or otherwise unavailable to testify at the arbitration. The arbitrator shall have the power to enter any award that could be entered by a Judge of the Superior Court of the State of California sitting without a jury, and only such power, except that the arbitrator shall not have the power to award punitive damages, treble damages, or any other damages which are not compensatory, even if permitted under the laws of the State of California or any other applicable law. The arbitration award may be enforced in any court having jurisdiction over the parties and the subject matter of the arbitration. Subject to Section 26 below, each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company.
Notwithstanding the foregoing, the parties irrevocably submit to the non-exclusive jurisdiction of the Superior Court of the State of California, Santa Clara County, and the United States District Court for the Northern District of California, Branch nearest to Palo Alto, California, in any action to enforce an arbitration award. Each party further agrees that personal jurisdiction over it may be effected by service of process by registered or certified mail addressed as provided in Section 20 of this Agreement, and that when so made shall be as if served upon it personally within the State of California. Both Executive and the Company expressly waive their right to a jury trial.
8
26. Attorney Fees. In the event that any dispute between the Company and Executive should result in arbitration, the arbitrator may award to one or more of the Prevailing Persons such reasonable attorney fees, costs and expenses, as determined by the arbitrator. Any judgment or order enforcing such arbitration may, in the discretion of the court entering such judgment or order contain, a specific provision providing for the recovery of attorney fees and costs incurred in enforcing such judgment or order and an award of prejudgment interest from the date of the breach at the maximum rate of interest allowed by law. For the purposes of this Section 26:
(a) attorney fees shall include, without limitation, attorney fees incurred in the following:
(i) arbitration;
(ii) post-arbitration order or judgment motions;
(iii) contempt proceedings;
(iv) garnishment, levy, and debtor and third party examinations;
(v) discovery; and
(vi) bankruptcy litigation;
(b) Prevailing Person shall mean any person who is determined by the arbitrator in the proceeding to have prevailed or who prevails by dismissal, default or otherwise.
27. Headings. All descriptive headings of sections and paragraphs in this Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph.
28. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
(Signature Page Follows)
9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
ZHONE TECHNOLOGIES, INC. | EXECUTIVE | |||||
By: | /s/ KIRK MISAKA | /s/ MORY EJABAT | ||||
Name: Kirk Misaka Title: Chief Financial Officer |
Mory Ejabat |
10
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
RULE 13a-14(a)/15d-14(a)
I, Morteza Ejabat, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Zhone Technologies, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 14, 2012
/s/ MORTEZA EJABAT |
Morteza Ejabat |
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
RULE 13a-14(a)/15d-14(a)
I, Kirk Misaka, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Zhone Technologies, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 14, 2012
/s/ KIRK MISAKA |
Kirk Misaka |
Chief Financial Officer |
Exhibit 32.1
SECTION 1350 CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, Morteza Ejabat, Chief Executive Officer of Zhone Technologies, Inc. (the Company), and Kirk Misaka, Chief Financial Officer of the Company, each hereby certify that, to their knowledge:
1. | The Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 14, 2012
/s/ MORTEZA EJABAT |
/s/ KIRK MISAKA | |
Morteza Ejabat | Kirk Misaka | |
Chief Executive Officer | Chief Financial Officer |
Revenue by Geography (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Revenue from External Customer [Line Items] | ||||
Net revenue | $ 29,198 | $ 30,204 | $ 87,095 | $ 91,070 |
Total North America
|
||||
Revenue from External Customer [Line Items] | ||||
Net revenue | 12,210 | 13,071 | 37,167 | 39,485 |
Total North America | United States
|
||||
Revenue from External Customer [Line Items] | ||||
Net revenue | 11,534 | 11,807 | 34,016 | 36,534 |
Total North America | Canada
|
||||
Revenue from External Customer [Line Items] | ||||
Net revenue | 676 | 1,264 | 3,151 | 2,951 |
Total International
|
||||
Revenue from External Customer [Line Items] | ||||
Net revenue | 16,988 | 17,133 | 49,928 | 51,585 |
Total International | Latin America
|
||||
Revenue from External Customer [Line Items] | ||||
Net revenue | 7,500 | 8,520 | 23,149 | 22,683 |
Total International | Europe, Middle East, Africa
|
||||
Revenue from External Customer [Line Items] | ||||
Net revenue | 8,757 | 8,010 | 24,859 | 27,951 |
Total International | Asia Pacific
|
||||
Revenue from External Customer [Line Items] | ||||
Net revenue | $ 731 | $ 603 | $ 1,920 | $ 951 |
Stock-Based Compensation Expense (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
Stock-based compensation expense | $ 834 | $ 931 | $ 1,266 | $ 1,454 |
Employee stock options
|
||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
Stock-based compensation expense | 819 | 905 | 1,251 | 1,355 |
Non-employees
|
||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
Stock-based compensation expense | 61 | |||
Employee Stock Purchase Plan
|
||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
Stock-based compensation expense | $ 15 | $ 26 | $ 15 | $ 38 |
Organization and Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
1 Months Ended | 3 Months Ended | 9 Months Ended | 9 Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2012
|
Mar. 13, 2012
|
Sep. 30, 2012
|
Dec. 31, 2011
|
Sep. 30, 2011
|
Dec. 31, 2010
|
Sep. 30, 2012
Axtel S.A.B. DE C.V.
|
Sep. 30, 2011
Axtel S.A.B. DE C.V.
|
Sep. 30, 2012
Axtel S.A.B. DE C.V.
|
Sep. 30, 2011
Axtel S.A.B. DE C.V.
|
Dec. 31, 2011
Axtel S.A.B. DE C.V.
|
Sep. 30, 2012
Emirates Telecommunications Corporation
|
Dec. 31, 2011
Emirates Telecommunications Corporation
|
Sep. 30, 2012
Minimum
|
Sep. 30, 2012
Maximum
|
Sep. 30, 2012
Other than the United States
|
Dec. 31, 2011
Other than the United States
|
|
Significant Accounting Policies [Line Items] | |||||||||||||||||
Cash and cash equivalents | $ 10,274 | $ 18,190 | $ 17,834 | $ 21,174 | |||||||||||||
Line of credit | $ 10,000 | $ 15,000 | |||||||||||||||
WFB credit facility, expiration date | Mar. 12, 2014 | Mar. 12, 2014 | |||||||||||||||
Extended product warranty, term | 1 year | 5 years | |||||||||||||||
Percentage of net revenue | 17.00% | 9.00% | 11.00% | 7.00% | |||||||||||||
Percentage of net accounts receivable | 30.00% | 30.00% | 24.00% | 17.00% | 29.00% | 75.00% | 71.00% | ||||||||||
Property and equipment, useful lives | 3 years | 5 years |
Commitments and Contingencies - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
9 Months Ended |
---|---|
Sep. 30, 2012
|
|
Commitments and Contingencies Disclosure [Line Items] | |
Product warranty period from the date of shipment | 1 year |
Maximum potential payment under surety bonds | $ 7.4 |
Amount of non-cancellable purchase commitments outstanding | $ 5.0 |
Number of days required to notice in advance for cancellation of orders | 30 days |
Property and Equipment, Net
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property and Equipment, Net |
Property and equipment, net, as of September 30, 2012 and December 31, 2011 were as follows (in thousands):
Depreciation and amortization expense associated with property and equipment amounted to $0.2 million and $1.3 million for the nine months ended September 30, 2012 and 2011, respectively. |