Clarent Corporation Form 10-Q/A 3/31/01

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.

The number of shares outstanding of the registrant’s common stock, $0.001 par value, was 40,074,347 at April 30, 2001.

This amendment on Form 10-Q/A amends Items 1, 2 and 3 of Part I of the Quarterly Report of Clarent Corporation (the “Company”) on Form 10-Q previously filed for the quarter ended March 31, 2001 (the “Prior Report”). Subsequent to the issuance of the Company’s financial statements on the Prior Report, the Company discovered accounting and financial irregularities affecting such financial statements. Many of these irregularities related to revenue recognition and cash reporting arising primarily from operations in the Company’s Asia-Pacific regional office. The Company has determined that these irregularities require the restatement of certain of its previously issued financial statements. This amendment is filed in connection with the Company’s restatement of its financial statements for the quarters ended March 31, 2000, June 30, 2000, September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001, as well as for the year ended December 31, 2000. The circumstances necessitating the restatement and their effects for the quarter ended March 31, 2001 are more fully described in Notes 1 and 10 of Notes to Unaudited Condensed Consolidated Financial Statements. In addition, the Company’s current litigation proceedings are described in Note 15 of Notes to Unaudited Condensed Consolidated Financial Statements.

Financial statement information and related disclosures included in this amended filing reflect, where appropriate, changes as a result of the restatement. Statements used in this Form 10-Q/A containing the words (i) “now,” “currently,” “present,” “to date,” and words of similar import, and (ii) “knowledge,” and words of similar import, are used to refer to conditions existing on the filing date of this Form 10-Q/A. Except as specifically indicated above, no other information included in the Prior Report on Form 10-Q is amended by the Form 10-Q/A and such information remains as of the date of the Prior Report. We direct you to refer to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 and to the other reports we file with the Securities and Exchange Commission from time to time after the date of this report for more current information regarding Clarent, including “Risk Factors that May Impact Future Operating Results.”

The accompanying unaudited condensed consolidated financial statements of the Company as of March 31, 2001 (restated) and for the three months ended March 31, 2001 (restated) and March 31, 2000 (restated) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the condensed consolidated financial statements include all adjustments that management considers necessary for a fair presentation of the results of operations for the interim periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The balance sheet at December 31, 2000 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/ A, for the year ended December 31, 2000, as amended in connection with the restatement of the Company’s financial statements. Certain prior period balances have been reclassified to conform to current period presentation.

On August 26, 2001, the Company’s Board of Directors formed a special committee, comprised of three outside directors, Messrs. Pape, Forman and Barker. The special committee directed and instructed the Company’s outside counsel to investigate certain facts that had come to the Board’s attention and that the Board determined could reflect potential accounting and financial irregularities. The Company’s outside counsel, at the direction of the special committee, requested the Company’s independent auditors to assist in the investigation. On September 4, 2001, the Company announced that it had discovered accounting and financial irregularities that materially affected the Company’s previously reported financial results for the first two quarters of the year 2001. Subsequently on October 23, 2001, the Company announced that it also had discovered accounting and financial irregularities that materially affected the Company’s previously reported financial results for the year 2000.

To address the activities discovered in its investigation, the Company has implemented remedial actions, including the prompt termination of employees who appear to have been involved in activities relating to the irregularities, closure of the Company’s Asia-Pacific regional headquarters, and the adoption of new and more stringent subsidiary cash control and expense approval policies, such as new banking and internal reporting procedures, improved controls over sales representatives and sales orders and hiring and payroll procedures, and new and more stringent credit approval policies.

In the course of the investigation, the Company discovered accounting and financial irregularities arising from activities that appear to have been initiated by a number of parties no longer associated with the Company, resulting in, among other things, an overstatement in revenue of an aggregate amount of $129.4 million over the restated periods. The circumstances necessitating the restatement, and the impact on the Company, can be described in the following general categories:


	•	The Company discovered that its revenue had been overstated for certain periods because revenue from sales in the Asia-Pacific region had been recognized in situations where customers had indirectly received Company funds from third parties, by means of arrangements effected through unauthorized acts of Company employees. These arrangements were entered into in violation of Company procedures and were not reported to the appropriate personnel within the Company.


	•	Revenue also had been overstated for certain periods because revenue had been recognized from certain sales in the Asia-Pacific region where customers now claim to have return rights or that the Company has repurchase obligations. The Company now believes that certain Company personnel may have entered into agreements with customers in the Asia-Pacific region purporting to provide such return rights or repurchase obligations. These agreements were entered into in violation of Company procedures and were not reported to the appropriate personnel within the Company.

	•	The Company has restated revenue for certain periods because, based on current information and actual payment history, it now appears that certain customers may not have been creditworthy at the time of purchase.

	•	Revenue also had been overstated for certain periods because of transactions involving the sale of products over which the Company continued to have some control until a subsequent period.


	•	In connection with the restatement, the Company has adjusted certain accruals and reserves related to accounts receivable, warranty and inventory and has made reclassification entries. The Company also recorded additional losses in the form of restructuring and asset impairments in the third quarter of 2001. These losses resulted from what the Company now knows was an over-expansion of its operating capacity and operating expenses as well as the overall downturn in the telecommunications industry. The Company increased its operating capacity based on forecasts that included revenue levels that the Company now knows, based on the discovery of financial irregularities, were overstated, but which the Company believed at the time were appropriate.

	•	The Company also determined that expenses were understated because certain payments or loans made from the Asia-Pacific regional office were effected in violation of Company procedures and were not reported to the appropriate personnel within the Company. The Company believes that such payments or loans are not recoverable.


	•	The Company’s cash position was overstated in the March 31, 2001 and June 30, 2001 financial statements because personnel in the Asia Pacific region transferred cash in violation of the Company’s policies and procedures. These cash transfers were not reported to the appropriate personnel within the Company. As a result, the cash transfers were accounted for in improper periods. As of September 30, 2001, in the aggregate, there was no direct material impact on the cash position of the Company as a result of the improper recording of these transactions, including the cash transfers, although the Company had recorded liabilities of approximately $24 million associated with the irregularities giving rise to the restatement. As of the date of filing of this report, the Company’s cash position has been materially impacted by several factors, as discussed below.

	•	The unauthorized transactions with third parties that appear to have used Company funds to purchase the Company’s products had a material impact on the Company’s financial condition because of the expense of the inventory for which the Company will probably not be able to recover any value and the associated distribution costs.

	•	The Company’s primary source of liquidity is its operating cash flows, which have been disrupted by the activities giving rise to, and the impact of, the restatement as well as the downturn in demand for telecommunications equipment.


	•	The Company suffered substantial operating losses due to the activities necessitating the restatement because it over-expanded its operating capacity and operating expenses in 2000 and the first two quarters of 2001. The Company increased its operating capacity based on forecasts that included revenue levels that the Company now knows, based on the discovery of financial irregularities, were overstated, but which the Company believed at the time were appropriate.

As a result of the information discovered in the investigation, the Company has determined that it is appropriate to restate its financial statements for the quarters ended March 31, 2000, June 30, 2000, September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001, as well as for the year ended December 31, 2000. For more current information regarding the restatements, please refer to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001.

The following tables summarize the effect of the restatement for the quarterly period ended March 31, 2001.

Condensed Consolidated Statements of Operations Data (in thousands, except per share amount):

In January 2002, the Company engaged Regent Pacific Management Corporation, an international firm that specializes in the recovery and restructuring of under-performing companies, and appointed Gary J. Sbona of Regent Pacific as its chief executive officer. Mr. Sbona has also joined the Company’s board of directors and has been appointed chairman of the board. On March 9, 2002, the Company appointed James B. Weil of Regent Pacific as its president.

At March 31, 2002, the Company’s cash, cash equivalents and short-term investments were approximately $34 million, which may not be adequate to meet the Company’s operating cash needs through the end of 2002, unless the Company achieves increased revenues and further reduces its expenses. To reduce its expenditures, the Company restructured in several areas, including reducing staffing, implementing expense management and curtailing capital spending. For example, since July 2001, the Company’s headcount decreased by approximately 82%, from approximately 1,018 employees to approximately 180 employees currently. In addition, the Company has sustained, and expects to continue to sustain, substantial expenses arising from the restatement of its financial statements and related litigation matters. Until the Company resolves the claims against it and reduces its commitments, the Company expects that its expenses will continue to exceed its revenues for the foreseeable future. The Company plans to take further measures to conserve cash, and to continue to evaluate its strategic alternatives.

For the quarter ended September 30, 2001, the Company reported revenues of $18.7 million. In quarters subsequent to the quarter ended September 30, 2001, revenues have declined substantially. The Company’s revenues have been, and the Company expects will continue to be, materially affected by the downturn in demand for telecommunications equipment and by events causing, and the impact of, the restatement of its financial statements. The Company does not expect demand for its products to recover for the remainder of 2002, and the Company expects operating losses and negative cash flows from operations to continue for the foreseeable future.

If the Company is not able to achieve increased revenues and resolve the claims against it, or if the Company incurs unexpected expenditures, then it will need to reduce expenses further and raise additional funds to continue as a going concern. The Company continues to evaluate its strategic alternatives, including financing transactions or a sale of assets. Due to the unavailability of a public market for the Company’s stock as well as the Company’s current stock price, additional funding may not be available to the Company on favorable terms or at all. If the Company raises additional funds through the issuance of equity securities, the percentage ownership of its stockholders could be significantly diluted. Furthermore, these securities may have rights, preferences or privileges senior to the Company’s common stock. If additional funding is not available when needed, the Company may be unable to continue as a going concern and achieve its intended business objectives.

Available-for-sale securities are carried at fair value, with the unrealized gains or losses reported as a separate component of stockholder’s equity. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay or call obligations without prepayment penalties. Realized gains and losses on sales of available-for-sale securities were immaterial for the three months ended March 31, 2001.

Inventory charges totaling $7.4 million were taken during the three months ended March 31, 2001, reflecting product costs associated with products shipped to certain customers in the Asia-Pacific region for which revenue was not recognizable, and for which the inventory is not expected to be recoverable.

The Company invests in equity instruments of privately held companies for the promotion of business and strategic objectives. The Company has also invested in a venture capital management fund. Except for $1.5 million received in settlement of accounts receivable during 2000, all of the Company’s investments are valued at the cash paid for the equity received, net of impairment losses. Impairment losses are recorded when events and circumstances indicate that such assets might be impaired and the decline in value is other than temporary. During the first quarter of 2001, the Company recorded impairment losses of $650,000.

Through March 31, 2001, the Company had invested $6.8 million in a venture capital management fund. The Company is committed to invest an additional $8.2 million in the venture capital management fund in future periods to be determined by the fund manager. This investment is recorded at cost as the Company has virtually no influence over the operating and financial policies of the fund.

The provision for income taxes of $165,000 for the three months ending March 31, 2001 consists principally of foreign income tax provided on the profits attributable to the Company’s foreign operations. The Company’s effective tax rates differed from the combined federal and state statutory rates due primarily to acquisition charges that were non-deductible for tax purposes.

On January 31, 2001, the Company increased the aggregate number of shares of common stock authorized for issuance under the 1999 Amended and Restated Equity Incentive Plan (the “1999 Plan”) by 987,966 or 2.5% of the Company’s outstanding shares, measured as of that date. This increase was in accordance with the provisions of the 1999 Plan.

On February 14, 2001, the Company cancelled outstanding options for approximately 2.9 million shares of common stock under a cancellation and re-grant program for employees. Replacement options to purchase approximately 635,000 shares of common stock were granted to employees on February 15, 2001 at the fair market value of $13.625 per share. These shares will vest in full on August 15, 2001 and will expire if unexercised on November 15, 2001.

On February 7, 2001, the Company adopted a Share Purchase Rights Plan designed to guard against abusive takeover tactics.

The Company operates in one industry segment. The Company designs, develops and sells Internet protocol telephony, or IP telephony, systems. Net revenue for non-U.S. locations is substantially the result of export sales from the U.S.

Net revenue by geographic region based on customer location was as follows (in thousands):

Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period less outstanding shares subject to a right of repurchase by the Company. Outstanding shares subject to repurchase are not included in the computations of basic and diluted net loss per share until the time-based vesting restrictions have lapsed.

The following table sets forth the computation of basic and diluted net loss per share:

In periods with a net loss, the Company excludes all warrants for common stock, outstanding stock options and shares subject to repurchase from the calculation of diluted net loss per common share because all such securities are anti-dilutive. The total numbers of shares excluded from the calculation of diluted net loss per share were 2,806,000, and 6,827,000 for the three months ended March 31, 2001 and 2000, respectively.

On April 25, 2000, AginfoLink USA, Inc. (“AginfoLink”) borrowed $250,000, pursuant to a promissory note, from Matthew Chiang, in his individual capacity, who was a non-officer employee of the Company at the time. Mr. Chiang served as President of the Company’s Asia-Pacific regional office from January 2001 to September 2001. The Company believes that William Pape, a director of the Company, holds a minority equity interest in AginfoLink and serves on the board of directors of AginfoLink. In the promissory note, AginfoLink agreed to repay the loan principal, as well as accrued and unpaid interest, on May 31, 2000. AginfoLink has informed the Company that it has taken the necessary steps to tender payment of the outstanding amount under this loan.

In January 2001, the Company advanced $5.0 million to Clarent Finance, LLC (“Clarent Finance”), a leasing company, for a six-year, eleven percent junior subordinated debenture. The interest shall be accrued and due by November 30, 2008. The principal is repayable in 16 equal quarterly payments of $312,500 each, commencing January 2005, and is due in full by November 30, 2008.

The Company entered into a remarketing agreement with Clarent Finance in January 2001 to provide for the remarketing of certain equipment manufactured by the Company, purchased by Clarent Finance and leased to the Company’s customers. Under the terms of the remarketing agreement, if remarketing proceeds are insufficient to equal the remaining defaulted lessee obligation, the Company is obligated to either pay the remaining lessee obligation to Clarent Finance or apply the shortage as a credit on the next equipment lease purchase in the program.

As a result of its remarketing obligations to Clarent Finance, the Company defers the recognition of all revenue and thereby establishes a liability for all amounts to be earned from leasing arrangements with Clarent Finance. At September 30, 2001, the Company’s recorded liability approximated its obligation under the

remarketing agreement. As of September 30, 2001 operating expenses for Clarent Finance had been immaterial.

On March 29, 2002 the Company purchased Clarent Finance for $275,000 in the form of forgiveness of a receivable. The Company received approximately $3.4 million in cash and a lease portfolio of $1.8 million (of which the Company had previously reported a liability under the remarketing agreement of $1.5 million as of September 30, 2001) and extinguished a note owed to the Company of $5.0 million.

The Company entered into various transactions with entities that, as a result of the investigation, the Company now believes are controlled by Matthew Chiang or members of his immediate family. Mr. Chiang was employed by the Company as a Marketing Director of the Asia-Pacific region from July 1997 to June 1999, a Director, Product and Market Strategy from July 1999 to December 2000 and the Company’s Vice President and General Manager of the Asia Pacific region and served as the President of its Asia-Pacific regional office from January 2001 to September 2001. The entities believed to be controlled by Mr. Chiang or members of his immediate family are Great MinCom Communication Corporation (which the Company believes is also known as Great MinCom Products Corporation and collectively, “Great MinCom”) and Articula Corporation (“Articula”). The Company believes that Mr. Chiang may have had a direct or indirect material interest in each of the transactions between the Company, Great MinCom and Articula. The Company believes that Jerry Chang, who was a director of the Company from July 1996 to September 2001, the Company’s President from July 1996 to April 2001, Chief Executive Officer from July 1996 to July 2001 and Chief Strategist from July 2001 to September 2001, may have an indirect financial interest in Articula.

During the year ended December 31, 2000, the Company sold products with an aggregate value of approximately $4.1 million to Great MinCom.

In December 2000 and March 2001, transfers of Company funds of $6.0 million and $7.0 million, respectively, were made to Great MinCom, with the funds intended for use as bid deposits in connection with certain proposed transactions in the Asia Pacific region (the “Bid Deposits”). As a result of the investigation, the Company has now determined that personnel in the Asia-Pacific region improperly reported that the second transfer to Great MinCom occurred in the second quarter of 2001 when the second transfer actually occurred in the first quarter of 2001, resulting in a $7.0 million overstatement of the Company’s cash balance at March 31, 2001.

In June 2001, the Company and Great MinCom entered into a Confirmation Agreement pursuant to which Great MinCom agreed to return the funds advanced as Bid Deposits to the Company by December 31, 2001, unless Great MinCom secured contracts for the proposed transactions relating to the Bid Deposits, in which case Great MinCom agreed to return the funds advanced as Bid Deposits after completion of the transactions. As a result of the investigation, the Company now believes that the funds advanced as Bid Deposits were not used for their intended purpose and are not recoverable.

From April to July 2001, an additional $43.0 million was transferred by the Asia-Pacific regional office to Great MinCom and Articula in violation of the Company’s financial control procedures. After transfer of these funds, the Company received promissory notes in exchange for the cash. These promissory notes are: a promissory note from Articula in the amount of $3.0 million (bearing interest of 4.15% per annum from May 3, 2001); a promissory note from Great MinCom in the amount of $2.4 million (bearing interest of 4.15% per annum from May 21, 2001); and a convertible promissory note from Articula and Great MinCom in the amount of $37.6 million (bearing interest of 5.0% per annum from July 25, 2001 and due in January 2002). At the same time as the execution of the $37.6 million convertible promissory note, the Company entered into a Strategic Partner Agreement with Articula and Great MinCom as of July 25, 2001, pursuant to which

Articula and Great MinCom, among other things, agreed to provide sales and marketing support to the Company and to use the Company as their exclusive supplier of VoIP products.

None of the amounts covered by the two promissory notes executed in May 2001 and the promissory note executed in July 2001 had been repaid as of the date of this filing. As a result of the investigation, the Company has now determined that $36.5 million had been transferred prior to the end of the second quarter of 2001 but not reported to the appropriate Company personnel, resulting in a $36.5 million overstatement of the cash balance for the quarterly period ended June 30, 2001.

An aggregate of $3.0 million of the funds transferred to Articula and Great MinCom by the Company’s Asia-Pacific regional office was intended for use as partial payment for the Company’s obligations under: a Joint Marketing Agreement dated as of April 4, 2001 between the Company and Articula pursuant to which the Company agreed to pay Articula $3.0 million; and a Consulting Services Agreement dated as of May 10, 2001 between the Company and Great MinCom pursuant to which the Company agreed to pay Great MinCom $1.1 million. In connection with the Consulting Services Agreement, Great MinCom agreed to assist the Company with the development of channel partner relationships for network design and system integration.

Principal of approximately $43.0 million plus accrued interest is outstanding under the various promissory notes as of September 30, 2001. As a result of the investigation and restatement the Company has now determined that a significant portion of the funds related to the $43.0 million, as well as the $13.0 million in Bid Deposits mentioned above and the $11.0 million from the guaranty noted below, may have been used by third parties to purchase the Company’s products from the Company’s customers. As a result, the Company reversed all revenue associated with the product’s original sale and expensed the associated inventory in the same period that the revenue was originally recognized because it is not believed to be recoverable and, for accounting purposes only, recorded any payment associated with the reversed revenue transactions as a reduction in the notes receivable balances. Remaining notes receivable balances of approximately $8.2 million were provided for by charges to other expense during the third quarter of 2001 due to the doubtful probability of collection. Although accounted for as described above, as of the date of this filing, the notes remain outstanding and unpaid. The Company reserves its rights to pursue collection of the entire principal balance plus accrued interest for each of the loans and the Bid Deposit amounts, in addition to other remedies or actions available to the Company.

D-Link Corporation (“D-Link”), a distributor and supplier to the Company, claims that on July 3, 2001 the Company executed a guaranty of Articula’s repayment of an $11.0 million loan from D-Link to Articula. The purported guaranty was not reported to the appropriate personnel in the Company by the executive who signed the guaranty in violation of the Company’s procedures. The Company now believes that, as of the date of this filing, Articula had repaid $2.0 million of the amount purportedly guarantied by the Company. The Company has recorded a liability of $9.0 million (in customer advances) in its September 30, 2001 financials as a result of this purported guaranty.

During May through July 2001, Mr. Chiang, the President of the Company’s Asia-Pacific regional office, received from the Company cash advances or effected loans in violation of the Company’s policies in the amount of approximately $1.1 million, all of which is outstanding, but fully reserved for, as of September 30, 2001. Mr. Chiang also effected loans and investments from the Asia-Pacific regional office in violation of the Company’s financial control policies, in the amount of approximately $703,000, some of which directly or indirectly benefited Mr. Chiang. These transactions were not reported to the appropriate personnel in the Company and the amounts remain outstanding, but fully reserved for, as of September 30, 2001. The Company now believes that these loans and investments resulted in the payments of Company funds to customers who used Company funds for the purchase of Company products. The Company has reversed all

revenue associated with the original recording of revenue of such products and expensed the associated inventory in the same period that the revenue was originally recognized.

As described in “Transactions Related to Asia-Pacific Region,” Mr. Chiang, a former executive of the Company, and certain entities affiliated with Mr. Chiang are currently indebted to the Company.

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Financial Instruments and for Hedging Activities” (“SFAS 133”) as amended by SFAS 138 which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company adopted FAS 133, beginning January 1, 2001, which did not have an impact on the Company’s results of operations or financial condition as the Company held no derivative financial instruments and did not engage in hedging activities.

On August 10, 2000, the Company acquired ACT Networks, Inc. (“ACT Networks”), a leading provider of multi-service access and voice/data integration products that enable the convergence of voice, video and data onto one managed network. In accordance with a plan that existed at the time of the acquisition, the Company established $6.2 million in accruals for merger related restructuring costs. During the quarter ended March 31, 2001 the Company had no activity related to its merger related restructuring accrual. At March 31, 2001, $6.2 million in accruals remained. These accruals are to provide $4.0 million for the costs of exiting non-cancelable operating leases for the Calabasas, California manufacturing facility, $1.3 million for involuntary employee termination costs related to approximately twenty-three duplicative management personnel and manufacturing employees in the ACT Networks organization and $933,000 in fixed assets disposition costs for disposal of manufacturing equipment and leasehold improvements in the Calabasas facility. These costs relate to the plan to exit the manufacturing activities currently performed at the Calabasas facility through discontinuation of certain product lines and outsourcing the manufacturing of the remaining products. The Company has started working with a contract manufacturer and expects to be ceasing production at the Calabasas facility by June 30, 2001.

As of March 31, 2001, the Company received funds totaling $19.0 million from certain customers in the Asia-Pacific region. These payments are currently recorded as customer advances. These advances consist of funds received from customers, and the Company now believes that these funds may be subject to refund, because (i) the Company is aware of a purported return right with respect to certain products or (ii) the customer has not accepted possession of certain products.

In April 2001, the Board of Directors approved an amendment to the 1999 Amended and Restated Equity Incentive Plan to increase the number of shares authorized for issuance by 1,000,000 to a total of 18,780,431.

On May 14, 2001, the Company announced a reduction in workforce by approximately 10% and a streamlining of its operations to achieve cost savings and operating efficiencies in accordance with previously stated goals. The Company expects to take a one-time restructuring charge relating to the reduction in workforce, assets and excess facilities of approximately $20.0 million in the second quarter 2001.

Beginning in July 2001, the Company and certain of its current and former officers and directors were named as defendants in several class action shareholder complaints filed in the United States District Court for the Southern District of New York, collectively captioned In re Clarent Corp. Initial Public Offering Securities Litigation. These lawsuits purport to bring suit on behalf of all purchasers of the Company’s common stock between July 1, 1999 and December 6, 2000. In these actions, the plaintiffs allege that the Company, certain of its officers and directors and the underwriters of its initial public offering (“IPO”) violated the federal securities laws because the Company’s IPO registration statement and prospectus purportedly contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs further allege that the prospectus relating to the Company’s secondary offering was false and misleading for the same reasons. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in the same Court against hundreds of other public companies that conducted IPOs of their common stock since the late 1990s (the “IPO Lawsuits”). On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Judge Scheindlin held an initial case management conference on September 7, 2001, at which time she ordered, among other things, that the time for all defendants to respond to any complaint be postponed until further order of the Court. Thus, the Company has not been required to answer any of the complaints, and no discovery has been served on the Company. In accordance with Judge Scheindlin’s orders at further status conferences in March and April, the appointed lead plaintiffs’ counsel filed amended, consolidated complaints in the IPO Lawsuits on April 19, 2002. However, Judge Scheindlin does not expect any of the defendants to file motions to dismiss the amended, consolidated complaints until at least summer of 2002.

In September and October 2001, a series of securities law class action complaints were filed in the United States District Court for the Northern District of California against the Company and certain of its current and former executive officers and directors. The plaintiffs in each of these actions allege, among other things, violations of the Securities Exchange Act of 1934, as amended, due to the filing with the SEC of allegedly false financial statements concerning the Company’s results of operations for the second, third and fourth quarters of 2000, and the first and second quarters of 2001. The original complaints seek unspecified monetary damages and other relief. In November 2001, the court entered an order consolidating these actions into a single action, and in December 2001 appointed a lead class plaintiff. A consolidated complaint has not yet been filed. No discovery has taken place and no trial date has been set.

In October and November 2001, four shareholder derivative actions were filed against the Company, three in the Delaware Chancery Court and one in California Superior Court. In November 2001, the three Delaware shareholder derivative actions were consolidated into a single action. The plaintiffs in these actions claim to be suing on the Company’s behalf and name various of the Company’s current and former officers and directors as defendants. The complaints assert several claims, including breach of fiduciary duties, corporate waste, abuse of control, unjust enrichment, usurpation of corporate opportunities and mismanagement, resulting from, among other things, the Company’s reporting of allegedly false financial statements concerning the Company’s results of operations for the second, third and fourth quarters of 2000 and the first and second quarters of 2001, the Company’s alleged failure to disclose information regarding the Company’s

operations and the defendants’ alleged failure to implement and maintain adequate internal financial controls. The complaints seek unspecified monetary damages and other relief. The plaintiff in the California action has commenced discovery against the defendants. However, the Company is seeking a protective order relating to certain of the discovery requests. Discovery has not commenced in the Delaware action. On March 23, 2002, the Company’s Board of Directors formed a special litigation committee of the Board of Directors to investigate the plaintiffs’ allegations. No trial date has been set in either action.

On December 31, 2001, D-Link Corporation (“D-Link”), a distributor and supplier to the Company, filed two complaints in California Superior Court in which D-Link asserted various breach of contract claims against the Company. D-Link seeks damages of approximately $19.0 million plus interest with respect to these alleged breaches of contracts. On March 5, 2002 the court consolidated the two actions. The Company has filed a cross-complaint against D-Link alleging breach of contract and breach of warranty. The Company has answered D-Link’s complaints, denying all material allegations and asserting various affirmative defenses. Discovery has commenced with respect to both of the D-Link complaints, but a trial date has not been set.

In December 2001, the Company received letters from Bright Oceans Corporation (HK) Limited (“Bright Oceans”) in which Bright Oceans asserted possible claims against the Company. Bright Oceans claimed that it purchased products from the Company on purchase orders subject to a right of return. Bright Oceans seeks recovery of $4.6 million plus interest and expenses based on its purported right of return.

On April 12, 2002, a civil complaint for violations of the federal securities laws was filed against the Company and certain of its officers and directors in the United States District Court for the District of Minnesota entitled Ahlstrom, et al. v. Clarent Corporation, et al. The plaintiffs in this action include Irwin L. Jacobs and a number of investors apparently affiliated with him. Plaintiffs allege that the defendants intentionally issued false financial reports for the Company between March 2001 and August 2001 in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and similar provisions of Minnesota law. The Company currently believes that this litigation will be coordinated or consolidated for most pre-trial purposes with the other securities law class action matters currently pending against the Company. This matter is at an early stage. No response to the complaint has yet been filed, and no discovery has taken place.

On April 26, 2002, certain former shareholders of PEAK Software Solutions, Inc. (“PEAK”), some of whom are current employees of the Company, including a key employee of the Company, filed a lawsuit against the Company in Colorado state court. The Complaint alleges claims for common law fraud, securities fraud and breach of contract relating to the Company’s acquisition of PEAK in July 2000. The complaint does not specify the damages sought. The complaint has not yet been served and no response has been filed.

The Company intends to defend itself vigorously against these allegations. However, the ultimate outcome of these matters cannot presently be determined.

You should read the following discussion in conjunction with our Unaudited Condensed Consolidated Financial Statements and related Notes. Certain statements contained in this Quarterly Report on Form 10-Q/ A, including, without limitation, statements containing the words “believe,” “anticipate,” “estimate,” “expect,” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report, and in other documents we file with the SEC, including our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001.

Clarent Corporation is a leading provider of softswitch and Internet Protocol (IP) communications solutions that take advantage of the flexibility and universal reach of IP networks, the most prominent of which is the public network known as the Internet. Our software platform and softswitch solutions, in conjunction with our hardware, or equipment provided by others, enable service providers to deliver simultaneous transmission of voice, fax and data over IP networks.

Our customers include service providers, system integrators, resellers and enterprises. Service provider customers include traditional local, international and wholesale long distance telecommunication companies, as well as “next generation” service providers, including Internet Service Providers (ISP’s), Application Service Providers (ASP’s), web-to-phone providers and others employing Internet-based business models.

We sell our products both through distributors and our direct sales force. We have sales and support personnel based in a number of countries and locations throughout the United States.

Our operations and prospects have been and we expect will be significantly affected by the developments leading to and relating to the restatement of our 2001 and 2000 financial statements. The circumstances necessitating the restatement, and the impact on us, can be described in the following general categories:


	•	We discovered that our revenue had been overstated for certain periods because revenue from sales in the Asia-Pacific region had been recognized in situations where customers had indirectly received our funds from third parties, by means of arrangements effected through unauthorized acts of our employees. These arrangements were entered into in violation of our procedures and were not reported to the appropriate personnel within the Company.

	•	Revenue also had been overstated for certain periods because revenue had been recognized from certain sales in the Asia-Pacific region where customers now claim to have return rights or that we have repurchase obligations. We now believe that certain of our personnel have entered into agreements with customers in the Asia-Pacific region purporting to provide such return rights or repurchase obligations. These agreements were entered into in violation of our procedures and were not reported to the appropriate personnel within the Company.

	•	We have restated revenue for certain periods because, based on current information and actual payment history, it now appears that certain customers may not have been creditworthy at the time of purchase.

	•	Revenue also had been overstated for certain periods because of transactions involving the sale of products over which we continued to have some control until a subsequent period.


	•	In connection with the restatement, we have adjusted certain accruals and reserves related to accounts receivable, warranty and inventory and have made reclassification entries. We also recorded additional losses in the form of restructuring and asset impairments in the third quarter of 2001. These losses resulted from what we now know was an over-expansion of our operating capacity and operating expenses as well as the overall downturn in the telecommunications industry. We increased our operating capacity based on forecasts that included revenue levels that we now know, based on the discovery of financial irregularities, were overstated, but which we believed at the time were appropriate.

	•	We also determined that expenses were understated because certain payments or loans made from the Asia-Pacific regional office were effected in violation of our procedures and were not reported to the appropriate personnel within the Company. We believe that such payments or loans are not recoverable.


	•	Our cash position was overstated in the March 31, 2001 and June 30, 2001 financial statements because personnel in the Asia Pacific region transferred cash in violation of the our policies and procedures. These cash transfers were not reported to the appropriate personnel within the Company. As a result, the cash transfers were accounted for in improper periods. As of September 30, 2001, in the aggregate, there was no direct material impact on our cash position as a result of the improper recording of these transactions, including the cash transfers, although we had recorded liabilities of approximately $24 million associated with the irregularities giving rise to the restatement. As of the date of filing of this report, our cash position has been materially impacted by several factors, as discussed below.

	•	The unauthorized transactions with third parties that appear to have used our funds to purchase our products had a material impact on our financial condition because of the expense of the inventory for which we will probably not be able to recover any value and the associated distribution costs.

	•	Our primary source of liquidity is our operating cash flows, which have been disrupted by the activities giving rise to, and the impact of, the restatement as well as the downturn in demand for telecommunications equipment.

	•	We suffered substantial operating losses due to the activities necessitating the restatement because we over-expanded our operating capacity and operating expenses in 2000 and the first two quarters of 2001. We increased our operating capacity based on forecasts that included revenue levels that we now know, based on the discovery of financial irregularities, were overstated, but which we believed at the time were appropriate.

To address the activities discovered in our investigation, we have implemented remedial actions, including the prompt termination of employees who appear to have been involved in activities relating to the irregularities, closure of our Asia-Pacific regional headquarters, and the adoption of new and more stringent subsidiary cash control and expense approval policies, such as new banking and internal reporting procedures, improved controls over sales representatives and sales orders and hiring and payroll procedures, and new more stringent credit approval policies.

We direct you to refer to Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements and our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 for more current information regarding the restatement.

The following table presents certain consolidated statement of operations data for the periods indicated as a percentage of total net revenue:

Net revenue decreased 9% to $21.0 million in the three months ended March 31, 2001 from $23.0 million in the three months ended March 31, 2000. The decrease in product and software sales is attributable to weak global economic conditions, including, in particular, the downturn of the telecommunications market, resulting in a significant decline in capital expenditures by our customers offset in part by revenues from a suite of products acquired from ACT Networks in August 2000. Service revenue from maintenance and support increased by 75% to $4.4 million in the three months ended March 31, 2001, from $2.5 million for the same three months of 2000. The increase in service revenue is attributable to the renewal of support contracts with existing customers and higher sales during the second half of fiscal 2000. No customer accounted for 10% or more of net revenue for the three months ended March 31, 2001.

Cost of revenue increased 107% to $18.7 million in the three months ended March 31, 2001 from $9.0 million in the three months ended March 31, 2000. Product and software costs increased by 108% to $15.4 million in the three months ended March 31, 2001 from $7.4 million in the same period of 2000. Service costs increased by 98% to $3.2 million in the three months ended March 31, 2001 from $1.6 million in the same period of 2000, due to the increases in technical support personnel to service an anticipated increased customer base.

Gross margin decreased to 11% for the first quarter of 2001, compared to 61% for the corresponding period in 2000 and 39% for the fourth quarter of 2000. The decrease in gross margin largely resulted from the $7.4 million of product costs associated with products shipped to certain customers in the Asia-Pacific region for which revenue was not recognizable because we now believe that these customers indirectly used Company funds for the purchase of our products and, to a lesser degree, because certain customers purportedly had return rights for such products. We believe that such products, once delivered to the customer, will probably not be recoverable. The decrease in gross margin was also the result of a higher rate of increase in costs associated with increased headcount as compared to the rate of increase of revenue for the period.

The mix of products we sell significantly impacts our gross margin. The decrease in sales of our software products both in absolute dollars and as a percentage of revenue has negatively impacted our gross margin. We expect a continuing negative impact on gross margin from the introduction of new hardware products and new versions of existing products. Our gross margins have also been affected by significant erosion in the average selling prices of our products due to a number of factors, including competitive pricing pressures and rapid technological changes, and we expect these to continue. We expect gross margin to be adversely affected by increases in material or labor costs, costs related to maintaining higher inventory balances, changes in the geographical mix of customers and changes in the channels of distribution. We expect to continue to increase the percentage of sales to distributors, which generally results in lower gross margins.

Research and development expenses increased 240% to $14.8 million in the three months ended March 31, 2001 from $4.3 million in the three months ended March 31, 2000. Research and development expenses increased as a percentage of revenue to 70% for the three months ended March 31, 2001 from 19% in the three months ended March 31, 2000. The increases in research and development expenses both in absolute dollars and as a percentage of revenue from period to period, were attributable to increases in the number of research and development personnel to 278 at March 31, 2001 from 76 at March 31, 2000 in anticipation of higher current period revenue and higher revenue growth, and to the decrease in net revenue.

Sales and marketing expenses increased 125% to $24.8 million in the three months ended March 31, 2001, from $11.1 million in the three months ended March 31, 2000. The absolute dollar increase in sales and marketing expenses was primarily attributable to an increase in personnel to 486 at March 31, 2001, from 199 at March 31, 2000. The change was also due to expenses required to implement our sales and marketing strategy and increased public relations and other promotional expenses including increased participation in our annual customer summit. Sales and marketing expenses as a percentage of revenue increased to 118% for the three months ended March 31, 2001 from 48% in the three months ended March 31, 2000. The increase in sales and marketing costs as a percentage of revenue is attributable to the growth rate of sales and marketing expenses compared to a decrease in net revenue for the period as we added sales and marketing personnel and spending on promotional activities in anticipation of higher current period revenue and higher revenue growth.

General and administrative expenses increased 167% to $6.5 million in the three months ended March 31, 2001, from $2.4 million in the three months ended March 31, 2000. General and administrative expenses as a percentage of revenue increased to 31% for the three months ended March 31, 2001 from 11% for the three months ended March 31, 2000. The absolute dollar increase in general and administrative expenses from period to period was largely attributable to an increase in personnel and related expenses required to build the infrastructure to support a larger organization based on anticipated higher current period revenue and higher revenue growth. The general and administrative headcount increased to 153 at March 31, 2001, as compared to 64 at March 31, 2000.

For the three months ended March 31, 2001, amortization of deferred compensation was $2.0 million as compared to $1.4 million in the three months ended March 31, 2000. Amortization of deferred compensation resulted from the granting of stock options to purchase common stock at prices below the deemed fair value of our common stock as well as the assumption of stock options through acquisition at prices below the deemed fair value of our common stock. The deferred compensation is being amortized using the graded method over the vesting period of the stock options.

On February 14, 2001, the Company cancelled outstanding options for approximately 2.9 million shares of common stock under a cancellation and re-grant program for employees. Replacement options to purchase approximately 635,000 shares of common stock were granted to employees on February 15, 2001, at the fair market value of $13.625 per share. These shares vested in full on August 15, 2001, and expired unexercised on November 15, 2001.

Amortization of goodwill and purchased intangible assets for the three months ended March 31, 2001, was $9.1 million as compared to $226,000 for the three months ended March 31, 2000. The goodwill and purchased intangible assets were the result of three purchase business combinations. One purchase was completed in the fourth quarter of 1999 and two in the third quarter of 2000. The value of the purchased intangible assets was determined using independent valuations for both the PEAK and ACT Networks acquisitions in 2000. We are amortizing the goodwill and purchased intangible assets using the straight-line method over periods ranging from three to five years from the dates of acquisition.

We believe that the projections used in performing valuations with respect to the research and development projects acquired from ACT Networks are still materially valid, however, there can be no assurance that the projected results will be achieved. We expect to continue the development of each project not yet completed and believe that there is a reasonable chance of successful completion. However, if we do not successfully deploy commercially accepted technology or products based on the IPRD, our operating results could be adversely affected in future periods. Additionally, the value of other intangible assets could become impaired. There has been no change in expected costs through March 31, 2001. The following list provides the information regarding the status of research and development projects at the date of acquisition:

Other income, net was $2.8 million in the three months ended March 31, 2001, as compared to $4.1 million in the three months ended March 31, 2000. The other income was primarily attributable to interest income earned on our cash, cash equivalents and other investments from the funds raised in our initial and secondary public offerings and acquisitions. Interest income in the first quarter of 2001 reflects lower cash and investment balances compared to the three months ended March 31, 2000, as well as a charge for impaired investments of $650,000. We expect interest income to decrease in the remaining quarters of 2001 as cash resources are invested in working capital and capital expenditures.

The provision for income taxes of $165,000 for the three months ended March 31, 2001, and $25,000 for the three months ended March 31, 2000 consist principally of foreign income tax provided on the profits attributable to the Company’s foreign operations. Our effective tax rates differed from the combined federal and state statutory rates due primarily to acquisition charges that were non-deductible for tax purposes.

From inception through June 1999, we financed our operations primarily through private sales of convertible preferred stock, which totaled $18.9 million in aggregate net proceeds. During 1999, we completed both an initial and a secondary public offering, which resulted in net proceeds of approximately $302.6 million. In addition, we received net proceeds of $33.3 million from our acquisitions during the third quarter of 2000.

Net cash used in operating activities was $20.4 million in the three months ended March 31, 2001, compared to net cash of $1.6 million provided by operating activities during the same period of 2000. The net cash used in operating activities in 2001 was principally the result of a net loss of $52.3 million an increase in inventories of $9.8 million, and a decrease in deferred revenue of $2.3 million, which was partially offset by adjustments for amortization and depreciation of $16.4 million, investment impairment of $650,000, an increase in customer advances of $16.5 million, a decrease in accounts receivable of $4.0 million, and an increase in accounts payable and accrued liabilities of $6.2 million. Amortization expense has increased significantly as a result of the deferred compensation, goodwill and intangibles related to two acquisitions completed during the third quarter of 2000. The increase in accounts payable and accrued liabilities primarily resulted from increases in inventories and, to a lesser extent, increases in operating expense levels, in both cases associated with the higher anticipated revenues than the level of the restated revenue. The increase in inventories was in anticipation of expected growth in product revenue. The decrease in deferred revenue resulted from decreases in amounts deferred for maintenance revenue. The increase in customer advances resulted from our receipt of funds from customers that we now believe may be subject to refund, because of (i) a purported return right or (ii) the customer has not accepted possession of certain products. Accounts receivable decreased as a result of a decrease in revenues.

Net cash provided by operating activities was $1.6 million in the first quarter of 2000, compared with $4.0 million used in operating activities in the same period in 1999. Net cash provided by operating activities for the first quarter of 2000 was attributable primarily to a net loss of approximately $1.4 million, which was more than fully offset by depreciation of $1.7 million, amortization of $1.6 million, a decrease in accounts receivable of $1.8 million, a decrease in prepaid expenses and other current assets of $624,000, and an increase in customer advances of $1.2 million. These amounts were partially offset by an increase in inventories of $1.5 million, decreases in accounts payable and accrual liabilities of $957,000, and a decrease in deferred revenue of $1.5 million. The increase in inventory for the first quarter was primarily in anticipation of expected growth in product revenue as well as a greater need for evaluation units. The decrease in accounts receivable for the first quarter of 2000 is primarily the result of collection of aged receivable balances.

Net cash from investing activities was approximately $22.8 million in the first three months of 2001 as compared to $14.9 million used in investing activities for the same period in 2000. For the first three months of 2001, $41.9 million of cash from investing activities resulted from the sale and maturity of investments, net of purchases, as compared to $11.4 million invested in the purchase of investment securities net of sales and maturities during the same period in 2000. Cash used in investing activities during the first quarter of 2001 included a note receivable of $5.0 million from a leasing company that, as of the date of this filing, we have acquired. Cash used in investing activities also includes purchases of property and equipment and expenditures on leasehold improvements totaling $14.2 million, which were based on anticipated higher current period revenue and higher revenue growth. Cash used for the purchase of property and equipment for the three months ended March 31, 2000, was $3.5 million.

Net cash from financing activities was $252,000 in the three months ended March 31, 2001 as compared to $1.0 million for the same period in 2000. The cash provided by financing activities was solely from the exercise of employee stock options.

As of March 31, 2001, our principal commitments consisted of obligations outstanding under operating leases. Although we have no material commitments for capital expenditures, we anticipate continued spending on capital expenditures and lease commitments during the remainder of 2001 at rates consistent with expenditures during the first quarter of 2001. We may also establish additional operations as we continue to expand globally.

On March 31, 2001, our cash, cash equivalents and short-term investment balance was $221.1 million, which we believed would be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

At March 31, 2002, our cash, cash equivalents and short-term investments were approximately $34 million, which may not be adequate to meet our operating cash needs through the end of 2002, unless we achieve increased revenues and further reduce our expenses. To reduce our expenditures, we restructured in several areas, including reducing staffing, implementing expense management and curtailing capital spending. For example, since July 2001, our headcount decreased by approximately 82%, from approximately 1,018 employees to approximately 180 employees currently. In addition, we have sustained, and expect to continue to sustain, substantial expenses arising from the restatement of our financial statements and related litigation matters. Until we resolve the claims against us and reduce our commitments, we expect that our expenses will continue to exceed our revenues for the foreseeable future. We plan to take further measures to conserve cash, and to continue to evaluate our strategic alternatives.

For the quarter ended September 30, 2001, we reported revenues of $18.7 million. In quarters subsequent to the quarter ended September 30, 2001, revenues have declined substantially. Our revenues have been, and we expect will continue to be, materially affected by the downturn in demand for telecommunications equipment and by events causing, and the impact of, the restatement of our financial statements. We do not expect demand for our products to recover for the remainder of 2002, and we expect operating losses and negative cash flows from operations to continue for the foreseeable future.

If we are not able to achieve increased revenues and resolve the claims against us, or if we incur unexpected expenditures, then we will need to reduce expenses further and raise additional funds to continue as a going concern. We continue to evaluate our strategic alternatives, including financing transactions or a sale of assets. Due to the unavailability of a public market for our stock as well as our current stock price, additional funding may not be available to us on favorable terms or at all. If we raise additional funds through the issuance of equity securities, the percentage ownership of our stockholders could be significantly diluted. Furthermore, these securities may have rights, preferences or privileges senior to our common stock. If additional funding is not available when needed, we may be unable to continue as a going concern and achieve our intended business objectives.

Our financial market risk includes risks associated with international operations and related foreign currencies. We anticipate that international sales will continue to account for a significant portion of our consolidated revenue. Our international sales are largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. Expenses of our international operations are denominated in each country’s local currency and therefore are subject to foreign currency exchange risk; however, through March 31, 2001 we have not experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates. We do not currently engage in any hedging activities or use derivative financial instruments.

We have an investment portfolio of fixed income securities, including those classified as cash equivalents, of approximately $180 million at March 31, 2001. These securities are subject to interest rate fluctuations and will decrease in market value if interest rates increase.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. We invest primarily in high-quality, short-term debt

instruments such as U.S. government securities and instruments issued by high quality financial institutions and companies including money market instruments and debt issued by corporations. A hypothetical 100 basis point increase in interest rates would result in less than a $200,000 decrease (less than 0.2%) in the fair market value of our available-for-sale securities.

We have investments in equity securities of privately held companies for the promotion of business and strategic objectives of $13.8 million at March 31, 2001. These investments are generally in companies in the telecommunications industry. We also have invested in a venture capital management fund. These investments are included in long-term investments and are accounted for using the cost method. For investments in which no public market exists, our policy is to regularly review the operating performance, recent financing transactions and cash flow forecasts for such companies in assessing the net realizable values of the securities of these companies. Impairment losses on equity investments are recorded when events and circumstances indicate that such assets are impaired and the decline in value is other than temporary. During the three months ended March 31, 2001, we recorded impairment losses of $650,000 on investments.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	By:	/s/ JOHN J. O’SHEA



	John J. O’Shea
	Chief Financial Officer
	(Principal Financial and Accounting Officer)


Delaware		77-0433687
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


	CLARENT CORPORATION FORM 10-Q/A INDEX
PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	CONDENSED CONSOLIDATED BALANCE SHEETS
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	SIGNATURES


		Page
		No.

PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)		3
	Condensed Consolidated Balance Sheets as of March 31, 2001 (restated) and December 31, 2000 (restated)		3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 (restated) and 2000 (restated)		4
	Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2001 (restated) and 2000 (restated)		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		24
Signatures			26


				March 31,			December 31,
				2001			2000

				(Unaudited)
				(Restated)			(Restated)
ASSETS
Current assets:
	Cash and cash equivalents			$	188,095		$	185,627
	Short-term investments				33,043			74,987
	Accounts receivable, gross				24,066			28,142
	Receivables allowance				(6,927	)		(6,973	)

	Accounts receivable, net				17,139			21,169
	Inventories				27,393			17,662
	Prepaid expenses and other current assets				5,956			5,942

		Total current assets			271,626			305,387
Investments					13,829			14,479
Property and equipment, net					46,482			36,938
Goodwill, net					86,237			93,644
Purchased intangible assets, net					35,662			38,057
Deferred tax assets					14,663			14,534
Other assets					9,446			4,517

			Total assets	$	477,945		$	507,556

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	23,757		$	14,337
	Deferred revenue				6,256			8,528
	Accrued liabilities				19,527			22,775
	Customer advances				19,008			2,551
	Merger related restructuring accrual				6,248			6,248

		Total current liabilities			74,796			54,439
Deferred tax liabilities					14,853			14,534
Stockholders’ equity:
	Common stock				583,580			583,328
	Deferred compensation				(7,720	)		(9,740	)
	Accumulated other comprehensive loss				(596	)		(326	)
	Accumulated deficit				(186,968	)		(134,679	)

		Total stockholders’ equity			388,296			438,583

			Total liabilities and stockholders’ equity	$	477,945		$	507,556


			Three Months Ended			Three Months Ended
			March 31, 2001			March 31, 2000

			(Restated)			(Restated)
Net revenue:
	Product and software		$	16,624		$	20,485
	Service			4,382			2,505

		Total net revenue		21,006			22,990
Cost of revenue:
	Product and software			15,421			7,399
	Service			3,248			1,638

		Total cost of revenue		18,669			9,037

Gross profit				2,337			13,953
Operating expenses:
	Research and development			14,758			4,340
	Sales and marketing			24,825			11,055
	General and administrative			6,523			2,441
	Amortization of deferred compensation			2,020			1,378
	Amortization of goodwill and other intangibles			9,109			226

		Total operating expenses		57,235			19,440

Loss from operations				(54,898	)		(5,487	)
Other income, net				2,774			4,115

Loss before provision for income taxes				(52,124	)		(1,372	)
Provision for income taxes				(165	)		(25	)

Net loss			$	(52,289	)	$	(1,397	)

Basic and diluted net loss per share			$	(1.32	)	$	(0.04	)

Shares used to compute basic and diluted net loss per share				39,621			31,448

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þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	Three Months Ended
	March 31, 2001

	As			As
	Reported			Restated

Total net revenue	$	61,192		$	21,006
Gross profit		42,707			2,337
Loss from operations		(16,417	)		(54,898	)
Net loss		(13,964	)		(52,289	)
Basic and diluted net loss per share	$	(0.35	)	$	(1.32	)


	March 31, 2001		December 31, 2000

	(Restated)		(Restated)
Raw materials	$	14,968	$	10,901
Work-in-process		478		83
Finished goods		11,947		6,678

	$	27,393	$	17,662


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


	Estimated Costs
	to Complete		Expected		Expected
	at Time of		Costs at		Date of
	Acquisition		Completion		Completion


	(In millions)
NetPerformer	$	3.9	$	3.9		Q3 2001
SX-10	$	0.8	$	0.8		Q4 2001
DynaStar	$	0.8	$	0.8		Q2 2001


	CLARENT CORPORATION