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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO __________________
Commission File Number: 000-26485
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PARADYNE NETWORKS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2658219
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8545 126TH AVENUE NORTH, LARGO, FLORIDA 33773
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(Address, including zip code, of principal
executive offices, including zip code)
(727) 530-2000
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of the Registrant's Common Stock as
of April 30, 2001 was 32,529,976.
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PARADYNE NETWORKS, INC.
FOR THE PERIOD ENDED MARCH 31, 2001
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 2001 and
December 31, 2000 1
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2001 and March 31, 2000 2
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2001 and March 31, 2000 3
Notes to Condensed Consolidated Financial Statements 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk 10
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in Securities and Use of Proceeds 11
SIGNATURES 11
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Paradyne Networks, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amount)
March 31, December 31,
2001 2000
Unaudited
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,196 $ 19,821
Accounts receivable less allowance for doubtful 14,502 23,770
accounts of $3,671 and of $3,919 at March 31,
2001 and December 31, 2000, respectively
Income tax receivables 3,869 4,000
Inventories 32,576 38,628
Prepaid & other current assets 2,365 2,563
---------- ----------
Total current assets 68,508 88,782
Property Plant & Equipment, less accumulated 17,768 20,299
depreciation of $22,741 and $21,704 at
March 31, 2001 and December 31, 2000, respectively
Other assets 5,271 8,199
---------- ----------
Total assets $ 91,547 $ 117,280
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,490 $ 17,032
Current portion of long-term debt 634 638
Payroll & benefit related liabilities 6,431 7,647
Other current liabilities 8,588 8,620
---------- ----------
Total current liabilities 20,143 33,937
Long Term Debt 643 684
---------- ----------
Total Liabilities 20,786 34,621
Stockholders' Equity:
Preferred Stock, par value $.001; 5,000,000 shares
authorized, none issued or outstanding
Common Stock, par value $.001; 60,000,000 shares 33 33
authorized, 32,525,443 and 32,556,127 shares
issued and outstanding as of March 31, 2001 and
December 31,2000, respectively
Additional paid-in capital 103,931 104,019
Retained earning (deficit) (31,819) (19,759)
Other Equity Adjustments (1,384) (1,634)
---------- ----------
Total Stockholders' Equity 70,761 82,659
---------- ----------
Total Liabilities and Stockholders' Equity $ 91,547 $ 117,280
---------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements
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Paradyne Networks, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
Unaudited
Three Months Ended
March 31,
----------------------------
2001 2000
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Revenues:
Sales $ 32,107 $ 62,952
Services 1,000 1,279
Royalties 0 250
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Total revenues 33,107 64,481
Total cost of sales 19,695 37,368
---------- ----------
Gross margin 13,412 27,113
Operating expenses:
Research and development 8,566 9,531
Selling, general & administrative 11,573 15,238
Impairment of intangible asset 1,602 0
Amortization of deferred stock compensation
and intangible assets 499 76
Business restructuring charges 3,807 0
---------- ----------
Total operating expenses 26,047 24,845
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Operating income (loss) (12,635) 2,268
Other (income):
Interest, net (172) (837)
Other, net (403) (453)
---------- ----------
Income before provision for income tax (12,060) 3,558
Provision for income tax 0 1,103
---------- ----------
Net income (loss) ($ 12,060) $ 2,455
========== ==========
Weighted average number of common shares outstanding
Basic 32,521 31,270
Diluted 32,521 32,907
Earnings (loss) per common share
Basic (0.37) 0.08
Diluted (0.37) 0.07
Consolidated Statements of Comprehensive Income (Loss)
Net income (loss) (12,060) 2,455
Translation adjustments (56) 3
Comprehensive income (loss) (12,116) 2,458
See accompanying Notes to Condensed Consolidated Financial Statements
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Paradyne Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Three Months Ended
March 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (12,060) $ 2,455
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Loss on sale of assets 406 12
Decrease in allowance for bad debts (248) (128)
Depreciation & Amortization 2,458 1,805
Impairment of intangible asset 1,602
(Increase) decrease in assets
Receivables 9,733 (13,773)
Inventories 6,052 (4,422)
Other assets 1,051 (369)
Increase (decrease) in Liabilities
Accounts payable (11,042) 15,856
Payroll related (1,216) (2,106)
Other current liabilities (32) 2,152
--------- ---------
Net cash provided by (used in) operating activities (3,296) 1,482
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CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Cash used to acquire net assets (1,500)
Capital expenditures (327) (2,475)
Proceeds from sale of property, plant and equipment 494 --
--------- ---------
Net cash provided by (used in) investing activities (1,333) (2,475)
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CASH FLOWS PROVIDED BY (USED IN ) FINANCING ACTIVITIES
Net proceeds from stock transactions 105 1,465
Borrowings under other debt obligations 231 506
Repayments under other debt obligations (276) (134)
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Net cash used in financing activities 60 1,837
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Effect of foreign exchange rate changes on cash (56) 3
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Net Increase (decrease) in cash and cash equivalents (4,625) 847
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Cash and cash equivalents at beginning of period 19,821 62,885
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Cash and cash equivalents at end of period $ 15,196 $ 63,732
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NON-CASH TRANSACTIONS
Stock issued for Notes $ (192) $ (463)
--------- ---------
Recoverable taxes related to stock option exercises -- $ 5,836
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
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PARADYNE NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION:
Paradyne Networks, Inc. (the "Company") designs, manufactures, and
markets data communications and networking products for network service
providers and business customers. The Company's products enable business
customers to efficiently access wide area network services and allow network
service providers to provide customers with high-speed services for data, voice,
video and multimedia applications.
The accompanying condensed unaudited consolidated financial statements
include the results of the Company and its wholly-owned subsidiaries: Paradyne
Corporation; Paradyne Canada Ltd.; Paradyne International Ltd.; Paradyne
Worldwide Corp.; Ark Electronic Products Inc.; Paradyne GmbH; Paradyne Finance
Corporation; and Paradyne International Sales Ltd. Intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying condensed unaudited consolidated financial statements
of the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not contain all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of management, such statements reflect all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of interim
period results. These financial statements should be read in conjunction with
the December 31, 2000 audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on April 2, 2001.
The results of operations for the interim periods are not necessarily
indicative of results to be expected for the entire year or for other future
interim periods.
2. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 2000, the FASB issued Statement No. 138, "Accounting for
Certain Hedging Activities", which amended Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement No. 138 must be
adopted concurrently with the adoption of Statement No. 133. The Company has
adopted these new statements effective January 1, 2001.
These Statements required the Company to recognize all derivatives on
the balance sheet at fair value. The Company does not anticipate that the
adoption of these statements will have a significant effect on its results of
operations or financial position. As of March 31, 2001, the Company does not
have any derivative instruments as defined in the statements or engage in
hedging activities.
3. INVENTORY:
Inventories at March 31, 2001 and December 31, 2000 are summarized as
follows (in thousands):
March 31, December 31,
2001 2000
----------- ------------
Raw Materials $ 22,924 $ 30,088
Work in Process 5,468 5,533
Finished Goods $ 4,184 $ 3,007
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32,576 38,628
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4. EARNINGS PER SHARE:
The following table summarizes (in thousands, except per share data)
the weighted average shares outstanding for basic and diluted earnings per share
for the periods presented.
Three Months Ended
March 31,
--------------------------
2001 2000
--------- ---------
Net income (loss) $ (12,060) $ 2,455
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 32,521 31,270
Dilutive effect of stock options -- 1,637
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Diluted 32,521 32,907
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EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.37) $ 0.08
Dilutive effect of stock options $ -- $ (0.01)
--------- ---------
Diluted $ (0.37) $ 0.07
--------- ---------
5. BUSINESS RESTRUCTURING CHARGES:
In the first quarter of 2001 the Company recorded additional business
restructuring charges of $3,807. The charges relate to the Company's plans to
reduce expenses necessitated by the softening of the telecommunications
equipment market which has resulted in fewer orders for the Company's equipment.
The expense reductions include severance payments for the termination of
approximately 220 employees in addition to certain costs incurred in conjunction
with the plan to consolidate facilities located in Redbank and Fairlawn, New
Jersey and Largo, Florida.
During the first quarter of 2001, the Company paid $2,040, related to
restructurings. The remaining $2,972 accured as of the end of March 31, 2001,
substantially all of which is expected to be paid during 2001, is related to
both U.S. and international restructuring. The following table summarizes the
activity in the business restructure accrual for the first three months of 2001:
Beginning Balance at January 1, 2001 $1,205
Additions to accrual in quarter one of 2001 3,807
Less payments made in quarter one of 2001
(related to prior period and current period restructuring) (2,040)
------
Ending Balance at March 31, 2001 $2,972
------
6. IMPAIRMENT OF INTANGIBLE ASSET:
As part of the restructuring that occurred in the first quarter of
2001, which included the closing of a development facility located in Fairlawn,
New Jersey, the Company recorded a $1,602 charge for the impairment of an
intangible asset. This charge represented the net book value of the "Acquired
Workforce" intangible that was originally recorded in the second quarter of 2000
as part of the purchase of substantially all of the assets of Control Resources
Corporation "CRC". Since the value of the in place work force (who were
terminated) was the basis for recording the acquired workforce intangible, this
intangible asset had no future economic value. Therefore the Company was
required to record an impairment for the remaining value of the asset.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and other sections of this Form 10-Q contains
forward-looking statements that involve risks and uncertainties. These forward
looking statements are made pursuant to the "safe-harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and are made based on
management's current expectations or beliefs as well as assumptions made by, and
information currently available to, management. All statements regarding future
events, our future financial performance and operating results, our business
strategy and our financing plans are forward-looking statements. In many cases,
you can identify forward-looking statements by terminology, such as "may,"
"will," "should," "expects," "intends," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue," or the negative of such
terms and other comparable terminology. These statements are only predictions.
Known and unknown risks, uncertainties and other factors could cause our actual
results to differ materially from those projected in the forward-looking
statements
OVERVIEW
We are a leading developer, manufacturer and distributor of broadband
and narrowband network access products for network service providers ("NSPs")
and business customers. We offer solutions that enable business class, service
level managed, high-speed connectivity over the existing telephone network
infrastructure and provide for cost-effective access speeds of up to 45 Megabits
per second. We market and sell our products worldwide to NSPs and business
customers through a multi-tier distribution system that includes direct sales,
strategic partner sales, NSP sales and traditional distributor or value added
reseller sales. Lucent technologies was our only 10% or greater customer during
the first quarter of 2001. A majority of our sales to Lucent represented sales
as a reseller of our products. Direct and indirect sales and services provided
to Lucent during the first three months of 2001 was $3.7 million, or 11% of
total revenues. Since Avaya Inc. was spun off from Lucent during the fourth
quarter of 2000, for comparison purposes with the prior year, revenues from both
Lucent and Avaya are combined. Collectively, we estimate that direct and
indirect sales to, and service performed for Lucent and Avaya accounted for
approximately 19% of our total revenues in the first three months of 2001 versus
25% in the same period of 2000. This percentage reduction principally results
from lower Lucent and Avaya equipment sales of some of our older products in
2001. A loss or a significant reduction or delay in sales to a major customer
could materially and adversely affect our business, financial condition and
results of operations.
Revenue from equipment sales is recognized when the following has
occurred: evidence of a sales arrangement exists; delivery has occurred or
services have been rendered; our price to the buyer is fixed or determinable;
and collectibility is reasonably assured. Revenue from services, which consists
mainly of repair of out-of-warranty products, is recognized when the services
are performed and all substantial contractual obligations have been satisfied.
Amounts billed to customers in sales transactions related to shipping and
handling are classified as product revenue. Provision is made currently for
estimated product returns. Royalty revenue is recognized when the Company has
completed delivery of technical specifications and performed substantially all
required services under the related agreement.
The information contained in this Form 10-Q is not a complete description of our
business or the risks associated with an investment in us. Readers are referred
to documents filed by Paradyne with the Securities and Exchange Commission,
specifically our most recent Form 10-K and other filings, which identify
important risk factors that could cause actual results to differ from those
contained in the forward-looking statements, including: the timing and amount of
expense reduction; the ability to successfully negotiate a new bank line of
credit; the uncertainty of litigation, including putative shareholder class
actions; a reliance on international sales; rapid technological change could
render Paradyne's products obsolete; the uncertain acceptance of new
telecommunications services based on DSL; substantial dependence on network
service providers who may reduce or discontinue their purchase of products or
services at any time; the timing and amount of, or cancellation or rescheduling
of, orders of Paradyne's products to existing and new customers; possible
inability to sustain revenue growth or profitability; dependence on only a few
customers for a substantial portion of Paradyne's revenue; highly competitive
markets; dependence on sales of access products to Lucent Technologies;
dependence on sole and single-source suppliers; and a long and unpredictable
sales cycle.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
REVENUES. Total revenues decreased $31.4 million, or 48.7%, to $33.1 million for
the three months ended March 31, 2001 from $64.5 million for the same period in
2000. The decrease was primarily due to a decrease in the volume of sales of our
broadband access products as a result of the continued deterioration in the
overall competitive local exchange carrier (CLEC) market, a significant decrease
in the sales of products to one of our major internet Service Provider customers
and an overall economic climate that has led many of our customers to delay
capital spending. As a percentage of total revenues, equipment sales were 97.0%
of total revenues for the three months ended March 31, 2001 compared to 97.6%
for the three months ended March 31, 2000.
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GROSS MARGIN. Gross margin decreased $13.7 million or 50.5% to $13.4 million for
the three months ended March 31, 2001 from $27.1 million for the three months
ended March 31, 2000. Most of the decrease results from decreased sales of our
broadband access products. Gross margin as a percentage of total revenues
decreased to 40.5% in 2001 from 42.0% in 2000 primarily as a result of a
decrease in the sale of our higher margin products along with a decrease in
service and royalty revenues. During the first quarter of 2001 the company
incurred business restructure expenses that resulted from the termination of
approximately 20 manufacturing related employees and the closing of certain
facilities. (See "Note 4 - Business Restructuring Charges" in the Notes to
Condensed Consolidated Financial Statements in this Form 10-Q for further
information.) As a result of these actions, we expect to realize reductions in
manufacturing costs on an annual basis of approximately $1.0 million.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
$1.0 million, or 10.1%, to $8.6 million for the three months ended March 31,
2001 from $9.5 million in 2000. This decrease is primarily attributable to a
reduction in expenditures for engineering prototype supplies and professional
fees for contracted labor, offset in part by increased expenditures for
personnel and facilities related costs mostly resulting from the purchase of
substantially all the assets of CRC in April 2000. As a percentage of total
revenues, research and development expense increased to 25.9% for the three
months ended March 31,2001 from 14.8% in the same period of 2000. This
percentage increase is primarily attributable to the 48.7% decrease in revenue
for the three month period ended March 31, 2001. As previously noted, the
company incurred business restructuring expenses that resulted from the
termination of approximately 120 research and development employees and the
closing of certain facilities. (See "Note 4 - Business Restructuring Charges" in
the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for
further information.) As a result of these actions, we expect to realize
reductions in research and development expenses on an annual basis of
approximately $10.0 million.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses decreased
$3.6 million, or 23.7%, to $11.6 million for the three months ended March 31,
2001 from $15.2 million for the three months ended March 31, 2000. The decrease
is primarily attributable to a $2.7 million decrease in advertising related
expenses, a $1.2 million decrease in personnel related expenses and a $.3
million decrease in consignment to customers, offset in part by a $.6 million
increase in professional fees primarily related to legal expenses. The overall
decrease in personnel related expenses is primarily the result of a business
restructuring that occurred in the first three months of 2001. SG&A expense as a
percentage of revenue increased from 23.6% for the three months ended March 31,
2000 to 35.0% for the three months ended March 31, 2001. This increase is
primarily attributable to the 48.7% decrease in revenue during the period. As
previously noted, the company incurred business restructure expenses that
resulted from the termination of approximately 80 SG&A employees and the closing
of certain facilities. (See "Note 4 - Business Restructuring Charges" in the
Notes to Condensed Consolidated Financial Statements in this Form 10-Q for
further information.) As a result of these actions, we expect to realize
reductions in SG&A expenses on an annual basis of approximately $6.0 million.
IMPAIRMENT OF INTANGIBLE ASSET. The $1.6 million charge for impairment of
intangible asset results from the writeoff of the net book value of an "Acquired
Workforce" intangible that was originally recorded in the second quarter of 2000
as part of the purchase of substantially all of the assets of CRC. As part of
the restructuring that occurred in the first quarter of 2001, we announced that
we were closing the Fairlawn, New Jersey facility and that substantially all of
the employees at that facility would be terminated. Since the value of the in
place work force (who were terminated) was the basis of recording the acquired
workforce intangible, we were required to record an impairment charge for the
remaining value of the asset.
AMORTIZATION OF INTANGIBLE ASSETS AND DEFERRED STOCK COMPENSATION. The
amortization of intangible assets and deferred stock compensation increased by
$.4 million to $.5 million for the three months ended March 31, 2001 from $.1
million for the same period in 2000. The amortization of intangible assets is
attributable to goodwill and acquired work force that resulted from the purchase
of substantially all of the assets of CRC in the second quarter of 2000 (see
above discussion of "Impairment of Intangible Asset"). As discussed above, $1.6
million of intangible asset is being written off this period as a result of the
impairment of an intangible asset. Therefore, amortization of this intangible
asset amounting to approximately $.4 million on an annual basis will be reduced
in future reporting periods. The amortization of deferred stock compensation is
related to the granting of stock options to key employees at prices deemed to be
below fair market value for financial reporting purposes.
BUSINESS RESTRUCTURING CHARGES. During the first quarter of 2001 we incurred
expenses of $3.8 million, or 11.5% of total revenues, related to our plans to
reduce expenses necessitated by the softening of the telecommunications
equipment market which has resulted in reduced demand for our equipment. These
expenses include severance payments for the termination of approximately 220
employees in addition to costs incurred in conjunction with the consolidation of
our facilities by closing two development centers located in New Jersey and one
office building in Florida.
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INTEREST AND OTHER (INCOME) EXPENSE, NET. Interest and other (income) expense,
net, decreased by $.7 million to $.6 million of income for the three months
ended March 31, 2001, from $1.3 million of income for the same period in 2000.
Interest and other (income) expense, net, is related to interest income on short
term investments, technology sales, income from fees, interest on notes payable
and borrowings under lines of credit and foreign exchange gains and losses. This
decrease in income was primarily attributable to a reduction in interest income
due to our significantly lower cash position from the first quarter of 2000
resulting in lower earnings on short term investments, and a reduction in the
amount of income from the sale of patents, offset in part by the recognition of
commitment fee income net of expenses, received in connection with the
termination of a credit facility with a customer.
PROVISION (BENEFIT) FOR INCOME TAXES. Provision (benefit) for income taxes
decreased by $1.1 million to $0 for the three months ended March 31, 2001, from
$1.1 million of provision for the same period in 2000. Since we incurred a
pretax loss for the first three months of 2001, had a loss carryover from the
prior year and is not expected to generate pretax income for the remainder of
the year, no tax provision is required.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the three months ended March 31, 2001 totaled
$3.3 million. The net loss adjusted for non-cash impacting items such as
depreciation, amortization, impairment of intangible assets and allowance for
bad debts is reduced to a negative cash flow of $8.2 million. Contributing to
cash provided from operations and further reducing the negative cash flow were
decreases in receivables of $9.7 million due to lower revenues and strong
collections and a decrease in inventories of $6.1 million. Decreases to cash
from operating activities offsetting the above contributions were principally
driven by a $11.0 million reduction in accounts payable, as previously incurred
purchase commitments were executed and paid off. Also contributing to cash
outflows were $2.0 million of payments related to business restructuring made
during the first quarter. As a result of employee terminations related to
restructurings recorded in the first quarter we estimate that our annual cash
flow needs for salary related payments will be approximately $15 million lower
than beginning of the year levels. Early in the second quarter of 2001 we
received cash of approximately $3.5 million in income tax refunds but we also
expect to pay severance payments during the quarter of approximately $2.3
million.
The primary use of funds in investing activities was due to $1.5
million of contingent consideration made during the first quarter to the sellers
of the CRC business. This payment resulted because product sales generated by
the CRC business in 2000 exceeded the 2000 target set as part of the
acquisition. There were minimal other investing activities during the quarter as
proceeds from the sale of property, plant and equipment was actually larger than
net capital expenditures, resulting in a slightly positive cash impact of $.2
million. The low level of capital expenditures reflects the very tight controls
placed on cash expenditures as a result of a slowdown in business activity.
Because these tight controls are being continued and with reduced need for
research and development capital (due to reduced research and development
personnel), it is expected that cash outflows to meet capital requirements for
the remainder of the year will be approximately $1.0 million per quarter.
Net cash from financing activities during the first quarter was
approximately breakeven for the quarter with no material transactions in any one
category.
In June 2000, we and four financial institutions entered into a credit
agreement under which we and each of the four financial institutions agreed to
provide funds to one of our major customers. We entered into this agreement in
order to develop further our relationship with this valuable customer. Our
portion of this credit agreement was $25.0 million. As of December 31, 2000, no
money had ever been borrowed from us under this facility. In March 2001, this
customer filed for bankruptcy thereby terminating our obligations.
We had $15.2 million of cash and cash equivalents at March 31, 2001
representing a decrease of $4.6 million from $19.8 million at December 31, 2000.
Working capital decreased $6.4 million from $54.8 million at December 31, 2000
to $48.4 million at March 31, 2001.
The bank line of credit with Paradyne Corporation, or wholly owned
operating subsidiary, expired at the end of January 2001, and we have not yet
negotiated a new line of credit. Paradyne Corporation is currently in
negotiations to secure a new line of credit facility with one or more banks,
which we expect to finalize during the second quarter. We are a holding company
with no business operations of our own. In the event we incur obligations, we
would be dependent on payments, loans, dividends and distributions from our
subsidiaries for funds to pay our obligations, It is probable that, under any
line of credit, Paradyne Corporation and its subsidiaries will be restricted
from paying dividends or making distributions to us unless certain financial
conditions are met.
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We believe that our current cash position, together with cash flows
from operations and our ability to monitor and control expenditures, will be
sufficient to meet our working capital needs for at least the next twelve
months.
RECENT TRENDS AND DEVELOPMENTS
There have been reductions in spending on networking equipment among
smaller communications companies including CLECs. Companies are continuing to
change their build-out strategies amid increased competition, and some companies
are experiencing decreases in funds available from the capital investment
markets.
In May we announced a temporary compensation plan impacting North
American employees. Most manufacturing employees had their work week reduced
from 40 hours to 34 hours per week resulting in a 15% reduction to their total
compensation. All other North American employees had their compensation rate
reduced from 3 to 15% depending on the amount of their base pay. Although we do
not know how long this temporary compensation reduction will be in effect, we
estimate that the annualized reduction to compensation would be approximately
$3.4 million.
INFLATION
Because of the relatively low levels of inflation experienced in 2000
and 2001 to date, inflation did not have a significant effect on our results in
such periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in investing in or trading market risk sensitive
instruments. We also do not purchase, for investing, hedging, or for purposes
"other than trading", instruments that are likely to expose us to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
price risk, except as noted in the following paragraph. We have not entered into
any forward or futures contracts, purchased any options or entered into any
interest rate swaps. Additionally, we do not currently engage in foreign
currency hedging transactions to manage exposure for transactions denominated in
currencies other than U.S. dollars
If we were to successfully negotiate and then borrow from a new
revolving line of credit facility, we would be exposed to changes in interest
rates. We are also exposed to changes in interest rates from investments in some
held-to maturity securities. Under our current policies, we do not use interest
rate derivative instruments to manage exposure to interest rate changes.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following Paradyne's September 28, 2000 press release regarding contemplated
third quarter results, several securities class action suits against Paradyne;
Andrew May, Paradyne's Chief Executive Officer and President at the time;
Patrick Murphy, Paradyne's Chief Financial Officer and Senior Vice President;
and Thomas Epley, Paradyne's Chairman of the Board (collectively, the
"Defendants"), were filed in October 2000 in the United States District Court
for the Middle District of Florida, Tampa Division. Sean E. Belanger, our
current President and Chief Executive Officer and a director was added as a
Defendant in the litigation in April 2001. These actions were later consolidated
into one case and the Court appointed Frank Gruttadauria and Larry Spitcaufsky
as the lead plaintiffs and the law firms of Milberg Weiss Bershad Hynes & Lerach
LLP and Barrack Rodos & Bacine as the lead counsel. The Amended Consolidated
Complaint alleges violations by the Defendants of the securities anti-fraud
provisions of the federal securities laws, specifically Section 10(b) of the
9
12
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. It further alleges that the individual Defendants are liable under
Section 20(a) of the Securities Exchange Act as "control persons of Paradyne".
The plaintiffs purport to represent a class of investors during a purported
class period of September 28, 1999 through September 28, 2000 and allege, in
effect, that the Defendants during that time, through material
misrepresentations and omissions, fraudulently or recklessly inflated the market
price of Paradyne's stock by allegedly erroneously reporting that Paradyne was
performing well, that its inventories were properly stated, and that its
customer base and product demand were solid. The securities section seeks
damages in an unspecified amount for the purported class for the alleged
inflated amount of the stock price during the class period. The Defendants
believe the claims are without merit and intend to vigorously defend them,
although they cannot predict the outcome. The Defendants intend to file a motion
to dismiss the Amended Consolidated Complaint on or before May 25, 2001.
Paradyne has engaged the law firm of Holland and Knight, LLP as its legal
counsel in this litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Our Registration Statement on Form S-1 (Registration No. 333-76385) was declared
effective on July 15, 1999 and our initial public offering commenced on July 16,
1999. We received net proceeds of approximately $62.2 million after deducting
estimated underwriting discounts, commissions, and offering expenses. As of
March 31, 2001, we had used approximately $52.4 million of the net proceeds to
repay all the outstanding indebtedness from our now expired revolving line of
credit facility with Bank of America, to pay for certain capital expenditures,
for working capital, and to fund the acquisition of CRC. We intend to use the
remainder of the net proceeds for general corporate purposes, including working
capital and additional capital expenditures
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paradyne Networks, Inc.
Date: May 15, 2001 /s/ Sean E. Belanger
----------------
Sean E. Belanger
President, Chief Executive
Officer and Director
/s/ Patrick M. Murphy
-----------------
Patrick M. Murphy
Senior Vice President,
Chief Financial Officer,
Corporate Secretary and Treasurer
(Principal Financial and Accounting
Officer)