<PAGE>
As filed with the Securities and Exchange Commission on July 7, 2000
Registration No. 333-37316
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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AVICI SYSTEMS INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 3576 02-0493372
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification
organization) Code Number)
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101 Billerica Avenue
North Billerica, Massachusetts 01862
(978) 964-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
SURYA R. PANDITI
President and Chief Executive Officer
Avici Systems Inc.
101 Billerica Avenue
North Billerica, Massachusetts 01862
(978) 964-2000
(Name, address including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
JOHN A. MELTAUS, ESQ. KEITH F. HIGGINS, ESQ.
Testa, Hurwitz & Thibeault, LLP Ropes & Gray
125 High Street One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
Telephone: (617) 248-7000 Telephone: (617) 951-7000
Telecopy: (617) 248-7100 Telecopy: (617) 951-7050
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued July 7, 2000
6,000,000 Shares
[LOGO OF AVICI]
COMMON STOCK
-----------
Avici Systems Inc. is offering 6,000,000 shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$18.00 and $20.00 per share.
-----------
We have applied to list our common stock for quotation on the Nasdaq National
Market under the symbol "AVCI."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Discounts
Price to and Proceeds to
Public Commissions Avici
-------- ------------ -----------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Avici has granted the underwriters the right to purchase up to an additional
900,000 shares to cover over-allotments. Morgan Stanley & Co. Incorporated
expects to deliver the shares of common stock to purchasers on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
J.P. MORGAN & CO.
LEHMAN BROTHERS
UBS WARBURG LLC
, 2000
<PAGE>
[The inside front cover contains a photograph of a three-dimensional
rectangular product chassis with 40 slots on the front of the box. The box is
labeled "AVICI Systems TSR" at the top left and is set against a black
background.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 7
Special Note Regarding Forward-
Looking Statements................. 18
Use of Proceeds..................... 19
Dividend Policy..................... 19
Capitalization...................... 20
Dilution............................ 21
Selected Financial Data............. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................ 28
Management.......................... 38
Certain Transactions................ 46
Principal Stockholders.............. 48
Description of Capital Stock........ 50
Shares Eligible for Future Sale..... 53
Underwriters........................ 56
Legal Matters....................... 59
Experts............................. 59
Where You Can Find More
Information........................ 59
Index to Financial Statements....... F-1
</TABLE>
----------------
Until , 2000, which is the 25th day after the date of this prospectus,
all dealers that buy, sell or trade the common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
information different from that contained in this prospectus. We are offering
to sell shares of common stock and seeking offers to buy shares of common
stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of the common stock.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
financial statements and notes appearing elsewhere in this prospectus.
AVICI SYSTEMS INC.
We develop and sell high-speed data networking equipment that enables
communications service providers to transmit high volumes of information across
their fiber optic networks. Our high-performance solution is being marketed to
telecommunications companies and Internet service providers, referred to as
carriers, that are creating next-generation optical networks to address the
increasing data traffic across the Internet. The strains placed on existing
public networks by this dramatic increase in traffic volume are forcing
carriers to purchase new equipment that will optimize the bandwidth of their
next-generation optical networks while also facilitating the provisioning to
their customers of new revenue-generating services.
The Avici Terabit Switch Router product, known as the TSR, is designed to
address the critical needs of carriers by:
. managing high volumes of network traffic at high speeds;
. providing the ability to incrementally add capacity to the network
without disrupting network performance, which we refer to as in-service
scalability;
. demonstrating high levels of operational availability and redundancy,
which we refer to as carrier-class reliability;
. prioritizing traffic types to facilitate the provisioning of new
revenue-generating services, such as video streaming and the
transmission of telephone calls over the Internet, referred to as
voice-over-Internet Protocol;
. operating with existing carrier equipment; and
. reducing network cost and complexity.
Our TSR provides these benefits through our proprietary technologies, including
our application specific integrated circuits and distributed system
architecture, as well as our Composite Link technology which enables the
addition of incremental bandwidth between the TSR and the carrier's network.
Our TSR has been designed to provide a long-term solution for the bandwidth
requirements at the core of carriers' optical networks. Currently available
routers were designed to handle lower capacities and transmission speeds and,
accordingly, cannot economically address the increasing capacity requirements
of carriers. The Avici TSR has been designed to enable in-service scalability
as demands on the optical layer increase, thereby avoiding expensive interim
solutions such as clustering designs and repeated equipment replacement.
We sell and market our products primarily through our direct sales force,
systems integrators and distributors. Our sales cycle typically includes
consultation with our sales force followed by laboratory tests and field
trials. The TSR became commercially available in the fourth quarter of 1999 and
we first recognized revenue, consisting of $504,000 from sales of the TSR to
one customer, in the first quarter of 2000. This customer has currently
deployed our TSR in a segment of The National Transparent Optical Network, a
research network consortium that is part of the Internet initiative known as
SuperNet. In addition, Enron Broadband Services and
4
<PAGE>
Williams Communications have agreed to future minimum purchases of the TSR and
follow-on features totaling $45 million through 2001, subject to successful
completion of field trials. While there has been no commitment to purchase
equipment for deployment, the TSR has successfully completed laboratory testing
at AT&T and has been selected by AT&T for field trials which we expect will be
completed by the end of 2000. Any future commitments for deployment orders will
be dependent upon the successful completion of these field trials. These trials
may not be successful and we may not receive future orders for our TSR. We have
also shipped the TSR to a limited number of other customers and prospective
customers.
Since commencing operations in November 1996, we have incurred significant
expenses as we have developed our product and established our sales and
marketing capabilities. We had net losses of $47.8 million in 1999 and $16.7
million in the three months ended March 31, 2000.
We intend to continue to develop and provide the next generation of data
networking equipment designed to power the core of carriers' optical networks
while establishing new standards for performance by:
. extending our technological capabilities;
. continuing to penetrate key carrier accounts;
. providing features to enable new carrier service offerings;
. expanding into new geographic markets; and
. relying on strategic outsourcing.
We are a Delaware corporation. Our principal executive offices are located at
101 Billerica Avenue, North Billerica, Massachusetts 01862 and our telephone
number is (978) 964-2000. TSR is our registered trademark and Avici, Composite
Links, IPriori, Velociti and the Avici logo are our trademarks. This prospectus
also contains trade names of other companies.
Concurrent Private Placement
We intend to offer $5 million of our common stock to Williams Communications
at the initial public offering price per share in a private placement that
would close concurrently with this offering. Williams has not committed to
purchase any of these shares, and the information in this prospectus does not
assume that these shares will be purchased.
THE OFFERING
<TABLE>
<C> <S>
Common stock offered............................ 6,000,000 shares
Common stock to be outstanding after this 45,037,767 shares
offering.......................................
Use of proceeds................................. We intend to use the net
proceeds from this offering
to fund operating losses and
for general corporate
purposes, primarily for
working capital needs. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.......... "AVCI"
</TABLE>
The above information is based upon the number of shares of common stock
outstanding as of May 15, 2000, and excludes 5,855,990 shares of common stock
issuable upon exercise of outstanding options at a weighted average exercise
price of $3.23 per share, 7,930,029 shares of common stock reserved for future
issuance under our stock plans as of May 15, 2000, and 275,000 shares of common
stock issuable upon exercise of outstanding warrants.
5
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended December 31, 31,
------------------------------ --------------------------
1997 1998 1999 1999 2000
------- --------- ---------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ -- $ -- $ -- $ -- $ 504
Total operating
expenses............... 5,351 31,057 48,634 10,100 17,032
Loss from operations.... (5,351) (31,057) (48,634) (10,100) (16,958)
Net loss................ (5,164) (30,118) (47,790) (10,035) (16,680)
Basic and diluted net
loss per share......... $(34.71) $ (19.05) $ (13.99) $ (3.61) $ (3.68)
Weighted average common
basic and diluted
shares................. 148,785 1,581,038 3,416,534 2,782,114 4,536,051
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (1.58) $ (0.46)
Pro forma weighted
average common basic
and diluted shares
(unaudited)............ 30,317,742 35,895,487
</TABLE>
Weighted average common shares used in computing basic and diluted net loss
per share exclude unvested shares of common stock subject to repurchase rights,
which totaled 3,483,987, 4,085,291, 2,374,974, 2,916,860 and 1,478,309 for the
years ended December 31, 1997, 1998 and 1999 and the three months ended March
31, 1999 and 2000, as well as shares issuable upon conversion of redeemable
convertible preferred stock. Weighted average common shares used in computing
pro forma basic and diluted net loss per share includes the weighted average
effect of the foregoing unvested restricted shares of common stock as well as
shares issuable upon conversion of redeemable convertible preferred stock.
The pro forma column in the balance sheet data below reflects the sale in
April and May 2000 of 2,969,769 shares of Series F redeemable convertible
preferred stock at $15.00 per share and gives effect to the conversion of all
outstanding redeemable convertible preferred stock into common stock and all
outstanding preferred stock warrants into common stock warrants upon the
closing of this offering. The pro forma as adjusted column in the balance sheet
data below also gives effect to the sale of the 6,000,000 shares of common
stock in this offering at an assumed initial public offering price of $19.00
per share, after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------
(unaudited)
Pro Pro Forma
Actual Forma As Adjusted
-------- ------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investments........... $ 31,784 $72,280 $177,050
Working capital.................................. 26,488 66,985 171,755
Total assets..................................... 49,107 89,603 194,373
Long-term obligations, less current portion...... 5,246 5,246 5,246
Redeemable convertible preferred stock........... 123,441 -- --
Total stockholders' equity (deficit)............. (93,109) 71,027 175,797
</TABLE>
Except as set forth in the financial statements or as otherwise indicated,
all information in this prospectus assumes:
. no exercise of the underwriters' over-allotment option; and
. the conversion of all outstanding shares of our redeemable convertible
preferred stock into 32,850,896 shares of common stock upon the closing
of the offering.
Recent Operating Results
For the three months ended June 30, 2000, our net revenues are estimated to
be approximately $2.2 million. For the three months ended June 30, 2000, our
net loss is estimated to be in the range of $26.0 million to $27.2 million and
our pro forma basic and diluted net loss per share is estimated to be in the
range of $0.68 to $0.71, based on approximately 38.2 million pro forma weighted
average common shares.
6
<PAGE>
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following factors, as well as other information
contained in this prospectus, before deciding to invest in shares of our
common stock. If any of the following risks actually occurs, our business,
financial condition and results of operations could be adversely affected. In
this case, the trading price of our common stock could decline and you may
lose all or part of your investment in our common stock.
Risks Related to Our Business
We expect that substantially all of our revenues will be generated from a
limited number of customers. Our revenues will not grow if our products are
not selected for or do not successfully pass field trial tests.
We first recognized revenues during the quarter ended March 31, 2000. All of
our recognized revenues through March 31, 2000 were attributable to shipments
of our TSR to one customer and amounted to $504,000. We have also shipped the
TSR to international systems integrators, including Nissho Electronics
Corporation, Itochu and Samsung, and to several other customers for laboratory
tests and field trials. We have deferred any revenues from these shipments as
of March 31, 2000 in accordance with our revenue recognition policy. We expect
that in the foreseeable future substantially all of our revenues will continue
to depend on sales of our TSR to these customers and a limited number of
potential new customers. Our sales cycle typically involves a lengthy sales
consultation process followed by laboratory testing in which our product is
evaluated against competing products. If our product is selected for field
trials after laboratory testing, our product is then tested in an operational
environment. Generally, our customers do not contractually commit to purchase
any minimum quantities of products from us until we have successfully
demonstrated specific performance criteria in these field trials. However, we
have received commitments from Williams Communications and Enron Broadband
Services, both of which are current stockholders, that are subject to
successful completion of field trials. We cannot predict whether the TSR will
successfully complete laboratory tests or field trials with particular
customers or whether these customers will order and commercially deploy the
TSR in meaningful volumes. The failure of current or prospective customers to
purchase our product for any reason, including the failure to pass field
trials, any determination not to install our product in their networks or any
downturn in their business, would seriously harm our ability to build a
successful business. Even if we are successful in promoting the adoption of
our product, customers usually test, purchase and deploy competitive products
for various segments of their networks. Accordingly, we will likely face
additional competitive challenges in further penetrating customer accounts.
The TSR is currently our only product and our future revenues depend on
enhancements to the TSR and the commercial success of the TSR.
Our future growth and our future revenue depend on the commercial success of
our TSR, which is the only product that we currently offer. We have shipped
our product to a limited number of current and prospective customers. These
entities are currently using our product in their internal networks only and
have not yet fully deployed our product in large network environments and may
not choose to do so. Even if these customers do fully deploy our product, it
may not operate as expected. The failure of the product to operate as expected
could delay or prevent its adoption. We must also continue to enhance the
features and functionality of the TSR to meet customer requirements. In
particular, we are developing MultiProtocol Label Switching, or MPLS, traffic
engineering capabilities and line card modules that will support OC-192c,
Gigabit Ethernet and Asynchronous Transfer Mode, or ATM. We may not be
successful in completing the development or introduction of these product
enhancements on a timely basis or at all. In addition, the failure of these
planned product enhancements to operate as expected could delay or prevent
future sales of our TSR. If our target customers do not adopt, purchase and
successfully deploy our TSR and our planned product enhancements, our revenues
will not increase significantly.
Our failure to increase our revenues would prevent us from achieving and
maintaining profitability.
We have incurred significant losses in each quarterly and annual period
since inception and expect to continue to incur significant losses in the
future. As of March 31, 2000, we had an accumulated deficit of $100.3 million.
We began recognizing revenues during the recent quarter ended March 31, 2000.
We cannot be certain
7
<PAGE>
that our revenues will increase or that we will generate sufficient revenues
to achieve profitability. We plan to continue product development and to
increase the number of our engineering, sales, marketing and administrative
employees. These efforts will require significant expenditures, a substantial
portion of which we will make long before any significant revenue related to
these expenditures may be realized. In addition, our operating expenses are
based largely on anticipated revenue trends and a significant portion of our
expenses, such as personnel and real estate facilities costs, is fixed. As a
result, we will need to generate significant revenues to achieve and maintain
profitability. If we fail to achieve significant increases in our revenues,
the size of our operating losses may be larger than expected. We may never
achieve profitability or generate positive cash flows from operations. If we
do achieve profitability or positive cash flows from operations in any period,
we may not be able to sustain or increase profitability or positive cash flows
on a quarterly or annual basis.
We rely on single or limited source suppliers for several key components. If
we are unable to purchase these components on a timely basis, we will not be
able to deliver our TSR to our customers within the timeframes required and we
may experience order cancellations.
We currently specify and purchase through our contract manufacturers several
key components from single or limited sources. We have worked with LSI Logic
for over three years to develop several of our key proprietary application
specific integrated circuits, or ASICs, which are custom designed integrated
circuits built to perform a specific function more rapidly than a general
purpose microprocessor. These proprietary ASICs are very complex and LSI Logic
is currently our sole source supplier for them. We do not have a long-term,
fixed-price or minimum volume of supply agreement with LSI Logic. Our ASICs
generally require a lead-time of 22 weeks. If required, we would likely be
unable to develop an alternate source to LSI Logic in a timely manner, which
could hurt our ability to deliver our TSR to our customers. We also purchase
other critical components, including optical components, field programmable
gate arrays and other ASICs, from sole or limited sources, and at times some
of these components are subject to allocation. Although we believe that there
are alternative sources for many of these components, in the event of a
disruption in supply, we may not be able to develop an alternate source in a
timely manner or at favorable prices.
We typically specify and purchase through our contract manufacturers all of
our components, including our ASICs, under purchase orders placed from time to
time. We do not carry significant inventories of components and have no
guaranteed supply arrangements with our vendors. If we are unable to purchase
our critical components, or to provide for the production of our ASICs, at
times and in volumes as our business requirements necessitate, we will not be
able to manufacture and deliver our TSR to our customers in accordance with
their volume and schedule requirements. If we are not able to satisfy the
delivery requirements of our customers, they may reduce any future orders or
eliminate our status as a vendor. Our reputation also would likely be harmed
and, given the limited number of customers in our target market, we may not be
able to replace any lost business with new customers. In addition, even if we
are able to obtain these critical components in sufficient volume and on
schedules that permit us to satisfy our delivery requirements, we have little
control over their cost. Accordingly, the lack of alternative sources for
these components may force us to pay higher prices. If we are unable to obtain
these components from our current suppliers or others at economical prices,
our margins would be adversely impacted unless we could raise the prices of
our products in a commensurate manner. The existing competitive conditions may
not permit us to do so, in which case we may suffer increasing losses or
reduced profits.
We have been in business for a short period of time and your basis for
evaluating us is limited.
We were founded in November 1996 and our TSR became commercially available
during the fourth quarter of 1999. Accordingly, we have limited meaningful
historical financial data upon which to base projected revenues and planned
operating expenses and upon which investors may evaluate us and our prospects.
In addition, our limited operating history means that we have less insight
into how technological and market trends may affect our business. The revenue
and income potential of our business, and in particular the TSR, is unproven
and the market that we are addressing is rapidly evolving. Our ability to sell
our TSR depends on, among other things, the level of demand for intelligent
high-speed routers. You should consider our business and prospects in light of
the risks and difficulties frequently encountered by companies like ours in
the early stages of development.
8
<PAGE>
The long and variable sales cycle for our TSR may cause revenues and
operating results to vary unexpectedly from quarter to quarter, which could
affect the market price of our common stock.
A customer's decision to purchase our TSR involves a significant commitment
of its resources and a lengthy evaluation, testing and product qualification
process. As a result, our sales cycle is likely to be lengthy. Throughout the
sales cycle, we spend considerable time and expense educating and providing
information to prospective customers about the use and features of our TSR.
Even after our customers make a decision to purchase, we believe that our
customers will deploy our TSR slowly and deliberately. The timing of
deployment can vary widely and depends on the skills of the customer, the size
of the network deployment, the complexity of the customer's network
environment and the degree of hardware and software configuration necessary.
Customers with significant or complex networks usually expand their networks
in large increments on a periodic basis. Accordingly, we expect to receive
purchase orders for significant dollar amounts on an irregular and
unpredictable basis. Because of our limited operating history and the nature
of our business, we cannot predict these sales and deployment cycles. These
long sales cycles, as well as our expectation that customers will tend to
sporadically place large orders with short lead times, may cause our revenues
and results of operations to vary significantly and unexpectedly from quarter
to quarter.
Our complex products may have errors or defects or may not interoperate
within the networks of our customers, which could result in reduced demand for
our products or costly litigation against us.
Our TSR is complex and is designed to be deployed in large and complex
networks with large volumes of traffic. Accordingly, our TSR can only be fully
tested when completely deployed in these types of networks. To date, our
customers are using our product solely in test networks. Despite this internal
testing, our customers may discover errors or defects in the hardware or the
software, or the product may not operate as expected, after it has been fully
deployed. In addition, many of our customers will require that our products be
designed to interface with their existing networks, each of which may have
different specifications and utilize multiple protocol standards. Our
customer's networks contain multiple generations of products that have been
added over time as these networks have grown and evolved. Our products must
interoperate with many of the products within these networks as well as future
products in order to meet the requirements of our customers. Because our
products are critical to the networks of our customers, any significant
interruption in their service as a result of defects in our product or the
failure of our product to interoperate within our customers' networks could
result in lost profits or damage to these customers. These problems could
cause us to incur significant service and warranty costs, divert engineering
personnel from product development efforts and significantly impair our
ability to maintain existing customer relations and attract new customers.
Although our contracts with our customers generally contain provisions
designed to limit our exposure to potential product liability claims, such as
disclaimers of warranties and limitations on liability for special,
consequential and incidental damages, a court might not enforce a limitation
on our liability, which could expose us to financial loss. In addition, a
product liability claim, whether successful or not, would likely be time
consuming and expensive to resolve and would divert management time and
attention. Further, if we are unable to fix the errors or other problems that
may be identified in full deployment, we would likely experience loss of or
delay in revenues and loss of market share and our business and prospects
would suffer.
Our failure to compete effectively, particularly against Cisco Systems and
other established participants with greater financial and other resources than
ours, could limit our ability to increase our market share.
The competition in the network infrastructure equipment market is intense.
This market historically has been dominated by Cisco Systems, although we also
compete with other companies such as Juniper Networks and Lucent Technologies.
Our prospective customers may be reluctant to replace or expand their current
infrastructure solutions, which may be supplied by one or more of these more
established competitors, with our products. Further, many of our competitors
have greater selling and marketing, technical, manufacturing, financial and
other resources, more customers, greater market recognition and more
established relationships and alliances in the industry. As a result, these
competitors may be able to develop, enhance and expand their product offerings
more quickly, adapt more swiftly to new or emerging technologies and changes
in customer demands,
9
<PAGE>
devote greater resources to the marketing and sale of their offerings, pursue
acquisitions and other opportunities more readily and adopt more aggressive
pricing policies. In addition, established or emerging network equipment
vendors may also focus on our target market, thereby further intensifying
competition. In order to compete effectively with these competitors, we must
demonstrate that our products are superior in meeting the needs of carriers
and provide high levels of reliability, scalability and interoperability in a
cost-effective manner.
In addition, we believe that understanding the infrastructure requirements
of telecommunications carriers and other service providers, experience in
working with these providers to develop new services for their customers and
an ability to provide vendor-sponsored financing are important competitive
factors in our market. We have limited experience in working with
telecommunications carriers and other service providers. In addition, we do
not currently have the ability to provide vendor-sponsored financing and this
may influence the purchasing decision of prospective customers, which may
decide to purchase products from one of our competitors that offers such
financing.
If we are unable to compete successfully against our current and future
competitors, we could experience order cancellations and price reductions. If
this occurs, our revenues may not grow, our gross margins could decrease and
we could experience additional losses.
We are likely to face difficulties in obtaining and retaining customers if
we do not expand our sales organization and our customer service and support
operations.
Our TSR requires a sophisticated sales effort targeted at a limited number
of key individuals within our target customers' organizations. This effort
requires specialized sales personnel and systems engineers. We are in the
process of staffing our direct sales force and plan to hire additional
qualified sales personnel and systems engineers. The competition for these
individuals is intense, and we might not be able to hire the type and number
of sales personnel and systems engineers that we need to be successful. In
addition, we believe that our future success, particularly in international
markets, is dependent upon our ability to establish successful relationships
with a variety of systems integrators and distribution partners. We have
entered into agreements with only a small number of systems integrators and
distribution partners. These systems integrators and distribution partners are
not prohibited from selling products that compete with our TSR. We cannot be
certain that we will be able to reach agreement with additional systems
integrators and distribution partners on a timely basis or at all, or that our
systems integrators and distribution partners will devote adequate resources
to selling our product. If we are unable to expand our direct and indirect
sales operations, we may not be able to increase market awareness or sales of
our product, which may prevent us from achieving and maintaining
profitability.
The complexity of our products and the difficulty of installing them also
require highly trained customer service and support personnel. We currently
have a small customer service and support organization that we will need to
increase to support new customers. Hiring customer service and support
personnel is very competitive in our industry because there are a limited
number of people available with the necessary technical skills and
understanding of our market. In addition, once we hire these personnel, they
may require extensive training in our product. If we are unable to expand our
customer service and support organization and train them rapidly, we may not
be able to increase sales of our product.
We depend upon contract manufacturers and any disruption in these
relationships may cause us to fail to meet the demands of our customers and
damage our customer relationships.
We do not have internal manufacturing capabilities. We rely on a small
number of contract manufacturers to manufacture our products in accordance
with our specifications and to fill orders on a timely basis. These contract
manufacturers procure material on our behalf and provide comprehensive
manufacturing services, including assembly, test and control. We have
historically been dependent on only one contract manufacturer, Sanmina
Corporation. Although we have recently begun outsourcing to Celestica, Inc.,
we have limited experience with them and they have not yet manufactured
significant volume for us. We may not be able to effectively manage our
relationship with these contract manufacturers and they may not meet our
future
10
<PAGE>
requirements for timely delivery and quality. If, as we expect, we experience
increased demand for our TSR, the challenges we face in managing our
relationships with these manufacturers will be increased. Each of our contract
manufacturers also builds products for other companies, and we cannot be
certain that they will always have sufficient quantities of inventory
available to fill orders placed by our customers, or that they will allocate
their internal resources to fill these orders on a timely basis. Qualifying a
new contract manufacturer and commencing volume production is expensive and
time consuming and could result in a significant interruption in the supply of
our product. If we are required or choose to change one or both of our
contract manufacturers, we may lose revenue and damage our customer
relationships.
If we fail to accurately predict our manufacturing requirements, we could
incur additional costs or experience manufacturing delays.
Our contract manufacturers are not obligated to supply products to us for
any specific period, in any specific quantity or at any certain price, except
as may be provided in a particular purchase order. We generally provide
forecasts of our demand to these manufacturers up to 12 months prior to
scheduled delivery of product to our customers. If we overestimate our
requirements, our manufacturers may have excess inventory, which would
increase our costs. If we underestimate our requirements, our manufacturers
may have an inadequate inventory, which could result in delays in delivery to
our customers and recognition of revenue. In addition, the lead times for
materials and components we order vary significantly and depend on factors
such as the specific supplier, contract terms and demand for each component at
a given time. For example, our ASICs have a lead time of up to 22 weeks. We
also may experience shortages of other components from time to time, which
also could delay the manufacturing of our products.
The unpredictability of our quarterly results of operations may adversely
affect the trading price of our common stock.
Our quarterly operating results are likely to vary significantly in the
future based on a number of factors related to our industry, the markets for
our products and how we manage our business. We have little or no control over
many of these factors and any of these factors could cause the price of our
common stock to fluctuate significantly. In addition to the risks discussed
elsewhere in this section, the following may also adversely affect the trading
price of our common stock:
. fluctuations in the demand for high-speed routers, including our TSR;
. the timing and size of customer orders for our products or cancellations
of orders;
. the timing of product acceptance by customers;
. the timing and level of research and development and prototype
expenses;
. the distribution channels through which we sell our products; and
. general economic conditions, as well as conditions specific to the
telecommunications industry.
We plan to significantly increase our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations,
broaden our customer support capabilities and develop new distribution
channels. We also plan to expand our general and administrative functions to
address the increased reporting and other administrative demands that will
result from being a publicly traded company and the increasing size of our
business. Our operating expenses are largely based on anticipated
organizational growth and revenue trends and a high percentage of our expenses
are, and will continue to be, fixed in the short term. As a result, if revenue
for a particular quarter is below our expectations for any of the reasons set
forth above, or for any other reason, we could not proportionately reduce
operating expenses for that quarter. Accordingly, this revenue shortfall would
have a disproportionate effect on our expected operating results for that
quarter, which could result in significant variations in our operating results
from quarter to quarter.
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<PAGE>
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
You should not rely on our results or growth for any single quarter as an
indication of our future performance. It is likely that in some future
quarters, our operating results may be below the expectations of public market
analysts and investors. In this event, the price of our common stock may fall.
If we do not respond effectively and on a timely basis to rapid
technological changes, our products could become obsolete and we would
probably be unable to attract new customers.
The market for high-speed router products is likely to be characterized by
rapid technological change, evolving industry standards and frequent new
product introductions. The introduction of new products by competitors, market
acceptance of products based on new or alternative technologies or the
emergence of new industry standards could render our existing or future
products obsolete. Accordingly, we may be required to make significant and
ongoing investments in future periods in order to remain competitive. The
development of new products or technologies is a complex and uncertain process
that requires the accurate anticipation of technological and market trends. We
may be unable to respond quickly or cost-effectively to these developments,
and we may not be able to obtain the necessary funds to develop or acquire new
technologies or products needed to compete. We also cannot assure you that any
products we do develop will gain market acceptance.
In addition, in order to introduce products incorporating new technologies
and new industry standards, we must be able to gain access to the latest
technologies used by our customers, our suppliers and other network vendors.
Any failure to gain access to the latest technologies could impair our ability
to develop competitive products.
Cisco's leadership position in our market could create technical challenges
to our ability to sell our products.
In developing our products, we have made, and will continue to make,
assumptions about the standards that may be adopted by our customers and
competitors. If the standards adopted are different from those that we have
chosen to support, market acceptance of our products would likely be
significantly reduced and our business will be seriously harmed. Because Cisco
maintains a leadership position in selling products that currently comprise
the infrastructure of the Internet, Cisco may have the ability to establish de
facto standards within the industry. Any actions by Cisco that diminish
compliance by our products with industry or de facto standards or the ability
of our products to interoperate with other Internet-related products would be
damaging to our reputation and our ability to generate revenue.
Customer requirements are likely to evolve, and we will not retain customers
or attract new customers if we do not anticipate and meet specific customer
requirements.
Our future success will also depend upon our ability to develop and manage
key customer relationships in order to introduce a variety of new products and
product enhancements that address the increasingly sophisticated needs of our
customers. Our current and prospective customers may require product features
and capabilities that our TSR does not have. We must effectively anticipate
and adapt to customer requirements and offer products that meet those demands
in a timely manner. Our failure to develop products that satisfy customer
requirements would seriously harm our ability to achieve market acceptance for
our products. In addition, we may experience design, manufacturing, marketing
and other difficulties that could delay or prevent our development,
introduction or marketing of new products and enhancements. Material delays in
introducing new products may cause customers to forego purchases of our
products and purchase those of our competitors, which could seriously harm our
business. The introduction of new or enhanced products also requires that we
manage the transition from older products in order to minimize disruption in
customer ordering patterns and ensure that adequate supplies of new products
can be delivered to meet anticipated customer demand. Our inability to
effectively manage this transition would cause us to lose current and
prospective customers.
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<PAGE>
If we are unable to manage our planned expansion effectively, we may incur
increased costs and place too many demands upon our management team.
We have expanded our operations rapidly since our inception and we expect to
continue to increase the scope of our operations, both domestically and
internationally. We plan to continue to hire a significant number of engineers
and sales and marketing personnel this year. Our growth has significantly
increased our operating complexity and has required, and will continue to
require, significant time commitments from our management team, thereby
severely restricting their ability to manage our business. Our ability to
successfully offer our products and implement our business plan in a rapidly
evolving market requires an effective planning and management process. We
expect that we will need to continue to improve our financial, managerial and
manufacturing controls and information systems, and to continue to expand,
train and manage our work force. We may not be able to implement adequate
control and reporting systems in an efficient and timely manner. We also
expect that we will be required to manage multiple relationships with various
customers and third parties. We expect to expand or relocate our headquarters
within the next 12 months, and any expansion or relocation could have a
disruptive effect on our operations. Further, the management of our operations
in diverse locations may also complicate the task of managing our growth. Our
failure to manage our expansion effectively could increase our costs,
adversely affect our relations with customers and suppliers and adversely
affect our revenues and operating margins.
Our ability to develop, market and support products depends on retaining our
management team and attracting and retaining highly qualified individuals in
our industry.
Our future success depends on the continued services of our management team,
which has significant experience with the data communications,
telecommunications and Internet infrastructure markets, as well as
relationships with many of the communications service providers and business
partners that we currently or may in the future rely on in implementing our
business plan. The loss of the services of our management team or any key
executive could have a significant detrimental effect on our ability to
execute our business strategy.
Our future success also depends on our continuing ability to identify, hire,
train, assimilate and retain large numbers of highly qualified engineering,
sales, marketing, managerial and support personnel. The demand for qualified
personnel is high and competition for their services is intense. The
competition for qualified employees in our industry is particularly intense in
the Boston, Massachusetts area where our principal operations are located. We
have from time to time experienced, and we expect to continue to experience in
the future, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. In particular, we have experienced difficulty in
hiring qualified ASIC, software, systems and test and customer support
engineers. The loss of the services of any of our key employees, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers and sales personnel, could delay
the development and introduction of and negatively impact our ability to sell
our products.
We face risks associated with our international expansion that could impair
our ability to grow our revenues abroad.
We intend to substantially expand our presence in international markets. We
currently have one sales representative in England and three distribution
agreements in place, two in Japan and one in Korea. We will require
significant management attention and financial resources to successfully
develop our direct and indirect international sales and support channels.
We have limited experience in marketing and distributing our TSR
internationally and we expect that we will need to develop versions of our
product that comply with local standards. We may not be able to develop
international market demand for our TSR. In addition, our international
operations will expose us to a number of risks that we do not have to address
in our domestic operations, including:
. greater difficulty in collecting accounts receivable and longer
collection periods;
. greater difficulty in enforcing agreements;
13
<PAGE>
. differences in technology standards;
. difficulties and costs of staffing and managing foreign operations;
. the impact of recessions in economies outside the United States;
. unexpected changes in regulatory requirements;
. certification requirements;
. foreign currency exchange rate fluctuations;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences; and
. political and economic instability.
We expect that our international sales will be generally denominated in
United States dollars. As a result, increases in the value of the United
States dollar relative to foreign currencies would cause our products to
become less competitive in international markets and could result in limited,
if any, sales and profitability. To the extent that we denominate sales in
foreign currencies, we will be exposed to increased risks of currency
fluctuations.
We may experience difficulty in identifying, acquiring and integrating
acquisition candidates.
We expect to supplement our internal growth by acquiring complementary
businesses, technologies or product lines. We may not be able to identify and
acquire suitable candidates on reasonable terms. We compete for acquisition
candidates with other companies that have substantially greater financial,
management and other resources than we do. If we do complete an acquisition,
integrating newly acquired organizations and products and services is likely
to be expensive, time consuming and a strain on our managerial resources.
Acquisitions, in particular multiple acquisitions over a short period of time,
involve a number of risks that may result in our failure to achieve the
desired benefits of the transaction.
We may finance acquisitions by issuing shares of our common stock, which
could dilute our existing stockholders. We may also use cash or incur
additional debt to pay for these acquisitions. In addition, we may be required
to expend substantial funds to develop acquired technologies. We may also be
required to amortize significant amounts of goodwill and other intangible
assets in connection with future acquisitions, which could adversely affect
our operating results.
Our intellectual property protection may be inadequate to protect our
proprietary rights, and we may be subject to infringement claims that could
subject us to significant liability and divert the time and attention of our
management.
We regard our products and technology as proprietary. We attempt to protect
them through a combination of patents, copyrights, trademarks, trade secret
laws, contractual restrictions on disclosure and other methods. These methods
may not be sufficient to protect our proprietary rights. We presently have 13
patent applications pending in the United States and we cannot be certain that
patents will be granted based on these or any other applications, or that,
even if issued, the patents will adequately protect our technology. We also
generally enter into confidentiality agreements with our employees,
consultants and customers, and generally control access to and distribution of
our documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise
misappropriate and use our products or technology without authorization,
particularly in foreign countries where the laws may not protect our
proprietary rights to the same extent as do the laws of the United States, or
to develop similar technology independently. We may need to resort to
litigation in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial
costs and diversion of resources and could harm our business.
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<PAGE>
We also license technologies from third parties, some of which we license
without indemnification from the licensor for infringement of third party
intellectual property rights. We are continuing to develop and acquire
additional intellectual property. Although we have not been involved in any
litigation relating to our intellectual property, including intellectual
property that we license from third parties, we expect that participants in
our markets will be increasingly subject to infringement claims. Third parties
may try to claim our products infringe their intellectual property. Any claim,
whether meritorious or not, could be time consuming, result in costly
litigation and/or require us to enter into royalty or licensing agreements.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed. In addition, any royalty or licensing
agreements might not be available on terms acceptable to us or at all, in
which case we would have to cease selling, incorporating or using the products
that incorporate the challenged intellectual property and expend substantial
amounts of resources to redesign our products. If we are forced to enter into
unacceptable royalty or licensing agreements or to redesign our products, our
business and prospects would suffer.
Risks Related to the Securities Markets and This Offering
The liquidity of our common stock is uncertain because it has never been
publicly traded, and you may not be able to resell your shares at or above the
price you paid.
There has not been a public market for our common stock. As a result, the
initial public offering price will be determined by negotiations among the
underwriters and us, and may not be indicative of prices that will prevail in
the public trading markets. We also cannot predict the extent to which a
trading market for our common stock will develop or how liquid that market
will be. You may not be able to resell your shares at or above the initial
public offering price.
Our management may apply the proceeds of this offering to uses that do not
enhance our financial results or market value.
Our management will have considerable discretion in the application of the
net proceeds from this offering, and you will not have the opportunity, as
part of your investment decision, to assess whether the proceeds are being
used appropriately. The net proceeds may be used for corporate purposes that
do not enhance our financial results or our market value. Pending any
application of the net proceeds, they may be placed in investments that do not
produce income or that lose value.
Insiders will continue to have substantial control over Avici after this
offering and could delay or prevent a change in corporate control.
We anticipate that our executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately 36.0% of our
outstanding common stock following the completion of this offering. These
stockholders, if acting together, would significantly influence, and likely
control, all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business
combination transactions. The interests of these stockholders may differ from
the interests of the other stockholders.
The market price of our common stock may be materially adversely affected by
market volatility.
The price at which our common stock will trade following this offering is
likely to be highly volatile and may fluctuate substantially. The price of the
common stock that will prevail in the market after this offering may be higher
or lower than the price you pay, depending on many factors, some of which are
beyond our control. In particular, given the limited amount of our product
sales and our limited number of customers, the announcement of any significant
customer developments, awards or losses or of any significant partnerships or
acquisitions by us or our competitors could have a material adverse effect on
our stock price.
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<PAGE>
In addition, the stock market in general has, and technology companies in
particular have, from time to time experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the
operating performance or prospects of such companies. As a result, investors
in our common stock may experience a decrease in the value of their common
stock. The fluctuations in the price of our common stock may affect our
visibility and credibility in our market and may affect our ability to secure
additional financing on acceptable terms, if at all.
The market price of our common stock might decline due to future non-cash
charges to earnings.
We have recorded and begun to amortize non-cash charges to earnings as a
result of options and restricted stock granted prior to the closing of this
offering to employees and consultants at prices deemed to be below fair market
value on the dates of grant. Our future operating results will reflect the
continued amortization of those charges over the vesting period of the options
and restricted stock. These charges will negatively impact future operating
results. It is not possible to calculate the future impact with respect to
consultant grants as the amount of these charges to earnings fluctuates with
the price of our common stock and other factors. It is possible that some
investors might consider this impact on operating results to be material,
which could result in a decline in the price of our common stock.
Our business could be harmed by class action litigation relating to stock
price volatility.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Those companies, like us, that are involved in rapidly changing
technology markets are particularly subject to this risk. We may be the target
of litigation of this kind in the future. This securities litigation, if any,
could result in substantial costs and divert management's attention and
resources, which could cause serious harm to our business. We could also incur
significant damages as a result of such litigation.
We are uncertain of our ability to obtain additional financing for our
future capital needs.
We expect the net proceeds from this offering and our current cash and cash
equivalents will meet our working capital and capital expenditure needs for at
least the next twelve months. We may need to raise additional funding at that
time or earlier if we decide to undertake more rapid expansion, including
acquisitions of complementary products or technologies, or if we increase our
marketing and/or research and development efforts in order to respond to
competitive pressures. We cannot be certain that we will be able to obtain
additional financing on favorable terms, if at all. We may obtain additional
financing by issuing shares of our common stock, which could dilute our
existing stockholders. If we cannot raise needed funds on acceptable terms, or
at all, we may not be able to develop or enhance our products or respond
appropriately to competitive pressures, which would seriously harm our
business.
Our charter documents and Delaware law could inhibit a takeover that
stockholders may consider favorable.
There are provisions of Delaware law and our charter and by-laws that could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. If a change of control or change in
management is delayed or prevented, the market price of our common stock could
suffer.
There may be sales of a substantial amount of our common stock after this
offering that could cause our stock price to fall.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. The sale of a
substantial number of shares of our common stock within a short period of time
after this offering could cause our stock price to fall. In addition, the sale
of a substantial number of shares by our stockholders could impair our ability
to raise capital through the sale of additional stock.
16
<PAGE>
You will suffer immediate and substantial dilution in the book value of your
investment.
The initial public offering price per share will significantly exceed the
pro forma net tangible book value per share. Accordingly, investors purchasing
shares in this offering will suffer immediate and substantial dilution of
$15.09 per share in their investment, assuming an initial public offering
price of $19.00 per share. This dilution is due in large part to earlier
investors in us having paid substantially less than the assumed initial public
offering price when they purchased their shares. The exercise of outstanding
options and warrants to purchase shares of our common stock will result in
additional dilution per share.
17
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and in other sections of this prospectus
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as "may," "might," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "intends,"
"predicts," "future," "potential" or "continue," the negative of these terms
and other comparable terminology. These forward-looking statements, which are
subject to risks, uncertainties, and assumptions about us, may include, among
other things, statements regarding planned product enhancements, release dates
for those product enhancements, customer purchasing patterns and commitments,
projections of our future operating results and capital requirements, our
anticipated growth strategies and anticipated trends in our business and
targeted market. These statements are only predictions based on our current
expectations and projections about future events. Because these forward-
looking statements involve risks and uncertainties, there are important
factors that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements, including those factors discussed under the caption entitled "Risk
Factors." You should specifically consider the numerous risks outlined under
"Risk Factors."
Except as set forth in the financial statements or as otherwise indicated,
all information in this prospectus assumes the filing, as of the closing of
the offering, of our amended and restated certificate of incorporation and the
adoption of our amended and restated by-laws implementing certain provisions
described below under "Description of Capital Stock--Delaware Law and Certain
Charter and By-Law Provisions; Anti-Takeover Effects."
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 6,000,000 shares of
our common stock in this offering will be approximately $104.8 million,
assuming an initial public offering price of $19.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us. If the over-allotment option is exercised in
full, we estimate that our net proceeds will be approximately $120.7 million.
We expect to use the net proceeds to fund operating losses and for general
corporate purposes, primarily for working capital needs. Additionally, we have
a term-loan agreement with Comdisco, a preferred stockholder. Proceeds of this
offering will also be used to liquidate this loan during its remaining term,
which expires in 2001. Total remaining payments as of June 30, 2000, including
principal and interest at an effective annual rate of 17%, were approximately
$1.1 million. We may use a portion of the net proceeds to acquire businesses,
products or technologies that are complementary to our business, although we
have no specific acquisitions planned. Pending such uses, we plan to invest
the net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the board of directors and will be dependent upon our
financial condition, results of operations, capital requirements, general
business condition and such other factors as the board of directors may deem
relevant. Our existing term loan agreement prohibits the payment of dividends
without prior written consent.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000. The
pro forma information reflects the sale in April and May 2000 of 2,969,769
shares of Series F redeemable convertible preferred stock at $15.00 per share
and gives effect to the conversion of all outstanding redeemable convertible
preferred stock into common stock and all outstanding preferred stock warrants
into common stock warrants upon the closing of this offering. The pro forma as
adjusted information also gives effect to the issuance and sale of the
6,000,000 shares of common stock offered by us in this offering at an assumed
initial public offering price of $19.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. The outstanding share information excludes: (1) 4,794,037 shares of
common stock issuable upon exercise of outstanding options as of March 31,
2000 with a weighted average exercise price of $2.75 per share, (2) 2,946,554
shares of common stock reserved for future issuance under our 1997 Stock
Incentive Plan as of March 31, 2000 and (3) outstanding warrants to purchase
275,000 shares of common stock at an exercise price of $1.00. This table
should be read in conjunction with "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
---------------------------------
(unaudited)
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term debt, less current portion........ $ 5,246 $ 5,246 $ 5,246
Redeemable convertible preferred stock, $.01
par value; 30,156,127 authorized,
29,881,127 issued and outstanding, actual;
no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted................................... 123,441 -- --
Preferred stock warrants.................... 198 -- --
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000
shares authorized,
no shares issued or outstanding on an
actual, pro forma and
pro forma as adjusted basis.............. -- -- --
Common stock, $.0001 par value; 50,000,000
shares authorized,
6,098,888 shares issued and outstanding,
actual; 250,000,000 shares authorized,
pro forma and pro forma as adjusted;
38,949,784 shares issued and outstanding,
pro forma; 44,949,784 shares issued and
outstanding, pro forma as adjusted....... 1 4 5
Additional paid-in capital................ 22,751 190,736 295,505
Common stock warrants..................... -- 198 198
Subscriptions receivable.................. (286) (286) (286)
Deferred compensation..................... (15,317) (15,317) (15,317)
Accumulated deficit....................... (100,258) (104,308) (104,308)
--------- --------- --------
Total stockholders' equity (deficit).... (93,109) 71,027 175,797
--------- --------- --------
Total capitalization.................. $ 35,776 $ 76,273 $181,043
========= ========= ========
</TABLE>
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DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$71.0 million, or $1.82 per share of common stock, after giving effect to the
sale in April and May 2000 of 2,969,769 shares of Series F redeemable
convertible preferred stock at $15.00 per share and the conversion upon the
closing of this offering of all outstanding shares of redeemable convertible
preferred stock into common stock and all outstanding preferred stock warrants
into common stock warrants. Our pro forma net tangible book value per share
represents our tangible net worth, which is our total tangible assets less
total liabilities, divided by the pro forma number of shares of common stock
outstanding after giving effect to the foregoing. After giving effect to the
issuance and sale of the 6,000,000 shares of common stock in this offering at
an assumed initial public offering price of $19.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as of March 31,
2000 would have been $175.8 million, or $3.91 per share of common stock. This
represents an immediate increase in pro forma net tangible book value to
existing stockholders of $2.09 per share of common stock and an immediate
dilution to new investors of $15.09 per share of common stock. If the initial
public offering price per share is higher or lower, the dilution to new
investors will be greater or less. The following table illustrates the
dilution in pro forma net tangible book value per share to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $19.00
Pro forma net tangible book value per share as of March 31,
2000........................................................... $1.82
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 2.09
-----
Pro forma net tangible book value per share after this offering... 3.91
------
Dilution per share to new investors............................... $15.09
======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 2000,
after giving effect to the sale in April and May 2000 of 2,969,769 shares of
Series F redeemable convertible preferred stock and the conversion upon the
closing of this offering of all outstanding shares of redeemable convertible
preferred stock into common stock, the difference between the number of shares
of common stock purchased from Avici, the total consideration paid to Avici
and the average price per share paid by existing stockholders and by new
investors purchasing shares of common stock in this offering. This calculation
is based on an assumed initial public offering price of $19.00 per share,
before deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 38,949,784 86.7% $168,775,329 59.7% $ 4.33
New investors................. 6,000,000 13.3 114,000,000 40.3 $19.00
---------- ----- ------------ -----
Total....................... 44,949,784 100.0% $282,775,329 100.0%
========== ===== ============ =====
</TABLE>
The table above assumes no exercise of stock options or warrants outstanding
at March 31, 2000. As of March 31, 2000, there were options outstanding to
purchase 4,794,037 shares of common stock at a weighted average exercise price
of $2.75 per share and 2,946,554 shares reserved for future grants or awards
under our stock plans. As of March 31, 2000, there were warrants outstanding
to purchase 275,000 shares of common stock at an exercise price of $1.00 per
share. To the extent any of these options or warrants are exercised, there
will be further dilution to new investors. To the extent all outstanding
options and warrants had been exercised as of March 31, 2000, pro forma net
tangible book value per share after this offering would be $3.78 and total
dilution to new investors would be $15.22 per share of common stock. From
April 1, 2000 through May 15, 2000, we issued options to purchase 1,176,650
shares of common stock at a weighted average exercise price of $5.01 per
share.
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 6,900,000 shares, or 15.0% of
the total number of shares of common stock outstanding after this offering.
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes thereto included elsewhere
in this prospectus. The statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 have been derived from our financial statements that have been
audited by Arthur Andersen LLP, independent public accountants, and that are
included elsewhere in this prospectus. The statement of operations data for
the period from inception (November 12, 1996) through December 31, 1996 and
the balance sheet data as of December 31, 1996 and 1997 have been derived from
our financial statements that have been audited by Arthur Andersen LLP,
independent public accountants, and that are not included in this prospectus.
The financial data for the three-month periods ended March 31, 1999 and 2000
and as of March 31, 2000 have been derived from our unaudited financial
statements, which are included elsewhere in this prospectus and include all
adjustments, consisting only of normal recurring adjustments that we consider
necessary for a fair presentation of our financial position and our results of
operations for those periods. The pro forma balance sheet data as of March 31,
2000 reflect the sale in April and May 2000 of 2,969,769 shares of Series F
redeemable convertible preferred stock at $15.00 per share and give effect to
the conversion of all outstanding redeemable convertible preferred stock into
common stock and all outstanding preferred stock warrants into common stock
warrants upon the closing of this offering. The historical results are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Period from
Inception Three Months Ended
through Year Ended December 31, March 31,
December 31, ------------------------------ ---------------------
1996 1997 1998 1999 1999 2000
------------ ------- --------- ---------- --------- ----------
(unaudited)
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ -- $ -- $ -- $ -- $ -- $ 504
Cost of revenues........ -- -- -- -- -- 429
----- ------- --------- ---------- --------- ----------
Gross margin........... -- -- -- -- -- 75
Operating expenses:
Research and
development........... -- 4,168 27,357 36,821 8,002 11,335
Sales and marketing.... -- -- 1,630 5,601 915 1,748
General and
administrative........ 123 858 2,010 3,041 736 757
Stock-based
compensation.......... -- 325 60 3,171 447 3,192
----- ------- --------- ---------- --------- ----------
Total operating
expenses............. 123 5,351 31,057 48,634 10,100 17,032
----- ------- --------- ---------- --------- ----------
Loss from operations.... (123) (5,351) (31,057) (48,634) (10,100) (16,957)
Interest income, net.... -- 187 939 844 65 277
----- ------- --------- ---------- --------- ----------
Net loss................ $(123) $(5,164) $ (30,118) $ (47,790) $ (10,035) $ (16,680)
===== ======= ========= ========== ========= ==========
Basic and diluted net
loss per share......... $ -- $(34.71) $ (19.05) $ (13.99) $ (3.61) $ (3.68)
===== ======= ========= ========== ========= ==========
Weighted average common
basic and diluted
shares................. -- 148,785 1,581,038 3,416,534 2,782,114 4,536,051
===== ======= ========= ========== ========= ==========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (1.58) $ (0.46)
========== ==========
Pro forma weighted
average common basic
and diluted shares
(unaudited)............ 30,317,742 35,895,487
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of
As of December 31, March 31, 2000
--------------------------------- -------------------
1996 1997 1998 1999 Actual Pro Forma
---- ------- -------- -------- -------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and investments........ $436 $ 6,870 $ 23,192 $ 47,917 $ 31,784 $72,280
Working capital......... 435 5,825 17,822 40,863 26,488 66,985
Total assets............ 451 8,903 31,359 61,839 49,107 89,603
Long term obligations,
less current portion... -- 1,471 5,521 6,390 5,246 5,246
Redeemable convertible
preferred stock........ 500 11,017 55,098 123,441 123,441 --
Total stockholders'
equity (deficit)....... (65) (4,917) (35,080) (79,746) (93,109) 71,027
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this prospectus.
Overview
Avici Systems provides high-speed data networking equipment that enables
telecommunications companies and Internet service providers to intelligently
transmit high volumes of information across their fiber optic networks.
Since our inception, we have incurred significant losses. As of March 31,
2000, we had an accumulated deficit of $100.3 million. Our operating
activities to date have been primarily devoted to research and development,
including the design and development of our proprietary ASICs and software,
and system testing the TSR. During this period, we have also built our
administrative, marketing and sales organizations and developed strategic
relationships with systems integrators, customers and vendors. We have not
achieved profitability on a quarterly or an annual basis and anticipate that
we will continue to incur significant operating losses in the foreseeable
future. We have a lengthy sales cycle for our products and, accordingly, we
expect to incur significant sales and other expenses before we realize the
related revenue. We expect to incur significant sales and marketing, research
and development and general and administrative expenses as we expand our
business and, as a result, we will need to generate significant revenues to
achieve and maintain profitability.
The TSR became commercially available in the fourth quarter of 1999. We
currently market the TSR to major carriers in North America through a direct
sales force. We have recently begun to market our products internationally
through systems integrators and distributors. We currently provide product
installation and customer field support through our internal customer service
organization. However, we plan to supplement our professional services staff
with resources from third-party support organizations.
We currently generate revenue from sales of our TSR, which is our only
product. We recognize revenue from product sales upon shipment, provided that
a purchase order has been received or a contract has been executed, there are
no uncertainties regarding customer acceptance, the sales price is fixed and
determinable and collectibility is deemed probable. If uncertainties regarding
customer acceptance exist, revenue is recognized when these uncertainties are
resolved. Amounts collected or billed prior to satisfying revenue recognition
criteria are recorded as deferred revenue. We also expect to generate revenue
in the future from support and maintenance as well as installation and
service. We will defer revenue from support and maintenance contracts and
recognize it ratably over the period of the related agreements. We expect to
recognize revenue from installation and other services as the work is
performed. We record an estimate of warranty liability for parts and labor on
our products at the time we recognize revenue.
All of our revenue through March 31, 2000 has been derived from a single
customer transaction in which we sold product through a distribution
arrangement with Nortel to GST Telecom for deployment in a segment of The
National Transparent Optical Network. We have also shipped our TSR to a
limited number of other customers, although any revenues from these shipments
have been deferred as of March 31, 2000 in accordance with our revenue
recognition policy. We expect that in the foreseeable future, substantially
all of our revenues will continue to depend on sales of our TSR to these
customers and a limited number of potential new customers. Generally, these
customers are not contractually committed to purchase any minimum quantities
of products from us. Enron Broadband Services and Williams Communications have
agreed to future minimum purchases of the TSR and follow-on features totaling
$45.0 million through 2001, subject to successful completion of field trials.
Additionally, while there has been no commitment to purchase equipment for
deployment, the TSR has successfully completed laboratory testing at AT&T and
has been selected by AT&T for field trials which we expect will be completed
by the end of 2000. Any future commitments for deployment orders will be
dependent upon the successful completion of these field trials. We cannot
assure you that these trials will be successful or that future orders will be
placed.
23
<PAGE>
We outsource our manufacturing operations to contract manufacturers that
assemble and test our products in accordance with our specifications.
Accordingly, a significant portion of our cost of revenues involves payment to
these entities. Our cost of revenues also includes payments to LSI Logic,
which develops several of our proprietary ASICs. These proprietary ASICs are
very complex and LSI Logic is currently our sole source supplier for them. Our
cost of revenues also includes overhead costs associated with our
manufacturing, mainly material procurement. Warranty costs and inventory
provisions will be expensed as cost of revenues.
Research and development expenses consist primarily of salaries and related
employee costs, prototype, equipment and materials costs and third-party costs
and fees related to the development and prototyping of our proprietary
technology, including our ASICs. We expense research and development costs as
incurred. We expect our research and development expenses to increase in
absolute dollars as we continue to invest in next generation products and
features in response to customer demand. In particular, we anticipate
significant expenditures in the second quarter of 2000 for prototype equipment
for internal use and other related costs.
Sales and marketing expenses consist primarily of salaries and related
employee costs, sales commissions, travel, public relations and other costs
associated with marketing material and tradeshows. We expect that sales and
marketing expenses will increase in absolute dollars in the future as we hire
additional sales and marketing personnel, establish sales offices in new
locations domestically and internationally and initiate additional marketing
programs.
General and administrative expenses consist primarily of salaries and
related costs for executive, finance, legal, facilities, human resources and
information technology personnel and professional fees. We expect that general
and administrative expenses will increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
operation as a public company.
During the year ended December 31, 1999 and the three months ended March 31,
2000, we recorded a non-cash charge for deferred stock compensation of
approximately $10.4 million and $10.5 million, respectively, in connection
with restricted stock and stock options granted to employees through March 31,
2000 at prices subsequently deemed to be below fair market value on the dates
of grant. We are amortizing the deferred stock compensation over the vesting
periods of the applicable options and the repurchase periods for the
restricted stock. Options granted are typically subject to a four-year vesting
period. Restricted stock grants are generally subject to our right to
repurchase the stock, which lapses over a four-year period or, if earlier,
immediately upon the closing of this offering. Options granted to nonemployees
are remeasured each period using the Black-Scholes option pricing model and
result in compensation expense based on the shares vesting in that period.
Stock-based compensation expense for the year ended December 31, 1999 was $3.2
million and for the three months ended March 31, 2000 was $3.2 million. The
unamortized balance of deferred stock compensation at March 31, 2000 was $15.3
million and is expected to be amortized to expense as follows: $6.7 million in
the remaining nine months ended December 31, 2000, $5.0 million in 2001, $2.6
million in 2002 and $1.0 million in 2003.
We expect to record an additional non-cash deferred compensation charge of
approximately $13.5 million for 1,605,150 options granted from April 1, 2000
through June 30, 2000. These grants have been made on terms consistent with
prior grants. The deferred compensation related to these grants will be
expensed over the option vesting period. We expect to continue to grant
options through the closing of this offering at exercise prices which may
subsequently be deemed to be below fair market value.
Recent Operating Results
For the three months ended June 30, 2000, our net revenues are estimated to
be approximately $2.2 million and our net loss is estimated to be in the range
of $26.0 million to $27.2 million. Net loss for the period includes non-cash
stock-based compensation of approximately $3.7 million and in-process research
and development expense of approximately $4.0 million. Our pro forma basic and
diluted net loss per share is estimated to be in the range of $0.68 to $0.71,
based on approximately 38.2 million pro forma weighted average common shares.
24
<PAGE>
Results of Operations
Three Months Ended March 31, 1999 and 2000
Net Revenues. We first recognized revenue in the three months ended March
31, 2000. Net revenues were $504,000 for the three months ended March 31,
2000, all of which was from a single customer transaction.
Cost of Revenues. Cost of revenues was $429,000, or 85.1% of net revenues,
for the three months ended March 31, 2000. Due to the high cost of starting up
production, cost of revenues as a percentage of net revenues in the three
months ended March 31, 2000 was higher than we anticipate once volume
production is attained.
Research and Development. Research and development expenses increased by
$3.3 million from $8.0 million for the three months ended March 31, 1999 to
$11.3 million for the three months ended March 31, 2000. This increase was due
mainly to a $3.1 million increase in engineering materials and custom test
equipment, as well as a $1.2 million increase in salary and salary-related
expenses resulting from increased staffing, offset by a $1.6 million decrease
in cost associated with a research and development contract which was
completed subsequent to the three months ended March 31, 1999.
Sales and Marketing. Sales and marketing expenses increased by $833,000 from
$915,000 for the three months ended March 31, 1999 to $1.7 million for the
three months ended March 31, 2000. This increase was due mainly to a $563,000
increase in salary and salary-related expenses.
General and Administrative. General and administrative expenses increased
slightly by $21,000 from $736,000 for the three months ended March 31, 1999 to
$757,000 for the three months ended March 31, 2000.
Stock-Based Compensation. Stock-based compensation increased by $2.7 million
from $447,000 for the three months ended March 31, 1999 to $3.2 million for
the three months ended March 31, 2000. This increase was due primarily to
shares of restricted stock and stock options granted subsequent to the three
month period ended March 31, 1999 in connection with our increased hiring
efforts.
Interest Income, Net. Interest income, net of interest expense, increased by
$212,000 from $65,000 for the three months ended March 31, 1999 to $277,000
for the three months ended March 31, 2000 as a result of a $242,000 increase
in interest income from increased invested cash balances, partially offset by
a $30,000 increase in interest expense on capital leases.
Years Ended December 31, 1997, 1998 and 1999
Net Revenues. We did not recognize any revenue during any of these years.
Cost of Revenues. We did not have any cost of revenues during any of these
years.
Research and Development. Research and development expenses increased from
$4.2 million in 1997 to $27.4 million in 1998 to $36.8 million in 1999. These
increases were due mainly to increased salary and salary-related expenses of
$8.8 million in 1998 and $2.1 million in 1999, increased material contract
development costs associated with the development of the TSR of $12.5 million
in 1998 and $5.1 million in 1999 and an increase in facilities and other
related costs of $2.5 million in 1998 and $1.2 million in 1999.
Sales and Marketing. Sales and marketing expenses in 1997 were not material.
These expenses increased from $1.6 million in 1998 to $5.6 million in 1999 due
mainly to increased salary and salary-related expenses of $571,000 in 1998 and
$1.6 million in 1999, increased facilities and other related costs of $125,000
in 1998 and $1.2 million in 1999 and increased marketing literature costs of
$392,000 in 1999.
General and Administrative. General and administrative expenses increased
from $858,000 in 1997 to $2.0 million in 1998 to $3.0 million in 1999 due
mainly to increased salary and salary-related expenses of $866,000 in 1998 and
$382,000 in 1999 and increased facilities, information systems and other
expenses necessary to support our growing scale of operations of $286,000 in
1998 and $648,000 in 1999.
25
<PAGE>
Stock-Based Compensation. Stock-based compensation expense decreased from
$325,000 in 1997 to $60,000 in 1998 and increased to $3.2 million in 1999 in
connection with restricted stock and stock options granted during that period
at prices subsequently deemed to be below fair market value on the date of
grant.
Interest Income, Net. Interest income, net of interest expense, increased
from $188,000 in 1997 to $940,000 in 1998 and decreased to $844,000 in 1999.
The increase from 1997 to 1998 is primarily due to a $1.0 million increase in
interest earned on available cash balances, offset by a $277,000 increase in
interest expense charges on capital leases. The decrease from 1998 to 1999 was
due to a $232,000 increase in interest earned on available cash balances
offset by a $328,000 increase in interest expense charges on capital leases.
Net Operating Loss and Tax Credit Carryforwards
We have not recorded a provision for income taxes because we experienced net
losses from inception through March 31, 2000. As of December 31, 1999, we had
net operating loss and tax credit carryforwards of approximately $73.2 million
and $2.4 million, respectively. These carryforwards will expire at various
dates through 2019, if not utilized. Utilization of the net operating losses
and tax credits may be subject to a substantial annual limitation due to the
ownership change limitations contained in the Internal Revenue Code and
similar state provisions. The annual limitation may result in the expiration
of the net operating loss and credits before utilization. Due to the
uncertainty that exists regarding the recoverability of the associated
deferred tax assets, a full valuation allowance has been recorded against
these assets.
Liquidity and Capital Resources
Since our inception, we have financed our operations through private sales
of equity securities and, to a lesser extent, equipment lease financing. From
inception through May 15, 2000, we raised approximately $168 million in a
series of preferred stock financings. During the three months ended March 31,
2000, we used $14.8 million in cash for operating activities. In 1999, we used
$41.0 million in cash for operating activities, compared to $25.7 million used
in 1998 and $3.9 million used in 1997. The increase in cash usage resulted
principally from the ongoing research and development costs of the TSR during
these periods, including increased personnel and material costs. We expect
research and development costs to increase as we enhance the functionality of
our TSR and develop new complementary products. We also will continue to
increase our investment in capital assets as we expand our operations.
At March 31, 2000, our primary sources of liquidity were $24.1 million in
cash and cash equivalents and $7.7 million in investments. In April and May of
2000, we generated $44.5 million in a preferred stock financing. Our purchases
of property and equipment were $1.9 million for 1997, $7.5 million in 1998,
$4.6 million in 1999 and $630,000 for the three months ended March 31, 2000,
and consisted primarily of purchases of application software and computer
equipment, including workstations and servers to support our increased
research and development activities. We financed $1.7 million, $4.8 million
and $4.4 million through capital lease arrangements during 1997, 1998 and
1999, respectively. As of March 31, 2000, our future minimum lease payment
obligations were $8.5 million under capital leases which require annual
payments of approximately $2.8 million in 2000, $3.6 million in 2001, $1.9
million in 2002 and $200,000 in 2003. In addition, our future minimum lease
payment obligations under operating leases is $557,000 which require annual
payments of approximately $319,000 in 2000 and $238,000 in 2001. We expect
capital expenditures to increase as we further expand our research and
development efforts and as our employee base grows. The timing and amount of
future capital expenditures will depend primarily on our future growth. We
expect to spend approximately $5.0 million in 2000 for computer equipment,
including application software, workstations and servers. We anticipate that
this equipment will be financed by capital leases.
We have a master lease agreement with a leasing company that is also a
preferred stockholder. This agreement provided for up to $12.0 million of
lease financing on specific types of equipment. The equipment leased under
this agreement remains the property of the lender at the end of the term.
However, due to the length of the contract terms, the leases are recorded as
capital lease obligations. Our remaining availability under the original lease
line expired in January 2000. In May 2000 we entered into a one year $6.0
million extension to
26
<PAGE>
the agreement. Leases under the amendment will have various terms ranging from
24 to 42 months and will accrue interest at various annual rates.
We have also borrowed $1.3 million in 1998 under a term-loan agreement with
the same lender for software purchases. We are required to repay this loan in
30 monthly installments of approximately $49,000, including principal and
interest. Repayment began in July 1999, with a final payment in the amount of
$187,500 due at the end of the term. The effective annual interest rate of
this loan is 17%.
Additionally, we expect that working capital requirements will increase
significantly as product sales increase, creating larger customer receivable
balances and the need to build inventory in advance of shipment.
We intend to offer $5.0 million of our common stock to Williams
Communications at the initial public offering price per share in a private
placement that would close concurrently with this offering. Williams has not
committed to purchase any of these shares.
We believe that the net proceeds from this offering, together with our
existing cash balances, available capital lease financing, funds generated
from operations and any net proceeds from the concurrent private placement,
will be sufficient to meet our operating and capital requirements for at least
the next 12 months. However, we could be required, or could elect, to raise
additional funds during that period and we may need to raise additional
capital in the future. We may not be able to obtain additional capital on
terms favorable to us or at all. The issuance of additional equity or equity-
related securities will be dilutive to our stockholders. If we cannot raise
funds on acceptable terms, or at all, we may not be able to develop or enhance
our products or respond appropriately to competitive pressures, which would
seriously limit our ability to increase our revenue and grow our business.
Recent Accounting Pronouncements
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." The interpretation clarifies the application of APB Opinion
No. 25 in specified events, as defined. The interpretation is effective July
1, 2000, but covers certain events occurring during the period after December
15, 1998, but before the effective date. To the extent that events covered by
this interpretation occur during the period after December 15, 1998, but
before the effective date, the effects of applying this interpretation would
be recognized on a prospective basis from the effective date. Accordingly,
upon initial application of the final interpretation, (a) no adjustments would
be made to the financial statements for periods before the effective date and
(b) no expense would be recognized for any additional compensation cost
measured that is attributable to periods before the effective date. We expect
that the adoption of this interpretation would not have any effect on the
accompanying financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition." This bulletin summarizes
views of the Staff on applying generally accepted accounting principles to
revenue recognition in financial statements. We believe that our current
revenue recognition policy complies with the guidelines in the bulletin.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. We do not currently engage in trading
market risk sensitive instruments or purchasing hedging instruments or "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. We may do so in the future as our operations expand domestically and
abroad. We will evaluate the impact of foreign currency exchange risk and
other derivative instrument risk on our results of operations when
appropriate. We will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral
of the effective date of the FASB Statement No. 133," in fiscal year 2001. The
adoption of SFAS No. 133 is not expected to have a material impact on our
financial condition or results of operations.
27
<PAGE>
BUSINESS
Overview
We provide high-speed data networking equipment that enables
telecommunications companies and Internet service providers to transmit high
volumes of information across their fiber optic networks. Our high-performance
solution is being marketed to telecommunications companies and Internet
service providers, referred to as carriers, that are creating next-generation
optical networks to address the increasing data traffic across the Internet.
The Avici Terabit Switch Router product, known as the TSR, is designed to
cost-effectively provide:
. high-speed/high-volume capacity;
. high levels of operational availability and redundancy, which we refer
to as carrier-class reliability; and
. the ability to incrementally add capacity to the network without
disrupting network performance, which we refer to as in-service
scalability.
Our TSR also optimizes bandwidth by dynamically managing and prioritizing
network traffic, thereby enabling carriers to provision new revenue-generating
services, such as video streaming and Voice-over-Internet Protocol, or VoIP.
Our TSR provides these benefits through our proprietary technologies,
including our application specific integrated circuits, or ASICs, and
distributed system design, as well as our Composite Link technology, which
enables the TSR to combine multiple lower speed connections to create a single
high-speed connection. Currently, the TSR is deployed in a segment of The
National Transparent Optical Network, a research network consortium that is
part of the Internet initiative known as SuperNet. In addition, Enron
Broadband Services and Williams Communications have agreed to future purchases
of the TSR, subject to successful completion of field trials. The TSR has
successfully completed laboratory testing at AT&T and has been selected by
AT&T for field trials. We have also shipped the TSR to a limited number of
other customers and prospective customers.
Industry Background
Demand for Data Services is Fueling Network Growth
Data traffic over today's communications networks is growing at an
exponential rate, far exceeding the growth in voice traffic. Ryan Hankin and
Kent, an industry research firm, estimates that North American data traffic
reached 350,000 terabytes per month in December 1999, compared to 50,000
terabytes per month for voice traffic in the same period. This proliferation
of data traffic is being driven by a number of factors, including increases
in:
. the number of Internet users worldwide, which according to
International Data Corporation, an industry research firm, is expected
to increase from approximately 144 million at the end of 1998 to
approximately 602 million by the end of 2003; and
. business use of the Internet for applications such as e-commerce, video
streaming and virtual private networks.
To keep pace with the growing demand, transmission speeds have increased from
kilobits per second to megabits per second to gigabits per second. The next
step in transmission speed is referred to as terabits per second. One terabit
per second is equal to one trillion bits per second. Pioneer Consulting LLC,
an industry research firm, estimates that peak-hour Internet bandwidth demand
in North America alone will grow from 0.33 terabits per second in 1999 to
17.92 terabits per second in 2004, representing a compound annual growth rate
exceeding 120%.
Limitations of the Existing Public Network Infrastructure
The existing public networks are largely built on technologies that were
originally designed to provide only voice services. These networks are based
on circuit switch technology, which dedicates an individual connection, or
part of the network, for the duration of a call even while there are pauses in
the conversation. Although adequate for voice traffic, circuit switch
technology is inefficient for the transmission of large volumes of data
28
<PAGE>
traffic, which tends to occur in large, intermittent bursts. As data traffic
carried over the existing network infrastructure began to increase, carriers
increased the capacity of their networks by overlaying devices designed to
increase data transmission rates and that are based on network standards such
as Synchronous Optical Network, or SONET.
At the same time, carriers also sought to increase the efficiency of data
transmission through their networks by adopting packet switching technologies,
such as Asynchronous Transfer Mode, or ATM, and Internet Protocol, or IP,
which divide data traffic into individual packets and transmit them
independently over the network. These packet-switching technologies enable
carriers to send data from multiple sources on the same connection, thereby
substantially reducing the bandwidth wasted using circuit switch technology.
With much of the growth in data traffic attributable to the increasing use of
the Internet, IP has become the predominant standard for transmitting data
across networks. Nevertheless, carriers have been forced to adopt and deploy
multiple protocols, such as SONET, ATM, IP and Ethernet at gigabit speeds, or
Gigabit Ethernet, and a variety of devices within their networks in an effort
to manage the proliferation of IP-based data services. The following diagram
illustrates the limitations of the existing public network infrastructure:
[DIAGRAM APPEARS HERE]
[Symmetric diagram with wavy line at center representing the fiber cable, which
is labeled "Carrier Optical Transport." Aligned on the horizontal axis extending
from each of the left and right sides of the "Carrier Optical Transport" wavy
line is a box with caption reading "DWDM and Optical Switches." Connected by a
bold line to both of the "DWDM and Optical Switches" boxes is a brick wall with
star-shaped icons on either side. Underneath each brick wall is the caption
"Mismatch Between Transmission Speeds and Capacity" with arrows pointing from
the caption to both sides of the brick wall. Seven lines lead from each of the
outside star-shaped icons to a vertical row of boxes with the caption "Existing
Carrier Equipment" above. From top to bottom, the boxes are labeled as follows:
"Gigabit Routers," "VoIP Gateways," "SONET," "Digital Subscriber Line
Aggregation," "ATM," "Gigabit Ethernet" and "Cable Modem Termination."]
The advent of Dense Wave Division Multiplexing, or DWDM, an optical
technology that multiplies the amount of data that can be carried over
existing fiber optic lines, has provided carriers with substantial raw
capacity in the core of their optical networks. The widespread deployment of
DWDM technology by carriers has now shifted their focus away from the
deployment of additional fiber lines toward packet switch equipment that can
transmit and route data in volumes and at speeds that take advantage of the
expanded bandwidth enabled by DWDM. Carriers are therefore primarily focusing
on routers, devices designed to forward IP-based data packets, as the
equipment of choice for harnessing the benefits of DWDM.
Limitations of Existing Routers
The transmission capacity of fiber optic lines has increased at a greater
rate than the transmission capacities of routers. This has created a chasm
between the capabilities of existing routers and the optical transmission
network and has produced bottlenecks in the public network. This chasm results
in large part because of the limited ability of existing router designs to
adapt to the evolving and increasing bandwidth demands of carriers. For
example, current router offerings employ a centralized design, which
inherently limits the number of interfaces available and, accordingly, the
ability to incrementally increase the bandwidth capacity of a router. This
limitation requires that carriers either cluster multiple routers to emulate
the functionality of a single large router with greater capacity or repeatedly
undertake large-scale upgrades, known as forklift upgrades, to address the
increases in optical transmission speeds and capacities.
The following diagram illustrates the growing chasm between router speeds
and optical transmission capacities as well as the periodic deployment of new
core router equipment and the redeployment of existing core routers to the
edge of the carrier network.
29
<PAGE>
[DIAGRAM APPEARS HERE]
[Diagram with circle labeled "Carrier Optical Transport" at the center. To
the right of the "Carrier Optical Transport" cloud is a caption reading
"Transport Evolution Over Time," with a vertical arrow pointing down from the
caption. Within the "Carrier Optical Transport" cloud is a vertical row of
three boxes, labeled "SONET," "SONET and DWDM" and "DWDM and Optical Switches"
from top to bottom. Horizontal lines extend to the left from each of the three
boxes, two lines from the first box and four lines from each of the bottom two
boxes. The lines are labeled "OC-12 line speed," "OC-48 line speed" and
"OC-192 line speed," respectively. A star-shaped icon indicates the
intersection of each set of these horizontal lines with the "Carrier Optical
Transport" circle. The star-shaped icons increase in size from top to bottom.
The lines then continue to the left, with the respective labels "OC-3 line
speed," "OC-12 line speed" and "OC-48 line speed," and connect to three boxes
aligned vertically, each containing two disks representing routers. The disks
within each box increase in size from top to bottom. An arrow leads from the
top box down and to the left, and connects to another box containing two
slightly larger disks representing routers. An arrow leads from the middle box
down and to the left, to another box two slightly larger disks representing
routers. The caption "Router Over Time" appears above the boxes containing the
router depictions. Underneath the boxes, a horizontal two-way arrow contains
the captions "Edge" on the left-hand side and "Core" on the right-hand side.]
Forklift upgrades require substantial periodic expenditures by carriers, as
well as significant network disruptions, to remove old router equipment from
the core of their networks and deploy newer products as they become available.
Historically, router vendors have introduced new router designs every 12 to 18
months.
Clustering routers requires that a significant number of interfaces, which
are the links between routers and the rest of the network, be dedicated solely
to interconnect multiple router chassis. Therefore, clustering has proven to
be inefficient. Ryan Hankin and Kent estimates that, for existing routers,
approximately 70% of these expensive interfaces are used for interconnection
instead of transmission.
At the same time, existing routers are unable to communicate with the newer
generation of optical transmission equipment to dynamically change bandwidth
or enable the provisioning of new services without disrupting the entire
network. This limitation increases the time and effort required for carriers
to deliver new services or reconfigure the network in the event of sudden
changes in bandwidth demand.
Carrier Requirements for a New Architecture
To respond to the challenges created by the increasing volume of data
traffic on the existing public networks, carriers are not only focused on
optimizing their next-generation optical networks for more efficient data
transmission, but are also searching for a means to rapidly provision new
revenue-generating data communications services. As a result, carriers are
demanding solutions with the following attributes:
Scalability Without Disruption. Carriers want a cost-effective means of
increasing capacity on a continual basis. As a key building block of the
public network, routers must therefore have the ability to expand capacity
without forklift upgrades or other significant disruption of the network.
Carrier-Class Reliability. The equipment that carriers deploy within their
networks must offer the highest level of up-time and redundancy. To meet this
requirement, known as carrier-class reliability, router designs must minimize
any single points of failure and provide automatic recovery from network
failures and device errors.
High Performance. In order to capitalize on the increasing capacity offered
by optical technologies, carriers demand high levels of performance and
flexibility. Although there are different measures for determining performance
of routers, we believe the most critical measure is the ability to process and
forward packets at transmission rates matching the line rates available over
the fiber optic core.
30
<PAGE>
Quality of Service Functionality that Enables New Revenue-Generating
Services. Quality of service is the ability to assign different priorities to
different traffic types, which is crucial to the delivery of time-sensitive
data streams, such as voice and video. Routers must provide quality of service
functionality over IP without adversely affecting performance. In addition to
prioritizing packets, routers must be able to manage and control network
congestion to enable carriers to deliver service level guarantees to their
customers.
Reduced Network Cost and Complexity. In addition to the cost of deploying
routers, carriers incur substantial capital costs in deploying and
interconnecting multiple types of networking equipment. More importantly, the
costs of running a network are significant. Not only must each router be
managed as an independent element of the network, but each additional type and
piece of network equipment increases the complexity of network design and
management. Carriers are demanding solutions that reduce the number and types
of network equipment and optimize the technologies employed in their networks.
Interoperability. Due to economic constraints associated with upgrading an
entire network to accommodate new technologies, it is critical that new
network equipment support the protocols and devices already deployed in
carrier networks.
Currently available routers were designed to handle lower capacities and
transmission speeds and cannot economically address carrier requirements, much
less the enhanced functionality demanded by carriers. Instead of trying to
adapt older technologies or interim solutions that provide only incremental
increases in capacity, carriers are now seeking a new solution that will
enable them to cost-effectively build next-generation optical networks
designed to capitalize on the opportunities created by the growth of the
Internet and the proliferation of data traffic.
The Avici Solution
Our high-performance TSR is engineered to provide a long-term solution for
the next-generation carrier networks by providing a platform for growth and
control of increasing volumes of data traffic. The following diagram
illustrates the role of the Avici TSR in the next generation of optical
networks:
[DIAGRAM APPEARS HERE]
[Symmetric diagram with wavy line at center representing the fiber cable, which
is labeled "Carrier Optical Transport." Aligned on the horizontal axis
extending from each of the left and right sides of the "Carrier Optical
Transport" wavy line is a box with caption reading "DWDM and Optical Switches."
Connected by four bold lines to both of the "DWDM and Optical Switches" boxes is
a three-dimensional rectangular box representing the Avici TSR. The caption
"Avici Composite Links" appears above the four bold lines, and an ellipse,
representing a ring around the "Avici Composite Links" lines, is found at the
center of these lines. A box containing the label "Avici TSR" appears
underneath each of the icons representing the Avici TSR. Seven lines lead from
each of the icons representing the Avici TSR to a vertical row of seven boxes
with the caption "Existing Carrier Equipment" above. From top to bottom, the
boxes are labeled as follows: "Gigabit Routers," "VoIP Gateways," "SONET,"
"Digital Subscriber Line Aggregation," "ATM," "Gigabit Ethernet" and "Cable
Modem Termination."]
Our solution is designed to provide the following key benefits:
Long-term Carrier Solution. Our TSR has been designed to meet the current
and evolving performance and bandwidth requirements at the core of carriers'
optical networks. The Avici TSR enables in-service scalability as demands on
the optical layer increase, thereby eliminating expensive clustering designs
and forklift upgrades. We believe that this scalability and flexibility
positions the Avici TSR as a long-term solution for carriers.
31
<PAGE>
In-Service Scalability. The TSR enables carriers to incrementally add
capacity in a cost-effective, non-disruptive manner. This capability for
dynamic, non-disruptive bandwidth provisioning enables carriers to service
existing customers while rapidly adapting to changes in bandwidth demand, new
service offerings and increased usage.
Carrier-Class Reliability. The Avici TSR has been designed and manufactured
to provide carrier-class reliability. We believe the TSR's technologically-
advanced features, such as our distributed architecture, Velociti switch
fabric and Composite Links, will enhance the reliability and performance of
carrier networks. The TSR's proprietary ASIC-based design and redundancy
features provide high levels of system reliability.
Ability to Manage High Volumes of Network Traffic at High Speeds. Our TSR,
through our Composite Link technology, is capable of processing data packets
at virtual line rates exceeding 10 gigabits per second, thereby achieving
virtual performance beyond OC-192. Our TSR can achieve these transmission
rates at full utilization of network interfaces without sacrificing packet
throughput performance. In addition, the TSR provides the ability to
prioritize IP traffic through its quality of service features without any loss
of transmission speeds.
Ability to Offer New Revenue-Generating Services. Our TSR provides an
effective foundation for the delivery of next-generation data communication
services. The TSR enables carriers to add capacity for new services and
customers without network disruption and to prioritize IP data traffic to
effectively provide quality of service guarantees. As a result, carriers are
able to offer and charge for new and enhanced services, such as voice-over-IP
and video streaming, and can also dynamically modify their service pricing
structures.
Cost-Effective Network Expansion and Operation. Our solution reduces the
need for network equipment such as ATM and SONET devices and optical
integration equipment. Our redundancy also eliminates the need for costly
back-up equipment. Our high speed interfaces reduce the need for additional
fiber capacity. In addition, our solution reduces ongoing network operating
expenses through the TSR's high port density and proprietary ASICs, which
reduce requirements for floor space and power consumption. The TSR's key
interoperability features preserve carriers' investments in their legacy
network equipment.
Strategy
Our goal is to design, develop and provide the next generation of reliable
high-speed data networking equipment that will power the core of carriers'
optical networks and establish new standards for performance. The key elements
of our strategy are to:
Extend Technological Capabilities. We have developed a product architecture
closely connected to the optical transport layer and designed to be a long-
term solution within the core of carriers' optical networks. We plan to
continue to invest heavily in research and development, particularly in
developing proprietary ASICs and software, to satisfy the requirements of
next-generation carrier networks. We plan to enhance the features of the TSR
and bring to market new, complementary products. For example, during the
second half of 2000 we plan to deliver for customer trials MultiProtocol Label
Switching, or MPLS, traffic engineering capability and line card modules for
OC-192c, Gigabit Ethernet, and ATM. We take a leading role in industry
standard-setting forums and promote the interoperability of our products with
those of key optical switch and router vendors.
Continue Penetration of Key Carrier Accounts. We strive to capture the
market opportunity presented by carriers demanding additional capacity as well
as carriers seeking the means to deliver additional services. We have
initially focused on a select group of leading carriers, and we are currently
participating in a number of customer trials. We intend to broaden our target
market focus to include all carriers with fiber optic backbones. We are
expanding our direct sales force and customer service organization as well as
partnering with international distributors, customer service organizations and
complementary product companies to expand our market presence.
32
<PAGE>
Provide Technology to Enable New Carrier Service Offerings. We work closely
with our customers and prospective customers to understand their network
requirements and service opportunities. We use this knowledge to develop new
features and functionality to enable carriers to deliver new revenue-
generating services. For example, we are working with Enron Broadband Services
to enable the delivery of video streaming. We intend to integrate our planned
MPLS to enable controlled traffic flow and allow carriers to offer services
such as virtual private networks. We will seek opportunities to enhance our
product features and promote the TSR as an effective means for carriers to
capitalize on new service opportunities.
Expand into New Geographic Markets. We intend to sell our products globally.
We have established relationships with leading distributors and vendors of
telecommunications equipment in Asia, and we intend to develop a direct Asian
salesforce to support our indirect sales channels. In addition, we have begun
to establish a direct European sales presence as well as relationships with
key distributors in that market.
Rely on Strategic Outsourcing. Our outsourcing strategy enables us to focus
our resources on our core competencies of product design and development,
sales and marketing. Although we design and develop our ASICs and other
proprietary technologies, we select and work closely with ASIC fabrication and
electronics manufacturing services providers to promote the cost-effective,
timely and reliable manufacture and testing of our products. To complement our
internal customer service organization, we plan to enter into a global service
and support arrangement for our products with a third party.
Products and Technology
Product Architecture
Our TSR has been designed to provide a critical functions for carriers
seeking to build reliable IP-based networks that can capitalize on the raw
capacity provided by DWDM and other optical technologies. We utilize a
parallel and distributed design to address the large volume of packet
forwarding and increasing traffic volume requirements of the Internet. By
using a distributed architecture that incorporates processing and packet
routing functionality in our line card ASICs, our TSR is designed to provide
carriers with a smooth upgrade path from OC-48 to speeds of OC-192 and higher
by changing or bundling line card modules as they become available rather than
upgrading the entire chassis. Accordingly, this architecture provides in-
service scalability and preserves the initial investment in our TSR.
Product Portfolio
The TSR is a 40-slot chassis which can be configured with the following
current and planned line card modules:
<TABLE>
<CAPTION>
Link Type Link Speed Status
------------------------------------------------------------------------------------
<S> <C> <C>
Packet over SONET OC-3c Commercially available
------------------------------------------------------------------------------------
Packet over SONET OC-12c Commercially available
------------------------------------------------------------------------------------
Packet over SONET OC-48c Commercially available
------------------------------------------------------------------------------------
Packet over SONET OC-192 In customer evaluation
------------------------------------------------------------------------------------
Packet over SONET OC-192c In development
------------------------------------------------------------------------------------
Gigabit Ethernet 1 Gigabit In development
------------------------------------------------------------------------------------
Asynchronous Transfer Mode OC-3c In development
------------------------------------------------------------------------------------
Asynchronous Transfer Mode OC-12c In development
</TABLE>
33
<PAGE>
IPriori Carrier System Control Software
IPriori is an advanced software system that has been developed to optimize
and control switching and routing in the TSR. IPriori is built on a
distributed model, which uses multiple processor units to provide increased
levels of reliability and scalability, and is specifically designed to address
the system requirements arising from a large number of ports. IPriori
implements industry standard routing protocols that are used in the Internet
today, and has undergone extensive interoperability testing in laboratory and
field environments to ensure compatibility with existing installed equipment.
It also forms the basis for advanced capabilities such as Composite Links,
quality of service and MPLS.
Composite Links
The Avici TSR connects to the optical transport layer through many physical
connections. Physical connections between two TSRs can be combined into a
single virtual network interface to provide a carrier with a high-capacity
connection. This single network connection is called a Composite Link.
Composite Link technology enables carriers to add additional lines or increase
or decrease transmission speeds on a particular Composite Link without
disrupting the network. This enables carriers to meet increases in bandwidth
demand and to offer new services to their customers more quickly. Each
Composite Link can be configured with up to 16 network interfaces and enables
carriers to achieve effective line speeds of OC-192 and beyond. With this
feature, the TSR is able to recognize heavy or light traffic demand in the
network and dynamically add and remove physical connections from the composite
group. When traffic increases and physical links are needed or when traffic
decreases and links can be removed from a composite group, the TSR
communicates this information to optical equipment to change network
connections appropriately. This maintains optimum traffic routing. Because our
Composite Links operate with no network disruption, they enable the rapid
provisioning of additional bandwidth while maintaining a stable and reliable
environment for IP services.
We intend to complement our Composite Links with our planned MPLS
functionality to provide traffic engineering capabilities and enable carriers
to control and efficiently balance data traffic across their networks. We
believe MPLS is a key component of differentiated IP-based services and, when
combined with other quality of service mechanisms, will enable carriers to
deliver enhanced network services.
Velociti Switch Fabric
Our Velociti switch fabric is the mechanism that transfers data from an
input line card to specific output cards in the TSR. This direct communication
provides high speed data transfer and, as additional capacity is needed,
enables cost-effective addition of line cards. Because all data handling,
switching and packet processing has been incorporated into the line cards,
carriers are able to support higher speed line cards without forklift
upgrades. The Velociti switch fabric also gives the TSR a high level of
reliability by creating multiple connections between pairs of input and output
line cards. In the event one path fails, one of the backup paths is selected
to continue data transmission, thereby substantially reducing the risk of
disruption to the network.
ASIC-based Packet Routing Technology
We have consolidated all data-flow and control processes, including packet
input and output framing, forwarding, scheduling, and switching into our
application specific integrated circuits, or ASICs. Unlike other router
designs, all of our ASICs reside on each line card module. Accordingly, the
overall capacity of the TSR increases with the addition of each line card.
These ASICs provide high levels of performance by enabling line rate packet
forwarding performance regardless of packet address and route table size.
34
<PAGE>
Our ASICs are designed to provide the following functions and benefits:
<TABLE>
<CAPTION>
ASIC Function Customer Benefits
------------------------------------------------------------------------------------------
<S> <C> <C>
Input Framer Analyzes and identifies incoming IP Enhances ability to manage
packets and marks them for network traffic to enforce
prioritization quality of service
------------------------------------------------------------------------------------------
Forwarding Determines packet destination and Maintains network performance
forwards the packet at line rates as bandwidth demand increases
------------------------------------------------------------------------------------------
Packet Scheduling Manages intelligent prioritization Ensures optimal system
and efficient use of the TSR's performance across high volumes
switching capacity of traffic flows.
------------------------------------------------------------------------------------------
Fabric Switching and Provides Velociti switch fabric that Creates high performance and
Packet Memory is responsible for communication economical scalability
among line card modules
------------------------------------------------------------------------------------------
Quality of Service Prioritizes packets for transmission Enables the creation and
delivery of differentiated IP-
based services
------------------------------------------------------------------------------------------
Output Framer Controls outbound traffic to ensure Provides additional control of
conformance to quality of service packet flows to ensure network
requirements stability
</TABLE>
Sales and Marketing
We sell and market our products primarily through our direct sales force,
systems integrators and distributors. Our sales cycle to carriers typically is
a lengthy and deliberate process. After preliminary discussions with our sales
organization, prospective customers may receive evaluation equipment to
encourage formal testing. The sales cycle normally includes laboratory testing
in which the TSR is evaluated against competing products for performance,
scalability, reliability, interoperability and other measures. Upon completion
of the laboratory tests, one product is typically selected for field trials in
which the product is deployed in a carrier's network in a limited and
controlled fashion. Only after successful completion of field trials will
carriers place orders and commercially deploy equipment across their networks
over time.
Our direct sales efforts are focused on the largest carriers. As of April
30, 2000, our sales and marketing organization consisted of 24 employees, of
which 15 were located in our headquarters in North Billerica, Massachusetts,
eight were located in a total of four sales and support offices around the
United States and one was located in the United Kingdom.
Our marketing objectives include building market awareness and acceptance of
Avici and the Avici TSR as well as generating qualified customer leads. In
addition to traditional marketing activities, we plan to sponsor an optical
partner program with key optical industry leaders to demonstrate the
interoperability of the TSR with their products.
Our international sales are conducted through systems integrators and
distributors. We have two systems integrators in Japan and one in Korea. In
addition, in order to further our international sales objectives, we are
identifying and establishing relationships with a number of additional
country-specific distributors.
Customers
Our target customer base includes new and established telecommunications
carriers and Internet service providers, and we expect to broaden our focus to
include all carriers with fiber optic backbones. Our TSR is deployed in a
segment of The National Transparent Optical Network, an Internet initiative
known as SuperNet. Enron Broadband Services and Williams Communications have
agreed to future purchases of the TSR, subject to satisfactory completion of
field trials. While there has been no commitment to purchase equipment for
35
<PAGE>
deployment, the TSR has successfully completed laboratory testing at AT&T and
has been selected by AT&T for field trials. We have also shipped the TSR to
international systems integrators, including Nissho Electronics Corporation,
Itochu and Samsung, as well as to a limited number of other customers and
prospective customers.
Customer Service and Support
We believe that a broad range of support services is critical to the
successful installation and ongoing support of the TSR, the development of
long-term relationships with customers and the generation of additional sales
of the TSR to our customers. We are committed to providing our customers with
the highest levels of service and support. As of April 30, 2000, we employed
nine people in our customer service and support organization. To complement
our internal customer service organization, we plan to enter into a global
service and support arrangement for our products with third parties.
Research and Development
We have assembled a team of skilled engineers with significant experience in
optics, hardware and software, and with particular strengths in the areas of
high speed interconnect, scalable connection fabrics, ASIC development and
Internet routing protocols. As of April 30, 2000, we had 148 employees
responsible for product design and development, quality assurance and
documentation. We believe that strong product development capabilities are
essential to our strategy of enhancing our core technology and developing
additional applications in an effort to maintain the competitiveness of our
product offerings. We have made, and will continue to make, a substantial
investment in research and development. Research and development expenses were
$11.3 million for the three months ended March 31, 2000, $36.8 million for the
year ended December 31, 1999 and $27.4 million for the year ended December 31,
1998.
Competition
The market for intelligent data networking equipment is intensely
competitive, subject to rapid technological change and significantly affected
by new product introductions and other market activities of industry
participants. This market historically has been dominated by Cisco Systems,
which as a result of its early leadership position in the market has been able
to develop and promote a broad product line of routers. The inability of our
products to interoperate with Cisco products would be damaging to our ability
to generate revenue. We also compete with other established companies such as
Juniper Networks and Lucent Technologies. We may experience a reluctance by
our prospective customers to replace or expand their current infrastructure
solutions, which may be supplied by one or more of these competitors, with our
products. In addition, these competitors have significantly broader product
lines than we do and may bundle their products with other networking products
in a manner that may discourage prospective customers from purchasing our TSR.
In order to compete effectively, we must deliver a product that is superior in
meeting the needs of carriers and:
. scales easily and efficiently with minimum disruption to the network;
. interoperates with existing network designs and equipment vendors;
. provides extremely high network reliability;
. provides high speed interfaces and high performance packet processing
capabilities;
. reduces complexity by decreasing the need for overlapping equipment;
. provides effective network management; and
. provides a cost-effective solution for our target customers.
Many of our current and potential competitors have greater selling and
marketing, technical, manufacturing, financial and other resources, more
customers, greater market recognition and more established relationships and
alliances in the industry. As a result, these competitors may be able to
develop, enhance and expand their product offerings more quickly, adapt more
swiftly to new or emerging technologies and changes in customer demands,
devote greater resources to the marketing and sale of their offerings, pursue
acquisitions and other opportunities more readily and adopt more aggressive
pricing policies.
36
<PAGE>
Intellectual Property
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patents, copyrights, trademarks, trade secret laws, and contractual
restrictions on disclosure and other methods to protect the proprietary
aspects of our technology. These legal protections afford only limited
protection for our technology. We presently have 13 patent applications
pending in the United States and we cannot be certain that patents will be
granted based on these or any other applications, or that, even if issued, the
patents will adequately protect our technology. We seek to protect our source
code for our software, documentation and other written materials under trade
secret and copyright laws, and we seek to limit disclosure of our intellectual
property by requiring employees, consultants and any third-party with access
to our proprietary information to execute confidentiality agreements with us.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, frequent
product enhancements and reliable product maintenance are essential to
establishing and maintaining a technology leadership position. There can be no
assurance that others will not develop technologies that are similar or
superior to our technology.
Our success will depend upon our ability to obtain necessary intellectual
property rights and protect our intellectual property rights. We cannot be
certain that we will be able to obtain the necessary intellectual property
rights or that other parties will not contest our intellectual property
rights.
Manufacturing
We outsource the manufacture and assembly of our products to contract
manufacturers. We have primarily used Sanmina Corporation, which provides
comprehensive manufacturing services, including assembly, test and control and
procurement of material, on our behalf. In addition, we have recently begun
limited outsourcing to Celestica, Inc., which also provides comprehensive
manufacturing services. We design product tests that are conducted using our
test equipment by the contract manufacturer. We believe that the outsourcing
of our manufacturing will enable us to conserve the working capital that would
be required to purchase capital equipment, will allow us to adjust
manufacturing volumes to meet changes in demand and will enable us to more
quickly deliver products.
Employees
As of April 30, 2000, we had a total of 226 employees, of which 148 were in
research and development, 24 were in sales and marketing, 23 were in financing
and administration, 22 were in manufacturing and nine were in customer
service.
Our future success will depend in part on our ability to attract, retain and
motivate highly qualified technical, sales and management personnel, for whom
competition is intense. Our employees are not represented by any labor union.
We believe our relations with our employees are good.
Facilities
Our headquarters are currently located in a leased facility in North
Billerica, Massachusetts, consisting of approximately 53,000 square feet under
a lease that expires in July 2001. We expect that our current space is not
adequate to support our targeted growth. We have leased approximately 18,000
additional square feet in the same office complex, with occupancy expected to
commence within the next two months. We have commenced negotiations for
approximately 80,000 additional square feet in the same office complex with
occupancy expected to commence within the next twelve months.
Legal Proceedings
We are not currently a party to any material litigation. In the ordinary
course of business, we may from time to time become involved in various
lawsuits and claims.
37
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth information concerning our executive
officers, directors and other key employees.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers and Directors:
Surya R. Panditi................. 41 President, Chief Executive Officer and
Director
Paul F. Brauneis................. 55 Chief Financial Officer, Vice President
of Finance and Administration, Treasurer
and Secretary
Christopher W. Gunner, Ph.D...... 45 Vice President of Engineering
Brian McCormack.................. 56 Senior Vice President of Worldwide Sales
Henry Zannini.................... 55 Vice President of Governmental Sales and
Director
James R. Swartz.................. 57 Chairman of the Board of Directors
Bandel L. Carano................. 38 Director
Stephen M. Diamond............... 43 Director
Catherine M. Hapka............... 45 Director
Richard T. Liebhaber............. 65 Director
James Mongiello.................. 58 Director
Other Key Employees:
Philip P. Carvey................. 57 Vice President of Advanced Development
Peter A. Chadwick................ 46 Vice President of Product Management
Larry R. Dennison, Ph.D.......... 42 Director of Hardware Development
Edward P. Maggio................. 51 Vice President of Manufacturing
James T. Graham.................. 57 Vice President of Customer Service
</TABLE>
Surya R. Panditi has served as our President, Chief Executive Officer and a
Director since June 1997. From August 1996 to June 1997, Mr. Panditi was Vice
President and General Manager of the LAN Infrastructure Business Unit of U.S.
Robotics. Mr. Panditi was employed by Telco Systems Inc., a provider of
transport and access solutions for networks, from April 1994 to June 1996,
most recently as Vice President and General Manager of the Magnalink
Communications Division.
Paul F. Brauneis has served as our Chief Financial Officer, Vice President
of Finance and Administration, Treasurer and Secretary since January 2000.
Prior to that, Mr. Brauneis served as Vice President and Corporate Controller
at Wang Global, an information technology services company, from August 1997
through December 1999. From September 1995 to July 1997, Mr. Brauneis served
as Vice President and Corporate Controller of BBN Corporation, a provider of
Internet and Internetworking solutions. During 1993 and 1994, Mr. Brauneis
served as Vice President, Chief Financial Officer and Treasurer of SoftKey
International, Inc., formerly known as Spinnaker Software Corporation, a
provider of personal productivity software.
Christopher W. Gunner has served as our Vice President of Engineering since
February 2000, Director of Architecture from June 1999 to February 2000,
Director of Software and Architecture from July 1998 to June 1999 and Chief
Protocol Engineer from May 1997 to April 1998. Prior to joining Avici, Dr.
Gunner was employed by Digital Equipment Corporation as a Consulting Engineer
from June 1995 to April 1997.
Brian McCormack has served as our Senior Vice President of Worldwide Sales
since May 2000 and served as our Vice President of Sales and Service from
February 1999 to April 2000. Mr. McCormack served Alcatel as Vice President of
Competitive Local Exchange Carrier (CLEC) Sales from September 1998 to January
1999. Prior to the acquisition of DSC Communications Corporation, a provider
of switching, transmission and access services and equipment for the
telecommunications industry, by Alcatel, Mr. McCormack served DSC
Communications Corporation as Vice President of Major Carriers Sales from
September 1997 to August 1998, as Vice President of Western Regional Bell
Operating Companies Sales from May 1997 to August 1997 and as Regional Sales
Vice President from January 1994 to April 1997.
38
<PAGE>
Henry Zannini co-founded Avici in November 1996 and has served as a Director
since that time. Mr. Zannini has served as our Vice President of Government
Sales since February 2000 and as our Vice President of Business Development
from November 1996 to January 2000. Before founding Avici, Mr. Zannini served
as Senior Director of Telecom Business Development for Analogic Corp., a
designer and manufacturer of advanced systems and subsystems to
telecommunications original equipment manufacturers, from September 1993 to
January 1996.
James R. Swartz has served as a Director and as Chairman of the Board of
Directors since November 1996. Mr. Swartz is a general partner of Accel
Partners, a venture capital investment firm he co-founded in 1983. Mr. Swartz
is also a director of several private companies.
Bandel L. Carano has served as a Director since June 1997. Mr. Carano has
been a general partner of Oak Investment Partners since 1985. Mr. Carano also
currently serves as a member of the investment advisory board of the Stanford
University Engineering Venture Fund. Mr. Carano also serves on the board of
directors of Metawave Communications Corp., a wireless equipment manufacturer,
Advanced Radio Telecom Corp., a wireless access telecommunications service
provider, and Wireless Facilities, Inc., a provider of telecommunications
outsourcing services, as well as several private companies.
Stephen M. Diamond has served as a Director since October 1999. Mr. Diamond
has been a general partner of Sprout Capital since April 1998. Mr. Diamond was
Group Vice President and Worldwide Director of Telecommunications and
Networking Research at Dataquest, an information technology market research
and consulting firm, from January 1996 to February 1998. Mr. Diamond served as
Vice President of Marketing at Electronic Retailing Systems International
Inc., a provider of electronic shelf labeling systems, from December 1994 to
December 1995.
Catherine M. Hapka has served as a Director since April 2000. Ms. Hapka has
been a director of Rhythms NetConnections Inc., a provider of broadband
communications services, since June 1997 and the Chief Executive Officer and
the chairman of the board of directors of Rhythms NetConnections Inc. since
June 1999. Ms. Hapka served as President of NETS, Inc., a provider of
intercompany electronic commerce services, from March 1997 to May 1997. Prior
to joining NETS, Inc., Ms. Hapka served as Executive Vice President, Markets
for U.S. West Communications, Inc., a broadband and communications services
provider, from January 1995 to October 1996.
Richard T. Liebhaber has served as a Director since June 1997. Mr. Liebhaber
has been a Consulting Managing Director at Veronis, Suhler & Associates, Inc.,
a provider of financial advisory services to the communications industry,
since June 1995. Prior to that, Mr. Liebhaber served as Executive Vice
President of MCI Communications Corporation from December 1985 to May 1995.
Mr. Liebhaber also serves on the board of directors of Advanced Radio Telecom
Corp., Rare Medium Group Inc., an Internet incubator, and KPN/Qwest Telecom
B.V., a joint venture between a Dutch telecommunications provider and Qwest.
James Mongiello has served as a Director since March 2000. Mr. Mongiello has
been a Venture Partner of Redpoint Ventures since October 1999 and a Venture
Partner of Brentwood Venture Capital from June 1998. From July 1998 until
March 2000, Mr. Mongiello was chief executive officer of FreeGate Corporation,
a provider of broadband access services. Before that, Mr. Mongiello was Vice
President of 3Com Corporation from November 1996 until June 1998. Prior to
joining 3Com Corporation, Mr. Mongiello was chief executive officer of
OnStream Networks, a telecommunications company, from June 1994 until its
acquisition by 3Com Corporation in October 1996.
Philip P. Carvey co-founded Avici in November 1996 and has served as our
Vice President of Advanced Development since February 2000 and served as Vice
President of Engineering from December 1996 to January 2000. Before founding
Avici, Mr. Carvey was employed as Division Engineer by BBN Corporation from
May 1995 to October 1996.
39
<PAGE>
Peter A. Chadwick has served as our Vice President of Product Management
since August 1999 and as our Director of Marketing from August 1998 to August
1999. From May 1997 to July 1998, Mr. Chadwick was Director of Product
Marketing for remote access servers at 3Com Corporation. Prior to joining 3Com
Corporation, Mr. Chadwick was Product Group Manager of LAN Infrastructure
Business Unit of U.S. Robotics from March 1996 to April 1997. Before that, Mr.
Chadwick was Brand Manager for local area network business at IBM from January
1995 to February 1996.
Larry R. Dennison co-founded Avici and has served as our Director of
Hardware Engineering since August 1999. Prior to that, Dr. Dennison was
Director of ASIC Development from December 1996 to August 1999. Dr. Dennison
was Engineering Manager at BBN Corporation from 1993 to July 1996, and was a
Division Scientist at BBN Corporation from July 1996 to November 1996.
Edward P. Maggio has served as our Vice President of Manufacturing since
March 1998. From May 1996 to November 1997, Mr. Maggio served as Vice
President of Operations at Diagnostic Instrument Corp., a contract
manufacturer. Mr. Maggio served as Vice President of Operations and Customer
Services of Boston Technology, a product and service provider to the data
communications industry, during 1994 and as a consultant from 1995 to
April 1996.
James T. Graham has served as our Vice President of Customer Service since
May 2000. Prior to joining Avici, Mr. Graham served Amdahl Corporation, a
provider of integrated computing solutions to the information technology
industry, as Vice President of Worldwide Product Support Services from January
1998 to August 1999 and Vice President of North American Product Support
Services from January 1995 to December 1997.
Each executive officer serves at the discretion of the board of directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of the directors or executive officers of Avici. Each of the
directors serves on the board of directors pursuant to the terms of an
agreement that will terminate upon the closing of this offering.
Board of Directors
Our by-laws provide for a board of directors of one or more directors, and
the number of directors is currently fixed at eight. Under the terms of our
amended and restated certificate of incorporation to be effective upon the
closing of this offering, the board of directors will be divided into three
classes of similar size, each of whose members will serve for a staggered
three-year term. Messrs. Carano and Zannini will serve in the class whose term
expires at the annual meeting of stockholders in 2001; Messrs. Diamond,
Liebhaber and Mongiello will serve in the class whose term expires at the
annual meeting of stockholders in 2002; and Ms. Hapka and Messrs. Panditi and
Swartz will serve in the class whose term expires at the annual meeting of
stockholders in 2003. Upon the expiration of the term of a class of directors,
directors in that class will be elected for three-year terms at the annual
meeting of stockholders in the year in which the term expires.
Committees of the Board of Directors
We have a compensation committee and an audit committee of the board of
directors. The current members of the compensation committee are Messrs.
Swartz and Carano. The compensation committee has the authority to review and
evaluate the salaries and incentive compensation of our management and
employees and to administer our stock plans.
The current members of the audit committee are Messrs. Diamond, Liebhaber
and Mongiello. The audit committee is responsible for reviewing the results
and scope of audits and other services provided by our independent public
accountants and reviewing our system of internal accounting and financial
controls. The audit committee also reviews such other matters with respect to
our accounting, auditing and financial reporting practices and procedures as
it may find appropriate or as may be brought to its attention.
40
<PAGE>
Compensation of Directors
We reimburse our directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. On February 10, 1999, we sold
25,000 shares of common stock to Mr. Liebhaber, one of our directors, at a
purchase price of $2.00 per share pursuant to a stock restriction agreement
that gives us, and some of our stockholders, a right of first refusal as to
all or a portion of these shares at the purchase price at which Mr. Liebhaber
proposes to sell, transfer or dispose of the shares to a third party. On April
14, 2000, we granted to Ms. Hapka, a member of the board of directors, an
option to purchase 75,000 shares of common stock at an exercise price of $4.00
per share and vesting over four years. We intend to grant options to our non-
employee directors in the future in accordance with our 2000 Non-Employee
Director Stock Option Plan. You should refer to "Benefit Plans--2000 Non-
Employee Director Stock Option Plan" for further detail.
Compensation Committee Interlocks and Insider Participation
Messrs. Carano and Swartz are not employees of Avici and Mr. Carano has
never been employed by Avici. Mr. Swartz was formerly the Interim Chief
Executive Officer, President and Secretary of Avici. Messrs. Carano and Swartz
are also general partners of affiliates of Avici that have made equity
investments in Avici. You should refer to "Certain Transactions" for more
information on these investments. No interlocking relationship exists between
any member of our board of directors or our compensation committee and any
member of the board of directors or compensation committee of any other
company and no such interlocking relationship has existed in the past.
Executive Compensation
The table below sets forth, for the year ended December 31, 1999, the cash
compensation earned by our chief executive officer and the other most highly
compensated executive officers who received annual compensation in excess of
$100,000 during 1999. These officers are collectively referred to below as the
Named Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------- ---------------
Securities
Salary Bonus Underlying
Name and Principal Position ($) ($) Options/SARS(#)
--------------------------- ------- ----- ---------------
<S> <C> <C> <C>
Surya R. Panditi.................................. 150,072 -- --
President and Chief Executive Officer
Brian McCormack................................... 200,566 -- 125,000
Senior Vice President of Worldwide Sales
Christopher W. Gunner............................. 128,608 1,300 25,000
Vice President of Engineering
Ralph A. Goldwasser............................... 140,088 -- 50,000
Chief Financial Officer
</TABLE>
As of December 31, 1999, Mr. Goldwasser was no longer an executive officer
of Avici. Paul F. Brauneis currently serves Avici as the Chief Financial
Officer, Vice President of Finance and Administration, Treasurer and
Secretary. Mr. Brauneis's base salary in 2000 is $150,072 and he received an
option to purchase 125,000 shares of our common stock, vesting over four years
at a rate of 2.0833% per month.
41
<PAGE>
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of options to
purchase shares of our common stock to each of the Named Executive Officers
during the year ended December 31, 1999. These percentages are based on an
aggregate of 2,512,850 shares granted to employees during that year. All
options were granted at fair market value as determined by the board of
directors on the date of grant.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Number of Percent of Stock
Securities Total Options Exercise Appreciation for
Underlying Granted To Price Option Term
Options Employees in Per Expiration ---------------------
Granted Fiscal Year Share Date 5% 10%
---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Surya R. Panditi........ -- -- -- -- -- --
Brian McCormack......... 100,000 4% $1.00 2009 $2,994,900 $4,828,111
25,000 1% 3.00 2009 698,725 1,157,028
Christopher W. Gunner... 25,000 1% 2.00 2009 723,725 1,182,028
Ralph A. Goldwasser..... 50,000 2% 2.00 2009 1,447,450 2,364,055
</TABLE>
The potential realizable values represent amounts that may be realized upon
exercise of options immediately prior to the expiration of their term assuming
the specified compounded rates of appreciation on our common stock over the
term of the options and assuming a fair market value of our common stock on
the date of grant equal to the assumed initial public offering price of
$19.00. The potential realizable values do not take into account applicable
tax and expense payments that may be associated with such option exercises.
Actual realizable value, if any, will be dependent on the future price of the
common stock on the actual date of exercise, which may be earlier than the
stated expiration date. The assumed annualized rates of stock price
appreciation over the exercise period of the options used in the table above
are mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of the future price of the common stock
on any date. There is no representation either express or implied that the
stock price appreciation rates for the common stock assumed for purposes of
this table will actually be achieved.
Fiscal Year-End Option Values
The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of December 31,
1999. There was no public trading market for our common stock as of December
31, 1999. Accordingly, the value of unexercised options have been determined
by the difference between the exercise price per share and the assumed initial
public offering price of $19.00 per share.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options at
December 31, 1999 (#) December 31, 1999 ($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Surya R. Panditi............ 150,000 -- 2,848,500 --
Brian McCormack............. -- 125,000 -- 2,200,000
Christopher W. Gunner....... 7,708 42,292 134,994 725,006
Ralph A. Goldwasser......... 6,641 68,359 114,850 1,166,400
</TABLE>
42
<PAGE>
Change in Control and Severance Provisions
Our offer letter to Paul F. Brauneis provides that, upon a change in control
of Avici, Mr. Brauneis will receive twelve months accelerated vesting of his
options. If Mr. Brauneis is terminated without cause or, in connection with a
change in control, is terminated or suffers a reduction in responsibility,
position or compensation, he also will receive six months accelerated vesting
of his options as well as six months continuation of his salary and benefits.
Our offer letter to Brian McCormack provides that, in the event of a change in
control of Avici, all of his options will become fully vested. Further, if Mr.
McCormack is involuntarily terminated for any reason other than gross
misconduct, he will receive a severance payment of $200,000.
Benefit Plans
1997 Stock Incentive Plan. Our 1997 Stock Incentive Plan, or 1997 Stock
Plan, was adopted by the board of directors in June 1997 and approved by the
stockholders in March 1998. The 1997 Stock Plan authorizes grants of
restricted stock, stock options and other stock-based awards. A maximum of
15,776,250 shares of common stock are authorized to be issued pursuant to the
1997 Stock Plan. Our officers, employees, directors, consultants and advisors
are eligible to receive awards under the 1997 Stock Plan.
The compensation committee of our board of directors administers the 1997
Stock Plan. The compensation committee has the authority to select the
recipients of awards and determine the number of shares of common stock
covered by options, the dates upon which options become exercisable, the
exercise price of options, the duration of options, the number of shares of
common stock subject to any restricted stock or other stock-based awards and
the terms and conditions of those awards, including the conditions for
repurchase, issue price and repurchase price.
In the event of a merger or other acquisition event, our board of directors
is authorized to provide for outstanding awards to be assumed or substituted
for by the acquiror. If the acquiror does not assume or substitute for
outstanding awards, our board of directors may provide that all unexercised
options will become exercisable in full prior to the completion of the event
and that all options will terminate upon the completion of the event if not
previously exercised.
The compensation committee may, in its sole discretion, amend, modify or
terminate any award granted or made under the 1997 Stock Plan, so long as the
amendment, modification or termination would not materially and adversely
affect the holder of such award. The compensation committee may also provide
that any option shall become immediately exercisable, in full or in part, or
that any restricted stock granted under the 1997 Stock Plan shall be free of
some or all restrictions.
As of May 15, 2000, options to purchase an aggregate of 5,855,990 shares of
our common stock at a weighted average exercise price of $3.23 per share were
outstanding under the 1997 Stock Plan and 7,930,029 shares were available for
future grant under the 1997 Stock Plan. Upon the closing of this offering, no
additional grants of stock options or other awards will be made under the 1997
Stock Plan.
2000 Stock Option and Incentive Plan. Our 2000 Stock Option and Incentive
Plan, or 2000 Stock Option Plan, was adopted by our board of directors in May
2000 and is expected to be approved by our stockholders in June 2000. Any
shares of common stock not issued under our 1997 Stock Plan on or before the
date of this offering or shares of common stock subject to options outstanding
on the date of this offering that have been forfeited or terminated will be
available for issuance under the 2000 Stock Option Plan. The maximum number of
shares with respect to which awards may be granted to any employee under the
2000 Stock Option Plan shall not exceed 500,000 shares of common stock during
any calendar year.
The 2000 Stock Option Plan provides for the grant of stock-based awards to
our employees, officers, directors, consultants and advisors. Under the 2000
Stock Option Plan, we may grant options that are intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code, options not intended to qualify as incentive stock options,
restricted stock and other stock-based awards. Incentive stock options may be
granted only to our employees.
43
<PAGE>
The 2000 Stock Option Plan is administered by the compensation committee.
Subject to the provisions of the 2000 Stock Option Plan, the compensation
committee has the authority to select the persons to whom awards are granted
and determine the terms of each award, including the number of shares of
common stock subject to the award. Payment of the exercise price of an award
may be made in cash or, if approved by the compensation committee, shares of
common stock, a combination of cash and stock, a promissory note or by any
other method approved by the compensation committee. Unless otherwise
permitted by the compensation committee, awards are not assignable or
transferable except by will or the laws of descent and distribution, and,
during the participant's lifetime, may be exercised only by the participant.
The compensation committee may, in its sole discretion, amend, modify or
terminate any award granted or made under the 2000 Stock Option Plan, so long
as the amendment, modification or termination would not materially and
adversely affect the holder of the award. The compensation committee may also
provide that any option shall become immediately exercisable, in full or in
part, or that any restricted stock granted under the 2000 Stock Option Plan
shall be free of some or all restrictions.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan,
or 2000 Employee Plan, was adopted by our board of directors in May 2000 and
is expected to be approved by our stockholders in June 2000. The 2000 Employee
Plan authorizes the issuance of up to a total of 750,000 shares of our common
stock to participating employees. On January 1 of each year, commencing with
January 1, 2001, the aggregate number of shares available for purchase under
the 2000 Employee Plan will automatically increase by the number of shares
necessary to cause the total number of shares then available for purchase to
be 750,000 shares.
The 2000 Employee Plan contains consecutive, overlapping, twenty-four month
offering periods. Each offering period includes four consecutive six-month
purchase periods. The offering periods generally start on the first trading
day on or after July 1 and January 1 of each year. However, the first such
purchase and offering periods will commence on the first trading day of the
common stock in this offering and end on the last trading day on or before
December 31, 2000 and June 30, 2002, respectively.
All of our employees, including directors who are employees, and all
employees of any participating subsidiaries whose customary employment is more
than 20 hours per week and for more than five months in a calendar year and
who have been employed by us for at least seven calendar days prior to
enrolling are eligible to participate in the 2000 Employee Plan. Employees who
would immediately after their purchase own five percent or more of the total
combined voting power or value of our stock or any subsidiary are not eligible
to participate.
To participate in the 2000 Employee Plan, an employee must authorize us to
deduct from one to ten percent of his or her compensation, including base pay
or salary and any overtime, bonuses or commissions paid during the offering
period. Amounts deducted and accumulated by the participant are used to
purchase shares of common stock at the end of each purchase period. The price
of stock purchased under the 2000 Employee Plan is 85% of the lower of the
fair market value of the common stock (i) at the beginning of the offering
period or (ii) at the end of the purchase period, whichever is lower, with the
option price at the beginning of the first offering period equal to 85% of the
initial public offering price. No employee may purchase common stock in excess
of $25,000 in any calendar year. Participants may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date that have not been used to purchase shares of common stock.
Participation ends automatically upon termination of employment.
2000 Non-Employee Director Stock Option Plan. Our 2000 Non-Employee
Director Stock Option Plan, or Director Plan, was adopted by the board of
directors in May 2000 and is expected to be approved by our stockholders in
June 2000. The Director Plan becomes effective on the date of this offering. A
total of 400,000 shares of common stock have been authorized for issuance
under the Director Plan. On January 1 of each year, commencing with January 1,
2001, the aggregate number of shares available for grant under the Director
Plan will automatically increase by the number of shares necessary to cause
the total number of shares then available for grant to be 400,000 shares.
44
<PAGE>
The Director Plan is administered by the compensation committee. Under the
Director Plan, each non-employee director who is or becomes a member of the
board of directors prior to this offering is automatically granted on the date
on which the common stock becomes registered under the Exchange Act an initial
option to purchase 40,000 shares of common stock with an exercise price equal
to the initial public offering price per share, which will vest in four equal
installments over four years. Ms. Hapka has already received her initial grant
under the 1997 Stock Plan. Each non-employee director who becomes a member of
the board of directors after the date of this offering will be automatically
granted on the date first elected to the board of directors an option to
purchase 35,000 shares of common stock, which will vest in four equal
installments over four years. In addition, provided that the director
continues to serve as a member of the board of directors, each non-employee
director will be automatically granted on the date of each annual meeting of
stockholders following his or her initial option grant date an option to
purchase 15,000 shares of common stock, 5,000 shares of which will vest
immediately and 10,000 shares of which will vest in four equal installments
over four years. All options granted under the Director Plan will have an
exercise price equal to the fair market value of the common stock on the date
of grant and a term of ten years from the date of grant. Unvested options
terminate when the director ceases to be a director for any reason other than
death or permanent disability. Vested options may be exercised at any time
during the option term. The term of the Director Plan is ten years, unless
sooner terminated by vote of the board of directors. No options have been
granted under the Director Plan.
401(k) Plan. We maintain an employee savings and retirement plan qualified
under Section 401 of the Internal Revenue Code and covering all of our
employees. Pursuant to the 401(k) plan, employees may elect to reduce their
current compensation by 15% annual salary or up to the statutorily prescribed
annual limit and have the amount of such reduction contributed to the 401(k)
plan. To date, we have not made any matching contributions to the 401(k) plan.
45
<PAGE>
CERTAIN TRANSACTIONS
Preferred Stock Issuances
Since inception in November 1996, we have issued and sold shares of
redeemable convertible preferred stock to the following persons and entities
who are our executive officers, directors or beneficial owners of more than 5%
of our outstanding capital stock. Upon the closing of this offering, each
outstanding share of redeemable convertible preferred stock will convert into
one share of common stock. You should refer to "Principal Stockholders" for
more detail on shares of our common stock held by these purchasers and their
affiliations with our directors and officers. Three of our directors, Bandel
L. Carano, James Mongiello and James R. Swartz, are affiliates of holders of
greater than 5% of our common stock.
<TABLE>
<CAPTION>
Series C- Series C- Series D-
Series A Series B 1 2 Series C-3 1 Series D-2 Series D-3 Series E Series F
Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred
Investor Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock
-------- --------- --------- --------- --------- ---------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surya R.
Panditi........ 100,000 13,800 4,200 2,000
Paul F.
Brauneis....... 5,000
Catherine
Hapka.......... 33,334
James
Mongiello...... 10,000
Nortel Networks
Inc. .......... 3,450,000 1,050,000 500,000 1,007,124 306,516 145,960
Accel Partners.. 1,750,000 2,275,000 339,963 103,467 49,270 370,535
Brentwood
Venture Capital
............... 3,150,000 266,064 80,976 38,560 289,984
Oak Investment
Partners ...... 3,150,000 266,064 80,976 38,560 289,984
</TABLE>
Series A Financing. On November 22, 1996, we issued an aggregate of
1,750,000 shares of Series A preferred stock to Accel V L.P., Accel
Internet/Strategic Technology Fund L.P., Accel Keiretsu V L.P., Accel
Investors '96 L.P. and Ellmore C. Patterson Partners. The per share purchase
price for our Series A preferred stock was $0.29.
Series B Financing. On May 14, 1997 and July 31, 1997, we issued an
aggregate of 10,517,000 shares of Series B preferred stock to 26 investors,
including Surya R. Panditi, Accel V L.P., Accel Internet/Strategic Technology
Fund L.P., Accel Keiretsu V L.P., Accel Investors '96 L.P., Ellmore C.
Patterson Partners, Brentwood Associates VII, L.P., Brentwood Affiliates Fund
L.P., Oak Investment Partners VII, L.P. and Oak VII Affiliates Fund, L.P. The
per share purchase price for our Series B preferred stock was $1.00.
Series C Financing. On January 28, 1998, we issued an aggregate of 3,450,000
shares of Series C-1 preferred stock to Nortel Networks Inc. The per share
purchase price for our Series C-1 preferred stock was $4.30.
On June 18, 1998, we issued an aggregate of 1,050,000 shares of Series C-2
preferred stock to Nortel Networks Inc. The per share purchase price for our
Series C-2 preferred stock was $6.00.
On June 3, 1999, we issued an aggregate of 500,000 shares of Series C-3
preferred stock to Nortel Networks Inc. The per share purchase price for our
Series C-3 preferred stock was $8.00.
Series D Financing. On March 31, 1998 and June 18, 1998, we issued an
aggregate of 3,745,665 shares of Series D-1 preferred stock to 39 investors,
including Surya R. Panditi, Accel V L.P., Accel Internet/Strategic Technology
Fund L.P., Nortel Networks Inc., Accel Keiretsu V L.P., Accel Investors '96
L.P., Ellmore C. Patterson Partners, Brentwood Associates VII, L.P., Brentwood
Affiliates Fund, Oak Investment Partners VII, L.P. and Oak VII Affiliates
Fund, L.P. The per share purchase price for our Series D-1 preferred stock was
$4.30.
On June 18, 1998, we issued an aggregate of 1,139,985 shares of Series D-2
preferred stock to 39 investors, including Surya R. Panditi, Accel V L.P.,
Accel Internet/Strategic Technology Fund L.P., Nortel Networks Inc., Accel
Keiretsu V L.P., Accel Investors '96 L.P., Ellmore C. Patterson Partners,
Brentwood Associates VII, L.P., Brentwood Affiliates Fund, Oak Investment
Partners VII, L.P. and Oak VII Affiliates Fund, L.P. The per share purchase
price for our Series D-2 preferred stock was $6.00.
46
<PAGE>
On March 31, 1999, we issued an aggregate of 542,850 shares of Series D-3
preferred stock to 39 investors, including Surya R. Panditi, Accel V L.P.,
Accel Internet/Strategic Technology Fund L.P., Nortel Networks Inc., Accel
Keiretsu V L.P., Accel Investors '96 L.P., Ellmore C. Patterson Partners,
Brentwood Associates VII, L.P., Brentwood Affiliates Fund, Oak Investment
Partners VII, L.P. and Oak VII Affiliates Fund, L.P. The per share purchase
price for our Series D-3 preferred stock was $8.00.
Series E Financing. On September 2, 1999 and October 7, 1999, we issued an
aggregate of 7,185,627 shares of Series E preferred stock to 41 investors,
including Accel V L.P., Accel Internet/Strategic Technology Fund L.P., Accel
Keiretsu V L.P., Accel Investors '96 L.P., Ellmore C. Patterson Partners,
Brentwood Associates VII, L.P., Brentwood Affiliates Fund, Oak Investment
Partners VII, L.P. and Oak VII Affiliates Fund, L.P. Enron Communications
Investment Corp., an affiliate of Enron Broadband Services, purchased 598,802
shares of Series E preferred stock. The per share purchase price for our
Series E preferred stock was $8.35.
Series F Financing. On April 24, 2000 and May 5, 2000, we issued an
aggregate of 2,969,769 shares of Series F preferred stock to 23 investors,
including Paul Brauneis and Dorothy F. Brauneis, JTROS, Catherine Hapka and
James Mongiello. Enron Communications Investment Corp. purchased 333,334
shares of Series F preferred stock and Williams Communications, Inc. purchased
600,000 shares of Series F prefered stock. The per share purchase price for
our Series F preferred stock was $15.00. Each of Enron Broadband Services and
Williams Communications, Inc. are customers conducting field trials of the
TSR.
Agreements with Nortel
On January 28, 1998, we entered into each of a Distribution Agreement,
Technology License Agreement and Assistance Agreement with Nortel Networks
Inc. (formerly known as Northern Telecom Inc.), or Nortel, to provide for
technology and marketing collaboration. All of these agreements were
terminated on August 26, 1999 pursuant to an Omnibus Agreement. Pursuant to
this Omnibus Agreement, Nortel granted to us a non-exclusive license to
intellectual property rights related to the development, manufacture,
marketing, sale and support of our product. Nortel also agreed to act as a
systems integrator for our products with mutually agreed upon customers. In
1999, we paid Nortel a total of approximately $5.2 million for technical
assistance and other consulting activities and approximately $354,000 for the
supply of components, and Nortel paid us approximately $815,000 for equipment.
In May 1999, we entered into a EMC Module Supply Agreement with Nortel,
pursuant to which Nortel agreed to manufacture and assemble EMC modules for
use in the TSR in accordance with our forecasts and purchase orders issued by
us. During the initial 18-month term of the agreement, we agreed to purchase a
minimum number of EMC enclosure piece part sets for an aggregate purchase
price of approximately $80,000, and in the event the agreement is renewed for
a second 18-month term, we likewise agreed to purchase a minimum number of EMC
enclosure piece part sets. The agreement allows us, for a one-time payment, to
license the design for manufacture by a party of our choice. The EMC Module
Supply Agreement has a term of 18 months, and is not terminable by either
party during that period except for material breach. The agreement is then
renewable with the agreement of both parties as to pricing, for a second 18-
month term, and renews thereafter for successive one-year periods unless
either party provides at least 90 days notice prior to the end of a term as to
its decision not to renew the agreement. Either party may terminate the
agreement for convenience upon 90 days prior written notice, subject to
reimbursement by us of various costs incurred by Nortel if terminated by us,
or forfeiture by Nortel of various costs if terminated by Nortel.
The terms of all agreements with Nortel were negotiated at arms length.
All future transactions, including loans between us and our officers,
directors and principal stockholders and their affiliates will be approved by
a majority of the disinterested directors on the board of directors, and will
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of May 15, 2000, by:
. each person who owns beneficially more than 5% of the outstanding
shares of our common stock;
. each of our directors and the Named Executive Officers; and
. all of our directors and executive officers as a group.
There were 39,037,767 shares of common stock deemed outstanding as of May
15, 2000, after giving effect to the conversion of all shares of redeemable
convertible preferred stock into common stock. The number of shares of common
stock deemed outstanding after this offering includes the 6,000,000 shares
that are being offered for sale by us in this offering. The number of shares
beneficially owned by each stockholder is determined in accordance with the
rules of the Securities and Exchange Commission and are not necessarily
indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership includes those shares of common stock that the
stockholder has sole or shared voting of investment power and any shares of
common stock that the stockholder has the right to acquire within 60 days
after May 15, 2000 through the exercise of any option, warrant or other right.
The percentage ownership of the outstanding common stock, however, is based on
the assumption, expressly required by the rules of the Securities and Exchange
Commission, that only the person or entity whose ownership is being reported
has converted options or warrants into shares of common stock. Unless
otherwise indicated below, to our knowledge, all persons named in the table
have sole voting and investment power with respect to their shares of common
stock, except to the extent authority is shared by spouses under applicable
law. Unless otherwise indicated, the address of each person or entity listed
below is c/o Avici Systems Inc., 101 Billerica Avenue, North Billerica,
Massachusetts 01862.
<TABLE>
<CAPTION>
Percentage of Common
Number of Stock Outstanding
Shares ------------------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
------------------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
Executive Officers and Directors
Surya R. Panditi(1).................. 1,120,000 2.9% 2.5%
Paul F. Brauneis(2).................. 18,020 * *
Christopher W. Gunner(3)............. 193,645 * *
Brian McCormack(4)................... 43,749 * *
Henry Zannini(5)..................... 707,275 1.8 1.6
Bandel L. Carano(6).................. 3,825,584 9.8 8.5
Stephen M. Diamond(7)................ 1,525,150 3.9 3.4
Catherine M. Hapka................... 33,334 * *
Richard T. Liebhaber................. 100,000 * *
James Mongiello(8)................... 3,835,584 9.8 8.5
James R. Swartz(9)................... 4,888,235 12.5 10.9
All Executive Officers and Directors 16,290,576 41.5 36.0
as a Group (11 persons).............
Five Percent (5%) Stockholders
Nortel Networks Inc. ................ 6,459,600 16.6 14.3
200 Athens Way
Nashville, TN 37228
Accel Partners(10)................... 4,888,235 12.5 10.9
428 University Avenue
Palo Alto, CA 94301
Brentwood Venture Capital(11)........ 3,825,584 9.8 8.5
11150 Santa Monica Boulevard,
Suite 1200
Los Angeles, CA 90025
Oak Investment Partners(12).......... 3,825,584 9.8 8.5
535 University Avenue,
Suite 130
Palo Alto, CA 94301
</TABLE>
48
<PAGE>
--------
* Less than 1%.
(1) Includes 40,000 shares held by Mr. Panditi's wife, 10,000 shares held in
trust for Mr. Panditi's daughter, and 150,000 shares issuable upon
exercise of options within 60 days of May 15, 2000.
(2) Includes 5,000 shares held by Paul F. Brauneis and Dorothy F. Brauneis,
JTROS, and 13,020 shares issuable upon exercise of options within 60 days
of May 15, 2000.
(3) Includes 18,645 shares issuable upon exercise of options within 60 days of
May 15, 2000.
(4) Includes 43,749 shares issuable upon exercise of options within 60 days of
May 15, 2000.
(5) Includes 7,275 shares owned by Mr. Zannini's wife.
(6) Consists of 3,731,856 shares held by Oak Investment Partners VII, L.P. and
93,728 shares held by Oak VII Affiliates Fund, L.P. Oak Associates VII,
L.L.C. is the general partner of Oak Investment Partners VII, L.P. Oak VII
Affiliates Fund, L.L.C. is the general partner of Oak VII Affiliates Fund,
L.P. Mr. Carano is a managing member of Oak Associates VII, L.L.C. and Oak
VII Affiliates Fund, L.L.C. Mr. Carano disclaims beneficial ownership of
shares owned by these entities except to the extent of his pecuniary
interest therein.
(7) Consists of 79,497 shares held by Sprout Venture Capital, L.P., 1,324,958
shares held by Sprout Capital VIII, L.P., 116,275 shares held by DLJESC
II, L.P. and 4,420 shares held by DLJ Capital Corporation. DLJ Capital
Corporation is the general partner of Sprout Venture Capital, L.P. and
Sprout Capital VIII, L.P. DLJ LBO Plans Management Corp. is the general
partner of DLJ ESC II, L.P. Mr. Diamond is a general partner of Sprout
Capital. Mr. Diamond disclaims beneficial ownership of the shares owned by
the DLJ and Sprout entities except to the extent of his pecuniary interest
therein.
(8) Consists of 3,672,561 shares held by Brentwood Associates VII, L.P. and
153,023 shares held by Brentwood Affiliates Fund, L.P. Brentwood VII
Ventures, L.P. is the general partner of Brentwood Associates VII, L.P.
and Brentwood Affiliates Fund, L.P. Mr. Mongiello is a venture partner of
Brentwood Venture Capital. Mr. Mongiello disclaims beneficial ownership of
the shares owned by the Brentwood entities except to the extent of his
pecuniary interest therein.
(9) Consists of 3,939,918 shares held by Accel V L.P., 527,930 shares held by
Accel Internet/Strategic Technology Fund L.P., 78,210 shares held by Accel
Keirutsu V L.P., 234,635 shares held by Accel Investors '96 L.P., and
107,542 shares held by Ellmore C. Patterson Partners. Accel V Associates
L.L.C. is the general partner of Accel V L.P. Accel Internet/Strategic
Technology Fund Associates L.L.C. is the general partner of Accel
Internet/Strategic Technology Fund L.P. Accel Keiretsu V Associates L.L.C.
is the general partner of Accel Keiretsu V L.P. Arthur C. Patterson, a
general partner of Accel Investors '96 L.P., is the sole general partner
of Ellmore C. Patterson Partners, James R. Swartz, is a general partner of
Accel Investors '96 L.P. and Accel Partners and a managing member of Accel
V Associates L.P., Accel Internet/Strategic Technology Fund Associates
L.L.C. and Accel Keiretsu V Associates LLC. Mr. Swartz disclaims
beneficial ownership of the shares owned by the Accel entities except to
the extent of his pecuniary interest therein, except for Ellmore C.
Patterson Partners, for which he completely disclaims ownership since he
has no economic interest therein or voting powers.
(10) Consists of 3,939,918 shares held by Accel V L.P., 527,930 shares held by
Accel Internet/Strategic Technology Fund L.P., 78,210 shares held by
Accel Keirutsu V L.P., 234,635 shares held by Accel Investors '96 L.P.,
and 107,542 shares held by Ellmore C. Patterson Partners. Accel V
Associates L.L.C. is the general partner of Accel V L.P. Accel
Internet/Strategic Technology Fund Associates L.L.C. is the general
partner of Accel Internet/Strategic Technology Fund L.P. Accel Keiretsu V
Associates L.L.C. is the general partner of Accel Keiretsu V L.P. Arthur
C. Patterson, a general partner of Accel Investors '96 L.P., is the sole
general partner of Ellmore C. Patterson Partners.
(11) Consists of 3,672,561 shares held by Brentwood Associates VII, L.P. and
153,023 shares held by Brentwood Affiliates Fund, L.P. Brentwood VII
Ventures, L.P. is the general partner of Brentwood Associates VII, L.P.
and Brentwood Affiliates Fund, L.P.
(12) Consists of 3,731,856 shares held by Oak Investment Partners VII, L.P.
and 93,728 shares held by Oak VII Affiliates Fund, L.P. Oak Associates
VII, L.L.C. is the general partner of Oak Investment Partners VII, L.P.
Oak VII Affiliates Fund, L.L.C. is the general partner of Oak VII
Affiliates Fund, L.P.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
After this offering, our authorized capital stock will consist of
250,000,000 shares of common stock, $.0001 par value per share, and 5,000,000
shares of preferred stock, $.01 par value per share. As of May 15, 2000, there
were outstanding:
. 39,037,767 shares of common stock held by 195 stockholders of record,
assuming the conversion into common stock of all outstanding shares of
redeemable convertible preferred stock, and
. options to purchase an aggregate of 5,855,990 shares of common stock
and warrants for the purchase of an aggregate of 275,000 shares of
Series B convertible preferred stock.
Based upon the number of shares outstanding as of that date, and giving
effect to the issuance of the shares of common stock offered by us in this
offering, there will be 45,037,767 shares of common stock outstanding upon the
closing of this offering.
The following summary describes the material terms of our securities,
various provisions of our amended and restated certificate of incorporation
and our amended and restated bylaws and provisions of applicable law.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares
present in person or by proxy at the meeting and entitled to vote in such
election. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends declared by the board of directors, subject to
any preferential dividend rights of outstanding preferred stock. Upon the
liquidation, dissolution or winding up of Avici, the holders of common stock
are entitled to receive ratably the net assets of Avici available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights, nor are they entitled to the
benefit of any sinking fund. The rights, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights
of the holders of shares of any series of preferred stock that we may
designate and issue in the future.
Preferred Stock
Under the terms of our amended and restated certificate of incorporation to
be filed as of the closing of this offering, our board of directors is
authorized to issue shares of preferred stock in one or more series without
stockholder approval. The board has discretion to determine the rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
of each series of preferred stock.
The purpose of authorizing the board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire, or could discourage a third party from acquiring, a
majority of our outstanding voting stock. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of the
holders of common stock. We have no present plans to issue any shares of
preferred stock.
50
<PAGE>
Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to some exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of our
outstanding voting stock, other than interested stockholders prior to the time
our common stock was listed on the Nasdaq National Market.
The amended and restated certificate of incorporation and amended and
restated by-laws to be effective on the closing of this offering provide:
. that the board of directors be divided into three classes, as nearly
equal in size as possible, with staggered three-year terms;
. that directors may be removed only for cause by the affirmative vote of
the holders of at least two-thirds of the shares of our capital stock
entitled to vote; and
. that any vacancy on the board of directors, however occurring,
including a vacancy resulting from an enlargement of the board, may
only be filled by vote of a majority of the directors then in office.
The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from acquiring, us.
The amended and restated certificate of incorporation and amended and
restated by-laws also provide that, after the closing of this offering:
. any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if
it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting; and
. special meetings of the stockholders may only be called by the chairman
of the board of directors, the president or by a majority of the board
of directors.
Our amended and restated by-laws provide that, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
requirements regarding advance notice to us. These provisions could delay
until the next stockholders' meeting stockholder actions that are favored by
the holders of a majority of our outstanding voting securities. These
provisions may also discourage another person or entity from making a tender
offer for our common stock, because this person or entity, even if it acquired
a majority of our outstanding voting securities, would be able to take action
as a stockholder, such as electing new directors or approving a merger, only
at a duly called stockholders meeting, and not by written consent.
Delaware corporation law provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a
greater percentage. Our amended and restated certificate of incorporation
requires the affirmative vote of the holders of at least 75% of the shares of
our capital stock entitled to vote to amend or repeal any of the foregoing
provisions of our amended and restated certificate of incorporation. Generally
our amended and restated by-laws may be amended or repealed by a majority vote
of the board of directors or the holders of a majority of the shares of our
capital stock issued and outstanding and entitled to vote. To amend our
amended and restated by-laws regarding special meetings of stockholders,
written actions of stockholders in lieu of a meeting, and the election,
removal and classification of members of the board of directors requires the
affirmative vote of the holders of at least two-
51
<PAGE>
thirds of the shares of our capital stock entitled to vote. The stockholder
vote would be in addition to any separate class vote that might in the future
be required pursuant to the terms of any series preferred stock that might be
outstanding at the time any amendments are submitted to stockholders.
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation provides that our
directors and officers shall be indemnified by us to the fullest extent
authorized by Delaware law. In addition, our amended and restated certificate
of incorporation provides that our directors will not be personally liable for
monetary damages to us or our stockholders for breaches of their fiduciary
duty as directors, except to the extent otherwise required by Delaware law.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, LLC.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our common stock in the public market
after this offering could adversely affect the prevailing market price of our
common stock. Furthermore, because we do not expect any shares to be available
for sale for at least ninety (90) days after the date of this prospectus due
to the contractual restrictions on resale described in the section entitled
"Underwriting" and the legal restrictions on resale described below, the sale
of a substantial amount of common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price of our
common stock and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 45,037,767 shares
of common stock, based upon the number of shares outstanding as of May 15,
2000 and assuming no exercise of outstanding options or warrants. Of these
shares, the 6,000,000 shares to be sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless the shares are purchased by affiliates, as that term is defined in Rule
144 under the Securities Act. Any shares purchased by an affiliate may not be
resold except pursuant to an effective registration statement or an applicable
exemption from registration, including an exemption under Rule 144 of the
Securities Act. The remaining 39,037,767 shares of common stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. These restricted securities may be sold in
the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act. These rules are summarized below.
All of these remaining shares of common stock will be subject to the lock-up
agreements described in the section entitled "Underwriters." In accordance
with the terms of the lock-up agreements, these shares may not be transferred
or disposed of, directly or indirectly, for 180 days after the date of this
prospectus. However, the lock-up agreements for stockholders other than our
directors and executive officers provide that if the last reported sale price
of our common stock is at least two times the initial public offering price
per share for each of the 20 trading days preceding the 90th day after the
date of this prospectus, then twenty five percent (25%) of these shares will
be released from the 180-day restrictions. This early release will occur: (a)
on the 90th day after the date of this prospectus if we make a public release
of our quarterly or annual results during the period beginning on the eleventh
trading day after the date of this prospectus and ending on the day prior to
the 90th day after the date of this prospectus or (b) otherwise, on the second
trading day after the first public release of our quarterly or annual results
occurring on or after the 90th day after the date of this prospectus. If the
conditions specified above are not met then, upon the expiration of the lock-
up agreements and subject to the provisions of Rule 144 and Rule 701, these
restricted shares will be available for sale in the public market 180 days
after the date of this prospectus. In addition, holders of stock options
could, subject to compliance with the lock-up agreements, exercise their
options and sell the shares of common stock issued upon exercise as described
below under "Stock Options."
Rule 144
In general, under Rule 144 as currently in effect, beginning ninety (90)
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year from the later of the date
those shares of common stock were acquired from us or from an affiliate of
ours would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
(1) one percent of the number of shares of common stock then
outstanding, which will equal approximately 450,000 shares immediately
after this offering; or
(2) the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale of any shares of common stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us. Affiliates may sell shares not
53
<PAGE>
constituting restricted securities in accordance with the foregoing volume
limitations and other restrictions, but without regard to the one-year holding
period.
In addition, under Rule 144(k), a person who is not one of our affiliates at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years from the later of
the date such shares of common stock were acquired from us or from an
affiliate of ours, including the holding period of any prior owner other than
an affiliate, is entitled to sell those shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Therefore, unless otherwise restricted pursuant to the lock-up
agreements or otherwise, those shares may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchased shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell those shares ninety (90) days after the effective date of
this offering in reliance on Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of our common stock prevailing from time to time. Nevertheless, sales of
significant amounts of our common stock in the public market could adversely
affect the market price of our common stock.
Stock Options
At May 15, 2000, approximately 737,394 shares of common stock were issuable
pursuant to immediately exercisable options granted under our 1997 Stock
Incentive Plan, which shares are subject to lock-up agreements with the
Underwriters.
We intend to file a registration statement on Form S-8 under the Securities
Act as soon as practicable following the date of this prospectus to register
all shares of common stock issuable under our stock plans, including the
shares of common stock subject to outstanding options as of May 15, 2000. This
registration statement is expected to become effective upon filing.
Registration Rights
Immediately after the completion of this offering, the holders of
approximately 34,775,896 shares of our common stock will be entitled to rights
with respect to the registration of those shares under the Securities Act, as
described below. The registration of these shares under the Securities Act
would result in these shares becoming freely tradable without restriction
under the Securities Act immediately upon the effectiveness of the
registration, except for shares purchased by affiliates. The rights described
below terminate five years after the completion of this offering.
Demand Registration Rights. At any time (i) after August 13, 2002, the
holders of at least a majority of the outstanding shares of our common stock
issued upon conversion of all classes of our outstanding preferred stock and
not previously registered under the Securities Act or sold under Rule 144 or
(ii) after 180 days following this offering, certain holders, including Nortel
Networks, Amerindo Technology Growth Fund II and Litton Master Trust, holding
an aggregate of 7,479,623 shares of common stock after this offering, can
request that we register at our expense all or a portion of their shares on a
(x) Form S-1 Registration Statement so long as the total offering price of the
shares to the public is at least $10,000,000 or (y) Form S-3 Registration
Statement so long as the total offering price of the shares to the public is
at least $2,500,000. We are required to file no more than two registration
statements in response to the demand registration rights described in clause
54
<PAGE>
(i) above no more than three registration statements in response to the demand
registration rights described in clause (ii) above. In addition, we are not
required to effect any other registration pursuant to these demand rights
within 180 days of any underwritten offering of our shares of common stock. We
are also not required to register more than one Form S-3 Registration
Statement in any one-year period. We may postpone the filing of any
registration statement pursuant to these demand rights for up to 120 days if
we are engaged in any activity, including a proposed registration of our
shares of common stock, that we determine would be adversely affected by the
requested registration to our material detriment.
Piggyback Registration Rights. If we register any of our securities for
public sale, either for our own account or for the account of any holder of
our securities, the holders of our of common stock issued upon conversion of
all classes of our outstanding preferred stock will have the right to include
their shares of common stock in this registration at our expense. This right,
however, does not apply to a registration statement relating to any of our
employee benefit plans or to a corporate reorganization. If marketing reasons
dictate, the managing underwriter of any underwritten offering will have the
right to limit the number of shares of common stock that these holders include
in any registration statement.
55
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc., Lehman
Brothers Inc. and UBS Warburg LLC are acting as representatives, have
severally agreed to purchase, and we have agreed to sell to them, the
respective number of shares of common stock set forth opposite the names of
the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...............................
J.P. Morgan Securities Inc. ....................................
Lehman Brothers Inc. ...........................................
UBS Warburg LLC.................................................
---------
Total......................................................... 6,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered in this offering are subject to
the approval of various legal matters by their counsel and to various other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered in this offering, other than those covered by
the over-allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page and part to dealers at a price that represents a concession not
in excess of $ a share under the initial public offering price. Any
underwriter may allow, and the dealers may reallow, a concession not in excess
of $ a share to other underwriters or to other dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives of the
underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 900,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to various
conditions, to purchase approximately the same percentage of the additional
shares of common stock as the number set forth next to the name of that
underwriter in the preceding table bears to the total number of shares of
common stock set forth next to the names of all underwriters in the preceding
table. If the underwriters exercise the option in full, the total price to the
public would be $ million, the total underwriters' discounts and
commissions would be $ million and total proceeds to us would be $
million.
At our request, the underwriters have reserved up to 900,000 shares of
common stock offered by this prospectus for sale, at the initial public
offering price, to our directors, officers, employees, customers and other
business associates. At our request, the underwriters have reserved 300,000 of
these shares for sale, at the initial public offering price, to Qwest
Communications. We cannot assure you that any of the reserved shares will be
purchased. The number of shares of common stock available for sale to the
general public will be reduced to the extent these parties purchase the
reserved shares. Any reserved shares which are not so purchased will be
offered by the underwriters to the general public on the same basis as the
other shares offered by this prospectus.
56
<PAGE>
Avici and each of its directors, officers, and other securityholders have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, they will not, directly or
indirectly, during the period ending 180 days after the date of this
prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock,
whether any transaction described above is to be settled by delivery of common
stock or other securities, in cash or otherwise. If the last reported sale
price of our common stock on the Nasdaq National Market is at least two times
the initial public offering price per share for each of the 20 trading days
preceding the 90th day after the date of this prospectus, then twenty five
percent (25%) of the shares, or options to purchase shares, of common stock
held by securityholders other than our directors and officers and subject to
the 180-day restriction described above will be released from this
restriction. This early release will occur: (a) on the 90th day after the date
of this prospectus if we make a public release of our quarterly or annual
results during the period beginning on the eleventh trading day after the date
of this prospectus and ending on the day prior to the 90th day after the date
of this prospectus or (b) otherwise, on the second trading day after the first
public release of our quarterly or annual results occurring on or after the
90th day after the date of this prospectus.
The restrictions described in the preceding paragraph do not apply to:
. the sale of shares of common stock to the underwriters;
. the issuance of shares of common stock by us upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
. the grant of an option to purchase common stock under our stock option
plans described in the prospectus, so long as the option is not
exercisable during the 180-day period; and
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of this offering.
Morgan Stanley & Co. Incorporated may, in its sole discretion, at any time and
without prior written notice or announcement, release all or any portion of
shares subject to the lock-up agreements.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have filed an application for our common stock to be quoted on the Nasdaq
National Market under the symbol "AVCI."
57
<PAGE>
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
In September 1999, we sold shares of our Series E convertible preferred
stock in a private placement. As part of this private placement, funds managed
by and invested in by J.P. Morgan Investment Management Inc., an affiliate of
J.P. Morgan Securities Inc., purchased an aggregate of 1,197,605 shares of
Series E convertible preferred stock, which are convertible into 1,197,605
shares of common stock, for approximately $10,000,001, or $8.35 per share. In
April 2000, we sold shares of Series F convertible preferred stock in a
private placement. As part of this private placement, the same funds purchased
an aggregate of 100,000 shares of Series F convertible preferred stock, which
are convertible into 100,000 shares of common stock, for approximately
$1,500,000, or $15.00 per share. Pursuant to the requirements of the National
Association of Securities Dealers, Inc., the funds have agreed not to sell,
transfer or assign these shares of Series F convertible preferred stock or the
shares of common stock issuable upon conversion of these shares for one year
after the date of this prospectus, or such less time as prescribed by the
National Association of Securities Dealers, Inc. The funds purchased these
shares on the same terms as the other investors in these private placements.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price for the shares
of common stock will be determined by negotiations between Avici and the
representatives of the underwriters. The material factors to be considered in
determining the initial public offering price will be the future prospects of
Avici and its industry in general, sales, operating results and certain other
financial information of Avici in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities and the financial and
operating information of companies engaged in activities similar to those of
Avici.
58
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. As of
the date of this prospectus, Testa, Hurwitz & Thibeault, LLP beneficially owns
6,667 shares of our common stock under the name High Street Investors 2000.
Legal matters in connection with this offering will be passed upon for the
underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The audited financial statements of Avici Systems Inc. as of December 31,
1998 and 1999 and for the years ended December 31, 1997, 1998 and 1999
included in this prospectus and elsewhere in this registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules that are part of the registration statement. Any
statements made in this prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
registration statement, we refer you to the exhibit for a more complete
description of the matter involved, and each statement in this prospectus
shall be deemed qualified in its entirety by this reference. You may read and
copy all or any portion of the registration statement or any reports,
statements or other information in the files at the following public reference
facilities of the Securities and Exchange Commission:
Washington, D.C. New York, New York Chicago, Illinois
Room 1024, Judiciary Seven World Trade 500 West Madison
Plaza Center Street
450 Fifth Street, Suite 1300 Suite 1400
N.W. New York, New York Chicago, Illinois
Washington, D.C., 10048 60661
20549
You can request copies of these documents upon payment of a duplicating fee
by writing to the Commission. You may call the Commission at 1-800-SEC-0330
for further information on the operation of its public reference rooms. Our
filings, including the registration statement, will also be available to you
on the Internet web site maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants, and make
available to our stockholders quarterly reports for the first three quarters
of each year containing unaudited interim financial statements.
59
<PAGE>
AVICI SYSTEMS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit)........................................................ F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Avici Systems Inc.:
We have audited the accompanying balance sheets of Avici Systems Inc. (a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Avici Systems Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Boston, Massachusetts
February 25, 2000
F-2
<PAGE>
AVICI SYSTEMS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, March 31,
-------------------------- March 31, 2000
1998 1999 2000 Note 1(n)
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 23,191,943 $ 34,242,471 $ 24,083,330 $ 64,579,865
Investments............ -- 13,674,979 7,700,209 7,700,209
Inventories............ -- 3,632,518 7,017,628 7,017,628
Trade accounts
receivable............ -- 598,800 208,500 208,500
Prepaid expenses and
other current assets.. 251,282 269,751 808,480 808,480
------------ ------------ ------------ ------------
Total current assets.. 23,443,225 52,418,519 39,818,147 80,314,682
------------ ------------ ------------ ------------
Property and equipment,
at cost:
Equipment under capital
lease................. 6,373,578 10,774,032 10,801,632 10,801,632
Computer equipment..... 2,120,642 2,236,936 3,063,865 3,063,865
Leasehold
improvements.......... 607,619 732,180 744,793 744,793
Furniture and
fixtures.............. 66,837 68,138 73,686 73,686
------------ ------------ ------------ ------------
9,168,676 13,811,286 14,683,976 14,683,976
Less--Accumulated
depreciation and
amortization.......... 1,579,219 4,726,776 5,718,967 5,718,967
------------ ------------ ------------ ------------
7,589,457 9,084,510 8,965,009 8,965,009
------------ ------------ ------------ ------------
Other assets:
Restricted cash........ 228,000 188,000 188,000 188,000
Other asset............ -- 100,000 100,000 100,000
Deferred financing
costs................. 98,000 48,000 35,500 35,500
------------ ------------ ------------ ------------
Total other assets.... 326,000 336,000 323,500 323,500
------------ ------------ ------------ ------------
$ 31,358,682 $ 61,839,029 $ 49,106,656 $ 89,603,191
============ ============ ============ ============
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of
long-term
obligations........... $ 1,796,976 $ 2,968,490 $ 3,268,351 $ 3,268,351
Accounts payable....... 3,219,679 5,833,367 4,631,994 4,631,994
Accrued expenses....... 604,826 1,000,017 1,566,835 1,566,835
Deferred revenue....... -- 1,753,400 3,862,900 3,862,900
------------ ------------ ------------ ------------
Total current
liabilities.......... 5,621,481 11,555,274 13,330,080 13,330,080
------------ ------------ ------------ ------------
Long-term obligations,
less current
maturities............. 5,520,715 6,390,264 5,246,071 5,246,071
------------ ------------ ------------ ------------
Commitments (Note 6)
Redeemable convertible
preferred stock, $0.01
par value:
Authorized--30,156,127
shares
Issued and
outstanding--
21,652,650 shares at
December 31, 1998,
29,881,127 shares at
December 31, 1999 and
29,881,127 shares at
March 31, 2000; none
authorized, issued and
outstanding, pro
forma................. 55,098,270 123,441,055 123,441,055 --
------------ ------------ ------------ ------------
Warrants to purchase
Series B redeemable
convertible preferred
stock.................. 198,000 198,000 198,000 --
------------ ------------ ------------ ------------
Stockholders' equity
(deficit):
Preferred stock, $0.01
par value--
Authorized--5,000,000
shares Issued and
outstanding--none,
actual and pro forma.. -- -- -- --
Common stock, $0.0001
par value--
Authorized--50,000,000
shares
Issued and
outstanding--5,903,112
shares at December 31,
1998, 6,053,698 shares
at December 31, 1999,
6,098,888 shares at
March 31, 2000 and
38,949,784 pro forma.. 590 606 610 3,895
Additional paid-in
capital............... 675,510 11,475,243 22,751,208 190,735,513
Common stock warrants.. -- -- -- 198,000
Subscriptions
receivable............ (175,000) (215,000) (286,031) (286,031)
Deferred compensation.. -- (7,428,874) (15,316,542) (15,316,542)
Accumulated deficit.... (35,580,884) (83,577,539) (100,257,795) (104,307,795)
------------ ------------ ------------ ------------
Total stockholders'
equity (deficit)..... (35,079,784) (79,745,564) (93,108,550) 71,027,040
------------ ------------ ------------ ------------
$ 31,358,682 $ 61,839,029 $ 49,106,656 $ 89,603,191
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AVICI SYSTEMS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March
Years Ended December 31, 31,
--------------------------------------- ---------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ -- $ -- $ -- $ -- $ 504,000
Cost of revenues........ -- -- -- -- 429,125
----------- ------------ ------------ ------------- ------------
Gross margin........ -- -- -- -- 74,875
Operating expenses:
Research and
development(1)....... 4,168,617 27,357,222 36,821,219 8,002,234 11,335,363
Sales and
marketing(1)......... -- 1,630,133 5,601,384 915,307 1,748,192
General and
administrative(1).... 857,716 2,010,043 3,040,732 735,564 756,529
Stock-based
compensation......... 324,845 60,062 3,170,549 447,053 3,192,301
----------- ------------ ------------ ------------- ------------
Total operating
expenses........... 5,351,178 31,057,460 48,633,884 10,100,158 17,032,385
----------- ------------ ------------ ------------- ------------
Loss from operations.... (5,351,178) (31,057,460) (48,633,884) (10,100,158) (16,957,510)
Interest income......... 271,877 1,300,728 1,532,751 231,934 474,206
Interest expense........ (84,303) (360,840) (688,795) (166,952) (196,952)
----------- ------------ ------------ ------------- ------------
Net loss................ $(5,163,604) $(30,117,572) $(47,789,928) $(10,035,176) $(16,680,256)
=========== ============ ============ ============= ============
Net loss per share:
Basic and diluted..... $ (34.71) $ (19.05) $ (13.99) $ (3.61) $ (3.68)
=========== ============ ============ ============= ============
Pro forma basic and
diluted.............. $ (1.58) $ (0.46)
============ ============
Weighted average common
shares used in
computing net loss per
share:
Basic and diluted..... 148,785 1,581,038 3,416,534 2,782,114 4,536,051
=========== ============ ============ ============= ============
Pro forma basic and
diluted.............. 30,317,742 35,895,487
============ ============
(1) Excludes noncash,
stock-based
compensation, as
follows:
Research and
development.......... $ 324,845 $ 60,062 $ 2,373,939 $ 245,321 $ 2,384,381
Sales and marketing... -- -- 636,028 109,758 430,020
General and
administrative....... -- -- 160,582 91,974 377,900
----------- ------------ ------------ ------------- ------------
$ 324,845 $ 60,062 $ 3,170,549 $ 447,053 $ 3,192,301
=========== ============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AVICI SYSTEMS INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Stock Common Stock
-------------------------- ----------------------- Additional Common
Number of Redemption Warrants Number of $0.0001 Par Paid-in Stock Subscriptions
Shares Value Outstanding Shares Value Capital Warrants Receivable
----------- ------------- ----------- ---------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996............ 1,750,000 $ 500,000 $ -- 1,925,000 $ 193 $ 57,557 $ -- $ --
Sale of Series B
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$54,116......... 10,467,000 10,467,000 -- -- -- -- -- --
Issuance of
warrants in
connection with
Series B
Redeemable
Convertible
Preferred
Stock........... -- -- 198,000 -- -- -- -- --
Issuance of
common stock to
consultants and
director........ -- -- -- 175,000 18 18,482 -- --
Issuance of
restricted stock
and related
compensation
expense......... 50,000 50,000 -- 3,568,750 356 347,357 -- --
Net loss........ -- -- -- -- -- -- -- --
----------- ------------- --------- ---------- ------ ------------ -------- ---------
Balance,
December 31,
1997............ 12,267,000 11,017,000 198,000 5,668,750 567 423,396 -- --
Sale of Series C
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$57,671......... 4,500,000 21,135,000 -- -- -- -- -- --
Sale of Series D
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$65,033......... 4,885,650 22,946,270 -- -- -- -- -- --
Exercise of
common stock
options......... -- -- -- 9,500 1 882 -- --
Issuance of
common stock
options to a
consultant...... -- -- -- -- -- 60,062 -- --
Issuance of
common stock to
a consultant.... -- -- -- 26,000 3 7,997 -- --
Issuance of
restricted stock
and related
compensation
expense......... -- -- -- 334,800 33 186,768 -- (175,000)
Repurchase of
restricted
stock........... -- -- -- (135,938) (14) (3,595) -- --
Net loss........ -- -- -- -- -- -- -- --
----------- ------------- --------- ---------- ------ ------------ -------- ---------
Balance,
December 31,
1998............ 21,652,650 55,098,270 198,000 5,903,112 590 675,510 -- (175,000)
Sale of Series C
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$17,855......... 500,000 4,000,000 -- -- -- -- -- --
Sale of Series D
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$19,344......... 542,850 4,342,800 -- -- -- -- -- --
Sale of Series E
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$169,528........ 7,185,627 59,999,985 -- -- -- -- -- --
Deferred
compensation
related to stock
options and
stock grants.... -- -- -- -- -- 10,405,923 -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- --
Exercise of
common stock
options......... -- -- -- 158,739 16 111,017 -- --
Issuance of
common stock.... -- -- -- 56,500 6 122,994 -- --
Issuance of
restricted
stock........... -- -- -- 10,000 1 39,999 -- (40,000)
Repurchase of
restricted
stock........... -- -- -- (74,653) (7) (700) -- --
Expense related
to grant of
stock options to
nonemployees.... -- -- -- -- -- 120,500 -- --
Net loss........ -- -- -- -- -- -- -- --
----------- ------------- --------- ---------- ------ ------------ -------- ---------
Balance,
December 31,
1999............ 29,881,127 123,441,055 198,000 6,053,698 606 11,475,243 -- (215,000)
Deferred
compensation
related to stock
options and
stock grants
(unaudited)..... -- -- -- -- -- 10,542,060 -- --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- --
Exercise of
common stock
options
(unaudited)..... -- -- -- 203,967 20 310,280 -- (180,722)
Issuance of
common stock
(unaudited)..... -- -- -- 3,000 -- 12,000 -- --
Repurchase of
restricted stock
(unaudited)..... -- -- -- (161,777) (16) (114,284) -- 109,691
Expense related
to grant of
stock options to
nonemployees
(unaudited)..... -- -- -- -- -- 525,909 -- --
Net loss
(unaudited)..... -- -- -- -- -- -- -- --
----------- ------------- --------- ---------- ------ ------------ -------- ---------
Balance, March
31, 2000
(unaudited)..... 29,881,127 123,441,055 198,000 6,098,888 610 22,751,208 -- (286,031)
Write-off of
license
agreement as the
purchase of in-
process research
and development
(unaudited)..... -- -- -- -- -- -- -- --
Sale of Series F
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of $50,000
(unaudited)..... 2,969,769 44,546,535 -- -- -- -- -- --
Conversion of
redeemable
convertible
preferred stock
into common
stock
(unaudited)..... (32,850,896) (167,987,590) -- 32,850,896 3,285 167,984,305 -- --
Conversion of
preferred stock
warrants into
common stock
warrants
(unaudited)..... -- -- (198,000) -- -- -- 198,000 --
----------- ------------- --------- ---------- ------ ------------ -------- ---------
Pro forma
balance, March
31, 2000
(unaudited)..... -- $ -- $ -- 38,949,784 $3,895 $190,735,513 $198,000 $(286,031)
=========== ============= ========= ========== ====== ============ ======== =========
<CAPTION>
Total
Stockholders'
Deferred Accumulated Equity
Compensation Deficit (Deficit)
------------- -------------- --------------
<S> <C> <C> <C>
Balance,
December 31,
1996............ $ -- $ (122,888) $ (65,138)
Sale of Series B
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$54,116......... -- (54,116) (54,116)
Issuance of
warrants in
connection with
Series B
Redeemable
Convertible
Preferred
Stock........... -- -- --
Issuance of
common stock to
consultants and
director........ -- -- 18,500
Issuance of
restricted stock
and related
compensation
expense......... -- -- 347,713
Net loss........ -- (5,163,604) (5,163,604)
------------- -------------- --------------
Balance,
December 31,
1997............ -- (5,340,608) (4,916,645)
Sale of Series C
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$57,671......... -- (57,671) (57,671)
Sale of Series D
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$65,033......... -- (65,033) (65,033)
Exercise of
common stock
options......... -- -- 883
Issuance of
common stock
options to a
consultant...... -- -- 60,062
Issuance of
common stock to
a consultant.... -- -- 8,000
Issuance of
restricted stock
and related
compensation
expense......... -- -- 11,801
Repurchase of
restricted
stock........... -- -- (3,609)
Net loss........ -- (30,117,572) (30,117,572)
------------- -------------- --------------
Balance,
December 31,
1998............ -- (35,580,884) (35,079,784)
Sale of Series C
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$17,855......... -- (17,855) (17,855)
Sale of Series D
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$19,344......... -- (19,344) (19,344)
Sale of Series E
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of
$169,528........ -- (169,528) (169,528)
Deferred
compensation
related to stock
options and
stock grants.... (10,405,923) -- --
Amortization of
deferred
compensation.... 2,977,049 -- 2,977,049
Exercise of
common stock
options......... -- -- 111,033
Issuance of
common stock.... -- -- 123,000
Issuance of
restricted
stock........... -- -- --
Repurchase of
restricted
stock........... -- -- (707)
Expense related
to grant of
stock options to
nonemployees.... -- -- 120,500
Net loss........ -- (47,789,928) (47,789,928)
------------- -------------- --------------
Balance,
December 31,
1999............ (7,428,874) (83,577,539) (79,745,564)
Deferred
compensation
related to stock
options and
stock grants
(unaudited)..... (10,542,060) -- --
Amortization of
deferred
compensation
(unaudited)..... 2,654,392 -- 2,654,392
Exercise of
common stock
options
(unaudited)..... -- -- 129,578
Issuance of
common stock
(unaudited)..... -- -- 12,000
Repurchase of
restricted stock
(unaudited)..... -- -- (4,609)
Expense related
to grant of
stock options to
nonemployees
(unaudited)..... -- -- 525,909
Net loss
(unaudited)..... -- (16,680,256) (16,680,256)
------------- -------------- --------------
Balance, March
31, 2000
(unaudited)..... (15,316,542) (100,257,795) (93,108,550)
Write-off of
license
agreement as the
purchase of in-
process research
and development
(unaudited)..... -- (4,000,000) (4,000,000)
Sale of Series F
Redeemable
Convertible
Preferred Stock,
net of issuance
costs of $50,000
(unaudited)..... -- (50,000) (50,000)
Conversion of
redeemable
convertible
preferred stock
into common
stock
(unaudited)..... -- -- 167,987,590
Conversion of
preferred stock
warrants into
common stock
warrants
(unaudited)..... -- -- 198,000
------------- -------------- --------------
Pro forma
balance, March
31, 2000
(unaudited)..... $(15,316,542) $(104,307,795) $ 71,027,040
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AVICI SYSTEMS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March
For the Years Ended December 31, 31,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net loss.............. $(5,163,604) $(30,117,572) $(47,789,928) $(10,035,176) $(16,680,256)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 121,890 1,654,023 3,147,557 715,579 992,191
Amortization of
deferred financing
costs................ 50,000 50,000 50,000 12,500 12,500
Compensation expense
associated with
issuance of stock
options to
consultants.......... 324,845 60,062 193,500 43,000 537,909
Stock-based
compensation......... -- -- 2,977,049 404,053 2,654,392
Changes in current
assets and
liabilities:
Inventories.......... -- -- (3,632,518) -- (3,627,624)
Trade accounts
receivable.......... -- -- (598,800) -- 390,300
Prepaid expenses and
other current
assets.............. (72,887) (163,095) (18,469) 12,651 (538,729)
Other asset.......... -- -- (100,000) -- --
Restricted cash...... (40,000) (188,000) 40,000 -- --
Accounts payable..... 406,184 2,813,495 2,613,688 507,470 (1,201,373)
Accrued expenses..... 444,162 144,198 395,191 256,830 566,818
Deferred revenue..... -- -- 1,753,400 -- 2,109,500
----------- ------------ ------------ ------------ ------------
Net cash used in
operating
activities......... (3,929,410) (25,746,889) (40,969,330) (8,083,093) (14,784,372)
----------- ------------ ------------ ------------ ------------
Cash Flows from
Investing Activities:
Purchases of property
and equipment........ (141,117) (2,678,835) (242,156) (92,909) (602,576)
Proceeds from sale of
equipment............ -- 13,245 -- -- --
Purchases of
investments.......... -- -- (13,674,979) -- --
Sales of investments.. -- -- -- -- 5,974,770
----------- ------------ ------------ ------------ ------------
Net cash provided by
(used in) investing
activities......... (141,117) (2,665,590) (13,917,135) (92,909) 5,372,194
----------- ------------ ------------ ------------ ------------
Cash Flows from
Financing Activities:
Proceeds from sale of
redeemable
convertible preferred
stock, net of
issuance costs....... 10,412,884 43,958,566 68,136,058 3,926,615 --
Proceeds from long-
term obligations..... -- 1,250,000 -- -- --
Payments on long-term
obligations.......... -- (490,972) (2,359,392) (404,362) (871,932)
Repurchase of
restricted stock..... -- (3,609) (707) -- (4,609)
Proceeds from issuance
of common stock and
exercise of stock
options.............. 91,368 20,684 161,034 3,850 129,578
----------- ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities......... 10,504,252 44,734,669 65,936,993 3,526,103 (746,963)
----------- ------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents........... 6,433,725 16,322,190 11,050,528 (4,649,899) (10,159,141)
Cash and cash
equivalents, beginning
of period............. 436,028 6,869,753 23,191,943 23,191,943 34,242,471
----------- ------------ ------------ ------------ ------------
Cash and cash
equivalents, end of
period................ $ 6,869,753 $ 23,191,943 $ 34,242,471 $ 18,542,044 $ 24,083,330
=========== ============ ============ ============ ============
Supplemental Disclosure
of Cash Flow
Information:
Cash paid during the
year for:
Interest.............. $ 34,303 $ 310,840 $ 638,795 $ 154,452 $ 184,452
=========== ============ ============ ============ ============
Supplemental Disclosure
of Noncash Investing
and Financing
Activities:
Equipment acquired
under capital lease
obligations.......... $ 1,737,459 $ 4,820,232 $ 4,400,454 $ 718,994 $ 27,600
=========== ============ ============ ============ ============
Issuance of warrants
in connection with
term loan and master
lease line........... $ 198,000 $ -- $ -- $ -- $ --
=========== ============ ============ ============ ============
Transfer of inventory
to property and
equipment............ $ -- $ -- $ -- $ -- $ 242,514
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
(including data related to unaudited periods)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Avici Systems Inc. (the Company) was incorporated in the State of Delaware
on November 12, 1996 and was organized to design and develop high-speed data
networking equipment for the carrier market. The Company's Terabit Switch
Router, known as the TSR, is designed to cost-effectively provide high-
speed/high-volume capacity, carrier-class reliability and in-service
scalability, or the ability to incrementally add capacity to the network
without disrupting network performance.
The Company is devoting significant efforts toward product research and
development. As such, it is subject to a number of risks and challenges
similar to other companies in a similar stage of development. These risks
include, but are not limited to, dependence on a few customers, dependence on
key individuals, dependence on contract manufacturers and key suppliers of
integral components, the need to develop and market commercially usable
products, the ability to obtain adequate financing to support growth and
product development and competition from substitute products and larger
companies with greater financial, technical, management, and marketing
resources.
The Company incurred net losses of approximately $5,200,000, $30,100,000 and
$47,800,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. At December 31, 1999, the Company had an accumulated deficit of
approximately $83,600,000 and has funded those losses through the sale of
redeemable convertible preferred stock and the issuance of certain long-term
obligations. The Company is dependent on the proceeds of equity financings to
meet its future working capital and research and development needs.
On May 3, 2000, the Company's Board of Directors authorized the Company to
file a registration statement with the Securities and Exchange Commission
(SEC) for the purpose of the initial public offering (IPO) of the Company's
common stock. Upon the completion of the offering, if requirements set forth
in the certificate of incorporation are met, all of the Company's outstanding
preferred stock will be converted into shares of common stock and all such
outstanding shares of preferred stock will be cancelled and retired.
The accompanying financial statements reflect the application of certain
significant accounting policies as described in this note and elsewhere in
these notes to financial statements.
(a) Revenue Recognition
The Company recognizes revenue from product sales upon shipment, provided
that a purchase order has been received or a contract has been executed, there
are no uncertainties regarding customer acceptance, the sales price is fixed
and determinable and collectibility is deemed probable. If uncertainties
regarding customer acceptance exist, the Company recognizes revenue when those
uncertainties are resolved. Revenue from support and maintenance contracts
will be recognized ratably over the period of the related agreements. Revenue
from installation and other services will be recognized as the work is
performed. Amounts collected or billed prior to satisfying the above revenue
recognition criteria are recorded as deferred revenue.
Warranty costs are estimated and recorded by the Company at the time of
product revenue recognition.
(b) Cash and Cash Equivalents
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Company has classified its cash equivalents and
investments as held-to-maturity and recorded them at amortized cost, which
approximates market value. The Company considers all highly liquid investments
with original maturities of three months or less at the date of acquisition to
be cash equivalents. Cash and cash equivalents include money markets,
certificates of deposit and commercial paper.
F-7
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(c) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------- March 31,
1998 1999 2000
---- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Finished goods and work in process............. $-- $1,922,876 $3,082,232
Raw materials.................................. -- 1,709,642 3,935,396
---- ---------- ----------
$-- $3,632,518 $7,017,628
==== ========== ==========
</TABLE>
(e) Depreciation and Amortization
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Expenditures for maintenance and repairs are charged to
expense as incurred, whereas major betterments are capitalized as additions to
property and equipment. The Company provides for depreciation and amortization
on the straight-line basis and charges to operations amounts that allocate the
cost of the assets over their estimated useful lives as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
-------------------- -------------
<S> <C>
Equipment under capital lease.. Life of lease
Computer equipment............. 3 years
Leasehold improvements......... 3 years
Furniture and fixtures......... 5 years
</TABLE>
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company's principal credit risk relates to its cash, cash
equivalents and investments. The Company has no significant off-balance sheet
concentrations such as foreign exchange contracts, option contracts, or other
foreign hedging arrangements. Revenues for the first quarter of 2000 were from
a single customer.
Certain key components used in the Company's products are procured from
single or limited source suppliers, and the Company relies on single or
limited contract manufacturers for the assembly of its products. The failure
of a supplier, including a contract manufacturer, to deliver on schedule could
delay or interrupt the Company's delivery of products and thereby adversely
affect the Company's revenues and operating results.
(g) Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, subscriptions receivable, accounts payable and a term loan. The
carrying amounts of these instruments approximate their fair value.
F-8
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(h) Research and Development and Software Development Costs
The costs of the development of hardware products and enhancements to
existing hardware products are expensed as incurred. The Company accounts for
its software development costs in accordance with SFAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed.
Accordingly, the costs for the development of new software that are included
in the hardware products and substantial enhancements to such existing
software are expensed as incurred until technological feasibility has been
established, at which time any additional costs would be capitalized. The
Company determines technological feasibility has been established at the time
at which a working model of the software has been completed. Because the
Company believes its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.
(i) Net Loss per Share and Pro Forma Net Loss per Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earnings per Share, for all periods presented. In accordance with
SFAS No. 128, basic and diluted net loss per common share was determined by
dividing net loss available for common stockholders by the weighted average
common shares outstanding during the period, less shares subject to
repurchase. Basic and diluted net loss per share are the same because all
outstanding common stock options have been excluded, as they are considered
antidilutive. Options to purchase a total of 403,000, 1,682,850, 3,969,935,
2,476,150 and 4,794,037 common shares have been excluded from the computations
of diluted weighted average shares outstanding for the years ended December
31, 1997, 1998 and 1999 and for the three months ended March 31, 1999 and
2000, respectively. Shares of common stock issuable upon the conversion of
outstanding shares of redeemable convertible preferred stock have also been
excluded for all periods presented.
In accordance with the SEC Staff Accounting Bulletin No. 98, Earnings per
Share in an Initial Public Offering, the Company has determined that there
were no nominal issuances of the Company's common stock prior to the Company's
proposed initial public offering.
The Company's historical capital structure is not indicative of its capital
structure after the proposed initial public offering due to the automatic
conversion of all shares of redeemable convertible preferred stock into common
stock concurrent with the closing of the Company's proposed initial public
offering and the elimination of the Company's repurchase right related to
restricted stock (see note 4(d)). Accordingly, pro forma net loss per share is
presented for the year ended December 31, 1999 and the three months ended
March 31, 2000 assuming the conversion of all outstanding shares of redeemable
convertible preferred stock into common stock and the elimination of the
Company's repurchase right related to its restricted stock outstanding upon
the closing of the Company's initial public offering using the if-converted
method from the respective dates of issuance.
F-9
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of unaudited pro forma basic
and diluted net loss per share:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------ ------------
<S> <C> <C>
Weighted average common shares outstanding...... 3,416,534 4,536,051
Add--Weighted average common shares issued upon
the conversion of redeemable convertible
preferred stock................................ 24,526,234 29,881,127
Add--Acceleration of vesting of restricted
stock.......................................... 2,374,974 1,478,309
---------- ----------
Pro forma basic and diluted weighted average
common shares outstanding...................... 30,317,742 35,895,487
========== ==========
</TABLE>
(j) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances involving nonowner sources. The Company does not have any items
of comprehensive income (loss) other than its reported net loss.
(k) Stock-Based Compensation
The Company uses the intrinsic value-based method of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to
account for all of its employee stock-based compensation plans and uses the
fair value method to account for all non-employee stock-based compensation.
(l) Disclosures about Segments of an Enterprise
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information regarding
operating segments and establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified
as components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision maker,
or decision making group, in making decisions regarding resource allocation
and assessing performance. To date, the Company has viewed its operations and
manages its business as principally one operating segment, the
telecommunications equipment industry.
(m) Unaudited Interim Results
The accompanying balance sheet as of March 31, 2000, the statements of
operations and cash flows for the three months ended March 31, 1999 and 2000
and the statement of convertible redeemable preferred stock and stockholders'
equity (deficit) for the three months ended March 31, 2000 are unaudited. In
the opinion of management, these statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of these periods. The data disclosed in the notes to
financial statements for these periods are unaudited.
(n) Unaudited Pro Forma Presentation
The unaudited pro forma balance sheet as of March 31, 2000 reflects the (i)
automatic conversion of all outstanding shares of Series A, Series B, Series
C-1, Series C-2, Series C-3, Series D-1, Series D-2, Series D-3 and Series E
redeemable convertible preferred stock into 29,881,127 shares of common stock
which will occur upon the closing of the Company's proposed initial public
offering, (ii) the sale of 2,969,769 shares of Series F
F-10
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
redeemable convertible preferred stock in April and May 2000 and the automatic
conversion of these shares into 2,969,769 shares of the Company's common stock
upon the closing of the Company's proposed initial public offering, (iii) the
conversion of the warrants to purchase Series B redeemable convertible
preferred stock into warrants to purchase common stock and (iv) the purchase
of a license to certain intellectual property (see Note 11(a)) from a Series F
investor.
(o) New Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued
interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25." The interpretation
clarifies the application of APB Opinion No. 25 in specified events, as
defined. The interpretation is effective July 1, 2000, but covers certain
events occurring during the period after December 15, 1998, but before the
effective date. To the extent that events covered by this interpretation occur
during the period after December 15, 1998, but before the effective date, the
effects of applying this interpretation would be recognized on a prospective
basis from the effective date. Accordingly, upon initial application of the
final interpretation, (a) no adjustments would be made to the financial
statements for periods before the effective date and (b) no expense would be
recognized for any additional compensation cost measured that is attributable
to periods before the effective date. We expect that the adoption of this
interpretation would not have any effect on the accompanying financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition." This bulletin summarizes certain views of the Staff on applying
generally accepted accounting principles to revenue recognition in financial
statements. We believe that our current revenue recognition policy complies
with the guidelines in the bulletin.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The Company currently
does not engage in trading market risk sensitive instruments or purchasing
hedging instruments or "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. The Company may do so in the future as
operations expand domestically and abroad. The Company will evaluate the
impact of foreign currency exchange risk and other derivative instrument risk
on our results of operations when appropriate. The Company will adopt SFAS No.
133 as required by SFAS No. 137, Deferral of the effective date of the FASB
Statement No. 133, in fiscal year 2001. The adoption of SFAS No. 133 is not
expected to have a material impact on our financial condition or results of
operations.
(2) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
---------- ----------
<S> <C> <C>
Capital leases....................................... $6,067,691 $8,292,120
Term loan............................................ 1,250,000 1,066,634
---------- ----------
7,317,691 9,358,754
Less--Current amount................................. 1,796,976 2,968,490
---------- ----------
$5,520,715 $6,390,264
========== ==========
</TABLE>
F-11
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The Company has a master lease agreement with a lender who is also a
preferred stockholder. This agreement provides for up to $12,000,000 of lease
financing on certain types of equipment, as defined. Leases under the
agreement have various terms ranging from 36 to 48 months and accrue interest
at annual effective rates between 8.03% and 9.23%. Equipment leased under this
agreement remains the property of the lender at the end of the term; however,
due to the length of the term, the leases are recorded as capital lease
obligations. As of December 31, 1999, $1,696,510 was still available under
this master lease agreement (see note 11(g)).
The Company also has a term-loan agreement with this lender, which provides
for maximum borrowings of $1,250,000. The loan line was fully utilized to
purchase software. Repayment of advances are due in 30 monthly installments of
principal plus interest of approximately $49,000 per month beginning in July
1999, with a final payment of principal and interest in the amount of $187,500
at the end of the term. The effective annual interest rate under the term loan
is 17%.
Future minimum payments due under these agreements at December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Capital
Term Loan Leases
---------- ----------
<S> <C> <C>
For the years ending,
2000............................................. $ 509,423 $3,646,884
2001............................................. 557,211 3,550,429
2002............................................. -- 1,887,431
2003............................................. -- 222,980
---------- ----------
Total payments................................. $1,066,634 9,307,724
==========
Less--Amounts representing interest.............. 1,015,604
----------
Present value of future minimum lease
payments...................................... $8,292,120
==========
</TABLE>
In connection with these agreements, the lender was granted warrants to
purchase 275,000 shares of Series B Redeemable Convertible Preferred Stock, as
discussed in Note 4(c).
(3) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets or
liabilities are computed based on the difference between the financial
statement and income tax bases of assets and liabilities using currently
enacted tax rates. Deferred income tax expense or credits are based on changes
in the asset or liability from period to period.
No provision for federal or state income taxes has been recorded, as the
Company has incurred net operating losses for all periods presented. As of
December 31, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes and tax credit carryforwards of
approximately $73,180,000 and $2,369,000, respectively. The net operating loss
carryforwards expire through 2019 and are subject to review and possible
adjustment by the Internal Revenue Service. The Tax Reform Act of 1986
contains provisions that may limit the net operating loss carryforwards
available to be used in any given year in the event of significant changes in
ownership interest, as defined.
F-12
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The approximate income tax effects of each type of temporary differences and
carryforwards are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards............... $ 13,700,000 $ 29,270,000
Research credit carryforwards.................. 1,095,000 2,369,000
------------ ------------
Gross deferred tax assets.................... 14,795,000 31,639,000
Valuation allowance............................ (14,795,000) (31,639,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax
assets, the Company has provided a full valuation allowance against these
amounts at December 31, 1998 and 1999.
(4) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Capitalization
As of December 31, 1999, the Company has authorized capital stock, which
consists of 50,000,000 shares of common stock, $0.0001 par value per share and
30,156,127 shares of preferred stock, $0.01 par value per share. The Company
has 6,053,698 shares of common stock outstanding, of which 5,627,959 are
subject to stock grant agreements (see Note 4(d)) as of December 31, 1999. All
shares of common stock are subject to transfer restrictions.
In May 1997, the Company's Board of Directors approved a seven-for-four
stock split of the Company's outstanding common stock, effected in the form of
a 100% dividend of common stock. In accordance with the Series A redeemable
convertible preferred stock agreement, the number of outstanding shares of
Series A redeemable convertible preferred stock was adjusted consistent with
the common stock split. This stock split and the Series A redeemable
convertible preferred stock adjustment have been retroactively reflected in
the accompanying financial statements and notes for all periods presented.
(b) Redeemable Convertible Preferred Stock
The designation of the series of redeemable convertible preferred stock
outstanding at December 31, 1999 and March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Redemption/
Shares Shares Price Per Liquidation
Designated Outstanding Share Value
---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Series A..................... 1,750,000 1,750,000 $0.29 $ 500,000
Series B..................... 10,792,000 10,517,000 1.00 10,517,000
Series C-1................... 3,450,000 3,450,000 4.30 14,835,000
Series C-2................... 1,050,000 1,050,000 6.00 6,300,000
Series C-3................... 500,000 500,000 8.00 4,000,000
Series D-1................... 3,745,665 3,745,665 4.30 16,106,360
Series D-2................... 1,139,985 1,139,985 6.00 6,839,910
Series D-3................... 542,850 542,850 8.00 4,342,800
Series E..................... 7,185,627 7,185,627 8.35 59,999,985
---------- ---------- ------------
Total...................... 30,156,127 29,881,127 $123,441,055
========== ========== ============
</TABLE>
F-13
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The Series A, Series B, Series C-1, Series C-2, Series C-3, Series D-1,
Series D-2, Series D-3 and Series E are collectively referred to as the
Preferred Stock.
The rights, preferences and privileges of the Preferred Stock are as
follows:
Dividends
The holders of shares of the Series A, Series B, Series C-1, Series C-2,
Series C-3, Series D-1, Series D-2, Series D-3 and Series E are entitled to
receive dividends of $0.02, $0.08, $0.344, $0.48, $0.64, $0.344, $0.48, $0.64
and $0.668, respectively, per share per annum (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or
other similar recapitalization affecting such shares), payable when and as
declared by the Board of Directors of the Company. The right to receive
dividends shall be noncumulative and the Company shall not declare or pay any
distributions on shares of common stock until the Preferred Stockholders have
received a distribution at the rate specified above. As of December 31, 1999
and March 31, 2000 no dividends have been declared or paid.
Liquidation Preference
In certain events, including liquidation, dissolution or winding up of the
Company and a consolidation or merger, the holders of Series A, Series B,
Series C-1, Series C-2, Series C-3, Series D-1, Series D-2, Series D-3 and
Series E have a preference in liquidation over the common stockholders of
$0.29, $1.00, $4.30, $6.00, $8.00, $4.30, $6.00, $8.00 and $8.35 per share,
respectively (subject to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar recapitalization affecting
such shares), plus any dividends declared but unpaid thereon. If the assets of
the Company are not sufficient to fulfill the liquidation amount, the
shareholders will share in the distribution of the assets on a pro rata basis
based on the liquidation amount. In addition, the Preferred Stockholders will
participate in the distribution of any assets in excess of their liquidation
amount on as-if-converted basis.
Voting Rights
Each holder of outstanding shares of Preferred Stock shall be entitled to
the number of votes equal to the number of whole shares of common stock into
which they are then convertible. In addition, the Company is required, under
certain circumstances, to obtain a vote of at least 66.7% of the Preferred
Stockholders to authorize certain actions.
Conversion
Each share of Preferred Stock is convertible at any time at the option of
the holder into one share of common stock, adjustable for dilutive events, as
defined. In addition, the Preferred Stock automatically converts into common
stock upon the closing of a public offering of the Company's common stock at a
price of at least $11.00 per share, which will result in gross proceeds of at
least $25,000,000.
In addition, Series B, Series C-1, Series C-2, Series C-3, Series D-1,
Series D-2, Series D-3 and Series E automatically convert into common stock in
the event that the Company has a dilutive issuance of common stock, as
defined, in which they do not purchase their pro rata share of such issuance,
as defined.
Mandatory Redemption
The Preferred Stock is subject to mandatory redemption provisions that
require the Company to redeem 33 1/3%, on the fifth anniversary of the
original issuance date, 50% on the sixth anniversary and 100% on the seventh
anniversary. The original issuance dates for the Series A, Series C-1, Series
C-2, Series C-3, Series D-2 and Series D-3 were November 22, 1996, January 28,
1998, June 18, 1998, June 3, 1999, June 18, 1998 and
F-14
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
March 31, 1999, respectively. The original issuance dates for the 9,625,000
shares and 892,000 shares of Series B was May 14, 1997 and July 31, 1997,
respectively. The original issuance dates for the 2,724,741 shares and
1,020,924 shares of Series D-1 was March 31, 1998 and June 18, 1998,
respectively. The original issuance date for the 5,237,037 shares and
1,948,590 shares of Series E was September 2, 1999 and October 7, 1999,
respectively. The redemption price shall be $0.29, $1.00, $4.30, $6.00, $8.00,
$4.30, $6.00, $8.00 and $8.35 for Series A, Series B, Series C-1, Series C-2,
Series C-3, Series D-1, Series D-2, Series D-3 and Series E, respectively
(subject to appropriate adjustments in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares),
plus any dividends declared but unpaid thereon.
(c) Series B Redeemable Convertible Preferred Stock Warrants
In connection with the term loan and master lease agreement discussed in
Note 2, the Company issued two warrants to purchase an aggregate of 275,000
shares of Series B to the lender. The warrants, all of which are exercisable
as of December 31, 1999, have an exercise price of $1.00 per share. The
warrants expire through 2006 or three years after an initial public offering,
whichever is earlier. The deemed fair market value of these warrants using the
Black-Scholes option pricing model prescribed by SFAS No. 123 was recorded as
deferred financing costs and is being amortized over the life of the loans as
interest expense.
(d) Restricted Stock Grants
Restricted stock grants may be granted to employees and entitle the
participants to acquire shares of common stock subject to repurchase by the
Company and/or certain other investors. Shares vest over a 48-month period.
Unvested shares may be repurchased by the Company at their original issuance
cost. Vested shares are subject to the right of first refusal by the Company
and certain other investors. The Company's repurchase right does not begin
until the employee ceases to be employed and terminates upon the closing of a
public offering of the Company's common stock at a price of at least $5.00 per
share, which will result in gross proceeds of at least $10,000,000.
A summary of the restricted stock activity since inception is as follows:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Outstanding, December 31, 1996.................................. 1,925,000
Granted....................................................... 3,568,750
---------
Outstanding, December 31, 1997.................................. 5,493,750
Granted....................................................... 334,800
Repurchased................................................... (135,938)
---------
Outstanding, December 31, 1998.................................. 5,692,612
Granted....................................................... 10,000
Repurchased................................................... (74,653)
---------
Outstanding, December 31, 1999.................................. 5,627,959
Repurchased (unaudited)....................................... (161,777)
---------
Outstanding, March 31, 2000 (unaudited)......................... 5,466,182
=========
Vested, December 31, 1999....................................... 3,742,542
=========
Vested, March 31, 2000 (unaudited).............................. 4,093,161
=========
</TABLE>
The difference, if any, between the issuance price of these stock grants and
the deemed fair market value of common stock has been recorded as stock-based
compensation expense or as deferred compensation in the accompanying financial
statements.
F-15
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The Company has provided loans to a former officer and a former employee to
fund their purchase of an aggregate of 164,865 shares of restricted stock and
the exercise of options. The vesting of certain of these stock grants and
options were accelerated in connection with the individuals' termination of
employment. The loans, aggregating $286,031, bear interest at 6% and 6.5% per
year, respectively. Payment is unconditional, is partially secured by the
personal assets of the individuals and the loans mature through January, 2004.
In connection with these transactions, compensation expense of $665,000 was
recorded in the three months ended March 31, 2000.
(e) 1997 Stock Incentive Plan
In June 1997, the Company adopted the 1997 Stock Incentive Plan (the Plan),
which provides for the issuance of up to 10,776,250 shares of common stock
incentives, as amended (see Note 11(c)). The Plan provides for the granting of
incentive stock options (ISOs), nonqualified stock options and stock grants
(see Note 4(d)). These incentives may be offered to the Company's employees,
officers, directors, consultants and advisors, as defined. As of December 31,
1999, 2,796,709 shares are outstanding under the plan as restricted and
unrestricted stock and 3,969,935 shares are outstanding under the plan as
stock options.
Nonqualified options and stock grants may be issued at no less than par
value per share of common stock. ISOs may be granted at no less than fair
market value (FMV) on the date of grant, as determined by the Company's Board
of Directors (no less than 110% of FMV on the date of grant for 10% or greater
stockholders), subject to limitations, as defined. Each option shall be
exercisable at such times and subject to such terms as determined by the Board
of Directors and shall expire within 10 years of issuance.
Option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Range of Average
Number of Exercise Exercise
Shares Prices Price
--------- ---------- --------
<S> <C> <C> <C>
Granted during 1997........................ 403,000 $0.01-0.10 $0.07
--------- -----
Outstanding, December 31, 1997............. 403,000 0.01-0.10 0.07
Granted.................................. 1,420,600 0.10-2.00 0.86
Exercised................................ (9,500) 0.10 0.10
Forfeited................................ (131,250) 0.10-0.50 0.53
--------- -----
Outstanding, December 31, 1998............. 1,682,850 0.01-2.00 0.69
Granted.................................. 2,572,850 2.00-4.00 3.15
Exercised................................ (158,739) 0.10-3.00 0.70
Forfeited................................ (127,026) 0.10-4.00 0.91
--------- -----
Outstanding, December 31, 1999............. 3,969,935 0.01-4.00 2.28
Granted.................................. 1,239,550 4.00 4.00
Exercised................................ (203,967) 0.10-3.00 1.52
Forfeited................................ (211,481) 0.10-4.00 2.43
--------- ---------- -----
Outstanding, March 31, 2000 (unaudited).... 4,794,037 $0.01-4.00 $2.75
========= ========== =====
Exercisable, December 31, 1999............. 580,333 $0.60
========= =====
Exercisable, March 31, 2000 (unaudited).... 755,813 $0.94
========= =====
</TABLE>
F-16
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The following table summarizes information relating to currently outstanding
and exercisable stock options as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Exercisable
---------------------------------------- ---------------------
Weighted
Number of Average
Shares Remaining Weighted Weighted
Outstanding at Contractual Average Average
Exercise December 31, Life Exercise Number of Exercise
Price 1999 (Years) Price Shares Price
-------- -------------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.01 150,000 3.5 $0.01 150,000 $0.01
0.10 182,271 7.8 0.10 84,031 0.10
0.50 326,209 8.3 0.50 113,459 0.50
1.00 805,805 8.7 1.00 206,605 1.00
2.00 792,600 9.1 2.00 16,238 2.00
3.00 394,850 9.4 3.00 -- 3.00
4.00 1,318,200 9.7 4.00 10,000 4.00
--------- ----- ------- -----
3,969,935 $2.28 580,333 $0.60
========= ===== ======= =====
</TABLE>
As of December 31, 1999 and March 31, 2000 (unaudited), the Company may
issue future stock grants or stock options to purchase 3,841,367 and 2,946,554
shares, respectively, under the Plan.
(f) Accounting for Stock-Based Compensation
During the year ended December 31, 1999 and the three months ended March 31,
2000, the Company recorded non-cash deferred compensation charges of
$10,405,923 and $10,542,060, respectively. These amounts represent the
aggregate difference between the deemed fair value of the Company's stock and
the exercise price of stock options granted and the selling price of stock
sold. All stock options granted and stock sold prior to 1999 were at fair
market value, as determined by the board of directors, and, therefore, did not
result in deferred compensation. The deferred compensation will be recognized
as an expense over the vesting period of the stock and stock options. During
the year ended December 31, 1999 and the three months ended March 31, 2000,
the Company recorded $2,977,049 and $2,654,392, respectively, of compensation
expense. The Company expects to recognize compensation expense of $9,286,120,
$5,010,083, $2,607,037, $1,008,853 and $58,841 during the years ended December
31, 2000, 2001, 2002, 2003 and 2004, respectively, based on stock and stock
options issued prior to March 31, 2000.
During 1998, 1999 and the three months ended March 31, 2000, the Company
issued options to consultants totaling 75,000, 60,000 and 14,000,
respectively. Such options generally vest either immediately or over three
years. The Company values these options using the Black-Scholes option pricing
model. The Company recorded stock-based compensation expense of approximately
$60,000, $194,000 and $538,000 for the years ended December 31, 1998 and 1999
and the three months ended March 31, 2000, respectively, related to these
options. In accordance with Emerging Issues Task Force 96-18, the Company will
record the value of these options as stock-based compensation expense over the
period the services are provided.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of stock options or warrants to be included in
the statement of operations or disclosed in the notes to the financial
statements. The Company has determined that it will continue to account for
stock-based compensation for employees under APB Opinion No. 25 and will elect
the disclosure-only alternative under SFAS No. 123 which requires disclosure
of the pro forma effects on earnings as if the fair-value-based method of
accounting under SFAS No. 123 had been adopted, as well as certain other
information.
F-17
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The Company has computed the pro forma disclosures required under SFAS No.
123 for stock and option grants during 1997, 1998 and 1999 using the Black-
Scholes option pricing model prescribed by SFAS No. 123, using the following
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate................. 5.77-6.76% 4.18-5.63% 4.91-6.19%
Expected dividend yield................. -- -- --
Expected lives.......................... 4.5 years 4.5 years 4.5 years
Expected volatility..................... -- -- --
Weighted average fair value of options
granted................................ $0.08 $0.18 $3.91
</TABLE>
If compensation cost had been determined for stock and option grants to
employees based on the provisions of SFAS No. 123, the Company's net loss and
net loss per share for the years ended December 31, 1997, 1998 and 1999 would
have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss--
As reported................... $(5,163,604) $(30,117,572) $(47,789,928)
Pro forma..................... (5,168,451) (30,159,949) (48,237,792)
Basic and diluted net loss per
share--
As reported................... $ (34.71) $ (19.05) $ (13.99)
Pro forma..................... (34.74) (19.08) (14.12)
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock and option grants have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock and
option grants.
(g) Investor Rights Agreement
The Preferred Stockholders and certain common stockholders have entered into
an agreement to provide for (i) their continuing representation on the Board
of Directors (ii) certain arrangements with respect to the registration of
their shares and (iii) certain rights with respect to the sale of any
securities of the Company. In connection with the election of directors, the
parties to the agreement have agreed to elect eight directors, three of which
are to be designated by the investors, one of which will be the chief
executive officer and one of which will be a representative from the
stockholders and the final three are elected by a majority vote of the
designated directors. The agreement also provides that after August 13, 2002
or 180 days after an initial public offering, certain investors may require
the Company to register certain shares. Finally, the agreement generally
provides the Preferred Stockholders the right of first refusal, on a
proportionate basis, to participate in new equity instruments offered for sale
by the Company. Upon the closing of an initial public offering, as defined,
the board representation rights and the rights of first refusal described
above are eliminated.
F-18
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(5) LOAN TO SHAREHOLDER
On November 30, 1999, the Company loaned an employee and shareholder of the
Company $100,000 and executed a secured promissory note. The principal and
interest are due and payable on November 29, 2001. The interest shall be
computed annually, at the Applicable Federal Rate, as defined by the Internal
Revenue Code (5.57% at December 31, 1999). The note is secured by 50,000
shares of the individual's common stock. The entire amount is outstanding and
included in other assets at December 31, 1999.
(6) COMMITMENTS
The Company has operating lease commitments for its facility that expire in
July 2001. The approximate minimum future rent payments under this lease as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Years ending December 31,
2000........................................................... $425,000
2001........................................................... 238,000
--------
Total future minimum lease payments.......................... $663,000
========
</TABLE>
Rent expense included in the accompanying statements of operations was
approximately $113,000, $337,000 and $470,000 for the years ended December 31,
1997, 1998 and 1999, and $117,000 and $126,000 for the three months ended
March 31, 1999 and 2000, respectively. In connection with its lease, the
Company had to provide a letter of credit equal to $188,000. The Company was
required to restrict its use of $188,000 in connection with this letter of
credit.
(7) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan), which provides for eligible
employees to make contributions on a tax-deferred basis. All employees on the
first day of the month following their date of employment, are eligible to
participate in the Plan. Contributions are limited to 15% of their annual
compensation, as defined, subject to certain IRS limitations. The Company may
contribute to the Plan at its discretion. No employer contributions were made
for all periods presented.
(8) TECHNOLOGY ASSISTANCE AND DISTRIBUTION AGREEMENTS
The Company entered into a technology assistance agreement with a preferred
stockholder for assistance with its product development program. The Company
initially agreed to pay the stockholder a total of $5,150,000 for the
assistance. During 1998, the Company expanded the scope of the technology
assistance agreement. Through 1999, the Company expensed as research and
development approximately $9,902,000, all of which had been paid.
The Company also had a distribution agreement with this stockholder. The
distribution agreement established guidelines as to how both companies will
work together once the Company's product is commercialized.
In August 1999, the Company and the Preferred Stockholder entered into a
termination agreement. This agreement provides for the termination of the
technology assistance agreement, the distribution agreement and a technology
license agreement.
F-19
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(9) RELATED PARTY
During 1997, the lender discussed in Note 2 and an executive employed by the
lender purchased Series B redeemable convertible preferred stock from the
Company. The number of shares purchased was 250,000 and 5,000, respectively.
In addition, the principal of an advertising agency hired by the Company
purchased 10,000 shares of Series B redeemable convertible preferred stock.
The purchase price was $1.00 per share, which was the fair market value as
determined by the Board of Directors on the date of the sale.
In July 1997, the Company issued 50,000 shares of Series B redeemable
convertible preferred stock to a recruiting agency as a portion of its
compensation for the placement of a key executive. The fair market value of
the shares has been recorded as an expense in the accompanying statement of
operations.
In May 1999, the Company entered into a supply agreement with a preferred
stockholder, pursuant to which the preferred stockholder agreed to manufacture
and assemble modules for use in the TSR in accordance with the Company's
forecasts and purchase orders issued by the Company. During the initial 18-
month term of the agreement, the Company agreed to purchase a minimum number
of enclosure piece part sets, for an aggregate purchase price of approximately
$80,000. The agreement can renew for a second 18-month term which would
require the Company to purchase a minimum number of enclosure piece part sets.
The agreement allows the Company, for a one-time payment, to license the
design for manufacture by a party of the Company's choice.
(10) ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
-------- ----------
<S> <C> <C>
Payroll and payroll-related........................... $420,528 $ 815,719
Other................................................. 184,298 184,298
-------- ----------
$604,826 $1,000,017
======== ==========
</TABLE>
(11) SUBSEQUENT EVENTS
(a) Sale of Series F Redeemable Convertible Preferred Stock
In April 2000, the Company amended its certificate of incorporation to
authorize 3,333,333 shares of Series F redeemable convertible preferred stock.
Also, in April and May 2000, the Company sold 2,969,769 shares of Series F
redeemable convertible preferred stock for which it received gross proceeds of
approximately $44,500,000.
The Company entered into a series of agreements with a strategic investor
who participated in this financing. Under a stock purchase agreement, the
Company agreed to issue 600,000 shares of Series F redeemable convertible
preferred stock for aggregate proceeds of approximately $9.0 million.
The Company entered into a perpetual non-exclusive license agreement with
the investor for the use of certain ideas, concepts and other intellectual
property. As consideration for the license, the Company paid the strategic
investor $4.0 million. The Company has obtained an independent appraisal of
this intellectual property
F-20
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
to assist in the allocation of the $4.0 million license payment. Based on this
appraisal, the Company will expense the license payment as the purchase of in
process research and development in the quarter ended June 30, 2000. The
investor has also agreed, subject to certain performance milestones, to meet
certain minimum purchase commitments of the Company's product.
(b) Increase in Authorized Capital Stock
In April 2000, the Board of Directors and stockholders authorized an
increase in the authorized shares of the Company's common stock from
50,000,000 to 200,000,000. In May 2000, the Board of Directors authorized,
subject to stockholder approval, an increase in the authorized shares of the
Company's common stock from 200,000,000 to 250,000,000 shares and authorized,
subject to stockholder approval, 5,000,000 shares of $0.01 par value
convertible preferred stock that may be issued by the Board of Directors from
time to time in one or more series. This amendment is to be effective upon the
closing of the Company's IPO.
(c) Amendment to the 1997 Stock Incentive Plan
In April and May, 2000, an additional 5,000,000 shares were authorized under
the Company's 1997 Stock Incentive Plan by the Board of Directors, increasing
the total authorized shares under the Plan to 15,776,250.
(d) 2000 Employee Stock Purchase Plan
In May 2000, the Board of Directors approved, subject to stockholder
approval, the 2000 Employee Stock Purchase Plan. A total of 750,000 shares of
common stock have been reserved for issuance under this plan. The 2000
Employee Stock Purchase Plan contains consecutive, overlapping, twenty-four
month offering periods. Each offering period includes four consecutive six-
month purchase periods. The offering periods generally start on the first
trading day on or after July 1 and January 1 of each year. However, the first
such purchase and offering periods will commence on the first trading day of
the common stock in the Company's IPO and end on the last trading day on or
before December 31, 2000 and June 30, 2002, respectively. Eligible employees,
as defined, may purchase common stock at a price equal to 85% of the lower of
the fair market value of the common stock (i) at the beginning of the offering
period or (ii) at the end of the purchase period, whichever is lower, with the
option price at the beginning of the first offering period equal to 85% of the
initial public offering price. Participation is limited to 1% to 10% of the
employee's eligible compensation, as defined, not to exceed $25,000 per
calendar year or amounts allowed by the Internal Revenue Code. On January 1 of
each year, commencing with January 1, 2001, the aggregate number of shares of
common stock available for purchase under the 2000 Employee Stock Purchase
Plan will automatically increase by the number of shares necessary to cause
the total number of shares then available for purchase to be 750,000 shares.
(e) 2000 Stock Option and Incentive Plan
In May 2000, the Board of Directors approved, subject to stockholder
approval, the 2000 Stock Option and Incentive Plan. The maximum number of
shares with respect to which awards may be granted to any employee under the
2000 Stock Option and Incentive Plan shall not exceed 500,000 shares of common
stock during any calendar year. Any shares not yet issued under our
predecessor 1997 Stock Incentive Plan on or before the date of the Company's
IPO or shares subject to options outstanding on the date of the Company's IPO
which have been forfeited or terminated will be available for issuance under
the 2000 Stock Option and Incentive Plan.
The 2000 Stock Option and Incentive Plan provides for the grant of stock-
based awards to the Company's employees, officers, directors, consultants and
advisors. Under the 2000 Stock Option and Incentive Plan, we may grant options
that are intended to qualify as incentive stock options within the meaning of
Section 422 of
F-21
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
the Internal Revenue Code, options not intended to qualify as incentive stock
options, restricted stock and other stock-based awards. Incentive stock
options may be granted only to employees of the Company.
(f) 2000 Non-Employee Director Stock Option Plan
In May 2000, the Board of Directors approved, subject to stockholder
approval, the 2000 Non-Employee Director Stock Option Plan, or Director Plan.
A total of 400,000 shares of common stock have been authorized for issuance
under the Director Plan. On January 1 of each year, commencing with January 1,
2001, the aggregate number of shares available for grant under the plan will
automatically increase by the number of shares necessary to cause the total
number of shares then available for grant to be 400,000 shares.
The Director Plan is administered by the compensation committee. Under the
Director Plan, each non-employee director who is or becomes a member of the
Board of Directors prior to the Company's IPO is automatically granted on the
date of the IPO an initial option to purchase 40,000 shares of common stock,
which will vest in four equal installments over four years. Each non-employee
director who becomes a member of the Board of Directors after the date of the
IPO will be automatically granted on the date first elected to the Board of
Directors an option to purchase 35,000 shares of common stock, which will vest
in four equal installments over four years. In addition, provided that the
director continues to serve as a member of the Board of Directors, each non-
employee director will be automatically granted on the date of each annual
meeting of stockholders following his or her initial option grant date an
option to purchase 15,000 shares of common stock, 5,000 shares of which will
vest immediately and 10,000 shares of which will vest in four equal
installments over four years. All options granted under the Director Plan will
have an exercise price equal to the fair market value of the common stock on
the date of grant and a term of ten years from the date of grant. Unvested
options terminate when the director ceases to be a director for any reason
other than death or permanent disability. Vested options may be exercised at
any time during the option term. The term of the Director Plan is ten years,
unless sooner terminated by vote of the Board of Directors. No options have
been granted under the Director Plan.
(g) Amendment of Master Lease Agreement
On May 8, 2000, the Company amended its master lease agreement. The
amendment provides for an increase in the lease financing available under the
master lease agreement by $6,000,000. Leases under the amendment will have
various terms ranging from 24 to 42 months and will accrue interest at various
annual rates.
In connection with this amendment, the Company issued a warrant to purchase
up to 57,485 shares at an exercise price of $8.35 per share. The number of
shares available is contingent upon certain events. If the Company completes
an IPO of its stock by November 30, 2000, the warrant is not exercisable and
expires. If the Company completes an IPO of its stock on or after December 1,
2000 and on or before December 31, 2000, the warrant becomes exercisable for
28,743 shares. If the Company completes an IPO of its stock on or after
January 1, 2001, the warrant becomes exercisable for 57,485 shares. The
warrant expires through 2007 or three years after the effective date of the
Company's IPO, whichever is earlier. This warrant will be valued using the
Black-Scholes option pricing model prescribed by SFAS No. 123 and any value
will be recorded as deferred financing costs and amortized over the life of
the loans as interest expense.
F-22
<PAGE>
[AVICI LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses payable in connection with the sale of the common stock
in this offering are as follows:
<TABLE>
<S> <C>
SEC registration fee........................................... $ 30,360
NASD filing fee................................................ 12,000
Nasdaq National Market listing fee............................. 90,000
Printing and engraving expenses................................ 200,000
Legal fees and expenses........................................ 350,000
Accounting fees and expenses................................... 250,000
Blue sky fees and expenses (including legal fees).............. 15,000
Transfer agent and registrar fees and expenses................. 10,000
Miscellaneous.................................................. 292,640
----------
Total...................................................... $1,250,000
==========
</TABLE>
The registrant will bear all of the expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law, the registrant's charter and by-laws
provide for indemnification of the registrant's directors and officers for
liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the registrant, and with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause to believe
were unlawful.
The underwriting agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the registrant against certain liabilities, including liabilities
under the Securities Act.
The registrant intends to apply for a directors' and officers' insurance
policy.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, the
registrant has sold the following securities that were not registered under
the Securities Act:
(a) Issuances of Preferred Stock.
1. On November 22, 1996, the Registrant issued and sold an aggregate of
1,750,000 shares of its Series A preferred stock for an aggregate purchase
price of $500,000 to a group of investors pursuant to a Series A
Convertible Preferred Stock Purchase Agreement.
2. On May 14, 1997 and July 31, 1997, the Registrant issued and sold an
aggregate of 10,517,000 shares of its Series B preferred stock for an
aggregate purchase price of $10,517,000 to a group of investors pursuant to
a Series B Convertible Preferred Stock Purchase Agreement.
3. On January 28, 1998, June 18, 1998 and June 3, 1999, the Registrant
issued and sold 3,450,000 shares of its Series C-1 preferred stock,
1,050,000 shares of its Series C-2 preferred stock and 500,000 shares of
its Series C-3 preferred stock, respectively, for an aggregate purchase
price of $25,135,000 to an investor pursuant to a Series C Convertible
Preferred Stock Purchase Agreement.
4. On March 31, 1998, June 18, 1998 and March 31, 1999, the Registrant
issued and sold an aggregate of 3,745,665 shares of its Series D-1
preferred stock, 1,139,985 shares of its Series D-2 preferred stock and
542,850 shares of its Series D-3 preferred stock for an aggregate purchase
price of $27,289,070 to a group of investors pursuant to a Series D
Convertible Preferred Stock Purchase Agreement.
II-1
<PAGE>
5. On September 2, 1999 and October 7, 1999, the Registrant issued and
sold an aggregate of 7,185,627 shares of its Series E preferred stock for
an aggregate purchase price of $59,999,985 to a group of investors pursuant
to a Series E Convertible Preferred Stock Purchase Agreement.
6. On April 24, 2000 and May 5, 2000, the Registrant issued and sold an
aggregate of 2,969,769 shares of its Series F preferred stock for an
aggregate purchase price of $44,546,535 to a group of investors pursuant to
a Series F Convertible Preferred Stock Purchase Agreement.
(b) Issuances of Common Stock and certain grants and exercises of stock
options.
1. From January 1, 1997 through May 15, 2000, the Registrant granted
stock options to purchase 6,812,650 shares of common stock at exercise
prices ranging from $0.01 to $12.00 per share to employees, consultants and
directors pursuant to its 1997 Stock Incentive Plan.
2. From January 1, 1997 through May 15, 2000, the Registrant issued and
sold to employees, consultants and directors pursuant to exercise of
options granted under its 1997 Stock Incentive Plan approximately 112,416
shares of common stock at an exercise price of $0.10 per share, 99,485
shares of common stock at an exercise price of $0.50 per share, 130,459
shares of common stock at an exercise price of $1.00 per share, 66,999
shares of common stock at an exercise price of $2.00 per share, 55,419
shares of common stock at an exercise price of $3.00 per share and 12,000
shares of common stock at an exercise price of $4.00 per share for cash and
non-cash consideration consisting of promissory notes of approximately
$181,000 in the aggregate.
3. From January 1, 1997 through May 15, 2000, the Registrant sold to
certain employees, consultants and directors approximately 1,173,750 shares
of common stock at $0.001 per share, 1,935,750 shares of common stock at
$0.01 per share, 814,050 shares of common stock at $0.10 per share, 181,000
shares of common stock at $1.00 per share, 46,500 shares of common stock at
$2.00 per share, 10,000 shares of common stock at $3.00 per share and
13,000 shares of common stock at $4.00 per share for cash and non-cash
consideration consisting of promissory notes of approximately $215,000 in
the aggregate and services rendered to the Registrant valued at
approximately $92,000 in the aggregate.
4. In July 2000, we agreed to offer concurrent with our initial public
offering $5,000,000 of common stock to Williams Communications, Inc. in a
private placement.
(c) Issuances of Warrants.
In connection with a term loan and master lease agreement, the Registrant
issued two warrants to purchase an aggregate of 275,000 shares of Series B
preferred stock to the lender. The warrants, all of which are exercisable as
of December 31, 1999, have an exercise price of $1.00 per share. The warrants
expire through 2006 or three years after an initial public offering, whichever
is earlier.
In connection with an amendment to the master lease agreement, the
Registrant issued a warrant to purchase up to 57,485 shares at an exercise
price of $8.35 per share. The number of shares available is contingent upon
certain events. If the Registrant completes an initial public offering of its
common stock by November 30, 2000, the warrant is not exercisable and expires.
If the Registrant completes an initial public offering of its common stock on
or after December 1, 2000 and on or before December 31, 2000, the warrant
becomes exercisable for 28,743 shares. If the Registrant completes an initial
public offering of its common stock on or after January 1, 2001, the warrant
becomes exercisable for 57,485 shares. The warrant expires through 2007 or
three years after the effective date of the Registrant's initial public
offering of the Registrant, whichever is earlier.
No underwriters were involved in the foregoing sales of securities. These
sales were made in reliance upon the exemption provided by Section 4(2) of the
Securities Act for transactions not involving a public offering and/or Rule
701 under the Securities Act.
II- 2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Index
------- -------------
<C> <S>
*1.1 Form of Underwriting Agreement
Certificate of Incorporation, as amended, of the registrant
**3.1 (currently in effect)
3.2 Form of Certificate of Amendment to the Amended and Restated
Certificate of Incorporation to be filed upon the closing of the
offering
**3.3 By-Laws of the registrant (currently in effect)
3.4 Form of Amended and Restated By-Laws to take effect as of the
effective date of the registration statement
*4.1 Specimen certificate representing the common stock
5.1 Opinion of Testa, Hurwitz & Thibeault, LLP
**10.1 1997 Stock Incentive Plan
10.2 2000 Stock Option and Incentive Plan
10.3 2000 Employee Stock Purchase Plan
10.4 2000 Non-Employee Director Stock Option Plan
**10.5 Fifth Amended and Restated Investor Rights Agreement, by and among
the registrant and the Investors and Founders listed therein, dated
as of April 24, 2000, as amended
Omnibus Agreement, dated August 26, 1999, between the registrant
**+10.6 and Nortel Networks Inc.
Lease, dated June 2, 1998, between the registrant and Y-CEE
**10.7 Investment Trust, as amended
**+10.8 EMC Module Supply Agreement, dated May 1999, between the registrant
and Nortel Networks Inc.
**+10.9 Procurement Agreement, dated May 17, 2000, between the registrant
and Williams Communications, Inc.
**10.10 Offer letter, dated December 1, 1998, from the registrant to Brian
McCormack
**10.11 Offer letter, dated January 13, 2000, from the registrant to Paul
F. Brauneis
**10.12 Lease, dated June 8, 2000, between the registrant and Yvon Cormier,
Trustee of Y-C Investment Trust V
23.1 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
**24.1 Power of Attorney (see page II-4)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
</TABLE>
--------
* To be filed by amendment
** Previously filed
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions
are omitted and filed separately with the Securities and Exchange
Commission.
(b) Financial Statements Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, the required information is disclosed in the notes
to the financial statements or the schedules are inapplicable, and therefore
have been omitted.
II-3
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The registrant hereby undertakes (1) to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser; (2) that for purposes of determining
any liability under the Securities Act, the information omitted from the form
of prospectus filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in North
Billerica, Commonwealth of Massachusetts on July 7, 2000.
AVICI SYSTEMS INC.
/s/ Paul F. Brauneis
By: _________________________________
Paul F. Brauneis
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities set forth below on July 7, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* President, Chief Executive Officer and
____________________________ Director (principal executive officer)
Surya R. Panditi
/s/ Paul F. Brauneis Chief Financial Officer
____________________________ (principal financial and accounting
Paul F. Brauneis officer)
* Director
____________________________
Bandel L. Carano
* Director
____________________________
Stephen M. Diamond
* Director
____________________________
Catherine M. Hapka
* Director
____________________________
Richard T. Liebhaber
* Director
____________________________
James Mongiello
* Director
____________________________
James R. Swartz
* Director
____________________________
Henry Zannini
</TABLE>
*By: /s/ Paul F. Brauneis
-------------------------
Paul F. Brauneis
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No.
-------
<C> <S>
*1.1 Form of Underwriting Agreement
**3.1 Certificate of Incorporation, as amended, of the registrant (currently
in effect)
3.2 Form of Certificate of Amendment to the Amended and Restated
Certificate of Incorporation to be filed upon the closing of the
offering
**3.3 By-Laws of the registrant (currently in effect)
3.4 Form of Amended and Restated By-Laws to take effect as of the
effective date of the registration statement
*4.1 Specimen certificate representing the common stock
5.1 Opinion of Testa, Hurwitz & Thibeault, LLP
**10.1 1997 Stock Incentive Plan
10.2 2000 Stock Option and Incentive Plan
10.3 2000 Employee Stock Purchase Plan
10.4 2000 Non-Employee Director Stock Option Plan
**10.5 Fifth Amended and Restated Investor Rights Agreement, by and among the
registrant and the Investors and Founders listed therein, dated as of
April 24, 2000, as amended
**+10.6 Omnibus Agreement, dated August 26, 1999, between the registrant and
Nortel Networks Inc.
**10.7 Lease, dated June 2, 1998, between the registrant and Y-CEE Investment
Trust, as amended
**+10.8 EMC Module Supply Agreement, dated May 1999, between the registrant
and Nortel Networks Inc.
**+10.9 Procurement Agreement, dated May 17, 2000, between the registrant and
Williams Communications, Inc.
**10.10 Offer letter, dated December 1, 1998, from the registrant to Brian
McCormack
**10.11 Offer letter, dated January 13, 2000, from the registrant to Paul F.
Brauneis
**10.12 Lease, dated June 8, 2000, between the registrant and Yvon Cormier,
Trustee of Y-C Investment Trust V
23.1 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
**24.1 Power of Attorney (see page II-4)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
</TABLE>
--------
* To be filed by amendment
** Previously filed
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions
are omitted and filed separately with the Securities and Exchange
Commission.
