<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2000
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission file number 000-30865
AVICI SYSTEMS INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 02-0493372
(State or Other Jurisdiction of Organization) (I.R.S. Employer Identification No.)
</TABLE>
101 Billerica Avenue
North Billerica, Massachusetts 01862
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (978) 964-2000
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes X No
----- -----
The registrant has been subject to such filing requirement since July 27,
2000.
At November 6, 2000, 48,183,367 shares of the registrant's Common Stock,
par value $0.0001 per share, were outstanding.
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AVICI SYSTEMS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
----
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999.................................................. 3
Statements of Operations (unaudited) for the three months
and nine months ended September 30, 2000 and 1999.................. 4
Statements of Cash Flows (unaudited) for the nine months ended
September 30, 2000 and 1999........................................ 5
Notes to Financial Statements (unaudited).......................... 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... *
ITEM 2. Changes in Securities and Use of Proceeds....................... 15
ITEM 3. Defaults Upon Senior Securities................................. *
ITEM 4. Submission of Matters to a Vote of Security Holders............. *
ITEM 5. Other Information............................................... *
ITEM 6. Exhibits and Reports on Form 8-K................................ 15
SIGNATURE.................................................................. 16
*No information provided due to inapplicability of item.
Page 2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVICI SYSTEMS INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999 (1)
--------- --------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 269,379 $ 34,242
Investments 3,510 13,675
Inventories 8,804 3,633
Trade accounts receivable 3,114 599
Prepaid expenses and other current assets 1,973 270
--------- --------
Total current assets 286,780 52,419
Property and equipment, net 14,144 9,084
Other long-term assets 401 336
--------- --------
$ 301,325 $ 61,839
========= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term obligations $ 3,717 $ 2,968
Accounts payable 6,551 5,833
Accrued expenses and other current liabilities 6,827 2,754
--------- --------
Total current liabilities 17,095 11,555
--------- --------
Long-term obligations, less current maturities 4,168 6,391
--------- --------
Commitments
Redeemable convertible preferred stock, $0.01 par value:
Authorized - 33,489,460 shares
Issued and outstanding - 0 shares at September 30,
2000 and 29,881,127 shares at December 31, 1999 -- 123,441
--------- --------
Warrants to purchase Series B redeemable convertible
preferred stock -- 198
--------- --------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value:
Authorized - 5,000,000 shares
Issued and outstanding - none -- --
Common stock, $0.0001 par value -
Authorized - 250,000,000 shares
Issued and outstanding - 48,066,514 shares at
September 30, 2000 and 6,053,698 shares at
December 31, 1999 5 1
Additional paid-in capital 462,424 11,475
Subscriptions receivable (2,642) (215)
Deferred compensation (29,816) (7,429)
Accumulated deficit (149,909) (83,578)
--------- --------
Total stockholders' equity (deficit) 280,062 (79,746)
--------- --------
$ 301,325 $ 61,839
========= ========
</TABLE>
(1) The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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AVICI SYSTEMS INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 4,356 $ -- $ 7,077 $ --
Cost of revenues 3,137 -- 5,439 --
----------- ----------- ----------- -----------
Gross margin 1,219 -- 1,638 --
----------- ----------- ----------- -----------
Operating expenses:
Research and development (1) 14,098 6,921 41,143 22,898
Sales and marketing (1) 3,482 1,602 7,794 3,608
General and administrative (1) 1,424 828 3,159 2,311
Stock-based compensation 6,643 928 13,556 1,970
Common stock warrant expense 2,400 -- 2,400 --
Purchased in-process research and
development -- -- 4,000 --
----------- ----------- ----------- -----------
Total operating expenses 28,047 10,279 72,052 30,787
----------- ----------- ----------- -----------
Loss from operations (26,828) (10,279) (70,414) (30,787)
Interest income, net 3,184 87 4,133 139
----------- ----------- ----------- -----------
Net loss $ (23,644) $ (10,192) $ (66,281) $ (30,648)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted $(.70) $ (2.80) $(4.56) $ (9.54)
=========== =========== =========== ===========
Pro forma basic and diluted $(.53) $ (.34) $(1.67) $ (1.07)
=========== =========== =========== ===========
Weighted average common shares used in computing
net loss per share:
Basic and diluted 33,944,444 3,636,409 14,521,524 3,212,361
=========== =========== =========== ===========
Pro forma basic and diluted 44,709,784 30,148,688 39,621,993 28,544,521
=========== =========== =========== ===========
(1) Excludes noncash, stock-
based compensation, as
follows:
Research and development $ 4,153 $ 742 $ 9,121 $ 1,454
Sales and marketing 1,202 163 2,437 383
General and administrative 1,288 23 1,998 133
----------- ----------- ----------- -----------
$ 6,643 $ 928 $ 13,556 $ 1,970
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
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AVICI SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(66,281) $(30,648)
Adjustments to reconcile net loss to net cash used in operating
activities -
Depreciation and amortization 3,301 2,280
Amortization of deferred financing costs 38 38
Common stock warrant expense 2,400 --
Compensation expense associated with issuance of stock options to 13,556 1,970
employees and consultants
Changes in current assets and liabilities:
Inventories (5,171) (5,287)
Trade accounts receivable (2,515) (1,009)
Prepaid expenses and other current assets (1,703) 15
Restricted cash (103) 40
Accounts payable 718 5,818
Accrued expenses and other current liabilities 4,073 (1,823)
-------- --------
Net cash used in operating activities (51,687) (28,606)
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (7,118) (172)
Purchases of investments (3,519) --
Sales of investments 13,684 --
-------- --------
Net cash provided by (used in) investing activities 3,047 (172)
-------- --------
Cash Flows from Financing Activities:
Proceeds from sale of common stock, net of issuance cost 240,564 --
Proceeds from sale of redeemable convertible preferred stock, net of 44,497 53,105
issuance costs
Proceeds from subscription receivable 144 --
Payments on long-term obligations (2,717) (1,869)
Repurchase of restricted stock (5) --
Proceeds primarily from exercise of stock options 1,294 105
-------- --------
Net cash provided by financing activities 283,777 51,341
-------- --------
Net Increase in Cash and Cash Equivalents 235,137 22,563
Cash and Cash Equivalents, beginning of period 34,242 23,192
-------- --------
Cash and Cash Equivalents, end of period $269,379 $45.755
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 555 $ 527
======== ========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Equipment acquired under capital lease obligations $ 1,250 $ 2,472
======== ========
</TABLE>
See accompanying notes.
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AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein has been prepared by Avici Systems
Inc., pursuant to the rules and regulations of the Securities and Exchange
Commission and includes the accounts of Avici Systems Inc. (the "Company").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company, the unaudited financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position at September 30, 2000, the operating
results for the three and nine month periods ended September 30, 2000 and 1999,
and the cash flows for the nine month periods ended September 30, 2000 and 1999.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's registration statement on Form S-1,
effective July 27, 2000. The balance sheet at December 31, 1999 has been
derived from audited financial statements as of that date.
The results of operations for the three and nine months ended September 30, 2000
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year ending December 31, 2000.
NOTE 2. INITIAL PUBLIC OFFERING AND CONCURRENT PRIVATE PLACEMENT
On July 27, 2000, the Company's amended registration statement for the initial
public offering of 8,050,000 shares of its common stock, including the
underwriters' over-allotment option for 1,050,000 shares became effective. The
initial public offering price to the public was $31.00 per share. The offering
closed on August 2, 2000 and resulted in net proceeds to the Company of
approximately $232.0 million, after deducting underwriting discounts and
commissions and before deducting expenses payable by the Company. As a result
of the initial public offering, 32,850,896 shares of common stock were issued
upon the conversion of all of the Company's redeemable convertible preferred
stock. In connection with its initial public offering, the Company amended its
certificate of incorporation to increase the number of authorized shares of
common stock to 250,000,000 and to provide for a total of 5,000,000 shares of
undesignated preferred stock. Additionally, on August 2, 2000, the Company
completed a private placement for the issuance of 322,582 shares of its common
stock concurrently with the close of its initial public offering at the initial
public offering price of $31.00 per share, which resulted in proceeds to the
Company of approximately $10.0 million.
The Company's historical capital structure is not indicative of its capital
structure after the 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 initial public offering and the
elimination of the Company's repurchase right related to restricted stock.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(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.
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(b) Cash and Cash Equivalents and Investments
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 and investments include money markets,
certificates of deposit and commercial paper.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
September 30, December 31,
2000 1999
------ ------
(unaudited)
(in thousands)
Finished goods and work in progress $1,510 $1,923
Raw materials 7,294 1,710
------ ------
$8,804 $3,633
====== ======
(d) 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. Shares of
common stock issuable upon the conversion of outstanding shares of redeemable
convertible preferred stock have also been excluded for all periods prior to
August 2, 2000, the date of the closing of the Company's initial public
offering.
Pro forma basic and diluted net loss per share is presented for the three and
nine month periods ended September 30, 2000 and 1999 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.
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 initial
public offering.
NOTE 4. SALE OF SERIES F 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 $44.5 million.
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 to assist in the allocation of the $4.0 million license payment. Based
on this appraisal, the Company expensed 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.
Page 7
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NOTE 5. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
The Company's in-process research and development ("IPR&D") relates to the
license agreement discussed in Note 4 which is comprised of a single research
and development project focusing on certain aspects of optical switching
technology. At the date of purchase, the project was estimated to be 13%
complete and continuing research and development commitments to complete the
project were expected to approximate $1.5 million. As of September 30, 2000,
the project was estimated to be 19% complete and remaining research and
development commitments were estimated to approximate $1.4 million.
The $4.0 million value assigned to the purchased IPR&D was determined by
estimating the costs to develop the purchased technology into a commercially
viable optical application, estimating the resulting cash flows from the
application and discounting the net cash flows to their present value. At the
date of acquisition, this project had not yet reached technological feasibility
and the IPR&D had no alternative future uses. Revenue projections used to value
the IPR&D project are based on estimates of relevant market size and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.
The rate used to discount the net cash flows to their present value was 35%
based on cost of capital considerations adjusted for certain risks associated
with the in-process technology.
NOTE 6. ISSUANCE OF COMMON STOCK WARRANT
Upon the closing of the Company's initial public offering on August 2, 2000, the
Company issued a warrant to AT&T Corporation ("AT&T") to purchase 100,000 shares
of the Company's common stock at a per share exercise price equal to the
Company's initial public offering price of $31.00 per share. The warrant is
nonforfeitable, becomes fully exercisable in one year and has a term of five
years. AT&T has not committed to exercise the warrant and is not obligated to
purchase any product or service from the Company as a condition to exercising
the warrant. Accordingly, the fair value of the warrant, which is estimated at
$2.4 million, has been expensed in the quarter ending September 30, 2000.
NOTE 7. SUBSCRIPTION NOTE RECEIVABLE
During the quarter ended September 30, 2000, the Company granted an officer of
the Company the right to purchase 100,000 shares of restricted stock and, in
connection with the purchase, loaned the individual $2.5 million. The loan is
non-interest bearing with limited recourse to the individual and is secured by
the restricted securities. The loan has a maturity of ten years and is to be
repaid from the proceeds of the sale of the related restricted securities, if
such sale precedes the maturity date. The full amount of the loan is
outstanding at September 30, 2000 and has been recorded as a subscription
receivable.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, certain matters
discussed in this Report on Form 10-Q constitute forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those stated or implied in forward-looking statements due to a
number of factors, including without limitation those discussed under the
caption "Factors Affecting Future Operating Results" included herein and under
the caption "Risk Factors" in the Company's Registration Statement on Form S-1
(No. 333-37316) filed by the Company in connection with its initial public
offering of Common Stock which became effective July 27, 2000. Forward-looking
statements include statements regarding the future or the Company's
expectations, beliefs, intentions or strategies regarding the future and may be
identified by the words "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "should," "will," and "would" and similar expressions. There
may be events in the future that could affect these matters.
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 September 30,
2000, we had an accumulated deficit of $149.9 million. Our operating activities
to date have been primarily devoted to research and development, including the
design and development of our proprietary application specific integrated
circuits and software, and system testing the Avici Terabit Switch Router (TSR).
During this period, we have also built our administrative, marketing, sales and
customer support 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 selling
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 in Asia and a direct sales force in
Europe. We currently provide product installation and customer field support
through our internal customer service organization and a third-party support
organization.
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.
We expect that in the foreseeable future, substantially all of our revenues will
continue to depend on sales of our TSR to current 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 the completion of field trials. Additionally, Qwest Communications
has agreed to an undisclosed minimum purchase and will be conducting a field
trial over the next several months. The TSR recently completed field trials at
AT&T. To date, there has been no commitment to purchase equipment for
deployment and accordingly, there can be no assurance that the completion of
these trials will result in future orders.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net Revenues. The Company recorded its initial revenue in the quarter ended
March 31, 2000. Net revenues were $4.4 million for the three months ended
September 30, 2000 which included of $2.3 million recognized upon the completion
of field trials with AT&T.
Cost of Revenues. Cost of revenues was $3.1 million for the three months ended
September 30, 2000. Cost of revenues includes the cost of manufacturing
overhead. Cost of revenues as a percentage of net revenues for the three months
ended September 30, 2000 was approximately 72% reflecting the high cost of
setting up production along with the lower margin mix between bays and modules.
We anticipate cost of revenues as a percentage of net revenues to decrease as
the future mix of product configurations change.
Research and Development. Research and development expenses increased by $7.2
million from $6.9 million for the three months ended September 30, 1999 to $14.1
million for the three months ended September 30, 2000. This increase was due
mainly to an increase in salary and salary-related expenses of $3.5 million
resulting from increased staffing, an increase in engineering materials and
prototype test equipment of $2.0 million as well as an increase in costs related
to facilities and other expenses of $1.8 million.
Sales and Marketing. Sales and marketing expenses increased by $1.9 million
from $1.6 million for the three months ended September 30, 1999 to $3.5 million
for the three months ended September 30, 2000. This increase was primarily due
to an increase in salary and salary-related expenses of $1.5 million resulting
from increased staffing, as well as increases in travel expense of $230,000 and
marketing publications and advertising expenses of $180,000.
General and Administrative. General and administrative expenses increased by
$600,000 from $828,000 for the three months ended September 30, 1999 to $1.4
million for the three months ended September 30, 2000. The increase was
primarily due to an increase in salary and salary-related costs associated with
increased staffing, information systems expenses and other costs necessary to
support the growing scale of operations.
Stock-Based Compensation. Stock-based compensation increased by $5.7 million
from $928,000 for the three months ended September 30, 1999 to $6.6 million for
the three months ended September 30, 2000. This increase was due primarily to
shares of restricted stock and stock options granted to new hires prior to the
Company's initial public offering at prices subsequently deemed to be lower than
fair market value at the time of grant.
Common Stock Warrant Expense. Common stock warrant expense was $2.4 million for
the three months ended September 30, 2000. The Company had no common stock
warrant expense for the comparable period of 1999.
Interest Income, Net. Interest income, net of interest expense, increased by
$3.1 million from $87,000 for the three months ended September 30, 1999 to $3.2
million for the three months ended September 30, 2000 due primarily to the
increase in invested cash balances from the proceeds of the Company's preferred
stock private financing, initial public offering and concurrent private
placement.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Net Revenues. Net revenues were $7.1 million for the nine months ended
September 30, 2000. The Company had no revenue in the comparable period of
1999.
Cost of Revenues. Cost of revenues was $5.4 million for the nine months ended
September 30, 2000. Cost of revenues includes the cost of manufacturing
overhead. Cost of revenues as a percentage of net revenues was approximately
77% for the nine months ended September 30, 2000 reflecting the high cost of
setting up production along with the lower margin mix between bays and modules.
We anticipate cost of revenues as a percentage of net revenues to decrease as
the future mix of product configurations change.
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Research and Development. Research and development expenses increased by $18.2
million from $22.9 million for the nine months ended September 30, 1999 to $41.1
million for the nine months ended September 30, 2000. This increase was due
mainly to an increase in engineering materials and prototype test equipment of
$10.1 million, an increase in salary and salary-related expenses resulting from
increased staffing of $6.8 million, as well as an increase in costs related to
facilities and other expenses of $3.0 million, offset by a $1.6 million decrease
in cost associated with a research and development contract which was completed
in March 1999.
Sales and Marketing. Sales and marketing expenses increased by $4.2 million
from $3.6 million for the nine months ended September 30, 1999 to $7.8 million
for the nine months ended September 30, 2000. This increase was primarily due
to an increase in salary and salary-related expenses of $3.2 million, resulting
from increased staffing as well as increases in marketing publications and
advertising expenses of $475,000 and an increase in travel costs of $413,000.
General and Administrative. General and administrative expenses increased by
$848,000 from $2.3 million for the nine months ended September 30, 1999 to $3.2
million for the nine months ended September 30, 2000. The increase was mainly
due to an increase in salary and salary-related costs resulting from increased
staffing plus increases in information systems expenses and other costs
necessary to support the growing scale of operations.
Stock-Based Compensation. Stock-based compensation increased by $11.6 million
from $2.0 million for the nine months ended September 30, 1999 to $13.6 million
for the nine months ended September 30, 2000. This increase was due primarily
to shares of restricted stock and stock options granted to new hires prior to
the Company's initial public offering at prices subsequently deemed to be lower
than fair market value at time of grant.
Common Stock Warrant Expense. Common stock warrant expense was $2.4 million for
the nine months ended September 30, 2000. The Company had no common stock
warrant expense for the comparable period of 1999.
Purchased In-Process Research and Development. The Company's in-process
research and development ("IPR&D") is comprised of a single research and
development project which is focused on certain aspects of optical switching
technology. At the date of purchase, the project was estimated to be 13%
complete and continuing research and development commitments to complete the
project were expected to approximate $1.5 million. As of September 30, 2000 the
project was estimated to be 19% complete and remaining research and development
commitments were estimated to approximate $1.4 million.
The $4.0 million value assigned to the purchased IPR&D was determined by
estimating the costs to develop the purchased technology into a commercially
viable optical application, estimating the resulting cash flows from the
application and discounting the net cash flows to their present value. At the
date of acquisition, this project had not yet reached technological feasibility
and the IPR&D had no alternative future uses. Revenue projections used to value
the IPR&D project are based on estimates of relevant market size and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.
The rate used to discount the net cash flows to their present value was 35%
based on cost of capital considerations adjusted for certain risks associated
with the in-process technology.
Interest Income, Net. Interest income, net of interest expense, increased by
$4.0 million from $139,000 for the nine months ended September 30, 1999 to $4.1
million for the nine months ended September 30, 2000 primarily as a result of an
increase in invested cash balances from the proceeds of the Company's preferred
stock private financing, initial public offering and concurrent private
placement.
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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 September 30, 2000, we raised approximately $410.0 million in
a series of preferred stock financings, our initial public offering and
concurrent private placements of common stock. During the nine months ended
September 30, 2000, we used $51.7 million in cash for operating activities,
compared to $28.6 million used in the nine months ended September 30, 1999. 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 to continue to invest heavily in research and
development 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.
As of September 30, 2000, our primary sources of liquidity were $269.4 million
in cash and cash equivalents and $3.5 million in investments. On July 27, 2000
the Company's amended registration statement for the initial public offering of
8,050,000 shares of its common stock, including the underwriters' overallotment
option for 1,050,000 shares, became effective. The initial public offering
price to the public of the common stock was $31.00 per share. The offering
closed on August 2, 2000 and resulted in net proceeds to the Company of
approximately $232.0 million, after deducting underwriting discounts and
commissions and before deducting expense payable by the Company. Additionally,
on August 2, 2000 the Company completed a private placement for the issuance of
322,582 shares of its common stock concurrently with the close of its initial
public offering at the initial public offering price of $31.00 per share, which
resulted in proceeds to the Company of approximately $10.0 million. In April
and May, 2000, we generated $44.5 million in a preferred stock financing.
Our purchases of property and equipment were $8.4 million for the nine months
ended September 30, 2000 and $2.6 million for the nine months ended September
30, 1999, 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 $1.3 million for the nine
months ended September 30, 2000 and $2.5 million for the nine months ended
September 30, 1999. As of September 30, 2000, our future minimum lease payment
obligations were $7.9 million under capital leases which require payments of
approximately $946,000 for the three months October through December of 2000,
and annual payments of $4.0 million in 2001, $2.3 million in 2002, $625,000 in
2003 and $29,000 in 2004. In addition, our future minimum lease payment
obligations under operating leases is $8.2 million which require payments of
approximately $353,000 in the three months October through December 2000 and
$1.4 million in 2001, $1.2 million in 2002, 2003 and 2004, $1.1 million in 2005,
$973,000 in 2006 and $811,000 in 2007. We expect capital expenditures to
increase as we further expand our operations, enhance our information systems
and as our employee base continues to grow. The timing and amount of future
capital expenditures will depend primarily on our future growth. For the three
months October through December 2000, we expect to spend approximately $12.0
million for leasehold improvements, computer and test equipment, including
application software, workstations and servers. We anticipate that a portion of
this equipment will be financed by capital leases.
At September 30, 2000, we have a master lease agreement with a leasing company
that is also a stockholder. This agreement originally 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 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%.
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.
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We believe that cash derived from the net proceeds from our initial public
offering, concurrent private placements and preferred stock financings, together
with existing cash balances and available capital lease financing 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.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include management's plans and
objectives for future operations, as well as statements regarding the strategy
and plans of the Company. The Company's actual experience may differ materially
from that discussed in the forward-looking statements. Factors that might cause
such a difference include the limited number of customers; continuing acceptance
of the Company's products and product enhancements; customer purchasing patterns
and commitments; the size, timing and recognition of revenue from customers; the
Company's ability to develop new products and product enhancements; market
acceptance of new product offerings and enhancements to our product and the
Company's ability to predict and respond to market developments; the failure to
keep pace with the rapidly changing requirements of our customers; the Company's
ability to attract and retain key personnel; the development and expansion of
the Company's direct sales force; risks associated with management of growth;
the Company's ability to obtain component parts; the Company being held liable
for defects or errors in our products; as well as risks of downturns in economic
conditions generally, and in the telecommunications industry specifically, and
risks associated with competition and competitive pricing pressures. For a more
detailed description of the risk factors associated with the Company, please
refer to the Company's Registration Statement on Form S-1 on file with the
Securities and Exchange Commission.
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 became effective July 1, 2000,
but covers certain events occurring during the period after December 15, 1998,
but before the effective date. There were no events covered by this
interpretation which occurred during the period after December 15, 1998, but
before the effective date. Accordingly, upon initial application of the final
interpretation, (a) no adjustments have been made to the financial statements
for periods before the effective date and (b) no expense has been recognized
for any additional compensation cost measured that is attributable to periods
before the effective date. We believe that the adoption of this interpretation
did 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" and on October 12, 2000 provided further
written guidance on implementing Staff Accounting Bulletin No. 101. This
bulletin and related subsequent guidance 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 and the additional written
guidelines.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, our investments in securities subject to equity market
risks and other income producing assets subject to interest rate risks were not
material in amount. We do not hold such assets for trading purposes. In
addition, we do not engage in currency hedging activities and hold no foreign
currency related derivative instruments that would subject our financial
condition or results of operations to risks associated with foreign currency
exchange rate fluctuations.
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PART II. OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds
RECENT SALES OF UNREGISTERED STOCK
During the quarterly period ended September 30, 2000, the Company granted stock
options to purchase 2,227,200 shares of common stock at exercise prices ranging
from $12.00 to $133.00 per share to employees, consultants and directors
pursuant to its 1997 Stock Incentive Plan, as amended, 2000 Stock Option and
Incentive Plan and 2000 Non-Employee Director Stock Option Plan.
During the quarterly period ended September 30, 2000, the Company issued and
sold an aggregate of 471,879 shares of its common stock to employees,
consultants and directors for aggregate consideration of $3.3 million pursuant
to exercises of options granted pursuant to its stock plans.
On August 2, 2000, the Company issued and sold 322,582 shares of its common
stock at an aggregate price of approximately $10.0 million to Williams
Communications and Enron Broadband Services.
On August 2, 2000, the Company issued a warrant to AT&T Corporation to purchase
100,000 shares of the Company's common stock at an exercise price of $31.00 per
share. The warrant is non-forfeitable, becomes fully exercisable in one year
and has a term of five years.
All such issuances of securities of the Company during the quarter ending
September 30, 2000 were made in reliance on Section 4(2), Rule 701 and/or
Regulation D under the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit No. Exhibit Description
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-laws of the Company
10.1 Offer letter, dated July 27, 2000, between the Company and
Steven B. Kaufman
10.2 Lease, dated August 2, 2000, between the Company and Y-CEE
Investment Trust
27.1 Financial Data Schedule (EDGAR filing only)
* Filed with the Company's Registration Statement on Form S-1 (File No. 333-
37316) filed with the Securities and Exchange Commission by the Company in
connection with its initial public offering which became effective July 27,
2000.
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the quarter
ended September 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVICI SYSTEMS INC.
Date November 13, 2000 By:/s/Paul F. Brauneis
--------------------------- ------------------------------------
Paul F. Brauneis
Chief Financial Officer, Vice
President of Finance and
Administration and Principal
Accounting Officer
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Exhibit index
Exhibit No. Exhibit Description
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-laws of the Company
10.1 Offer letter, dated July 27, 2000, between the Company and
Steven B. Kaufman
10.2 Lease, dated August 2, 2000, between the Company and Y-CEE
Investment Trust
27.1 Financial Data Schedule (EDGAR filing only)
* Filed with the Company's Registration Statement on Form S-1 (File No. 333-
37316) filed with the Securities and Exchange Commission by the Company in
connection with its initial public offering which became effective July 27,
2000.
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