<PAGE>
As filed with the Securities and Exchange Commission on May 18, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 Code
organization) 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. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Amount of
Title of Each Class of Proposed Maximum Registration
Securities to be Registered Aggregate Offering Price(1) Fee
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<S> <C> <C>
Common Stock, $.0001 par value......... $115,000,000 $30,360
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
----------------
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 , 2000
Shares
[LOGO OF AVICI]
COMMON STOCK
-----------
Avici Systems Inc. is offering 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 $ and
$ 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
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 following text is at the top of the page and spans the inside cover:
"The AVICI 40-slot Terabit Switch Router"
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 intelligently transmit high volumes of
information across their fiber optic networks. Our high-performance solution is
a critical building block for 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 of new revenue-generating services.
The Avici Terabit Switch Router, known as the TSR, is designed to address the
critical needs of carriers by providing:
. intelligent management of high volumes of network traffic at high
speeds;
. scalability without disruption, or the ability to incrementally add
capacity to the network without disrupting network performance;
. carrier-class reliability;
. quality of service functionality that facilitates the provisioning of
new revenue-generating services, such as video streaming and Voice-
over-Internet Protocol, or VoIP;
. interoperability with multiple protocols and existing carrier
equipment; and
. reduced network cost and complexity.
Our TSR provides these benefits through our proprietary technologies, including
our application specific integrated circuits, or ASICs, distributed system
architecture and Composite Links.
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."]
4
<PAGE>
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
cannot economically address carrier scalability requirements, much less the
enhanced functionality demanded by carriers. The Avici TSR has been designed to
scale as demands on the optical layer evolve and increase, thereby avoiding
expensive interim solutions, such as clustering designs and forklift upgrades,
and minimizing network disruption.
We sell and market our products primarily through our direct sales force,
systems integrators and distributors. Our sales cycle typically comprises
consultation with our sales force and successful completion of laboratory tests
and field trials. The TSR is currently deployed in a segment of The National
Transparent Optical Network, an Internet initiative known as SuperNet. In
addition, Enron Broadband Services and Williams Communications have agreed to
future minimum purchases of the TSR 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. We
have also shipped the TSR to a limited number of other customers and
prospective customers.
We intend to continue to develop and provide the next generation of data
networking equipment that will power the core of carriers' optical networks
while establishing new standards for performance by:
. extending our technological leadership position;
. continuing to penetrate key carrier accounts;
. providing key technology 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. Avici and TSR are our registered trademarks and
Composite Links, IPriori, Velociti and the Avici logo are our trademarks. This
prospectus also contains trade names of other companies.
The Offering
<TABLE>
<C> <S>
Common stock offered............................ shares
Common stock to be outstanding after this shares
offering.......................................
Use of proceeds................................. We intend to use the net
proceeds from this offering
for general corporate
purposes, including working
capital and capital
expenditures. 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 $3.29 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 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 47,638 9,950 16,785
Loss from operations.... (5,351) (31,057) (47,638) (9,950) (16,710)
Net loss................ (5,164) (30,118) (46,794) (9,885) (16,433)
Basic and diluted net
loss per share......... $(34.71) $ (19.05) $ (13.70) $ (3.55) $ (3.62)
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)...... (1.54) (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
our outstanding redeemable convertible preferred stock and preferred stock
warrants into common stock and 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 shares of common stock in this offering at
an assumed initial public offering price of $ 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 $
Working capital.................................. 26,488 66,985
Total assets..................................... 49,107 93,603
Long-term obligations, less current portion...... 5,246 5,246
Redeemable convertible preferred stock........... 123,441 --
Total stockholders' equity (deficit)............. (93,109) 75,027
</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;
. 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; and
. 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."
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 And Our Revenues Will Not Grow If We Do Not
Successfully Sell Products To These Customers.
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. Generally, these customers are not contractually
committed to purchase any minimum quantities of products from us, and the
commitments we have obtained to date 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 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.
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 $99.0 million.
We began recognizing revenues during the recent quarter ended March 31, 2000.
We cannot be certain 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
7
<PAGE>
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. Our ASICs generally require a
lead-time of eighteen 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 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 that our products 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 do not expect that they will
manufacture significant volume until after May 2000. We
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<PAGE>
may not be able to effectively manage our relationship with these contract
manufacturers and they may not meet our future 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 18 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. The primary factors that may affect
us include the following:
. fluctuations in the demand for intelligent high-speed routers, including
our TSR;
. the length and variability of the sales cycle for our products;
. the timing and size of customer orders for our products;
. the timing of product acceptance by customers;
. our ability to obtain sufficient supplies of sole or limited source
components;
. increases in the prices of the components we purchase;
. new product introductions and enhancements by us and our competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. our ability to attain and maintain production volumes and quality
levels for our TSR;
. the timing and level of research and development and prototype
expenses;
. the distribution channels through which we sell our products;
. costs related to acquisitions of technologies or businesses; 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
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<PAGE>
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.
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 intelligent 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, nor may we 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 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.
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 of 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.
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
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<PAGE>
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.
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
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<PAGE>
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;
. 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. These risks include, among others, the
following:
. significant costs and difficulties in assimilating the operations of
the acquired businesses;
. potential disruption of our existing operations;
. an inability to integrate, train and retain key personnel;
. diversion of management attention and employees from day-to-day
operations;
. an inability to incorporate, develop or market acquired technologies or
products;
. unexpected liabilities of the acquired business without sufficient
indemnification;
. operating inefficiencies associated with managing companies in
different locations; and
. impairment of relationships with employees, customers, suppliers and
strategic partners.
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.
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<PAGE>
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.
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.
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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 % 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, including:
. actual or anticipated fluctuations in our quarterly results of
operations;
. our loss of a major customer or the failure to complete a significant
transaction;
. changes in financial estimates by securities analysts;
. announcements by us or our competitors of significant contracts, new
products, significant acquisitions or strategic partnerships or joint
ventures;
. additions or departures of key personnel;
. future sales of our common stock, particularly by our directors and
officers;
. changes in market valuations of data networking companies;
. any deviations in net revenues or in losses from levels expected by
securities analysts; and
. commencement of, or involvement in, litigation.
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.
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 will 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
16
<PAGE>
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.
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 $
per share in their investment, assuming an initial public offering price of
$ 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.
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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."
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of our
common stock in this offering will be approximately $ million, assuming an
initial public offering price of $ 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 $ million.
The principal purposes of this offering are to establish a public market for
our common stock, to increase our visibility in the marketplace, to facilitate
future access to public capital markets, to obtain additional working capital
and to provide liquidity to existing stockholders.
We expect to use the net proceeds to fund operating losses and for general
corporate purposes, including working capital and capital expenditures. 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 of our outstanding shares of
redeemable convertible preferred stock and preferred stock warrants into
common stock and 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 shares of common stock offered by us in this offering at an assumed
initial public offering price of $ 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 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;
shares issued and outstanding, pro forma
as adjusted................................. 1 4
Additional paid-in capital................... 20,263 188,248
Common stock warrants........................ -- 198
Subscriptions receivable..................... (286) (286)
Deferred compensation........................ (14,072) (14,072)
Accumulated deficit.......................... (99,015) (99,065)
-------- -------- ------
Total stockholders' equity (deficit)....... (93,109) 75,027
-------- -------- ------
Total capitalization..................... $ 35,776 $ 80,273 $
======== ======== ======
</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 of our outstanding shares of redeemable
convertible preferred stock and preferred stock warrants into common stock and
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 shares of common stock in this offering at an
assumed initial public offering price of $ 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 $ million, or $ per share of common stock. This
represents an immediate increase in pro forma net tangible book value to
existing stockholders of $ per share of common stock and an immediate
dilution to new investors of $ 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..................... $
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....................................
-----
Pro forma net tangible book value per share after this offering.....
----
Dilution per share to new investors................................. $
====
</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 $ 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 % $168,775,329 % $4.33
New investors.................
---------- ----- ------------ -----
Total....................... 100.0% $ 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 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 $ and total dilution to new investors
would be $ 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 shares, or % 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 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 2,175 297 2,945
----- ------- --------- ---------- --------- ----------
Total operating
expenses............. 123 5,351 31,057 47,638 9,950 16,785
----- ------- --------- ---------- --------- ----------
Loss from operations.... (123) (5,351) (31,057) (47,638) (9,950) (16,710)
Interest income, net.... -- 187 939 844 65 277
----- ------- --------- ---------- --------- ----------
Net loss................ $(123) $(5,164) $ (30,118) $ (46,794) $ (9,885) $ (16,433)
===== ======= ========= ========== ========= ==========
Basic and diluted net
loss per share......... $ -- $(34.71) $ (19.05) $ (13.70) $ (3.55) $ (3.62)
===== ======= ========= ========== ========= ==========
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)...... $ (1.54) $ (0.46)
========== ==========
Pro forma weighted
average common basic
and diluted shares
(unaudited)............ 30,317,742 35,895,487
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------- As of
1996 1997 1998 1999 March 31, 2000
----- ------- -------- -------- --- -------------- ---
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and investments........ $ 436 $ 6,870 $ 23,192 $ 47,917 $ 31,784
Working capital......... 435 5,825 17,822 40,863 26,488
Total assets............ 451 8,725 31,359 61,839 49,107
Long term obligations,
less current portion... -- 1,471 5,521 6,390 5,246
Redeemable convertible
preferred stock........ 500 11,017 55,098 123,441 123,441
Total stockholders'
deficit................ (435) (4,917) (35,080) (79,746) (93,109)
</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. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including, but not limited to, those set forth under "Risk Factors"
and 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. Our
high-performance solution is a critical building block for telecommunications
carriers 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, 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. Our TSR also optimizes bandwidth by dynamically managing and
prioritizing network traffic, thereby bringing intelligence to the carriers'
networks and 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, distributed system
architecture and Composite Links.
Since our inception, we have incurred significant losses. As of March 31,
2000, we had an accumulated deficit of $99.0 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 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.
23
<PAGE>
All of our revenue through March 31, 2000 has been recognized from a single
customer. 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
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. We expect these field trials
to 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.
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.
In March 2000, we recorded a non-cash charge for deferred stock compensation
of approximately $18.5 million 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. Accordingly, the remaining deferred compensation expense related to
these shares of restricted stock will be recognized in the quarter in which
this offering closes. 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 $2.2 million and for the
three months ended March 31, 2000 was $2.9 million. The unamortized balance of
deferred stock compensation at March 31, 2000 was $14.1 million and is
expected to be amortized to expense as follows: $6.1 million in the remaining
nine months ended December 31, 2000, $4.6 million in 2001, $2.4 million in
2002 and $1.0 million in 2003.
24
<PAGE>
We expect to record an additional non-cash deferred compensation charge of
approximately $11.8 million for 1,176,650 options granted from April 1, 2000
through May 15, 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.
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.
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 an increase in the number of research and development personnel,
offset by the completion of a research and development contract 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 the hiring
of additional sales and marketing personnel and increased marketing 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 $2.6 million
from $297,000 for the three months ended March 31, 1999 to $2.9 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 higher interest
income from increased invested cash balances, partially offset by an 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 an increase in the number of research and
development personnel and contract research and development costs associated
with the development of the TSR.
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
to the addition of sales and marketing personnel and additional marketing
expenses.
25
<PAGE>
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 to
the addition of administrative personnel as well as increased facilities,
information systems and other expenses necessary to support our growing scale
of operations.
Stock-Based Compensation. Stock-based compensation expense decreased from
$325,000 in 1997 to $60,000 in 1998 and increased to $2.2 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. This increase was due primarily to stock options granted in 1999.
Interest Income, Net. Interest income, net of interest expense, increased
from $188,000 in 1997 to $939,000 in 1998 and decreased to $844,000 in 1999.
The increase from 1997 to 1998 is primarily due to the increase in interest
earned on available cash balances, offset by interest expense charges on
capital leases. The decrease from 1998 to 1999 is due to higher interest
expense charges resulting from increases in leased capital equipment over
modestly higher interest earned on invested balances.
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. 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
26
<PAGE>
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.
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.
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 believe that the net proceeds from this offering, together with our
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.
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 intelligently
transmit high volumes of information across their fiber optic networks. Our
high-performance solution is a critical building block for 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, 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. Our TSR also optimizes bandwidth by dynamically managing and
prioritizing network traffic, thereby bringing intelligence to the carriers'
networks and 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, distributed system
architecture and Composite Links. Currently, the TSR is deployed in a segment
of The National Transparent Optical Network, an 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, or VPNs.
To keep pace with the growing demand, transmission speeds have increased from
kilobits per second to megabits per second to gigabits 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 a line, or circuit, 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 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.
28
<PAGE>
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 use data packets from multiple senders to fill existing capacity
in a circuit, 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 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" 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
Optical transmission capacity is increasing 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 architectures to adapt to
the evolving and increasing bandwidth demands of carriers. For example,
current router offerings employ a centralized architecture, 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 undertake
large-scale upgrades, known as forklift upgrades, to address the increases in
optical transmission speeds.
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 cloud 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,
each labeled "DWDM and Optical Switches." Horizontal lines extend to the left
from each of the three boxes, and the lines are labeled "OC-12," "OC-48" and
"OC-192," respectively. A star-shaped icon indicates the intersection of each
of these horizontal lines with the "Carrier Optical Transport" cloud. The lines
then continue to the left, with the respective labels "OC-3," "OC-12" and "OC-
48," 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 with two slightly
larger disks representing routers. The caption "Router Deployment 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 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 architectures 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 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.
Quality of Service Functionality that Enables New Revenue-Generating
Services. Routers must provide Quality of Service, or QoS, functionality over
IP without adversely affecting performance. QoS is essentially the
30
<PAGE>
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 incorporate packet prioritization, network engineering,
traffic congestion management and control and ultimately, bandwidth management
to enable carriers to deliver QoS 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 layers of networking equipment. More importantly, the
operational costs of running a network are significant. Not only must each
router be managed as an independent element of the network, but each
additional network layer and additional network element increases the
complexity of network architecture and management. Carriers are demanding
solutions that consolidate the number and types of network elements 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
enabling intelligent control of bandwidth. 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 provides 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 has been designed to scale as demands on the
optical layer evolve and increase, thereby eliminating expensive clustering
designs, forklift
31
<PAGE>
upgrades and network disruption. We believe that this scalability and
flexibility positions the Avici TSR as a long-term solution for carriers.
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
technologies, 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 Intelligently Manage High Volumes of Network Traffic at High
Speeds. Our TSR, through our Composite Link technologies, 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 intelligently direct and manage IP traffic through QoS
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 dynamically provision additional
capacity for new services without network disruption and to prioritize IP data
traffic to effectively provide QoS guarantees and new services. As a result,
carriers are able to offer and charge for new and enhanced services, such as
VoIP and video streaming, and can also dynamically modify their service
pricing structures.
Cost-Effective Network Expansion and Operation. Our solution reduces the
need for previously required layers of network equipment, such as ATM and
SONET devices and optical integration equipment. Our built-in 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, intelligent 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 Leadership. 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 vendors and legacy 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.
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<PAGE>
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.
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 VPNs. 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 architecture has been designed to provide a critical building block for
carriers seeking to build resilient IP-based networks that can capitalize on
the raw capacity provided by DWDM and other optical technologies. We utilize a
parallel and distributed architecture 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
intelligent 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>
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<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 architecture model, which provides 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, QoS
and MPLS.
Composite Links
The Avici TSR connects to the optical transport layer through Composite
Links. A Composite Link combines multiple physical network interfaces into a
single virtual network interface to enable a carrier to add additional lines
or increase or decrease transmission speeds on a particular link without
disrupting the network. This allows carriers to offer faster service
provisioning to their customers. Our Composite Links enable carriers to
achieve virtual line speeds of OC-192 and beyond. Each Composite Link can be
configured with up to 16 network interfaces. Composite Links are also able to
recognize heavy or light traffic demand at the edge of the network and
dynamically adjust the number of links in the composite group. As physical
links are added to or removed from a composite group, the TSR communicates
this information to the optical equipment to maintain optimum traffic routing.
Because our Composite Links operate with no network disruption, they enable
the rapid provisioning of additional bandwidth for Internet traffic flows
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 QoS mechanisms, will enable carriers to deliver enhanced
network services.
Velociti Switch Fabric
Our Velociti switch fabric provides direct communication between the line
card modules in a TSR. This direct communication provides high performance,
and as system capacity is increased, allows economical scalability. All
forwarding, switching and general processing has been incorporated into the
line card ASICs, making the Velociti switch fabric capable of supporting
higher speed line cards with no forklift upgrade as carriers upgrade their
networks. The Velociti switch fabric also includes path diversity which makes
our TSR highly fault tolerant.
ASIC-based Packet Routing Technology
We have consolidated all data-flow and control processes, including packet
input/output framing, forwarding, scheduling, and switching, into our
programmable ASICs that reside on our line card modules. These ASICs enable
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 QoS
prioritization
- ------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------
QoS Prioritizes packets for transmission Enables the creation and
delivery of differentiated IP-
based services
- ------------------------------------------------------------------------------------------
Output Framer Shapes outbound traffic flows to Provides additional control of
ensure conformance to QoS 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
deployment, the TSR has successfully completed laboratory testing at AT&T and
has been selected by AT&T for
35
<PAGE>
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 a third party.
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 other 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 that:
. 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 performance interfaces and high speed 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.
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<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 better adjust
manufacturing volumes to meet changes in demand and will better 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 have the option to renew this lease for
two one-year terms. We expect that our current space is not adequate to
support our targeted growth and have commenced negotiations for approximately
80,000 additional square feet, 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................. 40 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................ 45 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.
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<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 Polycom, Inc., a provider of voice and video
communications equipment, Remedy Corporation, a provider of enterprise
applications, and 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.
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<PAGE>
Compensation of Directors
We reimburse our directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. 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 also intend to grant options to our non-employee
directors. 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 will be $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.
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.
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<PAGE>
<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 $62,889 $159,374
25,000 1% 3.00 2009 47,167 119,531
Christopher W. Gunner... 25,000 1% 2.00 2009 31,445 79,687
Ralph A. Goldwasser..... 50,000 2% 2.00 2009 62,889 159,374
</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. 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 $ 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 --
Brian McCormack............. -- 125,000
Christopher W. Gunner....... 7,708 40,729
Ralph A. Goldwasser......... 6,641 68,359
</TABLE>
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
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<PAGE>
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 $3.29 per share were
outstanding under the 1997 Stock Plan and 6,780,029 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.
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.
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<PAGE>
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 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.
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, 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
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<PAGE>
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 five percent 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.
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<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. 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. The per share purchase price for our Series F preferred stock
was $15.00.
Common Stock Issuances
During the year ended December 31, 1999, Richard T. Liebhaber, one of our
directors, purchased 25,000 shares of common stock for $2.00 per share
pursuant to a stock restriction agreement that gives us, and certain 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.
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, 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 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
Paul F. Brauneis(2).................. 18,020 *
Christopher W. Gunner(3)............. 193,645 *
Brian McCormack(4)................... 43,749 *
Henry Zannini(5)..................... 707,275 1.8
Bandel L. Carano(6).................. 3,825,584 9.8
Stephen M. Diamond(7)................ 1,525,150 3.9
Catherine M. Hapka................... 33,334 *
Richard T. Liebhaber................. 100,000 *
James Mongiello(8)................... 3,835,584 9.8
James R. Swartz(9)................... 4,888,235 12.5
All Executive Officers and Directors 16,290,576 41.5
as a Group (11 persons).............
Five Percent (5%) Stockholders
Nortel Networks Inc. ................ 6,459,600 16.6
200 Athens Way
Nashville, TN 37228
Accel Partners(10)................... 4,888,235 12.5
One Palmer Square
Princeton, NJ 08542
Brentwood Venture Capital(11)........ 3,825,584 9.8
11150 Santa Monica Boulevard,
Suite 1200
Los Angeles, CA 90025
Oak Investment Partners(12).......... 3,825,584 9.8
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 shares of common stock outstanding upon the
closing of this offering.
The following summary of provisions of our securities, various provisions of
our amended and restated certificate of incorporation and our amended and
restated bylaws and provisions of applicable law is not intended to be
complete and is qualified by reference to the provisions of applicable law and
to our amended and restated certificate of incorporation and amended and
restated bylaws included as exhibits to the Registration Statement of which
this prospectus is a part. See "Where You Can Find More Information."
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 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 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 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 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............................................................
=====
</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 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 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 approximately of
these shares for sale, at the initial public offering price, to Williams
Communications, one of our stockholders and customers. 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,
whether such shares or any such securities are then owned by such
person or are thereafter acquired directly from us; 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: (i)
the sale of shares of common stock to the underwriters; (ii) 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; (iii) 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 (iv) 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."
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
57
<PAGE>
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. 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. Among the 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. The estimated initial public offering price range indicated on the
cover page of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
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
Intangible assets...... -- -- -- 4,000,000
------------ ------------ ------------ ------------
Total other assets.... 326,000 336,000 323,500 4,323,500
------------ ------------ ------------ ------------
$ 31,358,682 $ 61,839,029 $ 49,106,656 $ 93,603,191
============ ============ ============ ============
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 8,935,740 20,263,354 188,247,659
Common stock warrants.. -- -- -- 198,000
Subscriptions
receivable............ (175,000) (215,000) (286,031) (286,031)
Deferred compensation.. -- (5,884,900) (14,071,836) (14,071,836)
Accumulated deficit.... (35,580,884) (82,582,010) (99,014,647) (99,064,647)
------------ ------------ ------------ ------------
Total stockholders'
equity (deficit)..... (35,079,784) (79,745,564) (93,108,550) 75,027,040
------------ ------------ ------------ ------------
$ 31,358,682 $ 61,839,029 $ 49,106,656 $ 93,603,191
============ ============ ============ ============
</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 2,175,020 296,829 2,944,682
----------- ------------ ------------ ----------- ------------
Total operating
expenses........... 5,351,178 31,057,460 47,638,355 9,949,934 16,784,766
----------- ------------ ------------ ----------- ------------
Loss from operations.... (5,351,178) (31,057,460) (47,638,355) (9,949,934) (16,709,891)
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) $(46,794,399) $(9,884,952) $(16,432,637)
=========== ============ ============ =========== ============
Net loss per share:
Basic and diluted..... $ (34.71) $ (19.05) $ (13.70) $ (3.55) $ (3.62)
=========== ============ ============ =========== ============
Pro forma basic and
diluted.............. $ (1.54) $ (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 $ 1,636,245 $ 171,978 $ 2,199,497
Sales and marketing... -- -- 440,581 71,883 375,579
General and
administrative....... -- -- 98,194 52,968 369,606
----------- ------------ ------------ ----------- ------------
$ 324,845 $ 60,062 $ 2,175,020 $ 296,829 $ 2,944,682
=========== ============ ============ =========== ============
</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.... -- -- -- -- -- 7,866,420 -- --
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 8,935,740 -- (215,000)
Deferred
compensation
related to stock
options and
stock grants
(unaudited)..... -- -- -- -- -- 10,593,709 -- --
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 20,263,354 -- (286,031)
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 $188,247,659 $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.... (7,866,420) -- --
Amortization of
deferred
compensation.... 1,981,520 -- 1,981,520
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........ -- (46,794,399) (46,794,399)
------------- ------------- --------------
Balance,
December 31,
1999............ (5,884,900) (82,582,010) (79,745,564)
Deferred
compensation
related to stock
options and
stock grants
(unaudited)..... (10,593,709) -- --
Amortization of
deferred
compensation
(unaudited)..... 2,406,773 -- 2,406,773
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)..... -- (16,432,637) (16,432,637)
------------- ------------- --------------
Balance, March
31, 2000
(unaudited)..... (14,071,836) (99,014,647) (93,108,550)
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)..... $(14,071,836) $(99,064,647) $ 75,027,040
============= ============= ==============
</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) $(46,794,399) $(9,884,952) $(16,432,637)
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......... -- -- 1,981,520 253,829 2,406,773
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
$46,800,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. At December 31, 1999, the Company had an accumulated deficit of
approximately $82,600,000 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 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 70,179 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
$7,866,420 and $10,593,709, 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 $1,981,520 and $2,406,773, respectively, of compensation
expense. The Company expects to recognize compensation expense of $8,485,991,
$4,572,521, $2,397,862, $963,393 and $58,842 during the years ended December
31, 2000, 2001, 2002, 2003 and 2004, respectively.
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) $(46,794,399)
Pro forma..................... (5,168,451) (30,159,949) (47,242,263)
Basic and diluted net loss per
share--
As reported................... $ (34.71) $ (19.05) $ (13.70)
Pro forma..................... (34.74) (19.08) (13.83)
</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 May 13, 2000 or
90 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 also issued to this investor the right to purchase $5.0 million of
common stock in the event of a qualified public offering at a price equal to
the initial public offering price.
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 investor has agreed, subject to certain performance
milestones, to meet certain minimum purchase commitments of the Company's
product. The Company is currently evaluating the allocation of the license
payment between these agreements.
F-20
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(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 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
F-21
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
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.
II-1
<PAGE>
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.
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 March 31, 2000, the Registrant granted
stock options to purchase 5,636,000 shares of common stock at exercise
prices ranging from $0.01 to $4.00 per share to employees, consultants and
directors pursuant to its 1997 Stock Incentive Plan.
2. From January 1, 1997 through March 31, 2000, the Registrant issued
and sold an aggregate of 372,206 shares of its common stock to employees,
consultants and directors pursuant to exercise of options granted under its
1997 Stock Incentive Plan.
3. From January 1, 1997 through March 31, 2000, the Registrant sold
4,174,050 shares of restricted stock to certain employees, consultants and
directors.
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.
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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Index
------- -------------
<C> <S>
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.
Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit
*23.1 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
+ 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.
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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in North Billerica, Commonwealth of
Massachusetts on May 18, 2000.
AVICI SYSTEMS INC.
/s/ Surya R. Panditi
By: _________________________________
Surya R. Panditi
President, Chief Executive Officer
and Director
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Avici Systems Inc., hereby
severally constitute and appoint Surya R. Panditi and Paul F. Brauneis, and
each of them singly, with full power of substitution, our true and lawful
attorneys, with full power to them and each of them singly, to sign for us in
our names in the capacities indicated below, any registration statement
related to the offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933 (a "462(b) Registration Statement"),
any and all amendments and exhibits to this registration statement or any
462(b) Registration Statement, and any and all applications and other document
to be filed with the Securities and Exchange Commission pertaining to the
registration of the securities covered hereby or thereby, and generally to do
all things in our names and on our behalf in such capacities to enable Avici
Systems Inc. to comply with the provisions of the Securities Act of 1933 and
all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Surya R. Panditi President, Chief Executive Officer and May 18, 2000
____________________________ Director (principal executive officer)
Surya R. Panditi
/s/ Paul F. Brauneis Chief Financial Officer May 18, 2000
____________________________ (principal financial and accounting
Paul F. Brauneis officer)
/s/ Bandel L. Carano Director May 18, 2000
____________________________
Bandel L. Carano
/s/ Stephen M. Diamond Director May 18, 2000
____________________________
Stephen M. Diamond
/s/ Catherine M. Hapka Director May 18, 2000
____________________________
Catherine M. Hapka
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director
____________________________
Richard T. Liebhaber
/s/ James Mongiello Director May 18, 2000
____________________________
James Mongiello
/s/ James R. Swartz Director May 18, 2000
____________________________
James R. Swartz
/s/ Henry Zannini Director May 18, 2000
____________________________
Henry Zannini
</TABLE>
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 Direcor 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.
*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
+ 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.
<PAGE>
Exhibit 3.1
-----------
THIRD RESTATED CERTIFICATE OF INCORPORATION
OF
AVICI SYSTEMS INC.
Avici Systems Inc. (the "Corporation"), a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. Pursuant to Section 242 and 245 of the General Corporation Law of the
State of Delaware, this Third Restated Certificate of Incorporation restates,
integrates and further amends the provisions of the Second Restated Certificate
of Incorporation of the Corporation, filed on September 2, 1999 and amended on
October 6, 1999 and further amended on December 10, 1999 (the "Second Restated
Certificate of Incorporation"). The original Certificate of Incorporation of
the Corporation, was filed on November 12, 1996 and amended on each of November
22, 1996, May 14, 1997, August 29, 1997, January 27, 1998, March 31, 1998, and
June 18, 1998 and a Restated Certificate of Incorporation was filed on August
31, 1999. This Third Restated Certificate of Incorporation has been duly
adopted by the directors of the Corporation with the approval of its
stockholders.
2. The text of the Second Restated Certificate of Incorporation is hereby
restated and amended to read in its entirety as follows:
FIRST: The name of the Corporation is Avici Systems Inc.
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is (i) 200,000,000 shares of Common
Stock, $.0001 par value per share ("Common Stock"), and (ii) 33,489,460 shares
of Preferred Stock, $.01 par value per share ("Preferred Stock"), of which,
1,750,000 shares are hereby designated "Series A Convertible Preferred Stock"
(the "Series A Preferred Stock"), 10,792,000 shares are hereby designated
"Series B Convertible Preferred Stock" (the "Series B Preferred Stock"),
5,000,000 shares are hereby designated "Series C Convertible Preferred Stock",
of which 3,450,000 shares, 1,050,000 shares and 500,000 shares, respectively,
are subdesignated as "Series C-1 Preferred Stock," "Series C-2 Preferred Stock"
and "Series C-3 Preferred Stock" (collectively, the "Series C Preferred Stock"),
5,428,500 shares are hereby designated "Series D Convertible Preferred Stock" of
which 3,745,665 shares, 1,139,985 shares and 542,850 shares, respectively, are
<PAGE>
-2-
subdesignated as "Series D-1 Preferred Stock," "Series D-2 Preferred Stock" and
"Series D-3 Preferred Stock" (collectively, the "Series D Preferred Stock"),
7,185,627 shares are hereby designated "Series E Convertible Preferred Stock"
(the "Series E Preferred Stock") and 3,333,333 shares are hereby designated
"Series F Convertible Preferred Stock" (the "Series F Preferred Stock").
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
------------
1. General. The voting, dividend and liquidation rights of the
-------
holders of the Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote
------
for each share held at all meetings of stockholders (and written actions in lieu
of meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased
or decreased (but not below the number of shares thereof then outstanding) by
the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote, irrespective of the provisions of Section
242(b)(2) of the General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the
-----------
Corporation, whether voluntary or involuntary, holders of Common stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
<PAGE>
-3-
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, special voting rights, conversion rights,
redemption privileges and liquidation preferences, as shall be stated and
expressed in such resolutions, all to the full extent now or hereafter permitted
by the General Corporation Law of Delaware. Without limiting the generality of
the foregoing, the resolutions providing for issuance of any series of Preferred
Stock may provide that such series shall be superior or rank equally or be
junior to the Preferred Stock of any other series to the extent permitted by
law. Except as set forth in Section 3(c) hereof and as otherwise specifically
provided in this Restated Certificate of Incorporation, no vote of the holders
of the Preferred Stock or Common Stock shall be a prerequisite to the issuance
of any shares of any series of the Preferred Stock authorized by and complying
with the conditions of this Restated Certificate of Incorporation, the right to
have such vote being expressly waived by all present and future holders of the
capital stock of the Corporation.
C. SERIES A, SERIES B, SERIES C, SERIES D, SERIES E AND SERIES F
-------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK.
---------------------------
The Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock (collectively referred to sometimes herein as the "Series
Preferred Stock") shall each have the following rights, preferences, powers,
privileges and restrictions, qualifications and limitations.
1. Dividends.
---------
(a) The holders of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C-1 and D-1 Preferred Stock, Series C-2 and D-2
Preferred Stock, Series C-3 and D-3 Preferred Stock, Series E Preferred Stock
and Series F Preferred Stock shall be entitled to receive dividends of $0.02,
$0.08, $.344, $.48, $.64, $.668 and $1.20, per share per annum, respectively
(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 Corporation. The
right to receive dividends on Series Preferred Stock shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no dividend
has been declared on the Series Preferred Stock in any prior year.
(b) The Corporation shall not declare or pay any distributions (as
defined below) on shares of Common Stock until the holders of the Series
Preferred Stock then outstanding shall have first received a distribution at the
respective rates specified in paragraph (a) of this Section 1.
(c) For purposes of this Section 1, unless the context requires
otherwise, "distribution" shall mean the transfer of cash or property without
consideration,
<PAGE>
-4-
whether by way of dividend or otherwise, payable other than in Common Stock or
other securities of the Corporation, or the purchase or redemption of shares of
the Corporation (other than repurchases of Common Stock held by employees or
directors of, or consultants to, the Corporation upon termination of their
employment or services pursuant to agreements providing for such repurchase at a
price equal to the original issue price of such shares and other than
redemptions in liquidation or dissolution of the Corporation) for cash or
property, including any such transfer, purchase or redemption by a subsidiary of
the Corporation.
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
---------------------------------------------------------
Consolidations and Asset Sales.
-------------------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, after and
subject to the payment in full of all amounts required to be distributed to the
holders of any other class or series of stock of the Corporation ranking on
liquidation prior and in preference to the Series Preferred Stock (collectively
referred to as "Senior Preferred Stock"), but before any payment shall be made
to the holders of Common Stock or any other class or series of stock ranking on
liquidation junior to the Series Preferred Stock (such Common Stock and other
stock being collectively referred to as "Junior Stock") by reason of their
ownership thereof, an amount equal to with respect to the Series A Preferred
Stock, $0.29 per share, with respect to the Series B Preferred Stock, $1.00 per
share, with respect to the Series C-1 and D-1 Preferred Stock, $4.30 per share,
with respect to the Series C-2 and D-2 Preferred Stock $6.00 per share, with
respect to the Series C-3 and D-3 Preferred Stock $8.00 per share, with respect
to the Series E Preferred Stock, $8.35 per share and with respect to the Series
F Preferred Stock, $15.00 per share (each 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 upon any such liquidation, dissolution or winding up of the
Corporation, the remaining assets of the Corporation available for distribution
to its stockholders shall be insufficient to pay the holders of shares of Series
Preferred Stock the full amount to which they shall be entitled, the holders of
shares of Series Preferred Stock and any class or series of stock ranking on
liquidation on a parity with the Series Preferred Stock shall share ratably in
any distribution of the remaining assets and funds of the Corporation in
proportion to the respective amounts which would otherwise be payable in respect
of the shares held by them upon such distribution if all amounts payable on or
with respect to such shares were paid in full.
(b) After the payment of all preferential amounts required to be
paid to the holders pursuant to subsection 2(a) above, upon the dissolution,
liquidation or winding up of the Corporation, the remaining assets and funds of
the Corporation available for distribution to its stockholders shall be
distributed among the holders of shares of Series Preferred Stock, Common Stock
and any other class or series of stock entitled to participate in liquidation
distributions with the holders of Common Stock, pro rata based on the number of
shares of Common Stock held by each (assuming conversion into Common Stock of
all such shares).
<PAGE>
-5-
(c) A consolidation or merger of the Corporation (except (i) into
or with a wholly-owned subsidiary of the Corporation with requisite stockholder
approval or (ii) a merger in which the beneficial owners of the Corporation's
capital stock as constituted immediately prior to such transaction hold no less
than fifty-one percent (51%) of the voting power in the resulting entity) or a
sale of all, substantially all or any substantial portion of the assets of the
Corporation shall be regarded as a liquidation, dissolution or winding up of the
affairs of the Corporation within the meaning of this Section 2 unless the
holders of 66.7% of the outstanding shares of Series Preferred Stock waive such
result in writing in advance; provided, however, that each holder of the Series
Preferred Stock shall have the right to elect the benefits of the provisions of
Section 4(i) hereof in lieu of receiving payment in liquidation, dissolution or
winding up of the Corporation pursuant to this Section 2. The amount deemed
distributed to the holders of Series Preferred Stock upon any such merger,
consolidation or sale shall be the cash or the value of the property, rights or
securities distributed to such holders by the acquiring person, firm or other
entity. The value of such property or rights, other than securities, shall be
determined in good faith by the Board of Directors of the Corporation. Any
securities shall be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability covered by clause (ii) below:
(A) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(C) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Corporation and
the holders of at least a majority of the voting power of all then outstanding
shares of Series Preferred Stock.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an
"Affiliate" or former "Affiliate" (as such term is defined in Rule 144 under the
Securities Act of 1933, as amended)) shall be to make an appropriate discount
from the market value determined in accordance with clause (i) (A), (B) or (C)
above to reflect the approximate fair market value thereof, as mutually
determined by the Corporation and the holders of at least a majority of the
voting power of all then outstanding shares of such Series Preferred Stock.
(iii) In the event the requirements of this subsection 2(c)
are not complied with, the Corporation shall forthwith either:
<PAGE>
-6-
(A) cause such closing to be postponed until such time
as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in subsection
2(c)(iv) hereof.
(iv) The Corporation shall give each holder of record of
Series Preferred Stock written notice of such impending transaction not later
than twenty (20) days prior to the stockholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the Corporation has given the first notice
provided for herein or sooner than ten (10) days after the Corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of Series
Preferred Stock that are entitled to such notice rights or similar notice rights
and that represent at least a majority of the voting power of all then
outstanding shares of such Series Preferred Stock.
3. Voting.
------
(a) Each holder of outstanding shares of Series Preferred Stock
shall be entitled to the number of votes equal to the number of whole shares of
Common Stock into which the shares of Series Preferred Stock held by such holder
are then convertible (as adjusted from time to time pursuant to Section 4
hereof), at each meeting of stockholders of the Corporation (and written actions
of stockholders in lieu of meetings) with respect to any and all matters
presented to the stockholders of the Corporation for their action or
consideration. Except (i) with respect to matters which alter or change the
powers, preferences, or special rights of the Preferred Stock or any particular
series thereof so as to affect them adversely, (ii) as required by law, (iii) as
provided by the provisions of subsection 3(b) or 3(c) below or (iv) as provided
by the provisions establishing any other series of Preferred Stock, holders of
Series Preferred Stock and of any other outstanding series of Preferred Stock
shall vote together with the holders of Common Stock as a single class.
(b) Voting for the Election of Directors. The directors of the
------------------------------------
Corporation shall be elected at the Corporation's annual meeting and:
(i) as long as at least 1,750,000 (as adjusted for stock
splits, dividends, combinations and the like with respect to such shares) shares
of Series A Preferred Stock, Series B Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock remain outstanding in the
aggregate, the holders of a majority of the shares of Series A Preferred Stock,
Series B Preferred Stock, Series D Preferred Stock, Series E Preferred
<PAGE>
-7-
Stock and Series F Preferred Stock then outstanding shall be entitled to elect
four (4) directors of the Corporation;
(ii) an additional four (4) directors shall be elected by the
holders of a majority of the shares of Common Stock and Series Preferred Stock
and any other series of Preferred Stock then outstanding, on an as converted
basis; and
(iii) at such time as a majority of the shares Series C Preferred
Stock then outstanding are held of record and beneficially owned by an entity
other than Nortel Networks Inc. or any entity affiliated therewith (a "Non-
Nortel Holder") and as long as at least 750,000 (as adjusted for stock splits,
dividends, combinations and the like with respect to such shares) shares of
Series C Preferred Stock remain outstanding and held by such Non-Nortel Holder,
such Non-Nortel Holder shall be entitled to elect one (1) director of the
Corporation, provided, however, that the individual to be elected as director
under this subsection 3(b)(iii) must first be approved by a majority of the then
current directors of the Corporation, which approval shall not be unreasonably
withheld.
In the case of any vacancy (other than a vacancy caused by removal) in the
office of a director occurring among the directors elected by the holders of a
class or series of stock pursuant to this Section 3(b), the remaining directors
so elected by that class or series may by affirmative vote of a majority thereof
(or the remaining director so elected if there be but one, or if there are no
such directors remaining, by the affirmative vote of the holders of a majority
of the shares of that class or series), elect a successor or successors to hold
office for the unexpired term of the director or directors whose place or places
shall be vacant.
(c) In addition to any other rights provided by law, so long as at
least 437,500 shares of Series A Preferred Stock, 2,406,250 shares of Series B
Preferred Stock, 1,250,000 shares of Series C Preferred Stock, 1,357,125 shares
of Series D Preferred Stock, 1,796,407 shares of Series E Preferred Stock or 25%
of the shares of Series F Preferred Stock that had been issued at any time shall
be outstanding (or, in the case where only the interests of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock, Series E Preferred Stock or the Series F Preferred
Stock are affected, so long as at least 437,500 shares of Series A Preferred
Stock, 2,406,250 shares of Series B Preferred Stock, 1,250,000 shares of the
Series C Preferred Stock, 1,357,125 shares of Series D Preferred Stock,
1,796,407 shares of Series E Preferred Stock or 25% of the shares of Series F
Preferred Stock that had been issued at any time, as applicable, shall be
outstanding), the Corporation shall not, without first obtaining the affirmative
vote or written consent of the holders of not less than 66.7% of the then
outstanding shares of Series Preferred Stock (or, in the case where only the
interests of one or more of the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock, Series E
Preferred Stock or the Series F Preferred Stock are affected, 66.7% of the then
outstanding shares of such Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock
and/or Series F Preferred Stock, as applicable):
<PAGE>
-8-
(i) Amend or repeal any provision of, or add any provision to, the
Corporation's Restated Certificate of Incorporation or By-laws;
(ii) Authorize or issue any new or existing class or classes or
series of capital stock having any preference or priority as to liquidation,
voting, redemption, dividends or assets superior to or on a parity with any such
preference or priority of any Series Preferred Stock, or authorize or issue
shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having rights to purchase,
any shares of stock of the Corporation having any preference or priority as to
liquidation, voting, redemption, dividends or assets superior to or on a parity
with any such preference or priority of any Series Preferred Stock;
(iii) Reclassify any Common Stock into shares having any preference
or priority as to liquidation, voting, redemption, dividends or assets superior
to or on a parity with any such preference or priority of any Series Preferred
Stock;
(iv) Consent to any liquidation, dissolution or winding up of the
Corporation or consolidate or merge into or with any other entity or entities
(other than with or into a wholly owned subsidiary of the Corporation), or
acquire any other entity, or sell, lease, abandon, transfer or otherwise dispose
of all, substantially all or any substantial portion of its assets, or sell,
transfer or encumber any technology developed by the Corporation which is
material to the business of the Corporation as then conducted other than under a
license granted in the ordinary course of business;
(v) Make any borrowings, issue any debt securities (whether or not
convertible) or guarantee (directly or indirectly) any indebtedness in excess of
an aggregate amount outstanding of $3,000,000 at any time;
(vi) Purchase or set aside any sums for the purchase of, or pay any
dividend or make any distribution on, any shares of stock other than the
Preferred Stock, except for dividends or other distributions payable on any
other class or series of stock solely in the form of additional shares of such
series or class of stock and except for the purchase of shares of Common Stock
from former employees or directors of, or consultants to, the Corporation who
acquired such shares directly from the Corporation, if each such purchase is
made pursuant to contractual rights held by the Corporation relating to the
termination of their employment or services and the purchase price does not
exceed the original issue price paid to the Corporation for such shares; or
(vii) Redeem or otherwise acquire shares of Preferred Stock except as
expressly authorized in Section 6 or pursuant to a purchase offer made pro rata
to all holders of the shares of Preferred Stock on the basis of the aggregate
number of outstanding shares of Preferred Stock then held by each such holder.
(d) (i) At any time (and only at such time) that the holders of Series
Preferred Stock are entitled to elect less than a majority of the members of the
Board of Directors pursuant to Section 3(b) hereof, in the event that (A) the
Corporation shall default in its
<PAGE>
-9-
redemption obligations under Section 6 or if it shall have insufficient funds
legally available to pay the Mandatory Redemption Price under Section 6(b) or
(B) proceedings by or against the Corporation are commenced under the United
States Bankruptcy Code or any other federal or state bankruptcy, reorganization,
receivership, insolvency or other similar law affecting the rights of creditors
generally, the Corporation shall promptly give written notice thereof to each
holder of Series Preferred Stock and the holders of Series Preferred Stock
shall, immediately upon the giving of written notice to the Corporation by the
holders of at least 50.1% of the outstanding shares of Series Preferred Stock,
be entitled to elect the smallest number of directors which shall constitute a
majority of the authorized number of directors of the Corporation, with the
holders of the Series Preferred Stock voting as a separate class; and the
holders of shares of Common Stock and of any other class or series of voting
stock (including the Series Preferred Stock), as a class, shall be entitled to
elect the remaining members of the Board of Directors.
(ii) Whenever under the provisions of subsection (i) above the right
shall have accrued to the holders of the shares of Series Preferred Stock as a
class to elect directors, the Board of Directors shall, within ten days after
delivery to the Corporation at its principal office of a request to such effect
by the holders of at least 50.1% of the then outstanding shares of Series
Preferred Stock, call a special meeting of the stockholders for the election of
directors, to be held upon not less than 20 nor more than 30 days' notice to
such holders (or distribute an action by written consent covering such matters
as set forth herein). If such notice of meeting or written consent is not given
within the ten days required above, the holders of Series Preferred Stock
requesting the calling of such meeting may also call such meeting and shall have
access to the stock books and records of the Corporation for such purpose. At
any meeting so called or at any other meeting held while the holders of the
outstanding shares of Series Preferred Stock shall have the voting power
provided in subsection (i) above, the holders of a majority of the then
outstanding shares of Series Preferred Stock, present in person or by proxy,
shall be sufficient to constitute a quorum for the election of directors as
herein provided. Upon the election of the directors at such meeting, the terms
of office of all persons who were previously directors of the Corporation shall
immediately terminate, whether or not the holders of the shares of Common Stock
and of any other class or series of voting stock shall then have elected the
remaining directors of the Corporation.
(iii) In the case of any vacancy in the office of a director
occurring among the directors elected by the holders of the shares of Series
Preferred Stock as a class, pursuant to the foregoing provisions of subsection
(i) hereof, the remaining directors elected by the holders of the Series
Preferred Stock by affirmative vote of a majority thereof, or the remaining
director so elected if there be but one, may, if permitted by law and subject to
the provisions of subsection (iv) hereof, elect a successor or successors to
hold office for the unexpired terms of the director or directors whose place or
places shall be vacant. In case of any vacancy in the office of a director
occurring among the directors elected by the holders of Common Stock and of any
other class or series of voting stock as a class, the remaining directors
elected by the holders of Common Stock and of any other class or series of
voting stock by affirmative vote of a majority thereof, or the remaining
director so elected if there be but one, may, if permitted by law, elect a
successor or successors to hold office for the unexpired term of the director or
directors whose place or places shall be vacant. Any director who shall have
been
<PAGE>
-10-
elected by the holders of the Series Preferred Stock (or by any directors so
elected by directors elected by the holders of the Series Preferred Stock as
provided in this subsection (iii)) may be removed during his term of office,
either with or without cause, by, and only by, the affirmative vote of the
holders of at least 66.7% of the then outstanding shares of Series Preferred
Stock, cast at a special meeting of such stockholders duly called for that
purpose.
(iv) If and when all breaches referred to in subsection (i)
above have been fully remedied, then the holders of the shares of Series
Preferred Stock shall be divested of all of the voting rights specified in
subsection (i) above, but always subject to the same provisions vesting such
voting rights in the holders of the shares of Series Preferred Stock in case of
similar future defaults as provided in subsection (i). Upon the termination of
any such voting rights as provided above, the Board of Directors shall call a
special meeting of stockholders at which all directors will be elected, and the
terms of office of all persons who are then directors of the Corporation shall
terminate immediately upon the election of their successors.
4. Optional Conversion. The holders of the Series Preferred Stock
-------------------
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series Preferred Stock shall
----------------
be convertible, at the option of the holder thereof, at any time and from time
to time, and without the payment of additional consideration by the holder
thereof, into such number of fully paid and nonassessable shares of Common Stock
as is determined (i) with respect to the Series A Preferred Stock, by dividing
$0.29 by the Series A Conversion Price (as defined below) in effect at the time
of conversion, (ii) with respect to the Series B Preferred Stock, by dividing
$1.00 by the Series B Conversion Price (as defined below) in effect at the time
of conversion, (iii) with respect to the Series C-1 and D-1 Preferred Stock, by
dividing $4.30 by the Series C-1 and D-1 Conversion Price (as defined below) in
effect at the time of conversion, (iv) with respect to the Series C-2 and D-2
Preferred Stock, by dividing $6.00 by the Series C-2 and D-2 Conversion Price
(as defined below) in effect at the time of conversion, (v) with respect to the
Series C-3 and D-3 Preferred Stock, by dividing $8.00 by the Series C-3 and D-3
Conversion Price (as defined below) in effect at the time of conversion, (vi)
with respect to the Series E Preferred Stock, by dividing $8.35 by the Series E
Conversion Price (as defined below) in effect at the time of conversion and
(vii) with respect to the Series F Preferred Stock, by dividing $15.00 by the
Series F Conversion Price (as defined below) in effect at the time of
conversion. The "Series A Conversion Price" shall initially be $0.29, the
"Series B Conversion Price" shall initially by $1.00, the "Series C-1 and D-1
Conversion Price" shall initially be $4.30, the "Series C-2 and D-2 Conversion
Price" shall initially be $6.00, the "Series C-3 and D-3 Conversion Price" shall
initially be $8.00, the "Series E Conversion Price" shall initially by $8.35 and
the "Series F Conversion Price" shall initially by $15.00. The Series A
Conversion Price, Series B Conversion Price, Series C-1 and D-1 Conversion
Price, Series C-2 and D-2 Conversion Price, Series C-3 and D-3 Conversion Price,
Series E Conversion Price and Series F Conversion Price are collectively
referred to herein as the "Applicable Conversion Price." Such initial Applicable
Conversion Price, and the rate at which shares of Series Preferred Stock may be
converted into shares of Common Stock, shall be subject to adjustment as
provided below.
<PAGE>
-11-
In the event of a notice of redemption of any shares of Series
Preferred Stock pursuant to Section 6 hereof, the Conversion Rights of the
shares designated for redemption shall terminate at the close of business on the
fifth full day preceding the date fixed for redemption, unless the redemption
price is not paid when due, in which case the Conversion Rights for such shares
shall continue until such price is paid in full. In the event of a liquidation
of the Corporation, the Conversion Rights shall terminate at the close of
business on the first full day preceding the date fixed for the payment of any
amounts distributable on liquidation to the holders of Series Preferred Stock.
(b) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of the Series Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then effective Applicable
Conversion Price.
(c) Mechanics of Conversion.
-----------------------
(i) In order for a holder of Series Preferred Stock to convert
shares of Series Preferred Stock into shares of Common Stock, such holder shall
surrender the certificate or certificates for such shares of Series Preferred
Stock, at the office of the transfer agent for the Series Preferred Stock (or at
the principal office of the Corporation if the Corporation serves as its own
transfer agent), together with written notice that such holder elects to convert
all or any number of the shares of the Series Preferred Stock represented by
such certificate or certificates. Such notice shall state such holder's name or
the names of the nominees in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. If required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or his
or its attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent (or by the Corporation if the
corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, and in any event within thirty (30) days, issue and deliver at
such office to such holder of Series Preferred Stock, or to his or its nominees,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled, together with cash in lieu of any fraction of a
share.
(ii) The Corporation shall at all times when the Series Preferred
Stock shall be outstanding, reserve and keep available out of its authorized but
unissued stock, for the purpose of effecting the conversion of the Series
Preferred Stock, such number of its duly authorized shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding Series Preferred Stock. Before taking any action which would cause
an adjustment reducing the Applicable Conversion Price below the then par value
of the shares of Common Stock issuable upon conversion of the Series Preferred
Stock, the Corporation will take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of Common Stock at such
adjusted Applicable Conversion Price.
<PAGE>
-12-
(iii) Upon any such conversion, no adjustment to the Applicable
Conversion Price shall be made for any declared but unpaid dividends on the
Series Preferred Stock surrendered for conversion or on the Common Stock
delivered upon conversion.
(iv) All shares of Series Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and payment of any dividends
declared but unpaid thereon. Any shares of Series Preferred Stock so converted
shall be retired and cancelled and shall not be reissued, and the Corporation
(without the need for stockholder action) may from time to time take such
appropriate action as may be necessary to reduce the authorized Series Preferred
Stock accordingly.
(v) The Corporation shall pay any and all issue and other taxes
that may be payable in respect of any issuance or delivery of shares of Common
Stock upon conversion of shares of Series Preferred Stock pursuant to this
Section 4. The Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of shares of Common Stock in a name other than that in which the shares of
Series Preferred Stock so converted were registered, and no such issuance or
delivery shall be made unless and until the person or entity requesting such
issuance has paid to the Corporation the amount of any such tax or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
(d) Adjustments to Series B Conversion Price, Series C Conversion Price(s),
-----------------------------------------------------------------------
Series D Conversion Price(s), Series E Conversion Price and Series F Conversion
- -------------------------------------------------------------------------------
Price for Diluting Issues:
- -------------------------
(i) Special Definitions. For purposes of this subsection 4 and
-------------------
subsection 5(a)(ii), the following definitions shall apply:
(A) "Option" shall mean rights, options or warrants to subscribe
------
for, purchase or otherwise acquire Common Stock or Convertible Securities,
excluding options described in subsection 4(d)(i)(D)(VI) below.
(B) "Original Issue Date" shall mean the date on which a share of
-------------------
Series F Preferred Stock was first issued.
(C) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities directly or indirectly convertible
into or exchangeable for Common Stock.
<PAGE>
-13-
(D) "Additional Shares of Common Stock" shall mean all shares of
---------------------------------
Common Stock issued (or, pursuant to subsection 4(d)(iii) below, deemed to
be issued) by the Corporation after the Original Issue Date, other than:
(I) shares of Common Stock issued or issuable upon
conversion of any Convertible Securities outstanding on the Original Issue Date,
or upon exercise of any Options outstanding on the Original Issue Date;
(II) shares of Common Stock issued or issuable as a dividend
or distribution on Series Preferred Stock;
(III) shares of Common Stock issued or issuable by reason of
a dividend, stock split, split-up or other distribution on shares of Common
Stock that is covered by subsection 4(e) or 4(f) below;
(IV) shares of Common Stock issued or issuable to lending or
leasing institutions pursuant to an agreement approved by the Board of Directors
of the Corporation;
(V) up to 275,000 shares of Series B Preferred Stock (and
275,000 shares of Common Stock should such Series B Preferred Stock be
converted) (such number to be proportionately adjusted in the event of any stock
splits, stock dividends, recapitalizations or similar events occurring on or
after the date of this Agreement) issuable to Comdisco in connection with lease
and loan and related warrant agreements, all dated June 25, 1997 between the
Corporation and Comdisco; or
(VI) up to 14,276,250 shares of Common Stock issued or
issuable to employees or directors of, or consultants to, the Corporation
pursuant to a plan adopted or an agreement approved by the Board of Directors of
the Corporation.
(ii) No Adjustment of Series B Conversion Price, Series C Conversion
---------------------------------------------------------------
Price(s), Series D Conversion Price(s), Series E Conversion Price or Series F
- -----------------------------------------------------------------------------
Conversion Price. No adjustment in the number of shares of Common Stock into
- ----------------
which the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock is
convertible shall be made, by adjustment in the Series B Conversion Price, the
Series C Conversion Price(s), the Series D Conversion Price(s), Series E
Conversion Price or Series F Conversion Price thereof: (a) unless the
consideration per share (determined pursuant to subsection 4(d)(v)) for an
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the applicable Series B Conversion Price, the Series C
Conversion Price(s), the Series D Conversion Price(s), Series E Conversion Price
or Series F Conversion Price, as the case may be, in effect on the date of, and
immediately prior to, the issue of such Additional Shares, or (b) if prior to
such issuance, the Corporation receives written notice from the holders of at
least 66.7% of the then outstanding shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock, voting separately, agreeing that no such adjustment shall be
<PAGE>
-14-
made to the Series B Conversion Price, Series C Conversion Price(s), Series D
Conversion Price(s), Series E Conversion Price and/or Series F Conversion Price,
respectively, as the result of the issuance of Additional Shares of Common
Stock and any such agreement shall be binding upon all holders of such series of
Series Preferred Stock.
(iii) Issue of Securities Deemed Issue of Additional Shares of
---------------------------------------------------------
Common Stock. If the Corporation at any time or from time to time after the
- ------------
Original Issue Date shall issue any Options or Convertible Securities or shall
fix a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the maximum
number of shares of Common Stock (as set forth in the instrument relating
thereto without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date, provided
that Additional Shares of Common Stock shall not be deemed to have been issued
unless the consideration per share (determined pursuant to subsection 4(d)(v)
hereof) of such Additional Shares of Common Stock would be less than the
applicable Series B Conversion Price, Series C Conversion Price(s), Series D
Conversion Price(s), Series E Conversion Price or Series F Conversion Price, as
the case may be, in effect on the date of and immediately prior to such issue,
or such record date, as the case may be, and provided further that in any such
case in which Additional Shares of Common Stock are deemed to be issued;
(A) No further adjustment in the Series B Conversion Price,
the Series C Conversion Price(s), the Series D Conversion Price(s), Series E
Conversion Price or Series F Conversion Price shall be made upon the subsequent
issue of Convertible Securities or shares of Common Stock upon the exercise of
such Options or conversion or exchange of such Convertible Securities;
(B) If such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Corporation, upon the exercise, conversion or
exchange thereof, the Series B Conversion Price, the Series C Conversion
Price(s), the Series D Conversion Price(s), Series E Conversion Price and/or the
Series F Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase becoming effective, be
recomputed to reflect such increase insofar as it affects such Options or the
rights of conversion or exchange under such Convertible Securities;
(C) Upon the expiration or termination of any unexercised
Option, the Series B Conversion Price, the Series C Conversion Price(s), the
Series D Conversion Price(s), Series E Conversion Price and the Series F
Conversion Price shall not be readjusted, but the Additional Shares of Common
Stock deemed issued as the result of the original issue of such Option shall not
be deemed issued for the purposes of any subsequent
<PAGE>
-15-
adjustment of the Series B Conversion Price, Series C Conversion Price(s), the
Series D Conversion Price(s), Series E Conversion Price and the Series F
Conversion Price;
(D) In the event of any change in the number of shares of
Common Stock issuable upon the exercise, conversion or exchange of any Option or
Convertible Security, including, but not limited to, a change resulting from the
anti-dilution provisions thereof, the Series B Conversion Price, Series C
Conversion Price(s), the Series D Conversion Price(s), Series E Conversion Price
and Series F Conversion Price then in effect shall forthwith be readjusted to
such Series B Conversion Price, Series C Conversion Price(s), Series D
Conversion Price(s), Series E Conversion Price and Series F Conversion Price,
respectively, as would have been obtained had the adjustment which was made upon
the issuance of such Option or Convertible Security not exercised or converted
prior to such change been made upon the basis of such change; and
(E) No readjustment pursuant to clause (B) or (D) above shall
have the effect of increasing the Series B Conversion Price, the Series C
Conversion Price(s), the Series D Conversion Price(s), Series E Conversion Price
or Series F Conversion Price to an amount which exceeds the lower of (i) the
Series B Conversion Price, the Series C Conversion Price(s), the Series D
Conversion Price(s), Series E Conversion Price or Series F Conversion Price on
the original adjustment date, respectively, or (ii) the Series B Conversion
Price, Series C Conversion Price(s), Series D Conversion Price(s), Series E
Conversion Price and Series F Conversion Price, respectively, that would have
resulted from any issuances of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
In the event the Corporation, after the Original Issue Date, amends
the terms of any Options or Convertible Securities (whether such Options or
Convertible Securities were outstanding on the Original Issue Date or were
issued after the Original Issue Date), then such Options or Convertible
Securities, as so amended, shall be deemed to have been issued after the
Original Issue Date and the provisions of this subsection 4(d)(iii) shall apply.
(iv) Adjustment of Series B Conversion Price, the Series C
------------------------------------------------------
Conversion Price(s), the Series D Conversion Price(s), Series E Conversion Price
- --------------------------------------------------------------------------------
and Series F Conversion Price Upon Issuance of Additional Shares of Common
- --------------------------------------------------------------------------
Stock. In the event the Corporation shall at any time after the Original Issue
- -----
Date issue Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to subsection 4(d)(iii), but excluding
shares issued as a stock split or combination as provided in subsection 4(e) or
upon a dividend or distribution as provided in subsection 4(f)), without
consideration or for a consideration per share less than the applicable Series B
Conversion Price, the Series C Conversion Price(s), the Series D Conversion
Price(s), Series E Conversion Price or Series F Conversion Price in effect on
the date of and immediately prior to such issue, then and in such event, such
Series B Conversion Price, Series C Conversion Price(s), Series D Conversion
Price(s),
<PAGE>
-16-
Series E Conversion Price and Series F Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying such Series B Conversion Price, Series C Conversion
Price(s), Series D Conversion Price(s), Series E Conversion Price and Series F
Conversion Price, respectively, by a fraction, (A) the numerator of which shall
be (1) the number of shares of Common Stock outstanding immediately prior to
such issue plus (2) the number of shares of Common Stock which the aggregate
consideration received or to be received by the Corporation for the total number
of Additional Shares of Common Stock so issued would purchase at such Series B
Conversion Price, Series C Conversion Price(s), Series D Conversion Price(s),
Series E Conversion Price and Series F Conversion Price, respectively; and (B)
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued; provided that, (i) for the purpose of this
-------- ----
subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or
conversion of Options or Convertible Securities outstanding immediately prior to
such issue shall be deemed to be outstanding, and (ii) the number of shares of
Common Stock deemed issuable upon exercise or conversion of such outstanding
Options and Convertible Securities shall not give effect to any adjustments to
the conversion price or conversion rate of such Options or Convertible
Securities resulting from the issuance of Additional Shares of Common Stock that
is the subject of this calculation.
(v) Determination of Consideration. For purposes of this subsection
------------------------------
4(d), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration shall:
-----------------
(I) insofar as it consists of cash, be computed at
the aggregate of cash received by the Corporation, excluding amounts paid or
payable for accrued interest;
(II) insofar as it consists of property other than
cash, be computed at the fair market value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(III) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (I) and (II) above,
as determined in good faith by the Board of Directors.
(B) Options and Convertible Securities. The
----------------------------------
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to subsection 4(d)(iii),
relating to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent
<PAGE>
-17-
adjustment of such consideration) payable to the Corporation upon the exercise
of such Options or the conversion or exchange of such Convertible Securities, or
in the case of Options for Convertible Securities, the exercise of such Options
for Convertible Securities and the conversion or exchange of such Convertible
Securities, by
(y) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion or exchange of
such Convertible Securities.
(vi) Multiple Closing Dates. In the event the Corporation shall
----------------------
issue on more than one date Additional Shares of Common Stock which are
comprised of shares of the same series or class of Preferred Stock, and such
issuance dates occur within a period of no more than 120 days, then the Series B
Conversion Price, the Series C Conversion Price(s), the Series D Conversion
Price(s), Series E Conversion Price and Series F Conversion Price shall be
adjusted only once on account of such issuances, with such adjustment to occur
upon the final such issuance and to give effect to all such issuances as if they
occurred on the date of the final such issuance.
(e) Adjustment for Stock Splits and Combinations. If the Corporation
--------------------------------------------
shall at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Stock, the Applicable Conversion Price
then in effect immediately before that subdivision shall be proportionately
decreased. If the Corporation shall at any time or from time to time after the
Original Issue Date combine the outstanding shares of Common Stock, the
Applicable Conversion Price then in effect immediately before the combination
shall be proportionately increased. Any adjustment under this paragraph shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the event
--------------------------------------------------
the Corporation at any time, or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Applicable
Conversion Price for the Series Preferred Stock then in effect shall be
decreased as of the time of such issuance or, in the event such a record date
shall have been fixed, as of the close of business on such record date, by
multiplying the Applicable Conversion Price for the Series Preferred Stock then
in effect by a fraction:
(1) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance
<PAGE>
-18-
or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Applicable Conversion Price for the Series Preferred Stock shall
be recomputed accordingly as of the close of business on such record date and
thereafter the Applicable Conversion Price for the Series Preferred Stock shall
be adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions; and provided further, however, that no such
adjustment shall be made if the holders of Series Preferred Stock simultaneously
receive a dividend or other distribution of shares of Common Stock in a number
equal to the number of shares of Common Stock as they would have received if all
outstanding shares of Series Preferred Stock had been converted into Common
Stock on the date of such event.
(g) Adjustments for Other Dividends and Distributions. In the event
-------------------------------------------------
the Corporation at any time or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then and in
each such event provision shall be made so that the holders of Series Preferred
Stock shall receive upon conversion thereof in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the
Corporation that they would have received had the Series Preferred Stock been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the conversion
date, retained such securities receivable by them as aforesaid during such
period, giving application to all adjustments called for during such period
under this paragraph with respect to the rights of the holders of the Series
Preferred Stock; and provided further, however, that no such adjustment shall be
made if the holders of Series Preferred Stock simultaneously receive a dividend
or other distribution of such securities in an amount equal to the amount of
such securities as they would have received if all outstanding shares of Series
Preferred Stock had been converted into Common Stock on the date of such event.
(h) Adjustment for Reclassification, Exchange, or Substitution. If
----------------------------------------------------------
the Common Stock issuable upon the conversion of the Series Preferred Stock
shall be changed into the same or a different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification, or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation, or sale of
assets provided for below), then and in each such event the holder of each such
share of Series Preferred Stock shall have the right thereafter to convert such
share into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification, or other change,
by holders of the number of shares of Common Stock into which such shares of
Series Preferred Stock might have been converted immediately prior to such
reorganization, reclassification, or change, all subject to further adjustment
as provided herein.
<PAGE>
-19-
(i) Adjustment for Merger or Reorganization, etc. In case of any
--------------------------------------------
consolidation or merger of the Corporation with or into another corporation or
the sale of all or substantially all of the assets of the Corporation to another
corporation (other than a consolidation, merger or sale which is covered by
subsection 2(c)), each share of Series Preferred Stock shall thereafter be
convertible (or shall be converted into a security which shall be convertible)
into the kind and amount of shares of stock or other securities or property to
which a holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Series Preferred Stock would have been
entitled upon such consolidation, merger or sale; and, in such case, appropriate
adjustment (as determined in good faith by the Board of Directors) shall be made
in the application of the provisions in this Section 4 set forth with respect to
the rights and interest thereafter of the holders of the Series Preferred Stock,
to the end that the provisions set forth in this Section 4 (including provisions
with respect to changes in and other adjustments of the Applicable Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Series Preferred Stock.
(j) No Impairment. The Corporation will not, by amendment of its
-------------
Restated Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series Preferred Stock against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Applicable Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and furnish to each holder
of Series Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series Preferred Stock, furnish or cause to be furnished
to such holder a similar certificate setting forth (i) such adjustments and
readjustments, (ii) the Applicable Conversion Price then in effect with respect
to the Series Preferred Stock held by such holder, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which then
would be received upon the conversion of such Series Preferred Stock.
(l) Notice of Record Date. In the event:
---------------------
(i) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common Stock or other securities of
the Corporation;
(ii) that the Corporation subdivides or combines its outstanding
shares of Common Stock;
<PAGE>
-20-
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its outstanding shares
of Common Stock or a stock dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with another corporation, or
of the sale of all or substantially all of the assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series Preferred Stock, and shall cause to
be mailed to the holders of the Series Preferred Stock at their last addresses
as shown on the records of the Corporation or such transfer agent, at least ten
days prior to the date specified in (A) below or twenty days before the date
specified in (B) below, a notice stating
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such dividend,
distribution, subdivision or combination are to be determined, or
(B) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, dissolution or winding up.
5. Mandatory Conversion.
--------------------
(a) (i) Upon the closing of the sale of shares of Common
Stock, at a price of at least $15.00 per share (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other similar
recapitalizations affecting such shares), in a public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
resulting in at least $25,000,000 of gross proceeds to the Corporation (a
"Mandatory Conversion Date"), (1) all outstanding shares of Series Preferred
Stock shall automatically be converted into shares of Common Stock, at the then
effective Applicable Conversion Price and (2) the number of authorized shares of
Preferred Stock shall be automatically reduced by the number of shares of
Preferred Stock that had been designated as Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock, and all provisions included under
the caption "Series A, Series B, Series C, Series D, Series E and Series F
Convertible Preferred Stock", and all references to the Series Preferred Stock,
shall be deleted and shall be of no further force or effect.
(ii) Notwithstanding the provisions of subsection
4(d)(iv), in the event the Corporation makes a Dilutive Issuance (as defined
below), shares of Series B
<PAGE>
-21-
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock held by a person or entity who or
which has the contractual right, and was given the opportunity, to purchase its
Pro Rata Portion (as defined below) of such Dilutive Issuance (whether pursuant
to a right of first refusal or otherwise), and who or which failed to purchase
its Pro Rata Portion of such Dilutive Issuance, shall be automatically converted
into shares of Common Stock without giving effect to the adjustment to the
Series B Conversion Price of shares of Series B Preferred Stock, the Series C
Conversion Price(s) of shares of Series C Preferred Stock, the Series D
Conversion Price(s) of shares of Series D Preferred Stock, the Series E
Conversion Price of shares of Series E Preferred Stock or the Series F
Conversion Price of shares of Series F Preferred Stock provided for in
subsection 4(d)(iv) as a result of such Dilutive Issuance, provided, however,
that this subsection 5(a)(ii) shall cease to be applicable to the holders of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock or Series F Preferred Stock then held by such holders
at such time that such holders and/or previous holders of such Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock have acquired Additional Shares for
a consideration in an amount equal to such holder's Pro Rata Portion of
$20,000,000, in one or more Dilutive Issuances. The date of such Dilutive
Issuance shall be considered a "Mandatory Conversion Date" with respect to the
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock, Series E Preferred Stock and the Series F Preferred Stock held by such
person or entity. A "Dilutive Issuance" shall mean any issuance of Additional
Shares of Common Stock that results (or would result, except for this paragraph)
in a reduction in the Series B Conversion Price, the Series C Conversion
Price(s), the Series D Conversion Price(s), the Series E Conversion Price or the
Series F Conversion Price pursuant to subsection 4(d)(iv). A holder's "Pro Rata
Portion" of a Dilutive Issuance shall mean the number of Additional Shares of
Common Stock issued in such Dilutive Issuance, multiplied by a fraction, the
numerator of which is the number of shares of Common Stock issuable upon
conversion of all shares of Preferred Stock of the Corporation the held by such
holder, and the denominator of which is the aggregate number of shares of Common
Stock then outstanding on a fully-diluted basis (assuming the conversion of all
outstanding convertible securities, the exercise of all options, warrants or
other rights to acquire shares of Common Stock or securities convertible into
shares of Common Stock and the issuance of any securities reserved for issuance
to officers, directors and employees of the Corporation or any subsidiary
pursuant to any plan, agreement or arrangement approved by the Board of
Directors of the Corporation), including any shares of Common Stock issuable
upon conversion of all shares of Preferred Stock of the Corporation then
outstanding. For purposes of this paragraph, the portion of a Dilutive Issuance
purchased by a holder of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
shall be deemed to include any portion of such Dilutive Issuance purchased by an
Affiliate of such holder.
All certificates representing shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock shall have affixed thereto a legend substantially in
the following form:
"The shares represented by this certificate are convertible into
shares of common stock at a rate which may vary among different
stockholders of the corporation.
<PAGE>
-22-
Information concerning the conversion rate applicable to the shares
represented by this certificate may be obtained from the Secretary of
the corporation."
(b) All holders of record of shares of Series Preferred Stock
subject to a mandatory conversion described in subsections 5(a)(i) or 5(a)(ii)
above shall be given written notice of the Mandatory Conversion Date and the
place designated for mandatory conversion of all such shares of Series Preferred
Stock pursuant to this Section 5. Such notice need not be given in advance of
the occurrence of the Mandatory Conversion Date. Such notice shall be sent by
first class or registered mail, postage prepaid, to each record holder of Series
Preferred Stock subject to such mandatory conversion at such holder's address
last shown on the records of the transfer agent for the Series Preferred Stock
(or the records of the Corporation, if it serves as its own transfer agent).
Upon receipt of such notice, each holder of shares of Series Preferred Stock
subject to such mandatory conversion shall surrender his or its certificate or
certificates for all such shares to the Corporation at the place designated in
such notice, and shall thereafter receive certificates for the number of shares
of Common Stock to which such holder is entitled pursuant to this Section 5. On
the Mandatory Conversion Date, all rights with respect to the Series Preferred
Stock so converted, including the rights, if any, to receive notices and vote
(other than as a holder of Common Stock) will terminate, except only the rights
of the holders thereof, upon surrender of their certificate or certificates
therefor, to receive certificates for the number of shares of Common Stock into
which such Series Preferred Stock has been converted, and payment of any
declared but unpaid dividends thereon. If so required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by
written instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or by his or its attorney
duly authorized in writing. As soon as practicable after the Mandatory
Conversion Date and the surrender of the certificate or certificates for Series
Preferred Stock, the Corporation shall cause to be issued and delivered to such
holder, or on his or its written order, a certificate or certificates for the
number of full shares of Common Stock issuable on such conversion in accordance
with the provisions hereof and cash as provided in subsection 4(b) in respect of
any fraction of a share of Common Stock otherwise issuable upon such conversion.
(c) All certificates evidencing shares of Series Preferred Stock
which are required to be surrendered for conversion in accordance with the
provisions hereof shall, from and after the Mandatory Conversion Date, be deemed
to have been retired and cancelled and the shares of Series Preferred Stock
represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. The Corporation may thereafter take such
appropriate action (without the need for stockholder action) as may be necessary
to reduce the authorized Series Preferred Stock accordingly.
6. Mandatory Redemption.
--------------------
(a) The Corporation will, on March 31, 2004, and on each of the
first and second anniversaries thereof (each such date being referred to
hereinafter as a "Mandatory Redemption Date"), redeem from each holder of shares
of Series A Preferred Stock, Series B
<PAGE>
-23-
Preferred Stock, Series C-1 and D-1 Preferred Stock, Series C-2 and D-2
Preferred Stock, Series C-3 and D-3 Preferred Stock, Series E Preferred Stock
and Series F Preferred Stock, at a price equal to $0.29, $1.00, $4.30, $6.00,
$8.00, $8.35 and $15.00 per share, respectively, plus any dividends declared but
unpaid thereon, subject to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar recapitalization affecting
such shares (the "Applicable Mandatory Redemption Price"), the following
respective portions of the number of shares of Preferred Stock held by such
holder on the applicable Mandatory Redemption Date:
<TABLE>
<CAPTION>
Aggregate Portion of Shares of
Mandatory Redemption Date Series Preferred Stock to be Redeemed
- --------------------------------- -------------------------------------------------
<S> <C>
March 31, 2004 33-1/3%
March 31, 2005 50%
March 31, 2006 All outstanding shares of Series Preferred Stock
</TABLE>
(b) If the funds of the Corporation legally available for redemption
of Series Preferred Stock on any Mandatory Redemption Date are insufficient to
redeem the number of shares of Series Preferred Stock required under this
Section 6 to be redeemed on such date, those funds which are legally available
will be used to redeem the maximum possible number of such shares of Series
Preferred Stock ratably in proportion to the respective amounts which would
otherwise be payable if the funds of the Corporation legally available therefor
had been sufficient to redeem all shares of Series Preferred Stock required to
be redeemed on such date. At any time thereafter when additional funds of the
Corporation become legally available for the redemption of Series Preferred
Stock, such funds will be used, at the end of the next succeeding fiscal
quarter, to redeem the balance of the shares which the Corporation was
theretofore obligated to redeem, ratably on the basis set forth in the preceding
sentence.
(c) The Corporation shall provide notice of any redemption of Series
Preferred Stock pursuant to this Section 6 specifying the time and place of
redemption and the Applicable Mandatory Redemption Price, by first class or
registered mail, postage prepaid, to each holder of record of Series Preferred
Stock at the address for such holder last shown on the records of the transfer
agent therefor (or the records of the Corporation, if it serves as its own
transfer agent), not more than 60 nor less than 30 days prior to the date on
which such redemption is to be made. If less than all Series Preferred Stock
owned by such holder is then to be redeemed, the notice will also specify the
number of shares which are to be redeemed. Upon mailing any such notice of
redemption, the Corporation will become obligated to redeem at the time of
redemption specified therein all Series Preferred Stock specified therein (other
than such shares of Series Preferred Stock as are duly converted pursuant to
Section 4 prior to the close of business on the fifth full day preceding the
Mandatory Redemption Date). In case less than all Series Preferred Stock
represented by any certificate is redeemed in any redemption pursuant to this
Section 6, a new certificate will be issued representing the unredeemed Series
Preferred Stock without cost to the holder thereof.
<PAGE>
-24-
(d) Unless there shall have been a default in payment of the
Applicable Mandatory Redemption Price, no share of Series Preferred Stock shall
be entitled to any dividends declared after its Mandatory Redemption Date, and
on such Mandatory Redemption Date all rights of the holder of such share as a
stockholder of the Corporation by reason of the ownership of such share will
cease, except the right to receive the Applicable Mandatory Redemption Price of
such share, without interest, upon presentation and surrender of the certificate
representing such share, and such share will not from and after such Mandatory
Redemption Date be deemed to be outstanding.
(e) Any Series Preferred Stock redeemed pursuant to this Section 6
will be cancelled and will not under any circumstances be reissued, sold or
transferred and the Corporation may from time to time take such appropriate
action as may be necessary to reduce the authorized Series Preferred Stock
accordingly.
FIFTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot.
2. Subject to Article Fourth hereof, the Board of Directors is expressly
authorized to adopt, amend or repeal the bylaws of the corporation.
SIXTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
SEVENTH. The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of Delaware, as amended from time to time,
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was, or has agreed to become, a director or officer of the Corporation, or
is or was serving, or has agreed to serve, at the request of the Corporation, as
a director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by or on
behalf of an Indemnitee in connection with such action, suit or proceeding and
any appeal therefrom.
As a condition precedent to his right to be indemnified, the Indemnitee
must notify the Corporation in writing as soon as practicable of any action,
suit, proceeding or investigation
<PAGE>
-25-
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee.
In the event that the Corporation does not assume the defense of any
action, suit, proceeding or investigation of which the Corporation receives
notice under this Article, the Corporation shall pay in advance of the final
disposition of such matter any expenses (including attorney's fees) incurred by
an Indemnitee in defending a civil or criminal action, suit, proceeding or
investigation or any appeal therefrom; provided, however, that the payment of
-------- -------
such expenses incurred by an Indemnitee in advance of the final disposition of
such matter shall be made only upon receipt of an undertaking by or on behalf of
the Indemnitee to repay all amounts so advanced in the event that it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
by the Corporation as authorized in this Article, which undertaking shall be
accepted without reference to the financial ability to the Indemnitee to make
such repayment; and further provided that no such advancement of expenses shall
------- --------
be made if it is determined that the Indemnitee did not act in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best interests
of the Corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
The Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by such Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation. In addition, the Corporation shall not indemnify an Indemnitee to
the extent such Indemnitee is reimbursed from the proceeds of insurance, and in
the event the Corporation makes any indemnification payments to an Indemnitee
and such Indemnitee is subsequently reimbursed from the proceeds of insurance,
such Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.
All determinations hereunder as to the entitlement of an Indemnitee to
indemnification or advancement of expenses shall be made in each instance by (a)
a majority vote of the directors of the Corporation consisting of persons who
are not at that time parties to the action, suit or proceeding in question
("disinterested directors"), whether or not a quorum, (b) a majority vote of a
quorum of the outstanding shares of stock of all classes entitled to vote for
directors, voting as a single class, which quorum shall consist of stockholders
who are not at the time parties to the action, suit or proceeding in question,
(c) independent legal counsel (who may, to the extent permitted by law, be
regular legal counsel to the Corporation), or (d) a court of competent
jurisdiction.
The indemnification rights provided in this Article (i) shall not be deemed
exclusive of any other rights to which an Indemnitee may be entitled under any
law, agreement or vote of stockholders or disinterested directors or otherwise,
and (ii) shall inure to the benefit of the heirs, executors and administrators
of the Indemnitees. The Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or
<PAGE>
-26-
agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.
EIGHTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Third Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Third Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-27-
IN WITNESS WHEREOF, this Third Restated Certificate of Incorporation has
been signed under the seal of the Corporation this 24th day of April, 2000.
AVICI SYSTEMS INC.
By: /s/ Surya Panditi
-------------------------
Surya Panditi,
President and CEO
[SEAL]
<PAGE>
Exhibit 3.3
-----------
AMENDED AND RESTATED
BYLAWS
OF
AVICI SYSTEMS INC.
Adopted by the Board of Directors on January 21, 1998
<PAGE>
BYLAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE 1 - Stockholders 1
1.1 Place of Meetings..................................... 1
1.2 Annual Meeting........................................ 1
1.3 Special Meetings...................................... 1
1.4 Notice of Meetings.................................... 1
1.5 Voting List........................................... 1
1.6 Quorum................................................ 2
1.7 Adjournments.......................................... 2
1.8 Voting and Proxies.................................... 2
1.9 Action at Meeting..................................... 2
1.10 Action without Meeting................................ 2
ARTICLE 2 - Directors 3
2.1 General Powers........................................ 3
2.2 Number; Election and Qualification.................... 3
2.3 Enlargement of the Board.............................. 3
2.4 Tenure................................................ 3
2.5 Vacancies............................................. 3
2.6 Resignation........................................... 3
2.7 Regular Meetings...................................... 3
2.8 Special Meetings...................................... 4
2.9 Notice of Special Meetings............................ 4
2.10 Meetings by Telephone Conference Calls................ 4
2.11 Quorum................................................ 4
2.12 Action at Meeting..................................... 4
2.13 Action by Consent..................................... 4
2.14 Removal............................................... 4
2.15 Committees............................................ 5
2.16 Compensation of Directors............................. 5
ARTICLE 3 - Officers 5
3.1 Enumeration........................................... 5
3.2 Election.............................................. 5
3.3 Qualification......................................... 5
3.4 Tenure................................................ 5
3.5 Resignation and Removal............................... 6
3.6 Vacancies............................................. 6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
3.7 Chairman of the Board and Vice-Chairman of the Board.. 6
3.8 President............................................. 6
3.9 Vice President........................................ 6
3.10 Secretary and Assistant Secretaries................... 7
3.11 Treasurer and Assistant Treasurers.................... 7
3.12 Salaries.............................................. 7
ARTICLE 4 - Capital Stock 8
4.1 Issuance of Stock..................................... 8
4.2 Certificates of Stock................................. 8
4.3 Transfers............................................. 8
4.4 Lost, Stolen or Destroyed Certificates................ 9
4.5 Record Date........................................... 9
ARTICLE 5 - General Provisions 9
5.1 Fiscal Year........................................... 9
5.2 Corporate Seal........................................ 9
5.3 Waiver of Notice...................................... 9
5.4 Voting of Securities.................................. 10
5.5 Evidence of Authority................................. 10
5.6 Certificate of Incorporation.......................... 10
5.7 Transactions with Interested Parties.................. 10
5.8 Severability.......................................... 11
ARTICLE 6 - Amendment 11
6.1 By the Board of Directors............................. 11
6.2 By the Stockholders................................... 11
</TABLE>
<PAGE>
BYLAWS
OF
Avici Systems Inc.
ARTICLE 1 Stockholders
-----------------------
1.1 Place of Meetings. All meetings of stockholders shall be held at such
-----------------
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors or the President or, if not so designated, at the
registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election of
--------------
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors or the President (which date shall not be a legal holiday in the place
where the meeting is to be held) at the time and place to be fixed by the Board
of Directors or the President and stated in the notice of the meeting. If no
annual meeting is held in accordance with the foregoing provisions, the Board of
Directors shall cause the meeting to be held as soon thereafter as convenient.
If no annual meeting is held in accordance with the foregoing provisions, a
special meeting may be held in lieu of the annual meeting, and any action
---
taken at that special meeting shall have the same effect as if it had been taken
at the annual meeting, and in such case all references in these Bylaws to the
annual meeting of the stockholders shall be deemed to refer to such special
meeting.
1.3 Special Meetings. Special meetings of stockholders may be called at
----------------
any time by the President or by the Board of Directors or, as provided in the
Certificate of Incorporation, by the stockholders. Business transacted at any
special meeting of stockholders shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
---
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5 Voting List. The officer who has charge of the stock ledger of the
-----------
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at
-1-
<PAGE>
the time and place of the meeting during the whole time of the meeting, and may
be inspected by any stockholder who is present.
1.6 Quorum. Except as otherwise provided by law, the Certificate of
------
Incorporation or these Bylaws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any
------------
other time and to any other place at which a meeting of stockholders may be held
under these Bylaws by the stockholders present or represented at the meeting and
entitled to vote, although less than a quorum, or, if no stockholder is present,
by any officer entitled to preside at or to act as Secretary of such meeting.
It shall not be necessary to notify any stockholder of any adjournment of less
than 30 days if the time and place of the adjourned meeting are announced at the
meeting at which adjournment is taken, unless after the adjournment a new record
date is fixed for the adjourned meeting. At the adjourned meeting, the
corporation may transact any business which might have been transacted at the
original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for each
------------------
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to
vote at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for him by
written proxy executed by the stockholder or his authorized agent and delivered
to the Secretary of the corporation. No such proxy shall be voted or acted upon
after three years from the date of its execution, unless the proxy expressly
provides for a longer period.
1.9 Action at Meeting. When a quorum is present at any meeting, the
-----------------
holders of shares of stock representing a majority of the votes cast on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of shares of stock of
that class representing a majority of the votes cast on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. When a quorum is present at any meeting, any
election by stockholders shall be determined by a plurality of the votes cast on
the election.
1.10 Action without Meeting. Any action required or permitted to be taken
----------------------
at any annual or special meeting of stockholders of the corporation may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or .take such action at a meeting at which all shares
entitled to vote on such action were present and voted. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
-2-
<PAGE>
ARTICLE 2 Directors
--------------------
2.1 General Powers. The business and affairs of the corporation shall be
--------------
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2.2 Number; Election and Qualification. The number of directors which
----------------------------------
shall constitute the whole Board of Directors shall be determined by resolution
of the stockholders or the Board of Directors, but in no event shall be less
than one, except as otherwise provided by the Certificate of Incorporation. The
number of directors may be decreased at any time and from time to time either by
the stockholders or by a majority of the directors then in office, but only to
eliminate vacancies existing by reason of the death, resignation, removal or
expiration of the term of one or more directors, except as otherwise provided by
the Certificate of Incorporation. The directors shall be elected at the annual
meeting of stockholders by such stockholders as have the right to vote on such
election. Directors need not be stockholders of the corporation.
2.3 Enlargement of the Board. The number of directors may be increased at
------------------------
any time and from time to time by the stockholders or by a majority of the
directors then in office, except as otherwise provided by the Certificate of
Incorporation.
2.4 Tenure. Each director shall hold office until the next annual meeting
------
and until his successor is elected and qualified, or until his earlier death,
resignation or removal.
2.5 Vacancies. Unless and until filled by the stockholders, any vacancy in
---------
the Board of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board, may be filled by vote of a majority of the directors
then in office, although less than a quorum, or by a sole remaining director,
except as otherwise provided by the Certificate of Incorporation. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office, and a director chosen to fill a position resulting from
an increase in the number of directors shall hold office until the next annual
meeting of stockholders and until his successor is elected and qualified, or
until his earlier death, resignation or removal.
2.6 Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.7 Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting
-3-
<PAGE>
of the Board of Directors may be held without notice immediately after and at
the same place as the annual meeting of stockholders.
2.8 Special Meetings. Special meetings of the Board of Directors may be
----------------
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in office.
2.9 Notice of Special Meetings. Notice of any special meeting of directors
--------------------------
shall be given to each director by the Secretary or by the officer or one of the
directors calling the meeting. Notice shall be duly given to each director (i)
by giving notice to such director in person or by telephone at least 48 hours in
advance of the meeting, (ii) by sending a telegram or telex, or delivering
written notice by hand, to his last known business or home address at least 48
hours in advance of the meeting, or (iii) by mailing written notice to his last
known business or home address at least 72 hours in advance of the meeting. A
notice or waiver of notice of a meeting of the Board of Directors need not
specify the purposes of the meeting.
2.10 Meetings by Telephone Conference Calls. Directors or any members of
--------------------------------------
any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation by such means shall
constitute presence in person at such meeting.
2.11 Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
2.12 Action at Meeting. At any meeting of the Board of Directors at which
-----------------
a quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law, the Certificate
of Incorporation or these By-Laws.
2.13 Action by Consent. Any action required or permitted to be taken at
-----------------
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
2.14 Removal. Except as otherwise provided by the General Corporation Law
-------
of Delaware, any one or more or all of the directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors, except that the
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<PAGE>
directors elected by the holders of a particular class or series of stock may be
removed without cause only by vote of the holders of a majority of the
outstanding shares of such class or series.
2.15 Committees. The Board of Directors may, by resolution passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee,
except as otherwise provided by the Certificate of Incorporation. In the
absence or disqualification of a member of a committee, the member or members of
the committee present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors and subject to the provisions of the
General Corporation Law of the State of Delaware, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it. Each such
committee shall keep minutes and make such reports as the Board of Directors may
from time to time request. Except as the Board of Directors may otherwise
determine, any committee may make rules for the conduct of its business, but
unless otherwise provided by the directors or in such rules, its business shall
be conducted as nearly as possible in the same manner as is provided in these
Bylaws for the Board of Directors.
2.16 Compensation of Directors. Directors may be paid such compensation
-------------------------
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment
shall preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE 3 Officers
-------------------
3.1 Enumeration. The officers of the corporation shall consist of a
-----------
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be elected
--------
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more
-------------
offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these Bylaws, each officer shall hold office until his
successor is elected and qualified,
-5-
<PAGE>
unless a different term is specified in the vote choosing or appointing him, or
until his earlier death, resignation or removal.
3.5 Resignation and Removal. Any officer may resign by delivering his
-----------------------
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office, except as otherwise
provided for in a duly authorized written agreement with the corporation.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise, unless such compensation is expressly provided for in a duly
authorized written agreement with the corporation.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring in
---------
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
3.7 Chairman of the Board and Vice-Chairman of the Board. The Board of
----------------------------------------------------
Directors may appoint a Chairman of the Board and may designate the Chairman of
the Board as Chief Executive Officer. If the Board of Directors appoints a
Chairman of the Board, he shall perform such duties and possess such powers as
are assigned to him by the Board of Directors. If the Board of Directors
appoints a Vice-Chairman of the Board, he shall, in the absence or disability of
the Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board and shall perform such other duties and possess such other
powers as may from time to time be vested in him by the Board of Directors.
3.8 President. The President shall, subject to the direction of the Board
---------
of Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders and, if he is a director, at all
meetings of the Board of Directors. Unless the Board of Directors has
designated the Chairman of the Board or another officer as Chief Executive
Officer, the President shall be the Chief Executive Officer of the corporation.
The President shall perform such other duties and shall have such other powers
as the Board of Directors may from time to time prescribe.
3.9 Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be
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<PAGE>
more than one, the Vice Presidents in the order determined by the Board of
Directors) shall perform the duties of the President and when so performing
shall have all the powers of and be subject to all the restrictions upon the
President. The Board of Directors may assign to any Vice President the title of
Executive. Vice President, Senior Vice President or any other title selected by
the Board of Directors.
3.10 Secretary and Assistant Secretaries. The Secretary shall perform
-----------------------------------
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary, (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such
----------------------------------
duties and shall have such powers as may from time to time be assigned to him by
the Board of Directors or the President. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these Bylaws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to time
prescribe. In he event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer, (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
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<PAGE>
ARTICLE 4 Capital Stock
------------------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the corporation shall
---------------------
be entitled to have a certificate, in such form as may be prescribed by law and
by the Board of Directors, certifying the number and class of shares owned by
him in the corporation. Each such certificate shall be signed by, or in the
name of the corporation by, the Chairman or Vice-Chairman, if any, of the Board
of Directors, or the President or a Vice President, and the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the Bylaws, applicable
securities laws or any agreement among any number of shareholders or among such
holders and the corporation shall have conspicuously noted on the face or back
of the certificate either the full text of the restriction or a statement of the
existence of such restriction.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of each certificate representing shares of such
class or series of stock, provided that in lieu of the foregoing requirements
there may be set forth on the face or back of each certificate representing
shares of such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests a copy of the full
text of the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
4.3 Transfers. Except as otherwise established by rules and regulations
---------
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these Bylaws, the corporation shall be entitled to treat the record holder
of stock as shown on its books as the owner of such stock for all purposes,
including the payment of dividends and the right to vote with respect to such
stock,
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<PAGE>
regardless of any transfer, pledge or other disposition of such stock until the
shares have been transferred on the books of the corporation in accordance with
the requirements of these Bylaws.
4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a
--------------------------------------
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 10 days after the date of adoption of a
record date for a written consent without a meeting, nor more than 60 days prior
to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
dose of business on the day before the day on which notice is given, or,, if
notice is waived,, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is properly delivered to the corporation. The record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 General Provisions
-----------------------------
5.1 Fiscal Year. Except as from time to time otherwise designated by the
-----------
Board of Directors, the fiscal year of the corporation shall begin on the first
day of January in each year and end on the last day of December in each year.
5.2 Corporate Seal. The corporate seal shall be in such form as shall be
--------------
approved by the Board of Directors.
5.3 Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these Bylaws, a waiver
of such notice either in
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<PAGE>
writing signed by the person entitled to such notice or such person's duly
authorized attorney, or by telegraph, cable or any other available method,
whether before, at or after the time stated in such waiver, or the appearance of
such person or persons at such meeting in person or by proxy, shall be deemed
equivalent to such notice.
5.4 Voting of Securities. Except as the directors may otherwise designate,
--------------------
the President or Treasurer may waive notice of, and act as, or appoint any
person or persons to act as, proxy or attorney-in-fact for this corporation
(with or without power of substitution) at, any meeting of stockholders or
shareholders of any other corporation or organization, the securities of which
may be held by this corporation.
5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant
---------------------
Secretary, or a temporary Secretary, as to any action taken by the stockholders,
directors, a committee or any officer or representative of the corporation shall
as to all persons who rely on the certificate in good faith be conclusive
evidence of such action.
5.6 Certificate of Incorporation. All references in these Bylaws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 Transactions with Interested Parties. No contract or transaction
------------------------------------
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum;
(2) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
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<PAGE>
5.8 Severability. Any determination that any provision of these By-laws is
------------
for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-laws.
Pronouns. All pronouns used in these By-laws shall be deemed to refer to
--------
the masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require.
ARTICLE 6 Amendment
--------------------
6.1 By the Board of Directors. These Bylaws may be altered, amended or
-------------------------
repealed or new bylaws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present, except as otherwise provided by the
Certificate of Incorporation.
6.2 By the Stockholders. These Bylaws may be altered, amended or repealed
-------------------
or new bylaws may be adopted by the affirmative vote of the holders of a
majority of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, except as otherwise provided by the
Certificate of Incorporation, provided notice of such alteration, amendment,
repeal or adoption of new bylaws shall have been stated in the notice of such
special meeting.
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<PAGE>
Exhibit 10.1
------------
AVICI SYSTEMS INC.
1997 STOCK INCENTIVE PLAN
-------------------------
(as amended on January 21, 1998)
1. Purpose
-------
The purpose of this 1997 Stock Incentive Plan (the "Plan") of Avici Systems
Inc., a Delaware corporation (the "Company"), is to advance the interests of the
Company's stockholders by enhancing the Company's ability to attract, retain and
motivate persons who make (or are expected to make) important contributions to
the Company by providing such persons with equity ownership opportunities and
performance-based incentives and thereby better aligning the interests of such
persons with those of the Company's stockholders. Except where the context
otherwise requires, the term "Company" shall include any present or future
subsidiary corporations of Avici Systems Inc. as defined in Section 424(f) of
the Internal Revenue Code of 1986, as amended, and any regulations promulgated
thereunder (the "Code").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other stock-
based awards (each, an "Award") under the Plan. Any person who has been granted
an Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
--------------------------
(a) Administration by Board of Directors. The Plan will be administered by
------------------------------------
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) Delegation to Executive Officers. To the extent permitted by
--------------------------------
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or
<PAGE>
subcommittees of the Board (a "Committee"). If and when the common stock, $.0001
par value per share, of the Company (the "Common Stock") is registered under the
Securities Exchange Act of 1934 (the "Exchange Act"), the Board shall appoint
one such Committee of not less than two members, each member of which shall be
an "outside director" within the meaning of Section 162(m) of the Code and a
"non-employee director" as defined in Rule 16b-3 promulgated under the Exchange
Act." All references in the Plan to the "Board" shall mean the Board or a
Committee of the Board or the executive officer referred to in Section 3(b) to
the extent that the Board's powers or authority under the Plan have been
delegated to such Committee or executive officer.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 4(c), Awards may
----------------
be made under the Plan for up to 5,526,250 shares of Common Stock. If any Award
expires or is terminated, surrendered or canceled without having been fully
exercised or is forfeited in whole or in part or results in any Common Stock not
being issued, the unused Common Stock covered by such Award shall again be
available for the grant of Awards under the Plan, subject, however, in the case
of Incentive Stock Options (as hereinafter defined), to any limitation required
under the Code. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 4(c), for
---------------------
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares with respect to which any Award may be granted to any
Participant under the Plan shall be 1,000,000 per calendar year. The per-
participant limit described in this Section 4(b) shall be construed and applied
consistently with Section 162(m) of the Code.
(c) Adjustment to Common Stock. In the event of any stock split, stock
--------------------------
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding stock-based Award shall be appropriately adjusted by
the Company (or substituted Awards may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 4(c) applies and Section 8(e)(1)
also applies to any event, Section 8(e)(1) shall be applicable to such event,
and this Section 4(c) shall not be applicable.
5. Stock Options
-------------
(a) General. The Board may grant options to purchase Common Stock (each,
-------
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it
-2-
<PAGE>
considers necessary or advisable. An Option which is not intended to be an
Incentive Stock Option (as hereinafter defined) shall be designated a
"Nonstatutory Stock Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
-----------------------
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other, party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
--------------
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement. No Option will be granted for a term in excess of
10 years.
(e) Exercise of Option. Options may be exercised only by delivery to the
------------------
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
---------------------
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option Agreement,
delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient
funds to pay the exercise price, or delivery by the Participant
to the Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price;
(3) to the extent permitted by the Board and explicitly provided in
an Option Agreement (i) by delivery of shares of Common Stock
owned by the Participant valued at their fair market value as
determined by the Board in good faith ("Fair Market Value"),
which Common Stock was owned by the Participant at least six
months prior to such delivery, (ii) by delivery of a promissory
note of the Participant to the Company on terms determined by the
Board, or (iii) by payment of such other lawful consideration as
the Board may determine; or
(4) any combination of the above permitted forms of payment.
-3-
<PAGE>
6. Restricted Stock
----------------
(a) Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
--------------------
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. Other Stock-Based Awards
------------------------
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
8. General Provisions Applicable to Awards
---------------------------------------
(a) Transferability of Awards. Except a the Board may otherwise determine
-------------------------
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award under the Plan shall be evidenced by a
-------------
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each type
----------------
of Award may be made alone or in addition or in relation to any other type of
Award. The terms of each type of Award need of be identical, and the Board need
not treat Participants uniformly.
-4-
<PAGE>
(d) Termination of Status. The Board shall determine the effect on an
---------------------
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Acquisition Events
------------------
(1) Consequences of Acquisition Events. Upon the occurrence of an
----------------------------------
Acquisition Event (as defined below), or the execution by the
Company of any agreement with respect to an Acquisition Event, the
Board shall take any one or more of the following actions with
respect to then outstanding Awards: (i) provide that outstanding
Options shall be assumed, or equivalent Options shall be
substituted, by the acquiring or succeeding corporation (or an
affiliate thereof), provided that any such Options substituted for
Incentive Stock Options shall satisfy, in the determination of the
Board, the requirements of Section 424(a) of the Code; (ii) upon
written notice to the Participants, provide that all or a portion
of then unexercised Options will become exercisable in full or in
part as of a specified time (the "Acceleration Time") prior to the
Acquisition Event and will terminate immediately prior to the
consummation of such Acquisition Event, except to the extent
exercised by the Participants between the Acceleration Time and
the consummation of such Acquisition Event; (iii) in the event of
an Acquisition Event under the terms of which holders of Common
Stock will receive upon consummation thereof a cash payment for
each share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), provide that all
outstanding Options shall terminate upon consummation of such
Acquisition Event and each Participant shall receive, in exchange
therefor, a cash payment equal to the amount (if any) by which (A)
the Acquisition Price multiplied by the number of shares of Common
Stock subject to such outstanding Options (whether or not then
exercisable), exceeds (B) the aggregate exercise price of such
Options; (iv) provide that all or any portion of the Restricted
Stock Awards then outstanding shall become free of all or certain
restrictions prior to the consummation of the Acquisition Event;
and (v) provide that any other stock-based Awards outstanding (A)
shall become exercisable, realizable or vested in full or in part,
or shall be free of all or certain conditions or restrictions, as
applicable to each such Award, prior to the consummation of the
Acquisition Event, or (B), if applicable, shall be assumed, or
equivalent Awards shall be substituted, by the acquiring or
succeeding corporation (or an affiliate thereof); provided that in
--------
no event shall the Board accelerate the vesting of any option,
Restricted Stock Award or other Award by a period of more than one
year.
An "Acquisition Event" shall mean: (a) any merger or consolidation which
results in the voting securities of the Company outstanding immediately prior
thereto representing
-5-
<PAGE>
immediately thereafter (either by remaining outstanding or by being converted
into voting securities of the surviving or acquiring entity) less than 51% of
the combined voting power of the voting securities of the Company or such
surviving or acquiring entity outstanding immediately after such merger or
consolidation; (b) any sale of all or substantially all of the assets of the
Company; or (c) the complete liquidation of the Company.
(2) Assumption of Options Upon Certain Events. The Board may grant
-----------------------------------------
Awards under the Plan in substitution for stock and stock-based
awards held by employees of another corporation who become
employees of the Company as a result of a merger or consolidation
of the employing corporation with the Company or the acquisition
by the Company of property or stock of the employing corporation.
The substitute Awards shall be granted on such terms and
conditions as the Board considers appropriate in the
circumstances.
(f) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(h) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(i) Acceleration. The Board may at an time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
-6-
<PAGE>
9. Miscellaneous
-------------
(a) No Right To Employment or Other Status. No person shall have any claim
--------------------------------------
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
(c) Effective Date and Term of Plan. The Plan shall become effective on
-------------------------------
the date on which it is adopted by the Board. No Awards shall be granted under
the Plan after the completion of ten years from the earlier of (i) the date on
which the Plan was adopted by the Board or (ii) the date a Plan was approved by
the Company's stockholders, but Awards previously granted may extend beyond that
date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time.
(e) Governing Law. The provisions of the Plan and all Awards made
-------------
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
-7-
<PAGE>
Exhibit 10.5
------------
FIFTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
----------------------------------------------------
This Agreement, dated as of April 24, 2000 is entered into by and among
Avici Systems Inc. (the "Company"), (i) 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 (collectively, the "Accel Entities"), Oak Investment
Partners VII, L.P., Oak VII Affiliates Fund, L.P., Brentwood Associates VII,
L.P., Brentwood Affiliates Fund, Polaris Venture Partners, L.P., Polaris Venture
Partners Founders' Fund, L.P., Nortel Networks Inc. ("Nortel"), Comdisco, Inc.
("Comdisco"), Amerindo Technology Growth Fund II and Litton Master Trust
(collectively, the "Amerindo Entities"), Anschutz Family Investment Company LLC
("Anschutz"), Tudor Arbitrage Partners, L.P., Tudor BVI Futures, Ltd., Tudor
Raptor Global Fund, Ltd. and Raptor Global Fund, L.P. (collectively, the "Tudor
Entities"), Bayview Investors, Ltd., J.P. Morgan Direct Venture Capital
Institutional Investors LLC, J.P. Morgan Direct Venture Capital Private
Investors LLC, MeriTech Capital Partners L.P., MeriTech Capital Affiliates L.P.,
DLJ Capital Corp., DLJ ESC II, L.P., Sprout Capital VIII, L.P., Sprout Venture
Capital, L.P., Merrill Lynch IBK Positions Inc., Merrill Lynch KECALP L.P. 1999,
KECALP Inc., as nominee for Merrill Lynch KECALP International L.P. 1999, Nissho
Electronics (USA) Corporation, Nissho Electronics Corporation, TWP Avici
Investors, Tailwind Capital Partners, L.P., Itochu Corporation, Itochu
Technology, Inc., Itochu Techno-Science Corporation, Itochu International, Inc.,
Dell USA L.P., Enron Communications Investments Corp., A.C.E. Investment
Partnership and Semir Sirazi (individually an "Existing Institutional Investor"
and collectively the "Existing Institutional Investors"), (ii) Samsung Venture
Investment Corp., Spinnaker Clipper Fund, LP, Spinnaker Crossover Fund, LP,
Spinnaker Crossover Institutional Fund, LP, 522 Fifth Avenue Fund L.P. and
Williams Communications, Inc. (individually a "New Institutional Investor" and
collectively the "New Institutional Investors"), (iii) Rein & Co., Inc.,
Terrance E. Bradley, Les Strauss, H & D Investments 97, Jim McQuillan, William
Dally, Smith Barney as Custodian for the IRA or Keogh of William F. Mann, Scott
Bradner, Surya Panditi, Robert Vetromile, Jr., Nicole A. Panditi, Karen M.
Dionne, Manuel Henriquez, Anthony Ciulla, Joaquin Garcia-Larrieu, James
Stableford, Marc Weiss, Shimon Amir, John Colorusso, Cecil Dean, Richard
Escalera and P. Allen King (individually an "Existing Additional Stockholder"
and collectively the "Existing Additional Stockholders"), (iv) Paul Brauneis,
Catherine Hapka, James Mongiello, Synergy Venture Partners I, L.P. and Testa,
Hurwitz & Thibeault, LLP, d/b/a: High Street Investors 2000 (individually a "New
Additional Stockholder" and collectively the "New Additional Stockholders"), (v)
those individuals, partnerships, corporations or other entities identified on
Exhibit A hereto as Subsequent Closing Investors (the "Subsequent Closing
- ---------
Investors") and (vi) Henry Zannini, Philip Carvey and Larry Dennison
(individually a "Founder" and collectively the "Founders"). The (i) Existing
Institutional Investors, the New Institutional Investors and the Subsequent
Closing Investors are sometimes referred to in this Agreement as the
"Institutional Investors", (ii) Existing Additional Stockholders and the New
Additional Stockholders are sometimes referred to in this Agreement as the
"Additional Stockholders" and (iii) the Institutional Investors and Additional
Stockholders are sometimes referred to in this Agreement as the "Investors."
BACKGROUND
----------
<PAGE>
WHEREAS, the Founders own 1,925,000 outstanding shares of Common Stock,
$.0001 par value of the Company (the "Common Stock");
WHEREAS, certain of the Investors hold 1,750,000 shares of the Company's
Series A Convertible Preferred Stock, $.01 par value per share (the "Series A
Preferred"), pursuant to a Series A Convertible Preferred Stock Purchase
Agreement, dated November 22, 1996, among the Company, such Investors and
certain of the Founders (the "Series A Purchase Agreement);
WHEREAS, certain of the Investors hold 10,517,000 shares of Series B
Convertible Preferred Stock, $.01 par value per share (the "Series B
Preferred"), pursuant to a Series B Convertible Preferred Stock Purchase
Agreement, among the Company, such Investors and the Founders dated May 14, 1997
as to certain of the Investors and July 31, 1997 as to certain other Investors
(the "Series B Purchase Agreement");
WHEREAS, Nortel holds 5,000,000 shares of Series C Convertible Preferred
Stock, $.01 par value per share (the "Series C Preferred"), pursuant to a Series
C Convertible Preferred Stock Purchase Agreement, dated January 28, 1998, as
amended, between the Company and Nortel (the "Series C Purchase Agreement");
WHEREAS, certain of the Investors hold 5,428,500 shares of Series D
Convertible Preferred Stock, $.01 par value per share (the "Series D
Preferred"), pursuant to a Series D Convertible Preferred Stock Purchase
Agreement, among the Company, such Investors and the Founders dated January 28,
1998 as to certain of the Investors and March 31, 1998 as to certain other
Investors (as amended to date, the "Series D Purchase Agreement");
WHEREAS, certain of the Investors hold 7,185,627 shares of Series E
Convertible Preferred Stock, $.01 par value per share (the "Series E
Preferred"), pursuant to a Series E Convertible Preferred Stock Purchase
Agreement, among the Company, such Investors and the Founders dated September 2,
1999 as to certain of the Investors and October 7, 1999 as to certain other
Investors (as amended to date, the "Series E Purchase Agreement");
WHEREAS, the Company and certain of the Investors have entered into a
Series F Preferred Stock Purchase Agreement of even date herewith (the "Series F
Purchase Agreement") (collectively with the Series A Purchase Agreement, the
Series B Purchase Agreement, the Series C Purchase Agreement, the Series D
Purchase Agreement and the Series E Purchase Agreement, the "Purchase
Agreements") pursuant to which such Investors have purchased shares of the
Company's Series F Convertible Preferred Stock, $.01 par value ("Series F
Preferred") (collectively with the Series A Preferred, the Series B Preferred,
the Series C Preferred, the Series D Preferred and the Series E Preferred, the
"Preferred Stock");
WHEREAS, the Stockholders (as defined in Article 1) wish to provide for,
among other undertakings, (i) their continuing representation on the Board of
Directors of the Company, (ii) certain arrangements with respect to the
registration of shares of capital stock of the Company
2
<PAGE>
under the Securities Act (as defined in Article 1) and (iii) certain rights with
respect to the sale of any securities of the Company;
WHEREAS, the Company, certain of the Investors and the Founders entered
into a Fourth Amended and Restated Investor Rights Agreement dated as of
September 2, 1999, as amended (the "Prior Investor Rights Agreement");
WHEREAS, the Company, the Investors and the Founders wish to amend and
restate the Prior Investor Rights Agreement in its entirety to make each of the
New Institutional Investors and each of the New Additional Stockholders a party
thereto and to make certain other changes to the terms thereof; and
WHEREAS, the Investors and the Founders who or which have executed this
Agreement are the holders of at least 60% of the voting power of the "Voting
Shares", "Registrable Shares" or "Shares" as each is defined in the Prior
Investor Rights Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, and the consummation of the sale and purchase of
the Series F Preferred pursuant to the Series F Purchase Agreement, and for
other valuable consideration, receipt of which is hereby acknowledged, the
parties hereto agree to amend and restate the Prior Investor Rights Agreement as
follows:
ARTICLE I. DEFINITIONS
A. Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Affiliate" means, with respect to a specified Person, a Person that,
---------
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with, the Person specified; provided
that, with respect to any Institutional Investor, "Affiliate" also means all
mutual funds or other pooled investment vehicles or entities under the control
or management of such Institutional Investor, or the general partner or
investment advisor of such Institutional Investor, or any Affiliate of such
mutual funds, pooled investment vehicles, general partner or investment advisor,
or any other Institutional Investor under the control or management of, or whose
assets are under the control or management of, any such Affiliate.
"Commission" means the United States Securities and Exchange
----------
Commission, or any other federal agency at the time administering the Securities
Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any similar federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
"Initial Public Offering:" means the initial public offering of shares
-----------------------
of Common Stock pursuant to a Registration Statement at a price to the public of
at least $15.00 per share
3
<PAGE>
(subject to appropriate adjustments for stock splits, stock dividends,
combinations and other similar recapitalizations affecting such shares)
resulting in gross proceeds to the Company (net of all underwriting discounts
and commissions) of at least $25,000,000.
"Person" means, with respect to Article VI, an individual,
------
partnership, corporation (including a business trust), joint stock company,
trust, unincorporated association, joint venture or other entity, or government
or any agency or political subdivision thereof.
"Registration Statement" means a registration statement filed by the
----------------------
Company with the Commission for a public offering and sale of Common Stock
(other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
"Registration Expenses" means the expenses described in Article II,
---------------------
Section 4.
"Registrable Shares" means (i) the shares of Common Stock issued or
------------------
issuable upon conversion of the Shares, (ii) any shares of Common Stock, and any
shares of Common Stock issued or issuable upon the conversion or exercise of any
other securities, acquired by the Investors pursuant to Articles IV or V and
(iii) any other shares of Common Stock issued in respect of such shares (because
of stock splits, stock dividends, reclassifications, recapitalizations, or
similar events); provided, however, that shares of Common Stock which are
-----------------
Registrable Shares shall cease to be Registrable Shares (a) upon any sale
pursuant to a Registration Statement or Rule 144 under the Securities Act, (b)
upon any sale in any manner to a person or entity which, by virtue of Article
VII, Section 2, is not entitled to the rights provided by this Agreement or (c)
in the circumstances set forth in Article VII, Section 2. Wherever reference is
made in this Agreement to a request or consent of holders of a certain
percentage of Registrable Shares, the determination of such percentage shall
include shares of Common Stock issuable upon conversion of the Shares even if
such conversion has not yet been effected.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.
"Shares" shall mean (i) the shares of Series A Preferred, Series B
------
Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series
F Preferred issued and sold pursuant to the Purchase Agreements and (ii) only
with respect to the provisions of Article V, the shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred
and Series F Preferred issued and sold pursuant to the Purchase Agreements and
any Voting Shares held by the Founders.
"Stockholders" means the Investors, the Founders and any persons or
------------
entities to whom the rights granted under this Agreement are transferred by any
Investor or any Founder, their successors or assigns pursuant to Article VII,
Section 2.
4
<PAGE>
"Voting Shares" means any and all shares of Common Stock, Series A
-------------
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, Series F Preferred and/or shares of capital stock of the Company, by
whatever name called, which carry voting rights (including voting rights which
arise by reason of default) which are now owned or subsequently acquired by a
Stockholder, however acquired, including without limitation shares of capital
stock acquired pursuant to stock splits, stock dividends combinations and other
similar events affecting such shares.
ARTICLE II. VOTING RIGHTS
A. Voting of Shares.
----------------
(a) In any and all elections of directors of the Company (whether at a
meeting or by written consent in lieu of a meeting), each Stockholder shall vote
or cause to be voted all Voting Shares owned by him or it, or over which he or
it has voting control, and otherwise use his or its respective best efforts, so
as to fix the number of directors of the Company at eight (8) until such time as
a majority of the outstanding shares of Series C Preferred Stock are held of
record and beneficially owned by an entity other than Nortel and/or Nortel's
Affiliate(s) collectively (a "Non-Nortel Holder"), and to elect, (i) four (4)
members designated by the holders of a majority of the shares of Common Stock
and Shares then outstanding, on an as converted basis, one of which members
shall be the Chief Executive Officer, so long as he or she holds that office,
(ii) three (3) members designated by the Institutional Investors, one of which
will be designated by each of (x) the Accel Entities, (y) Oak Investment
Partners VII, L.P. and Oak VII Affiliates Fund, L.P. and (z) Brentwood
Associates VII, L.P. and Brentwood Affiliates Fund and (iii) one (1) member
designated by a majority in interest of the holders of Series E Preferred and
approved by the Chief Executive Officer of the Company (which approval shall not
be unreasonably withheld), which member shall be a representative of the holders
of shares of Series E Preferred and shall initially be Stephen M. Diamond. Upon
such time as a Non-Nortel Holder holds a majority of the outstanding shares of
Series C Preferred Stock, the number of directors of the Company will be fixed
at nine (9) , and eight (8) members will be elected in accordance with
subsections (i), (ii) and (iii) above and one (1) member designated by the Non-
Nortel Holder and approved by a majority of the other seven members, which
approval shall not be unreasonably withheld.
(b) The Company shall provide the Stockholders with thirty (30) days'
prior written notice of any intended mailing of a notice to Stockholders for a
meeting at which directors are to be elected.
(c) No Revocation. The voting agreements contained herein are coupled
-------------
with an interest and may not be revoked, except by written consent of the
holders of 60% of the Voting Shares held by all Stockholders.
(d) Indemnification. In the event that any director elected pursuant
---------------
to Section 1 of this Article II shall be made or threatened to be made a party
to any action, suit or
5
<PAGE>
proceeding with respect to which he may be entitled to indemnification by the
Company pursuant to its Certificate of Incorporation or Bylaws, or otherwise, he
shall be entitled to be represented in such action, suit or proceeding by
counsel of his choice and the reasonable expenses of such representation shall
be reimbursed by the Company to the extent provided in or authorized by said
Certificate of Incorporation or By-laws. Each Stockholder agrees not to take any
action to amend any provisions of the Certificate of Incorporation or By-laws of
the Company relating to indemnification of directors, as presently in effect,
without the prior written consent of all of the Stockholders.
(e) Restrictive Legend. All certificates representing Voting Shares
------------------
owned or hereafter acquired by the Stockholders or any transferee of the
Stockholders bound by this Agreement shall have affixed thereto a legend
substantially in the following form:
"The shares of stock represented by this certificate are subject to
certain voting agreements as set forth in an Investor Rights Agreement
by and among the registered owner of this certificate, the corporation
and certain other shareholders of the corporation, a copy of which is
available for inspection at the office of the Secretary of the
corporation."
(f) Transfers of Voting Rights. Any transferee to whom Voting Shares
--------------------------
are transferred by a Stockholder, whether voluntarily or by operation of law,
shall be bound by the voting obligations imposed upon the transferor under this
Agreement, and shall be entitled to the rights granted to the transferor under
this Agreement, to the same extent as if such transferee were a Stockholder
hereunder.
ARTICLE III. REGISTRATION RIGHTS
1. Required Registrations.
----------------------
(a) At any time after (x) August 13, 2002, any Investor or Investors
holding at least 50% of the Registrable Shares or (y) the earlier of one hundred
eighty (180) days subsequent to an Initial Public Offering or ninety (90) days
subsequent to the exercise of the right provided in subparagraph (x) immediately
preceding, each of Nortel and, collectively, the Amerindo Entities, may request,
in writing, that the Company effect the registration (i) on Form S-1 or Form S-2
(or any successor form) of at least 50% of the Registrable Shares owned by
holder(s) having an aggregate offering price of at least $10,000,000 (based on
the then current market price or fair value) or (ii) on Form S-3 (or any
successor form) of Registrable Shares owned by such holder(s) having a minimum
aggregate offering price of at least $2,500,000 (based on the then current
market price or fair value). If the Investor or Investors initiating the
registration intend(s) to distribute the Registrable Shares by means of an
underwriting, such Investors shall so advise the Company in its request. In the
event such registration is underwritten, the rights of other Investors to
participate in such registration shall be conditioned on such Investors'
participation in such underwriting. If any such registration is underwritten,
6
<PAGE>
the Company in its sole discretion, will select and obtain an underwriter(s) of
nationally recognized standing to administer the offering. Upon receipt of any
such request, the Company shall promptly give written notice of such proposed
registration to all other Investors. Such Investors shall have the right, by
giving written notice to the Company within thirty (30) days after the Company
provides its notice, to elect to have included in such registration such of
their Registrable Shares as such Investors may request in such notice of
election; provided that if the underwriter (if any) managing the offering
determines that, because of marketing factors, all of the Registrable Shares
requested to be registered by all Investors may not be included in the offering,
then all Investors who have requested registration shall participate in the
registration pro rata based upon the number of Registrable Shares which they
have requested to be so registered; and provided further, in the case of a
registration initiated by the Amerindo Entities pursuant to clause (y) of this
paragraph (a), the Registrable Shares held by all Investors other than the
Amerindo Entities requested to be included in such registration shall be subject
to reduction in accordance with the provisions of the preceding clause before
any reduction is made in the number of Registrable Shares to be so included
which were requested to be registered by the Amerindo Entities. In the event
that the number of Registrable Shares requested to be registered by either
Anschutz and/or the Tudor Entities in a registration initiated by the Amerindo
Entities is reduced by more than fifty percent (50%) in accordance with the
provisions of the preceding sentence, Anschutz and/or the Tudor Entities, singly
or jointly, as the case may be, shall be entitled to request, in writing, that
the Company effect the registration on Form S-3 (or any successor form) of
Registrable Shares owned by it or them having a minimum aggregate offering price
of at least $2,500,000 (based on the then current market price or fair value),
and the Registrable Shares held by all Investors other than Anschutz and/or the
Tudor Entities requested to be included in such registration in accordance with
this paragraph (a) shall be subject to reduction in accordance with the
provisions of the preceding sentence before any reduction is made in the number
of Registrable Shares to be so included which were requested to be registered by
Anschutz and/or the Tudor Entities. Thereupon, the Company shall, as
expeditiously as possible, use its reasonable best efforts to effect within
ninety (90) days of receipt of such request the registration on Form S-1, Form
S-2 or Form S-3 (or any successor form) of all Registrable Shares which the
Company has been requested to so register.
(b) The Company shall not be required to effect more than two (2)
registrations pursuant to clause (x) and three (3) registrations pursuant to
clause (y) of paragraph (a) of Section 1 of this Article III (for a total of
five registrations); provided, however, that such obligation shall be deemed
-------- -------
satisfied only when a registration statement covering the applicable Registrable
Shares shall have (i) become effective and, if such method of disposition is a
firm commitment underwritten public offering, all such Registrable Shares have
been sold pursuant thereto, or (ii) been (x) withdrawn at the request of the
Investor(s) requesting such registration (other than as a result of information
concerning the business or financial condition of the Company which is made
known to the Investor(s) after the date on which such registration was
requested) and (y) such Investor(s) has (have) not elected not to have such
registration counted, and pay its pro rata portion of the Registration Expenses
of such registration, pursuant to Article III, Section 4. In addition, the
Company shall not be required to effect any registration within one hundred
eighty (180) days after the effective date of any other Registration Statement
on Form S-
7
<PAGE>
1 or S-3 involving an underwritten offering of the Company and the Company shall
not be required to file more than one Registration Statement on Form S-3 in any
one (1) year period.
(c) In the case of a request to register Registrable Shares pursuant
to this Article III, Section 1 which is not subject to the restrictions set
forth in Section 8 of this Article III, neither the Company nor the Investors
shall effect any sale or distribution (except that a distribution to a partner,
stockholder or affiliate of the Company or an Investor shall be permitted),
including any private placement or any sale pursuant to Rule 144 or Rule 144A,
of any Registrable Shares, or other equity of the Company (other than
Registrable Shares included in such registration and any shares acquired in
connection with the Company's initial public offering of Common Stock or in the
open market following the effectiveness of the Company's first Registration
Statement covering Common Stock to be sold on its behalf to the public in an
underwritten offering) during the 7-day period prior to and the 90-day period
(or such other period agreed to by the managing underwriter (if any)) following,
the effective date of the Registration Statement in such registration.
(d) Notwithstanding subsection (c) of Section 1 of this Article III,
if at the time of any request to register Registrable Shares pursuant to this
Article III, Section 1, the Company is engaged or has plans to engage within one
hundred twenty (120) days of the time of the request in a registered public
offering of securities for its own account or is engaged in any other activity
which, in the good faith determination of a majority of the Company's Board of
Directors, would be adversely affected by the requested registration to the
material detriment of the Company, then the Company may at its option direct
that such request be delayed for a period not in excess of one hundred twenty
(120) days from the effective date of such offering or the date of commencement
of such other material activity, as the case may be, but in no event shall such
delay exceed one hundred fifty (150) days from the time of any such request, and
such right to delay a request shall not be exercised by the Company more than
once in any 18-month period.
2. Incidental Registration.
-----------------------
(a) Whenever the Company proposes to file a Registration Statement at
any time and from time to time, it will, prior to such filing, give written
notice to all Investors of its intention to do so and, upon the written request
of such Investor(s) given within thirty (30) days after the Company provides
such notice (which request shall state the intended method of disposition of
such Registrable Shares), the Company shall use its reasonable best efforts to
cause all Registrable Shares which the Company has been requested by such
Investor(s) to register to be registered under the Securities Act to the extent
necessary to permit their sale or other disposition in accordance with the
intended methods of distribution specified in the request of such Investor(s);
provided, however, that the Company shall have the right to postpone or withdraw
- -------- -------
any registration effected pursuant to this Article III, Section 2 without
obligation to any Investor.
(b) In connection with any registration under this Article III,
Section 2 involving an underwriting, the Company shall not be required to
include any Registrable Shares in such registration unless the holders thereof
accept the terms of the underwriting as agreed
8
<PAGE>
upon between the Company and the underwriters selected by it. If in the opinion
of the managing underwriter it is desirable because of marketing factors to
limit the number of Registrable Shares to be included in the offering, then the
Company shall be required to include in the registration only that number of
Registrable Shares, if any, which the managing underwriter believes should be
included therein; provided, however, that no persons or entities other than the
-------- -------
Company, the Investors and other persons or entities holding registration rights
shall be permitted to include securities in the offering and provided further
that no other person or entities holding registration rights shall be entitled
to include any securities in the offering until, and only to the extent that,
all Registrable Securities that the Investors have requested to be included are
so included. If the number of Registrable Shares to be included in the offering
in accordance with the foregoing is less than the total number of shares which
the Investors have requested to be included, then the Investors who have
requested registration shall participate in the registration pro rata based upon
their total ownership of shares of Common Stock (giving effect to the conversion
into Common Stock of all securities convertible thereunto). If any holder (in
the case of more than one Investor) would thus be entitled to include more
securities than such holder requested to be registered, the excess shall be
allocated among other requesting holders pro rata in the manner described in the
preceding sentence.
3. Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of this Agreement to use its reasonable best efforts to effect
the registration of any of the Registrable Shares under the Securities Act, the
Company shall:
(a) File with the Commission a Registration Statement with respect to
such Registrable Shares and use its reasonable best efforts to cause that
Registration Statement to become and remain effective;
(b) As expeditiously as possible prepare and file with the Commission
any amendments and supplements to the Registration Statement and the prospectus
included in the Registration Statement as may be necessary to keep the
Registration Statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of the Registrable Shares covered
by such Registration Statement, in the case of a firm commitment underwritten
public offering, until each underwriter has completed the distribution of all
securities purchased by it and, in the case of any other offering, until the
earlier of the sale of all Registrable Shares covered thereby or one hundred
eighty (180) days after the effective date thereof;
(c) As expeditiously as possible furnish to each selling Investor(s)
such reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the selling Investor may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Shares owned
by the selling Investor(s);
(d) As expeditiously as possible use its best efforts to register or
qualify the Registrable Shares covered by the Registration Statement under the
securities or Blue Sky laws of such states as the selling Investor(s) shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the selling Investor(s) to consummate the
9
<PAGE>
public sale or other disposition in such states of the Registrable Shares owned
by the selling Investor(s); provided, however, that the Company shall not be
-------- -------
required in connection with this paragraph (d) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction;
(e) Notify each holder of Registrable Shares covered by such
Registration Statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or the happening of any event
as a result of which the prospectus included in such Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(f) Cause all such Registrable Shares registered hereunder to be
listed on each securities exchange on which similar securities issued by the
Company are then listed; and
(g) Provide a transfer agent and registrar for all Registrable Shares
registered hereunder and a CUSIP number for all such Registrable Shares, in each
case not later than the effective date of such registration.
If the Company has delivered preliminary or final prospectuses to the
selling Investor(s) and after having done so the prospectus is amended to comply
with the requirements of the Securities Act, the Company shall promptly notify
the selling Investor(s) and, if requested, the selling Investor(s) shall
immediately cease making offers of Registrable Shares and return all
prospectuses to the Company. The Company shall promptly provide each selling
Investor(s) with revised prospectuses and, following receipt of the revised
prospectuses, the selling holder shall be free to resume making offers of the
Registrable Shares.
4. Allocation of Expenses. The Company will pay all Registration Expenses
----------------------
(defined below) of all registrations under this Agreement; provided, however,
-------- -------
that if a registration under Article III, Section 1(a)(i) or (ii) is withdrawn
at the request of the selling Investor(s) requesting such registration (other
than as a result of information concerning the business or financial condition
of the Company which is made known to the selling Investor(s) after the date on
which such registration was requested) and if the requesting Investor(s) elects
not to have such registration counted as a registration requested under Article
III, Section 1(a)(i) or (ii), the requesting Investor(s) shall pay the
Registration Expenses of such registration pro rata in accordance with the
number of their Registrable Shares included in such registration. For purposes
of this Article III, Section 4, the term "Registration Expenses" shall mean all
expenses incurred by the Company in complying with the provisions of this
Article III including, without limitation, all registration and filing fees,
exchange listing fees, printing expenses, fees and expenses of counsel for the
Company, fees and expenses of an accountant for the Company and the fees and
expenses of one counsel selected by the selling Investor(s) and state Blue Sky
fees and expenses, but excluding underwriting discounts, selling commissions,
and the fees and expenses of selling Investor(s)' own counsel (other than the
one counsel selected to represent all selling Investor(s)).
10
<PAGE>
5. Indemnification and Contribution.
--------------------------------
(a) In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, the Company will indemnify
and hold harmless the seller of such Registrable Shares, each underwriter of
such Registrable Shares, and each other person, if any, who controls such seller
or underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to which
such seller, underwriter or controlling person may become subject under the
Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to such Registration
Statement, (ii) arise out of or are based upon the omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) any violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law; and the Company will pay to each such seller, underwriter and
each such controlling person as incurred, any legal or any other expenses
reasonably incurred by such seller, underwriter or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
-------- -------
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or final prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of such seller,
underwriter or controlling person specifically for use in the preparation
thereof.
(b) In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, each seller of Registrable
Shares, severally and not jointly, will indemnify and hold harmless the Company,
each of its directors and officers and each underwriter (if any) and each
person, if any, who controls the Company or any such underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages or liabilities, joint or several, to which the Company, such directors
and officers, underwriter or controlling person may become subject under the
Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement under which
such Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to the Registration Statement, or
arise out of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if the statement or omission was made in reliance upon
and in conformity with information relating to such seller furnished in writing
to the Company by or on behalf of such seller specifically for use in connection
with the preparation of such Registration Statement,
11
<PAGE>
prospectus, amendment or supplement; provided, however, that the obligations of
-------- -------
such sellers of Registrable Shares hereunder shall be limited to an amount equal
to the net proceeds to each seller from the Registrable Shares sold in
connection with such registration.
(c) Each party entitled to indemnification under this Article III,
Section 5 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has received notice of the commencement of any action for any
claim as to which indemnity may be sought, and shall permit the Indemnifying
Party to assume the defense of any such claim or any litigation resulting
therefrom if the Indemnifying Party acknowledges in writing its obligation to
indemnify; provided, that counsel for the Indemnifying Party, who shall conduct
--------
the defense of such claim or litigation, shall be approved by the Indemnified
Party (whose approval shall not be unreasonably withheld); and, provided
--------
further, that the failure of any Indemnified Party to give notice as provided
- -------
herein shall not relieve the Indemnifying Party of its obligations under this
Article III, Section 5 unless the failure to give notice to the Indemnifying
Party is prejudicial to the Indemnifying Party's ability to defend such claim or
litigation. Notwithstanding the foregoing, the failure to give notice shall not
relieve the Indemnifying Party of any liability that it may have to any
Indemnified Party otherwise than under this Article III, Section 5. The
Indemnified Party may participate in such defense at such party's expense;
provided, however, that the Indemnifying Party shall pay such expense if
- -------- -------
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding. No Indemnifying Party, in the defense of any such
claim or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect of such
claim or litigation, and no Indemnified Party shall consent to entry of any
judgment or settle such claim or litigation without the prior written consent of
the Indemnifying Party, which consent shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Registrable Shares exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Article III, Section 5 but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Article III, Section 5 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
selling holder or any such controlling person in circumstances for which
indemnification is provided under this Article III, Section 5; then, in each
such case, the Company and such holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportions as is appropriate to reflect the relative fault
of the indemnified party on the one hand and of the indemnified party on the
other in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative
12
<PAGE>
fault of the indemnifying party and of the indemnified party shall be determined
by a court of law by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission;
provided, however, that, in any such case, (A) no such holder will be required
- -------- -------
to contribute any amount in excess of the proceeds to it of all Registrable
Shares sold by it pursuant to such Registration Statement, and (B) no person or
entity guilty of fraudulent misrepresentation, within the meaning of Section
11(f) of the Securities Act, shall be entitled to contribution from any person
or entity who is not guilty of such fraudulent misrepresentation.
6. Indemnification with Respect to Underwritten Offerings. In the event
------------------------------------------------------
that Registrable Shares are sold pursuant to a Registration Statement in an
underwritten offering pursuant to Article III, Section 1, the Company agrees to
enter into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of an issuer of the
securities being registered and customary covenants and agreements to be
performed by such issuer, including without limitation customary provisions with
respect to indemnification by the Company of the underwriters of such offering.
7. Information by Holder. Each Investor including Registrable Shares in
---------------------
any registration shall furnish to the Company such information regarding such
holder and the distribution proposed by such holder as the Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement.
8. "Stand-Off" Agreement. Each Investor, if requested by the Company and
---------------------
the managing underwriter of an offering by the Company of Common Stock or other
securities of the Company pursuant to a Registration Statement, shall agree not
to sell publicly or otherwise transfer or dispose of any Registrable Shares or
other securities of the Company held by such Investor for a specified period of
time (as negotiated between the Company and the managing underwriter not to
exceed one hundred eighty (180) days) following the effective date of such
Registration Statement; provided, that:
--------
(a) Such agreement shall only apply to the first Registration
Statement covering Common Stock to be sold on its behalf to the public in an
underwritten offering and shall not apply to any shares acquired in such
offering (other than those acquired pursuant to Section 1 of Article IV hereof)
or to any shares acquired in the open market following such offering; and
(b) All stockholders of the Company holding not less than the number
of such shares of Common Stock held by such Investor (including shares of Common
Stock issuable upon the conversion of the Shares, or other convertible
securities, or upon the exercise of options, warrants or rights) and all
officers and directors of the Company enter into or are bound by similar
agreements.
13
<PAGE>
Such agreement shall be in writing in a form reasonably satisfactory
to the Company and such underwriter. The Company may impose stop-transfer
instructions with respect to the Registrable Shares or other securities subject
to the foregoing restriction until the end of the stand-off period.
9. Limitations on Subsequent Registration Rights. The Company shall not,
---------------------------------------------
without the prior written consent of the Investors holding at least sixty
percent (60%) of the Registrable Shares, enter into any agreement (other than
this Agreement) with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder (a) to include
securities of the Company in any Registration Statement, unless under the terms
of such agreement, such holder or prospective holder may include such securities
in any such registration only on terms subordinate to the terms on which such
Investors may include their respective shares in such registration, or (b) to
make a demand registration which could result in such registration statement
being declared effective prior to the earlier of August 13, 2002 or one hundred
eighty (180) days subsequent to an Initial Public Offering.
10. Rule 144 Requirements. After the earliest of (a) the closing of the
---------------------
sale of securities of the Company pursuant to a Registration Statement, (b) the
registration by the Company of a class of securities under Section 12 of the
Exchange Act, or (c) the issuance by the Company of an offering circular
pursuant to Regulation A under the Securities Act, the Company agrees to:
(i) Comply with the requirements of Rule 144(c) under the Securities
Act with respect to current public information about the Company;
(ii) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(iii) Furnish to any holder of Registrable Shares upon request (A) a
written statement by the Company as to its compliance with the requirements of
said Rule 144(c), and the reporting requirements of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), (B) a copy of the most recent annual or quarterly report of the
Company, and (C) such other reports and documents of the Company as such holder
may reasonably request to avail itself of any similar rule or regulation of the
Commission allowing it to sell any such securities without registration.
11. Mergers, Etc. The Company shall not, directly or indirectly, enter
------------
into any merger, consolidation or reorganization in which the Company shall not
be the surviving corporation unless the proposed surviving corporation shall,
prior to such merger, consolidation or reorganization, agree in writing to
assume the obligations of the Company under this Agreement, and for that purpose
references hereunder to "Registrable Shares" shall be deemed to be references to
the securities which the Investors would be entitled to receive in exchange for
Registrable Shares under any such merger, consolidation or reorganization;
provided, however, that the provisions of this Article III, Section 11 shall not
- -------- -------
apply in the event of any merger,
14
<PAGE>
consolidation or reorganization in which the Company is not the surviving
corporation if all holders are entitled to receive in exchange for their
Registrable Shares consideration consisting solely of (a) cash, (b) securities
of the acquiring corporation which may be immediately sold to the public without
registration under the Securities Act (including pursuant to Rule 144 and/or
Rule 145 promulgated thereunder), or (c) securities of the acquiring corporation
which the acquiring corporation has agreed to register within ninety (90) days
of completion of the transaction for resale to the public pursuant to the
Securities Act.
ARTICLE IV. RIGHT OF FIRST REFUSAL ON SALES
OF SECURITIES BY THE COMPANY
1. Right of First Refusal
----------------------
(a) The Company shall not issue, sell or exchange, agree to issue,
sell or exchange, or reserve or set aside for issuance, sale or exchange, (i)
any shares of its Common Stock, (ii) any other equity securities of the Company,
including, without limitation, shares of preferred stock, (iii) any option,
warrant or other right to subscribe for, purchase or otherwise acquire any
equity securities of the Company, or (iv) any debt securities convertible into
capital stock of the Company (collectively, the "Offered Securities"), unless in
each such case the Company shall have first complied with this Agreement. The
Company shall deliver to the Institutional Investors a written notice of any
proposed or intended issuance, sale or exchange of Offered Securities (the
"Offer"), which Offer shall (i) state that it has received a bona fide offer to
purchase Offered Securities, (ii) identify and describe the Offered Securities,
(iii) describe the price and other terms upon which they are to be issued, sold
or exchanged, and the number or amount of the Offered Securities to be issued,
sold or exchanged, (iv) identify the persons or entities, if known, to which or
with which the Offered Securities are to be offered, issued, sold or exchanged,
and (v) offer to issue and sell to or exchange with each Institutional Investor
its or his/her pro rata share of the Offered Securities. The amount of Offered
Securities to be offered by the Company to each Institutional Investor for
issuance, sale or exchange shall be determined as follows: (A) each
Institutional Investor may subscribe for an amount of the Offered Securities in
proportion to the amount that the number of Voting Shares or, in the case of an
Offer which is an underwritten public offering pursuant to an effective
registration statement under the Securities Act, shares of Series D Preferred,
Series E Preferred and Series F Preferred (plus any shares of Common Stock into
which shares of Series D Preferred, Series E Preferred and Series F Preferred
Stock have been converted), then held by such Institutional Investor bears to
the total number of Voting Shares then outstanding on a fully-diluted basis
(assuming the conversion of all outstanding convertible securities, the exercise
of all options, warrants or other rights to acquire Voting Shares or securities
convertible into Voting Shares and the issuance of any securities reserved for
issuance to officers, directors and employees of the Company or any subsidiary
pursuant to any plan, agreement or arrangement approved by the Board of
Directors of the Company) (the "Basic Amount"), and (B) such additional amount
of the Offered Securities as such Institutional Investor indicates it will
purchase or acquire should other Institutional Investors acquire less than their
respective Basic Amounts (the "Undersubscription Amount"). Each Institutional
Investor shall have the right, for a period of thirty (30) days following
delivery
15
<PAGE>
of the Offer, to purchase or acquire, at the price and upon the other terms
specified in the Offer, the number or amount of Offered Securities described
above. The Offer by its term shall remain open and irrevocable for such 30-day
period.
(b) To accept an Offer, in whole or in part, an Institutional Investor
shall deliver a written notice to the Company prior to the end of the 30-day
period of the Offer, setting forth the portion of the Institutional Investor's
Basic Amount that such Institutional Investor elects to purchase and, if such
Institutional Investor shall elect to purchase all of its Basic Amount, the
Undersubscription Amount (if any) that such Institutional Investor elects to
purchase (the "Notice of Acceptance"). If the Basic Amounts subscribed for by
all Institutional Investors are less than the aggregate Basic Amounts offered to
all Institutional Investors (the "Aggregate Basic Amounts") then, each
Institutional Investor who has set forth Undersubscription Amounts in its Notice
of Acceptance shall be entitled to purchase, in addition to the Basic Amounts
subscribed for, all Undersubscription Amounts it has subscribed for; provided,
--------
however, that should the Undersubscription Amounts subscribed for exceed the
- -------
difference between (a) the Offered Securities and (b) the Basic Amounts
subscribed for (the "Available Undersubscription Amount"), each Institutional
Investor who has subscribed for any Undersubscription Amount shall be entitled
to purchase only that portion of any Available Undersubscription Amount as the
Undersubscription Amount subscribed for by such Institutional Investor bears to
the total Undersubscription Amounts subscribed for by all Institutional
Investors, subject to rounding by the Board of Directors to the extent it
reasonably deems necessary.
(c) Notwithstanding any other provision of this Article IV, Section 1,
in the case of an Offer which relates to an underwritten public offering
pursuant to an effective registration statement under the Securities Act, (i)
the Company shall deliver to the Institutional Investors a copy of such
registration statement and a written notice of the proposed Offer which shall
(x) state the date on or about which the Registration Statement is expected to
become effective, (y) describe the price range in which the Offered Securities
are expected to be offered, such price range to be no greater than 20% above and
20% below the price range set forth in the preliminary prospectus included in
such registration statement, and (z) offer to sell to each Institutional
Investor its or his/her pro rata share of the Offered Securities, and (ii) the
allocation of shares to the Institutional Investors shall in all cases be
subject to compliance with all applicable rules and regulations of, and, if
necessary, approval by, the National Association of Securities Dealers, Inc. and
any other law, rule or regulation applicable to such underwritten public
offering. Each Institutional Investor shall have the right, for a period of ten
(10) days following delivery of the Offer, to agree to purchase, at the price
and upon the terms on which the Offered Securities are to be offered pursuant to
such registration statement, the number or amount of Offered Securities
described above. The Offer by its terms shall remain open and irrevocable for
such ten (10) day period. To accept an offer, in whole or in part, an
Institutional Investor shall provide written notice in accordance with the
provisions of subsection (b) of this Section 1 prior to the end of the 10-day
period. In the event of a change in the proposed price range of the Offered
Securities outside of the range set forth in the first sentence of this
paragraph, the Company shall provide each Institutional Investor with an
additional notice of any
16
<PAGE>
such change and such Institutional Investor shall have twenty-four (24) hours to
indicate its election to purchase such Offered Securities upon such terms and
conditions.
(d) The Company shall have ninety (90) days from the expiration of the
period set forth in Article IV, Section 1(a) to issue, sell or exchange all or
any part of such Offered Securities as to which a Notice of Acceptance has not
been given by the Institutional Investors (the "Refused Securities"), but only
upon terms and conditions (including, without limitation, unit prices and
interest rates) which are not more favorable, to the acquiring person or persons
or less favorable to the Company than those set forth in the Offer.
(e) Upon the closing of the issuance, sale or exchange of all or less
than all the Offered Securities as to which a Notice of Acceptance has been
given by the Institutional Investors and the Refused Securities, the
Institutional Investors shall acquire from the Company, and the Company shall
issue to such Institutional Investors, the number or amount of Offered
Securities specified in their respective Notices of Acceptance, and the
Undersubscription Amount of Offered Securities made available to the
Institutional Investors pursuant to subsection (b) of this Article IV, Section
1, upon the terms and conditions specified in the Offer. The purchase by the
Institutional Investors of any Offered Securities is subject in all cases to the
preparation, execution and delivery by the Company and such Institutional
Investors of a purchase agreement relating to such Offered Securities reasonably
satisfactory in form and substance to such Institutional Investors and their
respective counsel.
(f) Any Offered Securities not acquired by the Institutional Investors
or other persons in accordance with Article IV, Sections l(b), (c) and (d) may
not be issued, sold or exchanged until they are again offered to the
Institutional Investors under the procedures specified in this Article.
2. Excluded Issuances. The rights of the Institutional Investors under
------------------
this Article IV shall not apply to:
(a) Common Stock issued as a stock dividend to holders of Common Stock
or upon any subdivision or combination of shares of Common Stock;
(b) The issuance of any shares of Common Stock upon conversion of
outstanding shares of convertible preferred stock;
(c) Up to 14,276,250 shares of Common Stock, or options exercisable
therefor, including options outstanding on the date of this Agreement (such
number to be proportionately adjusted in the event of any stock splits, stock
dividends, recapitalizations or similar events occurring on or after the date of
this Agreement) issuable to officers, directors and employees of the Company or
any subsidiary pursuant to any plan, agreement or arrangement approved by the
Board of Directors of the Company;
17
<PAGE>
(d) Securities issued solely in consideration for the acquisition
(whether by merger or otherwise) by the Company or any of its subsidiaries of
all or substantially all of the stock or assets of any other entity;
(e) In the case of the Litton Master Trust, a "Dilutive Issuance"
under Article FOURTH, C, 5(a)(ii) of the Company's Certificate of Incorporation,
as amended;
(f) Securities issued to lending or leasing institutions pursuant to
an agreement approved by the Board of Directors of the Company;
(g) Up to 275,000 shares of Series B Preferred (and 275,000 shares of
Common Stock should such Series B Preferred be converted) (such number to be
proportionately adjusted in the event of any stock splits, stock dividends,
recapitalizations or similar events occurring on or after the date of this
Agreement) issuable to Comdisco in connection with lease and loan and related
warrant agreements, all dated June 25, 1997 between the Company and Comdisco; or
(h) The shares of Series F Preferred authorized on the date hereof and
sold at each of the Subsequent Closings (as such term is defined in the Series F
Purchase Agreement).
3. Waiver. Each Investor hereby waives its right to purchase any Series F
------
Preferred, and any related notice right, pursuant to its right under the Prior
Investor Rights Agreement.
ARTICLE V. SALE BY THE FOUNDERS RIGHT OF
FIRST REFUSAL AND CO-SALE AGREEMENT
1. Restrictions on Transfer.
------------------------
(a) Any sale or other disposition of any Voting Shares by a Founder,
other than according to the terms of this Agreement shall be void and transfer
no right, title or interest in or to any of such Voting Shares to the purported
transferee.
(b) Each Founder agrees to present the certificates representing the
Voting Shares presently owned or hereafter acquired by him to the Secretary of
the Company and cause the Secretary to stamp on the certificate in a prominent
manner the following legend:
"The sale or other disposition of any of the shares represented by
this certificate is restricted by an Investor Rights Agreement by and
among certain of the shareholders of this corporation and this
corporation (the "Agreement"). A copy of the Agreement is available
for inspection during normal business hours at the office of the
Secretary of the corporation."
2. Transfers Not Subject to Restrictions.
-------------------------------------
18
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(a) Subject to Section 2 of Article VI, any Founder may sell, assign
or transfer Voting Shares to (i) his spouse, non-minor children (natural or
adopted), non-minor siblings or parents, or to a trust established for the
benefit of his spouse, children (natural or adopted), siblings, parents or
himself, or dispose of them under his will, or (ii) the other Founders, without
compliance with Sections 3 and 5 of this Article V; provided that the transferee
provides the Company and each of the Institutional Investors with a written
agreement to be bound hereby to the same extent as the transferring Founder.
(b) The rights of the Institutional Investors under Section 4 of this
Article V shall not apply to any pledge of Voting Shares by a Founder which
creates a mere security interest, provided the pledgee provides the Company with
a written agreement to be bound hereby to the same extent as the pledging
Founder.
3. Offer of Sale; Notice of Proposed Sale.
--------------------------------------
If any Founder desires to sell, transfer or otherwise dispose of any of his
Voting Shares, or of any interest in such Voting Shares, whether voluntarily or
by operation of law, in any transaction other than pursuant to Section 2 of this
Article V, such Founder (the "Selling Founder") shall first deliver written
notice of his desire to do so (the "Notice") to the Company and each of the
Institutional Investors, in the manner prescribed in Section 6 of Article VII.
The Notice must specify: (i) that the Selling Founder has received a bona fide
offer to purchase Voting Shares and the name and address of the party that made
such offer (the "Offeror"), (ii) the number of Voting Shares the Selling Founder
proposes to sell or otherwise dispose of (the "Offered Shares"), (iii) the
consideration per Voting Share to be delivered to the Selling Founder for the
proposed sale, transfer or disposition, and (iv) all other material terms and
conditions of the proposed transaction.
4. Company Option to Purchase.
--------------------------
(a) Subject to Section 6(a) of this Article V, the Company shall have
the first option to purchase all or any part of the Offered Shares for the
consideration per share and on the terms and conditions specified in the Notice.
The Company must exercise such option, no later than thirty (30) days after such
Notice is deemed under Section 6 of Article VII to have been delivered to it, by
written notice to the Selling Founder.
(b) In the event the Company does not exercise its option within such
30-day period with respect to all of the Offered Shares, the Secretary of the
Company shall, by the last day of such period, give written notice of that fact
to the Institutional Investors (the "Investor Notice"). The Investor Notice
shall specify the number of Offered Shares not purchased by the Company (the
"Remaining Shares").
(c) In the event the Company duly exercises its option to purchase all
or part of the Offered Shares, the closing of such purchase shall take place at
the offices of the Company five (5) days after the expiration of such 30-day
period.
19
<PAGE>
(d) To the extent that the consideration proposed to be paid by the
Offeror for the Offered Shares consists of property other than cash or a
promissory note, the consideration required to be paid by the Company and/or the
Institutional Investors exercising their options under Section 4 and 5 of this
Article V may consist of cash equal to the value of such property, as determined
in good faith by agreement of the Selling Founder and the Company and/or the
Institutional Investors acquiring such Offered Shares.
(e) Notwithstanding anything to the contrary herein, neither the
Company nor the Institutional Investors shall have any right to purchase any of
the Offered Shares hereunder unless the Company and/or the Institutional
Investors exercise their respective option to purchase all of the Offered
Shares.
5. Institutional Investor's Option to Purchase and Institutional
-------------------------------------------------------------
Investors' Co-Sale Right.
------------------------
(a) Subject to Section 6(a) of this Article V, each Investor shall
have an option, exercisable for a period of thirty (30) days from the date of
delivery of the Investor Notice, to purchase all or a portion of his or its pro
rata share (subject to adjustment pursuant to Section 5(b) of this Article V),
according to the number of Voting Shares owned by such Institutional Investor in
relation to the total number of Voting Shares outstanding at such time, of the
Remaining Shares for the consideration per share and on the terms and conditions
set forth in the Investor Notice. Such option shall be exercised by delivery of
written notice to the Secretary of the Company.
(b) In the event options to purchase have been exercised by the
Institutional Investors with respect to some but not all of the portion of the
Remaining Shares for which they have the right to purchase pursuant to Section
5(a), each Institutional Investor who has exercised his or its option to
purchase all of his or its respective pro rata shares within the 30-day period
specified in Section 5(a) shall have an additional option, for a period of five
(5) business days next succeeding the expiration of such 30-day period, to
purchase all or any part of such balance of such Remaining Shares on the terms
and conditions set forth in the Investor Notice, which option shall be exercised
by the delivery of written notice to the Secretary of the Company. In the event
there are two or more such Institutional Investors that choose to exercise the
last-mentioned option for a total number of Voting Shares in excess of the
number available, the Remaining Shares available for each such Institutional
Investor's option shall be allocated to such Institutional Investor pro rata
based on the number of Voting Shares owned by the Institutional Investor so
electing in relation to the total number of Voting Shares outstanding at such
time.
(c) If the option to purchase the Remaining Shares is exercised in
full by the Institutional Investor(s), the closing of the purchase of the
Remaining Shares shall take place at the offices of the Company no later fifteen
(15) days after the exercise of such purchase option(s) by the Institutional
Investor(s).
(d) Alternatively, each Institutional Investor may within 30 days of
the effective date of the Investor Notice notify the Secretary of the Company of
his or its desire to
20
<PAGE>
participate in the sale of Voting Shares held by him or it on the terms set
forth in the Investor Notice, and the number of Voting Shares he or it wishes to
sell.
6. Failure to Fully Exercise Options Co-Sale.
-----------------------------------------
(a) If the Company and the Institutional Investors do not exercise
their options to purchase all of the Offered Shares within the periods described
in this Agreement (the "Option Period"), then all options of the Company and the
Institutional Investors to purchase the Offered Shares, whether exercised or
not, shall terminate, but each Institutional Investor which has, pursuant to
Section 5 of this Article V, expressed a desire to sell Voting Shares in the
transaction (a "Participating Investor"), shall be entitled to do so pursuant to
this Section. The Secretary of the Company shall promptly, on expiration of the
Option Period, notify the Selling Founder of the aggregate number of Voting
Shares the Participating Investors wish to sell. The Selling Founder shall use
his best efforts to interest the Offeror in purchasing, in addition to the
Offered Shares, the Voting Shares the Participating Investors wish to sell. If
the Offeror does not wish to purchase all of the Voting Shares made available by
the Selling Founder and the Participating Investors, then each Participating
Investor and the Selling Founder shall be entitled to sell, at the price and on
the terms and conditions set forth in the Notice, a portion of the Voting Shares
being sold to the Offeror, in the same proportion as such Selling Founder or
Participating Investor's ownership of Voting Shares bears to the aggregate
number of Voting Shares owned by the Selling Founder and the Participating
Investors. If, however, as a result of such proration, Nortel shall own less
than ten percent (10%) of the Voting Shares on a fully diluted basis, the
Selling Founder and the other Participating Investors shall, upon request by
Nortel, reduce their respective portions of Voting Shares (on a pro rata basis)
proposed to be sold, such that Nortel is able to have all of its Voting Shares
purchased by the Offeror or such lower amount that the Offeror has offered to
purchase. The transaction contemplated by the Notice shall be consummated not
later than sixty (60) days after the expiration of the Option Period.
(b) If the Participating Investors do not elect to sell the full
number of Voting Shares which they are entitled to sell pursuant to Section
6(a), the Selling Founder shall be entitled to sell to the Offeror, according to
the terms set forth in the Notice, that number of his own Voting Shares which
equals the difference between the number of Voting Shares desired to be
purchased by the Offeror and the number of Voting Shares the Participating
Investors wish to sell. If the Selling Founder wishes to sell, transfer or
otherwise dispose of any such Voting Shares at a price per Voting Share which
differs from that set forth in the Notice, upon terms different from those
previously offered to the Institutional Investors, or more than sixty (60) days
after the expiration of the Option Period, as a condition precedent to such
transaction, such Voting Shares must first be offered to the Investors on the
same terms and procedures and time periods set forth above.
(c) The proceeds of any sale made by the Selling Founder without
compliance with the provisions of this Section 6 shall be deemed to be held in
constructive trust in such amount as would have been due the Participating
Investors if the Selling Founder had complied with this Agreement.
21
<PAGE>
7. Other Rights Not Affected. Notwithstanding any provision in this
-------------------------
Article V to the contrary, nothing in this Article V shall limit any right of
the Company to repurchase any shares from a Founder or employee which have not
yet vested pursuant to the terms of any other agreement between the Company and
such Founder or employee.
22
<PAGE>
ARTICLE VI. CERTAIN OTHER RIGHTS AND RESTRICTIONS
1. Rights to Compel Sale. (a) Stockholders holding at least sixty
---------------------
percent (60%) of the Voting Shares of the Company (the "Compelling
----------
Stockholders") shall have the right in connection with the proposed sale of
- ------------
their Shares ("Compelling Securities") pursuant to a bona fide offer (a
---------------------
"Compelled Sale Offer") by a third party (a "Compelled Sale Purchaser"), to
-------------------- ------------------------
require Nortel to sell all, or its pro rata share (based on the number of Shares
then being sold by the Compelling Stockholders), of the Shares then held by
Nortel (the "Compelled Securities," and together with the Compelling Securities,
--------------------
the "Compelled Sale Securities"), to the Compelled Sale Purchaser, for the same
-------------------------
consideration per Share (the "Compelled Sale Offer Price") and otherwise on the
--------------------------
same terms and conditions upon which the Compelling Stockholders sell their
Compelling Securities.
(b) If the Compelling Stockholders elect to exercise their right to
compel sale pursuant to this Section 1, a representative selected by the
Compelling Stockholders (the "Representative") shall deliver written notice (the
--------------
"Compelled Sale Notice") of the Compelled Sale Offer to Nortel and to the
---------------------
Company, setting forth the Compelled Sale Offer Price, the identity of the
Compelled Sale Purchaser and the other terms and conditions thereof.
Not less than ten (10) business days prior to the proposed date of any
sale pursuant to a Compelled Sale Offer (the "Compelled Sale Transfer Date"),
----------------------------
which date shall not be less than ten (10) business days after delivery of the
Compelled Sale Notice, the Representative shall notify the Company and Nortel of
the Compelled Sale Transfer Date. Nortel shall deliver to the Company in escrow
(pending the consummation of the sale pursuant to the Compelled Sale Offer), not
less than two (2) business days before the Compelled Sale Transfer Date, the
duly endorsed stock certificates representing all of the Compelled Securities
owned by Nortel, together with any documentation reasonably required by the
Company and/or the Compelled Sale Purchaser to sell such Compelled Securities
pursuant to the terms of the Compelled Sale Offer; provided, that Nortel shall
--------
have, as a condition to the sale pursuant to the Compelled Sale Offer, the right
to receive all documentation relating to the sale of the Compelled Sale
Securities at least ten (10) business days prior to the Compelled Sale Transfer
Date.
The Compelling Stockholders shall have 90 days from the date the
Compelled Sale Notice is delivered to Nortel to execute a binding purchase
agreement with respect to the sale contemplated by the Compelled Sale Offer and
shall consummate the transactions contemplated thereby within 30 days of receipt
of all requisite governmental and regulatory approvals and requisite third party
consents applicable to any of the holders of Compelled Sale Securities and/or
the Company. Immediately after completion of any such sale pursuant to this
Section 1, the Representative shall notify the Company and Nortel of such
completion and shall furnish such evidence of such sale (including time of
completion) and of the terms thereof as the Company or Nortel may request. The
Representative shall also remit to Nortel the proceeds of such sale attributable
to the sale of Nortel's Compelled Securities immediately upon receipt thereof.
The Company shall, upon being notified of the consummation of such sale, remit
to Nortel a new stock certificate for any balance of the Shares not sold as part
of the Compelled Sale Securities, in accordance with Nortel's instructions.
23
<PAGE>
If Nortel becomes obligated to sell any Compelled Securities to a
Compelled Sale Purchaser under this Agreement and fails to deliver such
Compelled Securities in accordance with the terms of this Agreement, then the
Company, upon written notice to Nortel, (A) shall cancel on its books the stock
certificate or certificates representing the Compelled Securities to be sold,
(B) shall issue, in lieu thereof, in the name of such Compelled Sale Purchaser a
new certificate or certificates representing such Compelled Securities and (C)
shall remit the proceeds of the sale attributable to the sale of Nortel's
Compelled Securities to Nortel immediately upon receipt thereof, and thereupon
all of Nortel's rights in and to such Compelled Securities shall terminate;
provided, however, that the Company shall return to Nortel a new stock
- -------- -------
certificate for the balance of the Shares not sold as part of the Compelled Sale
Securities, in accordance with Nortel's instructions.
If any sale to a Compelled Sale Purchaser is not completed by the
expiration of the 90-day period referred to in the third paragraph of this
Section 1(b), then, without prejudice to such Compelling Stockholders' right to
seek to compel a sale under this Section 1 in the future, the Company shall
return to Nortel all certificates representing the Compelled Securities of
Nortel.
(c) Notwithstanding anything in this Section 1 to the contrary, there
shall be no liability on the part of any Compelling Stockholder or the
Representative to Nortel if any sale of Compelled Sale Securities pursuant to
this Section 1 is not consummated for whatever reason.
(d) Nortel shall not be required to make any representation or
warranty in connection with such Compelled Sale Offer other than (to the extent
factually correct) as to Nortel's ownership and authority to sell, free of
liens, claims and encumbrances, the Compelled Securities proposed to be sold by
it. Notwithstanding the foregoing, (i) Nortel shall be required to bear its
proportionate share of any escrows, holdbacks or adjustments in purchase price
under the terms of the purchase agreement relating to such Compelled Sale Offer,
up to but in no event in excess of the net proceeds received by Nortel for the
Compelled Securities sold by it pursuant to such Compelled Sale Offer and (ii)
to the extent factually correct, the Company shall be required to make customary
representations and warranties in connection with such Compelled Sale Offer.
(e) Notwithstanding the foregoing, this Section 1 shall not apply to a
proposed sale of Shares in which the Compelled Sale Purchaser does not acquire
more than 50% of the outstanding Shares of the Company in a single transaction.
This Section 1 shall be binding on Nortel and its Affiliates, but shall have no
force and effect with regard to any unaffiliated transferee of the Shares once
held by Nortel.
2. Restriction on Sales to Certain Persons. Except in connection with the
----------------------------------------
sale to a Person purchasing more than 50% of the outstanding Voting Shares, (i)
Nortel shall not have the right to sell any Voting Shares to any Person listed
on Schedule 2 to this Agreement and (ii) notwithstanding any other provision of
this Agreement to the contrary, no Stockholder (together with all Affiliates of
such Stockholder) nor any future stockholder of the Company, shall have
24
<PAGE>
the right to beneficially own or control more than 24.99% of all Voting Shares
outstanding on a fully diluted basis; provided, however, such limitation shall
-------- -------
not apply if a Stockholder's interest exceeds 24.99% as a result of the
acquisition of Voting Shares by the Company which, by reducing the number of
Voting Shares outstanding, increases the proportional number of Voting Shares
beneficially owned or controlled by such Stockholder (together with all
Affiliates of such Stockholder) or any other action which achieves a similar
result, provided such action is not attributable to such Stockholder.
3. Restriction on Distribution of Information. Any information provided
------------------------------------------
by Avici to Nortel in accordance with Section 8.2 of the Series C Purchase
Agreement and Section 7.2 of the Series D Purchase Agreement, shall be deemed to
be confidential information and shall be sent to Nortel's Mergers and
Acquisitions Department, 8200 Dixie Road, Suite 100, Brampton, Ontario L6T 5P6,
Canada. No such information shall be distributed directly or indirectly by
Nortel to any Nortel employee, agent, contract worker, contractor or other
individual in similar relationship to Nortel or its Affiliates who is directly
involved in the development or marketing of internet backbone routers or
switches.
ARTICLE VII. GENERAL
1. Termination. Article II shall terminate in its entirety on the earlier
-----------
of (a) the closing of an Initial Public Offering or (b) the tenth anniversary of
the date of this Agreement. All of the Company's obligations to register
Registrable Shares under Article III shall terminate on the earlier of the fifth
anniversary of an Initial Public Offering or, with respect to each Investor,
when such Investor may sell all of its Registrable Securities under Rule 144
within a single calendar quarter. Article IV and Article V shall terminate in
their entirety upon the earliest of (a) the sale of all or substantially all of
the capital stock, assets or business of the Company, by merger, sale of assets
or otherwise, (b) the closing of an Initial Public Offering, or (c) with respect
to rights relating to the Series A Preferred, the date on which less than
437,500 shares of Series A Preferred remain outstanding, with respect to the
rights relating to the Series B Preferred, the date on which less than 2,406,250
shares of Series B Preferred remain outstanding, with respect to the rights
relating to the Series C Preferred, on the date on which less than 1,250,000
shares of Series C Preferred remain outstanding, with respect to the rights
relating to the Series D Preferred, on the date on which less than 1,357,125
shares of Series D Preferred remain outstanding, with respect to the rights
relating to the Series E Preferred, on the date on which less than 1,796,407
shares of Series E Preferred remain outstanding and with respect to the rights
relating to the Series F Preferred, on the date on which less than 25% of the
shares of Series F Preferred that had been issued at any time remain outstanding
(each subject to appropriate adjustment for stock splits, stock dividends,
reclassifications, recapitalizations or similar events). Article VI shall
terminate on the tenth anniversary of the date of this Agreement.
2. Transfer of Rights; Aggregation. This Agreement, and the rights and
-------------------------------
obligations of the Investors hereunder, may be assigned by an Investor to any
person or entity to which Shares are transferred by the Investor, and such
transferee shall be deemed an "Investor" and a "Stockholder" for purposes of
this Agreement; provided that the transferee provides written
--------
25
<PAGE>
notice of such assignment to the Company and agrees to be bound by the terms
hereof. Notwithstanding the foregoing sentence, the rights and obligations of
each Investor under Article III may only be assigned by such Investor to (i) any
person or entity to which at least 500,000 Shares are transferred by such
Investor, (ii) any person or entity which is a partner, retired partner, member,
retired member, stockholder or Affiliate of such Investor, or (iii) such
Investor's spouse, non-minor children (natural or adopted), non-minor siblings
or parents, or to a trust established for the benefit of such Investor's spouse,
children (natural or adopted), siblings, parents or such Investor. Except as set
forth in Section 3 of Article VI, no Investor may assign any of its rights or
obligations hereunder to any person or entity which is determined by the Board
of Directors to be a "competitor" of the Company. Except in connection with a
permitted transfer under Section 2(a) of Article V of this Agreement, the
Founders may not assign any rights under this Agreement. All Voting Shares held
or acquired by any Affiliates of any Institutional Investor shall be aggregated
with those held or acquired by such Institutional Investor for the purpose of
determining the availability of any rights of such Institutional Investor under
this Agreement.
3. Severability. The provisions of this Agreement are severable, so that
------------
the invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other term or provision of this
Agreement, which shall remain in full force and effect.
4. Specific Performance. In addition to any and all other remedies that
--------------------
may be available at law in the event of any breach of this Agreement, the
Stockholders shall be entitled to specific performance of the agreements and
obligations of the Company and the Stockholders hereunder and to such other
injunctive or other equitable relief as may be granted by a court of competent
jurisdiction.
5. Governing Law. This Agreement shall be governed by, and construed and
-------------
enforced in accordance with, the laws of the Commonwealth of Massachusetts
(without reference to the conflicts of law provisions thereof).
6. Notices. All notices, requests, consents, and other communications
-------
under this Agreement shall be in writing and shall be delivered by hand or
mailed by first class certified or registered mail, return receipt requested,
postage prepaid:
If to the Company, at Avici Systems Inc., 101 Billerica Avenue, North
Billerica, MA 01862, Attention: President, or at such other address or
addresses as may have been furnished in writing by the Company to the
Investors, with a copy to Testa, Hurwitz & Thibeault, LLP, 125 High Street,
Boston, MA 02110, Attention: John A. Meltaus, Esq.;
If to an Investor, at his or its address set forth beneath his or its
signature to this Agreement (and, in the case of the Accel Entities, to the
attention of James R. Swartz and G. Carter Sednaoui), or at such other address
or addresses as may have been furnished to the Company in writing by the
Investor; and
26
<PAGE>
If to a Founder, at each such Founder's respective address set forth
beneath his signature on this Agreement, or at such other address or addresses
as may have been furnished to the Company in writing by such Founder.
Notices provided in accordance with this Article VII, Section 6 shall be
deemed delivered upon personal delivery or two (2) business days after deposit
in the mail.
7. Counterpart Signature Pages; Updated Agreement. Pursuant to Section
----------------------------------------------
1.2(b) of the Series F Purchase Agreement, certain purchasers will be permitted
to purchase shares of Series F Preferred from the Company at one or more
closings to occur after the date hereof and on or before May 31, 2000 (each a
"Subsequent Closing") and will become "Purchasers" as defined thereunder at that
time by executing counterpart signature pages thereto. It is a condition
precedent to such Purchasers purchasing shares of Series F Preferred at each
Subsequent Closing that such Purchasers execute counterpart signature pages to
this Agreement at such Subsequent Closing and become Investors, as defined
herein. Any such Purchaser (as defined in the Series F Purchase Agreement) who
shall execute a counterpart signature page in the form attached hereto as
Exhibit B at a Subsequent Closing shall become an Investor hereunder and shall
- ---------
be subject to the obligations and responsibilities and be entitled to the rights
and privileges appertaining to Investors hereunder without further action.
Following each Subsequent Closing, the Company shall update Exhibit A hereto, by
---------
adding the names of each Subsequent Closing Purchaser who purchases shares of
Series F Preferred at such Subsequent Closing to such Exhibit A.
---------
8. Complete Agreement; Amendments. This Agreement constitutes the full
------------------------------
and complete agreement of the parties hereto with respect to the subject matter
hereof. No amendment, modification or termination of any provision of this
Agreement shall be valid unless in writing and signed by the Company and the
holders of 60% of the voting power of the Shares and if the amendment,
modification or termination affects either any right or benefit that has been
granted or conveyed to Nortel, the Amerindo Entities, Anschutz or the Tudor
Entities and not to any or all other Investors or such amendment, modification
or termination affects Nortel, the Amerindo Entities, Anschutz or the Tudor
Entities differently than it affects any or all other Investors or Institutional
Investors, as the case may be, then Nortel's, the Amerindo's Entities',
Anschutz's and/or the Tudor Entities', as the case may be, concurrence shall
also be required in connection with any such amendment, modification or
termination; provided, that, in addition to the preceding provisions set forth
in this sentence, (i) Article III may be amended only if the Founders (by action
of the holders of a majority of the Voting Shares held by the Founders) concur
in such amendment, (ii) Article III may be amended with the consent of less than
all of the Investors only in a manner which affects Registrable Shares (to the
extent affected) in the same fashion and (iii) Articles IV and V may be amended
by the holders of 60% of the voting power of the Shares held by the
Institutional Investors and no consent of the Additional Stockholders shall be
required to amend such Articles, except that Article IV may be amended only if
the Founders (by action of a majority of the Voting Shares held by the Founders)
concur in such amendment. No waivers of or exceptions to any term, condition or
provision of this Agreement, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision. The Prior Investor Rights Agreement is hereby terminated and
shall be of no further force or effect.
27
<PAGE>
9. Pronouns. Whenever the content may require, any pronouns used in this
--------
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns and pronouns shall include the plural, and vice
versa.
10. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one Agreement binding on all the parties hereto.
11. Captions. Captions of sections have been added only for convenience
--------
and shall not be deemed to be a part of this Agreement.
[Remainder of page intentionally left blank]
28
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
written above.
COMPANY:
AVICI SYSTEMS INC.
By: /s/ Surya Panditi
-------------------------------------------
Surya Panditi, President and CEO
Address: 101 Billerica Avenue
North Billerica, MA 01862
FOUNDERS:
/s/ Henry Zannini
-----------------------------------------------
Henry Zannini
Address: 9L Tyler Street
Salem, NH 03079
/s/ Philip Carvey
-----------------------------------------------
Philip P. Carvey
Address: 7 Daniels Drive
Bedford, MA 01730
/s/ Larry Dennison
-----------------------------------------------
Larry Dennison
Address: 505 Nahatan Street
Norwood, MA 02062
<PAGE>
INSTITUTIONAL INVESTORS:
ACCEL V L.P.
By: Accel V Associates L.L.C.
Its General Partner
By: /s/ [ILLEGIBLE]
-------------------------------------------
Managing Member
Address: One Palmer Square
Princeton, NJ 08542
ACCEL INTERNET / STRATEGIC
TECHNOLOGY FUND L.P.
By: Accel Internet / Strategic Technology
Fund Associates L.L.C.
Its General Partner
By: /s/ [ILLEGIBLE]
-------------------------------------------
Managing Member
Address: One Palmer Square
Princeton, NJ 08542
ACCEL KEIRETSU V L.P.
By: Accel Keiretsu V Associates L.L.C.
Its General Partner
By: /s/ [ILLEGIBLE]
-------------------------------------------
Managing Member
Address: One Palmer Square
Princeton, NJ 08542
<PAGE>
ACCEL INVESTORS `96 L.P.
By: /s/ [ILLEGIBLE]
-------------------------------------------
General Partner
Address: One Palmer Square
Princeton, NJ 08542
ELLMORE C. PATTERSON PARTNERS
By: /s/ [ILLEGIBLE]
-------------------------------------------
General Partner
Address: One Palmer Square
Princeton, NJ 08542
BRENTWOOD ASSOCIATES VII, L.P.
By: Brentwood VII Ventures, L.P.
Its General Partner
By: /s/ G. Bradford Jones
-------------------------------------------
General Partner
Address: 3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, CA 94025
BRENTWOOD AFFILIATES FUND
By: Brentwood VII Ventures, L.P.
Its General Partner
By: /s/ G. Bradford Jones
-------------------------------------------
General Partner
Address: 3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, CA 94025
<PAGE>
OAK VII AFFILIATES FUND, L.P.
By: /s/ Bandel Carano
-------------------------------------------
General Partner
Address: 525 University Avenue
Suite 1300
Palo Alto, CA 94301
OAK INVESTMENT PARTNERS VII, L.P.
By: /s/ Bandel Carano
-------------------------------------------
General Partner
Address: 525 University Avenue
Suite 1300
Palo Alto, CA 94301
<PAGE>
POLARIS VENTURE PARTNERS, L.P.
By: Polaris Venture Management Co., LLC
Its General Partner
By: /s/ [ILLEGIBLE]
-------------------------------------------
Member
Address: 1000 Winter Street
Suite 3350
Waltham, MA 02154
POLARIS VENTURE PARTNERS FOUNDERS'
FUND, L.P.
By: Polaris Venture Management Co., LLC
Its General Partner
By: /s/ [ILLEGIBLE]
-------------------------------------------
Member
Address: 1000 Winter Street
Suite 3350
Waltham, MA 02154
<PAGE>
AMERINDO TECHNOLOGY GROWTH FUND II, a Panamanian
corporation
By: /s/ Gary Tanaka
-------------------------------------------
Gary Tanaka, Director
Address: c/o Amerindo Investment Advisors
399 Park Avenue, 22nd Floor
New York, NY 10022
LITTON MASTER TRUST
By: Amerindo Investment Advisors Inc.,
attorney-in-fact
By: /s/ Gary Tanaka
-------------------------------------------
Gary Tanaka, Director
Address: c/o Amerindo Investment Advisors
399 Park Avenue, 22nd Floor
New York, NY 10022
ANSCHUTZ FAMILY INVESTMENT
COMPANY LLC
By: /s/ Scott T. Carpenter
-------------------------------------------
Scott T. Carpenter, Vice President
Address: 555 Seventeenth Street
Suite 2400
Denver, CO 80222
A.C.E. Investment Partnership
By: /s/ Scott T. Carpenter
-------------------------------------------
Title: Scott T. Carpenter, Vice President
-----------------------------------------
Address: 555 Seventeenth Street
Suite 2400
Denver, CO 80222
<PAGE>
NORTEL NETWORKS INC.
By:
-------------------------------------------
Title:
-----------------------------------------
Address: 200 Athens Way
Nashville, TN 37228
BAYVIEW INVESTORS, LTD.
By: /s/ [ILLEGIBLE]
-------------------------------------------
Address: BancAmerica Robertson Stephens
555 California Street, #2600
San Francisco, CA 94104
COMDISCO, INC.
By: /s/ [ILLEGIBLE]
-------------------------------------------
Title:
Address: 6111 North River Road
Rosemont, IL 60018
Attn: Venture Group
TUDOR ARBITRAGE PARTNERS, L.P.
Tudor Global Trading, Inc.
As General Partner
By:
-------------------------------------------
James J. Pallotta
Vice President
Address: Tudor Investment Corporation
40 Rowes Wharf, 2nd Floor
Boston, MA 02110
<PAGE>
TUDOR BVI FUTURES, LTD.
Tudor Investment Corporation
As Investment Advisor
By:
-------------------------------------------
James J. Pallotta
Vice President
Address: Tudor Investment Corporation
40 Rowes Wharf, 2nd Floor
Boston, MA 02110
TUDOR RAPTOR GLOBAL FUND, LTD.
Tudor Investment Corporation
As Investment Advisor
By:
-------------------------------------------
James J. Pallotta
Vice President
Address: Tudor Investment Corporation
40 Rowes Wharf, 2nd Floor
Boston, MA 02110
RAPTOR GLOBAL FUND, L.P.
Tudor Investment Corporation
As General Partner
By:
-------------------------------------------
James J. Pallotta
Vice President
Address: Tudor Investment Corporation
40 Rowes Wharf, 2nd Floor
Boston, MA 02110
<PAGE>
J.P. MORGAN DIRECT VENTURE CAPITAL INSTITUTIONAL
INVESTORS LLC
By: /s/ [ILLEGIBLE]
--------------------------------------------
Title: Vice President
-----------------------------------------
Address: 522 Fifth Avenue, 13th Floor
New York, NY 10036
J.P. MORGAN DIRECT VENTURE CAPITAL PRIVATE
INVESTORS LLC
By: /s/ [ILLEGIBLE]
-------------------------------------------
Title: Vice President
----------------------------------------
Address: 522 Fifth Avenue, 13th Floor
New York, NY 10036
522 FIFTH AVENUE FUND L.P.
By: /s/ [ILLEGIBLE]
-------------------------------------------
Title: Vice President
----------------------------------------
Address: 522 Fifth Avenue, 13th Floor
New York, NY 10036
<PAGE>
MERITECH CAPITAL PARTNERS L.P.
By: MeriTech Capital Associates L.L.C.
its General Partner
By: MeriTech Management Associates L.L.C.
a managing member
By: /s/ Paul S. Madera
---------------------------------
Paul S. Madera
Address: 428 University Avenue
Palo Alto, CA 94301
MERITECH CAPITAL AFFILIATES L.P.
By: MeriTech Capital Associates L.L.C.
its General Partner
By: MeriTech Management Associates L.L.C.
a managing member
By: /s/ Paul S. Madera
---------------------------------
Paul S. Madera
Address: 428 University Avenue
Palo Alto, CA 94301
<PAGE>
DLJ CAPITAL CORP.
/s/ Stephen M. Diamond
------------------------------------
By: Stephen M. Diamond
Its: Vice President
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
DLJ ESC II, L.P.
By: DLJ LBO Plans Management Corporation
Its: General Partner
/s/ Stephen M. Diamond
------------------------------------
By: Stephen M. Diamond
Its: Attorney in Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
<PAGE>
SPROUT CAPITAL VIII, L.P.
By: DLJ Capital Corp.
Its: Managing General Partner
/s/ Stephen M. Diamond
------------------------------------
By: Stephen M. Diamond
Its: Vice President
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
SPROUT VENTURE CAPITAL, L.P.
By: DLJ Capital Corp.
Its: General Partner
/s/ Stephen M. Diamond
------------------------------------
By: Stephen M. Diamond
Its: Vice President
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
<PAGE>
Dell USA L.P.
By: /s/ [illegible]
--------------------------------
Title:
-----------------------------
Address: One Dell Way
Round Rock, TX 78682
Enron Communications Investments Corp.
By: /s/ [illegible]
--------------------------------
Title: Vice President
-----------------------------
Address: 1400 Smith Street
Houston, TX 77010
Nissho Electronics (USA) Corporation
By: /s/ [illegible]
--------------------------------
Title: President
-----------------------------
Address: 3945 Freedom Circle, Suite 240
Santa Clara, CA 95054
Nissho Electronics Corporation
By: /s/ Atts Kato
--------------------------------
Title: Senior Managing Director
-----------------------------
Address: 3-1, Tsukiji 7-Chome
Chuo-Ku, Tokyo. 104-8444 Japan
<PAGE>
Itochu Corporation
By: /s/ Eizo Kobayashi
--------------------------------
Title: Eizo Kobayashi, Chief Operating Officer
-----------------------------
Information Technology & Telecommunication
Division
Address: 5-1 Kita-Aoyama 2-Chome
Minatoku, Tokyo, Japan
ITOCHU International Inc.
By:
--------------------------------
Title:
-----------------------------
Address: 335 Madison Avenue, 24th Floor
New York, NY 10017
Itochu Technology, Inc.
By: /s/ Takahiro Swasaki
--------------------------------
Title: President
-----------------------------
Address: 3100 Patrick Henry Drive
Santa Clara, CA 95054
Itochu Techno-Science Corporation
By:
--------------------------------
Title:
-----------------------------
Address: 11-5, Fujimi I-chome
Chiyoda-ku, Tokyo, 102-0071
JAPAN
<PAGE>
KECALP Inc., as nominee for Merrill Lynch KECALP
International L.P. 1999
By: /s/ Edward Higgins
--------------------------------
Title: Vice President
-----------------------------
Address: 225 Liberty Street
14th Floor - South Tower
New York, NY 10281
Merrill Lynch IBK Positions Inc.
By:
--------------------------------
Title:
-----------------------------
Address: 225 Liberty Street
14th Floor - South Tower
New York, NY 10281
Merrill Lynch KECALP L.P. 1999
By: KECALP Inc., its General Partner
--------------------------------
By: /s/ Edward Higgins
--------------------------------
Title: Vice President
-----------------------------
Address: 225 Liberty Street
14th Floor - South Tower
New York, NY 10281
Semir Sirazi
-----------------------------------
Address: 500 Elmwood Avenue
Wilette, IL 60091
<PAGE>
<TABLE>
<S> <C>
Tailwind Capital Partners, L.P. Tailwind Capital Partners, L.P.
By: Thomas Weisel Capital Partners LLC By:
General Partner -----------------------------------
Title:
By: /s/ David Baylor --------------------------------
---------------------------------
David Baylor, General Counsel Address: One Montgomery Street, Suite 3700
San Francisco, CA 94104
TWP Avici Investors
By: /s/ David Baylor
-----------------------------------
Title: David Baylor, Managing Partner
--------------------------------
Address: One Montgomery Street, Suite 3700
San Francisco, CA 94104
</TABLE>
<PAGE>
Spinnaker Crossover Institutional Fund, LP
By: /s/ Eric Moore
--------------------------------
Title: Eric Moore, Controller
-----------------------------
Address: 1875 South Grant Street
Suite 600
San Mateo, CA 94402
Spinnaker Crossover Fund, LP
By: /s/ Eric Moore
--------------------------------
Title: Eric Moore, Controller
-----------------------------
Address: 1875 South Grant Street
Suite 600
San Mateo, CA 94402
Spinnaker Clipper Fund, LP
By: /s/ Eric Moore
--------------------------------
Title: Eric Moore, Controller
-----------------------------
Address: 1875 South Grant Street
Suite 600
San Mateo, CA 94402
Williams Communications, Inc.
By: /s/ [illegible]
--------------------------------
Title: President & Chief Executive Officer
-----------------------------
Address: One Williams Center, MD 26-1
Attn: President, Domestic Strategic
Investments
Tulsa, OK 74172
<PAGE>
ADDITIONAL STOCKHOLDERS:
REIN & CO., INC.
By:
--------------------------------
General Partner
Address: Union Valley Corporate Center
4599 Highway Nine
North Howell Township, NJ
SMITH BARNEY AS CUSTODIAN FOR THE IRA OR KEOGH OF
WILLIAM F. MANN
By:
--------------------------------
General Partner
Address: Smith Barny
53 State Street
Boston, MA 02109
-----------------------------------
Terrance E. Bradley
Address: 186 Pond Street
Hopkinton, MA 01748
-----------------------------------
John McQuillan
Address: 355 Garfield Road
Concord, MA 01742
<PAGE>
-----------------------------------
Scott Bradner
Address: 15 High Street
Cambridge, MA 02138
-----------------------------------
Robert Vetromile, Jr.
Address: 18 Brentwood
Barrington, RI 02806
-----------------------------------
Surya Panditi
Address: 3 Nicholas Circle
Andover, MA 01810
-----------------------------------
Nicole Panditi
Address: 3 Nicholas Circle
Andover, MA 01810
-----------------------------------
Karen M. Dionne
Address: 3 Nicholas Circle
Andover, MA 01810
<PAGE>
-----------------------------------
Les Strauss
Address: 2730 Polo Island Drive
Unit A202
Wellington, FL 33414
H&D INVESTMENTS 97
By:
--------------------------------
General Partner
Address: 60 State Street
Boston, MA 02109
Attn: Paul P. Brountas, Esq.
-----------------------------------
William Dally
Address: 1068 Vernier Place
Stanford, CA 94305
-----------------------------------
Shimon Amir
Address: 4 Dwight Street
Brookline, MA 02146
-----------------------------------
John Colorusso
Address: 149 Forest Street
Medford, MA 02155
<PAGE>
-----------------------------------
Anthony Ciulla
Address: c/o Amerindo Investment Advisors
399 Park Avenue, 22nd Floor
New York, NY 10022
-----------------------------------
Joaquin Garcia-Larrieu
Address: c/o Amerindo Investment Advisors
399 Park Avenue, 22nd Floor
New York, NY 10022
-----------------------------------
James Stableford
Address: c/o Amerindo Investment Advisors
399 Park Avenue, 22nd Floor
New York, NY 10022
-----------------------------------
Marc Weiss
Address: c/o Amerindo Investment Advisors
399 Park Avenue, 22nd Floor
New York, NY 10022
-----------------------------------
Cecil Dean
Address: 18 Grey Birch Road
Andover, MA 01810
<PAGE>
-----------------------------------
Richard Escalera
Address: 17 Scenic View Drive
Pelham, NH 03076
-----------------------------------
P. Allen King
Address: 30 Gibson Street
Needham, MA 02192
Testa, Hurwitz & Thibeault, LLP, d/b/a:
High Street Investors 2000
By: /s/ George Thibeault
--------------------------------
Title: Partner
-----------------------------
Address: 125 High Street
Boston, MA 02110
Synergy Venture Partners I, L.P.
By: /s/ Ajit J. Deura
--------------------------------
Title: Partner
-----------------------------
Address: 45365 Rutherford Terrace
Fremont, CA 94539
/s/ Catherine Hapka
-----------------------------------
Catherine Hapka
Address: 4947 S. Fillmore Ct.
Englewood, CO 80110
<PAGE>
/s/ James Mongiello
-----------------------------------
James Mongiello
Address: 47066 Palo Amarillo Drive
Fremont, CA 94539
Samsung Venture Investment Corp.
By: /s/ Jae - Han Lee
--------------------------------
Jae - Han Lee
President
Address: 16th Fl. Samsung Yeoksam Bldg.
647-9 Yeoksam-Dong, Kangnam-Ku
<PAGE>
/s/ Paul Brauneis
-----------------------------------
Paul Brauneis
Address: 43 Pickman Drive
Bedford, MA 01730
<PAGE>
Exhibit A
---------
Second Closing Purchasers:
<PAGE>
Exhibit B
---------
Signature Page to Fifth Amended and Restated Investor Rights Agreement
dated as of April __, 2000 among Avici Systems Inc. and the
Investors and Founders named therein
Pursuant to Section 7 of Article VII of the Fifth Amended and Restated
Investor Rights Agreement dated as of April __, 2000 among Avici Systems Inc.,
the Investors and Founders named therein (the "Agreement"), the undersigned (the
"Subsequent Closing Investor") hereby agrees to become a party to the Agreement
as if such person or entity had been listed on Exhibit A thereto, to be added to
---------
Exhibit A thereto as a "Subsequent Closing Investor", to be subject to the terms
- ---------
thereof and to be bound by the obligations and responsibilities and entitled to
the rights and privileges appertaining to Investors, as set forth therein.
IN WITNESS WHEREOF, the undersigned has caused the Fifth Amended and
Restated Investor Rights Agreement to be executed under seal as of the date set
forth below:
Name of Subsequent Closing Investor:
----------------------------------
Address:
------------------------
------------------------
------------------------
Signature:
-----------------------
Title:
------------------------
(if applicable)
Acknowledged and Agreed to:
Avici Systems Inc.
By:
----------------------------------
Name:
Title:
<PAGE>
Exhibit 10.7
------------
LEASE
BY
YVON CORMIER, TRUSTEE OF Y-CEE INVESTMENT TRUST
TO
AVICI SYSTEMS INC.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Identifications............................................. 3
2. Lease; the Premises......................................... 3
3. Tenant Fit-Up; Costs and Reimbursement...................... 5
4. Term........................................................ 8
5. Use of the Premises; Licenses and Permits................... 8
6. Basic Rent; Additional Rent................................. 9
7. Taxes....................................................... 14
8. Insurance; Waivers of Subrogation........................... 15
9. Utilities................................................... 17
10. Repairs..................................................... 18
11. Compliance with Laws and Regulations........................ 20
12. Alterations by Tenant....................................... 21
13. Landlord's Access........................................... 22
14. Indemnities................................................. 23
15. Casualty Damage............................................. 24
16. Condemnation................................................ 26
17. Landlord's Covenant of Quiet Enjoyment; Title............... 29
18. Tenant's Obligation to Quit................................. 29
19. Transfers of Tenant's Interest.............................. 30
20. Transfers of Landlord's Interest............................ 31
21. Mortgagees' Rights.......................................... 32
22. Tenant's Default; Landlord's Remedies....................... 34
23. Remedies Cumulative; Waivers................................ 38
24. Notices..................................................... 39
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
25. Recording................................................... 39
26. Estoppel Certificates....................................... 40
27. Hazardous Materials and Compliance with Environmental Laws.. 40
28. Other Utilities............................................. 42
29. Option to Extend Term and to Request Additional Space....... 42
30. Security Deposit............................................ 45
31. Brokerage................................................... 46
32. Bind and Inure; Limited Liability of Landlord............... 46
33. Authority................................................... 47
34. Captions.................................................... 47
35. Integration................................................. 47
36. Severability; Choice of Law, and Forum...................... 48
</TABLE>
-2-
<PAGE>
LEASE
1. Identifications:
----------------
This LEASE made as of the second day of _________ 1998, by and between the
following parties:
THE PARTIES:
------------
(a) The name and address of the Landlord is:
Yvon Cormier, Trustee of Y-CEE INVESTMENT TRUST
59 Chandler Circle
Andover, MA 01810
(b) The name and address of the Tenant is:
Avici Systems Inc.
12 Elizabeth Drive
Chelmsford, MA 01824
2. Lease; the Premises:
--------------------
In consideration of the Basic Rent, Additional Rent, and other payments and
covenants of the Tenant hereinafter set forth, and upon the following terms and
conditions, it being the intent of the parties hereto that this instrument be
deemed a "triple net lease" except as hereinafter provided, the Landlord hereby
leases to the Tenant and the Tenant hereby leases from the Landlord certain
premises comprising 47,000 sq. ft. the total rentable area in the Building ("The
Premises"), known and otherwise numbered Building 6 of Billerica Office Park
("Building"), the same more definitively described in a Floor Plan attached
hereto as Exhibit A ("Floor Plan"), on a parcel of land (the "Property") in
Billerica Office Park, so-called, in the Towns of Billerica, and Tewksbury
Middlesex County, Massachusetts, together with the right to use other
improvements
-3-
<PAGE>
constructed on the Property, including the exclusive right to use 141 parking
areas adjacent to the Building based upon a ratio of 3 spaces per 1,000 rentable
sq. ft. in the Premises. In addition, the Tenant shall be allowed to use non-
designated parking spaces until such time as they are assigned by the Landlord
to future Tenants at the building.
The Premises are leased together with the right, in common with the
Landlord and all others claiming under the Landlord or otherwise from time to
time lawfully entitled thereto, to use Billerica Park Drive (together with any
additional and substitute ways now or hereafter laid out in Billerica Park for
common use, the "Common Drives") for all purposes for which public ways may now
or hereafter be used in the Towns of Billerica and Tewksbury. The Landlord
reserves the rights to relocate the Common Drives and to install, maintain,
repair, replace and grant easements for utility lines, pipes and conduits in the
Common Drives and across the Property for the benefit of other properties, all
without any measurable interference with or, any interruption of the use and
enjoyment of access to the Premises by the Tenant as contemplated hereby subject
to the same conditions as Landlord's right to relocate common drives and place
and grant easements for utility lines. Landlord further reserves the right at
any time to submit all or a portion of the Common Drives to a declaration of
common easements for the benefit of the Property and the other properties in
Billerica Park serviced by the Common Drives, in which event the Tenant shall,
if (i) all such other properties in Billerica Park are afforded substantially
the same rights and benefits in the Common Drives, (ii) the expenses of
Maintenance, landscaping, plowing and sanding are fairly and reasonably
allocated among the Property and such other properties and (iii) such
declaration shall not adversely affect the rights of Tenant hereunder
(specifically including the Tenant's exclusive rights to use the 141 parking
areas adjacent to the Building) be bound by the same and shall pay as Additional
Rent hereunder its
-4-
<PAGE>
pro-rata (as defined hereafter) share of such expenses as are from time to time
allocable to the Property under such declaration, provided those charges are
typical of those assessed to similar properties at Billerica Park. The Tenant's
Pro-Rata Share of expenses as delineated aforesaid shall be based on a fraction
the numerator of which shall be the total amount of square feet leased to the
Tenant at the Building and the denominator of which shall be the aggregate total
of rentable square feet in Building 6.
3. Tenant Fit-Up; Costs and Reimbursement:
---------------------------------------
Upon execution of this Lease, the Tenant shall be allowed access to the
Premises for purposes of undertaking and completing a fit-up of the interior
portion of the Premises in order to accommodate its proposed business
operations. To facilitate the Tenant commencing the fit-up, the Landlord shall
deliver the Premises, Building, and Property, including but limited to the roof,
foundations, beams, girders, mullions, exterior runoff water and related
drainage systems, exterior walls, parking lot and sidewalk areas, HVAC systems,
electrical and plumbing systems, loading doors, entrance doors, interior walls,
floors, ceilings, and the exterior and interior portion of all windows, window
frames, doors, door frames and all other glass and plate glass in good and
normal operating order and repair, free from all defects.
Prior to the Tenant being allowed access to the Building to begin work on
the fit-up, however, it shall be required to submit to the Landlord for approval
all plans and/or specifications related to the contemplated work, it being
agreed, however, that the Landlord will not unreasonably withhold, condition, or
delay such approval. If Landlord shall fail to approve the plans and/or
specifications within three business days from receipt of the same from the
Tenant, it shall be conclusively presumed that the Landlord has approved the
plans as presented. If the Landlord shall disapprove the plans and
specifications, he shall set forth in writing the
-5-
<PAGE>
basis for the same. In connection with the approval of such plans and
specifications, the parties agree to cooperate with one another and to work
together in good faith so that plans and specifications submitted by the Tenant
in a timely manner are approved and/or accepted by the Landlord within thirty
(30) days from execution of this instrument.
All such plans and specifications shall be drawn in accordance with good
engineering practices. In addition thereto, the Tenant shall assure that all
work done at the Building is completed in a good and workmanlike manner and that
only first class materials are used by any contractor(s) hired by the Tenant to
perform the fit-up. Any contractors hired by the Tenant to perform the fit-up
shall use materials in connection with the fit-up that are comparable in quality
to those already existing materials used in the construction of the Building.
The Tenant shall bear all costs of preparing all plans, drawings and
specifications and in addition thereto, the Tenant shall be solely exclusively
liable to all contractors hired to perform work for the fit-up including without
limitation all costs of labor and materials. Barring an instrument signed by
the Landlord, the Landlord shall have no liability whatsoever for costs,
expenses and/or fees due contractors hired by the Tenant. In connection
therewith, should the Tenant breach this obligation and should the Landlord be
joined in any action brought by any third party against the Tenant asserting
damages for goods sold and delivered and/or for services rendered (including but
not limited to any action to perfect and/or to record a mechanic's or
materialman's lien against the Premises), then in such event (i) the Tenant
shall have thirty (30) days from commencement of such litigation to cause the
same to be Dismissed or to cause such lien to be removed by the posting of a
bond or such other means at the Tenant shall in its sole discretion implement
failing which the same shall be deemed an event of default thereby entitling the
Landlord, without further notice other than that required by law, to avail
itself of the remedies
-6-
<PAGE>
described in (S)22 hereafter (ii) the Tenant shall indemnify and shall otherwise
hold the Landlord harmless from and against any and all such claims including
but not limited to reimbursement to the Landlord for all reasonable legal
fees/costs it might incur in connection with defense of any such action.
During the period of the fit-up, the Tenant shall pay all utilities for the
Premises based on readings from meters, submeters or check meters. In
connection herewith, the Tenant acknowledges that failure to complete the fit-up
shall not delay the Commencement Date of the Lease as defined in (S)4 and the
accompanying responsibility of the Tenant to begin payment of both basic and
additional rent effective on the Commencement Date unless such delay is caused
by Landlord, including without limitation, Landlord's failure to timely approve
Tenant's plans.
Furthermore, and in conjunction with the Tenant's fit-up, it shall be the
sole and exclusive responsibility of the Tenant to obtain any permits necessary
for it to begin work as may be required by either the towns of Billerica or
Tewksbury and likewise, it shall be the sole and exclusive responsibility of the
Tenant to assure that all final inspections which may be required by either
municipality take place in a timely fashion so as not delay issuance of any
occupancy permit which might be required.
In addition thereto, it shall be the sole and exclusive responsibility of
the Tenant to assure, effective with its execution of this Lease, that all
insurance required by (S)8 has been obtained and is full force and effect.
In conjunction with the fit-up, and prior to any contractor commencing work
at the Building, the Tenant shall deliver in form suitable to the Landlord, if
requested, evidence that each of such contractors has in full force and effect
Workmen's Compensation for the benefit of its employees. In any all event,
however, the Landlord shall bear no liability for any person
-7-
<PAGE>
injured while on the Premises during the process of the fit-up except if such
injury or damage is caused by the negligence or other misconduct of the
Landlord, its agents, servants, employees or contractors.
4. Term:
-----
The Term of this Lease (the "Term"), shall begin on the date of execution
of this instrument and shall end on July 31, 2001 ("Expiration Date") unless (i)
sooner terminated in accordance with the terms and provisions of this Lease;
(ii) or extended pursuant to the provisions of (S)29 hereafter. The
Commencement Date ("Commencement Date") shall be August 1, 1998 (subject to
delays in completion of Tenant's work caused by Landlord) or the date on which
the Tenant begins to conduct business from the Premises, whichever first occurs.
5. Use of the Premises; Licenses and Permits:
------------------------------------------
The Tenant shall use the Premises only for offices, general engineering,
research and development, light manufacturing, warehousing, (collectively
"Permitted Uses") and such other uses as are or may be permitted by the Zoning
By-Laws for the towns of Billerica and Tewksbury all to the extent now and
hereafter from time to time permitted under applicable laws, by-laws,
ordinances, codes, rules, regulations, orders and other lawful requirements of
governmental bodies having jurisdiction. The Landlord represents that as of the
date of this Lease the Premises may be used for all Permitted Uses under the
Billerica and Tewksbury Zoning By-laws applicable to the Building and that the
Premises, Property and Building conform with all applicable laws, codes, by-
laws, rules, ordinances, statutes and regulations including but not limited to
`the Americans With Disabilities Act. The Tenant, its subtenants, licensees,
invitees and any other users of the Premises shall apply in their own names for
and obtain at their own expense any and all licenses, permits and other
approvals which may be required from such
-8-
<PAGE>
governmental bodies solely in connection with operation of the Tenant's business
at the Premises during the Term.
6. Basic Rent; Additional Rent:
----------------------------
Effective with the Commencement Date, and for the term of this Lease as
defined by (S)4 above (except as provided for in the second paragraph of this
clause), the Tenant shall pay to the Landlord as Basic Rent, the sum of Three
Hundred Seventy Six Thousand ($376,000.00) Dollars per year in monthly
installments of Thirty One Thousand Three Hundred Thirty Three and 33/100
(31,333.33) Dollars, the same calculated at the rate of $8.00 per square foot
for 47,000 rentable square feet of area at the Building more particularly
described on Exhibit A.
As more specifically set forth hereafter, each yearly amount of Basic Rent
is to be Triple Net. Basic Rent shall be payable without counterclaim,
deduction, defense setoff or abatement, except as otherwise expressly provided
herein, in advance on the first day of each month in equal installments (except
in the case of a partial month at the beginning of the Term, in which event the
Tenant shall pay the appropriate pro rata proportion of such installment) to the
Landlord at the address set forth above or to such other party or such other
address as the Landlord may thereafter from time to time specify by notice to
the Tenant. If the name or address of the party entitled to receive Basic Rent
and Additional Rent shall be changed, the Tenant may, until ten (10) days after
receipt of such notice or such change, continue to pay Basic Rent and Additional
Rent to the party and the address to which, and in the manner in which, the
preceding installment of Basic Rent was paid.
To the end this Lease is Triple Net, Basic Rent shall be received by the
Landlord net of all costs and expenses related to the Premises other than as
expressly set forth herein. The Tenant agrees to pay, for that area leased to
it and exclusively dedicated to its use, its proportionate share
-9-
<PAGE>
(initially 47% except in the case of real estate taxes for which the Tenant
shall pay 100% of the tax bill issued from the town of Billerica and 35.4% of
the tax bill issued from the town of Tewksbury) of real estate taxes, insurance
premiums of the Landlord, costs of common area utilities, costs of repairs and
maintenance,* specifically including ordinary maintenance of the parking lot and
walkways, costs of snow plowing other costs which are specifically set forth
herein and any and all charges, costs, expenses, and obligations of every kind
and nature whatever with regard to the Building or the use, operation or
maintenance thereof,** except as otherwise expressly agreed in this Lease
("Additional Rent"), to the Landlord upon demand as Additional Rent, in the same
manner as Basic Rent. The Landlord shall in each case, at the time of demand for
payment, provide the Tenant with evidence of the payment for any such charges,
costs, expenses and obligations. In connection with the Tenant's obligation to
pay Additional Rent, the Landlord shall provide an annual statement to the
Tenant prepared in accordance with generally accepted accounting principles and
certified by an officer of the Landlord no later than ninety days after the end
of each year.
Any adjustment(s) to Additional Rent shall be based on the annual statement
subject to the Tenant's audit rights as described in the Lease. Notwithstanding
anything in this Lease to the contrary, the Tenant shall have no liability for
the Landlord's mortgage debt service or other financing costs, any brokerage
expenses of the Landlord or any repairs which are the obligation of the Landlord
under Paragraph 10 or any capital improvements or assessments prior to the
Commencement Date of the Lease or within the last year of the term and last year
of any Option Period.
- ------------------------------------
* of common areas and facility
** incurred by Landlord
-10-
<PAGE>
Specifically excluded from Additional Rent are:
1. The cost of correcting defects (other than defects in Tenant's work),
except conditions (not occasioned by construction effects) resulting from
ordinary wear and tear shall not be deemed effects for this purpose;
2. Salaries of officers and executives of the Landlord not connected with
the Operation of the Property;
3. The initial cost of tools and equipment used in the operation of the
Property;
4. Depreciation;
5. Expenses relating to tenants' alterations, including, without
limitation, the construction of initial leasehold improvement for tenant spaces;
6. Interest, fees or principal on indebtedness and any ground lease rents;
7. Expenses for which the Landlord, by the terms of this Lease or any
other lease, makes a separate charge;
8. Real estate taxes, other than as provided for by the Lease;
9. The cost of any electric current furnished to Tenant and other Building
tenants exclusive of the lobby which is to be a common area and outside lighting
for the parking lot;
10. The cost of any services or systems for that portion of the Building
occupied by the Landlord or affiliates of the Landlord (exclusive of space
occupied by the Landlord or affiliates of the landlord in connection with the
operation of the Building) and which are not provided generally to other tenants
in the Building;
11. Leasing fees or commissions, advertising and promotional expenses, and
legal fees incurred in connection with leasing space in the Building;
-11-
<PAGE>
12. Costs incurred in performing work or furnishing services for any
tenant (including Tenant), whether at such tenant's or Landlord's expense, to
the extent that such work or service is in excess of any work or service that
Landlord is obligated to furnish to Tenant at Landlord's expense (e.g., if
Landlord agrees to provide extra cleaning to another tenant, the cost thereof
would be excluded since Landlord is not obligated to furnish extra cleaning to
Tenant);
13. The cost of repairs or replacements incurred by reason of fire or
other casualty or condemnation;
14. Association fees and dues;
15. Expenses for painting and redecorating for other tenants;
16. Legal expenses in enforcing the terms of the Lease for the Tenant and
any other tenant;
17. Penalties and interest for late payment of real estate taxes, water
and sewer charges, or any other obligation of Landlord;
18. Water rents and sewer charges to any tenant on a direct meter basis
which are paid by the tenant;
19. The cost of any item or service to the extent to which Landlord is
entitled to be reimbursed or compensated by insurance, any tenant, or any third
party, or would have been entitled to reimbursement or compensation if Landlord
maintained the insurance which it is required to maintain hereunder;
20. Expenses due to Landlord's default under any lease or other agreement
relating to the Building, the Lot, or the Premises, and
21. All other items that, under generally accepted accounting principles,
are properly classified as capital expenditures, except as expressly otherwise
provided in this Lease.
-12-
<PAGE>
The Tenant shall pay to the Landlord upon demand as Additional Rent
interest on any payments of Basic Rent or Additional Rent not paid within 10
(ten) days after the same are due) at a rate (herein called the "Lease Interest
Rate") equal to five percent (5%) per annum computed from the date such payment
was due until such payment is made, each of such payment(s) of interest being
payable as Additional Rent with the payment of Basic Rent next coming due.
Notwithstanding the foregoing, if no such demand is made in writing delivered in
hand to the Tenant within the period of thirty (30) days following the date any
payment of Basic Rent or Additional Rent was due, the Landlord shall be deemed
to have waived the right to be paid any interest on such payment in respect of
periods prior to such demand.
Rent for any partial month shall be equitably pro-rated. Rent shall be
paid by check mailed by the first business day of each month to the Landlord at
the above address or any other address provided to Tenant by Landlord in
accordance with this Lease.
The Tenant shall have ninety (90) days from receipt of any year end
statement described above to dispute the inclusion or amount of any item or
items in any such statement provided to it. In such event, the Tenant shall pay
the Operating Expense Payment and the Tax Payment excluding the items or amounts
in dispute. If the parties are unable to settle the dispute between themselves
within sixty (60) days of notice by the Tenant to the Landlord, such dispute
shall be settled by a firm of real estate audit professionals mutually
acceptable to both parties ("Audit Professionals"). If the Landlord and Tenant
cannot agree on the Audit Professionals within thirty (30) days, then each party
shall, within fifteen (15) days thereafter, select one independent firm of
auditors and the two then selected shall chose a third independent Audit
Professional. The third firm thereupon shall settle the dispute and both the
Landlord and Tenant shall be bound its decision. If the Landlord fails to
select its Audit Professional within the 15 day period as
-13-
<PAGE>
aforesaid, then to the extent the Tenant has previously paid the Landlord for
items in Dispute, the Tenant shall have the right to deduct such amount from any
installments of basic or additional rent or other charges due or becoming due
under the Lease ("Set Off Rights.") If the Tenant fails to select its auditor
within such 15 day period, it shall be conclusively deemed that the Tenant has
waived its right to audit and/or to contest the validity of applicable Year End
Statements.
Audit Professionals shall be entitled to review all records relating to the
disputed items. All costs for the Audit Professionals shall be borne by the
party against whom a decision is rendered, subject to the following: if more
than one item is disputed, the expenses shall be apportioned equitably according
to the number of items decided against each party taking into consideration the
amount(s) involved.
If the Audit Professionals determine that the Tenant has made an
underpayment, Tenant shall reimburse Landlord for the amount of the same within
thirty (30) days following such determination. If the Audit Professionals
determine that the Tenant has made an overpayment, the Landlord shall reimburse
the Tenant for the same likewise within thirty (30) days of such determination.
Should the Landlord fail to pay the overpayment as described aforesaid, the
Tenant shall have the remedy of the Set Off Rights. If the Tenant fails to pay
the Landlord the underpayment, the same shall be deemed a default of non-payment
under the Lease.
7. Taxes. (Deleted)
------
8. Insurance; Waivers of Subrogation;
----------------------------------
The Landlord shall carry appropriate general liability insurance as well
property and casualty insurance on the Premises, Building, Property and
Improvements with the same limits of coverage as set forth for the Tenant
herein. The Landlord shall further obtain insurance for the
-14-
<PAGE>
Building and Improvements, with full replacement cost as determined by its
Insurer. Tenant shall, at its own cost and expense, obtain prior to the
commencement of the Term and throughout the Term shall maintain, with companies
qualified to do business in Massachusetts and reasonably acceptable to the
Landlord and to any Mortgagee(s), for the benefit as named insureds of the
Landlord, the Tenant and any Mortgagees as their respective interests may
appear, the following:
(i) comprehensive general liability and property insurance (with
contractual liability rider) against claims for bodily injury, death
or property damage occurring to, upon or about the Premises in limits
of $2,000,000.00 per occurrence for bodily injury or death and
property damage or such higher limits as may result from the
operation of clause (iv) below, the risk of loss to all Tenant's
contents of, and personal property and trade fixtures located in, the
Premises being upon the Tenant, and the Landlord having no liability
with respect thereto;
(ii) deleted
(iii) so called "property" or "casualty" insurance, with losses payable to
the Landlord or any first Mortgagee, against loss or damage to the
presently existing (prior to Tenant's occupation) interior
Improvements and to any other buildings, structures and improvements
from time to time constituting a part of the Premises, such as may
result from fire and such other casualties as are normally covered by
"extended coverage" and "difference in conditions" endorsements, such
casualty or property insurance to be in an amount equal to the
replacement cost of the Improvements and any other buildings,
structures or improvements from time to time constituting part of the
Premises and to include lost rentals coverage for a period of at
least one year.
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<PAGE>
Replacement cost shall be redetermined as frequently as the Landlord
or any Mortgagee may from time to time reasonably request; and
(iv) at the written request of the Landlord, such other insurance
coverages and such additional coverage amounts as any Mortgagee may
reasonably require the Landlord to obtain provided such coverage is
customary and usual with respect to commercial buildings similar to
the subject property.
At the commencement of the Term and thereafter not less than ten (10) days
prior to the expiration dates of the policies theretofore furnished originals or
duplicates or certificates (contractually binding upon the insurer and not
merely informational) thereof issued by the insurers, shall be delivered to the
Landlord. All such policies and certificates shall provide that they are non-
cancellable without at least thirty (30) days' prior written notice to the
Landlord and any Mortgagees. Tenant shall have the right to substitute
insurance policies of equal coverage.
The Landlord and the Tenant each hereby release the other from any
liability for any loss or damage to the Premises or other property and for
injury to or death of persons occurring on or about the Premises or in any
manner growing out of or connected with the Tenant's use and occupation of the
Premises or the condition thereof, whether or not caused by the negligence or
other fault of the Landlord, the Tenant or other respective agents, employees,
subtenants, licensees, invitees or assignees; provided, however, that this
release (i) shall apply notwithstanding the indemnities set forth in Paragraph
14, but only to the extent that such loss or, damage to the Premises or other
property or injury to or death of persons is covered by insurance which protects
the Landlord or the Tenant or both of them as the case may be; (ii) shall not be
construed to impose any other or greater liability upon either the Landlord or
the Tenant than would have existed in the absence hereof; and (iii) shall be in
effect only to the extent and so
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<PAGE>
long as the applicable insurance policies provide that this release shall not
affect the right of the insureds to recover under such policies, which clauses
shall be obtained by the parties hereto whenever available.
9. Utilities;
----------
The Landlord represents and warrants that all building systems at the
Premises, Building and Property are in good condition and repair, without
defects, at the time of commencement of the Lease; the Premises, Building and
Property contain in-place utilities for the Tenant to operate its business which
the Tenant has inspected; and all permits required therefor have been obtained
and are and will remain in full force and effect. In connection with the in-
place utilities, the Tenant shall be solely liable and responsible for
installation of such other utilities which may be needed to operate its business
should the same not be in existence on the date of execution of this Lease. The
Tenant expressly acknowledges that its intended use of the Premises is for
commercial purposes and the Landlord shall have no duty to furnish to the Tenant
with utility services of any kind, except as to water, sewer, gas, telephone
[subject to telephone company], electric and HVAC services. Separate gas and
electrical meters shall be provided for the Tenant and the Tenant in turn agrees
to be billed directly by the applicable utility company.
10. Repairs:
--------
The Landlord shall, at its own cost and expense, and during the term of the
Lease, maintain and make all necessary repairs to the roof, foundations, beams,
girders, and other structural elements of the Building, mullions, exterior
runoff water and related drainage systems, all exterior areas, including Parking
Lots and walkways (subject to the Tenant paying for those ordinary repairs as
Additional Rent per the terms contained on Page 11 of the Lease), all other
Common Areas and facilities (subject to assessment of the same as an element of
Additional
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<PAGE>
Rent) and exterior walls of the Premises only (exclusive of signs which may be
installed by the Tenant). However, the Landlord shall have no obligation to
repair any damage resulting from negligent acts of the Tenant, its agents,
employees, contractors, and invitees unless covered by Landlord's insurance
policy.
In connection herewith, the Landlord represents (i) The property shall be
maintained consistent with generally accepted practices associated with a first
class research and development building (ii) it shall provide snow plowing for
the parking areas (iii) it shall remove snow and ice from walkways (iv) it shall
provide landscaping services so that the property is maintained in a neat and
clean condition. The same, however, shall be deemed a common area maintenance
charge subject to inclusion as Additional Rent.
From and after the commencement of and during the Term, the Tenant shall,
at its own cost and expense: make all other repairs, non-structural, interior
and exterior, necessary to keep the Premises, including all electrical other
than common systems, mechanical, heating, ventilating and air conditioning,
plumbing (other than in common areas) and other building systems [excluding ewer
and gas systems and all capital repairs and replacements] serving the Premises,
in as good condition, order and repair as the same are at the commencement of
the Term or thereafter may be put, reasonable wear and use, damage by fire or
other casualty caused by the Landlord and repairs which are expressly the
obligation of the Landlord hereunder only excepted (it being understood,
however, that the foregoing exception for reasonable wear and use shall not
relieve the Tenant from the obligation to keep the Premises in good order,
repair and condition).
[Deleted]
-------
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<PAGE>
If the Landlord shall fail to cure any default by the Landlord in its
obligations under this Paragraph 10, thirty (30) days after notice from the
Tenant to the Landlord of such default (or, in the event of imminent danger of
injury to persons or damage to property, after telephone notice of such default)
or to commence such cure and diligently prosecute the same to completion, in the
absence of any Terminable Default on the part of the Tenant hereunder, the
Tenant may, at its option, cure such default for the Landlord's account as was
specified in such notice, in which event the Tenant may offset against the Basic
Rent next accruing under this Lease, cumulatively until exhausted, the
reasonable costs and expenses it can demonstrate were incurred in good faith in
the cure of such default plus interest thereon at the Lease Interest Rate, but
in no event shall any such offset reduce the amount of Basic Rent payable below
the amount from time to time necessary for the Landlord to make payments of
principal, interest and other expenses payable under any first Mortgage
perfected against the Premises, including any real estate taxes or other
expenses which are or could become a lien upon the Premises, except to the
extent such taxes and other expenses are actually paid by the Tenant. The
Landlord shall provide the Tenant with evidence of such payments as the Tenant
may reasonably require. Notwithstanding the foregoing, if the Landlord disputes
the Tenant's allegation of default or the Tenant's right to take any action
under this paragraph, any action taken by the Tenant under this paragraph or the
costs and expenses incurred in any action taken by the Tenant under this
paragraph, shall not afford the Tenant the right to offset any amounts due the
Landlord until (i) the parties in good faith attempt to meet and resolve any
such dispute within 10 days after notice from the Landlord to the Tenant (ii)
determination of such dispute by a court of appropriate jurisdiction.
Notwithstanding anything to the contrary as contained in this Paragraph,
the Landlord shall be solely and exclusively liable for ill repairs and
replacements which are capital in nature.
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11. Compliance with Laws and Regulations:
-------------------------------------
The Tenant agrees that its obligations to make payment of the Basic Rent,
Additional Rent and all other charges an its part to be paid, and to perform all
of the covenants and agreements on its part to be performed during the Term
hereunder shall not, except as set forth in Paragraph 16 in the event of
condemnation by public authority, be affected by any present or future law, by-
law, ordinance, code, rule, regulation, order or other lawful requirement
regulating or affecting the use which may be made of the Premises.
During the Term, the Tenant and Landlord shall comply, each at its own cost
and expense, with: all applicable laws, by-laws, ordinances, codes, rules,
regulations, orders, and other lawful requirements of the governmental bodies
having jurisdiction (other than such as are the obligation of the Landlord
hereunder), whether or not foreseeable, and whether or not they involve any
changes in governmental policy, which are applicable to the Premises, the
fixtures and equipment therein and thereon, or the Tenant's particular use
thereof; the orders, rules and regulations of the New England Fire Insurance
Rating Association or any other body hereafter constituted exercising similar
functions, which may be applicable to the Premises, the fixtures and equipment
therein or thereon or the use thereof; and the requirements of all policies of
public liability, fire and all other types of insurance at any time in force
with respect to the Premises and the fixtures and equipment therein and thereon.
Notwithstanding the foregoing, the Tenant shall not be responsible for future
laws, by-laws, ordinances, codes, rules, regulations, orders and other lawful
requirements of governmental bodies having jurisdiction that require a
structural change to the Premises, Building or Property or other capital outlay.
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<PAGE>
12. Alterations by Tenant:
----------------------
The Tenant shall erect no signs (other than one at the driveway to the
Building and on the facade of the Building, subject to approval of the Landlord
(which approval shall not be unreasonably withheld, conditioned or delayed] and
subject to any applicable ordinances related to signs as promulgated by either
the towns of Billerica or Tewksbury) and shall make no alterations, additions or
improvements in or to any portion of the Premises without the Landlord's prior
written consent subject to the provisions of this Paragraph 12, which consent
shall not be unreasonably withheld, conditioned or delayed. In connection
therewith, the Landlord shall have ten days, from receipt of written notice from
the Tenant detailing the proposed alterations, to approve or reject the same.
The Landlord shall be deemed to have given his approval to any proposed
alterations unless he shall have objected to the same within the time set forth
herein. As part of any request for such consent, the Tenant shall provide the
Landlord with plans and specifications drawn in accordance with good engineering
practice (only if it would be usual and appropriate to prepare plans and
specifications given the nature and extent to the proposed alterations,
additions or improvements), reasonable evidence of suitable insurance and, lien
bonds or other suitable assurances of the Tenant's obligation and wherewithal to
complete the same at no expense to the Landlord and without failure to pay any
contractor engaged to do the work.
The Landlord agrees that in the absence of a Terminable Default on the part
of the Tenant hereunder, its consent shall not be required for interior, non-
structural alterations to the Building from time to time constituting a part of
the Premises if the same are consistent with the use of the Premises as
contemplated hereby and with the heating, ventilating and air conditioning and
other engineering and mechanical systems in the building. (Deleted) At the
-------
time Tenant requests
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<PAGE>
Landlord's consent to any future alterations, installations, removals, additions
or improvements, Landlord agrees it will only require Tenant to remove such
alteration, installment, removal, addition or improvement at the end of the
Lease Term provided the Landlord, in his sole discretion, determines such
improvements will impair his ability to re-let the Premises to another tenant.
13. Landlord's Access:
------------------
The Tenant agrees to permit the Landlord Purchasers and any Mortgagees and
their authorized representatives to enter the Premises (i) at all reasonable
times during usual business hours after not less than two business days' prior
oral or written notice for the purposes of inspecting the same, exercising such
other rights as it or they may have hereunder or under any mortgages (provided
such rights are consistent with the Landlord's rights hereunder) and, during the
last six (6) months of the Term or after any Terminable Default (inclusive of
any applicable notice period) hereunder on the part of the Tenant, to show the
Premises to other prospective tenants, and (ii) at any time and without notice
in the event of emergency (in which event the Landlord shall attempt to give
oral notice by telephone.) In connection therewith, Landlord shall use all
commercially reasonable efforts to protect Tenant's property and personnel from
loss and injury and to avoid interfering with conduct of Tenant's business.
14. Indemnities:
------------
The Tenant and Landlord agree as follows: each shall indemnify and save
the other harmless from and against any and all losses, claims, liability,
expenses and damages (other than consequential damages) which either directly or
indirectly, in whole or in part arise out of or result from (i) the negligence
or
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<PAGE>
willful misconduct of either party, its agents, servants and employees (ii) any
act or occurrence in or about the Premises, unless caused by the negligence or
willful misconduct of the applicable party, its agents, servants, contractors or
employees (iii) the breach of any provision of this Lease by either party or any
of its agents, servants, employees or contractors (iv) judgments, citations,
fines or other penalties rendered or assessed against one or the other (with the
exception of any claims under the applicable party's workmen's compensation
insurance policy) as a result of one of the party's failure to comply with all
federal, state and local laws, safety and health regulations relating to either
party's use or occupation of the Premises. In connection herewith, both the
Landlord and Tenant agree to give the other prompt notice of any such violation
which may be asserted by a governmental agency.
The Landlord and Tenant further agree to indemnify the other from and
against all costs, expenses (including reasonable attorneys' fees) and other
liabilities incurred in connection with any such indemnified claim or action
and/or proceeding brought thereon. If the Landlord shall breach this covenant
and fail to reimburse the Tenant for such costs and expenses after written
demand, the Tenant shall be allowed to offset the same against basic or
additional rent. If the Tenant shall breach this covenant and fail to reimburse
the Landlord for such costs and expenses after written demand, the Landlord may
declare a Default under this Lease based upon non-payment of rent.
Nothing contained above is intended to require indemnification for any
property claim for which insurance is required to be maintained under the terms
this Lease. The rights and obligations of the Landlord and Tenant under this
Paragraph 14 shall survive the expiration and/or earlier termination of this
Lease.
15. Casualty Damage:
----------------
a. Tenant's Right to Terminate: if the Premises or the Building shall be
damaged or destroyed by fire, windstorm or any other insured casualty, the
Tenant shall immediately give
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written notice thereof to Landlord and unless this Lease is terminated as
hereinafter provided, the Landlord, at his own expense, shall repair or rebuild
the same so as to restore the Premises to substantially the same condition they
were in immediately prior to such damage or destruction, subject however, to
zoning and building laws then in existence, provided that the Landlord shall not
be responsible for any delay in such repair or reconstruction which may result
from any cause beyond its reasonable control, and provided further that the
Landlord shall not be required to expend more than the net amount of insurance
proceeds, if any received, by Landlord for such purposes, plus the amount of any
deductible, so long as the Landlord maintains the insurance required of it under
this Lease. Notwithstanding the foregoing, the Landlord within 30 days after
receipt of said written notice of damage, shall inform the Tenant if said damage
can be repaired within 120 days, based upon a reasonable estimate of the
Landlord's architect and Engineer. If the Landlord notifies the Tenant it cannot
repair or rebuild the Premises so as to restore the same to substantially the
same condition they were in immediately prior to the destruction within said 120
days, or if in fact the Premises is not restored within 120 days, then in either
of such event, the Tenant may elect to cancel this Lease upon notice to the
Landlord.
b. Landlord's Right to Terminate: If the Premises or the Building are
substantially damaged by fire or casualty (the term "substantially damaged"
meaning damage of such character that the same cannot, in the ordinary course,
reasonably be expected to be repaired within 120 days from the time that repair
work would commence or if either the Premises or Building shall be damaged or
destroyed to the extend of 25% or more on a square footage basis by my cause,
(whether insured against by the Landlord or not) the Landlord may elect by
written notice to the Tenant, to be provided to Tenant within 30 days of
Landlord's receipt of said damage, either to terminate this Lease or to repair
or rebuild on the conditions set forth in the above clause. The
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Tenant shall likewise be afforded the right to terminate the Lease if more than
25% of either the Premises or Building shall be damaged or destroyed.
c. Tenant's Obligations to Repair: In the event that the remises or
Building is damaged or destroyed by any cause, then, unless this Lease is
terminated as provided above, the Tenant at its own expense (but in no event
beyond the limits of its insurance less any applicable deductible) and
proceeding with all reasonable dispatch shall repair or replace all trade
fixtures, equipments, signs or other property installed by or belonging to the
Tenant which shall be damaged to destroyed.
d. Abatement of Rent: If the Premises shall be damaged by fire or
casualty, the Basic Rent and Additional Rent payable by the Tenant shall abate
or be reduced proportionately for the period in which, by reason of such damage,
there is substantial interference with the operation of the Tenant's use of the
Premises, having regard to the extent to which Tenant may be required to
discontinue its use of the Premises, but such abatement or reduction shall end
if and when Landlord shall have substantially restored the Premises (exclusive
of any of Tenant's fixtures, furnishings, equipment and the like or work
performed therein by Tenant) to substantially the condition in which the
Premises were in prior to such damage, so long as Tenant has been provided 120
days from the date it is afforded access to the Premises to complete the
Tenant's repairs. In no event shall Landlord be obligated in connection with
the restoration of the Premises, as stated herein, to expend an amount in excess
of the proceeds of insurance recovered with respect thereto. In the event the
Premises shall be damaged by fire or other casualty resulting from negligence of
the Tenant, its agents, contractors, employees or invitees, and this Lease shall
not be terminated as a result of such damage, Tenant shall not be released
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from any of its obligations hereunder including, without limitation, its duty to
pay the Basic Rent and Additional Rent payable by Tenant without abatement or
reduction.
e. Award: Landlord shall have and hereby reserves and accepts and Tenant
hereby grants and assigns to Landlord, all rights to recover damages to the
Premises, Building or Property and the leasehold interest hereby created, from
Landlord's insurance and to compensation accrued or hereafter to accrue by
reason of such damage or destruction, as aforesaid, and by way of confirming the
foregoing, Tenant hereby grants and assigns, and covenants with Landlord, to
grant and assign to Landlord all rights to such damages or compensation from
Landlord's insurance. Nothing contained herein shall be construed to prevent
Tenant from prosecuting in any proceedings a claim for the value of the Tenant's
inventory, furnishings, equipment or usual trade fixtures installed in the
Premises by Tenant and at Tenant's expense, provided that such action shall not
affect the amount of compensation otherwise recoverable by Landlord.
16. Condemnation:
If a substantial portion of the useable floor areas of the building, or of
the parking area, from time to time constituting part of the Premises shall be
taken, such that the same shall materially and adversely interfere with the
Tenant's ability to conduct business on the Premises, or if the Tenant's access
to the Premises shall be deprived for three (3) months or more, by eminent
domain or appropriated by public authority, the Tenant may terminate this Lease
by giving written notice to the Landlord within thirty (30) days after such
taking or appropriation becomes final. In the event of any such termination,
this Lease shall terminate a s of the date the Tenant must surrender possession
or, if later, the date the Tenant actually surrenders possession,
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or the date Tenant's access is deprived and the Basic Rent and Additional Rent
reserved shall be apportioned and paid to and as of such date.
If all or any part of the improvements or any other improvements from time
to time constituting part of the Premises is taken or appropriated by public
authority as aforesaid and this Lease is not terminated as set forth above, the
Landlord shall, subject to the rights of any Mortgagees, apply any such damages
and compensation awarded (net of the costs and expenses, including reasonable
attorneys' fees, incurred by the Landlord in obtaining the same) to secure,
close and restore so much of the Improvements or other improvements constituting
part of the Premises as remain to an architectural whole except that in no event
shall the Landlord be obligated to expend more for such replacement than the net
amount of any such damages, compensation or award which the Landlord may have
received as damages in respect to the Improvements and any other improvements
from time to time constituting part of the Premises as they existed immediately
prior to such taking or appropriation; in such event, there shall be an
equitable abatement of Basic Rent in proportion to the loss of useable floor
area in the Improvements after giving effect to such replacement, from and after
the date the Tenant must surrender possession (or access is deprived) or, if
later, the date the Tenant actually surrenders possession and except further,
that if, in such event, for any reason any Mortgagee retains any portion of such
damages or award and the Landlord fails within thirty (30) days after a request
by notice from the Tenant to agree to secure and close the remaining
improvements as aforesaid, then the Tenant shall have an additional period of
sixty (60) days after the expiration of such thirty (30) day period within which
to terminate this Lease, in which event, this Lease shall thereupon be void and
without recourse to the parties as to obligations thereafter accruing. The
Tenant agrees that the foregoing rights shall be its sole remedies, both at law
and in equity, for
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the failure of any Mortgagees and the Landlord to fulfill its obligations to
secure and close the remaining improvements as aforesaid.
The Landlord hereby reserves, and the Tenant hereby assigns to the
Landlord, any and all interest in and claims to the entirety of any damages or
other compensation by way of damages which may be awarded in connection with any
such taking or appropriation except so much of such damages or award as is
specifically and separately awarded to the Tenant and expressly attributable to
Improvements constructed and/or made by the Tenant as well as to the Tenant's
trade fixtures, personal property or moving expenses. Nothing contained herein
shall prohibit the Tenant from making claim in its own name against the
municipality for damages including but not limited to loss of business and an
amount equal to its unamortized costs of leasehold improvements on condition
such application does not interfere with the Landlord's paramount right to claim
damages in connection with any such taking. Notwithstanding anything to the
contrary set forth above, if the Tenant is deprived of access to the Property,
an abatement of rent, effective on the date of deprivation, shall take effect.
In addition thereto, in the event of Condemnation, all Basic and Additional Rent
shall be abated.
17. Landlord's Covenant of Quiet Enjoyment; Title:
----------------------------------------------
The Landlord covenants that the Tenant, upon paying the Basic Rent and
Additional Rent provided for hereunder and performing and observing all of the
other covenants and provisions hereof, may peaceably and quietly hold and enjoy
the Premises for the Term as aforesaid, subject, however, to all of the terms
and provisions of this Lease. The Landlord warrants that as Trustee of Y-CEE
INVESTMENT TRUST, u/d/t dated January 12, 1979 and recorded with the Middlesex
Northern District Registry of Deeds at Book 2348, Page 327, that he has the
right and lawful authority to enter Into this Lease and further that the
Landlord is the owner of the fee in
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the Premises subject to no liens or encumbrances of record except those which
are required by Lexington Savings Bank to secure a mortgage on said )remises. In
connection herewith, the Landlord, upon request, shall furnish to the Tenant
evidence sufficient to establish that it owns the Premises, including a list of
encumbrances, if any, perfected and recorded against the same.
18. Tenant's Obligation to Quit:
----------------------------
The Tenant shall, upon expiration of the Term or other termination of this
Lease, leave and peaceably and quietly surrender and deliver to the Landlord the
Premises and any alterations, additions and improvements which have been made by
the Tenant to the Premises, and any replacements thereof in the order, condition
and repair required by Paragraph 10 hereof and the other provisions of this
Lease, except, however, that the Tenant shall first remove any trade fixtures
and equipment and any alterations, additions and Improvements which the Landlord
has required be removed pursuant to the terms of Paragraph 12 hereof and Tenant
if so requested by the Landlord pursuant to the terms of Paragraph 12 hereof,
restoring the Premises in each case to substantially their condition prior to
the Installation of such fixtures or the undertaking of such alterations,
additions or improvements, as the case may be reasonable wear and tear and
casualty excepted. The provisions of this Paragraph 18 shall expressly survive
the termination or expiration of the Term of this Lease.
19. Transfers of Tenant's Interest:
-------------------------------
a. Subletting: Tenant shall have the right, subject to approval of the
Landlord which consent shall not be unreasonably withheld, conditioned or
delayed, to sublet all or any portion of the Premises or grant a license
therein, provided: (i) Tenant is not in default of the Lease beyond any
applicable cure period (ii) Tenant provides Landlord with prior written notice
of the Sublease or license, at least thirty (30) days prior to the commencement
date of the sublease or license
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(iii) Tenant delivers to Landlord an executed copy of the sublease or license by
the commencement date of the sublease or license (iv) Tenant remains liable
under the Lease.
Notwithstanding the provisions of (S)26 hereafter, Landlord shall, at
Tenant's Request, provide Tenant with (i) an Estoppel Certificate stating
whether Landlord knows of any Default under the Lease at the time of the
proposed subletting [or assignment as hereinafter provided]
b. Assignment: Should the Tenant desire to assign its interest in the
Lease to a third party, it shall be required to notify the Landlord of the same
in writing and to furnish the Landlord timely any and all materials it might
reasonably request concerning the proposed Assignee's financial condition and a
detailed description of such entity's business operations and proposed use of
the Premises. The Landlord shall be required to notify the Tenant in writing of
its decision whether to agree to or reject the proposed Assignment within thirty
(30) days of its receipt of all documentation it might request be supplied to it
from either the Tenant and/or proposed Assignee. In connection therewith,
Landlord shall not unreasonably withhold, condition or delay its consent.
Any attempted assignment without the consent of the Landlord and without an
executed Assumption Agreement between it, the Tenant and the Assignee, shall be
deemed void.
Notwithstanding anything to the contrary, the Landlord shall not withhold,
its consent to an assignment by the Tenant, upon reasonable notification to the
Landlord, to a subsidiary, parent or affiliate of Tenant or to a successor to
Tenant by means of merger, consolidation, corporate reorganization or the
purchase of all or substantially all of the Tenant's assets or stock condition
such Assignee shall demonstrate its financial ability to comply with all terms
under the Lease including but not limited to the fact that its net worth is not
less than that of the Tenant and the transferee assumes the terms of this Lease
by execution of a separate writing. in addition thereto,
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any other transfer, pledge, sale or other disposition and/or power to vote the
outstanding shares of *corporate stock of the Tenant shall not be deemed an
Assignment. In the event of any Assignment,** Tenant shall remain liable under
the provisions of the Lease jointly and severally with Assignee.
20. Transfers of Landlord's Interest:
---------------------------------
The Landlord shall have the right from time to time to sell or mortgage its
interest in the Building and Property, to assign its interest in this Lease, or
to assign from time to time the whole or any portion of the Basic Rent,
Additional Rent or other sums and charges at any time paid or payable hereunder
by the Tenant to the Landlord, to any Mortgagees or other transferees designated
by the Landlord (or, in the case of any purchasers at foreclosure sales or
grantees under deeds in lieu of foreclosure, by any Mortgagee) by duly recorded
instruments and after receipt of copies of such instruments, the Tenant shall
pay the Basic Rent, Additional Rent and
* less than the majority of
** under this clause (b)
such other sums and charges so assigned, subject to the terms of the Lease, upon
demand to such Mortgagees and other transferees, purchasers and grantees at the
addresses mentioned in and in accordance with the terms of such instruments.
Each foreclosing Mortgagee or other transferee, purchaser or grantee shall, in
writing, assume the obligations of the Landlord under this Lease, subject,
however, to the limitations upon liability of the Landlord as set forth in
Paragraph 27.
Within ten (10) days following any transfer by Landlord of its ownership
interest in the property, Landlord shall provide Tenant with written notice of
such transfer and the name and address of the successor Landlord to whom Tenant
should send future rent payments and notices (the "Transfer Notice"). In the
event that the Landlord fails to provide the Transfer Notice,
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(a) the Tenant shall not be liable to any successor Landlord for rent payments
paid to the former (predecessor) Landlord and (b) any successor Landlord shall
be bound by any notice sent to the former (predecessor) Landlord by the Tenant.
21. Mortgagees' Rights:
-------------------
The Tenant hereby agrees that this Lease is and shall be subject and
subordinate to any mortgage (and to any amendments, extensions, increases,
refinancings or restructurings thereof) of the Premises, whether or not such
mortgage is filed subsequent to the execution, delivery or the recording of this
Lease or any notice hereof (the holder from time to time of any such mortgage
being in this Lease sometimes called the "Mortgagee"). The foregoing
subordination shall be self-operative and automatically effective as to any
mortgage filed subsequent to the execution and delivery hereof but only if
either the Mortgagee agrees in a recordable writing or such mortgage provides
that, for so long as there exists no Terminable Default under this Lease on the
part of the Tenant, the Mortgagee, in Foreclosing against or taking possession
of the Premises or otherwise Exercising its rights under such mortgage, will not
join the Tenant in any foreclosure proceedings (except to the extent required by
law) and will not terminate this Lease (except as provided herein) or disturb
the Tenant's possession of the Premises hereunder in customary form or words of
similar import and will make insurance proceeds available as and to the extent
provided in Paragraph 8. The Tenant hereby agrees to execute, acknowledge and
deliver in recordable form such instruments confirming and evidencing the
foregoing subordination as the Landlord or any such Mortgagee may from time to
time reasonably require.
No notice from the Tenant of any default by the Landlord in its obligations
shall be valid, and the Tenant shall not attempt to terminate this Lease,
withhold Basic Rent or Additional Rent or exercise any other remedy which may
arise by reason of any such default, unless the Tenant
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first gives such notice to all Mortgagees of whom Tenant has been given notice
and provides such Mortgagees with the same period(s) for cure as are available
to the Landlord after such notice within which to cure such default. The Tenant
shall and does hereby agree, upon default by the Landlord under any mortgage, to
attorn to and recognize the Mortgagee or anyone else claiming under such
mortgage, including a purchaser at a foreclosure sale, at its request as
successor to the Interest of the Landlord under this Lease, to execute,
acknowledge and deliver in recordable form such evidence of this attornment,
which shall nevertheless be self-operative and automatically effective, as the
Mortgagee or such successor may request and to make payments of Basic Rent and
Additional Rent hereunder directly to the Mortgagee or any such successor, as
the case may be, upon request. In such event, the Tenant shall not be liable to
the Landlord for any payment made to such Mortgagee. By any such request, such
Mortgagee or successor shall be deemed and construed without further agreement
to have assumed and agreed to carry out and perform all covenants and
obligations of the Landlord under this Lease thereafter arising, subject,
however, to the provisions of Paragraph 27. Any Mortgagee may, at any time, by
giving written notice to and without any further consent from the Tenant,
subordinate its mortgage to this Lease, and thereupon the interest of the Tenant
under this Lease shall automatically be deemed to be prior to the lien of such
mortgage without regard to the relative dates of execution, delivery or
recording thereof or otherwise.
In connection herewith, the Tenant acknowledges that any Mortgagee reserves
the right to use whatever reasonable format of a non-disturbance agreement it
might elect to employ and therefore the Landlord does not warrant or otherwise
represent what the precise provisions of that instrument might be or what the
same might provide. Notwithstanding the foregoing, any Subordination and
Nondisturbance Agreement prepared by the Mortgagee and presented to the
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Tenant for execution shall include a provision that the Tenant's possession
shall not be disturbed and the Mortgagee shall abide by the terms and conditions
of this Lease if the Tenant is then in compliance with the terms of this
instrument [to wit: not in default beyond applicable notice and cure periods)
and continues to abide by the terms and conditions of the same. The costs of
recording any such non-disturbance agreement shall be borne by the Tenant.
22. Tenant's Default; Landlord's Remedies:
--------------------------------------
If (a) the Tenant shall default in the payment of any Basic Rent or
Additional Rent and such default shall continue for fourteen (14) days after
notice from the Landlord of such default without cure; or (b) the Tenant shall
default in the performance or observance of any of the other covenants contained
in this Lease and on the Tenant's part to be performed or observed and shall
fail, within thirty (30) days after notice from the Landlord of such default to
cure such default, or if it is beyond the reasonable control of the Tenant to
cure such default within thirty (30) days, promptly to commence such cure and
thereafter to pursue such cure diligently to completion; or (c) if the estate
hereby created shall be taken on execution, or by other process of law, or if
the Tenant shall be involved in financial difficulties as evidenced
(1) by its commencement of a voluntary case under Title 11 of the
United States Code as from time to time in effect, or by its authorizing,
by appropriate proceedings of trustees or other governing body, the
commencement of such voluntary case,
(2) by its filing an answer or other pleading admitting or failing to
deny the material allegations of a petition filed against it commencing an
involuntary case under said Title 11, or seeking, consenting to or
acquiescing in the relief therein provided, or by its failing to controvert
timely the material allegations of any such petition.
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(3) by the entry of an order for relief in any involuntary case
commenced under said Title 11,
(4) by its seeking relief as a debtor under any applicable law, other
than said Title 11, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the
rights of creditors, or by its consenting to or acquiescing in such relief,
(5) by the entry of an order by a court of competent jurisdiction (i)
finding it to be bankrupt or insolvent, (ii) ordering or approving its
liquidation, reorganization or any modification or alteration of the rights
of its creditors, or (iii) assuming custody of, or appointing a receiver or
other custodian for, all or a substantial part of its property, or
(6) by its making an assignment for the benefit of, or entering into a
composition with, its creditors, or appointing or consenting to the
appointment of a receiver or other custodian for all or a substantial part
of its property;
then, and in any of said cases (a), (b), or (c) (each of which, subject to the
following sentence is herein sometimes called a ("Terminable Default"), the
Landlord may, to the extent permitted by law, immediately or at any time
thereafter and without demand or notice, terminate this Lease and enter onto and
upon the Premises, or any part thereof, repossess the same as the Landlord's
former estate, and expel the Tenant and those claiming through or under the
Tenant and remove its effects without being deemed guilty of any manner of
trespass, and without prejudice to any remedies which might otherwise be used
for arrears of rent or preceding breach of covenant.
No termination or repossession provided for in this Paragraph 22 shall
relieve the Tenant, of its obligations and liabilities under this Lease, all of
which shall survive any such termination or repossession. In the event of any
such termination or repossession, the Tenant shall pay to the
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Landlord either (i) in advance on the first day of each month, for what would
have been the entire balance of the Term, one-twelfth (1/12) (and a pro rata
portion thereof for any fraction of a month) of the Basic Rent, Additional Rent
and all other amounts for which the Tenant is obligated hereunder, less, in each
case, the actual net receipts by the Landlord by reason of any reletting of the
Premises after deducting the Landlord's reasonable expenses in connection with
such reletting, including, without limitation, removal, storage and repair costs
and reasonable broker's and attorneys' fees, or (ii) at the option of the
Landlord exercisable by the Landlord's giving notice to the Tenant within thirty
(30) days after any such termination, the present value of the amount by which
the payments of Basic Rent and the Additional Rent reasonably estimated to be
payable for the balance of the Term after the date of the exercise of said
option would exceed the payments reasonably estimated to be the fair rental
value of the Premises on the terms and conditions of this Lease over such
period, determined as of such date. In connection with reletting the Premises as
provided for herein, Landlord agrees to use all reasonable efforts in connection
with the same.
Without thereby affecting any other right or remedy of the Landlord
hereunder, in the event of (i) any default on the part of the Tenant in the
performance or observance of any non-monetary covenant contained in this Lease
and on the Tenant's part to be performed or observed and the failure of the
Tenant, within thirty (30) days after notice from the Landlord of such default,
to cure such default or if it is beyond the reasonable control of the Tenant to
cure such default within thirty (30) days or promptly to commence such cure and
thereafter to pursue such cure diligently to completion or (ii) any default on
the part of the Tenant which results in jeopardy to the Landlord's title to the
Premises or to the Landlord's interest under any mortgage of the Premises and
which remains uncured for two (2) business days after notice of such default
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from the Landlord to the Tenant (or if it is beyond the reasonable control of
the Tenant to cure such default within two (2) business days, if the Tenant
shall not promptly commence such cure and thereafter diligently pursue such cure
to completion) or (iii) imminent danger of injury to persons or damage to
property as a result of any default on the part of the Tenant as to which the
Landlord has given telephone notice to the Tenant, or (iv) any Terminable
Default on the part of the Tenant hereunder, then in any of such events the
Landlord may, at its option, cure such default or Terminable Default for the
Tenant's account and the cost to the Landlord of such cure, together with
interest thereon at the Lease Interest Rate, shall be deemed to be Additional
Rent and shall be paid to the Landlord by the Tenant with the installment of
Basic Rent next accruing.
If the Landlord shall be required to commence proceedings to enforce its
remedies as provided for herein, it shall, in addition to damages, be entitled
to receive all its costs and its reasonable attorney's fees incurred by it in
any such action.
23. Remedies Cumulative; Waivers:
-----------------------------
The specific remedies to which the Landlord or Tenant may resort under the
terms of this Lease are cumulative and are not intended to be exclusive of any
other remedies or means of redress to which the Landlord or Tenant may be
lawfully entitled under any provision of this Lease or otherwise. The failure
of the Landlord or the Tenant to insist in any one or more cases upon the strict
performance of any of the covenants of this Lease shall not be construed as a
waiver or relinquishment for the future of such covenant. A receipt by the
Landlord, or payment by the Tenant, of Basic Rent or Additional Rent with
knowledge of the breach of any covenant hereof shall not be deemed a waiver of
such breach, and no waiver, change, modification or discharge by the Landlord of
the Tenant of any provision in this Lease shall be deemed to have been made or
shall be effective unless expressed in writing and signed by an authorized
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representative of the Landlord or the Tenant as appropriate. In addition to the
other remedies provided for in this Lease, the Landlord and the Tenant shall be
entitled to the restraint by injunction of the covenants, conditions or
provisions of this Lease, or to a decree compelling performance of or compliance
with any of such covenants, conditions or provisions. In connection herewith,
the prevailing party, should litigation be initiated, shall entitled to an award
of its costs and its reasonable attorney's fees.
24. Notices:
--------
Any notices, requests, approvals, specifications, demands or consents
required or permitted hereunder shall be in writing and mailed, postage prepaid,
by registered or certified mail, return receipt requested, if to the Landlord or
to the Tenant at the address set forth herein for each, with copies of such
notice(s) sent to respective counsel for both the Landlord and Tenant, as
follows: if to the Landlord, Robert L. Marder, Esquire, 23 Central Avenue, Suite
408, Lynn, Ma. 01901; if to the Tenant to: Melvin R. Shuman, Esq., Hale and
Dorr, 60 State Street, Boston, MA 02109; if to any Mortgagee at such address as
it may specify by such notice to the Landlord and the Tenant, or at such other
address as any of them may from time to time specify by like notice to the
others. When this Lease provides for any period to commence after notice, such
period shall be deemed to commence one day after postal records indicate
delivery of such notice was first sent as attested to by Post Office Stamped
Receipt. When this Lease requires that notice be given on or before a certain
date or within a certain period, such notice shall be deemed given on the date
mailed as in this Paragraph 24 provided. Time shall be of the essence of all
notice provisions of this Lease.
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25. Recording:
----------
The Landlord and the Tenant hereby agree, each at the request of the other
or of any Mortgagee, promptly to execute, acknowledge and deliver a recordable
form or notice of lease, notices of any assignments of rents and profits,
notices of any amendments to this Lease and of such other information as may
from time to time be necessary under G.L. (Ter. ed.) Chapter 183, Section 4 or
under similar additional or successor statutes for the protection of any
Interest of the Landlord, the Tenant or any Mortgagee having a perfected
interest in the Premises. The party which seek preparation of any such
document(s) listed herein shall bear the cost(s) of recording the same.
26. Estoppel Certificates:
----------------------
The Landlord and the Tenant hereby agree from time to time, but not more
than twice during any calendar year, each after not less than twenty (20) days
prior written notice from the other or any Mortgagee, to execute, acknowledge
and deliver, without charge, to the other party, the Mortgagee or any other
person designated by the other party, a statement in writing certifying: that
this Lease is unmodified and in full force and effect (or if there have been
modifications, identifying the same by the date thereof and specifying the
nature thereof); that to the knowledge of such party there exist no defaults (or
if there be any defaults, specifying the same); the amount of the Basic Rent,
the dates to which the Basic Rent, Additional Rent and other sums and charges
payable hereunder have been paid; and that such party to its knowledge has no
claims against the other party hereunder except for the continuing obligations
under this Lease (or if such party has any such claims, specifying the same).
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27. Hazardous Materials and Compliance with Environmental Laws:
-----------------------------------------------------------
(a) The Landlord represents that the Property, Premises and Building and
its existing uses to the best of his knowledge and belief (after due
investigation and familiarity with previous uses) comply with, and Landlord is
not in violation of, and has not violated, in connection with his ownership,
use, maintenance or operation of the Property, Premises and Building and the
conduct of business related thereto, any applicable federal, state, county or
local statutes, laws, regulations, rules, ordinances, codes, standards, orders,
licenses and permits of any governmental authorities relating to environmental,
health or safety matters (including without limitation Hazardous Materials as
defined hereafter) [collectively "Environmental Laws"]. Landlord and Tenant
shall at their own expense promptly observe and comply with all present and
future Environmental Laws including without limitation the Clean Air Act
Amendments of 1990 and any regulations (as amended) and all regulations and
standards as are or may be promulgated thereunder.
(b) Without limiting the foregoing, Landlord represents that it, its
agents, servants, contractors and employees have (i) operated the Property
Premises and Building and have at all times received, handled, used, stored,
treated, transported and disposed of any chemical, material or substance,
exposure to which is prohibited, limited or regulated by any federal, state,
country, regional, or local authority or which even if not so prohibited,
limited or regulated, poses a hazard to the health and safety of the occupants
of the Property, Premises and Building (collectively "Hazardous Materials") in
strict compliance with Environmental Laws and (ii) removed (or will remove prior
to the Commencement Date) from the Property all Hazardous Materials.
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(c) Landlord represents there is no fact pertaining to the physical
condition of the Property, Premises and Building known to him which (i)
materially and adversely affects or materially and adversely will affect the
Property, Premises and Building or the use, enjoyment or value thereof or
Landlord's ability to perform his obligations contained in this Lease and (ii)
which Landlord has not disclosed to Tenant in writing prior to this Lease.
(d) Landlord represents it has received no notices of any violation or
claimed violation of any of the matters referred to above including notices
related to any pending investigation, lawsuit or other action relating thereto.
In addition thereto, Landlord hereby agrees to indemnify and hold tenant
harmless from and against any and all "Remediation Costs" (as hereafter defined)
sustained or incurred by Tenant in the event that Tenant is required by any
state or federal agency to affect a Remediation of any Hazardous Substances
which may be located on the Property and the Building as of the date of this
Lease, unless such Hazardous Substances are present or released as the result of
the acts or omissions of Tenant or any of Tenant's agents, servants, employees,
contractors or invitees.
As used herein, the term "Remediation Costs" shall mean the cost of
remediation and clean-up of the Hazardous Substances which Tenant may incur as
the result of any order of the DEP, the U.S. Environmental Protection Agency or
any State or Federal Court of competent jurisdiction requiring that Tenant
affect a remediation of any Hazardous Substances.
(e) The provisions of this (S)27 shall survive the expiration or earlier
termination of this Lease.
28. Other Utilities:
----------------
[Deleted] Subject to approval from the Landlord, which approval shall not
be unreasonably withheld, conditioned or delayed, the Tenant, at its sole cost
and expense, shall
-41-
<PAGE>
have right to introduce into the Premises such other utilities as it may be deem
necessary for the conduct of its business. The Tenant shall pay the cost of all
such other utilities directly to the applicable utility supplier.
29. Option to Extend Term and to Request Additional Space:
------------------------------------------------------
A. Provided that no Terminable Default exists, then, in such event, the
Tenant shall have the option of notifying the Landlord not later than one
hundred eighty (180) days prior to the expiration of the Lease Term, as defined
by (S)4 above, of its intent to extend the term of this Lease for a period of
three (3) years ("Option Period").
During the term of the Option Period, the Tenant shall pay to the Landlord
as basic rent the sum of $399,500.00 per year in monthly installments of
$33,291.67, the same calculated at the rate of $8.50 per square foot for the
47,000 square feet of area at Building 6.
In addition thereto, all obligations of the Tenant with respect to the
triple net provision of the Lease, as defined in (S)6 above and in other
applicable portions of this instrument, shall remain in full force and effect
during the Option Period as well as all other terms, conditions and covenants of
such Lease without necessity that any other writing be executed by the parties.
B. Provided that no Terminable Default exists, then in such event, the
Tenant shall have the following additional options:
(i) Lease of Remaining Building: The Tenant shall have the right at
---------------------------
any time during the base or initial term of this Lease, to notify the landlord
of its intent to lease all of the then remaining uncommitted space at the
Building on the same terms and conditions applicable to the base term; in such
event, the Landlord and Tenant shall first be required to execute a Letter of
Intent in the same format as that which was executed by the parties on or about
April 28, 1998, subject (in the case of a lease for the entire Building) to
terms and conditions applicable to a
-42-
<PAGE>
true net lease for the entire building (other than payment of capital repairs or
replacements which shall continue to be governed by Section 6 hereof) it being
understood, however, that if the Tenant should exercise this right, the term of
said lease applicable to the entire building, or 100,000 square feet of the
Premises, shall be three years in duration from the date on which any lease
modification is executed.
Reservation: The ability of the Tenant to exercise this right shall
-----------
terminate automatically with respect to a portion or all of the uncommitted
space at the Building, when the Landlord shall have executed a Letter of Intent
with any third party for a lease of such portion or all of the remaining
uncommitted space at the Building and thereafter a lease is entered into between
the Landlord and that other Third Party. Barring execution of a Lease, the
Tenant's right as aforesaid to lease the remaining space or a portion thereof at
the Building shall be revived. In connection with the Tenant's rights set forth
in this clause (i), the Landlord agrees he shall not execute any Letter of
Intent or lease with any third party for lease of any portion of the then
remaining leasable space in the Building unless Landlord has previously notified
Tenant in writing of the potential interest of such third party (provided that
such notice shall not be required to include any confidential information) and
has afforded the Tenant five business days within which to exercise its first
right to lease all the then remaining leasable space in the Building.
(ii) Lease of Additional Space: After the initial lease-up of the entire
--------------------------
Building, the Landlord agrees as follows: the Tenant shall have the first option
to lease additional space ("Additional Space") at the Building once any tenant
for such Additional Space shall have vacated the same.
In connection therewith,
-43-
<PAGE>
[1] the Landlord shall promptly notify the Tenant in writing when it
receives notice that any Tenant for that adjacent contiguous space has given
notice of its intent not to renew any lease for that area;
[2] the Tenant shall have ten (10) days from receipt of said notice
to advise the Landlord in writing whether it intends to exercise such option for
the Additional Space;
[3] should the Tenant notify the Landlord of its intent to exercise
the option for Additional Space, the parties shall thereupon meet, and within
five days from receipt of the Tenant's notice, shall execute a letter of intent
in the same format as that which was executed by them on or about April 28,
1998, it being understood that the amount of base rent for the Additional Space
shall be market rental as determined by the Landlord;
[4] failing notice by the Tenant as described in (S)[2] above, the
Landlord shall have the right to market the Additional Space and to execute a
Letter of Intent with any third party for the same.
30. Security Deposit:
----------------
To secure the Tenant's performance to pay Basic and Additional Rent under
the terms, conditions and covenants of this Lease, the Tenant, upon execution of
this instrument, shall pay to the Landlord six months Basic Rent in advance
("Security Deposit") or $188,000.00. Such Security Deposit may be paid in cash,
surety bond or irrevocable letter of credit.
If paid in cash [to include check], the Security Deposit shall be deposited
into an escrow account.("Escrow") by the Landlord and all interest earned
thereon shall accrue to the Tenant.
In connection with the preceding paragraph, the Landlord shall provide the
Tenant with the name of the Bank, title of the account, and account number into
which the Security Deposit has been deposited. Prior to opening the Escrow, the
Tenant shall furnish the Landlord with its
-44-
<PAGE>
tax identification number to assure any tax due on interest earned is reported
as earnings of the Tenant.
Upon a monetary default of the Tenant, after notice and expiration of
applicable cure periods, as defined by (S)22 or should the Tenant commit damage
or waste to the Premises which is not repaired prior to the date it shall Quit
and Deliver up possession of the Premises to the Landlord, the Landlord shall
have the right of set-off against the Escrow and shall account to the. Tenant
for the same.
It is agreed between the Landlord and Tenant, since the Lease between them
is commercial, that the provisions of G.L. c. 186, (S)15B shall not be
applicable to the terms of this clause.
31. Brokerage:
----------
The Brokers named herein, Meredith & Grew Incorporated and Spaulding Slye,
by execution hereafter, each certifies that it is duly licensed as a broker by
the Commonwealth of Massachusetts and hereby joins in this Agreement and becomes
a party hereto insofar as any provisions of this instrument expressly apply to
it.
32. Bind and Inure; Limited Liability of Landlord:
----------------------------------------------
All of the covenants, agreements, stipulations, provisions, conditions and
obligations herein expressed and set forth shall be considered as running with
the land and shall extend to, bind and inure to the benefit of the Landlord and
the Tenant, which terms as used in this Lease shall include their respective
successors and assigns where the context hereof so admits.
The Landlord shall not have any individual or personal liability for the
fulfillment of the covenants, agreements and obligations of the Landlord
hereunder, the Tenant's recourse and the Landlord's liability hereunder being
limited to the Premises, Property and Building. In
-45-
<PAGE>
connection therewith, the Landlord agrees it shall not cause the Premises,
Property or Building to be mortgaged beyond 85% of its fair market value
determined by an Appraisal to be performed by an applicable lender. The term
"Landlord" as used in this Lease shall refer only to the owner or owners from
time to time of the Premises who shall be deemed and construed without further
agreement to have assumed and agreed to carry out and perform all covenants and
obligations of the Landlord arising under this Lease during the period of such
ownership (and, except in the case of foreclosing Mortgagees, purchasers at
foreclosure sales, grantees under deeds in lieu of foreclosure and their
successors and assigns, prior to such period if not carried out and performed by
the prior owner), subject, however, to the provisions of this Paragraph 31, it
being understood that no such owner shall have any liability hereunder for
matters rising from and after the date such owner ceases to have any interest in
the remises. In no event shall the Landlord be liable to the Tenant for any
special consequential or indirect damages suffered by the Tenant or any other
person or entity by reason of a default by the Landlord under any provisions of
this Lease. Likewise, the Tenant shall not be liable to the Landlord or any
special, consequential or indirect damages suffered by the Landlord any other
person or entity by reason of a default by the Tenant under any revisions of
this Lease.
33. Authority:
----------
The Landlord represents he has been specifically authorized by the
beneficiaries of Y-CEE INVESTMENT TRUST to execute this instrument.
The Tenant represents its duly authorized officer, identified hereafter, as
been authorized to execute this instrument by the Board of Directors of Avici
Systems Inc.
-46-
<PAGE>
34. Captions:
---------
The captions for the numbered Paragraphs of this Lease are provided for
reference only and they do not constitute a part of this agreement or any
indication of the intentions of the parties hereto.
35. Integration:
------------
The parties acknowledge that all prior written and oral agreements between
them and all prior representations made by either party to the other have been
incorporated in this instrument or otherwise satisfied prior to the execution
hereof.
36. Severability; Choice of Law, and Forum:
---------------------------------------
If any provision of this Lease shall be declared to be void or
unenforceable either by law or by a court of competent jurisdiction, the
validity or enforceability of remaining provisions shall not thereby be
affected.
This Lease is made under, and shall be construed in accordance with, the
laws of The Commonwealth of Massachusetts.
In addition thereto, and should either the Landlord or Tenant initiate
litigation to seek enforcement of the terms, conditions and/or covenants of the
within Lease, in such event the parties agree that Jurisdiction, other than for
Summary Process proceedings, shall vest solely and exclusively with Essex County
Superior Court Department for the Commonwealth of Massachusetts, each signatory
hereafter having agreed to the within forum selection clause.
-47-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in multiple counterparts under seal as of the date first above written.
Landlord,
TRUSTEE OF Y-CEE INVESTMENT TRUST
/s/ Yvon Cormier
--------------------------------------------------
Yvon Cormier, as Trustee as aforesaid and not
individually
Tenant,
AVICI SYSTEMS, INC.
By:
/s/ Surya Pandit
--------------------------------------------------
6/1/98
Broker, Broker,
SPAULDING & SLYE MEREDITH & GREW INCORPORATED
By: By:
/s/ Roy Hirshland /s/ David L. Pergola
- --------------------------- --------------------------------------------------
[Graphic of Office Space]
AMENDMENT TO LEASE
------------------
This Amendment is attached hereto and is incorporated by reference, as if
fully set forth therein, to a Lease ("Lease") dated June 2, 1998 by and between
Yvon Cormier, Trustee of Y-CEE Investment Trust, u/d/t dated January 12, 1979
and recorded with the Middlesex County (Northern District) Registry of Deeds at
Book 2348, Page 327, 59 Chandler Circle, Andover, Middlesex County ("Lessor")
and Avici Systems, Inc., a corporation organized in accordance with law, having
its principal place of business at Building 6, 101 Billerica Avenue, Billerica,
Middlesex County ("Lessee").
-48-
<PAGE>
In consideration of One ($1.00) Dollar, the parties hereby agree the Lease
more particularly described above be and is hereby amended effective as follows:
(a) By deleting the following designated clauses ("Deleted Clause") from
(S)6 of the Lease which is entitled Basic Rent; Additional Rent and substituting
therefore the following new clause ("Amended Clause"):
Deleted Clause: "To the end this Lease is Triple Net, Basic Rent
---------------
shall be received by the Landlord net of all costs and expenses related the
Premises other than as expressly set forth herein. The Tenant agrees to pay,
for that area leased to it and exclusively dedicated to its use, its
proportionate share (initially 47% except in the case of real estate taxes for
which the Tenant shall pay 100% of the tax bill issued from the town of
Billerica, and 35.4% of the tax bill issued from the town of Tewksbury) of
leased space, of real estate taxes, insurance premiums of the Landlord, costs of
utilities, costs of repairs and maintenance, specifically including ordinary
maintenance of the parking lot and walkways, costs of snow plowing other costs
which are specifically set forth herein and any and all charges, costs,
expenses, and obligations of every kind and nature whatever with regard to the
Premises or the use, operation or maintenance thereof, except as otherwise
expressly agreed in this Lease ("Additional Rent"), to the Landlord upon demand
as Additional Rent, in the same manner as Basic Rent. The Landlord shall in
each case, at the time of demand for payment, provide the Tenant with evidence
of the payment for any such charges, costs, expenses and obligations. In
connection with the Tenant's obligation to pay Additional Rent, the Landlord
shall provide an annual statement to the Tenant prepared in accordance with
generally accepted accounting principles and certified by an officer of the
Landlord no later than ninety days after the end of each year.
<PAGE>
Any adjustment(s) to Additional Rent shall be based on the annual
statement subject to the Tenant's audit rights as described in the Lease.
Notwithstanding anything in this Lease to the contrary, the Tenant shall have no
liability for the Landlord's mortgage debt service or other financing costs, any
brokerage expenses of the Landlord or any repairs which are the obligation of
the Landlord under Paragraph 10 or any capital improvements or assessments prior
to the Commencement Date of the Lease or within the last year of the Term and
last year of any Option Period."
Amended Clause: "To the end this Lease is Triple Net, Basic Rent
--------------
shall be received by the Landlord net of all costs and expenses related to the
Premises other than as expressly set forth herein. The Tenant agrees to pay,
for that area leased to it and exclusively dedicated to its use, its
proportionate share (initially 47% except in the case of real estate taxes for
which the Tenant shall pay 100% of the tax bill issued from the town of
Billerica and 35.4% of the tax bill issued from the town of Tewksbury) of (i)
real estate taxes, (ii) insurance premiums billed to the Landlord for Building 6
of Billerica Office Park and (iii) costs of repairs and maintenance,
specifically including ordinary maintenance of the parking lot and walkways,
landscaping, costs of snow plowing, common area utilities and other costs which
are specifically set forth herein (collectively "Maintenance Costs") [those
costs delineated in (S)(iii) calculated at the rate of $.75 per square foot of
leased space (to wit: 47,000 sq. ft.), such rate fixed for the Basic Term of
the Lease and Option Period so long as and only so long as the original Landlord
named herein (the "Original Landlord") remains the Landlord, which totals
$35,250.00 per year, payable in monthly installments of $2,937.50] as
"Additional Rent," to the Landlord upon demand and in the same manner as Basic
Rent. The Landlord shall in each case, at the time of demand for payment,
provide the Tenant with evidence of the payment for real estate taxes and
<PAGE>
insurance and if the Original Landlord is no longer the Landlord, Maintenance
Costs. In connection with the Tenant's obligation to pay that portion of the
Additional Rent for real estate taxes and insurance, the Landlord shall provide
the Tenant a copy of the relevant real estate tax bill(s) and insurance bill,
certified by an officer of the Landlord, no later than ninety (90) days from
receipt of the same and including therewith a calculation of the Tenant's Pro
Rata share determined as aforesaid. In connection with Tenant's obligation to
pay Maintenance Costs, if the original Landlord is no longer the Landlord,
Landlord shall provide an annual statement to the Tenant, prepared in accordance
with generally accepted accounting principles and certified by an officer of the
Landlord, setting forth all Maintenance Costs for the previous year, no later
than ninety (90) days after the end of each year included in the Term. The
Tenant shall thereafter have those audit rights to dispute such charges as more
specifically delineated hereafter in this Section 5.
Notwithstanding anything in this Lease to the contrary, the Tenant shall
have no liability for the Landlord's mortgage debt service or other financing
costs, any brokerage expenses of the Landlord, any management fee or fees paid
or payable by or to Landlord, or any repairs which are the obligation of the
Landlord under Paragraph 10 or any capital improvements or assessments prior to
the Commencement Date of the Lease or within the last year of the Term and last
year of any Option Period."
Except as otherwise amended by this instrument, the Lessor and Lessee by
execution hereafter hereby ratify and otherwise reaffirm all terms, conditions,
covenants, obligations and representations set forth and otherwise contained in
the Lease more particularly described above.
Signed Under Seal this 29th Day of October 1998
-----------------------------------------------
Y-CEE Investment Trust,
By:
/s/ Yvon Cormier
--------------------------
Yvon Cormier, Trustee
Avici Systems Inc.
By:
/s/ John Colorusso
--------------------------
John Colorusso, Controller
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our firm) included in or made part of this
registration statement.
Arthur Andersen LLP
Boston, Massachusetts
May 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1999 AND MARCH 31,
2000 AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 AND THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 0 23,191,943
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 23,443,225
<PP&E> 0 9,168,676
<DEPRECIATION> 0 1,579,219
<TOTAL-ASSETS> 0 31,358,682
<CURRENT-LIABILITIES> 0 5,621,481
<BONDS> 0 5,520,715
0 55,098,270
0 0
<COMMON> 0 590
<OTHER-SE> 0 (35,080,374)
<TOTAL-LIABILITY-AND-EQUITY> 0 31,358,682
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 5,351,178 31,057,460
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 84,303 360,840
<INCOME-PRETAX> (5,163,604) (30,117,572)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,163,604) (30,117,572)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,163,604) (30,117,572)
<EPS-BASIC> (34.71) (19.05)
<EPS-DILUTED> (34.71) (19.05)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1999 AND MARCH 31,
2000 AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999
<PERIOD-END> DEC-31-1999 MAR-31-1999
<CASH> 34,242,471 0
<SECURITIES> 13,674,979 0
<RECEIVABLES> 598,800 0
<ALLOWANCES> 0 0
<INVENTORY> 3,632,518 0
<CURRENT-ASSETS> 52,418,519 0
<PP&E> 13,811,286 0
<DEPRECIATION> 4,726,776 0
<TOTAL-ASSETS> 61,839,029 0
<CURRENT-LIABILITIES> 11,555,274 0
<BONDS> 6,390,264 0
123,441,055 0
0 0
<COMMON> 606 0
<OTHER-SE> (79,746,170) 0
<TOTAL-LIABILITY-AND-EQUITY> 61,839,029 0
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 47,638,355 9,949,934
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 688,795 166,952
<INCOME-PRETAX> (46,794,399) (9,884,952)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (46,794,399) (9,884,952)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (46,794,399) (9,884,952)
<EPS-BASIC> (13.70) (3.55)
<EPS-DILUTED> (13.70) (3.55)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1999 AND MARCH 31,
2000 AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 24,083,330
<SECURITIES> 7,700,209
<RECEIVABLES> 208,500
<ALLOWANCES> 0
<INVENTORY> 7,017,628
<CURRENT-ASSETS> 39,818,147
<PP&E> 14,683,976
<DEPRECIATION> 5,718,967
<TOTAL-ASSETS> 49,106,656
<CURRENT-LIABILITIES> 13,330,080
<BONDS> 5,246,071
123,441,055
0
<COMMON> 610
<OTHER-SE> (93,109,160)
<TOTAL-LIABILITY-AND-EQUITY> 49,106,656
<SALES> 504,000
<TOTAL-REVENUES> 504,000
<CGS> 429,125
<TOTAL-COSTS> 16,784,766
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196,952
<INCOME-PRETAX> (16,432,637)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,432,637)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,432,637)
<EPS-BASIC> (3.62)
<EPS-DILUTED> (3.62)
</TABLE>
