<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______ to ________
Commission file number 000-30865
AVICI SYSTEMS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 02-0493372
(State or Other Jurisdiction (I.R.S. Employer
of Organization) Identification No.)
101 Billerica Avenue
North Billerica, Massachusetts 01862
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (978) 964-2000
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes No X
-----
The registrant has been subject to such filing requirement since
July 27, 2000, less than 90 days.
At August 20, 2000, 48,012,062 shares of the registrant's Common Stock,
par value $0.0001 per share, were outstanding.
<PAGE>
AVICI SYSTEMS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
----
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999.................................... 3
Statements of Operations (unaudited) for the three
months and six months ended June 30, 2000 and 1999... 4
Statements of Cash Flows (unaudited) for the six
months ended June 30, 2000 and 1999..................... 5
Notes to Financial Statements (unaudited)............... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk............................................. 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................... *
ITEM 2. Changes in Securities and Use of Proceeds............... 15
ITEM 3. Defaults Upon Senior Securities......................... *
ITEM 4. Submission of Matters to a Vote of Security Holders..... 16
ITEM 5. Other Information....................................... *
ITEM 6. Exhibits and Reports on Form 8-K........................ 16
SIGNATURE.............................................................. 17
*No information provided due to inapplicability of item.
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVICI SYSTEMS INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999 (1)
--------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 50,144 $ 34,242
Investments 3,494 13,675
Inventories 6,436 3,633
Trade accounts receivable 592 599
Prepaid expenses and other current assets 1,385 270
--------- --------
Total current assets 62,051 52,419
Property and equipment, net 9,520 9,084
Other long-term assets -- 336
--------- --------
$ 71,571 $ 61,839
========= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term obligations $ 3,321 $ 2,968
Accounts payable 3,914 5,833
Accrued expenses and other current liabilities 6,497 2,754
--------- --------
Total current liabilities 13,732 11,555
--------- --------
Long-term obligations, less current maturities 4,669 6,391
--------- --------
Commitments
Redeemable convertible preferred stock, $0.01 par value:
Authorized - 33,489,460 shares
Issued and outstanding - 32,850,896 shares at June 30, 2000 and 29,881,127 shares at
December 31, 1999 167,987 123,441
--------- --------
Warrants to purchase Series B redeemable convertible preferred stock 198 198
--------- --------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value-Authorized - 5,000,000 shares issued and
outstanding - none -- --
Common stock, $0.0001 par value -
Authorized - 50,000,000 shares
Issued and outstanding - 6,371,157 shares at June 30, 2000 and 6,053,698 shares at
December 31, 1999 1 1
Additional paid-in capital 36,603 11,475
Subscriptions receivable (286) (215)
Deferred compensation (25,067) (7,429)
Accumulated deficit (126,266) (83,578)
--------- --------
Total stockholders' equity (deficit) (115,015) (79,746)
--------- --------
$ 71,571 $ 61,839
========= ========
</TABLE>
(1) The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
Page 3
<PAGE>
AVICI SYSTEMS INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 2,217 $ -- $ 2,721 $ --
Cost of revenues 1,874 -- 2,303 --
----------- ----------- ----------- -----------
Gross margin 343 -- 418 --
----------- ----------- ----------- -----------
Operating expenses:
Research and development (1) 15,709 7,975 27,045 15,977
Sales and marketing (1) 2,564 1,090 4,312 2,006
General and administrative (1) 978 748 1,734 1,483
Stock-based compensation 3,721 595 6,913 1,042
Purchased in-process research and
development 4,000 -- 4,000 --
----------- ----------- ----------- -----------
Total operating expenses 26,972 10,408 44,004 20,508
----------- ----------- ----------- -----------
Loss from operations (26,629) (10,408) (43,586) (20,508)
Interest income (expense), net 671 (12) 948 53
----------- ----------- ----------- -----------
Net loss $ (25,958) $ (10,420) $ (42,638) $ (20,455)
=========== =========== =========== ===========
Net loss per share:
=========== =========== =========== ===========
Basic and diluted
$(5.11) $ (3.24) $(8.86) $ (6.82)
=========== =========== =========== ===========
Pro forma basic and diluted $(0.68) $ (0.37) $(1.15) $ (0.74)
=========== =========== =========== ===========
Weighted average common shares used in computing
net loss per share:
Basic and diluted 5,084,077 3,215,561 4,810,064 2,998,838
=========== =========== =========== ===========
Pro forma basic and diluted 38,260,708 28,127,220 37,078,097 27,742,438
=========== =========== =========== ===========
(1) Excludes noncash, stock-based compensation, as
follows:
Research and development $3,045 $467 $5,429 $ 712
Sales and marketing 473 111 903 221
General and administrative 203 17 581 109
------ ---- ------ ------
$3,721 $595 $6,913 $1,042
====== ==== ====== ======
</TABLE>
See accompanying notes.
Page 4
<PAGE>
AVICI SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(42,638) $(20,455)
Adjustments to reconcile net loss to net cash used in operating
activities -
Depreciation and amortization 2,009 1,481
Amortization of deferred financing costs 25 25
Compensation expense associated with issuance of stock options to 6,913 1,042
employees and consultants
Changes in current assets and liabilities:
Inventories (3,334) (3,142)
Trade accounts receivable 7 --
Prepaid expenses and other current assets (804) 15
Restricted cash -- 40
Accounts payable (1,919) (1,599)
Accrued expenses and other current liabilities 3,743 4,048
-------- --------
Net cash used in operating activities (35,998) (18,545)
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (1,522) (104)
Purchases of investments (3,494) --
Sales of investments 13,675 --
-------- --------
Net cash provided by (used in) investing activities 8,659 (104)
-------- --------
Cash Flows from Financing Activities:
Proceeds from sale of redeemable convertible preferred stock, net of 44,497 8,324
issuance costs
Payments on long-term obligations (1,760) (962)
Repurchase of restricted stock (5) --
Proceeds from issuance of common stock and exercise of stock options 509 61
-------- --------
Net cash provided by financing activities 43,241 7,423
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 15,902 (11,226)
Cash and Cash Equivalents, beginning of period 34,242 23,192
-------- --------
Cash and Cash Equivalents, end of period $ 50,144 $ 11,966
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 377 $ 354
======== ========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Equipment acquired under capital lease obligations $ 391 $ 1,936
======== ========
Transfer of inventory to property and equipment $ 530 $ --
======== ========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
AVICI SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein has been prepared by Avici Systems
Inc., pursuant to the rules and regulations of the Securities and Exchange
Commission and includes the accounts of Avici Systems Inc. (the "Company").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company, the unaudited financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position at June 30, 2000, the operating
results for the three and six month periods ended June 30, 2000 and 1999, and
the cash flows for the six month periods ended June 30, 2000 and 1999. These
financial statements and notes should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December 31,
1999 included in the Company's registration statement on Form S-1, effective
July 27, 2000. The balance sheet at December 31, 1999 has been derived from
audited financial statements as of that date.
The results of operations for the three and six months ended June 30, 2000 are
not necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2000.
NOTE 2. SUBSEQUENT EVENT - INITIAL PUBLIC OFFERING AND CONCURRENT PRIVATE
PLACEMENT
On July 27, 2000, the Company's amended registration statement for the initial
public offering of 8,050,000 shares of its common stock, including the
underwriters' over-allotment option for 1,050,000 shares became effective. The
initial public offering price to the public was $31.00 per share. The offering
closed on August 2, 2000 and resulted in net proceeds to the Company of
approximately $232.0 million, after deducting underwriting discounts and
commissions and before deducting expenses payable by the Company. As a result
of the initial public offering, 32,850,896 shares of common stock were issued
upon the conversion of all of the Company's redeemable convertible preferred
stock. In connection with its initial public offering, the Company amended its
certificate of incorporation to increase the number of authorized shares of
common stock to 250,000,000 and to provide for a total of 5,000,000 shares of
undesignated preferred stock. Additionally, on August 2, 2000, the Company
completed a private placement for the issuance of 322,582 shares of its common
stock concurrently with the close of its initial public offering at the initial
public offering price of $31.00 per share, which resulted in proceeds to the
Company of approximately $10.0 million.
The Company's historical capital structure is not indicative of its capital
structure after the initial public offering due to the automatic conversion of
all shares of redeemable convertible preferred stock into common stock
concurrent with the closing of the Company's initial public offering and the
elimination of the Company's repurchase right related to restricted stock.
The following table presents the pro forma balance sheet at June 30, 2000 after
giving effect to cash proceeds from the initial public offering, after deducting
underwriting discounts and commissions and the concurrent private placement
totaling approximately $242.0 million, after deducting underwriting discounts
and commissions.
<TABLE>
<CAPTION>
June 30, 2000
Pro forma
---------------------
(unaudited)
(in thousands)
<S> <C>
Cash and investments $295,638
Other assets 17,933
--------
Total assets $313,571
========
Short-term liabilities $ 13,732
Long-term liabilities 4,669
Stockholders' equity 295,170
--------
Total liabilities and stockholders' equity $313,571
========
</TABLE>
Page 6
<PAGE>
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company recognizes revenue from product sales upon shipment, provided that a
purchase order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptance, the sales price is fixed and
determinable and collectibility is deemed probable. If uncertainties regarding
customer acceptance exist, the Company recognizes revenue when those
uncertainties are resolved. Revenue from support and maintenance contracts will
be recognized ratably over the period of the related agreements. Revenue from
installation and other services will be recognized as the work is performed.
Amounts collected or billed prior to satisfying the above revenue recognition
criteria are recorded as deferred revenue.
Warranty costs are estimated and recorded by the Company at the time of product
revenue recognition.
(b) Cash and Cash Equivalents and Investments
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its cash equivalents and investments as
held-to-maturity and recorded them at amortized cost, which approximates market
value. The Company considers all highly liquid investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents. Cash and cash equivalents and investments include money markets,
certificates of deposit and commercial paper.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------ ------
(unaudited)
(in thousands)
<S> <C> <C>
Finished goods and work in progress $1,037 $1,923
Raw materials 5,399 1,710
------ ------
$6,436 $3,633
====== ======
</TABLE>
(d) Net Loss per Share and Pro Forma Net Loss per Share
Basic and diluted net loss per share are presented in conformity with SFAS No.
128, Earnings per Share, for all periods presented. In accordance with SFAS No.
128, basic and diluted net loss per common share was determined by dividing net
loss available for common stockholders by the weighted average common shares
outstanding during the period, less shares subject to repurchase. Basic and
diluted net loss per share are the same because all outstanding common stock
options have been excluded, as they are considered antidilutive. Shares of
common stock issuable upon the conversion of outstanding shares of redeemable
convertible preferred stock have also been excluded for all periods presented.
Pro forma basic and fully diluted net loss per share is presented for the three
and six month periods ended June 30, 2000 and 1999 assuming the conversion of
all outstanding shares of redeemable convertible preferred stock into common
stock and the elimination of the Company's repurchase right related to its
restricted stock outstanding upon the closing of the Company's initial public
offering using the if-converted method from the respective dates of issuance.
In accordance with the SEC Staff Accounting Bulletin No. 98, Earnings per Share
in an Initial Public Offering, the Company has determined that there were no
nominal issuances of the Company's common stock prior to the Company's initial
public offering.
Page 7
<PAGE>
NOTE 4. SALE OF SERIES F CONVERTIBLE PREFERRED STOCK
In April 2000, the Company amended its certificate of incorporation to authorize
3,333,333 shares of Series F redeemable convertible preferred stock. Also, in
April and May 2000, the Company sold 2,969,769 shares of Series F redeemable
convertible preferred stock for which it received gross proceeds of
approximately $44.5 million.
The Company entered into a series of agreements with a strategic investor who
participated in this financing. Under a stock purchase agreement, the Company
agreed to issue 600,000 shares of Series F redeemable convertible preferred
stock for aggregate proceeds of approximately $9.0 million.
The Company entered into a perpetual non-exclusive license agreement with the
investor for the use of certain ideas, concepts and other intellectual property.
As consideration for the license, the Company paid the strategic investor $4.0
million. The Company has obtained an independent appraisal of this intellectual
property to assist in the allocation of the $4.0 million license payment. Based
on this appraisal, the Company has expensed the license payment as the purchase
of in process research and development in the quarter ended June 30, 2000. The
investor has also agreed, subject to certain performance milestones, to meet
certain minimum purchase commitments of the Company's product.
NOTE 5. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
The Company's in-process research and development ("IPR&D") relates to the
license agreement discussed in note 4 which is comprised of a single research
and development project which is focused on certain aspects of optical switching
technology. At the date of purchase, the project was estimated to be 13%
complete and continuing research and development commitments to complete the
project were expected to approximate $1.5 million.
The $4.0 million value assigned to the purchased IPR&D was determined by
estimating the costs to develop the purchased technology into a commercially
viable optical application, estimating the resulting cash flows from the
application and discounting the net cash flows to their present value. At the
date of acquisition, this project had not yet reached technological feasibility
and the IPR&D had no alternative future uses. Revenue projections used to value
the IPR&D project are based on estimates of relevant market size and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.
The rate used to discount the net cash flows to their present value was 35%
based on cost of capital considerations adjusted for certain risks associated
with the in-process technology.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, certain matters
discussed in this Report on Form 10-Q constitute forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those stated or implied in forward-looking statements due to a
number of factors, including without limitation those discussed under the
caption "Factors Affecting Future Operating Results" included herein and under
the caption "Risk Factors" in the Company's Registration Statement on Form S-1
(No. 333-37316) filed by the Company in connection with its initial public
offering of Common Stock which became effective July 27, 2000. Forward-looking
statements include statements regarding the future or the Company's
expectations, beliefs, intentions or strategies regarding the future and may be
identified by the words "anticipate," "believe," "could," "estimate" "expect,"
"intend," "may," "should," "will," and "would" and similar expressions. There
may be events in the future that could affect these matters.
OVERVIEW
Avici Systems provides high-speed data networking equipment that enables
telecommunications companies and Internet service providers to intelligently
transmit high volumes of information across their fiber optic networks.
Since our inception, we have incurred significant losses. As of June 30, 2000,
we had an accumulated deficit of $126.3 million. Our operating activities to
date have been primarily devoted to research and development, including the
design and development of our proprietary application specific integrated
circuits and software, and system testing the Avici Terabit Switch Router (TSR).
During this period, we have also built our administrative, marketing 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 selling and other expenses
before we realize the related revenue. We expect to incur significant sales and
marketing, research and development and general and administrative expenses as
we expand our business and, as a result, we will need to generate significant
revenues to achieve and maintain profitability.
The TSR became commercially available in the fourth quarter of 1999. We
currently market the TSR to major carriers in North America through a direct
sales force. We have recently begun to market our products internationally
through systems integrators and distributors. We currently provide product
installation and customer field support through our internal customer service
organization and a third-party support organization.
We currently generate revenue from sales of our TSR, which is our only product.
We recognize revenue from product sales upon shipment, provided that a purchase
order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptance, the sales price is fixed and
determinable and collectibility is deemed probable. If uncertainties regarding
customer acceptance exist, revenue is recognized when these uncertainties are
resolved. Amounts collected or billed prior to satisfying revenue recognition
criteria are recorded as deferred revenue. We also expect to generate revenue
in the future from support and maintenance as well as installation and service.
We will defer revenue from support and maintenance contracts and recognize it
ratably over the period of the related agreements. We expect to recognize
revenue from installation and other services as the work is performed. We
record an estimate of warranty liability for parts and labor on our products at
the time we recognize revenue.
We expect that in the foreseeable future, substantially all of our revenues will
continue to depend on sales of our TSR to current customers and a limited number
of potential new customers. Generally, these customers are not contractually
committed to purchase any minimum quantities of products from us. Enron
Broadband Services and Williams Communications have agreed to future minimum
purchases of the TSR and follow-on features totaling $45.0 million through 2001,
subject to successful completion of field trials. Additionally, while there has
been no commitment to purchase equipment for deployment, the TSR has
successfully completed laboratory testing at AT&T and has been selected by AT&T
for field trials which we expect will be completed by the end of 2000. Any
future commitments for deployment orders will be dependent upon the successful
completion of these field trials. We cannot assure you that these trials will be
successful or that future orders will be placed.
Page 9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Net Revenues. The Company recorded its initial revenue in the quarter ended
March 31, 2000. Net revenues were $2.2 million for the three months ended June
30, 2000.
Cost of Revenues. Cost of revenues was $1.9 million for the three months ended
June 30, 2000. Cost of revenues includes the cost of manufacturing overhead.
Cost of revenues as a percentage of net revenues for the three months ended June
30, 2000 was approximately 85% reflecting the high cost of setting up production
along with the lower margin mix between bays and modules. We anticipate cost of
revenues as a percentage of net revenues to decrease as the future mix of
product configurations change.
Research and Development. Research and development expenses increased by $7.7
million from $8.0 million for the three months ended June 30, 1999 to $15.7
million for the three months ended June 30, 2000. This increase was due mainly
to an increase in engineering materials and custom test equipment of $5.0
million and an increase in salary and salary-related expenses resulting from
increased staffing of $2.1 million.
Sales and Marketing. Sales and marketing expenses increased by $1.5 million
from $1.1 million for the three months ended June 30, 1999 to $2.6 million for
the three months ended June 30, 2000. This increase was primarily due to an
increase in salary and salary-related expenses of $1.1 million as well as an
increase in marketing publications and advertising expenses of $250,000.
General and Administrative. General and administrative expenses increased by
$230,000 from $748,000 for the three months ended June 30, 1999 to $978,000 for
the three months ended June 30, 2000. The increase was primarily due to an
increase in salary and salary-related costs, information systems expenses and
other costs necessary to support our growing scale of operations.
Stock-Based Compensation. Stock-based compensation increased by $3.1 million
from $595,000 for the three months ended June 30, 1999 to $3.7 million for the
three months ended June 30, 2000. This increase was due primarily to shares of
restricted stock and stock options granted at a price subsequently deemed to be
lower than fair market value subsequent to the six month period ended June 30,
1999 in connection with our increased hiring efforts.
Purchased In-Process Research and Development. The Company's in-process
research and development ("IPR&D") is comprised of a single research and
development project which is focused on certain aspects of optical switching
technology. At the date of purchase, the project was estimated to be 13%
complete and continuing research and development commitments to complete the
project were expected to approximate $1.5 million.
The $4.0 million value assigned to the purchased IPR&D was determined by
estimating the costs to develop the purchased technology into a commercially
viable optical application, estimating the resulting cash flows from the
application and discounting the net cash flows to their present value. At the
date of acquisition this project had not yet reached technological feasibility
and the IPR&D had no alternative future uses. Revenue projections used to value
the IPR&D project are based on estimates of relevant market size and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.
The rate used to discount the net cash flows to their present value was 35%
based on cost of capital considerations adjusted for certain risks associated
with the in-process technology.
Interest Income (Expense), Net. Interest income, net of interest expense,
increased by $683,000 from $12,000 of net interest expense for the three months
ended June 30, 1999 to $671,000 of net interest income for the three months
ended June 30, 2000 due to an increase in interest income of $676,000 resulting
from increased invested cash balances for the three months ended June 30, 2000
plus a decrease in interest expense on capital leases of $7,000 for the three
months ended June 30, 2000.
Page 10
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Net Revenues. Net revenues were $2.7 million for the six months ended June 30,
2000. The Company had no revenue in the comparable period of 1999.
Cost of Revenues. Cost of revenues was $2.3 million for the six months ended
June 30, 2000. Cost of revenues includes the cost of manufacturing overhead.
Cost of revenues as a percentage of net revenues was approximately 85% for the
six months ended June 30, 2000 reflecting the high cost of setting up production
along with the lower margin mix between bays and modules. We anticipate cost of
revenues as a percentage of net revenues to decrease as the future mix of
product configurations change.
Research and Development. Research and development expenses increased by $11.0
million from $16.0 million for the six months ended June 30, 1999 to $27.0
million for the six months ended June 30, 2000. This increase was due mainly to
an increase in engineering materials and custom test equipment of $8.1 million,
an increase in salary and salary-related expenses resulting from increased
staffing of $3.3 million, an increase in cost related to facilities and other
expenses of $1.2 million, offset by a $1.6 million decrease in cost associated
with a research and development contract which was completed in March 1999.
Sales and Marketing. Sales and marketing expenses increased by $2.3 million
from $2.0 million for the six months ended June 30, 1999 to $4.3 million for the
six months ended June 30, 2000. This increase was primarily due to an increase
in salary and salary-related expenses of $1.7 million as well as an increase in
marketing publications and advertising expenses of $295,000.
General and Administrative. General and administrative expenses increased by
$200,000 from $1.5 million for the six months ended June 30, 1999 to $1.7
million for the six months ended June 30, 2000. The increase was mainly due to
an increase in salary and salary-related costs, information systems expenses and
other expenses necessary to support our growing scale of operations.
Stock-Based Compensation. Stock-based compensation increased by $5.9 million
from $1.0 million for the six months ended June 30, 1999 to $6.9 million for the
six months ended June 30, 2000. This increase was due primarily to shares of
restricted stock and stock options granted at the price subsequently deemed to
be lower than fair market value subsequent to the six month period ended June
30, 1999 in connection with our increased hiring efforts.
Purchased In-Process Research and Development. The Company's in-process
research and development ("IPR&D") is comprised of a single research and
development project which is focused on certain aspects of optical switching
technology. At the date of purchase, the project was estimated to be 13%
complete and continuing research and development commitments to complete the
project were expected to approximate $1.5 million.
The $4.0 million value assigned to the purchased IPR&D was determined by
estimating the costs to develop the purchased technology into a commercially
viable optical application, estimating the resulting cash flows from the
application and discounting the net cash flows to their present value. At the
date of acquisition, this project had not yet reached technological feasibility
and the IPR&D had no alternative future uses. Revenue projections used to value
the IPR&D project are based on estimates of relevant market size and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.
The rate used to discount the net cash flows to their present value was 35%
based on cost of capital considerations adjusted for certain risks associated
with the in-process technology.
Interest Income (Expense), Net. Interest income, net of interest expense,
increased $895,000 from $53,000 for the six months ended June 30, 1999 to
$948,000 for the six months ended June 30, 2000 as a result of an increase in
interest income of $918,000 from increased invested cash balances partially
offset by an increase in interest expense on capital leases of $23,000 for the
six months ended June 30, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through private sales of
equity securities and, to a lesser extent, equipment lease financing. From
inception through June 30, 2000, we raised approximately $168.0 million in a
series of preferred stock financings. During the six months ended June 30,
2000, we used $36.0 million in cash for operating activities, compared to $18.5
million used in the six months ended June 30, 1999. The increase in cash usage
resulted principally from the ongoing research and development costs of the TSR
during these periods, including increased personnel and material costs. We
expect to continue to invest heavily in research and development as we enhance
the functionality of our TSR and develop new complementary products. We also
will continue to increase our investment in capital assets as we expand our
operations.
As of June 30, 2000, our primary sources of liquidity were $50.1 million in cash
and cash equivalents and $3.5 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 the six months ended June 30, 2000
and $2.0 million for the six months ended June 30, 1999, and consisted primarily
of purchases of application software and computer equipment, including
workstations and servers to support our increased research and development
activities. We financed $391,000 for the six months ended June 30, 2000 and
$1.9 million for the six months ended June 30, 1999. As of June 30, 2000, our
future minimum lease payment obligations were $8.0 million under capital leases
which require annual payments of approximately $1.9 million for the six months
ended July through December of 2000, $3.7 million in 2001, $2.0 million in 2002
and $377,000 in 2003. In addition, our future minimum lease payment obligations
under operating leases is $483,000 which require annual payments of
approximately $223,000 in the six months ended July through December 2000 and
$260,000 in 2001. We expect capital expenditures to increase as we further
expand our research and development efforts and as our employee base grows. The
timing and amount of future capital expenditures will depend primarily on our
future growth. For the six months July through December 2000 we expect to spend
approximately $2.5 million for computer equipment, including application
software, workstations and servers. We anticipate that this equipment will be
financed by capital leases.
At June 30, 2000 we have a master lease agreement with a leasing company that is
also a preferred stockholder. This agreement provided for up to $12.0 million
of lease financing on specific types of equipment. The equipment leased under
this agreement remains the property of the lender at the end of the term.
However, due to the length of the contract terms, the leases are recorded as
capital lease obligations. Our remaining availability under the original lease
line expired in January 2000. In May 2000 we entered into a one year $6.0
million extension to the agreement. Leases under the amendment will have
various terms ranging from 24 to 42 months and will accrue interest at various
annual rates.
We have also borrowed $1.3 million in 1998 under a term-loan agreement with the
same lender for software purchases. We are required to repay this loan in 30
monthly installments of approximately $49,000, including principal and interest.
Repayment began in July 1999, with a final payment in the amount of $187,500 due
at the end of the term. The effective annual interest rate of this loan is 17%.
Additionally, we expect that working capital requirements will increase
significantly as product sales increase, creating larger customer receivable
balances and the need to build inventory in advance of shipment.
On July 27, 2000 the Company's amended registration statement for the initial
public offering of 8,050,000 shares of its common stock, including the
underwriters' overallotment option for 1,050,000 shares, became effective. The
initial public offering price to the public of the common stock was $31.00 per
share. The offering closed on August 2, 2000 and resulted in net proceeds to
the Company of approximately $232.0 million, after deducting underwriting
discounts and commissions and before deducting expenses payable by the Company.
Additionally, on August 2, 2000 the Company completed a private placement for
the issuance of 322,582 shares of its common stock concurrently with the close
of its initial public offering at the initial public offering price of $31.00
per share, which resulted in proceeds to the Company of approximately $10.0
million.
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Upon the commencement of the Company's initial public offering the Company
committed, upon the closing of the offering, to issue a warrant to AT&T
Corporation to purchase 100,000 shares of the Company's common stock at an
exercise price per share equal to the Company's initial public offering price.
The warrant is nonforfeitable, becomes fully exercisable in one year and has a
term of five years. AT&T has not committed to exercise the warrant and is not
obligated to purchase any product or service from the Company as a condition to
exercising the warrant and accordingly, the fair value of the warrant, which is
estimated to approximate $2.4 million will be expensed in the quarter ending
September 30, 2000.
We believe that the net proceeds from our preferred stock financings, initial
public offering and concurrent private placements, together with existing cash
balances and available capital lease financing will be sufficient to meet our
operating and capital requirements for at least the next 12 months. However, we
could be required, or could elect, to raise additional funds during that period
and we may need to raise additional capital in the future. We may not be able
to obtain additional capital on terms favorable to us or at all. The issuance
of additional equity or equity-related securities will be dilutive to our
stockholders. If we cannot raise funds on acceptable terms, or at all, we may
not be able to develop or enhance our products or respond appropriately to
competitive pressures, which would seriously limit our ability to increase our
revenue and grow our business.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include management's plans and
objectives for future operations, as well as statements regarding the strategy
and plans of the Company. The Company's actual experience may differ materially
from that discussed in the forward-looking statements. Factors that might cause
such a difference include the limited number of customers; continuing acceptance
of the Company's products and product enhancements; the size, timing and
recognition of revenue from customers; the Company's ability to develop new
products and product enhancements; market acceptance of new product offerings
and enhancements to our product and the Company's ability to predict and respond
to market developments; the failure to keep pace with the rapidly changing
requirements of its customers; the Company's ability to attract and retain key
personnel; the development and expansion of the Company's direct sales force;
risks associated with management of growth; the Company's ability to obtain
component parts; the Company being held liable for defects or errors in its
products; as well as risks of downturns in economic conditions generally, and in
the telecommunications industry specifically, and risks associated with
competition, and competitive pricing pressures. For a more detailed description
of the risk factors associated with the Company, please refer to the Company's
Registration Statement on Form S-1 on file with the Securities and Exchange
Commission.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion No.
25." The interpretation clarifies the application of APB Opinion No. 25 in
specified events, as defined. The interpretation 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.
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. We do not currently engage in trading
market risk sensitive instruments or purchasing hedging instruments or "other
than trading" instruments that are likely to expose us to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
We may do so in the future as our operations expand domestically and abroad. We
will evaluate the impact of foreign currency exchange risk and other derivative
instrument risk on our results of operations when appropriate. We will adopt
SFAS No. 133 as required by SFAS No. 137, "Deferral of the effective date of the
FASB Statement No. 133," in fiscal year 2001. The adoption of SFAS No. 133 is
not expected to have a material impact on our financial condition or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, our investments in securities subject to equity market
risks and other income producing assets subject to interest rate risks were not
material in amount. We do not hold such assets for trading purposes. In
addition, we do not engage in currency hedging activities and hold no foreign
currency related derivative instruments that would subject our financial
condition or results of operations to risks associated with foreign currency
exchange rate fluctuations.
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PART II. OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds
RECENT SALES OF UNREGISTERED STOCK
In a private placement consummated on April 24, 2000 and May 5, 2000, Avici
issued and sold an aggregate of 2,969,769 shares of its Series F preferred stock
for an aggregate purchase price of $44.5 million to a group of investors
pursuant to a Series F Convertible Preferred Stock Purchase Agreement.
During the quarterly period ended June 30, 2000, the Company granted stock
options to purchase 2,070,150 shares of common stock at exercise prices ranging
from $4.00 to $12.00 per share to employees, consultants and directors pursuant
to its 1997 Stock Incentive Plan, as amended.
During quarterly period ended June 30, 2000, the Company issued and sold an
aggregate of 289,045 shares of its common stock to employees, consultants and
directors for aggregate consideration of $509,338 pursuant to exercises of
options granted pursuant to its 1997 Stock Incentive Plan, as amended.
All such issuances of securities of the Company during the quarter ending June
30, 2000 were made in reliance on Section 4(2), Rule 701 and/or Regulation D
under the Securities Act of 1933, as amended.
On August 2, 2000, upon the closing of the Company's initial public offering,
all outstanding 1,750,000 shares of Series A Preferred Stock, 10,517,000 shares
of Series B Preferred Stock, 3,450,000 shares of Series C-1 Preferred Stock,
1,050,000 shares of Series C-2 Preferred Stock, 500,000 shares of Series C-3
Preferred Stock, 3,745,665 shares of Series D-1 Preferred Stock, 1,139,985
shares of Series D-2 Preferred Stock, 542,850 shares of Series D-3 Preferred
Stock, 7,185,627 shares of Series E Preferred Stock and 2,969,769 shares of
Series F Preferred Stock were converted into the same number of shares of Common
Stock.
On August 2, 2000, upon the closing of the Company's initial public offering,
all outstanding preferred stock warrants, exercisable for an aggregate of
275,000 shares of preferred stock, were converted into common stock.
USE OF PROCEEDS
On July 27, 2000, the Company commenced an initial public offering of 7,000,000
shares of its Common Stock at a price to the public of $31.00 per share. This
offering was effected pursuant to the Company's Registration Statement on Form
S-1 (No. 333-37316), which was declared effective by the Securities and Exchange
Commission on July 27, 2000. All of the 7,000,000 shares of Common Stock were
offered by the Company and sold to the several underwriters, for whom Morgan
Stanley Dean Witter, J.P. Morgan & Co., Lehman Brothers and UBS Warburg LLC
acted as representatives. As part of the initial public offering, the Company
granted to the several underwriters an overallotment option to purchase up to an
additional 1,050,000 shares of Common Stock from the Company. On July 28, 2000,
the representatives of the underwriters exercised their option to purchase the
additional 1,050,000 shares of Common Stock from the Company. The purchases of
the 8,050,000 shares of Common Stock closed on August 2, 2000. None of the net
proceeds of the offering were paid directly or indirectly to any of our
directors or officers or their associates, or to persons owning 10% or more of
any class of our equity securities or our affiliates.
The aggregate offering price of the initial public offering to the public was
approximately $249.5 million (inclusive of the overallotment option). After
deducting approximately $17.5 million in underwriting discounts, the net
proceeds of the offering were approximately $232.0 million, before deducting
expenses payable by the Company. The Company expects to use approximately $1.1
million of the proceeds from the initial public offering for the liquidation of
a term-loan agreement as it comes due. The Company expects to use the remaining
net proceeds of the offering for working capital and general corporate purposes.
Pending these uses, the Company has invested all of the net proceeds in
investment grade, interest bearing securities.
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Item 4. Submission of Matters to a Vote of Security Holders
On April 17, 2000, the stockholders of the Company approved by written consent
the following matters: (i) an increase from 10,776,250 to 14,276,250 in the
aggregate number of shares of the Company's Common Stock reserved for issuance
under the 1997 Stock Incentive Plan; and (ii) the Company's Third Restated
Certificate of Incorporation, which was filed with the Secretary of State of the
State of Delaware on April 24, 2000. The affirmative vote of 28,049,814 shares
(out of 36,036,557 shares outstanding) was received by written consent.
On July 3, 2000, the stockholders of the Company approved by written consent the
following matters: (i) the Company's Fourth Restated Certificate of
Incorporation, to be filed upon the closing of the Company's initial public
offering; (ii) the Company's Amended and Restated By-Laws; (iii) an increase
from 14,276,250 to 15,776,250 in the aggregate number of shares of the Company's
Common Stock reserved for issuance under the 1997 Stock Incentive Plan; (iv) the
Company's 2000 Stock Option and Incentive Plan; (v) the Company's 2000 Employee
Stock Purchase Plan; and (vi) the Company's 2000 Non-Employee Director Stock
Option Plan. The affirmative vote of 31,946,234 shares (out of 39,222,258 shares
outstanding) was received by written consent.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule (EDGAR filing only)
The Company did not file any current reports on Form 8-K during the
quarter ended June 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVICI SYSTEMS INC.
Date August 31, 2000 By: /s/ Paul F. Brauneis
------------------------- ------------------------------------
Paul F. Brauneis
Chief Financial Officer, Vice President of
Finance and Administration and
Principal Accounting Officer
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