<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 2000
REGISTRATION NO. 333-40624
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ADVANCED SWITCHING COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3576
(Primary Standard Industrial
Classification Code Number)
54-1865834
(I.R.S. Employer
Identification No.)
8330 BOONE BOULEVARD
VIENNA, VIRGINIA 22182
(703) 448-5540
(Address, including zip code, and telephone number,
including area code, of registrants' principal executive offices)
ASGHAR D. MOSTAFA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
8330 BOONE BOULEVARD
VIENNA, VIRGINIA 22182
(703) 448-5540
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
ANDREW P. VARNEY, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
1001 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2505
(202) 639-7000
JEFFREY SMALL, ESQ.
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
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, please 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 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,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class Amount to be Offering Price Aggregate Offering Amount of
of Securities to be Registered Registered Per Share(1) Price(1) Registration Fee(2)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.0025 per
share............................ 7,187,500 $15.00 $107,812,500 $28,462.50
--------------------------------------------------------------------------------------------------------------------------
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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. The proposed
maximum offering price includes amounts attributable to shares that may be
purchased by the underwriters to cover over-allotments, if any.
(2) The registrant previously paid $22,770 of the registration fee.
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
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 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 August , 2000
[ADVANCED SWITCHING COMMUNICATIONS, INC. LOGO]
6,250,000 Shares
COMMON STOCK
------------------------
Advanced Switching Communications, 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
$13 and $15 per share.
------------------------
We have applied to list our common stock for quotation on the Nasdaq National
Market under the symbol "ASCX."
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------- ------------- -----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total................................... $ $ $
</TABLE>
Advanced Switching Communications, Inc. has granted the underwriters the right
to purchase up to an additional 937,500 shares to cover over-allotments.
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.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER
CHASE H&Q
ROBERTSON STEPHENS
, 2000
<PAGE> 3
[INSIDE FRONT COVER]
In the upper left corner, under the heading "Advanced Switching
Communications" and the subheading "Broadband Access Platforms" is the following
text: "As the number of end-users increases, customers can stack individual
systems and eventually move to ASC's multi-slot chassis products using the same
cards."
In the upper right corner, under the caption "Standalone Systems" are
images of the A-1000, the A-1240, the A-2000 and the A-3010 stacked in vertical
arrangement. Underneath the images are (i) the caption "or cards in the A-4000
and A-4500" and (ii) an arrow pointing to an image of the A-4000 in the center
of the page.
To the lower right of the A-4000 image is the caption "Multiservice
aggregation to OC-12c (622 Mbps)." Underneath the A-4000 image is an arrow
pointing to an image of the A-4500 in the lower left corner of the page. The
caption "Smooth migration to Internet protocol and optical networking" appears
to the lower right of the arrow, and the caption "Multiservice switching to
OC-192 (10 Gbps)" appears to the lower right of the A-4500 image.
The Advanced Switching Communications logo appears in the lower right
corner of the page.
[TWO PAGE INSIDE GATEFOLD]
Under the caption "Advanced Switching Communications: Product Applications"
is a diagram that illustrates how the company's products connect corporate
enterprises, multi-tenant units and small business, home office and residential
users to the optical core.
In the upper right is an oval labeled "Optical Core." A bold line connects
the Optical Core to an illustration of an ASC multi-slot chassis system in the
middle of the page above the caption "Regional Central Office or Point of
Presence." There are three lines leading out from the multi-slot chassis away
from the optical core:
- one line connects the Regional Central Office or Point of Presence
to an illustration of an ASC standalone system superimposed on a
building in the upper middle of the page over the caption "Local
Central Office." Two parallel lines labeled "Bundled T1/E1 lines"
pass from the local central office, through a ring, to an
illustration of two buildings in the upper left corner of the page
"Corporate Enterprise."
- the second line connects the Regional Central Office or Point of
Presence to another illustration of an ASC standalone system
superimposed on an illustration of two buildings on the left side
of the page under the caption "Multi-Tenant Units: Small and
Mid-sized Businesses."
- the third line connects the Regional Central Office or Point of
Presence to another illustration of an ASC standalone system
superimposed on a building in the lower middle of the page over
the caption "Local Central Office." Three lines connect the
standalone system, through a rectangle labeled "DSLAMS", to an
illustration in the lower left corner of the page under the
caption "Small Business, Home Office and Residential."
In the lower right corner, under the caption "The ASC Solution" is the
following text: "The ASC product line extends the benefits of packet technology
into the access network, connecting existing communications systems to the
optical core and supporting the deployment of broadband services in multiple
applications."
The Advanced Switching Communications logo appears in the lower right
corner below the text.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Special Note Regarding Forward-Looking
Statements.......................... 13
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.............................. 27
Management............................ 41
Certain Transactions.................. 50
Principal Stockholders................ 54
Description of Securities............. 56
Shares Eligible for Future Sale....... 59
Underwriters.......................... 65
Legal Matters......................... 66
Experts............................... 67
Where You Can Find More Information... 67
Index to Financial Statements......... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
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 any sale of the common stock.
UNTIL , 2000, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL
DEALERS THAT BUY, SELL OR TRADE SHARES, 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.
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and notes thereto appearing elsewhere in
this prospectus.
ADVANCED SWITCHING COMMUNICATIONS, INC.
Advanced Switching Communications, Inc. designs and markets a line of
broadband access platforms to telecommunications service providers. Our compact
and software-configurable products enable our customers to transmit voice, data
and multimedia communications traffic more rapidly and cost-effectively while
preserving their investments in existing communications systems. In response to
the rapid increase in data communications traffic driven by the growth of the
Internet and worldwide deregulation, telecommunications service providers are
rapidly building advanced packet-based networks. Packet-based networks, which
transport communications traffic in small bundles, or "packets," offer a
significantly more flexible, cost-effective and efficient means for providing
communications services than existing circuit-based networks, designed years ago
to carry telephone calls. Telecommunications service providers typically situate
high-speed packet transmission equipment at the core or backbone of their
networks, but rely on voice-oriented technology for their access networks. Our
products are deployed at central offices, facilities that serve as staging areas
for the delivery of telecommunications services to the end-user, points of
presence or multi-tenant office buildings that comprise the entry points to a
service provider's access network. By extending the benefits of packet
technology beyond the network core, our products reduce transmission and
operating costs, increase the efficiency of core network equipment, provide
access to optical networks and allow our customers to develop networks for
broadband services. We market our products to telecommunications service
providers worldwide, focusing on established as well as emerging carriers,
multi-tenant unit service providers and digital subscriber line service
providers. Customers that have purchased or committed to purchase in excess of
$100,000 of our products in the twelve months ended June 30, 2000 include:
AccessLan, Broadband Office, Broadview Networks, Dishnet DSL, Intermedia
Communications Inc., mPower Communications, 2nd Century Communications, Urban
Media and UUNet.
We designed our product line to meet the requirements of broadband service
providers worldwide. Our products offer the following benefits and features:
- Enhanced Revenue Opportunities. Our scalable product design and
multi-service capabilities enable service providers to efficiently add
services and quickly penetrate new markets to capitalize on new revenue
opportunities, with relatively low initial investment.
- Highly Scalable Product Architecture. By designing a product line that
can easily be adapted from a single, stackable platform to a high
density, multi-slot chassis system with a common software and hardware
foundation, we allow our customers to economically grow their access
platform equipment as their network requirements evolve.
- Multi-Service Protocol Capabilities. Our software-configurable ports
eliminate the need for service providers to predetermine the number of
ports dedicated to each specific protocol or service. Service providers
that use our products can remotely configure ports for specific protocols
to quickly add services, with minimal service disruption and without
dispatching personnel to physically change a customer's connection.
- Reduced Operating Costs. Our products aggregate multiple local access
lines with transmission speeds as low as 64 kilobits per second into
fewer higher-speed optical or electrical connections to the core network.
As a result, our products reduce the costs of building and operating the
core network by eliminating the need for service providers to deploy
multiple overlay networks for each protocol or service offered and by
dedicating core equipment and ports to high-speed, single protocol
connections.
1
<PAGE> 6
- Interoperability with Existing Systems. Our products comply with
stringent network facility standards for central office equipment and
operate with leading core network components, allowing service providers
to capitalize on the value of their existing investments. Our products
utilize industry standard protocols and have built-in software
flexibility to add new protocols as they are adopted and standardized in
the marketplace.
- Space and Physical Design Advantages. The compact design and high port
density of our equipment means that it occupies minimal space at central
offices, multi-tenant unit office buildings, or other points of presence.
In addition, the lower power requirements and the low heat output of our
products allow service providers to deploy services to locations
previously excluded from the network because of the physical limitations
of the space.
Our objective is to be the leading provider of broadband access platforms
for integrated voice, data and multimedia services. To achieve our objective, we
intend to:
- broaden our customer base domestically and internationally;
- leverage our technology leadership from the access network into the
network core;
- provide our customers with a smooth migration path to next-generation
network architectures;
- expand our global sales efforts and our customer service and support
capabilities; and
- continue to outsource our product manufacturing.
We sell our products primarily through a direct sales force. We also
increase awareness and customer acceptance of our products through strategic
relationships with original equipment manufacturers, distributors and resellers.
Prior to 1999, we were a development stage company principally engaged in
research and development. We shipped our first product in March 1999. We depend
on a single contract manufacturer to manufacture substantially all of our
products. We derive a substantial portion of our revenue from a limited number
of customers, and Broadband Office accounted for 53% of our revenue for the six
months ended June 30, 2000. We have incurred significant losses since our
inception and as of June 30, 2000 we had an accumulated deficit of $24.8
million. We expect to continue to incur net losses. For a discussion of the
risks associated with our limited operating history and competitive position,
see "Risk Factors" beginning on page 5.
We were incorporated in 1997 under the laws of the State of Delaware. Our
headquarters are located at 8330 Boone Boulevard, Vienna, Virginia 22182, and
our telephone number is (703) 448-5540. Our website address is www.asc.com. The
information contained on our website is not part of this prospectus.
------------------------
Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
- all outstanding shares of our redeemable convertible preferred stock will
be converted into shares of common stock immediately prior to the
completion of this offering;
- the underwriters will not exercise their over-allotment option; and
- we will file our amended and restated certificate of incorporation upon
the completion of this offering.
2
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common stock offered............................ 6,250,000 shares
Common stock to be outstanding after the
offering...................................... 40,590,687 shares
Over-allotment option........................... 937,500 shares
Use of proceeds................................. We intend to use the net proceeds for
working capital and other general corporate
purposes. See "Use of Proceeds" on page 14
Proposed Nasdaq National Market symbol.......... ASCX
</TABLE>
The foregoing information is based upon shares outstanding as of June 30,
2000 and excludes:
- 4,188,782 shares of common stock issuable upon the exercise of options
outstanding as of June 30, 2000 with a weighted average exercise price of
$2.11 per share;
- 347,000 shares of common stock issuable upon the exercise of warrants
outstanding as of June 30, 2000 with a weighted average exercise price of
$10.52 per share;
- 90,468 shares of common stock reserved for additional option grants under
our stock plans as of June 30, 2000; and
- additional shares of common stock issuable upon conversion of our
outstanding preferred stock in respect of dividends accruing after June
30, 2000.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 10, SIX MONTHS
1997) YEAR ENDED ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------ ------------------
1997 1998 1999 1999 2000
-------------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................... $ -- $ -- $ 4,278 $ 402 $ 12,933
Gross profit.......................... -- -- 1,439 65 3,377
Loss from operations.................. (309) (5,127) (9,781) (4,732) (9,353)
Net loss.............................. (293) (5,111) (9,329) (4,640) (8,297)
Accretion of transaction costs and
accrued dividends on redeemable
convertible preferred stock......... -- (367) (2,589) (482) (2,748)
------ ------- -------- ------- --------
Net loss applicable to common
shareholders........................ $ (293) $(5,478) $(11,918) $(5,122) $(11,045)
====== ======= ======== ======= ========
Basic and diluted net loss per
share............................... $(0.05) $ (0.48) $ (1.01) $ (0.43) $ (0.95)
====== ======= ======== ======= ========
Shares used in computing net loss per
share............................... 5,742 11,389 11,789 11,958 11,601
====== ======= ======== ======= ========
Pro forma basic and diluted net loss
per share(1)........................ $ (0.38) $ (0.34)
======== ========
Shares used in computing pro forma net
loss per share(1)................... 24,251 32,462
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (2) AS ADJUSTED (3)
-------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 5,464 $ 5,464 $ 85,639
Working capital........................................ 20,082 20,082 100,257
Total assets........................................... 43,952 43,952 124,127
Long-term debt, less current portion................... 37 37 37
Redeemable convertible preferred stock................. 58,383 -- --
Total stockholders' equity (deficit)................... (25,371) 33,012 113,187
</TABLE>
---------------
(1) Pro forma net loss per share for the year ended December 31, 1999 and
the six months ended June 30, 2000 is computed using the weighted
average number of common shares outstanding, including the pro forma
effects of the automatic conversion of our outstanding preferred stock
into shares of common stock effective upon the completion of this
offering as if such conversion occurred on January 1, 1999, or at date
of original issuance, if later.
(2) Pro forma to give effect to the conversion of all issued and outstanding
shares of redeemable convertible preferred stock into common stock.
(3) As adjusted to reflect the sale of 6,250,000 shares of common stock
offered hereby at the assumed initial public offering price of $14 per
share (the midpoint of the filing range) after deducting the
underwriting discount and estimated offering expenses payable by us. See
"Use of Proceeds" on page 14 for more information on our intended use of
the proceeds from this offering and "Capitalization" on page 15 for more
information on our capital structure.
4
<PAGE> 9
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our common stock.
RISKS RELATED TO OUR BUSINESS AND FINANCIAL PERFORMANCE
OUR LIMITED OPERATING HISTORY MAY MAKE IT DIFFICULT TO VALUE AND EVALUATE
OUR BUSINESS AND OUR FUTURE PROSPECTS
We commenced operations in September 1997 and commercially released our
first product in the first quarter of 1999. Your evaluation of the risks and
uncertainties of our business will be difficult because of our limited operating
history. 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 market are unproven. You must
consider our business and prospects in light of the risks and difficulties
typically encountered by companies in their early stages of development,
particularly those in new, rapidly evolving and highly competitive markets such
as the market for broadband access solutions.
WE HAVE INCURRED SUBSTANTIAL LOSSES TO DATE AND MAY NOT BE ABLE TO ACHIEVE
OR MAINTAIN PROFITABILITY, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE
Since we began operations, we have incurred net losses in every fiscal
period. We incurred a net loss of $8.3 million in the first six months of 2000
and our accumulated deficit through June 30, 2000 was $24.8 million. We expect
to incur net losses in the future. Our operating losses have been due in part to
the commitment of significant resources to our research and development and
sales and marketing organizations. We expect our expenses to continue to
increase in an effort to develop our business and, as a result, we will need to
generate significant revenue to achieve profitability. We cannot be certain if
or when we will become profitable. Our failure to become profitable within the
timeframe expected by investors may adversely affect the market price of our
common stock.
UNEXPECTED FLUCTUATIONS IN OUR OPERATING RESULTS MAY CAUSE OUR STOCK PRICE
TO DECLINE
Our operating results are difficult to forecast and may fluctuate
significantly from quarter to quarter. As a result of our limited operating
history, we do not have historical financial data for a significant number of
periods upon which to forecast quarterly financial performance. It is likely
that in some future quarters, our operating results may fall below the
expectations of investors or securities analysts, which could cause the price of
our common stock to fall substantially.
IF WE FAIL TO INCREASE OUR REVENUE, OR IF WE EXPERIENCE DELAYS IN
GENERATING REVENUE, WE WILL CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES.
We plan to significantly increase our operating expense 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 capabilities to address
the demands resulting from this offering and the continued growth of our
business. Our operating expenses are largely based on anticipated personnel
requirements and revenue trends, and a high percentage of our expenses are, and
will continue to be, fixed. In addition, we may be required to spend more in
research and development than originally budgeted in order to respond to
industry trends. As a result, if we fail to increase our revenue, or if we
experience delays in generating revenue, we will continue to incur substantial
operating losses.
THERE IS INTENSE COMPETITION IN THE MARKET FOR BROADBAND ACCESS SOLUTIONS
AND IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUE COULD DECLINE AND WE COULD
EXPERIENCE ADDITIONAL LOSSES
The market for broadband access solutions is new, rapidly evolving and very
competitive. We expect competition in this market to increase as a result of a
number of factors, including the entrance of new or larger competitors and the
introduction of new products or technologies. This competition could, among
other things:
- divert sales from us;
- force us to charge lower prices; and
5
<PAGE> 10
- adversely affect our strategic relationships with manufacturers,
resellers and others.
If any of these risks occurred, our revenues could decline, our gross margins
could decrease, our expenses could increase and we could experience additional
losses. Our principal competitors may be different depending on the market we
target, and include large networking equipment companies such as Alcatel, Cisco
Systems, Lucent Technologies, Marconi(Fore) and Nortel Networks, as well as
companies such as Accelerated Networks, ADC Kentrox, and Tiara Networks.
Many of our current and potential competitors are large public companies
that have longer operating histories and significantly greater financial,
technical, marketing and other resources than we do. As a result, these
competitors are able to devote greater resources to the development, promotion,
sale and support of their products. In addition, competitors with large market
capitalization or cash reserves are much better positioned than we are to
acquire other companies, including our competitors, and thereby acquire new
technologies or products that may displace our product lines.
WE PURCHASE SEVERAL OF OUR KEY COMPONENTS FROM SINGLE SOURCES, AND WE COULD
LOSE REVENUE AND MARKET SHARE IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF
THOSE COMPONENTS
Several key components of our products are currently available from single
or limited sources with whom we have no guaranteed supply agreements, including:
- programmable chips supplied by Lucent Technologies;
- asynchronous transfer mode, or ATM, chips supplied by Conexant Systems
Inc.; and
- circuit emulation chips supplied by PMC-Sierra, Inc.
If we are unable to obtain a sufficient supply of these or other critical
components from our current vendors:
- we may be unable to manufacture and ship our products on a timely basis,
which could result in lost or delayed revenue, harm to our reputation,
increased manufacturing costs and exposure to claims by our customers;
and
- we may be forced either to develop alternative sources of supply or to
modify the design of our products to use more readily available
components, which may take a long time and may involve significant
additional expense.
For example, during the first quarter of 2000, we encountered delays in
receiving programmable chips used in our A-1240 product, which resulted in
production delays. In addition, our vendors may increase their prices for these
components. Accordingly, the lack of alternative sources for these components
may also force us to pay higher prices for these components, which would cause
our gross margins to decrease.
WE ARE ENTIRELY DEPENDENT ON OUR LINE OF BROADBAND ACCESS PLATFORM PRODUCTS
AND OUR PRODUCTS MAY NOT BE READILY ACCEPTED
Widespread commercial acceptance of our products is critical to our future
success. To date, our A-1000, A-2000 and A-1240 products are the only products
that we have sold and we expect that revenue from these products will account
for a substantial portion of our revenue for the foreseeable future. We intend
to develop and introduce new products and enhancements to existing products in
the future. If our target customers do not adopt, purchase and successfully
deploy our current and planned products, our revenue will not grow
significantly. The acceptance of our products may be hindered by:
- the failure of prospective customers to recognize the value of broadband
access platform products;
- the reluctance of our prospective customers to replace or expand their
current access equipment, which may be supplied by more established
vendors, with our products; and
- the emergence of new technologies or industry standards that could cause
our products to be less competitive or become obsolete.
BECAUSE MOST OF OUR SALES ARE MADE UNDER SHORT-TERM PURCHASE ORDERS, WE MAY
EXPEND SIGNIFICANT RESOURCES AND BE UNABLE TO RECOVER THE COSTS IF OUR CUSTOMERS
FAIL TO PURCHASE ADDITIONAL PRODUCTS
Our contracts and purchase orders are separately negotiated with each of
our customers and the terms may vary widely. A majority of our sales are made
under short-term purchase orders for one or a few of our
6
<PAGE> 11
products at one time instead of long-term contracts for large scale deployment
of our products. These purchase orders do not ensure that they will purchase any
additional products other than those specifically listed in the order. Moreover,
since we believe that these purchase orders represent the early portion of
longer term customer programs, we expend significant financial and personnel
resources and expand our operations to be able to fulfill these programs. If our
customers fail to purchase additional products to expand their programs as we
expect, we may be unable to recover the costs we incurred.
OUR CUSTOMER CONTRACTS ALLOW OUR CUSTOMERS TO TERMINATE WITHOUT SIGNIFICANT
PENALTIES
Our contracts are generally non-exclusive and contain provisions allowing
our customers to terminate them without significant penalties. Our contracts
also may specify the achievement of shipment, delivery and installation
commitments. We are generally able to meet these commitments or negotiate
extensions with our customers. However, if we fail to meet these commitments in
a timely manner, our customers may choose to terminate their contracts with us
or impose monetary penalties. If our customers elect to terminate their
contracts with us, our future revenues would be reduced.
WE DEPEND UPON A SINGLE CONTRACT MANUFACTURER TO MANUFACTURE SUBSTANTIALLY
ALL OF OUR PRODUCTS. IF THAT MANUFACTURER IS UNABLE OR UNWILLING TO MANUFACTURE
A SUFFICIENT QUANTITY OF OUR PRODUCTS, OUR REVENUE MAY DECLINE AND OUR CUSTOMER
RELATIONSHIPS MAY BE DAMAGED
We currently subcontract the manufacturing and testing of substantially all
of our products to Benchmark Electronics, an independent manufacturer with whom
we have no long-term agreement. Our reliance on a single manufacturer exposes us
to a number of risks, including reduced control over manufacturing capacity,
product completion and delivery times, product quality and manufacturing costs.
If, as we anticipate, we experience increased demand for our products and
introduce new products and product enhancements, the challenges we face in
managing our relationship with Benchmark will be increased. If Benchmark is
unable or unwilling to manufacture a sufficient quantity of products for us, on
the time schedules and with the quality that we demand:
- we may not be able to fulfill customer orders on a timely basis; and
- we may be forced to engage additional or replacement manufacturers,
which is expensive and time consuming.
If that occurs, our revenue may decline and our customer relationships may be
damaged.
IF WE FAIL TO PREDICT OUR MANUFACTURING AND COMPONENT REQUIREMENTS
ACCURATELY, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS
We provide forecasts of our demand to our contract manufacturer and
component vendors up to six months prior to scheduled delivery of products to
our customers. If we overestimate our requirements, we may have excess
inventory, which could increase our costs and harm our relationships with our
contract manufacturer and component vendors by reducing our future orders. If we
underestimate our requirements, we may have an inadequate inventory of
components. Inadequate inventory could interrupt manufacturing of our products
and result in delays in shipments. In addition, lead times for materials and
components that we order are long and depend on factors such as the procedures
of, or contract terms with, a specific supplier and demand for each component at
a given time. In the case of some components in short supply, component vendors
have imposed strict allocations that limit the number of these components they
will supply to a given customer in a specified time period. These vendors may
choose to increase allocations to larger, more established companies, which
could reduce our allocations and harm our ability to manufacture our products.
DUE TO THE LONG AND UNPREDICTABLE SALES CYCLE FOR OUR PRODUCTS, THE TIMING
OF REVENUE IS DIFFICULT TO PREDICT AND MAY CAUSE OUR OPERATING RESULTS TO
FLUCTUATE UNEXPECTEDLY
The sales and deployment cycle for our products is lengthy and varies
substantially from customer to customer; it may extend for six months or more.
The length of our sales cycle may cause our revenue and operating results to
vary unexpectedly from quarter to quarter. A customer's decision to purchase our
products involves a significant commitment of its resources and a lengthy
evaluation and product qualification process. Consequently, we may incur
substantial expenses and devote senior management attention to potential
7
<PAGE> 12
relationships that never materialize, in which event our investments will
largely be lost and we may miss other opportunities.
BECAUSE WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A LIMITED
NUMBER OF CUSTOMERS, ANY LOSS OF OR DELAY IN RECEIVING REVENUE FROM THOSE
CUSTOMERS COULD SIGNIFICANTLY DAMAGE OUR FINANCIAL PERFORMANCE
We have historically derived a significant portion of our revenue from a
relatively small number of customers. If any of these customers stop or delay
purchasing products or services from us, our financial performance would be
negatively impacted. Two customers accounted for 22% and 53% of our revenue for
the year ended December 31, 1999. These same customers accounted for 11% and 10%
of our revenue for the six months ended June 30, 2000. One additional customer,
Broadband Office, accounted for 53% of our revenue for the six months ended June
30, 2000. Most of our customers are not contractually obligated to purchase
future products or services from us, and they may discontinue doing so at any
time. In addition, although our largest customers will probably vary from period
to period, we anticipate that a small number of customers will continue to
represent a large percentage of our revenue in any given fiscal period.
Accordingly, the failure to obtain a significant order from a customer within
the fiscal period expected by us could have a significant adverse effect on our
financial performance for that fiscal period.
WE ANTICIPATE THAT THE AVERAGE SELLING PRICES OF OUR PRODUCTS WILL DECLINE,
WHICH COULD REDUCE OUR GROSS MARGINS AND REVENUE
Our industry has experienced rapid erosion of average product selling
prices. We anticipate that the average selling prices of our products will
decline in response to competitive pressures, increased sales discounts, new
product introductions by our competitors or other factors. We are seeking to
improve our product design to reduce our costs and increase our sales. If we are
unable to do so, declines in average selling prices will reduce our gross
margins and revenue.
IF NETWORK SERVICE PROVIDERS CHOOSE A PROTOCOL OTHER THAN ATM FOR THEIR
CORE NETWORKS AND WE ARE NOT ABLE TO ADAPT TO THE CHANGE, OUR TARGET MARKET
COULD BE REDUCED
While we have designed a product that is adaptable to many communications
protocols, our initial architecture is based on an ATM infrastructure. In the
service providers' networks ATM competes with other protocols such as time
division multiplexing (TDM) and Internet protocol (IP). We believe that an
eventual migration to an IP-based protocol is possible. To the extent that
network service providers choose a protocol other than ATM for their core
networks, we may not be able to react in time or adapt to the change and we
could see our target market substantially reduced.
OUR SUCCESS DEPENDS ON OUR CUSTOMERS SUCCESSFULLY BUILDING NEW
COMMUNICATIONS SYSTEMS AND OFFERING BROADBAND ACCESS SOLUTIONS TO THEIR
END-USERS, WHICH WE HAVE NO ABILITY TO FORESEE OR CONTROL
If our current or potential customers are not successful in building their
communications systems and promoting their products, including new
revenue-generating data services, then our growth will be limited. The ultimate
success of our customers depends in part on their competitive position and on
the demand for broadband access solutions, which we are not able to foresee or
control.
IF WE ARE NOT SUCCESSFUL IN DEVELOPING AND MARKETING, OR IF WE ARE DELAYED
IN INTRODUCING, NEW AND ENHANCED PRODUCTS AND FEATURES THAT KEEP PACE WITH
TECHNOLOGY AND OUR CUSTOMERS' NEEDS AND EXPECTATIONS, OUR SALES AND COMPETITIVE
POSITION WILL SUFFER
The market for broadband access solutions is characterized by rapidly
changing technologies, frequent new product introductions and evolving customer
requirements and industry standards. In order to remain competitive, we will
need to introduce on a timely basis new products or product enhancements that
offer significantly improved performance and features, at lower prices, and we
may not be successful in doing so. Some prior versions of our products were
released behind schedule, and this may happen again in the future. Delays in
introducing new products and features, or the introduction of new products which
do not meet the evolving demands of our customers, could damage our reputation
and cause a loss of or delay in revenue.
8
<PAGE> 13
IF WE DO NOT EXPAND OUR DIRECT AND INDIRECT SALES CHANNELS, WE MAY BE
UNABLE TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS, WHICH MAY PREVENT
US FROM ACHIEVING AND MAINTAINING PROFITABILITY
Our products and services require a technical sales effort targeted at
several key people within each of our prospective customers' organizations. Our
sales efforts require the attention of sales personnel and specialized system
engineers with extensive experience in networking technologies. Competition for
these individuals is intense, and we may not be able to hire sufficient numbers
of qualified sales personnel and specialized system engineers. We also plan to
expand our relationships with resellers and original equipment manufacturers. If
we fail to develop or cultivate relationships with significant resellers or
original equipment manufacturers, or if these resellers and original equipment
manufacturers are not successful in their sales efforts, our business may be
harmed. Many of our resellers also sell our competitors' products. Failure to
expand these channels could adversely affect our revenues and operating results.
IF WE DO NOT EXPAND OUR CUSTOMER SERVICE AND SUPPORT ORGANIZATION, WE MAY
BE UNABLE TO INCREASE OUR SALES
We currently have a small customer service and support organization and
will need to increase our staff to support new and existing customers. Our
products are complex and require highly-trained customer service and support
personnel. Hiring customer service and support personnel is difficult in our
industry due to the limited number of people available with the necessary
technical skills. If we are unable to expand our customer service and support
organization and train our personnel rapidly, we may not be able to increase
sales.
IF WE ARE NOT ABLE TO HIRE AND RETAIN QUALIFIED PERSONNEL, OR IF WE LOSE
KEY PERSONNEL, WE MAY BE UNABLE TO MANAGE OR GROW OUR BUSINESS
The growth of our business and revenue depends in large part upon our
ability to attract and retain sufficient numbers of highly skilled employees,
particularly qualified sales and engineering personnel. Qualified personnel are
in great demand throughout our industry, particularly in the Washington, D.C.
metropolitan area. We may not be successful in hiring and retaining the skilled
personnel that we need.
Our future success also depends to a significant degree on the skills and
efforts of Asghar Mostafa, our co-founder, Chairman of the Board and Chief
Executive Officer, and on the ability of our other executive officers and
members of senior management to work effectively as a team. The loss of the
services of Mr. Mostafa or one or more of our other executive officers or senior
management members could have a material adverse effect on our financial
performance and ability to compete.
OUR COMPANY IS GROWING RAPIDLY AND WE MAY BE UNABLE TO MANAGE OUR GROWTH
EFFECTIVELY, WHICH COULD RESULT IN LOST SALES OR DISRUPTIONS TO OUR BUSINESS
Our failure to effectively manage our recent and anticipated growth could
have a material adverse effect on the quality of our products, our ability to
retain key personnel and our financial performance. From June 30, 1999 to June
30, 2000, the number of our employees increased from 50 to 128. In addition, the
proceeds of this offering will be used in part to further expand our operations
and increase the number of our employees. This growth has strained, and may
further strain, our management, operational systems and other resources. To
manage our growth effectively, we must be able to enhance our financial and
accounting systems and controls, integrate new personnel and manage expanded
operations. We may not be able to do so.
WE ARE BEGINNING TO EXPAND OUR INTERNATIONAL BUSINESS, WHICH EXPOSES US TO
ADDITIONAL RISKS THAT WE DO NOT FACE IN OUR U.S. BUSINESS
In 1999, we derived approximately 10% of our revenue from sales outside the
United States, and we expect that percentage to increase as our business grows.
An expanded international business exposes us to a number of risks that we do
not have to address in our U.S. operations. These risks include:
- longer sales cycles;
- challenges and costs inherent in managing geographically dispersed
operations;
9
<PAGE> 14
- protectionist laws and business practices that favor local competitors;
- difficulties in finding and managing local resellers;
- diverse and changing governmental laws and regulations, including greater
regulation of the telecommunications industry; and
- foreign currency exchange rate fluctuations.
If we are unsuccessful in addressing these risks, our international
business will not achieve the revenue or profits we expect.
IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS, WE MAY LOSE
SALES AND INCUR ADDITIONAL EXPENSES
Our success depends in part on both the adoption of industry standards for
technologies in the broadband access solutions market and our products'
compliance with those industry standards as different standards emerge, evolve
and achieve acceptance. The absence of industry standards for a particular
technology may prevent widespread adoption of products based on that technology.
In addition, because many technological developments occur prior to the adoption
of related industry standards, we may develop products that do not comply with
the industry standards that are eventually adopted, which would hinder our
ability to sell those products. Moreover, if a competitor obtains a leadership
position in selling broadband access products, that competitor may have the
ability to establish de facto standards within the industry.
IF OUR PRODUCTS CONTAIN DEFECTS OR FAIL TO PERFORM PROPERLY OR WORK
EFFECTIVELY WITH OUR CUSTOMERS' NETWORKS, WE COULD LOSE REVENUE AND INCUR DAMAGE
TO OUR REPUTATION AND LIABILITY TO OUR CUSTOMERS
Our products must work effectively with our customers' existing networks,
which typically include products from a variety of different vendors and utilize
multiple protocol standards. The complexity of these networks makes it difficult
for us to ensure that our products will function properly within these networks
and also makes it difficult for us to identify the source of any problems which
occur in the operation of our products. Despite testing by us and our customers,
our products may contain undetected software or hardware errors which result in
product failures or poor product performance. We have experienced such errors in
the past in connection with new products and product upgrades. We expect that
such errors will be found from time to time in new or enhanced products after we
have already shipped the products. If our products contain defects or fail to
work properly, we may:
- suffer a loss of or delay in revenue;
- incur additional expenses in our efforts to identify and remedy the
problems;
- suffer damage to our reputation; and
- be exposed to damage claims by our customers.
CLAIMS BY NORTEL NETWORKS OR OTHER COMPANIES THAT WE ARE INFRINGING THEIR
PROPRIETARY RIGHTS COULD HINDER OR BLOCK OUR ABILITY TO SELL OUR PRODUCTS,
SUBJECT US TO SIGNIFICANT MONETARY LIABILITY AND DIVERT THE TIME AND ATTENTION
OF OUR MANAGEMENT
The broadband access equipment industry is characterized by the existence
of a large number of patents and frequent claims and related litigation
regarding patent and other intellectual property rights. In particular, leading
companies in the data communications and networking markets have extensive
patent portfolios with respect to networking technology. We recently received a
letter from Nortel Networks Corporation alleging that a specific feature of our
products infringes one of Nortel's patents relating to inverse multiplexing over
ATM. We believe that our products do not infringe Nortel's patent and we intend
to contest this claim vigorously. However, we cannot assure you that we will
prevail in our objection to this claim, nor can we assure you that this dispute
will not result in litigation or that an adverse result or judgment will not
adversely affect our financial condition. The Nortel claim could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, or require us to develop non-infringing technology. If
Nortel succeeds in its claim, we would need to enter into royalty or license
agreements. These royalty or license agreements, if required, may not be
available on acceptable terms, if at all.
10
<PAGE> 15
Other companies may in the future assert against us patent, copyright,
trademark and other intellectual property rights. We expect that we may
increasingly be subject to infringement claims as the numbers of products and
competitors in the market for broadband access equipment grows and the
functionality of products overlaps. If there is a successful claim of
infringement or if we fail to develop non-infringing technology or license
proprietary rights on a timely basis that may become necessary, our ability to
use technologies, products, and brand names may be limited and our business may
be harmed.
OUR COMPETITIVE POSITION WOULD BE ADVERSELY AFFECTED IF WE WERE UNABLE TO
PROTECT OUR PROPRIETARY RIGHTS
Our success and competitiveness are dependent to a significant degree on
the protection of our proprietary rights. We rely primarily on a combination of
patents, copyrights, trademarks, trade secret laws and contractual restrictions
to protect our proprietary rights. Despite these precautions, we cannot
guarantee that the steps we have taken to protect our proprietary rights will be
adequate to deter misappropriation of our intellectual property. Others may be
able to copy or reverse engineer aspects of our products, to obtain and use
information that we regard as proprietary or to independently develop similar
technology. If we are unable to protect our trademarks and other proprietary
rights against unauthorized use by others, our reputation and brand name may be
damaged and our competitive position may be significantly harmed.
IF WE MAKE ACQUISITIONS OR STRATEGIC INVESTMENTS, OUR STOCKHOLDERS COULD BE
DILUTED, WE COULD INCUR ADDITIONAL DEBT, AND WE COULD ASSUME ADDITIONAL
CONTINGENT LIABILITIES
We intend to consider investments in complementary companies, products or
technologies. While we have no current agreements to do so, we may buy
businesses, products or technologies in the future. If we make an acquisition or
investment, we may:
- issue stock that would dilute your stock ownership;
- incur debt which would restrict our cash flow;
- assume liabilities which may result in additional costs;
- incur amortization expenses related to goodwill and other intangible
assets; or
- incur large and immediate write-offs.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OR MANAGE THE ACQUISITIONS OR
INVESTMENTS WE MAKE
Acquisitions or investments made by us could involve numerous risks,
including:
- problems combining the purchased operations, technologies or products;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of the purchased
organizations.
We may not be able to successfully integrate businesses, products,
technologies or personnel that we might acquire in the future. Any failure to do
so could disrupt our business and seriously harm our financial condition.
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, WHICH MAY NOT BE
AVAILABLE
At June 30, 2000, we had approximately $25.5 million in cash, cash
equivalents and marketable securities. We believe that these amounts, combined
with proceeds from this offering and cash anticipated to be available from
future operations, will enable us to meet our working capital requirements for
the next 12 months. However, if cash from available sources is insufficient, or
if cash is used to acquire complementary companies, products or technologies, or
for other uses not presently planned, we may need additional capital. The
development and marketing of new and enhanced products and the expansion of our
sales channels and associated support personnel will require a significant
commitment of resources. In addition, if the market for broadband access
solutions develops at a slower pace than anticipated or if we fail to establish
significant
11
<PAGE> 16
market share and achieve a meaningful level of revenue, we may continue to incur
significant operating losses and utilize significant amounts of capital. As a
result, we could be required to raise substantial additional capital. Additional
capital may not be available to us at all, or if available, may be available
only on unfavorable terms. Any inability to raise additional capital when we
require it would materially adversely affect our business, results of operations
and financial condition.
RISKS RELATED TO THE SECURITIES MARKETS AND THIS OFFERING
STOCK MARKET VOLATILITY HAS INCREASED, MAKING YOUR INVESTMENT MORE RISKY
The stock markets, particularly the Nasdaq National Market, on which we
expect our common stock to be listed, have experienced extreme price and volume
fluctuations. These fluctuations have particularly affected the market prices of
equity securities of technology related companies and have often been unrelated
or disproportionate to the operating performance of those companies.
THE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK WILL LIMIT
YOUR ABILITY TO INFLUENCE CORPORATE ACTIONS
Immediately following this offering, our executive officers, directors and
their affiliates will together own approximately 71% of our outstanding common
stock. As a result, those stockholders, if they act together, will be able to
determine the outcome of the vote on any matter requiring stockholder approval,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying,
preventing or deterring a change in control of our company, could deprive our
stockholders of an opportunity to receive a premium for their common stock as
part of a sale of our company and might affect the market price of our common
stock.
SOME PROVISIONS OF OUR CHARTER AND BY-LAWS MAY DELAY OR PREVENT
TRANSACTIONS THAT MANY STOCKHOLDERS MAY FAVOR
Some provisions of our certificate of incorporation and by-laws may have
the effect of delaying, discouraging, or preventing a merger or acquisition that
our stockholders may consider favorable, including transactions in which
stockholders might receive a premium for their shares. These provisions include:
- authorization of the issuance of "blank check" preferred stock without
the need for action by stockholders;
- a classified board of directors with staggered three-year terms;
- inability of stockholders to call special meetings of stockholders or act
by written consent; and
- advance notice requirements for proposing matters that can be acted on by
stockholders at stockholder meetings.
Some provisions of Delaware law may also discourage, delay or prevent
someone from acquiring us or merging with us. See "Description of
Securities -- Delaware Anti-Takeover Law and Certain Charter and By-Law
Provisions; Anti-Takeover Effects" on page 57 for more detailed information on
these provisions.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO FALL
Additional sales of our common stock in the public market after this
offering, or the perception that such sales could occur, could cause the market
price of our common stock to decline. Upon completion of this offering, we will
have 40,590,687 shares of common stock outstanding. See "Capitalization" on page
15 for a detailed discussion of shares included and excluded from this number.
The 6,250,000 shares sold in this offering will be freely transferable without
restriction or registration under the Securities Act of 1933. Based on shares
outstanding as of June 30, 2000, the remaining shares of common stock
outstanding after this offering will be available for sale as follows:
<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
------------------ ------------------------ -------
<S> <C> <C>
90 days after effectiveness..... 26,367 Eligible for sale under Rule 144 or Rule 701
180 days after effectiveness.... 34,314,320 Eligible for sale upon expiration of lock-up
</TABLE>
12
<PAGE> 17
In addition, Morgan Stanley & Co. Incorporated may, in its sole discretion,
at any time without notice, release all or any portion of the shares subject to
the lock-up agreements, which would result in more shares being available for
sale in the public market at an earlier date. Sales of common stock by existing
stockholders in the public market, or the availability of these shares for sale,
could materially and adversely affect the market price of our common stock.
In addition, as soon as practicable after the date of this prospectus, we
intend to file a registration statement on Form S-8 with the Securities and
Exchange Commission covering the shares of common stock reserved for issuance
under our stock option plans. Based on shares and options outstanding as of June
30, 2000, approximately 90,468 shares of common stock will be reserved for
issuance under our stock option plans on the effective date of this offering. On
the date 180 days after the effective date of this offering, at least 1,231,708
shares will be subject to immediately exercisable options, based on options
outstanding on June 30, 2000. Sales of a large number of these shares could have
an adverse effect on the market price for our common stock.
After this offering, the holders of 20,079,791 shares of common stock,
including shares issuable upon exercise of warrants which will be outstanding
immediately after the consummation of this offering, will have certain rights
with respect to registration of such shares for sale to the public. If such
holders, by exercising their registration rights, cause a large number of
securities to be registered and sold in the public market, such sales could have
an adverse effect on the market price for our common stock. If we were to
include in a company-initiated registration statement shares held by these
holders pursuant to the exercise of their registration rights, these sales may
have an adverse effect on our ability to raise needed capital. See "Shares
Eligible for Future Sale" beginning on page 59 for further details regarding the
number of shares eligible for sale in the public market after this offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including the risks outlined under "Risk Factors" beginning on page 5 and
elsewhere in this prospectus.
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<PAGE> 18
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 6,250,000 shares of
common stock we are offering at an assumed initial public offering price of $14
per share (the midpoint of the filing range) will be approximately $80.2
million, or $92.4 million if the underwriters exercise their over-allotment
option in full, after deducting underwriting discounts and commissions, and
after deducting our estimated offering expenses.
The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock, and to enhance our ability to
acquire businesses, products or technologies through the use of our common
stock. We expect to use the net proceeds of this offering primarily to fund
operating losses and for working capital and other general corporate purposes,
including increased expenditures for research and development and sales and
marketing, as well as capital expenditures, to implement our business
strategies. No specific amount has been allocated to any particular purpose. In
addition, we may use a portion of the net proceeds for the acquisition of
businesses, products and technologies that are complementary to ours. However,
we have no current plans, agreements or commitments and are not currently
engaged in any negotiations with respect to any acquisition. Pending these uses,
we intend to invest the net proceeds of this offering in investment grade,
interest-bearing securities.
Our management will have considerable discretion in the application of the
net proceeds of 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
increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that lose value.
DIVIDEND POLICY
We have never paid or declared 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 our board of directors and will be dependent upon our financial condition,
results of operations, capital requirements, general business condition and any
other factors that the board may deem relevant.
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<PAGE> 19
CAPITALIZATION
The following table shows our capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of preferred stock into 22,651,937 shares of common stock; and
- on a pro forma as adjusted basis to reflect the sale of 6,250,000 shares
of common stock in this offering and the application of the estimated net
proceeds of $80.2 million, after deducting underwriting discounts and
commissions and our estimated offering expenses.
The outstanding share information excludes (1) 4,188,782 shares of common
stock issuable upon the exercise of options outstanding as of June 30, 2000 with
a weighted average exercise price of $2.11 per share, (2) 347,000 shares of
common stock issuable upon the exercise of warrants outstanding as of June 30,
2000 with a weighted average exercise price of $10.52 per share, and (3) 90,468
shares of common stock reserved for additional option grants under our stock
option plans as of June 30, 2000, and (4) additional shares of common stock
issuable upon conversion of outstanding preferred stock in respect of dividends
accruing after June 30, 2000. You should read this table together with our
financial statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds" appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, less current portion........................ $ 37 $ 37 $ 37
Redeemable convertible preferred stock $.01 par value;
actual -- 8,977,984 shares authorized, 8,755,920 shares
issued and outstanding; pro forma and pro forma as
adjusted -- no shares authorized, issued or outstanding... 58,383 -- --
Stockholders' equity (deficit):
Preferred stock, $.01 par value; actual -- 1,022,016 shares
authorized, no shares issued and outstanding; pro forma
and pro forma as adjusted -- 10,000,000 shares authorized,
no shares issued or outstanding...........................
Common stock, $.0025 par value; actual -- 37,908,000 shares
authorized, 11,688,750 shares issued and outstanding, pro
forma -- 37,908,000 authorized, 34,340,687 shares issued
and outstanding; pro forma as adjusted -- 37,908,000
shares authorized, 40,590,687 issued and outstanding...... 30 86 101
Additional paid-in capital.................................. 4,560 62,887 143,047
Accumulated deficit......................................... (24,841) (24,841) (24,841)
Treasury stock.............................................. (200) (200) (200)
Deferred stock compensation................................. (4,883) (4,883) (4,883)
Accumulated comprehensive loss.............................. (37) (37) (37)
-------- -------- --------
Total stockholders' equity (deficit)................... (25,371) $ 33,012 113,187
-------- -------- --------
Total capitalization................................... $ 33,049 $113,224
======== ========
</TABLE>
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<PAGE> 20
DILUTION
The pro forma net tangible book value of our common stock as of June 30,
2000, was approximately $33.0 million, or $0.96 per share of common stock. Pro
forma net tangible book value per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities, divided by
34,340,687 shares of common stock outstanding after giving effect to the
conversion of all outstanding shares of preferred stock into shares of common
stock upon completion of this offering. After giving effect to our sale of
6,250,000 shares of common stock in this offering at an assumed initial offering
price of $14 per share and after deducting the estimated underwriting discounts
and commissions and our estimated offering expenses, our net tangible book value
as of June 30, 2000, would have been $113 million or $2.79 per share. This
represents an immediate increase in net tangible book value of $1.83 per share
to existing stockholders and an immediate dilution in net tangible book value of
$11.21 per share to purchasers of common stock in this offering, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $14.00
Pro forma net tangible book value per share as of June 30,
2000................................................... $0.96
Increase in pro forma net tangible book value per share
attributable to new investors from this offering....... 1.83
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.79
------
Dilution per share to new investors......................... $11.21
======
</TABLE>
The following table sets forth on a pro forma basis, as of June 30, 2000,
the number of shares of common stock purchased from us, the total consideration
paid or to be paid to us, and the average price per share paid or to be paid by
existing stockholders and by new investors, before deducting 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............... 34,340,687 84.6% 56,908,800 39.4% $ 1.66
New investors....................... 6,250,000 15.4 87,500,000 60.6 14.00
---------- ----- ----------- ----- ------
Total..................... 40,590,687 100.0% 144,408,800 100.0% $ 3.56
========== ===== =========== ===== ======
</TABLE>
The table above excludes (1) 4,188,782 shares of common stock issuable upon
the exercise of options outstanding as of June 30, 2000 with a weighted average
exercise price of $2.11 per share, (2) 347,000 shares of common stock issuable
upon the exercise of warrants outstanding as of June 30, 2000 with a weighted
average exercise price of $10.52 per share, (3) 90,468 shares of common stock
reserved for additional option grants under our stock option plans as of June
30, 2000 and (4) additional shares of common stock issuable upon conversion of
our outstanding preferred stock in respect of dividends accruing after June 30,
2000. To the extent outstanding options or warrants are exercised, there will be
further dilution to new investors. See "Management -- Stock Option Plans" on
page 46 and note 9 to our financial statements.
16
<PAGE> 21
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the period from September
10, 1997 (inception) through December 31, 1997 and for the years ended December
31, 1998 and 1999, and the balance sheet data at December 31, 1998 and 1999 are
derived from audited financial statements included elsewhere in this prospectus.
The statement of operations data for the six months ended June 30, 1999 and 2000
and the balance sheet data at June 30, 2000 are derived from unaudited financial
statements included elsewhere in this prospectus. 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 for these periods.
Historical results are not necessarily indicative of results that may be
expected for any future period. The balance sheet data at December 31, 1997 is
derived from audited financial statements not included in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 10,
1997) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------ -------------------
1997 1998 1999 1999 2000
-------------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $ -- $ -- $ 4,278 $ 402 $ 12,933
Cost of revenue.......................... -- -- 2,839 337 9,556
---------- ------- -------- -------- --------
Gross profit............................. -- -- 1,439 65 3,377
Operating expenses:
Research and development, excluding
stock compensation amortization
amounts(1).......................... 111 3,717 6,718 3,021 5,528
Sales and marketing, excluding stock
compensation amortization
amounts(1).......................... 73 799 3,209 1,292 3,562
General and administrative, excluding
stock compensation amortization
amounts(1).......................... 125 611 1,251 484 961
Amortization of stock
compensation(1)..................... -- -- 42 -- 373
Stock and warrant issuance costs....... -- -- -- -- 2,306
---------- ------- -------- -------- --------
Total operating expenses....... 309 5,127 11,220 4,797 12,730
---------- ------- -------- -------- --------
Loss from operations..................... (309) (5,127) (9,781) (4,732) (9,353)
---------- ------- -------- -------- --------
Other income, net........................ 16 16 452 92 1,056
---------- ------- -------- -------- --------
Net loss................................. (293) (5,111) (9,329) (4,640) (8,297)
Accretion of transaction costs and
accrued dividends on redeemable
convertible preferred stock............ -- (367) (2,589) (482) (2,748)
---------- ------- -------- -------- --------
Net loss applicable to common
shareholders........................... $ (293) $(5,478) $(11,918) $ (5,122) $(11,045)
========== ======= ======== ======== ========
Basic and diluted net loss per share..... $ (0.05) $ (0.48) $ (1.01) $ (0.43) $ (0.95)
========== ======= ======== ======== ========
Shares used in computing net loss per
share.................................. 5,742 11,389 11,789 11,958 11,601
========== ======= ======== ======== ========
Pro forma basic and diluted net loss per
share(2)............................... $ (0.38) $ (0.26)
======== ========
Shares used in computing pro forma basic
and diluted net loss per share(2)...... 24,251 32,462
======== ========
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(1) AMORTIZATION OF STOCK COMPENSATION AMOUNTS:
Research and development............. $ -- $ -- $ 5 $ -- $ 152
Sales and marketing.................. -- -- 35 -- 186
General and administrative........... -- -- 2 -- 35
---------- ------- -------- -------- --------
$ -- $ -- $ 42 $ -- $ 373
========== ======= ======== ======== ========
</TABLE>
(2) Pro forma net loss per share for the year ended December 31, 1999 and the
six months ended June 30, 2000 is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the
automatic conversion of our outstanding preferred stock into shares of
common stock effective upon the completion of this offering as if such
conversion occurred on January 1, 1999, or at date of original issuance, if
later.
17
<PAGE> 22
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------ AS OF JUNE 30,
1997 1998 1999 2000
------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 98 $ 1,449 $33,012 $ 5,464
Working capital............................ 23 3,916 35,069 20,082
Total assets............................... 368 6,451 41,695 43,952
Long-term debt, less current portion....... 263 286 98 37
Redeemable convertible preferred stock..... -- 10,593 55,517 58,383
Total stockholders' deficit................ (122) (5,478) (17,475) (25,371)
</TABLE>
18
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with our financial statements and
related notes appearing elsewhere in this prospectus.
OVERVIEW
We design and market a line of broadband access platforms to
telecommunications service providers. Our compact and software-configurable
products enable our customers to transmit voice, data and multimedia
communications traffic more rapidly and cost-effectively while preserving their
investments in existing communications systems.
From our inception in September 1997 through the fourth quarter of 1998, we
were a development stage company and had no revenue and our operating activities
related primarily to research and development, developing and testing prototype
products, building our technical support infrastructure, staffing our marketing,
sales and customer service organizations, and establishing relationships with
suppliers, manufacturers and potential customers. We commenced shipments of our
products in the first quarter of 1999. Since our inception, we have incurred
significant losses, and as of June 30, 2000, we had an accumulated deficit of
$24.8 million.
We derive our revenue from sales of our line of broadband access platforms.
We generally recognize revenue from product sales upon shipment provided that a
purchase order has been received or a contract has been executed, there are no
significant uncertainties regarding customer acceptance, the fee is fixed and
determinable and collectibility is deemed probable. If our arrangement with the
customer includes obtaining customer acceptance, revenue is recognized when
customer acceptance has been received.
We market and sell our products primarily through a direct sales and
marketing organization and, to a lesser extent through resellers and original
equipment manufacturers. We depend on a relatively small number of customers for
a large percentage of our revenue in any particular quarter. For the year ended
December 31, 1999, two customers accounted for 22% and 53% of our revenue. These
same customers accounted for 11% and 10% of our revenue for the six months ended
June 30, 2000, while Broadband Office accounted for 53% of our revenue for the
six months ended June 30, 2000. While the level of sales to any specific
customer is anticipated to vary from period to period, we expect that we will
continue to have significant customer concentration in the foreseeable future.
In addition to the customer concentration we have experienced, we have a lengthy
sales cycle for our products, which may extend for six months or more, and there
is often a significant delay between the time we incur expenses and the time we
realize the related revenue. Moreover, we have historically derived a
significant portion of our revenue from sales that occur near the end of a
fiscal quarter. As a result, delays in anticipated sales are more likely to
result in a deferral of the associated revenue beyond the end of a particular
quarter, which could have a significant impact on our operating results for that
quarter.
Despite increased revenues, we have not achieved profitability on a
quarterly or an annual basis, and anticipate that we will continue to incur net
losses. We expect to continue to incur significant sales and marketing, research
and development and general and administrative expenses and, as a result, we
will need to generate significant revenues to achieve and maintain
profitability.
Our cost of revenue includes all costs associated with the production of
our products, including cost of materials, manufacturing and assembly costs paid
to contract manufacturers, manufacturing start-up expenses and manufacturing
personnel, including related overheads. Because we outsource our manufacturing
and assembly requirements, a significant portion of our manufacturing expenses
consist of payments to third-party contract manufacturers. Manufacturing
engineering and documentation controls are performed at our facility in Vienna,
Virginia. During the fourth quarter of 1999 and the first six months of 2000 we
engaged a new contract manufacturer, Benchmark Electronics, and modified our
manufacturing arrangements to increase the scope of activities outsourced. Prior
to that time, we retained responsibility for negotiating with various suppliers
and purchasing product components, and the responsibility of our manufacturer
was limited to
19
<PAGE> 24
assembling and testing the products. Under our present turnkey arrangements, we
have outsourced a number of additional tasks for which we had previously been
responsible, including:
- determining the supply of components necessary to build the product;
- negotiating with, and ordering components from, suppliers; and
- purchasing and maintaining an inventory of product components.
Our gross margin for the fourth quarter of 1999 and the first six months of
2000 was negatively affected by:
- increased manufacturing costs associated with (1) early production of one
of our products, the A-1240, which at such time was our most complex
product, and (2) the changes in our manufacturing process described
above; and
- strategic price reductions implemented to penetrate a high volume, high
growth target market, which we believe will continue to account for a
major portion of our revenue for the next few quarters.
We expect that continued increases in production volumes and further
improvement in the design of the A-1240 will allow more efficient production of
the product and will continue to improve margins in comparison to the margins we
experienced in the first six months of 2000. We also expect our new
manufacturing arrangements to contribute to improved margins in the near future
as Benchmark becomes more familiar with our products and we begin to benefit
from additional purchasing power as a result of increases in production volume.
In addition, as our products gain acceptance in new target markets, we expect
our margins to benefit from reduced costs due to volume and product design
changes and from pricing changes.
We believe that our gross margins will continue to be affected primarily by
the following factors:
- price declines as a result of competitive pressures, increased sales
discounts, new product introductions by our competitors, or other factors
without corresponding cost reductions;
- the mix of sales channels through which our products and services are
sold, as we generally realize higher gross margin on direct sales, in
particular since our expansion into international markets means we will
rely more on sales to resellers and original equipment manufacturers;
- the mix of product configurations sold, as the software options available
to our customers generally have a higher gross margin than hardware
components; and
- the volume of manufacturing and the effect on manufacturing and component
costs as we attempt to continue to manage the costs of necessary
components and our arrangements with our contract manufacturers.
Research and development expenses consist primarily of salaries and related
personnel costs, prototype costs and other costs related to the design,
development, testing and enhancement of our products. To date, we have expensed
our research and development costs as they were incurred. Several components of
our research and development effort require significant expenditures, the timing
of which can cause quarterly variability in our expenses. We incur significant
expenses in connection with the purchase of testing equipment for our products.
We believe that research and development is critical to our strategic product
development objectives and intend to enhance our technology to meet the changing
requirements of our customers. As a result, in the future, we expect our
research and development expenses to increase in absolute dollars, but decline
as a percentage of revenue.
Sales and marketing expenses consist primarily of salaries and related
personnel costs, commissions, promotional, travel and other marketing expenses
and recruiting expenses. We intend to increase our direct sales efforts, expand
our operations internationally, hire additional sales and marketing personnel,
initiate additional marketing programs and establish sales offices in new
locations. As a result, in the future, we expect our sales and marketing
expenses to increase in absolute dollars, but decline as a percentage of
revenue.
20
<PAGE> 25
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, legal, facilities, human resources and
information technology personnel, recruiting expenses and professional fees. We
expect our general and administrative expenses to increase in absolute dollars
as we add personnel and incur additional costs related to the growth of our
business and our operation as a public company.
Amortization of stock compensation represents the amortization of costs
incurred in connection with option grants whose exercise prices are below the
deemed fair value of our common stock at the date of grant. These costs are
amortized over the vesting period which represents the period to which the
employees' services related.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Revenue. Our revenue increased by approximately $12.5 million, from
$402,000 for the six months ended June 30, 1999 to $12.9 million for the six
months ended June 30, 2000. This increase was due principally to an increase in
sales of our A-1000, A-2000 and A-1240 products to new customers.
Cost of Revenue. Cost of revenue increased by approximately $9.2 million,
from $337,000 for the six months ended June 30, 1999 to $9.6 million for the six
months ended June 30, 2000. Our gross margin increased from 16% to 26%,
primarily due to the significant increase in sales volume which exceeded the
growth in manufacturing overhead costs. The margin growth resulting from the
decrease in overhead costs as a percentage of revenue was partially offset by an
increase in the level of discounts granted to customers to penetrate a new
market segment and an increase in materials and assembly costs resulting from
changes in our manufacturing arrangements.
Research and Development Expenses. Our research and development expenses
increased by approximately $2.5 million, or 83%, from $3.0 million for the six
months ended June 30, 1999 to $5.5 million for the six months ended June 30,
2000, representing 63% and 43% of total operating expenses for the six months
ended June 30, 1999 and 2000, respectively. The increase was due principally to
an increase in the number of research and development personnel and related
costs associated with the development of new products such as the A-3010,
A-4000, A-5040 and the A-7010 and new features and functionality of the A-1000,
A-1240 and the A-2000.
Sales and Marketing Expenses. Our sales and marketing expenses increased
by approximately $2.3 million, or 177%, from $1.3 million for the six months
ended June 30, 1999 to $3.6 million for the six months ended June 30, 2000,
representing 27% and 28% of total operating expenses for the six months ended
June 30, 1999 and 2000, respectively. The increase was due principally to the
hiring of additional sales and marketing personnel, sales-based commissions and
marketing program costs including web development costs, trade shows,
advertising and product launch activities.
General and Administrative Expenses. Our general and administrative
expenses increased by $477,000, or 99%, from $484,000 for the six months ended
June 30, 1999 to $961,000 for the six months ended June 30, 2000, representing
10% and 8% of total operating expenses for the six months ended June 30, 1999
and 2000, respectively. This increase was due to the hiring of additional
general and administrative personnel and increased expenses necessary to support
our growing operations.
Other Income, Net. Other income, net of expenses increased by $964,000, or
1048%, from $92,000 for the six months ended June 30, 1999 to $1.1 million for
the six months ended June 30, 2000. Other income, net consists of interest
earned on our cash balances and marketable securities and interest expense
associated with our bank debt. The increase in other income, net was primarily
due to higher interest income as a result of increases in invested balances
during 2000.
Stock and Warrant Issuance Costs. Stock and warrant issuance costs
represent expenses incurred in connection with the issuance of warrants to
existing or potential customers. In March 2000, in connection with the signing
of a purchase agreement, we issued to Intermedia Communications, Inc. a warrant
to purchase
21
<PAGE> 26
125,000 shares of our common stock at an exercise price of $15.00 per share.
Under the original warrant agreement, the warrant vested and became exercisable
as product payments were made. In June 2000, we amended and restated the warrant
agreement to provide for immediate vesting of the warrant and to permit
Intermedia to exercise the warrant after seven years, or earlier depending on
the timing and amount of products purchased. We accounted for the warrant as a
cost of establishing a relationship with a potential customer and recorded a
one-time charge of $1.0 million in June 2000. We determined the cost associated
with the warrant under the Black-Scholes option pricing model using the
following assumptions: volatility of 70%; risk-free interest rate of 6.3%;
dividend rate of 0%; and term of seven years.
In June 2000, in connection with the signing of a purchase agreement, we
issued to Broadband Office a warrant to purchase 222,000 shares of our common
stock at an exercise price of $8.00 per share. The warrant vests immediately and
is exercisable at any time over the next 36 months. We accounted for this
warrant as a cost of developing a long-term business relationship with this
customer. Therefore, in June 2000, we recognized a one-time charge of $1.3
million. The amount of the charge was determined using the Black-Scholes option
pricing model and the following assumptions: volatility of 70%; risk-free
interest rate of 6.0%; dividend rate of 0%; and term of three years.
Net Operating Loss Carryforwards. As of June 30, 2000, we had
approximately $22.8 million of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. See "-- Net Operating Loss Carryforwards" on page 24 below.
YEARS ENDED DECEMBER 31, 1998 AND 1999
Revenue. We did not generate any revenue in 1998. In 1999 our revenue was
$4.3 million from sales of our A-1000, A-2000 and A-1240 products.
Cost of Revenue. We did not incur any cost of revenue in 1998. In 1999 our
cost of revenue was $2.8 million, and our gross margin was 34%.
Research and Development Expenses. Our research and development expenses
increased by approximately $3.0 million, or 81%, from $3.7 million in 1998 to
$6.7 million in 1999, representing 72% and 60% of total operating expenses for
1998 and 1999, respectively. The increase in research and development expenses
was due principally to an increase in the number of research and development
personnel and related costs associated with the development of the A-1000,
A-1240, A-2000, A-3010 and A-4000 products as well as enhancements to the
features and functionality of those products.
Sales and Marketing Expenses. Our sales and marketing expenses increased
by approximately $2.4 million, or 302%, from $799,000 in 1998 to $3.2 million in
1999, representing 16% and 29% of total operating expenses for 1998 and 1999,
respectively. The increase in sales and marketing expenses reflects the hiring
of additional sales and marketing personnel, sales based commissions and
marketing program costs including web development costs, trade shows,
advertising and product launch activities.
General and Administrative Expenses. Our general and administrative
expenses increased by approximately $640,000, or 105%, from $611,000 in 1998 to
$1.3 million in 1999, representing 12% and 11% of total operating expenses for
1998 and 1999, respectively. The increase was due to the hiring of additional
general and administrative personnel and expenses necessary to support our
growing operations.
Other Income, Net. Other income, net of expenses increased by
approximately $436,000 from $16,000 in 1998 to $452,000 in 1999. Other income,
net consists of interest earned on our cash balances and marketable securities
and interest expense associated with our bank debt. The increase in other
income, net was primarily due to higher interest income as a result of increases
in invested balances during 1999, partially offset by increased interest expense
on bank debt.
Net Operating Loss Carryforwards. As of December 31, 1999, we had
approximately $14.7 million of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. See "-- Net Operating Loss Carryforwards" on page 24 below.
22
<PAGE> 27
INCEPTION THROUGH DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
From our inception in September 1997 through the end of 1998, we recognized
no revenue and incurred no cost of revenue. Our operating expenses were $309,000
for the period from inception through December 31, 1997. Our operating
activities during this period related primarily to research and development,
developing and testing prototype products, building our technical support
infrastructure, staffing our marketing, sales and customer service
organizations, and establishing relationships with suppliers, manufacturers and
potential customers. As a result, we believe that a discussion of our results of
operations for the period from inception through December 31, 1997 compared to
our results of operations for the year ended December 31, 1998 would not be
meaningful.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for each of our last six quarters, selected
data from our statement of operations and such data as a percentage of revenue.
The information for each of these quarters is unaudited and has been prepared on
the same basis as the audited financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments consisting
only of normal recurring adjustments have been included to present fairly the
unaudited quarterly results when read in conjunction with our audited financial
statements and the related notes appearing elsewhere in this prospectus. The
operating results for any quarter are not necessarily indicative of the results
of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- --------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................ $ 186 $ 216 $ 1,201 $ 2,675 $ 4,994 $ 7,939
Cost of revenue.................... 161 176 727 1,775 3,777 5,779
--------- --------- ------- ------- ------- -------
Gross profit..................... 25 40 474 900 1,217 2,160
Operating expenses:
Research and development,
excluding stock compensation
amortization amounts(1)....... 1,410 1,611 1,548 2,149 2,651 2,877
Sales and marketing, excluding
stock compensation
amortization amounts(1)....... 561 731 698 1,219 1,453 2,109
General and administrative,
excluding stock compensation
amortization amounts(1)....... 238 246 397 370 476 485
Amortization of stock
compensation(1)............... -- -- -- 42 109 264
Stock and warrant issuance
costs......................... -- -- -- -- -- 2,306
--------- --------- ------- ------- ------- -------
Total operating
expenses............... 2,209 2,588 2,643 3,780 4,689 8,041
--------- --------- ------- ------- ------- -------
Loss from operations............... (2,184) (2,548) (2,169) (2,880) (3,472) (5,881)
Other income, net.................. 75 17 19 341 604 452
--------- --------- ------- ------- ------- -------
Net loss........................... $(2,109) $(2,531) $(2,150) $(2,539) $(2,868) $(5,429)
========= ========= ======= ======= ======= =======
</TABLE>
23
<PAGE> 28
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- --------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.................... 86.6 81.5 60.5 66.4 75.6 72.8
--------- --------- ------- ------- ------- -------
Gross profit..................... 13.4 18.5 39.5 33.6 24.4 27.2
Operating expenses:
Research and development,
excluding stock compensation
amortization amounts(1)....... 758.1 745.8 128.9 80.3 53.1 36.2
Sales and marketing, excluding
stock compensation
amortization amounts(1)....... 301.6 338.4 58.1 45.6 29.1 26.6
General and administrative,
excluding stock compensation
amortization amounts(1)....... 128.0 113.9 33.1 13.8 9.5 6.1
Amortization of stock
compensation(1)............... -- -- -- 1.6 2.2 3.3
Stock and warrant issue costs.... -- -- -- -- -- 29.0
--------- --------- ------- ------- ------- -------
Total operating
expenses............... 1,187.7 1,198.1 220.1 141.3 93.9 101.2
--------- --------- ------- ------- ------- -------
Loss from operations............... (1,174.3) (1,179.6) (180.6) (107.7) (69.5) (74.0)
Other income, net.................. 40.3 7.9 1.6 12.7 12.1 5.7
--------- --------- ------- ------- ------- -------
Net loss........................... (1,134.0)% (1,171.7)% (179.0)% (94.9)% (57.4)% (68.3)%
========= ========= ======= ======= ======= =======
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) AMORTIZATION OF STOCK
COMPENSATION AMOUNTS:
Research and development...... $ -- $ -- $ -- $ 5 $ 42 $ 110
Sales and marketing........... -- -- -- 35 59 127
General and administrative.... -- -- -- 2 8 27
--------- --------- ------- ------- ------- -------
$ -- $ -- $ -- $ 42 $ 109 $ 264
========= ========= ======= ======= ======= =======
</TABLE>
Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. In addition, we plan to
increase significantly 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 capabilities to address the increased
reporting and other administrative demands which will result from becoming a
public company and the growth 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. As a result, any
delay in generating or recognizing revenue could cause significant variations in
our operating results from quarter to quarter and could result in substantial
operating losses. 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 one quarter as any indication of
our future performance. In future quarters, if our operating results are below
the expectations of public market analysts and investors, the price of our
common stock will probably decrease.
NET OPERATING LOSS CARRYFORWARDS
Our state and federal net operating loss carryforwards begin to expire in
2004 and 2012, respectively, to the extent that they are not used. We have not
recognized any benefit from the future use of loss carryforwards for these
periods, or for any other periods, since inception. Management's evaluation of
the available evidence in assessing realizability of the tax benefits of such
loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize
24
<PAGE> 29
the tax benefits currently. The net operating loss carryforwards could be
limited in future years if there is a significant change in our ownership.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through private sales
of securities and, to a lesser extent, bank borrowings and equipment lease
financing. We have raised an aggregate of $53.1 million, net of offering
expenses, through the sale of our capital stock.
Net cash used in operating activities for the six months ended June 30,
2000 was $6.4 million. Net cash used in operating activities for the period from
inception through December 31, 1997 and for the years ended December 31, 1998
and 1999 was $126,000, $4.2 million and $12.7 million, respectively. Net cash
used in operating activities for each period consists primarily of the net loss
for the period as well as increases in accounts receivable and inventory for
both the year ended December 31, 1999 and the six months ended June 30, 2000.
Net cash used in investing activities for the six months ended June 30,
2000 was $21.7 million. Net cash provided by investing activities for the year
ended December 31, 1999 was $2.2 million. Net cash used in investing activities
was $275,000 for the period from inception through December 31, 1997 and $4.9
million for the year ended December 31, 1998. Net cash used in investing
activities for all periods consisted primarily of purchases of marketable
securities as well as purchases of property and equipment. Net cash provided by
investing activities consisted of proceeds from the sale of marketable
securities.
Net cash provided by financing activities for the three months ended June
30, 2000 was $604,000. Net cash provided by financing activities for the period
from inception through December 31, 1997 and for the years ended December 31,
1998 and 1999 was $499,000, $10.5 million and $42.0 million, respectively. For
each period, the net cash provided by financing activities consists primarily of
proceeds from the issuance of our capital stock.
We have no material commitments other than obligations under our credit
facilities and both operating and capital leases.
As of June 30, 2000, our principal source of liquidity consisted of $25.5
million in cash, cash equivalents and marketable securities. Our management
intends to invest our cash in excess of current operating requirements in
short-term, interest-bearing, investment-grade securities. The development and
marketing of new and enhanced products and the expansion of our sales channels
and associated support personnel will require a significant commitment of
resources. Our future capital requirements will depend upon a number of factors,
including the rate of growth of our sales, the timing and level of research and
development activities and sales and marketing campaigns. As of June 30, 2000,
we did not have any material commitments for capital expenditures. However, we
expect to incur capital expenditures as we expand our operations in the near
future. Although we do not have any current plans or commitments to do so, from
time to time, we may also consider the acquisition of, or evaluate investments
in, products and businesses complementary to our business. Any acquisition or
investment may require additional capital.
Although it is difficult for us to predict future liquidity requirements
with certainty, we believe that the net proceeds from this offering, together
with our current cash, cash equivalents and marketable securities will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. We may require additional capital
to fund our business if we seek to acquire complementary companies, products or
technologies, or for other uses not presently planned. In addition, if the
market for broadband access equipment develops at a slower pace than anticipated
or if we fail to establish significant market share and achieve a meaningful
level of revenue, we may continue to incur significant operating losses and
utilize significant amounts of capital. As a result, we could be required to
raise substantial additional capital. If cash from other available sources is
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities. If additional funds are raised through the
issuance of debt securities, these securities could have rights, preferences and
privileges senior to holders of common stock, and the terms of this debt could
impose restrictions on our operations and cause us to incur significant interest
expense. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. Additional capital may not be
available to us at all, or if available, may be available only on unfavorable
terms.
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<PAGE> 30
Any inability to raise additional capital when we require it would materially
adversely affect our business, results of operations and financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, we had investments in marketable securities of $20.1
million. All of these securities consisted of highly liquid investments. Of the
total, $11.2 million was for marketable securities with remaining maturities at
the date of purchase of less than 365 days, the balance of the securities or
$8.9 million had remaining maturities at the date of purchase of 365 days or
greater. These investments are subject to interest rate risk and will decrease
in value if market interest rates increase. A hypothetical increase or decrease
in market interest rates by 10% from the June 30, 2000 rates would not cause a
material change in the fair value of these short-term investments. We have the
ability to hold these investments until maturity, and therefore we do not expect
the value of these investments to be affected to any significant degree by the
effect of a sudden change in market interest rates. Declines in interest rates
over time will, however, reduce our interest income.
As of June 30, 2000, we did not own any equity investments. Therefore, we
did not have any material equity price risk.
Substantially all of our revenue is currently realized in U.S. dollars. In
addition, we do not maintain significant asset or cash account balances in
currencies other than the United States dollar. Therefore, we do not believe
that we currently have any significant direct foreign currency exchange rate
risk. In the future, a portion of our international sales may be denominated in
currencies other than U.S. dollars, which would then expose us to gains and
losses based upon exchange rate fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that entities capitalize costs related to internal-use software. We
were required to implement SOP No. 98-1 for the year ended December 31, 1999.
The adoption of SOP No. 98-1 did not have a material impact on our financial
position, results of operations or cash flows.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, SOP No. 98-5 requires
that all start-up costs that were capitalized in the past must be written off.
We were required to implement SOP 98-5 for the year ended December 31, 1999. The
adoption of SOP No. 98-5 did not have a material impact on our financial
position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because we currently
hold no derivative instruments and do not engage in hedging activities, we
expect that the adoption of SFAS No. 133 will not have a material impact on our
financial position, results of operations or cash flows. We will be required to
implement SFAS No. 133 for the year ending December 31, 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101. This summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition principles comply with SAB 101.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25." This interpretation is
generally effective for applicable transactions beginning July 1, 2000. We do
not expect this interpretation to have a material impact on our financial
statements.
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BUSINESS
OVERVIEW
Advanced Switching Communications, Inc. designs and markets a line of
broadband access platforms to telecommunications service providers. Our compact
and software-configurable products enable our customers to transmit voice, data
and multimedia communications traffic more rapidly and cost-effectively while
preserving their investments in existing communications systems. Our products
are deployed at central offices, points of presence or multi-tenant office
buildings that comprise the entry points to a service provider's access network.
By extending the benefits of packet technology beyond the network core, our
products reduce transmission and operating costs, increase the efficiency of
core network equipment, provide access to optical networks and allow our
customers to develop networks for broadband services. We market our products to
telecommunications service providers worldwide, focusing on established as well
as emerging carriers, multi-tenant unit service providers and digital subscriber
line service providers.
INDUSTRY BACKGROUND
INTERNET AND DEREGULATION DRIVING DATA TRAFFIC AND CLEC GROWTH
Growth in broadband applications, such as Internet access, electronic
commerce, business usage of web-based communications, remote access for
teleworkers, application hosting and other services has generated enormous
growth in data traffic. This explosion of data traffic, coupled with existing
demand for voice traffic, is placing significant strains on the existing network
infrastructure. Meanwhile, worldwide deregulation of the telecommunications
industry has resulted in the emergence of new service providers who are building
advanced packet-based networks, which transport voice and data in small bundles,
or "packets." These networks use available network bandwidth more efficiently
than traditional circuit-switched telephone networks, which were designed for
voice traffic and built long before the advent of the Internet. Packet-based
networks offer a highly flexible, cost-effective and efficient means to provide
communications services, including data, voice and multimedia, and are
undergoing rapid expansion. In the United States, for example, the Association
for Local Telecommunications Services estimates in its year 2000 annual report
that more than 300 new competitive local exchange carriers, or CLECs, have
emerged since the passage of the Telecommunications Act of 1996 and are
investing, on average, over $1 billion per month in the aggregate on their
networks. In general, these competitive service providers seek to capture
opportunities in markets that larger incumbent service providers have generally
ignored, including small to medium sized-businesses and lower population density
markets. In response to deregulation and increased competition, incumbent
service providers worldwide are seeking to upgrade their existing networks to
enable them to provide broadband services that are comparable to the offerings
of competitive service providers. As a result, both incumbent and competitive
service providers are aggressively pursuing equipment solutions that allow them
to offer broadband services while capitalizing on their investment in existing
network infrastructure.
LIMITATIONS OF EXISTING LOCAL ACCESS NETWORKS
Telecommunications service providers typically situate high-speed packet
transmission equipment at the core or backbone of their networks, but rely on
voice-oriented technology for their access networks. Local access networks are
comprised of a system of central offices, facilities that serve as staging areas
for the delivery of telecom services to the end user. Commonly known as the
"last mile," access networks generally still use the copper infrastructure
originally built to transmit voice signals using technology known as analog. As
a result of the technological constraints of voice-oriented technology, existing
access network architectures consist of separate voice and data networks that
operate with different transmission protocols. These multiple or overlay
networks are unable to efficiently satisfy the demand for enhanced services.
While the bandwidth capabilities of local area networks (at customer premises)
and fiber-based core networks have dramatically
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increased, the access networks that link the two have not kept pace. Existing
access equipment alternatives do not adequately meet the needs of service
providers because:
- Traditional access equipment does not support broadband services.
- Existing packet-based solutions, known as edge switching equipment, that
do support broadband services are generally large, inflexible and costly
adaptations of core network products that are difficult to install,
operate and upgrade.
We believe that the size of the market for the type of access equipment
described above is best characterized by the edge aggregation market estimates
of RHK, a market research and consulting firm. According to RHK, the market for
edge aggregation is forecast to grow from $3.7 billion in 1999 to between $14.1
billion and $16.3 billion in 2003, a compound annual growth rate of between 39%
and 44%.
ACCESS EQUIPMENT REQUIREMENTS FOR BROADBAND SERVICE PROVIDERS
Deregulation and increased competition are forcing service providers to
invest in equipment that accelerates the delivery of broadband services to
customers. Service providers must reduce time-to-market, offer significant cost
advantages and provide differentiated and expanded service offerings in order to
win customers and gain market share. As a result, today's service providers
require multi-service access equipment with the following characteristics:
- Scalability. With demand for broadband services growing rapidly across
all market segments, service providers need equipment suitable for all of
their markets. In order for service providers to grow their customer base
and increase the breadth and number of available service offerings, this
equipment must scale in a linear fashion regardless of customer density.
- Multi-Service Protocol Support. Today's networks carry multiple
transmission types or protocols, including frame relay, asynchronous
transfer mode, or ATM, Internet protocol, and time division multiplexing,
or TDM. Global multi-billion dollar service markets have been built
around each of these protocols. Service providers require a solution that
adapts these multiple access protocols to a single packet-based network.
A unified solution can dramatically streamline provisioning, create
structural cost advantages and simplify network architectures.
- Cost Effectiveness. Service providers seek equipment with low initial
cost that will allow them to build their networks rapidly and target
customers and markets that may otherwise go unserved. In addition, widely
deployed equipment must allow service providers to maintain low operating
costs by minimizing the time and expense involved in provisioning and
upgrading services.
- Space and Other Physical Requirements. The demand for broadband services
is causing service providers to extend their networks closer to their
customers in larger numbers of central offices, points of presence and
new locations, such as basements of multi-tenant units. Space in these
locations is limited and expensive and may have insufficient power and
cooling capacity necessary to operate traditional networking equipment.
Equipment deployed at these sites must be compact and must have minimal
power and cooling requirements. However, this equipment must also comply
with the rigorous industry standards established for central office
equipment.
- Interoperability with Existing Systems. Service providers require
equipment that operates in conjunction with the exacting standards of
today's carrier network systems and preserves the value of their existing
networks. In addition, they seek a unified architecture that is not
easily disrupted and that will maximize the performance of their core
network equipment, such as switches and routers.
- Rapid Provisioning and Response Times. Competitors in today's
telecommunications market are racing to expand their networks and
increase their market share. Service providers require a solution that
enables them to rapidly offer reliable integrated services on a wide
scale. Once deployed, their equipment must support quick provisioning
times in response to end-user requests. Moreover, service providers need
equipment that can be remotely configured so that they can avoid sending
a technician
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to physically modify the equipment to add a new protocol or service or
change a customer's network configuration.
THE ASC SOLUTION
Our product line is focused exclusively on providing solutions at the local
access network level and enabling our customers to extend the high-speed
benefits of packet technology from their typically optical core networks into
local access applications. We have designed our product line to meet the
protocol flexibility, price-point, scalability and interoperability requirements
of broadband service providers worldwide. Our innovative products are easily
integrated into the access network architecture and offer the following benefits
and features:
- Enhanced Revenue Opportunities. Our scalable product design and our
multi-service capabilities help service providers generate additional
revenue by penetrating new markets and expanding the types of services
and variety of service packages they can offer and allowing them to
provision services more rapidly. The relatively low initial investment
required to deploy our equipment enables service providers to increase
revenue growth by rapidly building and expanding their network.
- Highly Scalable Product Architecture. By designing a product line that
scales from a single, stackable platform to a high density, multi-slot
chassis system, with a common software and hardware foundation, we allow
our customers to economically grow their access platform equipment as
their network requirements evolve. Our scalable product architecture
allows service providers to target small and medium sized markets that
are prohibitively expensive to service using other, less scalable
technologies.
- Multi-Service Capabilities. Our products' ports, which receive and
transmit data from physical access lines, are individually software
configurable to support various transmission protocols, including frame
relay, ATM, and TDM (for voice). Our products also support enhancements
to frame relay and ATM, known as multi-link frame relay and inverse
multi-plexing over ATM, respectively, that allow service providers to use
existing network capacity more efficiently and provide new broadband
services. By converting these protocols into a single network protocol,
we can significantly simplify a service provider's core network. In
addition, new protocols can be added through software instead of
hardware. Our software-configurable ports eliminate the need for service
providers to predetermine the number of ports dedicated to each specific
protocol or service. Service providers that use our products can remotely
configure ports for specific protocols when an end user requests service
to speed service provisioning. In addition, a service provider can change
a customer's service using software, with minimal service disruption and
without dispatching personnel to physically change a customer's
connection.
- Reduced Operating Costs. Our products aggregate multiple local access
lines with transmission speeds as low as 64 kilobits per second into
fewer higher-speed optical or electrical connections to the core network.
As a result, our products reduce the costs of building and operating the
core network by dedicating core equipment to a few high-speed, single
protocol connections rather than many lower speed, multi-protocol
connections. Additionally, converging access services into a single
network protocol eliminates the complexity and expense of deploying
multiple overlay networks for each protocol or service offered.
- Interoperability with Existing Systems. Since our products operate with
all leading core network components, service providers can preserve and
leverage the value of their existing investments. Our products utilize
industry standard protocols and have built-in software flexibility to add
new protocols as they are adopted and standardized in the marketplace.
- Space and Physical Design Advantages. The compact design and high port
density of our equipment means that it occupies minimal space at central
offices, multi-tenant office buildings, or other points of presence. In
addition, the lower power requirements and the low heat output of our
products allow service providers to deploy services to locations
previously excluded from the network because of the
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<PAGE> 34
physical limitations of the space. Finally, our products comply with
Network Equipment Building System, or NEBS, level 3 standards, the most
stringent network facility standard set forth by Bellcore for central
office equipment. This means that they can be deployed in virtually any
central office in a service provider's network.
STRATEGY
Our objective is to be the leading provider of broadband services access
platforms that enable service providers worldwide to provide integrated voice,
data and multimedia broadband services. To achieve our objective, we enable
service providers to continue building high-speed networks that extend packet
technology outward from the network core to the access network and thereby
eliminate the need for costly single-protocol overlay networks. Key elements of
our strategy include:
Broaden Customer Base Domestically and Internationally. We have won
strategic customer accounts in three market segments: next-generation carriers,
multi-tenant unit service providers and digital subscriber line service
providers. We plan to leverage this success to generate increased sales by
focusing global sales efforts on these key segments, publicizing early wins and
developing marketing materials and campaigns targeted at these segments. For
example, many next-generation carriers are positioning themselves to offer
integrated voice-data-multimedia services over a single network infrastructure,
while some are expanding and extending their packet-based networks to satisfy
customers' bandwidth and networking demands. We intend to capitalize on these
developments and broaden our focus by targeting groups within incumbent local
exchange carriers (ILECs), interexchange carriers, post telephone and telegraph
organizations abroad and other types of service providers building these
packet-based networks.
Leverage Technology Leadership from Access into Core. We believe we have
established a technology leadership position in the market for broadband access
platforms. Our broadband access platforms are designed for deployment in
hundreds or thousands of points of presence, central offices or multi-tenant
office buildings within a service provider's network. Once our products are
installed in a service provider's network, we can simplify its network
architecture and operations. To address evolving network needs, we will continue
to extend the capabilities of our product by leveraging our unique
software-upgradeable design to support new protocols, greater numbers of
end-users and higher speed optical connections, as well as enhanced switching
capabilities. Moreover, as we add new features and products, our solutions will
gradually assume more functionality previously relegated to core platforms,
extending our platforms into the core of service provider networks.
Provide Customers with a Smooth Migration Path to a New Generation of
Networks. Our product line is designed to support the current infrastructures
and protocols in the market with a software-based architecture that supports new
protocols and services without major hardware changes. Today, the predominant
network protocol used to provide integrated multi-protocol services is ATM. We
plan to leverage our flexible architecture to allow our customers to rapidly
capture market share using ATM as a network protocol and cost-effectively evolve
their networks to support the Internet protocol and optical-based services of
the future.
Expand Our Global Sales Efforts and Our Customer Service and Support
Capabilities. We primarily sell our products through our direct sales force. We
plan to expand our direct sales force domestically and internationally,
including expansion in Europe, Asia and Latin America which represented an
aggregate of 10% of our revenue in 1999. To support our direct sales efforts, we
will continue to develop relationships with multiple distribution partners,
systems integrators, resellers and original equipment manufacturers to help
build acceptance of our products. We plan to complement our product line by
expanding our professional service and support organization designed to ensure
effective product implementations and high levels of customer satisfaction.
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Continue to Outsource Product Manufacturing. Our manufacturing strategy is
based on the use of one or more contract manufacturers for the assembling,
testing, packaging, warehousing and shipping of our products. By continuing to
outsource the manufacturing of our products, we can continue to focus our
resources on product design and development, and executing sales and marketing
initiatives. In addition, outsourcing allows us to achieve economies of scale in
operating and purchasing while reducing the significant capital investments
required for manufacturing equipment and inventory management. Currently, we use
one primary contract manufacturer, Benchmark Electronics.
PRODUCTS
Our product family of broadband access platforms includes the A-1000,
A-2000, A-1240, A-3010 and A-4000. Our unique, scaleable architecture with
MultiStream technology provides cost effective access solutions at a variety of
port densities, large or small. Each of our compact, stackable platforms, the
A-1000, the A-2000, the A-1240, and the A-3010 operates as a complete
stand-alone system or as a card, or component, in the A-4000, which contains 18
slots to house these individual cards. The following table summarizes our
product line. All of the products set forth below are currently commercially
available, except the following, which are expected to be available in 2001:
- the A-4500, a multi-slot system with high-speed optical switching
capabilities;
- the A-5040, a card with four high-speed 155 Mbps (OC-3c) optical
connections; and
- the A-7010, a card with one high-speed 622 Mbps (OC-12c) optical
connection.
SINGLE-SLOT CHASSIS
<TABLE>
<CAPTION>
PRODUCT FIRST
NAME PROTOCOLS SUPPORTED AVAILABLE PORTS APPLICATIONS SHIPMENT
<S> <C> <C> <C> <C>
A-1000 ATM - 12 T1/E1 Low customer density points 1Q 1999
Frame Relay - 1 T3/E3 of presence.
Inverse Multiplexing over ATM (IMA)
Multilink frame relay (MFR)
ATM-frame relay conversion
A-2000 ATM - 4 T3/E3 Low customer density points 1Q 1999
Frame Relay - 1 OC-3c of presence or as
ATM-frame relay conversion aggregation platform behind
multiple A-1000s, A-1240s,
and A-3010s or other
equipment with T3/ E3
network connections.
A-1240 ATM - 24 T1/E1 Low to medium customer 3Q 1999
Frame Relay - 1 T3/E3 density points of presence.
IMA - 1 10/100 BaseT In-building points of
MFR Ethernet presence.
ATM-frame relay conversion
TDM (via ATM Circuit Emulation)
VLAN (over Ethernet)
A-3010 ATM - 28 T1/E1 (over Low to medium customer 3Q 2000
Frame Relay channelized T3/E3) density points of presence.
IMA - 1 T3/E3 (unchann.)
MFR - 1 10/100 BaseT
ATM-frame relay conversion Ethernet
TDM (via ATM Circuit Emulation)
VLAN (over Ethernet)
</TABLE>
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MULTI-SLOT CHASSIS
<TABLE>
<CAPTION>
PRODUCT FIRST
NAME PROTOCOLS SUPPORTED AVAILABLE PORTS APPLICATIONS SHIPMENT
<S> <C> <C> <C> <C>
A-4000 ATM - up to 392 T1/E1 Aggregation at high 2Q 2000
Frame Relay - 56 T3/E3 customer density points of
IMA - 4 OC-3c/ STM-1 or 16 presence and at sites used
MFR T3/E3 (scales to 16 to aggregate traffic from
ATM-frame relay conversion OC-3c/ STM-1 with multiple smaller points of
TDM (via ATM Circuit Emulation) A-5040 or 4 OC-12c/ presence or buildings.
STM-4 with A-7010 in
2001)
A-4500 IP/MPLS - 64 OC-3c or 16 OC-12c Switching at high customer Estimated
ATM alone initially density points of presence 2001
Frame Relay - Planned to scale to and at network hub sites.
IMA higher optical speeds
MFR and densities
ATM-frame relay conversion
TDM (via ATM Circuit Emulation)
Scales from speeds of DS-0 or 64
Kbps to OC-48 and OC-192 or 9.95
Gbps.
</TABLE>
TECHNOLOGY AND PRODUCT ARCHITECTURE
Our product architecture is designed to give service providers a platform
to offer broadband services today while providing a smooth migration path to the
new generation of networks.
SYSTEM-ON-A-CARD DESIGN
The fundamental building block of our broadband access systems is our
system-on-a-card design. We have engineered compact entry-level systems that
contain all of the components necessary for a service provider to deliver
broadband services. With traditional systems, customers must make a considerable
upfront investment in costly equipment before installing the components that
connect to end-users. Our customers can stack our individual sub-systems as the
number of their end-users grows, and eventually move to our chassis products
with considerably lower upfront costs than with traditional equipment. In
addition, the cards used in our standalone systems may be removed and inserted
into our A-4000 chassis, allowing our customers to preserve their initial
investments.
PROTOCOL INDEPENDENT PORTS
In traditional system architectures, the support of each service or
protocol is dependent on a separate hardware component. Many products were
designed to support a single type of service. Other products have incorporated
multiple services in a single system through separate physical components that
support different services when installed in the same chassis. Our universal
ports create a new paradigm by eliminating the need for hardware dedicated to
specific services. Through software, our universal ports can be remotely
configured for different services. Because they are protocol-independent and
software-configurable, our ports can greatly simplify network planning and
significantly reduce capital expenditures on hardware, as service providers no
longer need to install separate components for different services.
MULTI-SERVICE SWITCH FABRIC
We have designed a custom switch fabric explicitly for the needs of access
networks. Our fabric employs a proprietary network processor. Our network
processor is unique in that it natively supports both cell-based, or fixed
length, and frame-based, or variable length, packet-oriented protocols without
requiring conversion between the protocols. Since cell-based protocols are able
to prioritize traffic and ensure that time sensitive voice traffic is not
delayed, the predominant approach to providing integrated voice-data services in
today's access networks centers around cell-based protocols, such as ATM.
Because of the pervasiveness of the Internet and the growth in related traffic;
an eventual migration to an Internet protocol or variable length packet based
protocol is possible. Our products' switch fabric anticipates a migration to a
native Internet
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protocol approach. With native support of both cell- and frame-based packet
protocols, our switch fabric adapts to the needs of today's access networks,
while providing flexibility to evolve without major hardware modifications.
COMMON SOFTWARE ARCHITECTURE
Our software architecture is scalable and identical both for the
stand-alone and multi-slot chassis systems. One of our key-enabling features is
a high-performance and efficient software system that scales from a stackable to
a multi-slot chassis. This system supports distributed call control processing,
bandwidth resource allocation and network administration and management while
providing a common view of management information regardless of the size of the
system. Another key feature we have built into this design is a software system
that determines where specific functions occur either locally or remotely across
a system. Both of these software features preserve a consistent "look and feel"
to the user. This facilitates network management and service provisioning and
allows customers to preserve their investment in network management systems and
our existing hardware as they grow their network into higher densities and new
services.
MULTISTREAM TECHNOLOGY
Most local access networks are based on connections that come in two sizes:
T1/E1 or T3/E3. There is a large difference in capacity and cost between the
T1/E1, which represents 1.5/2.0 Mbps, and the T3/E3, which represents 45/34
Mbps. Moreover, service providers typically take longer to provision or deliver
T3/E3 connections. In many smaller markets these larger connections may not be
readily available. Our MultiStream technology bridges the capacity and cost gaps
between T1/E1 and T3/E3. This technology bundles multiple physical T1/E1s onto
one logical connection that operates like a single large "pipe." The total
capacity of a bundle equals the sum of the combined links. However, if one of
the T1/E1 connections should fail, the software adjusts the capacity downward
and continues using the remaining active T1/E1 lines, providing a built-in
source of network redundancy.
MultiStream employs bundling technology for both ATM traffic, which is
called inverse multiplexing over ATM, or IMA, and frame relay traffic, which is
called multi-link frame relay, or MFR. Because all of our product ports are
configured with software, we believe we are the only equipment provider who can
support both IMA bundles and MFR bundles simultaneously on the same card. In
addition, the software configurability of our broadband access platforms allows
the service provider to add T1/E1 connections and increase the connection size
without interrupting service.
Service providers can apply our MultiStream technology in two ways:
- End-user applications and services. Service providers can bundle
connections from the central office or point of presence to the end-user
to offer a menu of access speeds between a T1/E1 and a T3/E3.
- Internal service provider network connections. MultiStream technology
can also be applied to connections from the central office to the network
or between points of presence, allowing the service provider to (1) save
money and avoid wasted capacity with a bundled connection instead of a
T3/E3 and (2) speed time to market by utilizing more readily available
T1/E1 connections when a T3/E3 connection is unavailable or will not be
available for several months.
CUSTOMERS
We market to telecommunications and data communications service providers
worldwide. Customers that have purchased or committed to purchase in excess of
$100,000 of our products in the twelve months ended June 30, 2000 include:
AccessLan, BroadBand Office, Broadview Networks, Dishnet DSL, Intermedia
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Communications, Inc., mPower Communications, 2nd Century Communications, Urban
Media and UUNet. We focus on the following key service provider market segments:
NEXT-GENERATION CARRIERS
Emerging carriers, which we refer to as next-generation carriers, include
several different classifications of service providers including CLECs, Internet
service providers and other more traditional service providers. Next generation
carriers, however, are unified by their fundamental reliance on packet network
architectures to provide advanced broadband services. Next-generation carriers
are moving away from traditional voice-oriented architectures and extending
packet platforms into the far reaches of their networks. Many are driving to
offer integrated voice-data-multimedia services over a single network
infrastructure, while some are expanding and extending their data networks to
satisfy their customers' bandwidth and networking demands. Our broadband access
platforms can be used by next-generation carriers to extend their networks to
new locations, offer additional and differentiated services and migrate to an
advanced architecture. Our customers that are next-generation carriers include:
2nd Century Communications, Intermedia Communications Inc. and UUNet.
MULTI-TENANT UNIT SERVICE PROVIDERS
Multi-tenant unit service providers represent a relatively new class of
service provider that locates a point of presence or "mini-central office" in
the basement or wiring closet of a shared office building. By creating this
service aggregation point within a building, the multi-tenant unit service
provider is able to bypass the ILEC network, thereby eliminating the need to
rent space and place equipment at the ILEC's central office. As a result, the
multi-tenant unit service provider can deliver differentiated services to
building tenants with significant cost advantages compared to the ILEC and
improve customer responsiveness. While it may take several weeks for an end user
to obtain service from an ILEC's central office, once a multi-tenant unit
service provider has a point-of-presence in a building, an end-user in that
building can generally receive service in a matter of days. Many multi-tenant
unit service providers intend to use the in-building approach as leverage to
launch nationwide service delivery networks and as a platform for delivering
business application level services to end-users. Our products can be used by
multi-tenant unit service providers for in-building service delivery as well as
at metropolitan hubs and aggregation sites. We market to the class of
multi-tenant unit service providers that sell to the business market. Our
customers that are multi-tenant unit service providers include: BroadBand Office
and Urban Media.
DIGITAL SUBSCRIBER LINE SERVICE PROVIDERS
There has been significant investment over the past several years by
service providers offering broadband services using digital subscriber line
technology, a technology that provides high-speed access services over standard
copper telephone lines. These service providers place equipment, known as
digital subscriber line access multiplexers, or DSLAMs, at ILEC central offices
and connect residential or corporate customer access lines to these devices to
deliver broadband access. We market to digital subscriber line service providers
that are facilities based, meaning that they purchase and install their own
DSLAMs and network infrastructure, instead of reselling services from another
service provider. Our products can help carry the user's traffic from the DSLAM
or multiple DSLAMs into the service provider's core more cost-effectively. Our
customers that are digital subscriber line service providers include: Broadview
Networks, Dishnet DSL, mPower Communications and Network Plus (through an
original equipment manufacturing arrangement with AccessLan).
The following examples illustrate how organizations in our target markets
are using our products to deploy their broadband service offerings:
CLEC TARGETS NEW REVENUE OPPORTUNITIES THROUGH MULTISTREAM TECHNOLOGY
One of the country's largest CLECs wanted to offer customers a menu of
frame relay and ATM services with access speeds between 1.5 Mbps (T1) and 45
Mbps (T3) to increase market share and revenue.
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Traditionally, when end-user customers reach capacity on a T1 connection, their
options are limited: they can either purchase a T3 line, which would be
expensive and severely underutilized; or purchase costly proprietary equipment.
This CLEC chose our products as a way to bridge the T1-T3 gap and be first to
market in providing incremental frame relay and ATM bandwidth options between
1.5 Mbps and 45 Mbps. Currently, the CLEC is in the process of deploying our
stand-alone products such as the A-1240 in lower density sites and plans to
deploy the A-4000 in higher density sites.
NEXT-GENERATION CLEC OFFERS INTEGRATED SERVICES AT SIGNIFICANT COST
ADVANTAGE OVER INCUMBENT CARRIER
A next-generation CLEC wanted to build a local access network that did not
rely on existing infrastructure or equipment. It estimated that the cost of
building a packet-based network that supports both voice and data would be
approximately 60 percent less than a voice-oriented network. Traditionally,
network service providers have offered voice and data services over a
voice-oriented or TDM infrastructure. With TDM, voice and data services are
delivered to the customer through separate overlay networks. As a result,
bandwidth and equipment ports throughout the network must remain dedicated to
specific customer applications even when those applications are inactive. Our
customer sought to eliminate the need for separate overlay networks in order to
obtain the cost advantages and offer the enhanced services it needed to compete
with incumbents.
Our customer chose our products to play an integral role in its
infrastructure and deployed our stand-alone broadband access platforms in
central offices to aggregate traffic from multiple customers and create a single
network connection into the core network. Our products permit our customer's
network capacity and ports on core switches to be shared among different
applications and customers. In addition, the compact size of our broadband
access platforms reduces their space requirements. With a packet-oriented
network in place, our customer can offer integrated voice and data services over
existing connections without having to purchase traditional TDM and voice
switching equipment. As a result, our customer can compete aggressively against
incumbents and offer unique services.
MULTI-TENANT UNIT SERVICE PROVIDER ATTACKS SMALL-MEDIUM BUSINESS MARKET
WITH NEW APPROACH
A multi-tenant unit service provider needed to rapidly deploy services to
large numbers of shared office buildings nationwide. In order to capture
customers, our customer had to differentiate its service offerings from those of
incumbent providers. Our customer faced two main connectivity problems: how to
distribute services within a building and how to connect that building to its
nationwide network. The uneven mix of facilities available to connect buildings
to the network exacerbated these problems.
Our customer selected the A-1240 broadband access platform to establish a
point of presence in large numbers of office buildings, deliver high-speed
Internet access and other services within the buildings, integrate end-user
voice traffic and connect all traffic to its network. It chose our broadband
access platform because it allows the service provider to offer end-users a
range of Internet bandwidth options up to 100 Mbps and to reconfigure an
end-user's access speed remotely through software. Additionally, end users'
existing voice equipment can connect directly to the A-1240, providing a
mechanism for the multi-tenant unit service provider to integrate voice traffic
with little disruption to the customer's existing equipment. Our A-1240's
flexibility enables our customer to use multiple methods when connecting
buildings to its network, and our MultiStream technology allows it to deploy
services rapidly by bundling T1 connections when a T3 connection is not
available. Our customer also installed our equipment at its metropolitan hub
sites to aggregate traffic from multiple buildings for a faster, more efficient
access network architecture.
SALES AND MARKETING
We sell our broadband access platforms primarily through a direct sales
force both domestically and internationally. We also drive awareness and
customer acceptance of our products through strategic relationships with
original equipment manufacturers, distributors and resellers. Because of our
focus on the access network, we have established co-marketing relationships with
a wide range of equipment providers operating either inside service provider
networks closer to the core or at the end-user location. We seek to
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partner widely to deliver a complete, end-to-end solution to service providers.
To that end, we have a variety of co-marketing arrangements designed to extend
our reach into our service provider segments. As of July 31, 2000, our sales and
marketing organization consisted of 39 persons in 9 locations.
SALES
Direct Sales. Our direct sale force is regionally dispersed throughout the
United States, in Canada and the United Kingdom. Our sales force is comprised of
regional sales directors, managers and system engineers who manage customer
relationships and sell our products into different levels of the service
provider organization.
Distribution Channel Sales. We intend to develop relationships with
distribution partners and resellers to extend our market reach to additional
service providers, including regional service providers and independent
telephone companies. These relationships will also provide an additional product
fulfillment channel. We currently have agreements with Consulintel, Netways,
Solunet, Technica Corporation, Walker Associates and Westcon.
Original Equipment Manufacturer Sales. We intend to employ relationships
with a limited number of original equipment manufacturers to expand our market
reach, especially in segments or application areas where we are part of a
complete solution. We currently have agreements with AccessLan and Alidian.
International Sales. We are currently building our international sales
organization, primarily in Europe, Asia and Latin America. In addition, we seek
to develop strategic relationships with key system integrators and resellers to
build acceptance for our products. We anticipate that we will rely on these
types of relationships to a greater degree internationally than domestically.
MARKETING
We have a variety of marketing programs and initiatives to support the sale
and distribution of our products. We target these activities to prospective and
existing customers, distribution partners and resellers, and the trade press and
analysts. Marketing activities include preparation of sales tools, business
cases, competitive analyses and other marketing collateral, sales training,
publication of customer deployments, new product information and educational
articles in industry journals, maintenance of our World Wide Web site as well as
an Intranet site, participation in technical conferences, advertising in
industry journals and other venues, and direct marketing to prospective
customers. We also participate in leading industry tradeshows domestically and
internationally.
CUSTOMER SERVICE
Providing a high level of continuing service and support is critical to our
objective of developing long-term customer relationships. Our expanding customer
service and support efforts are divided into three distinct functions that
ensure effective implementation of our products. First, product quality
assurance seeks to ensure that the highest quality product is delivered to the
field. Second, project management provides the technical leadership, support and
training to help the customer bring the product to revenue-generating capability
as quickly as possible. Finally, network support provides our customers with
ongoing support once the equipment has been installed. Our customer service and
support organization is comprised of headquarters-based software, project and
application engineers and field-based network engineers. Services are delivered
through web-based support, by phone or in person.
RESEARCH AND DEVELOPMENT
We have assembled a team of highly experienced networking professionals
recruited from industry-leading communications companies. Our product
development staff has successfully developed hardware and software products and
has expertise in the areas of voice, frame relay, ATM, IP, switching/routing,
network management, and provisioning for carrier-class networks. The team
consists of hardware and software engineers, many with advanced degrees and
proven product successes for wide area switching and routing
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systems. As of July 31, 2000, we employed people in our research and
development staff, with plans to continue expanding all functional areas of our
research and development organization. Research and development expenses totaled
$3.7 million in 1998, $6.7 million in 1999 and $5.5 million in the first six
months of 2000.
MANUFACTURING
Our manufacturing operations consist of prototype development, materials
planning and procurement, final assembly, testing, systems integration, order
fulfillment and quality control. This subcontracting activity extends from
prototypes to full production and includes activities such as material
procurement, final assembly, test, control and shipment to our customers. We
design, specify and monitor all of the tests that are required to meet internal
and external quality standards. We maintain relationships with strategic
technology suppliers in tandem with Benchmark and utilize distribution channels
to help manage supply.
We currently subcontract the manufacturing and testing of substantially all
of our products through purchase orders with Benchmark Electronics. We have not,
however, entered into any long-term agreements with Benchmark Electronics. Our
reliance on Benchmark Electronics as our single manufacturer exposes us to a
number of risks, including reduced control over manufacturing capacity, product
completion and delivery times, product quality and manufacturing costs. If
Benchmark Electronics is unable or unwilling to manufacture a sufficient
quantity of products for us, on the time schedules and with the quality that we
demand, we may not be able to fulfill customer orders on a timely basis and may
be forced to engage additional or replacement manufacturers. Qualifying a new
contract manufacturer and commencing a volume production is expensive and time
consuming. If we are required or choose to change contract manufacturers, our
revenue may decline and our customer relationships may be damaged.
COMPETITION
Our product line is focused on providing the next-generation access
solution for the access network. Many vendors have product lines that compete in
the broadband access equipment market. We believe that the principal competitive
factors for next-generation access equipment are:
- scalability to high and low customer density locations with a
cost-effective solution;
- multi-service capability with service interworking;
- inherent support of voice, data, and multimedia traffic;
- ability to support new protocols and services with software upgrades;
- product innovation and speed to market;
- ability to react quickly to customer demands and requirements; and
- price.
Many of our current and potential competitors, including Alcatel, Cisco
Systems, Lucent Technologies, Marconi (Fore) and Nortel Networks, are large
public companies that have longer operating histories and significantly greater
financial, technical, marketing and other resources than we do. As a result,
these competitors are able to devote greater resources to the development,
promotion, sale and support of their products. In addition, competitors with
large market capitalizations or cash reserves are much better positioned than we
are to acquire other companies, including our competitors, and thereby acquire
new technologies or products that may displace our product lines.
Many of our competitors have significantly more established customer
support and professional services organizations than we do. In addition, many of
our competitors have more extensive customer bases and broader customer
relationships than we do, including relationships with many of our current and
potential customers. Moreover, these competitors often have broader product
offerings than we do. These companies can leverage their customer relationships
and broader product offerings and adopt aggressive pricing policies to gain
market share. As a result, we may not be able to maintain a competitive position
against current or future
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competitors. Our failure to maintain and enhance our competitive position within
the market could seriously harm our business, results of operations and
financial condition.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret
laws and contractual restrictions to protect our proprietary rights. We have
filed one U.S. patent application and a corresponding application under the
Patent Cooperation Treaty relating to the management of tunneling protocols.
There can be no assurance that these patent applications will be approved, that
any issued patents will protect our intellectual property or that third parties
will not challenge them. Furthermore, there can be no assurance that others will
not independently develop similar or competing technology or design around any
patents that may be issued. We also have four pending trademark applications in
the United States and three domain names.
We enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. There can be no
assurance that these precautions will prevent misappropriation or infringement
of our intellectual property. Monitoring unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our proprietary rights, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States.
The broadband access equipment industry is characterized by the existence
of a large number of patents and frequent claims and related litigation
regarding patent and other intellectual property rights. In particular, leading
companies in the data communications and networking markets have extensive
patent portfolios with respect to networking technology. We recently received a
letter from Nortel Networks Corporation alleging that a specific feature of our
products infringes one of Nortel's patents relating to inverse multiplexing over
ATM. We believe that our products do not infringe Nortel's patent and we intend
to contest this claim vigorously. However, we cannot assure you that we will
prevail in our objection to this claim, nor can we assure you that this dispute
will not result in litigation or that an adverse result or judgment will not
adversely affect our financial condition. The Nortel claim could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, or require us to develop non-infringing technology. If
Nortel succeeds in its claim, we would need to enter into royalty or license
agreements. These royalty or license agreements, if required, may not be
available on acceptable terms, if at all. If there is a successful claim of
infringement or if we fail to develop non-infringing technology or license the
proprietary rights on a timely basis, our ability to use certain technologies,
products and brand names may be limited and our business may be harmed.
From time to time, other third parties, including leading companies, have
asserted against others and may assert against us patent, copyright, trademark
and other intellectual property rights. We expect that we may increasingly be
subject to infringement claims as the numbers of products and competitors in the
market for broadband access equipment grow and the functionality of products
overlaps. If third parties assert claims or initiate litigation against us or
our manufacturers, suppliers or customers alleging infringement of their
proprietary rights with respect to our existing or future products, we will be
subject to risks similar to those described in the preceding paragraph.
We have agreed and may agree in the future to indemnify certain of our
customers against claims that our products infringe upon the proprietary rights
of others. We could incur substantial costs in defending ourselves and our
customers against infringement claims. In the event of a claim of infringement,
we and our customers may be required to obtain one or more licenses from third
parties. We cannot assure you that we or our customers could obtain necessary
licenses from third parties at a reasonable cost or at all.
We have licensed, and may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. We
attempt under such licenses to ensure that the quality of our brand is
maintained by these parties, however, such third parties may take actions that
could materially and adversely affect the value of our proprietary rights or
reputation.
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Litigation may be necessary in the future to enforce or defend our
proprietary rights or to determine the validity and scope of the proprietary
rights of others. This litigation, whether successful or unsuccessful, could
result in substantial costs and diversion of management and technical resources.
In addition, any inability to protect our proprietary rights may harm our
business and financial prospects.
We license from third parties software that is used in our products or is
required to develop new products or product enhancements. In the future,
third-party licenses may not be available to us on commercially reasonable terms
or at all. Third parties who hold exclusive rights to software technology that
we seek to license may include our competitors. If we are unable to obtain any
necessary third-party licenses, we would be required to redesign our product or
obtain substitute technology, which may perform less well, be of lower quality
or be more costly.
GOVERNMENT REGULATION
In the United States, our products must comply with various regulations and
standards defined by the Federal Communications Commission, or FCC, and
Underwriters Laboratories. Internationally, products that we develop may be
required to comply with standards established by telecommunications authorities
in various countries as well as with recommendations of the International
Telecommunication Union. Moreover, the encryption technology contained in our
products is subject to U.S. export controls, which limit our ability to
distribute some versions of our products outside of the United States and
Canada. If we do not comply with existing or evolving standards and regulations
or if we fail to obtain timely domestic or foreign regulatory approvals or
certificates, we would not be able to sell our products where these standards or
regulations apply, which may prevent us from sustaining our revenue or
maintaining profitability.
The jurisdiction of the FCC extends to the communications industry, to our
customers and to the products and services that our customers sell. Future FCC
regulations, or regulations set forth by other regulatory bodies, may adversely
affect the broadband access services industry. Regulation of our customers may
have a material adverse affect on our business, results of operations and
financial condition. For example, FCC regulatory policies that affect the
availability of data and Internet services may impede our customers' penetration
into broadband access markets. In addition, international regulatory bodies are
beginning to adopt standards for the communications industry. The delays that
these governmental processes may entail may cause order cancellations or
postponements of product purchases by our customers, which would materially
adversely affect our business, results of operations and financial condition.
EMPLOYEES
As of July 31, 2000, we had a total of 135 employees, of whom 132 were
based in the United States and three were based internationally. 55 of our
employees are engaged in research and development, 28 in operations, 39 in
marketing and sales and 13 in finance and administrative functions.
Additionally, we hire consultants as necessary. We believe that our future
success will depend in significant part on our ability to attract and retain
highly skilled technical, marketing and management personnel. None of our
employees are represented by a labor union or subject to a collective bargaining
agreement. We believe that our relations with our employees are good.
FACILITIES
Our executive offices and principal operations are located in Vienna,
Virginia. We lease approximately 21,000 square feet of office and laboratory
space pursuant to a lease that expires on November 30, 2005. We lease an
additional 21,000 square feet in the same building under a lease that expires on
August 31, 2002. We currently sublease approximately 7,000 square feet to a
third party. We also lease sales offices in Tampa, Boston, Denver and Dallas. We
believe that our facilities are adequate to meet our current needs, and that
additional facilities will be available as we expand in the future.
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LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, results of operations or financial condition. We may in the future be
party to litigation arising in the course of our business, including claims that
we allegedly infringe on third-party trademarks and other intellectual property
rights. These claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
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MANAGEMENT
The following table sets forth information regarding our executive officers
and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------------------------------------------------------
<S> <C> <C>
Asghar D. Mostafa........... 42 Chairman, President and Chief Executive Officer
Ronald S. Westernik......... 45 Director, Senior Vice President-Business Development and
Strategy
James R. Loehndorf, Jr...... 45 Vice President and Chief Scientist
Harry J. D'Andrea........... 44 Chief Financial Officer
Glen A. Hunt................ 52 Vice President-Engineering
Lawrence Kraft.............. 34 Vice President-Marketing
Alexander H. Dobson......... 37 Vice President-Sales
Jeffrey M. Range............ 40 Vice President-Worldwide Operations
Betsy S. Atkins............. 45 Director
Henry G. Baker.............. 53 Director
Robert Ted Enloe, III(1).... 61 Director
Richard H. Kimball(1)....... 43 Director
Arthur J. Marks(1)(2)....... 55 Director
Edward W. Scott(2).......... 38 Director
John W. Seazholtz(2)........ 63 Director
</TABLE>
---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Asghar D. Mostafa has served as our President, Chief Executive Officer and
Chairman of the board of directors since our inception. Prior to co-founding our
company, Mr. Mostafa served as Vice President and general manager of 3Com
Corporation's Broadband Access Communications Division from August 1995 to
August 1997. From February 1990 to May 1995, Mr. Mostafa was the founder,
President, and Chief Executive Officer of ISDN Systems Corporation. Previously,
he was Vice President of Product Development for the telecommunications division
of Data General Corporation as well as co-founder and director of engineering
for International Communications, Inc., a developer of T1 multiplexers.
Ronald S. Westernik has served as our Senior Vice President-Business
Development and Strategy since July 1999, as a director since our inception, and
previously served as our Vice President-Marketing from our inception to June
1999. Prior to co-founding our company, Mr. Westernik was Vice President of
Marketing for the Broadband Access Communications Division at 3Com from June
1996 to June 1997. Mr. Westernik also spent 17-years with AT&T Corp., where he
held several positions including Director of Strategy and Planning for Systems
Marketing.
James R. Loehndorf, Jr. has served as our Vice President and Chief
Scientist since our inception. Prior to co-founding our company, Mr. Loehndorf
was Systems Architect for the Broadband Access Communications Division at 3Com
from October 1996 to September 1997. From May 1989 to October 1996, Mr.
Loehndorf was a senior member of the technical staff at Ameritech Corporation's
Science and Technology Group, responsible for Ameritech's ADSL strategy. He also
served as a data-communications systems architect at ITT/Courier from May 1978
to May 1989.
Harry J. D'Andrea has served as our Chief Financial Officer since June
1999. Prior to joining our company, Mr. D'Andrea served as Chief Financial
Officer for Call Technologies, Inc. from 1998 to June 1999. He was also Chief
Financial Officer of Yurie Systems, Inc. (acquired by Lucent Technologies) from
1997 to 1998 and Chief Financial Officer of American Communications Services,
Inc. (now e.spire Communications) in 1996. From 1993 to 1995, Mr. D'Andrea
served as Executive Vice President, Chief Financial Officer and Treasurer at
Caterair International Corporation. He has also held senior management positions
at Marriott Corporation.
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Glen A. Hunt has served as our Vice President-Engineering since June 1999
and as our Vice President-Product Development from January 1999 to June 1999.
Mr. Hunt joined our company from Netrix Corporation where he was Executive
Director of Network Products from July 1992 to January 1997 and Vice President
of Marketing from January 1997 to December 1998. Previously, he was Director of
Advanced Network Management for Sprint from April 1998 to June 1992 and Director
of Product Development at Dynatech Corporation from April 1985 to March 1988.
Lawrence Kraft has served as our Vice President-Marketing since June 1999.
Prior to joining our company, Mr. Kraft was Vice President of Marketing for
NetFax Corporation from July 1998 to October 1998. Previously, he was Manager of
Product Marketing at U.S. Robotics (now 3Com) from August 1995 to October 1997,
vice president of marketing at ISC from June 1995 to August 1995, and held
various positions with Sprint Corporation from June 1992 to June 1995, including
Group Product Manager for SprintLink Internet services.
Alexander H. Dobson has been with our company since January 1999 and served
as Vice President-Sales since October 1999. Mr. Dobson joined our company from
3Com where he managed the worldwide activities of the MCIWorldCom account team
from February 1998 to January 1999. Previously, he was the director of carrier
sales for U.S. Robotics (now 3Com) Canada from January 1996 to February 1998 and
held various sales and sales management positions at Motorola Information
Systems from May 1993 to January 1996.
Jeffrey M. Range has served as our Vice President-Worldwide Operations
since January 2000. Mr. Range joined our company from Newbridge Networks, Inc.,
where he held several management positions including Vice President, NSA
Operations from September 1996 to November 1999. Mr. Range also served as Vice
President, Corporate Planning and Logistics for Newbridge Networks, Inc. in
Canada from September 1993 to September 1996.
Betsy S. Atkins has served as a director of our company since August 2000.
Since 1995, Ms. Atkins has served as Chief Executive Officer of Baja
Corporation, a consulting firm. Prior to joining Baja, Ms. Atkins was the Chief
Executive Officer of NCI, a manufacturing company. Ms. Atkins is a founder of
Ascend, a Lucent Network Solutions company and serves on the board of directors
of Lucent Technologies. She also serves on the board of directors of Polycom
Corporation and Selectica, Inc.
Henry G. Baker, Ph.D. has served as a director of our company since August
1998. Since March 1996, Dr. Baker has been a co-founder and general partner of
Baker Communications Fund, L.P., a private equity fund that invests exclusively
in communications equipment, services and applications providers. Prior to co-
founding Baker Communications, Dr. Baker consulted for various venture capital
firms and startup companies. From 1980 to 1985, he was a founder and employee of
Symbolics, Inc., a computer workstation manufacturer. Dr. Baker is a member of
the supervisory board of directors of Interxion Holdings, N.V., a pan-European
operator of Internet exchange centers.
Robert Ted Enloe, III has served as a director of our company since June
2000. Mr. Enloe has been managing partner of Balquita Partners, Ltd., a real
estate and securities investment partnership, since 1996. Mr. Enloe served as
Vice Chairman and a member of the Office of the Chief Executive of Compaq
Computer Corporation from April to July 1999. From 1975 to 1986 he was
president, and from 1992 to 1996 Chief Executive Officer, of Liberte Investors,
Inc. Mr. Enloe is also a director of Compaq, Leggett & Platt, Inc., Sixx
Holdings Incorporated, Liberte Investors and Sierra Cities.com.
Richard H. Kimball has served as a director of our company since September
1999. Mr. Kimball is a Managing General Partner of Technology Crossover
Ventures, a venture capital firm he co-founded in 1995. Prior to that, Mr.
Kimball spent over ten years at Montgomery Securities serving as a securities
analyst and Managing Director. He is currently on the board of directors of
Copper Mountain Networks and several private companies.
Arthur J. Marks has served as a director of our company since September
1999. Since 1984, Mr. Marks has been a general partner of New Enterprise
Associates, a private equity fund that invests in early stage companies in
information technology and medical and life sciences. Mr. Marks serves on the
board of
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directors of Epicor Software, eXcelon Corporation, Progress Software, Talk.com
and several private companies.
Edward W. Scott has served as a director of our company since August 1998.
Since March 1996, Mr. Scott has been a co-founder and general partner of Baker
Communications Fund, L.P., a private equity fund that invests exclusively in
communications equipment, services and application providers. Prior to co-
founding Baker Communications, from December 1990 to March 1996 Mr. Scott was a
private equity investor with the Apollo Investment Fund, L.P. Mr. Scott also
serves on the board of directors of Akamai Technologies, Inc. and several
private companies.
John W. Seazholtz has served as a director of our company since April 1998.
Since April 2000, Mr. Seazholtz has been Chairman of the board of directors of
Westell Technologies, Inc. From May 1998 to April 2000, Mr. Seazholtz was the
President and CEO of Telesoft America, Inc. (a subsidiary of Telesoft spa).
Prior to Telesoft, he was the Chief Technology Officer for Bell Atlantic
Corporation from 1984 to April 1998. Mr. Seazholtz has also worked at New Jersey
Bell, Bell Telephone Laboratories and AT&T. Mr. Seazholtz also serves on the
board of directors of Odetics, Inc.
BOARD OF DIRECTORS
Our board of directors currently consists of eight members. Upon the
completion of this offering, the terms of office of the board of directors will
be divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2001; Class II, whose term will expire at
the annual meeting of stockholders to be held in 2002; and Class III, whose term
will expire at the annual meeting of the stockholders to be held in 2003. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. This classification of the board of directors may have the
effect of delaying or preventing a change of control or management of our
company. Each officer serves at the discretion of the board of directors. There
are no family relationships among any of our directors or officers.
BOARD COMMITTEES
Our board of directors currently has two committees: an audit committee and
a compensation committee. The audit committee consists of Messrs. Enloe, Kimball
and Marks. The audit committee makes recommendations to our board of directors
regarding the selection of independent auditors, reviews the results and scope
of audit and other services provided by our independent auditors and reviews the
accounting principles and auditing practices and procedures to be used for our
financial statements. The compensation committee consists of Messrs. Marks,
Scott and Seazholtz. The compensation committee makes recommendations to our
board of directors regarding our stock plans and the compensation of officers
and other managerial employees.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from us for their
services as members of our board of directors, although we are authorized to pay
members for attendance at meetings or a salary in addition to reimbursement for
expenses in connection with attendance at meetings. We have granted options to
our directors in the past and we may continue to do so in the future.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently or has been
an officer or employee of ours at any time since our formation. No member of the
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
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<PAGE> 48
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the Delaware General Corporation Law, we will adopt provisions
in our certificate of incorporation that limit or eliminate the personal
liability of our directors for a breach of their fiduciary duty of care as a
director. The duty of care generally requires that, when acting on behalf of the
corporation, directors exercise an informed business judgment based on all
material information reasonably available to them. Consequently, a director will
not be personally liable to us or our stockholders for monetary damages or
breach of fiduciary duty as a director, except for liability for:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation also will allow us to indemnify our
officers, directors and other agents to the full extent permitted by Delaware
law. We have entered into indemnification agreements with each of our directors
and officers that give them additional contractual reassurances regarding the
scope of indemnification and that provide additional procedural protection. The
indemnification agreements require actions such as:
- indemnifying officers and directors against certain liabilities that may
arise because of their status as officers or directors; and
- advancing expenses, as incurred, to officers and directors in connection
with a legal proceeding, subject to certain limited exceptions.
The limited liability and indemnification provisions in our certificate of
incorporation may discourage stockholders from bringing a lawsuit against our
directors for breach of their fiduciary duty and may reduce the likelihood of
derivative litigation against our directors and officers, even though a
derivative action, if successful, might otherwise benefit us and our
stockholders. Moreover, a stockholder's investment in our company may be
adversely affected to the extent we pay the costs of settlement or damage awards
against our directors and officers under these indemnification provisions. At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
EXECUTIVE COMPENSATION
The table below sets forth, for the fiscal year ended December 31, 1999,
the compensation earned by:
- our chief executive officer; and
- our next four most highly compensated executive officers, collectively
referred to below as the named executive officers.
In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table below does not include medical, group life
or other benefits which are available to all of our salaried employees, and
perquisites and other benefits, securities or property which do not exceed the
lesser of $50,000 or 10% of the person's salary and bonus shown in the table. In
the table below, columns required by the
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<PAGE> 49
regulations of the Securities and Exchange Commission have been omitted where no
information was required to be disclosed under those columns.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
--------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Asghar D. Mostafa....................................... $164,583 $ -- $ -- --
President and Chief Executive Officer
Glen A. Hunt............................................ 138,889 -- -- 60,000
Vice President-Engineering
James R. Loehndorf, Jr.................................. 110,000 25,000 96,657(1) --
Vice President and Chief Scientist
Ronald S. Westernik..................................... 105,208 25,000 -- --
Senior Vice President-Business Development and
Strategy
Alexander H. Dobson..................................... 66,458 34,781(2) -- 151,562
Vice President-Sales
</TABLE>
---------------
(1) Represents reimbursement of an amount that, after taxes, was sufficient to
cover relocation expenses.
(2) Represents bonus and commission income.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted by us to the named executive officers during 1999. All of these options
granted by us were granted under the Second 1998 Nonqualified Stock Option Plan
and have a term of 10 years, subject to earlier termination in the event the
optionee's services to our company cease. See "Stock Option Plans" for a
description of the material terms of these options. During fiscal 1999, we
granted options to purchase a total of 1,913,979 shares of common stock under
our Second 1998 Nonqualified Stock Option Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL RATES
NUMBER OF PERCENT OF OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS EXERCISE FOR OPTION TERM(3)
UNDERLYING GRANTED TO PRICE PER -----------------------
OPTIONS EMPLOYEES IN SHARE EXPIRATION ESTIMATED
NAME GRANTED FISCAL 1999(1) ($/SH) DATE VALUE(2) 5% 10%
---- ---------- -------------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Asghar D. Mostafa...... -- -- -- -- -- -- --
Glen A. Hunt........... 60,000 3.1% $1.50 1/11/09 $ 750,000 $1,278,271 $2,088,743
James R. Loehndorf,
Jr. ................. -- -- -- -- -- -- --
Ronald S. Westernik.... -- -- -- -- -- -- --
Alexander H. Dobson.... 100,000 5.2 1.50 2/15/09 1,250,000 2,130,452 3,481,239
40,000 2.1 2.00 11/01/09 480,000 832,180 1,372,495
3,242 0.2 2.00 10/31/09 38,904 67,448 111,240
1,876 0.1 2.00 11/30/09 22,512 39,029 64,370
6,444 0.3 2.00 12/31/09 77,328 134,064 221,109
</TABLE>
---------------
(1) Based on an aggregate of 1,913,979 options granted by us, during the fiscal
year ended December 31, 1999, to our employees, including the named
executive officers.
(2) Estimated values are computed by (i) multiplying the number of shares of
common stock subject to a given option by the assumed initial public
offering price of $14 per share, and (ii) subtracting from that result the
aggregate option exercise price.
(3) Potential realizable values are computed by (i) multiplying the number of
shares of common stock subject to a given option by the assumed initial
public offering price of $14 per share, (ii) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rates shown in the table over the term of the options, and (iii) subtracting
from that result the aggregate option
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<PAGE> 50
exercise price. The potential realizable values set forth above 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 5% and 10% table above are
mandated by the rules of the Securities and Exchange Commissions 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 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 for each of the named executive officers the
number and value of securities underlying unexercised stock options that were
held by the named executive officer as of December 31, 1999. No stock options
were exercised by any executive officers during 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Asghar D. Mostafa.............................. -- -- -- --
Glen A. Hunt................................... -- 60,000 -- $ 750,000
James R. Loehndorf, Jr. ....................... -- -- -- --
Ronald S. Westernik............................ -- -- -- --
Alexander H. Dobson............................ -- 151,562 -- 1,868,744
</TABLE>
---------------
(1) Options are "in-the-money" if the value of our common stock exceeds the
exercise price of the options. There was no public trading market for common
stock as of December 31, 1999. We have calculated the value of unexercised
in-the-money options at fiscal year-end on the basis of the assumed initial
public offering price of $14 per share, less the aggregate exercise price.
STOCK OPTION PLANS
2000 STOCK INCENTIVE PLAN
We intend to adopt the Advanced Switching Communications, Inc. 2000 Stock
Incentive Plan prior to the closing of this offering. The 2000 Stock Incentive
Plan will become effective upon its adoption by the board of directors and
ratification by our stockholders. The purpose of the 2000 Stock Incentive Plan
will be to provide an incentive to our employees, officers, consultants and
directors and advisors through the granting or awarding of incentive and
nonqualified stock options, stock appreciation and dividend equivalent rights,
restricted stock, performance units, performance shares, shares awards and
phantom stock awards.
Share Reserve. We will authorize shares of common stock for issuance
under the 2000 Stock Incentive Plan for the grant of stock options and other
incentive awards to eligible individuals.
Eligibility. Employees, officers, consultants and directors and advisors
of our company will be eligible to receive awards under the 2000 Stock Incentive
Plan.
Administration. The 2000 Stock Incentive Plan will be administered by our
board of directors or by committee, which will consist of non-employee
directors. Under the 2000 Stock Incentive Plan, the Committee will have the
authority to, among other things,
- select the employees to whom stock options and other incentive awards
will be granted;
- determine the type, size and the terms and conditions of stock options
and other incentive awards; and
- establish the terms for treatment of stock options and other incentive
awards upon termination of employment or change in control.
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<PAGE> 51
Termination or Amendment. The 2000 Stock Incentive Plan will terminate on
the day preceding the tenth anniversary of the date of its adoption by the board
of directors. The board of directors will be able to at any time and from time
to time amend or terminate the 2000 Stock Incentive Plan; provided, however,
that, to the extent necessary under applicable law, no such change will be
effective without the requisite approval of the stockholders. In addition, no
such change will alter or adversely impair any rights or obligations under any
stock option and other incentive awards previously granted, except with the
written consent of the grantee.
OTHER STOCK OPTION PLANS
Since inception, we have granted stock options pursuant to three stock
option plans:
- 1999 Nonqualified Stock Option Plan;
- Second 1998 Nonqualified Stock Option Plan; and
- 1998 Nonqualified Stock Option Plan.
Each of these plans is subject to the following terms:
Eligibility. Our key personnel, including directors or officers, are
eligible to receive awards under each stock plan.
Administration. Our stock option plan committee administers each stock
plan. The stock option plan committee is appointed by our board of directors and
is composed of three members of our board of directors. The stock option plan
committee is responsible for the operation of the plans and makes
recommendations to our board of directors with respect to who may participate in
the plans and the extent of their participation. Upon recommendation of the
stock option plan committee and subject to any applicable limitations contained
in the plans, our board of directors selects the recipients of awards and
determines:
- the exercise price of options; and
- the duration of options.
Our board of directors authorizes the options granted under the stock
plans. Our board of directors may require that any shares purchased by an
optionee under each plan be subject to the terms of a stockholders' agreement or
that the optionee remain employed by, or render services to, our company.
Options. The plans provide for nonstatutory stock options to purchase
shares of our common stock. Optionees receive the right to purchase a specified
number of shares of common stock at a specified option price and subject to such
other terms and conditions as are specified in connection with the option grant.
Optionees must pay the exercise price in full in cash at the time an option is
exercised under the plan. Options can be exercised in whole or in part. If an
optionee ceases to be an employee, officer or director of our company, other
than due to retirement or death, any options granted under the plans shall
terminate immediately.
Termination or Amendment. No award may be granted under the plans after
the tenth anniversary of the effective date, but the vesting and effectiveness
of the awards previously granted may extend beyond that date. No award under the
plans, however, may be exercised after the tenth anniversary of the grant. Our
board of directors may at any time terminate, amend or revise the stock plans
with respect to any shares as to which options have not been granted and within
three months after termination of employment if the optionee engages in
activities contrary to the best interests of our company.
1999 NONQUALIFIED STOCK OPTION PLAN
Share Reserve. In 1999, our board of directors approved our 1999
Nonqualified Stock Option Plan, which was amended on February 2, 2000 and March
21, 2000. We reserved 4,498,000 shares under our amended 1999 plan. As of June
30, 2000, we granted 1,324,484 options under the 1999 plan. Upon the adoption of
the 2000 plan, we will not make any further awards under the 1999 plan. If the
2000 plan is not adopted, the 1999 plan shall remain in effect for a period of
10 years.
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<PAGE> 52
Options. Under the plan, in the event of the liquidation or dissolution of
our company, or upon such other event as may be determined by the stock option
committee, each outstanding option will immediately become fully exercisable
with respect to the total number of shares subject to the option.
Change in Control. If following a transaction resulting in a change in
control the successor corporation terminates the employee other than for cause
or the employee resigns for certain specified reasons, all of his or her options
will become vested upon the termination date of his or her employment.
SECOND 1998 NONQUALIFIED STOCK OPTION PLAN
Share Reserve. On July 31, 1998, our board of directors adopted our Second
1998 Nonqualified Stock Option Plan, which was amended on August 31, 1998 and
September 28, 1999. We reserved 2,216,000 shares under the second 1998 plan and
granted 2,147,479 options to purchase shares. Upon the adoption of the 1999
plan, no further awards have been, or will be, made under the second 1998 plan.
Options. The plan provides that in the event of the: (i) consummation of a
merger or consolidation in which our company is not the surviving entity, (ii)
consummation of a sale of more than 50% of the outstanding common stock to
persons not shareholders of our company on the date of the grant, or (iii)
liquidation or dissolution of our company, each outstanding option will
immediately become fully exercisable with respect to the total number of shares
subject to the option.
1998 NONQUALIFIED STOCK OPTION PLAN
Share Reserve. On February 3, 1998, our board of directors adopted our
1998 Nonqualified Stock Option Plan. We reserved 2,000,000 shares under the 1998
plan and granted 982,000 options to purchase shares. Upon the adoption of the
second 1998 plan, no further awards have been, or will be, made under the 1998
plan.
Options. Each outstanding option granted under the plan will immediately
become fully exercisable with respect to the total number of shares subject to
the option upon the (i) consummation of a merger or consolidation in which our
company is not the surviving entity, (ii) consummation of a sale of more than
50% of the outstanding common stock to persons not shareholders of our company
on the date of the grant, (iii) liquidation or dissolution of our company, or
(iv) effectiveness of a registration statement providing for the initial
offering of our shares to the public.
401(K)PLAN
We have established a tax-qualified employee savings and retirement plan
commonly known as a 401(k) plan. The 401(k) plan provides that each participant
may contribute up to 15% of his or her pre-tax gross compensation (up to the
annual statutory limit). We may make profit sharing contributions in our
discretion as determined annually by our board of directors. Employer
contributions to the plan vest according to a schedule entitling full vesting
after four years. We have not made any company contributions to the plan since
inception.
EMPLOYMENT AGREEMENTS
Asghar D. Mostafa. On August 31, 1998, we entered into an executive
employment agreement with Mr. Mostafa, our Chief Executive Officer and President
and Chairman of our board of directors, which continues indefinitely unless
terminated in accordance with the agreement. The employment agreement provides
that we may terminate Mr. Mostafa's employment at any time with cause. Mr.
Mostafa may terminate the employment agreement without cause or for good reason
upon sixty days written notice to us. In addition, the employment agreement will
terminate automatically upon Mr. Mostafa's death or disability.
Under his employment agreement, Mr. Mostafa's base salary was initially
$150,000 per year. Upon achieving milestones related to product shipments, which
have already been achieved, Mr. Mostafa's annual base salary was increased to
$200,000. Mr. Mostafa's base salary may also be increased annually upon approval
of a majority of our board of directors. In addition to a base salary, Mr.
Mostafa receives bonuses
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<PAGE> 53
determined, upon recommendation of our compensation committee, by the consent of
a majority of our board of directors.
The employment agreement provides that if Mr. Mostafa's employment is
terminated upon death or disability or if he resigns because of a material
diminution of his responsibilities and duties, assignment to commute a distance
substantially greater than he currently commutes, a decrease in his salary, a
purported termination or any termination within 60 days following a change in
control, Mr. Mostafa is entitled to continue to receive all benefits under the
employment agreement for a period of two years. In addition, if Mr. Mostafa
resigns for the reasons described above, he is entitled to a severance payment
to be paid in 24 equal monthly installments in an amount equal to:
- three years of his base salary at the time of termination, assuming
minimum increases,
- two times the average aggregate bonuses previously paid to him pursuant
to his employment agreement, and
- any deferred compensation or accrued vacation time.
Mr. Mostafa's agreement contains restrictive covenants requiring
non-disclosure of our proprietary information and restricting him from competing
with us or soliciting our employees and customers for a two year period after
termination of his employment.
Other Named Executive Officers. We have entered into key employee
employment agreements with each of Ronald S. Westernik, James R. Loehndorf, Jr.,
Glen A. Hunt and Alexander H. Dobson under which these officers are entitled to
annual base salaries of $100,000, $100,000, $145,000 and $95,000, respectively.
Each agreement has a term of three years. Under these agreements, in addition to
his base salary, each officer receives:
- bonuses as determined by our board of directors or our chief executive
officer;
- payment of necessary business expenses; and
- benefits that are made available to our other employees including medical
and permanent disability insurance.
Each agreement contains restrictive covenants requiring each of the named
executive officers to disclose, assign and transfer to us all work product and
intellectual property created by him during his employment with us and
restricting him from competing with us and soliciting our employees and
customers for a two year period after termination of his employment.
Each agreement provides that we may terminate the executive officer at any
time with cause and, upon two weeks written notice and the consent of our board
of directors, without cause. Each named executive officer may terminate his
employment agreement upon two weeks written notice.
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<PAGE> 54
CERTAIN TRANSACTIONS
COMMON STOCK ISSUANCES
On December 9, 1997, we issued and sold an aggregate of 9,100,000 shares of
common stock to our co-founders, Asghar D. Mostafa, Ronald S. Westernik and
James R. Loehndorf, Jr. for a total purchase price of $162,435, or approximately
$0.018 per share.
KEY EMPLOYEE STOCK AGREEMENTS
We entered into key employee stock agreements with some of officers and
employees, including Ronald S. Westernik and James R. Loehndorf, Jr. in
connection with our issuance of common stock to these employees.
Repurchase Rights. Under the key employee stock agreements, we are
entitled to repurchase all, but not less than all, of the shares of common stock
owned by the employee if the employee:
- is terminated for cause;
- commits or permits unauthorized transfers of any of his or her shares; or
- terminates his or her employment without cause.
If we repurchase shares after the date of this offering, the purchase price will
be the greater of the original price paid for the shares by the employee or the
book value of the shares as of the date of the employee's termination or
attempted transfer. Our right of repurchase expires eighteen months following
the date the employee ceases to be an employee or we become aware of a attempted
transfer.
Put and Call Rights. If the employee dies, becomes disabled, is terminated
other than for cause, or is subject to a voluntary or involuntary bankruptcy or
insolvency petition or assignment, for 180 days, the employee can cause us to
purchase all of his or her shares or we can repurchase all of his or her shares
at fair market value. The fair market value of the shares will be determined by
the board of directors. If the employee contests the determination, an appraiser
will be appointed to determine fair market value.
Take Along and Right of First Refusal. In the event that a sale or
exchange of our common stock is approved by the holders of a majority of our
common stock, the employees subject to key employee stock agreements agree to
vote for and participate in the sale. If the employee receives an offer from a
third party to purchase his or her shares, the employee must notify us and offer
to sell those shares to us. We have the right to repurchase these shares within
60 days of receipt of the notice. If we chose not to repurchase the shares, the
employee is free to consummate the sale with a third party.
STOCKHOLDERS AGREEMENT
On August 31, 1998, we entered into a stockholder agreement with Mostafa
Investments Limited Partnership. The agreement provides that, in the event of
Mr. Mostafa's death, all shares owned by Mostafa Investments Limited Partnership
will be sold to us at a price equal to the greater of (1) the proceeds of life
insurance policies owned by us naming Mr. Mostafa as the insured or owned by us
for the purpose of repurchasing these shares or (2) the appraised value of the
shares.
If Mostafa Investments Limited Partnership transfers its shares or the
stockholder agreement terminates, Mr. Mostafa will have the right to purchase
from us any life insurance policies naming him as the insured for an amount
equal to the greater of (1) the cash value of the policies, (2) the unearned
premiums on the policies or (3) $1.00. If Mr. Mostafa is permanently disabled or
terminates his employment with us for any reason, Mostafa Investments Limited
Partnership may cause us to repurchase all of his shares within 180 days at the
value of the shares determined as of the last day of the month preceding the
date he exercises this right.
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<PAGE> 55
PREFERRED STOCK ISSUANCES
Since 1998, we have issued and sold shares of convertible redeemable
preferred stock to the following persons and entities who are our executive
officers, directors or principal stockholders. Upon the closing of the offering,
each share of preferred stock will convert into shares of our common stock. For
more detail on shares held by these investors, see "Principal Stockholders."
<TABLE>
<CAPTION>
PREFERRED STOCK TOTAL SHARES CONSIDERATION
----------------- TOTAL OF COMMON PER COMMON
NUMBER CONSIDERATION STOCK AS SHARE
INVESTOR OF SHARES CLASS PAID TO ASC CONVERTED (1) EQUIVALENT
-------- --------- ----- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Asgher D. Mostafa (2)................ 9,428 A $2,357,000 623,511 $4.28
8,800(3) B 2,200,000 2,487,959 1.00
292,412 D 2,500,123 622,509 4.28
Ronald S. Westernik.................. 100 A 25,000 6,613 4.28
400 B 100,000 113,089 1.00
James R. Loehndorf, Jr............... 240 B 60,000 67,853 1.00
John W. Seazholtz.................... 240 B 60,000 67,853 1.00
Baker Communications Fund L.P........ 3,989,270 C 10,400,000 8,902,378 1.36
292,412 D 2,500,123 622,509 4.28
New Enterprise Associates (4)........ 1,462,061 D 12,500,621 3,112,548 4.28
Technology Crossover Ventures (5).... 1,462,061 D 12,500,621 3,112,548 4.28
Robert Ted Enloe, III................ 67,567 E 500,000 67,582 7.40
</TABLE>
---------------
(1) Represents the number of shares of common stock issuable upon conversion of
the preferred stock as of June 30, 2000. The amount of common stock issuable
upon conversion of the preferred stock will increase as dividends continue
to accrue on the preferred stock.
(2) Represents shares originally purchased by Mostafa Investment Limited
Partnership and presently owned by Mostafa Venture Fund, LLC, both of which
are controlled by Asghar D. Mostafa.
(3) Asghar D. Mostafa originally purchased 8,800 shares of Class B preferred
stock in June 1998, and subsequently sold 4,091 of these shares to Baker
Communications on September 10, 1999. The shares in the table are shown
before giving effect to this transfer.
(4) New Enterprise Associates includes the following entities managed by NEA
Partners VIII and NEA General Partners, L.P.: New Enterprise Associates
VIII, L.P., NEA Presidents' Fund, L.P. and NEA Ventures 1999, L.P.
(5) Technology Crossover Ventures includes the following entities managed by
Technology Crossover Management III, L.L.C.: TCV III (GP), TCV III, L.P.,
TCV III (Q), L.P., TCV III Strategic Partners, L.P.
Class A Preferred Stock. In 1998, we issued an aggregate of 9,528 shares
of Class A preferred stock to Asghar D. Mostafa and Ronald S. Westernik. The per
share price for our Class A preferred stock was $250 which was paid through the
conversion of loans.
Class B Preferred Stock. In 1998, we issued an aggregate of 10,960 shares
of Class B preferred stock to 15 investors, including Asghar D. Mostafa, Ronald
S. Westernik, James R. Loehndorf, Jr. and John Seazholtz. The per share purchase
price for our Class B preferred stock was $250. On September 10, 1999, Asghar D.
Mostafa sold 4,091 shares of Class B preferred stock to Baker Communications
Fund, L.P. at a per share purchase price of $338.96.
Class C Preferred Stock. In 1998 and 1999, we issued an aggregate of
3,835,286 shares of Class C preferred stock to Baker Communications Fund, L.P.
for a purchase price of $2.71 per share, a portion of which was paid through the
conversion of a loan. On September 10, 1999, we issued an additional 153,984
shares of Class C preferred stock to Baker Communications Fund, L.P. in
consideration of Baker's agreement to forego its right to receive additional
common shares upon conversion of the Class A shares.
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<PAGE> 56
Class D Preferred Stock. On September 10, 1999 and October 10, 1999, we
issued in two tranches an aggregate of 4,678,594 shares of Class D preferred
stock to 13 investors, including Asghar Mostafa, Baker Communications Fund, L.P.
and entities affiliated with New Enterprise Associates, Technology Crossover
Ventures and Morgan Stanley & Co. The per share purchase price for our Class D
preferred stock was $8.55 which, with respect to Mr. Mostafa and Baker
Communications, was paid through the conversion of loans.
Class E Preferred Stock. On June 30, 2000, we issued 67,567 shares of
Class E preferred stock to Robert Ted Enloe, III for a purchase price of
$500,000 or $7.40 per share.
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS WITH CERTAIN INVESTORS
Four of our directors are partners in entities that own more than five
percent of our capital stock. Henry G. Baker and Edward W. Scott are general
partners of Baker Communications Fund, L.P., Richard H. Kimball is a general
partner of Technology Crossover Ventures and Arthur J. Marks is a general
partner of New Enterprise Associates.
LOANS FROM EXECUTIVE OFFICERS AND STOCKHOLDERS
Between October 7, 1997 and September 7, 1999, we borrowed an aggregate of
approximately $11.4 million from Asghar D. Mostafa, Ronald S. Westernik, James
H. Loehndorf, Jr., and Baker Communications Fund, L.P. Each of these loans was
evidenced by an interest-bearing promissory note and was ultimately paid in full
or converted into shares of our convertible preferred stock, as set forth in the
table below.
<TABLE>
<CAPTION>
LOANS CONVERSION INTO PREFERRED STOCK
-------------------------------- -------------------------------
LENDER DATE AMOUNT INT. RATE DATE CLASS SHARES
------ ------- ---------- --------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Asghar D. Mostafa................. 10/7/97 $ 107,143 6.5% 6/26/98 A 428
2/6/98 250,000 6.5 6/26/98 A 1,000
3/9/98 1,750,000 6.5 6/26/98 A 7,000
6/11/98 250,000 6.5 6/26/98 A 1,000
4/20/99 1,000,000 5.0 --(1) -- --
9/7/99 2,500,000 5.0 9/10/99 D 292,412
Ronald S. Westernik............... 12/5/97 25,000 6.5 6/26/98 A 100
James R. Loehndorf, Jr.(2)........ 12/5/97 12,500 6.5 -- -- --
Baker Communications Fund, L.P.... 4/20/99 3,000,000 5.0 6/30/99 C 1,106,332
9/7/99 2,500,000 5.0 9/10/99 D 292,412
</TABLE>
---------------
(1) This promissory note was cancelled and the principal amount was included in
the $2,500,000 loan made to us by Mr. Mostafa on September 7, 1999.
(2) We repaid this loan in full together with accrued interest on July 7, 1998.
OPTIONS GRANTS
In the past, we have granted options to our executive officers and
directors. We intend to grant additional options to our executive officers and
directors in the future. See "Management -- Option Grants in Last Fiscal Year."
INDEMNIFICATION AGREEMENT
On September 19, 1997, we entered into an indemnification agreement with
Asghar D. Mostafa. Under this agreement, Mr. Mostafa agreed to provide
securities valued at $1,300,000 as collateral to a bank in order to induce the
bank to issue a standby letter of credit in favor of our landlord. In return, we
agreed to indemnify Mr. Mostafa against any and all losses related to the lease
and agreed to give Mr. Mostafa a first priority
52
<PAGE> 57
security interest in our intellectual property. In 1999, we provided substitute
collateral for the letter of credit. Accordingly, the indemnification agreement
and the security interest have been terminated.
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
We have entered into indemnification agreements with our directors for the
indemnification of and advancement of expenses to such persons to the full
extent permitted by law. We also intend to execute such agreements with our
future directors.
We believe that the transactions set forth above were made on terms no less
favorable to us and at least as beneficial for us as could have been obtained
from unaffiliated third parties. All future transactions, including loans
between us and our officers, directors, principal stockholders and their
affiliates will be approved by a majority of the board of directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of our common stock as of July 31, 2000, and as adjusted to
reflect the sale of the shares of common stock in this offering by:
- each person who is known by us to beneficially own more then 5% of our
common stock;
- each of our named executive officers;
- each of our directors; and
- all officers and directors as a group.
Unless otherwise indicated, the address of each listed stockholder is c/o
Advanced Switching Communications, Inc., 8330 Boone Boulevard, 8th Floor,
Vienna, Virginia 22182. The number and percentage of shares beneficially owned
are based on 34,514,636 shares of common stock outstanding as of July 31, 2000,
assuming conversion of all outstanding shares of preferred stock into common
stock, and 6,250,000 shares of common stock outstanding after the completion of
this offering, assuming the underwriters' over-allotment option to purchase
937,500 shares of common stock is not exercised. Beneficial ownership is
determined under the rules and regulations of the Securities and Exchange
Commission. Shares of common stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of July 31, 2000 are deemed
to be outstanding and beneficially owned by the person holding the options or
warrants for the purpose of computing the number of shares beneficially owned
and the percentage ownership of that person. The shares subject to options or
warrants held by a person are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. Except as indicated in
the footnotes to this table, and subject to applicable community property laws,
the persons named in the table have sole voting and investment power with
respect to all shares of our common stock shown as beneficially owned by them.
Percentage ownership figures after the offering do not include shares that may
be purchased by each person in the offering. Entries denoted by an asterisk
represent an amount less than 1%.
<TABLE>
<CAPTION>
PERCENT OF SHARES
NUMBER OF SHARES BENEFICIALLY OWNED
BENEFICIALLY -----------------------
OWNED BEFORE THE BEFORE THE AFTER THE
NAME AND ADDRESS OF OFFICER, DIRECTOR OR BENEFICIAL OWNER OFFERING OFFERING OFFERING
--------------------------------------------------------- ---------------- ----------- ---------
<S> <C> <C> <C>
Asghar D. Mostafa(1)....................................... 10,590,877 30.7% 26 %
Baker Communications Fund, L.P............................. 10,745,335 31.1 26.4
c/o Baker Capital Partners, LLC
540 Madison Avenue
New York, NY 10022
New Enterprise Associates(2)............................... 3,132,416 9.1 7.7
11951 Freedom Drive
One Freedom Square, Suite 1240
Reston, VA 20190
Technology Crossover Ventures(3)........................... 3,132,416 9.1 7.7
575 High Street
Palo Alto, CA 94301
Ronald S. Westernik........................................ 720,287 2.1 1.8
James R. Loehndorf, Jr..................................... 568,185 1.6 1.4
Alexander Dobson........................................... 25,000 * *
Glen A. Hunt............................................... 15,000 * *
Betsy S. Atkins............................................ * *
Henry G. Baker(4).......................................... 10,619,734 31.1 26.4
c/o Baker Capital Partners, LLC
540 Madison Avenue
New York, NY 10022
</TABLE>
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<PAGE> 59
<TABLE>
<CAPTION>
PERCENT OF SHARES
NUMBER OF SHARES BENEFICIALLY OWNED
BENEFICIALLY -----------------------
OWNED BEFORE THE BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OFFERING OFFERING OFFERING
------------------------------------ ---------------- ----------- ---------
<S> <C> <C> <C>
Robert Ted Enloe, III(5)................................... 68,041 * *
c/o Balquita Partners, Ltd.
3102 Maple Avenue, Suite 200
Dallas, TX 75201
Richard H. Kimball(3)...................................... 3,132,416 9.1 7.7
c/o Technology Crossover Ventures
575 High Street
Palo Alto, CA 94301
Arthur J. Marks(2)......................................... 3,132,416 9.1 7.7
c/o New Enterprise Associates
11951 Freedom Drive
One Freedom Square, Suite 1240
Reston, VA 20190
Edward W. Scott(4)......................................... 10,745,335 31.1 26.4
c/o Baker Capital Partners, LLC
540 Madison Avenue
New York, NY 10022
John W. Seazholtz(6)....................................... 208,185 * *
399 Princeton Avenue
Brick, NJ 08724
Directors and officers as a group (15 persons)(7).......... 29,217,699 84.0% 71.2
</TABLE>
---------------
(1) Includes 8,000,000 shares owned by Mostafa Investments Limited Partnership,
an investment partnership controlled by Asghar D. Mostafa, and 2,564,280
shares owned by Mostafa Venture Fund, LLC, an investment limited liability
company controlled by Asghar D. Mostafa. Excludes 67,533 shares owned by Mr.
Mostafa's brother, Iraj Mostafa, an employee of ASC.
(2) Represents shares held by New Enterprise Associates, which includes the
following entities managed by NEA Partners VIII and NEA General Partners,
L.P.: New Enterprise Associates VIII, L.P., NEA Presidents' Fund, L.P. and
NEA Ventures 1999, L.P. Arthur. J. Marks, a member of our board of
directors, is a general partner of NEA Partners VIII, which is the general
partner of New Enterprise Associates VIII, L.P., and of NEA General Partners
L.P., which is the general partner of NEA Presidents' Fund, L.P. Mr. Marks
disclaims beneficial ownership of these shares, except to the extent of his
pecuniary interest therein.
(3) Represents shares held by Technology Crossover Ventures, which includes the
following entities managed by Technology Crossover Management III, L.L.C.:
TCV III (GP), TCV III, L.P., TCV III (Q), L.P., and TCV III Strategic
Partners, L.P. Richard H. Kimball, a member of our board of directors, is a
managing member of the general partner of these entities. Mr. Kimball
disclaims beneficial ownership of these shares, except to the extent of his
pecuniary interest therein.
(4) Represents shares held by Baker Communications Fund, L.P. Baker Capital
Partners, LLC is a general partner of Baker Communications Fund, L.P. Henry
G. Baker and Edward W. Scott, members of our board of directors, are members
of Baker Capital Partners, LLC. Messrs. Baker and Scott disclaim beneficial
ownership of these shares, except to the extent of their pecuniary interest
therein.
(5) Represents shares held by Balquita Partners, Ltd., a limited partnership
controlled by Mr. Enloe.
(6) Includes 140,000 shares issuable upon the exercise of options granted under
our stock option plans.
(7) Includes 260,000 shares issuable upon the exercise of options granted under
our stock option plans.
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<PAGE> 60
DESCRIPTION OF SECURITIES
After this offering, our authorized capital stock will consist of
250,000,000 shares of common stock, $.0025 par value per share, and 10,000,000
shares of preferred stock, $.01 par value per share. As of July 31, 2000, there
were outstanding:
- 34,514,636 shares of common stock held by 52 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 4,151,282 shares of common 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 40,764,636 shares of our common stock outstanding upon
the closing of this offering.
The descriptions of common stock and preferred stock reflect changes to our
capital structure that will occur upon the closing of this offering in
accordance with the amended and restated certificate of incorporation that we
will adopt immediately prior to the closing of this offering.
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. 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 such 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 our company, the holders of common
stock are entitled to receive ratably our net assets of ours 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. The rights, preferences and
privileges of holders of common stock are subject to the rights of the holders
of shares of any series of preferred stock which we may designate and issue in
the future. Certain holders of common stock have the right to require us to
register their shares of common stock under the Securities Act in certain
circumstances. See "Shares Eligible for Future Sale."
PREFERRED STOCK
Under the terms of our amended and restated certificate of incorporation,
to be effective upon the closing of this offering, the 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. We have no
present plans to issue any shares of preferred stock.
WARRANTS
On March 10, 2000, we issued to one of our customers a warrant to purchase
125,000 shares of common stock at an exercise price of $15.00 per share. This
warrant was amended and restated on June 30, 2000. The warrant has vested, and
if not sooner exercised, this warrant will remain outstanding until June 30,
2007. The warrant may be exercised earlier depending on the timing and amount of
products purchased.
On June 21, 2000, we issued to one of our customers a warrant to purchase
222,000 shares of common stock at an exercise price of $8.00 per share. The
warrant vested immediately upon issuance and is exercisable at any time until
June 21, 2003.
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<PAGE> 61
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 certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock. 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 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 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, both effective upon the closing of this offering, 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 board of
directors.
Our amended and restated by-laws, effective upon the closing of this
offering, 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 which 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 such
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's 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, effective upon the closing of this offering, permits the board of
directors to amend or repeal our by-laws by majority vote but requires the
affirmative vote of the holders of at least 66 2/3% of the shares of our capital
stock entitled to vote to amend or repeal any of the provisions of our amended
and restated by-laws. Generally our amended and restated certificate of
incorporation, effective upon the closing of this offering, may be amended by
holders of a majority of the shares of our capital stock issued and outstanding
and entitled to vote. The stockholder vote with respect to our certificate of
incorporation or by-laws, as amended and restated upon the closing of this
offering, 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 such amendments are submitted to
stockholders.
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<PAGE> 62
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation, effective upon the
closing of this offering, provides that our directors and officers shall be
indemnified by us to the fullest extent authorized by Delaware law. This
indemnification would cover all expenses and liabilities reasonably incurred in
connection with their services for or on behalf of us. In addition, our amended
and restated certificate of incorporation, effective upon the closing of this
offering, provides that our directors will not be personally liable for monetary
damages to us for breaches of their fiduciary duty as directors, unless they
violated their duty of loyalty to us or our stockholders, acted in bad faith,
knowingly or intentionally violated the law, authorized illegal dividends or
redemptions or derived an improper personal benefit from their action as
directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
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<PAGE> 63
SHARES ELIGIBLE FOR FUTURE SALE
Based on shares outstanding as of June 30, 2000, upon completion of this
offering, we will have 40,590,687 shares of common stock outstanding (assuming
no exercise of outstanding options). See "Capitalization" on page 15 for a
detailed discussion of shares included and excluded from this number. Of these
shares, the 6,250,000 shares to be sold in this offering will be freely tradable
without restriction or further registration under the Securities Act of 1933, as
amended, except that any shares purchased by our affiliates, as that term is
defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below. The remaining
34,340,687 shares of common stock held by existing stockholders were issued and
sold by us in reliance on exemptions from the registration requirements of the
Securities Act. Of these shares, 34,314,320 shares will be subject to "lock-up"
agreements described below on the effective date of this offering. Upon
expiration of the lock-up agreements, these shares will become eligible for sale
subject in most cases to the limitations of either Rule 144 or Rule 701. In
addition, holders of stock options could exercise such options and sell certain
of the shares issued upon exercise as described below under "Stock Options".
SALES OF RESTRICTED SHARES
<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
------------------ ------------------------ -------
<S> <C> <C>
90 days after effectiveness..... 26,367 Eligible for sale under Rule 144 or Rule 701
180 days after effectiveness.... 34,314,320 Eligible for sale upon expiration of lock-up
</TABLE>
Certain of the shares listed in the foregoing table as not eligible for
sale until 180 days after effectiveness may become eligible for sale earlier as
described below under "Lock-up Agreements".
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period, a number of
such shares that does not exceed the greater of (1) one percent of the then
outstanding shares of common stock (approximately 406,000 shares immediately
after this offering) or (2) the average weekly trading volume in the common
stock in the over-the-counter market during the four calendar weeks preceding
the date on which notice of such sale is filed, provided certain requirements
concerning availability of public information, manner of sale and notice of sale
are satisfied. In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, in
order to sell shares of common stock which are not restricted securities.
Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale and who has beneficially
owned shares for at least two years may resell such shares without compliance
with the foregoing requirements. In meeting the one-and two-year holding periods
described above, a holder of shares can include the holding periods of a prior
owner who was not an affiliate. The one-and two-year holding periods described
above do not begin to run until the full purchase price or other consideration
is paid by the person acquiring the shares from the issuer or an affiliate. Rule
701 provides that currently outstanding shares of common stock acquired under
our employee compensation plans, and shares of common stock acquired upon
exercise of presently outstanding options granted under these plans, may be
resold beginning 90 days after the date of this prospectus:
- by persons, other than affiliates, subject only to the manner of sale
provisions of Rule 144, and
- by affiliates under Rule 144 without compliance with its one-year minimum
holding period, subject to certain limitations.
STOCK OPTIONS
At June 30, 2000, approximately 275,000 shares of common stock were
issuable pursuant to immediately exercisable options granted under our 1998
Nonqualified Stock Option Plan and the balance of the shares granted under our
1998 plan will vest automatically upon the closing of the offering.
Approximately 175,000 shares are not subject to lock-up agreements with the
underwriters. At June 30, 2000, approximately 230,750 shares of common stock
were issuable pursuant to immediately exercisable options granted under our
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<PAGE> 64
Second 1998 Nonqualified Stock Option Plan of which approximately 95,250 shares
are not subject to lock-up agreements with the underwriters. At June 30, 2000,
there were 18,958 shares of common stock issuable pursuant to immediately
exercisable options granted under the 1999 Nonqualified Stock Option Plan of
which 18,958 are not 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 up to
4,188,782 shares of common stock issuable under our stock plans, including the
404,708 shares of common stock subject to immediately exercisable options as of
June 30, 2000. This registration statement is expected to become effective upon
filing.
LOCK-UP AGREEMENTS
All officers and directors and certain stockholders holding an aggregate of
approximately 34,321,952 shares of our common stock have agreed, subject to
certain exceptions, not to 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, or otherwise transfer or dispose of,
directly or indirectly (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), any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock for a period of 180 days
after the date of this prospectus, without the prior written consent of Morgan
Stanley & Co. Incorporated. However, if the reported last sale price of the
common stock on the Nasdaq National Market is at least twice the initial public
offering price per share for 20 of the 30 trading days ending on the last
trading day preceding the 120th day after the date of this prospectus, 25% of
the shares of our common stock subject to the 180-day restriction described
above will be released from these restrictions provided that the stockholder is
not an executive officer of our company. The release of these shares will occur
on the later to occur of:
- the 120th day after the date of this prospectus if we make our first
post-offering public release of our quarterly or annual earnings results
during the period beginning on the eleventh trading day after the date of
this prospectus and ending on the day prior to the 120th day after the
date of this prospectus, or
- on the second trading day following the first public release of our
quarterly or annual results occurring on or after the 120th day after the
date of this prospectus, if we do not make our first post-offering public
release as set forth in the preceding clause.
Morgan Stanley & Co. Incorporated may in its sole discretion choose to release
any or all of these shares from such restrictions prior to the expiration of
such 120 or 180-day period. However, Morgan Stanley & Co. Incorporated does not
have any current intention to release shares of common stock subject to lock-up
agreements. Any determination to release any shares subject to the lock-up
agreements would be based on a number of factors at the time of determination,
including the market price of the common stock, the liquidity of the trading
market for the common stock, general market conditions, the number of shares
proposed to be sold and the timing, purpose and terms of the proposed sale.
REGISTRATION RIGHTS
After this offering, the holders of approximately 20,079,791 shares of
common stock will be entitled to rights with respect to the registration of such
shares under the Securities Act. Under the terms of the agreement between us and
the holders of such registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such common stock therein. Additionally, such holders are also entitled to
demand registration rights pursuant to which they may require us on up to two
occasions to file a registration statement under the Securities Act at our
expense with respect to shares of our common stock, and we are required to use
our best efforts to effect such registration. Further, holders may require us to
file two additional registration statements on Form S-3 at our expense during
any one year period. All of these registration rights are subject to conditions
and limitations, among them the right of the underwriters of an offering to
limit the number of shares included in such registration.
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<PAGE> 65
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the ownership and disposition of
our common stock by a non-U.S. holder. As used in this discussion, the term
"non-U.S. holder" means a beneficial owner of our common stock that is not, for
U.S. federal income tax purposes:
- an individual who is a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision of the United States,
other than a partnership treated as foreign under U.S. Treasury
regulations;
- an estate whose income is includable in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust, in general, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have authority to control all substantial decisions of the trust.
An individual may be treated as a resident of the United States in any
calendar year for U.S. federal income tax purposes, instead of a nonresident,
by, among other ways, being present in the United States on at least 31 days in
that calendar year and for an aggregate of at least 183 days during a three-year
period ending in the current calendar year. For purposes of this calculation,
you would count all of the days present in the current year, one-third of the
days present in the immediately preceding year and one-sixth of the days present
in the second preceding year. Residents are taxed for U.S. federal income tax
purposes as if they were U.S. citizens.
This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership or trust that the U.S. tax consequences of holding and
disposing of our common stock may be affected by certain determinations
made at the partner or beneficiary level;
- the tax consequences for the shareholders, partners or beneficiaries of a
non-U.S. holder;
- special tax rules that may apply to particular non-U.S. holders, such as
financial institutions, insurance companies, tax-exempt organizations,
U.S. expatriates, broker-dealers, and traders in securities; or
- special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge," "conversion transaction,"
"synthetic security" or other integrated investment.
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable existing and proposed U.S. Treasury
regulations and administrative and judicial interpretations, all as in effect on
the date of this prospectus, and all of which are subject to change,
retroactively or prospectively. The following summary assumes that a non-U.S.
holder holds our common stock as a capital asset. EACH NON-U.S. HOLDER SHOULD
CONSULT A TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S.
INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES
OF OUR COMMON STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that we pay
dividends on our common stock, we will have to withhold a U.S. federal
withholding tax at a rate of 30%, or a lower rate under an applicable income tax
treaty, from the gross amount of the dividends paid to a non-U.S. holder.
Non-U.S. holders should consult their tax advisors regarding their entitlement
to benefits under a relevant income tax treaty.
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<PAGE> 66
Dividends that are effectively connected with a non-U.S. holder's conduct
of a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
taxed on a net income basis at the regular graduated rates and in the manner
applicable to U.S. persons. In that case, we will not have to withhold U.S.
federal withholding tax if the non-U.S. holder complies with applicable
certification and disclosure requirements, which generally requires the non-U.S.
holder to provide a U.S. taxpayer identification number. In addition, a "branch
profits tax" may be imposed at a 30% rate, or a lower rate under an applicable
income tax treaty, on dividends received by a foreign corporation that are
effectively connected with the conduct of a trade or business in the United
States.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
December 31, 2000, a non-U.S. holder who claims the benefit of an applicable
income tax treaty rate generally will be required to satisfy applicable
certification and other requirements. However,
- in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number;
- in the case of common stock held by a foreign trust, the certification
requirement will be applied to the trust or the beneficial owners of the
trust depending on whether the trust is a "foreign complex trust",
"foreign simple trust" or "foreign grantor trust" as defined in the U.S.
Treasury regulations;
- in the case of common stock hold by a foreign estate, the certification
requirement will be applied to the estate; and
- look-through rules will apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.
A non-U.S. holder that is a foreign trust is urged to consult its own tax
advisor regarding its status under these U.S. Treasury regulations and the
certification requirement applicable to it.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal
withholding tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, recently enacted legislation, effective
August 5, 1997, denies income tax treaty benefits to foreigners receiving income
derived through a partnership, or otherwise fiscally transparent entity, in
certain circumstances. Prospective investors should consult with their own tax
advisers concerning the effect, if any, of these new Treasury regulations and
this recent legislation on an investment in our common stock.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of our common stock unless:
- the gain is effectively connected with the non-U.S. holder's conduct of a
trade or business in the United States or, alternatively, if an income
tax treaty applies, is attributable to a permanent establishment
maintained by the non-U.S. holder in the United States; in these cases,
the gain will be taxed on a net income basis at the regular graduated
rates and in the manner applicable to U.S. persons (unless an applicable
treaty provides otherwise) and, if the non-U.S. holder is a foreign
corporation, the "branch profits tax" described above may also apply to
its "effectively connected earnings and profits," within the meaning of
the Internal Revenue Code for the taxable year, as adjusted for specific
items, unless it qualifies for a lower rate under an applicable tax
treaty;
62
<PAGE> 67
- the non-U.S. holder is an individual who holds our common stock as a
capital asset, is present in the United States for at least 183 days in
the taxable year of the disposition and meets other requirements, then
such individual generally will be subject to a flat 30% tax on the gain
derived from a sale, which may be offset by United States capital losses,
notwithstanding the fact that such individual is not considered a
resident alien of the U.S. Thus, individual non-U.S. holders who have
spent (or expect to spend) more than a de minimis period of time in the
United States in the taxable year in which they contemplate a sale of
common stock are urged to consult their tax advisers prior to the sale
concerning the U.S. tax consequences of such sale;
- the non-U.S. holder is subject to tax under the provisions of the U.S.
tax law applicable to certain United States expatriates; or
- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition or the period that the
non-U.S. holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. The tax
relating to stock in a U.S. real property holding corporation generally will not
apply to a non-U.S. holder whose holdings, direct and indirect, at all times
during the applicable period, constituted 5% or less of our common stock,
provided that our common stock was regularly traded on an established securities
market. We believe that we are not currently, and we do not anticipate becoming
in the future, a U.S. real property holding corporation for U.S. federal income
tax purposes. If we were, or were to become, a U.S. real property holding
corporation, we believe that our common stock would be treated as "regularly
traded."
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the U.S. Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to that holder and the tax withheld
from those dividends. Copies of the information returns reporting those
dividends and withholding may also be made available to the tax authorities in
the country in which the non-U.S. holder is a resident under the provisions of
an applicable income tax treaty or agreement.
Under some circumstances, U.S. Treasury regulations require additional
information reporting and backup withholding at a rate of 31% on some payments
on common stock. Under currently applicable law, non-U.S. holders generally will
be exempt from these additional information reporting requirements and from
backup withholding on dividends paid prior to 2001 if we either were required to
withhold a U.S. federal withholding tax from those dividends or we paid those
dividends to an address outside the United States. Backup withholding and
information reporting generally will apply to dividends paid to addresses inside
the United States on shares of our common stock to beneficial owners that are
not "exempt recipients" and that fail to provide identifying information in the
manner required. After 2000, the gross amount of dividends paid to a non-U.S.
holder that fails to certify its non-U.S. holder status in accordance with
applicable U.S. Treasury regulations generally will be reduced by backup
withholding at a rate of 31% regardless of whether an address is inside or
outside the United States.
The payment of the proceeds of the disposition of common stock by a
non-U.S. holder to or through the U.S. office of a broker or a non-U.S. office
of a U.S. broker generally will be reported to the U.S. Internal Revenue Service
and reduced by backup withholding at a rate of 31% unless the non-U.S. holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption and the broker has no actual knowledge to the
contrary. The payment of the proceeds of the disposition of common
63
<PAGE> 68
stock by a non-U.S. holder to or through a non-U.S. office of a non-U.S. broker
will not be reduced by backup withholding or reported to the U.S. Internal
Revenue Service unless the non-U.S. broker is a "U.S. related person." In
general, the payment of proceeds from the disposition of common stock by or
through a non-U.S. office of a broker that is a U.S. person or a "U.S. related
person" will be reported to the U.S. Internal Revenue Service and, after 2000,
may in limited circumstances be reduced by backup withholding at a rate of 31%,
unless the broker receives a statement from the non-U.S. holder, signed under
penalty of perjury, certifying its non-U.S. status or the broker has documentary
evidence in its files that the holder is a non-U.S. holder and the broker has no
actual knowledge to the contrary. For this purpose, a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business; or
- effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by U.S. persons, or (B) the partnership is engaged
in a U.S. trade or business.
Non-U.S. holders should consult their own tax advisors regarding the
application of the information reporting and backup withholding rules to them,
including changes to these rules that will become effective after 2000. Any
amounts withheld under the backup withholding rules from a payment to a non-U.S.
holder will be refunded, or credited against the holder's U.S. federal income
tax liability, if any, provided that the required information is furnished to
the U.S. Internal Revenue Service.
64
<PAGE> 69
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, Chase Securities Inc., and FleetBoston
Robertson Stephens Inc. are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to them, severally, the number of shares
indicated below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Chase Securities Inc........................................
FleetBoston Robertson Stephens Inc..........................
--------
Total............................................. 6,250,000
========
</TABLE>
The underwriters are offering the shares of common stock 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 by this prospectus are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus if any such shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters over-allotment option described below.
Morgan Stanley Dean Witter Online, Inc., an affiliate of Morgan Stanley &
Co. Incorporated, may act as a selected dealer in connection with the offering
to facilitate Internet distribution.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain 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.
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 937,500
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
overallotments, 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 certain conditions, to
purchase about the same percentage of the additional shares of common stock as
the number listed next to the underwriter's name in the preceding table bears to
the total number of shares of common stock listed next to the names of all
underwriters in the preceding table. If the underwriters' option is exercised in
full, the total price to the public would be $ , the total
underwriters' discounts and commissions would be $ and total proceeds
to us would be $ .
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 to list our common stock for quotation on the
Nasdaq National Market under the symbol "ASCX."
We, our directors, executive officers and certain other stockholders have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, each of us will not, during the
period ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
65
<PAGE> 70
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. This lock-up restriction
is subject, in certain circumstances for shares held by stockholders other than
executive officers of ASC, to earlier release. See "Shares Eligible for Future
Sale -- Lock-up Agreements."
The restrictions described in the preceding paragraph do not apply to:
- the sale of any shares to the underwriters; or
- 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 the offering of the shares.
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 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.
From time to time, Morgan Stanley & Co. Incorporated has provided
investment banking services to us. In September 1999, Morgan Stanley Venture
Partners III, L.P., Morgan Stanley Venture Investors, III, L.P. and The Morgan
Stanley Venture Partners Entrepreneur Fund, L.P., affiliates of Morgan Stanley &
Co. Incorporated, purchased 12.5% of our Class D preferred stock.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
At our request, the underwriters have reserved for sale, at the initial
offering price, up to 312,500 shares offered hereby for our directors, officers,
employees, business associates, and related persons. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which are
not so purchased will be offered to the underwriters to the general public on
the same basis as the other shares offered hereby.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between us and the representatives. Among the factors to be considered in
determining the initial public offering price will be our future prospects and
our industry in general, sales, earnings and our other financial operating
information in recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to ours. The estimated
initial public offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
Fried, Frank, Harris, Shriver & Jacobson, a partnership including
professional corporations, in Washington, D.C., will pass upon the validity of
the shares of common stock offered by this prospectus. Davis Polk & Wardwell, in
New York, New York, will pass upon certain legal matters relating to the
offering for the underwriters.
66
<PAGE> 71
EXPERTS
The financial statements as of December 31, 1998 and 1999, and for the
period from September 10, 1997 (inception) through December 31, 1997 and for
each of the two years in the period ended December 31, 1999, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing in this prospectus, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
shares of common stock offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and its
exhibits and schedules. Particular items are omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. For further
information about our company and the common stock offered by this prospectus,
we refer you to the registration statement, including its exhibits and
schedules. You may read and copy the registration statement at the Securities
and Exchange Commission's following locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
Room 1024 Seven World Trade Center Citicorp Center
450 Fifth Street, Suite 1300 500 West Madison Street
N.W. New York, NY 10048 Suite 1400
Washington, DC 20549 Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of the registration statement by mail from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 or by telephone at
1-800-SEC-0330. The registration statement is also available to the public from
commercial document retrieval services and at the Securities and Exchange
Commission's World Wide Web site located at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.
67
<PAGE> 72
ADVANCED SWITCHING COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Statements of Comprehensive Loss............................ F-7
Notes to Financial Statements............................... F-8
</TABLE>
F-1
<PAGE> 73
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advanced Switching Communications, Inc.
McLean, Virginia
We have audited the accompanying balance sheets of Advanced Switching
Communications, Inc. (the "Company") as of December 31, 1998 and 1999, and the
related statements of operations, comprehensive loss, stockholders' equity
(deficit), and cash flows for the period from September 10, 1997 (inception) to
December 31, 1997, and the years ended December 31, 1998 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of Advanced Switching Communications, Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the period from September 10, 1997 (inception) to December 31, 1997,
and the years ended December 31, 1998 and 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
--------------------------------------
McLean, VA
June 9, 2000
F-2
<PAGE> 74
ADVANCED SWITCHING COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ JUNE 30, JUNE 30,
1998 1999 2000 2000
------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 1)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,449 $ 33,012 $ 5,464
Marketable securities..................................... 3,481 -- 11,212
Accounts receivable....................................... -- 2,116 8,848
Inventories............................................... 7 2,088 4,964
Other current assets...................................... 29 1,368 432
------- -------- --------
Total current assets................................ 4,966 38,584 30,920
------- -------- --------
Property and equipment, net................................. 1,484 2,092 3,139
Marketable securities....................................... -- -- 8,872
Other assets................................................ 1 1,019 1,021
------- -------- --------
6,451 41,695 43,952
======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... 548 2,183 8,703
Accrued compensation and related benefits................. 276 833 599
Accrued warranty costs.................................... -- 143 623
Other accrued liabilities................................. 27 160 749
Current portion of long-term debt......................... 199 196 164
------- -------- --------
Total current liabilities........................... 1,050 3,515 10,838
Long-term debt, less current portion........................ 286 98 37
Deferred rent............................................... -- 40 65
------- -------- --------
1,336 3,653 10,940
Commitments and contingencies
Class A redeemable convertible preferred stock $1.00 par
value; 10 authorized; 10 issued and outstanding,
liquidation value of $2,382 at December 31, 1999 and June
30, 2000 (unaudited)...................................... 2,462 2,617 2,694 $ --
Class B redeemable convertible preferred stock $1.00 par
value; 14 authorized; 11 issued and outstanding,
liquidation value of $2,740 at December 31, 1999 and June
30, 2000 (unaudited)...................................... 2,832 3,010 3,099 --
Class C redeemable convertible preferred stock $0.01 par
value; 4,154 authorized; 2,173, 3,989 and 3,989 issued and
outstanding at December 31, 1998, 1999 and June 30, 2000
(unaudited), respectively, liquidation value of $11,639 at
December 31, 1999 and $12,063 at June 30, 2000
(unaudited)............................................... 5,299 10,989 11,478 --
Class D redeemable convertible preferred stock $0.01 par
value; 4,700 authorized; 0, 4,679 and 4,679 issued and
outstanding at December 31, 1998, 1999 and June 30, 2000
(unaudited), respectively, liquidation value of $40,954 at
December 31, 1999 and $42,550 at June 30, 2000
(unaudited)............................................... -- 38,901 40,612 --
Class E redeemable convertible preferred stock $0.01 par
value; 100 authorized; 0, 0 and 68 issued and outstanding
at December 31, 1998, 1999 and June 30, 2000 (unaudited),
respectively, liquidation value of $500 at June 30, 2000
(unaudited)............................................... -- -- 500 --
Stockholders' equity (deficit):
Common stock $0.0025 par value; 37,908 authorized;
11,960, 11,530 and 11,689 issued and outstanding at
December 31, 1998, 1999 and June 30, 2000 (unaudited),
respectively.......................................... 30 30 30 87
Additional paid-in-capital.............................. -- -- 4,560 62,886
Accumulated deficit..................................... (5,542) (16,544) (24,841) (24,841)
Treasury stock, 490 shares.............................. -- (200) (200) (200)
Deferred stock compensation............................. -- (761) (4,883) (4,883)
Accumulated comprehensive loss.......................... 34 -- (37) (37)
------- -------- -------- --------
Total stockholders' equity (deficit)................ (5,478) (17,475) (25,371) $ 33,012
------- -------- -------- --------
$ 6,451 $ 41,695 $ 43,952
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 75
ADVANCED SWITCHING COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 10, SIX MONTHS ENDED
1997) THROUGH YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------- ---------------------
1997 1998 1999 1999 2000
-------------- -------- --------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................... $ -- $ -- $ 4,278 $ 402 $ 12,933
Cost of revenue................... -- -- 2,839 337 9,556
------ ------- -------- ------- --------
Gross profit...................... -- -- 1,439 65 3,377
Operating expenses:
Research and development,
excluding stock compensation
amortization amounts(1)...... 111 3,717 6,718 3,021 5,528
Sales and marketing, excluding
stock compensation
amortization amounts(1)...... 73 799 3,209 1,292 3,562
General and administrative,
excluding stock compensation
amortization amounts(1)...... 125 611 1,251 484 961
Amortization of stock
compensation(1).............. -- -- 42 -- 373
Stock and warrant issuance
costs........................ -- -- -- -- 2,306
------ ------- -------- ------- --------
Total operating expenses... 309 5,127 11,220 4,797 12,730
------ ------- -------- ------- --------
Loss from operations.............. (309) (5,127) (9,781) (4,732) (9,353)
Other income (expenses):
Interest income................. 18 87 539 112 1,068
Interest expense................ (2) (71) (87) (20) (12)
------ ------- -------- ------- --------
Total other income
(expense)............... 16 16 452 92 1,056
------ ------- -------- ------- --------
Net loss.......................... (293) (5,111) (9,329) (4,640) (8,297)
Accretion of transaction costs and
accrued dividends on redeemable
convertible preferred stock..... -- (367) (2,589) (482) (2,748)
------ ------- -------- ------- --------
Net loss applicable to common
shareholders.................... $ (293) $(5,478) $(11,918) $(5,122) $(11,045)
====== ======= ======== ======= ========
Basic and diluted loss per
share........................... $(0.05) $ (0.48) $ (1.01) $ (0.43) $ (0.95)
====== ======= ======== ======= ========
Weighted average shares used in
net loss per share
calculations.................... 5,742 11,389 11,789 11,958 11,601
====== ======= ======== ======= ========
Pro forma net loss per share,
basic and diluted (unaudited)
(Note 1)........................ $ (0.38) $ (0.26)
======== ========
Shares used in computing pro forma
basic and diluted net loss per
share (unaudited) (Note 1)...... 24,251 32,462
======== ========
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(1) AMORTIZATION OF STOCK COMPENSATION:
Research and development..... $ -- $ -- $ 5 $ -- $ 152
Sales and marketing.......... -- -- 35 -- 186
General and administrative... -- -- 2 -- 35
------ ------- -------- ------- --------
$ -- $ -- $ 42 $ -- $ 373
====== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 76
ADVANCED SWITCHING COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED STOCKHOLDER'S
--------------- PAID-IN TREASURY ACCUMULATED DEFERRED COMPREHENSIVE EQUITY
SHARES AMOUNT CAPITAL STOCK DEFICIT COMPENSATION LOSS (DEFICIT)
------ ------ ---------- -------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares issued.............. 9,580 $24 $ 147 $ -- $ -- $ -- $ -- $ 171
Net loss................... -- -- -- -- (293) -- -- (293)
------ --- ------- ----- -------- ------- ---- --------
Balance, December 31,
1997..................... 9,580 24 147 (293) -- -- (122)
Shares issued.............. 2,380 6 36 -- -- -- -- 42
Options granted for
consulting services...... -- -- 46 -- -- -- -- 46
Dividends accrued on
redeemable, convertible
preferred stock.......... -- -- (229) -- (100) -- -- (329)
Accretion of transaction
costs on redeemable,
convertible preferred
stock.................... -- -- -- -- (38) -- -- (38)
Unrealized gain on
securities............... -- -- -- -- -- -- 34 34
Net loss................... -- -- -- -- (5,111) -- -- (5,111)
------ --- ------- ----- -------- ------- ---- --------
Balance, December 31,
1998..................... 11,960 30 -- (5,542) -- 34 (5,478)
Shares repurchased......... -- -- -- (200) -- -- -- (200)
Options granted for
consulting services...... -- -- 47 -- -- -- -- 47
Gain on sale of
securities............... -- -- -- -- -- -- (34) (34)
Options exercised.......... 59 -- 66 -- -- -- -- 66
Deferred compensation
expense associated with
equity awards............ -- -- 803 -- -- (803) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 42 -- 42
Dividends accrued on
redeemable, convertible
preferred stock.......... -- (916) (1,035) -- (1,951)
Preferred stock dividend... -- -- -- -- (418) -- -- (418)
Accretion of transaction
costs on redeemable,
convertible preferred
stock.................... -- -- -- -- (220) -- -- (220)
Net loss................... -- -- -- -- (9,329) -- -- (9,329)
------ --- ------- ----- -------- ------- ---- --------
Balance, December 31,
1999..................... 12,019 30 -- (200) (16,544) (761) -- (17,475)
Options exercised
(unaudited).............. 159 -- 196 -- -- -- -- 196
Deferred compensation
expense associated with
equity awards
(unaudited).............. -- -- 4,495 -- -- (4,495) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 373 -- 373
Issuance of warrants
(unaudited).............. -- -- 2,306 -- -- -- -- 2,306
Dividends accrued on
redeemable, convertible
preferred stock
(unaudited).............. -- -- (2,193) -- -- -- -- (2,193)
Accretion of transaction
costs on redeemable,
convertible preferred
stock (unaudited)........ -- -- (244) -- -- -- -- (244)
Unrealized gain on
securities (unaudited)... -- -- -- -- -- -- (37) (37)
Net loss................... -- -- -- -- (8,297) -- -- (8,297)
------ --- ------- ----- -------- ------- ---- --------
Balance, June 30, 2000
(unaudited).............. 12,178 $30 $ 4,560 $(200) $(24,841) $(4,883) $(37) $(25,371)
====== === ======= ===== ======== ======= ==== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 77
ADVANCED SWITCHING COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 10,
1997) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------- -------------------
1997 1998 1999 1999 2000
-------------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................. $(293) $(5,111) $ (9,329) $(4,640) $ (8,297)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on disposal of equipment......... -- -- -- -- 13
Realized gain on marketable
securities.......................... -- (45) (34) (34) (105)
Depreciation and amortization......... 5 216 657 293 593
Amortization of stock compensation.... -- -- 42 -- 373
Stock and warrant issuance costs...... -- -- -- -- 2,306
Deferred rent......................... 71 -- 40 20 25
Consulting expense related to stock
options............................. 46 47 --
Changes in operating assets and
liabilities:
Accounts receivable................... -- -- (2,116) (316) (6,732)
Inventory............................. -- (7) (2,081) (2,012) (2,876)
Other current assets.................. (1) (28) (1,339) 19 936
Accounts payable...................... 35 513 1,635 1,359 6,520
Accrued liabilities................... 57 246 833 27 835
Other assets.......................... -- (1) (1,018) (1,010) (2)
----- ------- -------- ------- --------
Net cash used in operating activities...... (126) (4,171) (12,663) (6,294) (6,411)
----- ------- -------- ------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment...... (122) (1,583) (1,266) (406) (1,653)
Proceeds from sales of marketable
securities............................ -- -- 3,481 3,481 14,046
Purchases of marketable securities....... (153) (3,362) -- -- (34,134)
----- ------- -------- ------- --------
Net cash used in (provided by)
investing activities................ (275) (4,945) 2,215 3,075 (21,741)
----- ------- -------- ------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock... 171 40 -- -- --
Proceeds from issuance of preferred
stock................................. -- 10,270 42,336 4,507 500
Proceeds from exercise of stock
options............................... -- -- 66 -- 196
Proceeds from issuance of notes
payable............................... 333 408 -- 1,000 --
Principal payments on notes payable...... (5) (251) (191) (98) (92)
Repurchase of treasury shares............ -- -- (200) -- --
----- ------- -------- ------- --------
Net cash provided by (used in)
financing activities................ 499 10,467 42,011 (5,409) 604
----- ------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents.............................. 98 1,351 31,563 2,190 (27,548)
Cash and cash equivalents, beginning of
period................................... -- 98 1,449 1,449 33,012
----- ------- -------- ------- --------
Cash and cash equivalents, end of period... $ 98 $ 1,449 $ 33,012 $ 3,639 $ 5,464
===== ======= ======== ======= ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION:
Interest paid............................ $ 2 $ 27 $ 86 $ 19 $ 14
===== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 78
ADVANCED SWITCHING COMMUNICATIONS, INC.
STATEMENTS OF COMPREHENSIVE LOSS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 10,
1997) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------- -----------------
1997 1998 1999 1999 2000
-------------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss.................................. $(293) $(5,111) $(9,329) $(4,640) $(8,297)
Unrealized gain (loss) on marketable
securities.............................. -- 34 (34) -- (37)
----- ------- ------- ------- -------
Comprehensive loss........................ $(293) $(5,077) $(9,363) $(4,640) $(8,334)
===== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 79
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Advanced Switching Communications, Inc. ("ASC" or the "Company") was
incorporated in the state of Delaware in September 1997. The Company provides
next-generation broadband access platforms to telecommunications service
providers. ASC's products enable its customers to transmit voice, data and
multimedia traffic more rapidly and cost-effectively while preserving their
investments in existing communications systems. Through December 31, 1999, the
Company principally marketed its products in the United States. Through December
31, 1998, the Company was considered to be in the development stage and was
principally engaged in research and development, raising capital and building
its management team. The Company shipped its first product in March 1999.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment. When the
arrangement with the customer includes obtaining customer acceptance, revenue is
recognized when customer acceptance has been received. Revenue is recognized in
amounts expected to be realized upon final settlement.
Upon shipment to its customers, ASC provides for the estimated cost to
repair or replace products to be returned under warranty. ASC's warranty period
is typically 12 months from the date of shipment to the end user.
ASC provides post-contract support for its products. This support is
considered insignificant to the sale of the products and therefore the Company
recognizes any revenue associated with post-contract support in conjunction with
the sale of the product in accordance with Statement of Position 97-2, "Software
Revenue Recognition."
Research and Development
Research and development costs are charged to operations as incurred.
Cash and Cash Equivalents and Marketable Securities
The Company considers all highly-liquid investments purchased with an
original maturity of three months or less to be cash equivalents, and
investments with original maturity dates greater than three months but less than
12 months to be short-term investments. To date, all marketable securities have
been classified as available-for-sale and have been carried at fair value, with
unrealized gains and losses, reported as a separate component of comprehensive
income. The fair value of marketable securities was determined based on quoted
market prices at the reporting date for those instruments. The cost of
securities sold is based on specific identification. Premiums and discounts are
amortized over the period from acquisition to maturity and are included in
investment income, along with interest and dividends.
At December 31, 1998, the Company held U.S. mortgage-backed and corporate
debt securities with an amortized cost of $3,447,000 and a fair value of
$3,481,000, resulting in an unrealized holding gain of $34,000. At June 30,
2000, the Company held U.S. mortgage-backed and corporate debt securities,
commercial paper and taxable auction securities. The amortized cost of such
securities at June 30, 2000 was $24,807,000 (unaudited) resulting in an
unrealized holding loss of $37,000 (unaudited).
Inventories
Inventories are stated at the lower of cost (average cost basis) or market
(net realizable value).
F-8
<PAGE> 80
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets
Other assets include prepaid manufacturing costs to the contract
manufacturers of $1,314,000 at December 31, 1999. These prepaid costs were being
reduced as completed products were received by the Company. There were no such
prepaid costs at June 30, 2000 (unaudited).
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets using the straight-line method, based upon the
following asset lives:
<TABLE>
<S> <C>
Computer and telecommunications equipment 3 years
Computer software 3 years
Furniture and office equipment 5 years
Leasehold improvements Shorter of lease term or useful life of asset
</TABLE>
Income Taxes
Income taxes are accounted for using the liability method. Under this
method, deferred tax assets and liabilities are recorded based on temporary
differences between the financial statement amounts and the tax bases of assets
and liabilities measured using enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company periodically evaluates the
realizability of its net deferred tax assets and records a valuation allowance
if, based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates.
Accounting for Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation", ("SFAS 123"), the Company
accounts for stock option grants to employees and directors in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, ASC recognizes no compensation expense for stock option
grants with an exercise price equal to or greater than the fair value of the
shares at the date of grant. Stock options issued to consultants of the Company
are accounted for under SFAS 123, which requires an expense to be recognized
using an option-pricing model. The expense recorded in connection with the stock
option grants to consultants was $46,000 and $47,000 for the years ended
December 31, 1998 and 1999, respectively.
Fair Value of Financial Instruments
The carrying value of the Company's cash and cash equivalents, marketable
securities, accounts receivable, accounts payable and accrued liabilities
approximate their fair values due to their relatively short maturities. The fair
value of long-term marketable securities is estimated based on current interest
rates, degrees of risk and remaining maturities.
The fair value of short and long-term debt is estimated based on current
interest rates available to the Company for debt instruments with similar terms,
degrees of risk and remaining maturities. The carrying amounts of these
obligations approximate their fair values.
F-9
<PAGE> 81
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk, Product and Significant Customers and Supplier
Information
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
investments in marketable securities and accounts receivable. The Company places
its temporary cash investments in money market funds and debt instruments with
high credit-quality issuers with no more than 10% of the portfolio due from any
one issuer. The Company's accounts receivable are derived from revenue earned
from customers located in the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of accounts
receivable.
During the year ended December 31, 1999, two customers accounted for 22%
and 53% of the Company's revenue and at December 31, 1999, these two customers
accounted for 29% and 49% of total trade accounts receivable. During the six
months ended June 30, 2000, these same two customers accounted for 11% and 10%
of the Company's revenue and at June 30, 2000, these two customers accounted for
9% and 5% of total trade receivables (unaudited). One additional customer
accounted for 53% of the Company's revenue and 62% of total trade receivables at
June 30, 2000 (unaudited).
The Company is currently dependent on two contract manufacturers and some
of the key components in the Company's product come from single or limited
sources of supply. If we are unable to manufacture and ship our products on a
timely basis, this could result in lost or delayed revenue or increased
manufacturing costs.
Pro Forma Information (unaudited)
Under the terms of the Company's agreements with the holders of the Class
A, B, C, D and E Redeemable Convertible Preferred Stock ("Convertible Preferred
Stock") (Note 7), all of such preferred stock will be converted automatically
into shares of common stock upon closing of the Company's initial public
offering and, therefore, all such shares have been converted for the pro forma
presentation. The pro forma balance sheet information at June 30, 2000 reflects
the conversion of the Class A, B, C, D and E preferred stock into 22,651,937
shares of common stock as if the conversion occurred on June 30, 2000. The
Common Shares to be issued resulting from an initial public offering and its
related net proceeds are excluded from such pro forma information.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share". Under the provisions of SFAS No. 128, basic net loss per
share is computed by dividing the net loss applicable to common shareholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common and common equivalent shares
outstanding during the period, if dilutive. Common equivalent shares consist of
incremental common shares issuable upon the exercise of stock options and upon
conversion of Class A, B, C, D and E Convertible Preferred Stock.
The Company has excluded all potential common shares from the calculation
of diluted loss per common share because all such securities are anti-dilutive
for all periods presented. The total number of potential common shares excluded
from the calculations of diluted net loss per share was zero, 7,870,000,
22,272,000, 14,069,000 (unaudited) and 26,981,000 (unaudited) for the period
ended December 31, 1997, the years ended December 31, 1998 and 1999 and the six
months ended June 30, 1999 and 2000, respectively.
F-10
<PAGE> 82
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share for the year ended December 31, 1999 and the
six months ended June 30, 2000 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Class A, B, C, D and E Convertible Preferred Stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1999, or at date of original issuance, if later.
The following table sets forth the pro forma computation of basic and
diluted net loss per share for the periods indicated (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1999 JUNE 30, 2000
------------ -------------
<S> <C> <C>
Numerator:
Net loss applicable to common shareholders.............. $(11,918) $(11,045)
Accretion of transaction costs and accrued dividends on
redeemable, convertible preferred stock............... 2,589 2,748
-------- --------
Pro Forma net loss...................................... $ (9,329) $ (8,297)
======== ========
Historical weighted average common shares outstanding... 11,789 11,601
Weighted average number of shares assumed upon
conversion of redeemable convertible common stock..... 12,462 20,861
-------- --------
Shares used in computing pro forma basic and diluted net
loss per share........................................ 24,251 32,462
======== ========
Pro forma basic and diluted net loss per share.......... $ (0.38) $ (0.26)
======== ========
</TABLE>
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 established methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. Because the
Company currently holds no derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will not have
a material impact on its financial position, results of operations or cash
flows. The Company will be required to implement SFAS No. 133 for the year
ending December 31, 2001.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25." With the exception of certain provisions which require earlier
application, this interpretation is effective for all applicable transactions
beginning July 1, 2000. The Company does not expect that the adoption of this
Interpretation will have a material impact on its financial statements.
Unaudited Interim Results
The accompanying balance sheet as of June 30, 2000, the statements of
operations, cash flows and comprehensive loss for the six months ended June 30,
1999 and 2000 and the statement of stockholders' equity for the six months ended
June 30, 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 notes to the
financial statements for
F-11
<PAGE> 83
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
these periods is also unaudited. Results of the six months ended June 30, 2000
are not indicative of results the entire year.
2. INVENTORIES
Inventories consisted of the following at December 31, 1998 and 1999 and
June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
1998 1999 2000
---- ------ -----------
<S> <C> <C> <C>
Raw materials.............................................. $7 $1,065 $ 373
Work in process............................................ -- 798 6
Finished goods............................................. -- 225 4,585
-- ------ ------
$7 $2,088 $4,964
== ====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Computer software and equipment............................. $ 808 $1,454
Office equipment............................................ 650 1,074
Furniture and fixtures...................................... 231 419
Equipment under capital leases.............................. 16 23
------ ------
1,705 2,970
Less accumulated depreciation............................... (221) (878)
------ ------
Property and equipment, net................................. $1,484 $2,092
====== ======
</TABLE>
4. INCOME TAXES
No provisions for income taxes have been recorded as the Company has
incurred net losses since inception.
At December 31, 1998 and 1999, the Company had approximately $5.4 million
and $14.7 million of federal and state net operating loss carryforwards
available to offset future taxable income. The Federal and State net operating
loss carryforwards begin to expire in 2012 and 2004, respectively. Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period. Such a change may
have occurred as a result of the preferred stock issuances during 1998 and 1999.
As of December 31, 1998 and 1999, the Company had gross deferred tax assets
of approximately $2.2 million and $5.9 million, respectively, related primarily
to net operating loss carryforwards that are available to reduce future taxable
income through 2019. Management believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded.
F-12
<PAGE> 84
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Amounts borrowed consisted of the following at December 31, 1998 and 1999
(in thousands):
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Bank note payable, interest at prime plus 2% (10.5% at
December 31, 1999), due in monthly installments of $5 plus
interest through November 2000, collateralized by the
Company's furniture....................................... $ 110 $ 53
Bank note payable, interest at prime plus 0.5% (9.0% at
December 31, 1999), due in monthly installments of $2 plus
interest through April 2001, collateralized by
substantially all of the Company's assets................. 43 26
Bank note payable, interest at prime plus 0.75% (9.25% at
December 31, 1999), due in monthly installments of $10
plus interest through June 2001, collateralized by
substantially all of the Company assets................... 322 204
----- -----
475 283
Amounts under capital lease (Note 6)........................ 10 11
Less current portion........................................ (199) (196)
----- -----
Long-term portion........................................... $ 286 $ 98
===== =====
</TABLE>
6. COMMITMENTS
The Company leases office space and equipment under various noncancelable
operating and capital leases with various expiration dates through 2005. The
terms of the facility leases provide for rental payments on a graduated scale.
The facility leases for the Company's headquarters expire in August 2002 and
November 2005. The Company leases office space for sales personnel in various
cities throughout the U.S. These leases are on a month-to-month arrangement or
are for a period of no longer than 1 year. The Company recognizes rent expense
on a straight-line basis over the lease periods. Rental expense for all
operating leases for the period from September 7, 1997 through December 31, 1997
and the years ended December 31, 1998 and 1999 was $71,000, $355,000 and
$673,000, respectively.
Future minimum lease payments under noncancelable operating and capital
leases, including operating lease commitments entered into subsequent to
December 31, 1999, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000........................................................ $ 7 $1,097
2001........................................................ 2 1,181
2002........................................................ 2 1,017
2003........................................................ -- 625
2004........................................................ -- 639
Thereafter.................................................. -- 600
--- ------
11 $5,159
--- ======
Less current portion........................................ (7)
---
Long-term portion........................................... $ 4
===
</TABLE>
In connection with the lease of the Company's headquarters, the Company is
required to maintain $1,000,000 in an escrow account with the bank that has
issued a letter of credit to the landlord. This escrow requirement terminates at
the sooner of the end of the lease term or the time at which ASC has maintained
a
F-13
<PAGE> 85
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
net worth in excess of $5,000,000 for 24 consecutive months. This amount has
been recorded in long-term other assets for the year ended December 31, 1999.
Subsequent to December 31, 1999, the Company received a letter from Nortel
Networks Corporation alleging that our products infringe one of Nortel's patents
relating to inverse multiplexing over ATM. Management intends to contest this
claim vigorously. Management is of the opinion that any liability or loss
associated with this claim will not have a material adverse effect on the
Company's operations or liquidity.
The Company is involved in various other claims arising in the normal
course of business. Management is of the opinion that any liability or loss
associated with such matters will not have a material adverse effect on the
Company's operations or liquidity.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Issuances of redeemable convertible preferred stock during the years ended
December 31, 1998 and 1999 and the six months ended June 30, 2000 (unaudited)
were as follows (in thousands).
<TABLE>
<CAPTION>
SHARES
------------------- ISSUANCE DATE
CLASS AUTHORIZED ISSUED PROCEEDS COSTS ISSUED
----- ---------- ------ -------- -------- --------------
<S> <C> <C> <C> <C> <C>
A............................ 10 10 $ 2,382 $ -- June 1998
B............................ 14 11 2,740 -- June 1998
C............................ 4,154 2,173 5,893 789 August 1998
1,662 4,506 11 June 1999
154(1) --(1) -- September 1999
D............................ 4,700 4,094 35,002 1,822 September 1999
585 5,000 338 October 1999
E............................ 100 68 500 -- June 2000
------ ----- ------- ------
8,978 8,757 $56,023 $2,960
====== ===== ======= ======
</TABLE>
---------------
(1) This tranche of Class C Redeemable Convertible Preferred shares was issued
in accordance with the anti-dilutive provisions for Class C at the time of
the sale of Class D Redeemable Convertible Preferred shares. As there were
no proceeds in connection with the Class C shares, the number of shares
valued at the liquidation price per share was treated as a dividend in order
to record the Class C at its liquidation value in the balance sheet.
The holders of the Redeemable Convertible Preferred Stock have various
rights and preferences as follows:
Voting
Each share of Class A, B, C and D has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes together
as one class with the Common Stock.
Dividends
Holders of Class A, B, C and D Redeemable Convertible Preferred Stock are
entitled to receive cumulative dividends at the per annum rate of 6.5%, 6.5%, 8%
and 8% of the original purchase price paid, respectively, whether or not
declared, payable quarterly in arrears, when and if declared by the Board of
Directors. The holders of Class A, B, C and D have rights to receive a pro rata
share of dividends paid to holders of commons stock. No dividends on Convertible
Preferred Stock or Common Stock have been declared from inception through June
30, 2000. All accrued dividends are included in the Convertible Preferred Stock
balances at the respective balance sheet dates.
F-14
<PAGE> 86
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Liquidation
In the event of any involuntary liquidation, dissolution or winding up of
the Company the holders of Class A, B, C and D Convertible Preferred Stock are
entitled to receive an amount of $250, $250, $2.71 and $8.55 per share,
respectively, plus any accrued dividends, whether or not declared, prior to and
in preference to any distribution to the holders of Common Stock.
Conversion
Each share of Class A and B Convertible Preferred Stock is convertible, at
the option of the holder, upon the occurrence of a triggering event which is
defined as follows: (1) the closing of a public offering of Common Stock
generating aggregate proceeds of $50,000,000, or (2) the Company enters into a
merger consolidation or other similar combination, or (3) the Company achieves
an annual gross revenue of more than $25,000,000. Each share of Class C and D
Redeemable Convertible Preferred Stock may be converted at any time at the
option of the holder. Each share of Class C and D Redeemable Convertible
Preferred Stock automatically converts upon: (1) the closing of a public
offering of Common Stock generating aggregate proceeds of $50,000,000 or (2) the
Company enters into a merger, consolidation or other similar combination for a
total purchase price of the equity of the Company of at least $250,000,000. Upon
the conversion of Class C shares, Class A and B shares automatically convert
into shares of common stock. Class A, B, C and D preferred shares are
convertible into common shares based on the following calculation: the sum of
the original issuance price per share multiplied by the number of shares
outstanding plus the cumulative accrued dividends, divided by the applicable
conversion ratio. The original issue price per share is $250, $250, $2.7117 and
$8.55 for Classes A, B, C and D, respectively. The conversion ratios are 4.275,
1.00, 1.356 and 4.275 for Classes A, B, C and D, respectively.
At December 31, 1999, the Company has reserved 612,000, 3,010,000,
8,584,000 and 9,580,000 shares of Common Stock for the conversion of Class A, B,
C and D convertible preferred stock, respectively.
At June 30, 2000, the Company has reserved 630,000, 3,099,000, 8,902,000,
9,953,000 and 68,000 shares of Common Stock for the conversion of Class A, B, C,
D and E Convertible Preferred Stock, respectively (unaudited).
Redemption
The Class A and B shares are redeemable at the option of the holder upon
the same triggering event under which it is convertible, at a cash price equal
to the applicable liquidation preference. Shares of Class C and D are redeemable
at the option of the holder any time on or after August 31, 2005 at a cash price
equal to the applicable liquidation preference.
Series E Convertible Redeemable Preferred Stock (unaudited)
On June 30, 2000, the Company issued 67,567 shares of Class E convertible
redeemable preferred stock to a board member for a purchase price of $500,000 or
$7.40 per share. These shares are convertible at any time at the option of the
holder and automatically convert to common stock upon an initial public
offering. The total number of common shares into which they are convertible is
67,567 at the issuance date. At the time of issuance of the Class E shares, the
deemed fair value of the underlying common shares was $12.00 per share.
Therefore, $311,000 was initially allocated to additional paid-in capital as a
presumed beneficial conversion feature. As the Class E shares are convertible at
any time, the entire amount of $311,000 was immediately accreted to the Series E
Convertible Redeemable Preferred Stock on June 30, 2000.
F-15
<PAGE> 87
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMON STOCK
In February 1998, the Company's Board of Directors approved a 20-for-1
stock split of the issued and outstanding common stock and in July 1998, the
Company's Board of Directors approved a 10-for-1 stock split of the issued and
outstanding common stock. In August 1999, the Company's Board of Directors
approved a 2-for-1 stock split of the issued and outstanding common stock. The
2-for-1 split became effective in November 1999. All share and per share amounts
for common stock have been adjusted accordingly.
The Company issued 339,000 and 31,000 options to purchase shares of Common
Stock to consultants and other service providers of the Company in 1998 and
1999, respectively. The fair value of the options issued was determined to be
$46,000 and $47,000 in 1998 and 1999, respectively, using the Black-Scholes
option pricing model and has been recognized in general and administrative
expenses. There were no options granted to third parties during the quarters
ended June 30, 1999 and 2000.
Warrants (unaudited)
In March 2000, in connection with the signing of a purchase agreement with
a customer, the Company issued to Intermedia Communications, Inc. a warrant to
purchase 125,000 shares of common stock at an exercise price of $15.00 per
share. Under the original warrant agreement, the warrant vested and became
exercisable as product payments were made. In June 2000, the Company amended and
restated the warrant agreement to provide for immediate vesting of the warrant
and to permit Intermedia to exercise the warrant after seven years, or earlier
depending on the timing and amount of products purchased. The Company accounted
for the warrant as a cost of establishing a relationship with a potential
customer and recorded a one-time charge of $1,024,000 in June 2000. The Company
determined the cost associated with the warrant under the Black-Scholes option
pricing model using the following assumptions: volatility of 70%; risk-free
interest rate of 6.3%; no expected dividend yield and a term of seven years. As
of June 30, 2000, there have been no sales to Intermedia.
In June 2000, in connection with the signing of a purchase agreement with
Broadband Office, Inc. for the sale of ASC products, the Company issued a
warrant to purchase 222,000 shares at an exercise price of $8.00 per share. The
warrant vests immediately and is exercisable at any time over the next 36
months. The Company views the issuance of this warrant as a cost of developing a
long-term business relationship. Therefore, in June, the Company recognized the
cost as an operating expense in the amount of $1,283,000. The cost was
determined using the Black-Scholes option pricing model and the following
assumptions: volatility of 70%; risk-free interest rate of 6.0%; no expected
dividend yield and a term of three years.
9. STOCK OPTIONS
In February 1998 and July 1998, the Company adopted the Advanced Switching
Communications, Inc. 1998 and Second 1998 Nonqualified Stock Option Plans
(collectively "the 1998 Plan") to offer key employees, board members and third
parties who provide valuable services to the Company the option to purchase
shares of Common Stock. Under the 1998 Plan, the Company issues options to
eligible participants at an exercise price determined by the Board of Directors,
at the date of grant. Options vest 25% annually over a period of four years from
the date of grant and expire ten years from the date of grant. Vesting may
accelerate under certain circumstances including an initial public offering,
change of ownership, liquidation or dissolution of the Company. Options will no
longer be granted under the 1998 plan.
In December 1999, the Company adopted the Advanced Switching
Communications, Inc. 1999 Nonqualified Stock Option Plan (the "1999 Plan"). The
1999 Plan provides for option grants to employees, board members and third
parties to purchase shares of Common Stock at an exercise price determined by
the Board of Directors at the date of grant. Options vest 25% on the first
anniversary of the grant date at which time the remaining options vest monthly
over a three-year period. Options granted under the 1999 Plan expire
F-16
<PAGE> 88
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ten years from the date of grant. Vesting may accelerate under certain
circumstances such as liquidation or dissolution of the Company. The maximum
number of options available for grants under the 1999 Plan was 3,198,000 at
December 31, 1999. The Board of Directors approved an increase to this amount
subsequent to December 31, 1999 to 4,498,000 (unaudited).
The following table presents activity under the Plans (in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Balance, January 1, 1998.............................. -- $ --
Options Granted..................................... 1,651 1.05
Options Exercised................................... -- --
Options Cancelled................................... -- --
----- -----
Balance, December 31, 1998............................ 1,651 $1.05
Options Granted..................................... 1,914 1.65
Options Exercised................................... (59) 1.14
Options Cancelled................................... (260) 1.50
----- -----
Balance, December 31, 1999............................ 3,246 $1.35
Options Granted (unaudited)......................... 1,324 3.77
Options Exercised (unaudited)....................... (159) 1.23
Options Cancelled (unaudited)....................... (222) 1.65
----- -----
Balance, June 30, 2000 (unaudited).................... 4,189 $2.11
===== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999 (amounts in thousands, except dollars):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING VESTED OPTIONS
------------------------------------------------- EXERCISABLE
RANGE OF NUMBER OF WEIGHTED AVG. ----------------------------
EXERCISE SHARES REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVG.
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- ----------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.60 240 8.15 years $0.60 60 $0.60
1.00 1,043 8.49 years 1.00 225 1.00
1.50 1,347 9.31 years 1.50 48 1.50
1.75 40 8.75 years 1.75 10 1.75
2.00 576 9.91 years 2.00 -- 2.00
---------- ----- ---------- ----- --- -----
$0.60-2.00 3,246 9.06 years $1.35 343 $1.02
========== ===== ========== ===== === =====
</TABLE>
Valuation of Option Grants
At various dates during the year ended December 31, 1999, the Company
granted a total of 710,408 options to employees at exercise prices below the
estimated fair market value at the dates of grant. The Company recorded
compensation expense of $42,000 for the year ended December 31, 1999 resulting
in a remaining deferred compensation balance of $761,000 at December 31, 1999.
The Company also granted a total of 1,324,484 options at exercise prices
below the estimated fair market value at the dates of grant for the six months
ended June 30, 2000. The total expense associated with these options was
$4,495,000 which will be amortized over the option vesting period of four years.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair market value at the grant dates for the awards
under SFAS No. 123, the Company's historical net loss and net loss per share
would not have changed significantly from the amounts reported based upon the
fact that a charge was recorded for options whose exercise price was below the
deemed fair market value of the
F-17
<PAGE> 89
ADVANCED SWITCHING COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
options at the grant date. In addition, all other options granted were at prices
in excess of the deemed fair market value at the grant date.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Risk free interest rate................................... 5.33% 5.76%
Dividend yield............................................ -- --
Expected volatility....................................... -- --
Expected life............................................. 5 5
</TABLE>
The weighted average fair value at date of grant for options granted during
the years ended December 31, 1998 and 1999 was $0.05, and $0.27 per share,
respectively.
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined contribution profit sharing plan
covering substantially all employees. Employees can contribute up to 15%
(subject to statutory limitations) of their total compensation. Profit sharing
contributions made by the Company are discretionary and are determined annually
by the Board of Directors. Employer contributions, if any, vest to the employees
according to a schedule entitling full vesting after four years. There have been
no Company contributions to the plan since inception.
11. LOANS FROM EXECUTIVE OFFICERS AND STOCKHOLDERS
Between October 7, 1997 and September 7, 1999, the Company borrowed an
aggregate of approximately $11.4 million from certain executive officers and
stockholders. Each of these loans was evidenced by an interest-bearing
promissory note and was ultimately paid in full or converted into shares of our
convertible preferred stock, as set forth in the table below.
<TABLE>
<CAPTION>
LOANS CONVERSION INTO PREFERRED STOCK
-------------------------------- ---------------------------------
DATE AMOUNT INT. RATE DATE CLASS SHARES
------- ---------- --------- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
10/7/97 $ 107,143 6.5% 6/26/98 A 428
12/5/97 25,000 6.5 6/26/98 A 100
12/5/97(2) 12,500 6.5 -- -- --
2/6/98 250,000 6.5 6/26/98 A 1,000
3/9/98 1,750,000 6.5 6/26/98 A 7,000
6/11/98 250,000 6.5 6/26/98 A 1,000
4/20/99 1,000,000 5.0 --(1) -- --
4/20/99 3,000,000 5.0 6/30/99 C 1,106,332
9/7/99 2,500,000 5.0 9/10/99 D 292,412
9/7/99 2,500,000 5.0 9/10/99 D 292,412
</TABLE>
---------------
(1) This promissory note was cancelled and the principal amount was assumed into
the first $2,500,000 loan made to the Company on September 7, 1999.
(2) The Company repaid this loan in full together with accrued interest on July
7, 1998.
12. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in one industry segment, the development of
next-generation broadband access platforms. There were no sales to any
individual country outside the United States where such sales accounted for 10%
or more of total revenue for all periods presented. For the year ended December
31, 1999, total sales to customers within the United States were $3,848,000 and
total sales to international customers were $430,000.
F-18
<PAGE> 90
[INSIDE BACK COVER]
At the top of the page, under the caption "Advanced Switching
Communications" and the subheading "Family of Broadband Access Platforms" is the
following text: "Each of ASC's compact, stackable platforms--the A-1000, the
A-2000, the A-1240 and the A-3010--operates as a complete standalone system or
as a card in the A-4000 and A-4500 chassis, which contain 18 slots to house
individual cards."
Below the text, on the left side of the page are illustrations of the
company's products and opposite each illustration, on the right side of the
page, is a short description of the product's application, as follows:
[image of A-1000] "For points of presence or central
offices with low end-user density."
[image of A-1240] "For points of presence or central
offices with low-medium end-user
customer density as well as
deployments inside shared office
buildings."
[image of A-2000] "An aggregation platform for multiple
A-1000s, A-1240s, A-3010s, or other
equipment."
[image of A-3010] "For points of presence or central
offices with low-medium end-user
customer density, supporting a single,
economical physical connection."
[image of A-4000 & A-4500] "A-4000: For aggregation applications
at high customer density points of
presence or central offices."
"A-4500 (planned): For high-speed
switching applications at high
customer density points of presence,
central offices or network hub sites."
The Advanced Switching Communications logo appears in the lower right
corner of the page.
<PAGE> 91
[LOGO]
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by the Registrant
(other than underwriting discounts and commissions) expected to be incurred in
connection with the issuance and distribution of the securities described in
this registration statement. All amounts are estimated except for the Securities
and Exchange Commission's registration fee and the National Association of
Securities Dealers' filing fee.
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Registration fee under Securities Act....................... $ 28,463
NASD filing fee............................................. 9,125
The Nasdaq National Market fees............................. 95,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 350,000
Printing and engraving expenses............................. 150,000
Registrar and transfer agent fees........................... 10,000
Miscellaneous expenses...................................... 66,537
----------
Total............................................. $1,200,000
==========
</TABLE>
---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent under the circumstances set forth therein.
Article VII of the Registrant's Certificate of Incorporation, as amended
and restated upon the closing of this offering, eliminates liability of
directors of the Registrant to the Registrant or its shareholders for monetary
damages for breach of fiduciary duty to the extent permitted by Section
102(b)(7) of the General Corporation Law of the State of Delaware. Article VII
of the Registrant's Certificate of Incorporation, as amended and restated upon
the closing of this offering, requires the Registrant to indemnify the
Registrant's directors and officers to the extent permitted under Section 145 of
the Delaware General Corporation Law. Article VII of the Registrant's
Certificate of Incorporation, as amended and restated upon the closing of this
offering, also provides that the Registrant shall indemnify any 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 a director or officer
of the Registrant, or is or was serving at the request of the Registrant as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, or other enterprise, in accordance with provisions corresponding
to Section 145 of the Delaware General Corporation Law. Further, the
Registrant's Certificate of Incorporation, as amended and restated upon the
closing of this offering, provides that any person, other than an officer or
director, 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 an employee or agent of the Registrant, or was serving at the request of the
Registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, and who desires
indemnification shall make written application for such indemnification to the
Board of Directors for its determination that indemnification is appropriate,
and if so, to what extent. The Registrant's Bylaws, as amended and restated upon
the closing of this offering, also provide that the Registrant may indemnify, to
the extent of the provisions set forth therein, any person other than an officer
or director 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 an employee or agent of the Registrant, or was serving at the request of the
Registrant as a director, officer, employee or agent of
II-1
<PAGE> 93
another corporation, partnership, joint venture, trust or other enterprise, if
such person makes written application for such indemnification to the Registrant
Board and the Registrant Board determines that indemnification is appropriate
and the extent thereof. The Registrant's Bylaws, as amended and restated upon
the closing of this offering, further provide that the indemnification described
therein is not exclusive, and shall not exclude any other rights to which the
person seeking to be indemnified may be entitled under statute, any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, both
as to action in his official capacity and to his action in another capacity
while holding such office.
The above discussion of Section 145 and of the Registrant's Certificate of
Incorporation and Bylaws, both as amended and restated upon the closing of this
offering, is not intended to be exhaustive and is respectively qualified in its
entirety by such statute, the Certificate of Incorporation and the By-laws, both
as amended and restated upon the closing of this offering. The Registrant
intends to obtain primary and excess insurance policies insuring its directors
and officers and those of its subsidiaries against certain liabilities they may
incur in their capacity as directors and officers. Under such policies, the
insurer, on behalf of, may also pay amounts for which the Registrant has granted
indemnification to the directors or officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception, the Registrant has issued the following securities
that were not registered under the Securities Act as summarized below. The share
numbers summarized below have been adjusted to reflect the 20-for-1, 10-for-1
and 2-for-1 stock splits of the Registrant's common stock that took place on
February 3, 1998, July 14, 1998, and November 12, 1999, respectively.
(a) Issuances of Capital Stock.
Since its inception, the Registrant has sold and issued the following
unregistered securities:
(a) Since December 9, 1997, the Registrant has granted and sold an
aggregate of 11,470,000 shares of common stock to key officers and
employees pursuant to Key Employee Stock Agreements for an aggregate
purchase price of $231,486.
(b) In 1998, the Registrant issued an aggregate of 9,528 shares of its
Class A redeemable convertible preferred stock for an aggregate purchase
price of approximately $2,382,000.
(c) In 1998, the Registrant issued an aggregate of 10,960 shares of
Class B redeemable convertible preferred stock for an aggregate purchase
price of approximately $2,740,000.
(d) In 1998 and 1999, the Registrant issued an aggregate of 3,989,269
shares of Class C redeemable convertible preferred stock for an aggregate
purchase price of approximately $10,400,000.
(e) In 1999, the Registrant issued an aggregate of 4,678,594 shares of
Class D redeemable convertible preferred stock for an aggregate purchase
price of approximately $40,001,979.
(f) On June 30, 2000, the Registrant issued an aggregate of 67,567
shares of Class E redeemable convertible preferred stock for an aggregate
purchase price of approximately $500,000.
2. CERTAIN GRANTS AND EXERCISES OF STOCK OPTIONS
(a) From inception through June 30, 2000, the Registrant granted stock
options to purchase 4,889,463 shares of common stock at exercise prices ranging
from $.60 to $7.00 per share to employees pursuant to its 1998 Nonqualified
Stock Option Plan, Second Nonqualified Stock Option Plan and 1999 Nonqualified
Stock Option Plan.
(b) From inception through June 30, 2000, the Registrant issued and sold an
aggregate of 218,750 shares of its common stock to employees for aggregate
consideration of $1.00 to $1.50 per share pursuant to exercises of options
granted under its 1998 Nonqualified Stock Option Plan and Second 1998
Nonqualified Stock Option Plan.
II-2
<PAGE> 94
No underwriters were involved in any of the foregoing sales of securities.
Such sales were made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative to
sales by an issuer not involving any public offering or the rules and
regulations thereunder, or, in the case of options to purchase common stock and
sales of restricted common stock, Rule 701 of the Securities Act. All of the
foregoing securities are deemed restricted securities for the purposes of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of the Registrant, as amended
and restated
*3.2 By-laws of the Registrant, as amended and restated
*4.1 Form of certificate of common stock
+4.2 Amended and Restated Warrant to Purchase Common Stock
granted to ICI Capital LLC dated June 30, 2000
+4.3 Warrant to Purchase Common Stock granted to Broadband
Office, Inc. dated June 21, 2000
*5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson
+10.1 Executive Employment Agreement, dated as of August 31, 1998,
between the Registrant and Asghar D. Mostafa.
+10.2 Form of Key Employee Employment Agreement
+10.3 Advanced Switching Communications, Inc. 1998 Nonqualified
Stock Option Plan
+10.4 Advanced Switching Communications, Inc. Second 1998
Nonqualified Stock Option Plan
+10.5 Advanced Switching Communications, Inc. 1999 Nonqualified
Stock Option Plan
*10.6 Advanced Switching Communications, Inc. 2000 Stock Incentive
Plan
+10.7 8% Convertible Redeemable Class D Preferred Stock Securities
Purchase and Stockholder Agreement
+10.8 Amendment to the 8% Convertible Redeemable Class D Preferred
Stock Securities Purchase and Stockholders Agreement
*10.9 Second Amendment to the 8% Convertible Redeemable Class D
Stock Securities Purchase and Stockholders Agreement
+10.10 Form of Key Employee Stock Agreement
+10.11 Form of Indemnification Agreement, between the Registrant
and each of its directors
+10.12 Stockholders' Agreement, dated as of August 31, 1998,
between the Registrant and Mostafa Investments Limited
Partnership
10.13 American Center Lease Agreement between Met Life
International Real Estate Equity Shares, Inc. and Keyvan
Rafie dated May 29, 1992
10.14 American Center Lease Agreement between Met Life
International Real Estate Equity Shares, Inc. and Advanced
Switching Communications, Inc. dated September 27, 1997
10.15 Assignment of Lease and Acceptance between Keyvan Rafie and
Advanced Switching Communications, Inc.
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in Exhibit 5.1 above)
23.3 Consent of RHK
24.1 Power of Attorney (included on signature page of this
registration statement)
27.1 Financial data schedule
</TABLE>
---------------
* To be filed by amendment.
+ Previously filed.
II-3
<PAGE> 95
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set
forth is not applicable or is shown in the financial statements or notes.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than 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 Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(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 proper delivery to
each purchaser.
(2) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424b(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.
(3) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of Vienna,
Commonwealth of Virginia, on August 17, 2000.
ADVANCED SWITCHING
COMMUNICATIONS, INC.
By: /s/ ASGHAR D. MOSTAFA
------------------------------------
Asghar D. Mostafa
President and Chief Executive
Officer
The undersigned directors and officers of Advanced Switching
Communications, Inc., Inc. hereby constitute and appoint Asghar D. Mostafa and
Harry J. D'Andrea and each of them with full power to act without the other and
with full power of substitution and resubstitution, our true and lawful
attorneys-in-fact with full power to execute in our name and behalf in the
capacities indicated below this Registration Statement on Form S-1 and any and
all amendments thereto, including post-effective amendments to this Registration
Statement and to sign any and all additional registration statements relating to
the same offering of securities as this Registration Statement that are filed
pursuant to Rule 462(b) of the Securities Act of 1933, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and hereby ratify and confirm that all such
attorneys-in-fact, or any of them, or their substitutes shall lawfully do or
cause to be done by virtue hereof. Pursuant to the requirements of the
Securities Act, this registration statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ASGHAR D. MOSTAFA President, Chief Executive Officer August 17, 2000
-------------------------------------------- and Director (Principal Executive
Asghar D. Mostafa Officer)
/s/ HARRY J. D'ANDREA Chief Financial Officer (Principal August 17, 2000
-------------------------------------------- Financial and Accounting Officer)
Harry J. D'Andrea
/s/ BETSY S. ATKINS Director August 17, 2000
--------------------------------------------
Betsy S. Atkins
* Director August 17, 2000
--------------------------------------------
Henry G. Baker
* Director August 17, 2000
--------------------------------------------
Robert Ted Enloe, III
* Director August 17, 2000
--------------------------------------------
Richard H. Kimball
* Director August 17, 2000
--------------------------------------------
Arthur J. Marks
* Director August 17, 2000
--------------------------------------------
Edward W. Scott
* Director August 17, 2000
--------------------------------------------
John W. Seazholz
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director August 17, 2000
--------------------------------------------
Ronald S. Westernik
*By: /s/ Attorney-in-fact August 17, 2000
---------------------------------------
</TABLE>
<PAGE> 98
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of the Registrant, as amended
and restated
*3.2 By-laws of the Registrant, as amended and restated
*4.1 Form of certificate of common stock
+4.2 Amended and Restated Warrant to Purchase Common Stock
granted to ICI Capital LLC dated June 30, 2000
+4.3 Warrant to Purchase Common Stock granted to Broadband
Office, Inc. dated June 21, 2000
*5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson
+10.1 Executive Employment Agreement, dated as of August 31, 1998,
between the Registrant and Asghar D. Mostafa.
+10.2 Form of Key Employee Employment Agreement
+10.3 Advanced Switching Communications, Inc. 1998 Nonqualified
Stock Option Plan
+10.4 Advanced Switching Communications, Inc. Second 1998
Nonqualified Stock Option Plan
+10.5 Advanced Switching Communications, Inc. 1999 Nonqualified
Stock Option Plan
*10.6 Advanced Switching Communications, Inc. 2000 Stock Incentive
Plan
+10.7 8% Convertible Redeemable Class D Preferred Stock Securities
Purchase and Stockholder Agreement
+10.8 Amendment to the 8% Convertible Redeemable Class D Preferred
Stock Securities Purchase and Stockholders Agreement
*10.9 Second Amendment to the 8% Convertible Redeemable Class D
Stock Securities Purchase and Stockholders Agreement
+10.10 Form of Key Employee Stock Agreement
+10.11 Form of Indemnification Agreement, between the Registrant
and each of its directors
+10.12 Stockholders' Agreement, dated as of August 31, 1998,
between the Registrant and Mostafa Investments Limited
Partnership
10.13 American Center Lease Agreement between Met Life
International Real Estate Equity Shares, Inc. and Keyvan
Rafie dated May 29, 1992
10.14 American Center Lease Agreement between Met Life
International Real Estate Equity Shares, Inc. and Advanced
Switching Communications, Inc. dated September 27, 1997
10.15 Assignment of Lease and Acceptance between Keyvan Rafie and
Advanced Switching Communications, Inc.
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in Exhibit 5.1 above)
23.3 Consent of RHK
24.1 Power of Attorney (Included in signature pages to the
registration statement)
27.1 Financial data schedule
</TABLE>
---------------
* To be filed by amendment.
+ Previously filed.
