<PAGE>
As filed with the Securities and Exchange Commission on September 22, 2000
Registration No. 333-
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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TELLIUM, INC.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 3661 22-3509099
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial identification No.)
incorporation or classification code
organization) number)
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2 Crescent Place
Oceanport, New Jersey 07757-0901
(732) 923-4100
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
---------------
Harry J. Carr
Chief Executive Officer
Tellium, Inc.
2 Crescent Place
Oceanport, New Jersey 07757-0901
(732) 923-4100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
Richard A. Steinwurtzel, Esq. Alexander D. Lynch, Esq.
Vasiliki B. Tsaganos, Esq. Babak Yaghmaie, Esq.
Fried, Frank, Harris, Shriver & Gunderson Dettmer Stough Villeneuve
Jacobson Franklin & Hachigian, LLP
1001 Pennsylvania Avenue, N.W. 733 Third Avenue, Suite 220
Suite 800 New York, NY 10017
Washington, D.C. 20004 (212) 687-5222
(202) 639-7000
---------------
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title Of Each Class Proposed Maximum Aggregate Amount of
Of Securities To Be Registered Offering Price(1) Registration Fee
----------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.001 per share..... $250,000,000.00 $66,000.00
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended. The
proposed maximum offering price includes amounts attributable to shares
that may be purchased by the underwriters to cover over-allotments, if any.
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.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated September 22, 2000.
[Logo of Tellium, Inc.]
Shares
Tellium, Inc.
Common Stock
-----------
This is an initial public offering of shares of common stock of Tellium, Inc.
All of the shares of common stock are being sold by Tellium.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price will be
between $ and $ per share. Application has been made for the quotation of
the common stock on the Nasdaq National Market under the symbol "TELM".
See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to Tellium........................... $ $
</TABLE>
To the extent that the underwriters sell more than shares, the
underwriters have the option to purchase up to an additional shares from
Tellium at the initial public offering price, less the underwriting discount.
-----------
The underwriters expect to deliver the shares in New York, New York on
, 2000.
Thomas Weisel Partners LLC
Goldman, Sachs & Co.
J.P. Morgan & Co.
CIBC World Markets
Wit SoundView
-----------
Prospectus dated , 2000.
<PAGE>
[INSIDE FRONT COVER ARTWORK]
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights information we present more fully
elsewhere in this prospectus. This summary does not contain all of the
information you should consider before buying shares in the offering. You
should read the prospectus carefully before deciding whether to invest in our
common stock.
Tellium, Inc.
We design, develop and market high-speed, high-capacity, intelligent
optical switching solutions that enable network service providers to quickly
and cost-effectively deliver new high-speed services. We believe that
traditional networking solutions do not offer service providers the means to
improve their data service offerings and upgrade their infrastructure in a
timely and cost-effective manner. Our line of intelligent optical switches is
designed to efficiently meet increasing capacity and service demands. Our
products are based on a highly reliable set of hardware combined with feature-
rich software, both of which scale to enable service providers to grow and
manage their networks quickly and efficiently in order to keep pace with the
dynamic requirements of data services. Since the second quarter of 1999, we
have focused on the development of optical switches. In September 1999, we
shipped our Aurora 32 Optical Switch and, in the third quarter of 2000, we
shipped our next generation Aurora Optical Switch. Our objective is to be the
leading provider of intelligent optical switching solutions for global public
telecommunications networks.
Our target customer base includes emerging and established service
providers. These include long-distance carriers, wholesale service providers,
competitive local exchange carriers, Internet service providers and cable
operators. We currently have three customers: Cable & Wireless Global Networks
Limited, Extant, Inc. and Qwest Communications Corporation.
Our optical switches and software provide the following key benefits to
service providers:
. Improved network architecture. Our optical switching solutions are
designed to enable service providers to reduce their costs by deploying
new architectures which are simpler to operate, administer and maintain,
more efficient in their utilization of protection capacity, and provide
better restoration capability than current architectures.
. Simplified delivery of new services. Our optical switching solutions help
service providers create scalable and flexible optical networks, enabling
reliable, fast, cost-effective delivery of new and existing optical data
services. We accomplish this by simplifying the network architecture over
which the services are delivered and automating the service delivery
functions.
. Fast provisioning. Our optical switching solutions allow service
providers to provision services across their networks in a matter of
minutes, replacing a process which can often take up to several months.
. Scalability. Our optical switching solutions help service providers scale
their networks rapidly by converting the optical network from a
"hardwired" system, which is costly and difficult to change, to a dynamic
system in which it is easy to add components or change configuration.
This enables our customers to provide new revenue-generating services
that meet their customers' needs.
. Cost-effectiveness. Our optical switching solutions include modular,
scalable products that allow our customers to retain their investments as
they expand capacity and automate operations, enabling service providers
to eliminate costly equipment while retaining the functionality that they
expect.
1
<PAGE>
. Compatibility with existing networks. Our optical switching solutions can
be deployed quickly in networks today because they interoperate with
existing network components and architectures.
. Flexible platform. Our optical switching solutions are by design highly
flexible in their configuration and upgrade capability because all of our
products share a common hardware and software platform.
We were founded in April 1997 by a group of individuals from Bell
Communications Research, Inc., or Bellcore. Prior to 1999, we were principally
engaged in research and development. Given our limited operating history and
the competitive environment in our industry, we may face a number of
difficulties in achieving our objective. We have derived almost all of our
revenue from two customers. Extant, Inc. accounted for 99% of our revenue for
the six months ended June 30, 2000. We have limited meaningful historical
financial data upon which to base projected revenues and have incurred
significant losses to date. As of June 30, 2000, we had an accumulated deficit
of $65.0 million. We expect to have large fixed expenses and to incur
increasing marketing, sales, research, manufacturing and administrative
expenses, and we expect to incur net losses in the future.
In September 2000, we completed a private placement of 7,274,413 shares of
our Series E preferred stock to a number of investors for an aggregate purchase
price of approximately $218.0 million. Upon completion of this offering, the
shares of Series E preferred stock will automatically convert into common stock
at the initial public offering price.
Corporate Information
We were incorporated in Delaware on April 21, 1997 as MWD, Inc. and began
business operations on May 8, 1997. We changed our name to Tellium, Inc. on
June 3, 1997. Our principal executive offices are located at 2 Crescent Place,
Oceanport, New Jersey 07757-0901, and our telephone number is (732) 923-4100.
Our World Wide Web site address is www.tellium.com. Information contained in
our Web site is not incorporated by reference into this prospectus, and you
should not consider information contained in our Web site as part of this
prospectus.
Tellium(R) is a federally registered trademark of Tellium. Aurora(TM),
StarNet(TM), Full-Spectrum(TM), PlaNet(TM) and Smarter, Faster Optical
Networks(TM) are also trademarks of Tellium. Any other trademarks or service
marks appearing in this prospectus are trademarks or service marks of the
respective companies that use them.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered.................................. shares
Shares to be outstanding after this offering.... shares
Proposed Nasdaq National Market symbol.......... TELM
Use of proceeds................................. For general corporate
purposes, including working
capital, and potential
acquisitions of complementary
businesses, technologies or
products.
</TABLE>
At the request of Tellium, the underwriters are reserving up to shares
of common stock at the initial offering price for sale to individuals and
entities designated by Tellium.
Except as otherwise indicated, the number of shares outstanding after this
offering includes:
. 22,965,348 shares of common stock outstanding at June 30, 2000;
. the automatic conversion of our Series A, B, C and D preferred stock
outstanding as of June 30, 2000 into 56,694,924 shares of common stock
based on a one-to-three conversion ratio upon the completion of this
offering;
. the automatic conversion of 7,274,413 shares of our Series E preferred
stock into shares of common stock upon the completion of this
offering, assuming an initial public offering price of $ per share;
. the issuance of 1,500,000 shares of common stock to AT&T Corp. in
connection with our license of intellectual property from AT&T;
. 3,750,000 shares of common stock that are issuable to stockholders of
Astarte Fiber Networks, Inc. if our acquisition of Astarte closes; and
. 333,333 shares of common stock issued to officers and affiliates of
Qwest.
This information excludes, as of June 30, 2000:
. 15,846,528 shares of common stock subject to options outstanding under
our stock option plan with a weighted average exercise price of $1.89 per
share;
. 2,759,160 shares of common stock reserved for future issuance under our
stock option plan;
. 225,000 shares of common stock subject to options that were issued
outside of our stock option plan;
. 5,226,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $3.05 per share;
. 88,527 shares of common stock subject to outstanding warrants to purchase
Series C preferred stock at an exercise price of $3.05 per share;
. 2,000,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $30.00 per share; and
. shares of common stock to be issued according to the over-allotment
option.
In addition, from July 1, 2000 through August 31, 2000, we granted options
to purchase 2,084,000 shares of our common stock under our stock option plan at
an exercise price of $2.14 per share.
Except as otherwise indicated, information in this prospectus:
. reflects a three-for-one stock split of our common stock effective on
August 11, 2000; and
. assumes no exercise of the over-allotment option to purchase additional
shares of common stock granted to the underwriters.
3
<PAGE>
Summary Financial Data
(in thousands, except share and per share data)
The following tables contain financial data that should be read together
with our financial statements and the notes relating to those statements and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
Inception
(May 8, 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>
Statement of operations
data:
Revenue................... $ 55 $ 1,364 $ 5,227 $ 1,063 $ 7,585
Non-cash charges related
to equity issuances...... -- -- 559 -- 371
Revenue, net of non-cash
charges related to equity
issuances................ 55 1,364 4,668 1,063 7,214
Gross profit.............. 43 104 786 152 2,153
Total operating expenses.. 6,413 20,887 20,423 9,429 23,225
Operating loss............ 6,370 20,783 19,637 9,277 21,072
Net loss.................. 5,265 20,510 19,799 9,428 19,445
Basic and diluted net loss
per share................ (3.39) (9.66) (7.42) (3.57) (2.00)
Weighted average shares
used in computing basic
and diluted net loss per
share.................... 1,554 2,123 2,668 2,642 9,727
Pro forma basic and
diluted net loss per
share (unaudited)........ $ (0.36) $ (0.29)
Weighted average shares
used in computing pro
forma basic and diluted
net loss
per share (unaudited).... 54,947 66,422
</TABLE>
The pro forma summary balance sheet data as of June 30, 2000 reflects:
. the automatic conversion of our Series A, B, C and D preferred stock
outstanding as of June 30, 2000 into 56,694,924 shares of common stock
based on a one-to-three conversion ratio upon the completion of this
offering;
. the automatic conversion of 7,274,413 shares of our Series E preferred
stock into shares of common stock upon the completion of this
offering, assuming an initial public offering price of $ per share;
. the issuance of 1,500,000 shares of common stock to AT&T in connection
with our license of intellectual property from AT&T;
. 3,750,000 shares of common stock that are issuable to stockholders of
Astarte if our acquisition of Astarte closes; and
. 333,333 shares of common stock issued to officers and affiliates of
Qwest.
The pro forma as adjusted summary balance sheet data as of June 30, 2000
reflects:
. the sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share, after
deducting the estimated underwriting discount and offering expenses.
4
<PAGE>
<TABLE>
<CAPTION>
As of June 30, 2000
----------------------------
Pro Pro Forma As
Actual Forma Adjusted
------- ------- ------------
(unaudited)
<S> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents......................... $30,228 $ $
Working capital................................... 34,628
Total assets...................................... 53,412
Long-term portion of capital lease obligations.... 1,080
Long-term obligations, less current portion....... 913
Total stockholders' equity........................ 39,686
</TABLE>
See note 2 of the notes to our financial statements for a description of
the method that we used to compute our pro forma basic and diluted net loss per
share.
5
<PAGE>
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below and all other information
contained in this prospectus, including our financial statements and the
related notes, before you purchase any shares of our common stock. If any of
the following risks actually occur, the trading price of our common stock could
decline and you may lose all or part of your investment.
Risks Related to Our Business and Financial Results
We have incurred significant losses to date and expect to continue to incur
losses in the future, which may cause our stock price to decline.
We have not recognized meaningful revenue and have incurred significant
losses to date. We expect to continue to incur losses in the future. We had net
losses of $19.8 million for the year ended December 31, 1999 and $19.4 million
for the six months ended June 30, 2000. As of June 30, 2000, we had an
accumulated deficit of $65.0 million. We have large fixed expenses and expect
to continue to incur significant manufacturing, research and development, sales
and marketing, administrative and other expenses in connection with the ongoing
development and expansion of our business. We expect these operating expenses
to increase significantly as we increase our spending in order to develop and
grow our business. In order to become profitable, we will need to generate and
sustain higher revenue. We may never generate sufficient revenues to achieve or
sustain profitability.
We have been in business for a short period of time, and there is limited
financial and operating information available for you to evaluate us.
We began our business operations in May 1997 and shipped our first product
in January 1999. We have limited meaningful historical financial and
operational data upon which we can base projected revenues and planned
operating expenses and upon which you may evaluate us and our prospects. You
should consider our business and prospects in light of the heightened risks and
unexpected expenses and problems we may face as a company in an early stage of
development in a new, rapidly evolving and highly competitive industry.
We have derived substantially all of our revenue to date from Extant, and any
loss of or delay in receiving revenue from Extant could significantly damage
our financial performance.
For the six months ended June 30, 2000, we have derived virtually all of
our revenue from sales to Extant. To date, we have collected only a portion of
this revenue. The accounts receivable of approximately $7.0 million related to
these sales is past due. If we fail to collect the accounts receivable related
to these sales in a timely manner, or at all, we will not be able to recognize
future revenue from Extant and our financial performance could be adversely
affected. Moreover, while Extant has agreed to purchase its full requirements
for optical switches from us for the first three years of the contract, Extant
is not contractually obligated to purchase future products or services from us,
and may discontinue doing so at any time. Extant is permitted to terminate the
agreement for, among other things, a breach of our material obligations under
the contract.
Extant has announced that it is being acquired by Dynegy, Inc., a publicly
traded company. Dynegy may determine not to proceed with Extant's planned
network build-out on a timely basis, or at all. Accordingly, Dynegy's
acquisition of Extant creates additional uncertainties regarding our existing
arrangements with Extant and may adversely affect our ability to derive future
revenues from Extant. If Extant were to stop or delay purchasing products or
services from us, or reduce the amount of products or services that it obtains
from us, our business and financial performance would suffer.
6
<PAGE>
Our future prospects are dependent on our relationship with Cable & Wireless
and Qwest.
We recently entered into an agreement with Cable & Wireless under which
Cable & Wireless has made a commitment to purchase a minimum of $350 million of
our optical switches over the next five years. Our agreement with Cable &
Wireless gives Cable & Wireless the right to reduce its minimum purchase
commitment from $350 million to $200 million if we do not maintain a
technological edge so that there exists in the marketplace superior technology
that we have not matched. Our agreement with Cable & Wireless also permits
Cable & Wireless to terminate the agreement upon breach of a variety of our
obligations under the contract. The termination of our contract with Cable &
Wireless would have a material adverse effect on our business.
We also recently entered into an agreement with Qwest pursuant to which
Qwest has made a commitment to purchase a minimum of $300 million of our
optical switches over the next three years. Our agreement with Qwest allows
Qwest, through binding arbitration, to terminate the agreement upon breach of a
variety of our obligations under the contract. The termination of our contract
with Qwest would have a material adverse effect on our business.
We expect that substantially all of our revenues will be generated from a
limited number of customers and that our revenues will not grow if we do not
successfully sell products to these customers.
We anticipate that substantially all of our revenues for the foreseeable
future will be derived from three customers: Cable & Wireless, Extant and
Qwest. As a result, it is critical for us to expand our customer base in order
to succeed. We may not be able to obtain additional customers, or customers
that are willing to make significant commitments to purchase our products and
services. Our growth will also be limited if Cable & Wireless, Extant and Qwest
and our potential customers are not successful in building or upgrading their
communications networks and promoting their services. If our customers do not
deploy our products in their commercial networks in a timely manner, or at all,
we will have less revenues than we expect. In addition, if our current or
prospective customers decide not to purchase products from us for any reason,
including if there is a downturn in their businesses, our ability to sell
products and generate revenues would be seriously harmed. Our customer base and
revenues will not grow if:
. customers are unwilling or slow to utilize our products;
. we experience delays or difficulties in completing the development and
introduction of our planned products or product enhancements;
. our competitors introduce new products that are superior to our
products;
. our products do not perform as expected; or
. we do not meet our customers' delivery requirements.
If our line of optical switching products is not a commercial success, our
business will suffer.
We began to focus on the marketing and the selling of optical switches in
the second quarter of 1999. No service provider has fully deployed our optical
switches in a large, complex network environment. Our future revenue growth
depends on the commercial success and adoption of our optical switches.
We are developing new products and enhancements to existing products. We
may not be able to develop new products or product enhancements in a timely
manner, or at all. Any failure to develop new products or product enhancements
will substantially decrease market acceptance and sales of our present and
future products. Any failure to develop new products or product enhancements
could also delay purchases by our customers under their contracts, or, in some
7
<PAGE>
cases, could cause us to be in breach under our contracts with our customers,
all of which will significantly harm our business and financial results. Even
if we are able to develop and commercially introduce new products and
enhancements, these new products or enhancements may not achieve widespread
market acceptance and may not be satisfactory to our customers. Any failure of
our future products to achieve market acceptance or be satisfactory to our
customers could harm our business and financial results.
Due to the long and variable sales cycles for our products, our revenues and
operating results may vary significantly from quarter to quarter.
Our sales cycle is lengthy because a customer's decision to purchase our
products involves a significant commitment of its resources and a lengthy
evaluation, testing and product qualification process. We may incur substantial
expenses and devote senior management attention to potential relationships that
may never materialize, in which event our investments will largely be lost and
we may miss other opportunities. In addition, after we enter into a contract
with a customer, the timing of deployment of our products may vary widely and
will depend on a number of factors, many of which are beyond our control,
including:
. specific network deployment plans of the customer;
. installation skills of the customer;
. size of the network deployment;
. complexity of the customer's network environment; and
. degree of hardware and software configuration required.
For example, customers with significant or complex networks usually expand
their networks in large increments on a periodic basis. Accordingly, we may
receive purchase orders for significant dollar amounts on an irregular and
unpredictable basis. We cannot predict the timing or size of these sales and
deployment cycles. The long sales cycles, as well as our expectation that some
customers will tend to place large orders with short lead times on an irregular
and unpredictable basis, may cause our revenues and operating results to vary
significantly and unexpectedly from quarter to quarter. As a result, it is
likely that in some future quarters, our operating results may be below the
expectations of market analysts and investors, which could cause the trading
price of our common stock to decline.
We expect the average selling prices of our products to decline, which may
reduce revenues and gross margins.
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 a number of factors, including:
. competitive pressures;
. increased sales discounts; and
. new product introductions by our competitors.
If we are unable to achieve sufficient cost reductions and increases in
sales volumes, this decline in average selling prices will reduce our revenues
and gross margins.
We could be required to record significant charges for non-cash items.
As part of our agreement with Extant, we issued a warrant to Extant to
purchase approximately 5,226,000 shares of our common stock at $3.05 per share.
The majority of shares subject to the warrant become exercisable as Extant
meets specified milestones during the term of our supply
8
<PAGE>
agreement. We recorded non-cash charges of approximately $2.0 million related
to the warrant through June 30, 2000. Charges of $559,000 and $371,000 have
been recorded as an offset to revenue for the year ended December 31,1999 and
the six-month period ending June 30, 2000, respectively, to reflect the fair
value of the warrants earned by Extant based upon purchases through that date.
As the vesting of the remaining warrants is dependent upon future purchases
made by the customer, variable accounting will be used and related charges will
vary each accounting period until the final measurement date, based in part on
the fair value of our common stock on each measurement date. The final
measurement date occurs when Extant's purchases reach specified levels. If
these non-cash charges exceed the amount of revenue received from Extant, the
total amount of revenue from Extant would be offset in its entirety and any
remaining charges would be included as a cost of revenue and would adversely
impact our gross margins.
As part of our agreement with Qwest, we issued two warrants to a wholly-
owned subsidiary of Qwest, to purchase 2,000,000 shares of our common stock at
an exercise price of $30.00 per share. The warrants to purchase 2,000,000
shares were vested when we issued the warrants and become exercisable as Qwest
meets specified milestones during the term of our procurement contract. The
fair value of the issued warrants will be recorded as a reduction of revenue
related to the Qwest procurement contract.
In addition, we have recorded deferred compensation expense and have begun
to amortize non-cash charges to earnings as a result of options and other
equity awards granted to employees at prices deemed to be below fair market
value on the dates of grant. Our future operating results will reflect the
continued amortization of those charges over the vesting period of these
options and awards.
All of the non-cash charges referred to above will negatively impact future
operating results. It is possible that some investors might consider the impact
on operating results to be material, which could result in a decline in the
price of our common stock.
We expect to incur significant additional non-cash charges associated with
our anticipated acquisition of Astarte and our acquisition of an intellectual
property license from AT&T. The potential goodwill and intangible assets
associated with the anticipated Astarte acquisition is approximately $113.7
million based upon the preliminary purchase price allocation. This amount is
subject to change pursuant to the receipt of a definitive appraisal. The
intangible asset associated with the acquisition of the AT&T license is
approximately $45.0 million. We currently estimate that these amounts will be
amortized over five years, although the amortization period has not been
finalized.
Risks Related to Our Products
Our products may have errors or defects that we find only after full
deployment, or problems may arise from the use of our products in conjunction
with other vendors' products, which could seriously harm our business.
Our products are complex and are designed to be deployed in large and
complex networks. Our products can only be fully tested when completely
deployed in very large networks with high amounts of traffic. To date, no
service provider has fully deployed our optical switches in a large, complex
network environment. Networking products frequently contain undetected software
or hardware errors when first introduced or as new versions are released. Our
customers may discover errors or defects in our software or hardware or our
products may not operate as expected after they have been fully deployed. In
addition, service providers typically use our products in conjunction with
products from other vendors. As a result, if problems occur, it may be
difficult to identify the source of the problem. If we are unable to fix any
defects or errors or other problems arise, we could:
. lose revenues;
. lose existing customers;
9
<PAGE>
. fail to attract new customers and achieve market acceptance;
. divert development resources;
. increase service and repair, warranty and insurance costs; and
. be subjected to legal actions for damages by our customers.
If any of these problems occur, our business could be seriously harmed.
If our products do not interoperate with our customers' networks, installations
will be delayed or cancelled, which could seriously harm our business.
Our customers require that our products be designed to interface with their
existing networks, each of which may have different specifications and utilize
multiple protocol standards. Our customers' networks contain multiple
generations of products that have been added over time as these networks have
grown and evolved. The requirement that we modify product designs in order to
achieve a sale may result in a longer sales cycle, increased research and
development expense and reduced margins on our products. If our products do not
interoperate with our customers' networks, installations could be delayed and
orders for our products could be cancelled, all of which could seriously harm
our business and prospects.
If our products do not meet industry standards that may emerge, we will not
gain market acceptance.
Our success depends, in part, on both the adoption of industry standards
for new technologies in our market, and our products' compliance with industry
standards. To date, no industry standards have been adopted related to some
functions of our products. The absence of an industry standard may prevent
market acceptance of our products if potential customers delay purchases of new
equipment until standards are adopted. In addition, in developing our products,
we have made, and will continue to make, assumptions about the industry
standards that may be adopted by our competitors and existing and potential
customers. If the standards adopted are different from those which we have
chosen to support, customers may not choose our products and our business will
be seriously harmed.
If we fail to compete successfully, we will not be able to increase our market
share.
If we do not compete successfully in the intensely competitive market for
public telecommunications network equipment, we will:
. not be able to obtain or retain customers;
. experience price reductions;
. experience order cancellations;
. experience increased expenses; and
. experience reduced gross margins.
Due to the lengthy sales cycles, testing and deployment process and
manufacturing constraints associated with large-scale deployments of our
products, we may lose any advantage that we might have by being the first to
market with an optical switching product prior to achieving significant market
penetration. Many of our competitors, in comparison to us, have:
. longer operating histories;
. greater name recognition;
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. larger customer bases; and
. significantly greater financial, technical, sales, marketing,
manufacturing and other resources.
These competitors may be able to adopt more aggressive pricing policies
than we can or develop products that gain wider market acceptance than our
products.
Risks Related to the Expansion of Our Business
The optical switching market is new. Our business will suffer if this market
does not develop as we expect.
The market for our optical switching products is extremely new and rapidly
evolving. Optical switching may not be widely adopted as a method by which
service providers address their data capacity requirements. As a result, a
viable market for our products may not develop or be sustainable. In addition,
most service providers have made substantial investments in their current
network infrastructure and are typically reluctant to adopt new and unproven
technologies. They may elect to remain with their current network architectures
or to adopt new architectures, like ours, in limited stages or over extended
periods of time. A decision by a customer to purchase our product will involve
a significant capital investment. We will need to convince service providers of
the benefits of our products for future network upgrades. If the market for
optical switching products does not develop, or develops more slowly than we
expect, our business will be seriously harmed.
If we do not respond rapidly to technological changes and anticipate evolving
customer requirements, customers will not buy our products and we could lose
revenues.
The market for network telecommunications equipment is characterized by:
. rapid technological change;
. frequent new product introductions; and
. changes in customer requirements.
We may be unable to anticipate or respond quickly or effectively to these
developments. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development and introduction of
new products and enhancements. If our competitors introduce products based on
new or alternative technologies, our existing and future products could become
obsolete and our business could be harmed.
Our customers may require product features and capabilities that our
current products do not have. Consequently, if we fail to develop or enhance
our products, or offer services that satisfy evolving customer demands, we will
not be able to satisfy our existing customers' requirements or increase demand
for our products. This would seriously harm our business.
If we do not expand our sales and marketing 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 require a sophisticated sales and marketing effort targeted at
a limited number of key individuals within our current and prospective
customers' organizations. Our success will depend, in part, on our ability to
develop and manage these relationships. We are in the process of building our
direct sales and marketing force and plan to hire additional qualified sales
and marketing personnel and consulting engineers. Competition for these
individuals is intense because there is a limited number of people available
with the necessary technical skills and understanding of our
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market. In addition, we believe that our future success depends on our ability
to establish successful relationships with various distribution partners. If we
are unable to expand our sales and marketing operations, we may not be able to
effectively market and sell our products, which may prevent us from achieving
and maintaining profitability.
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 rapidly train these personnel, we may not be able to increase
sales.
Our failure to manage growth, improve existing processes and implement new
systems could impair our future growth.
We have expanded our operations rapidly since our inception in May 1997.
Our growth has placed, and our anticipated growth will continue to place, a
significant strain on our management systems and resources. Our ability to
successfully offer our products and implement our business plan in a rapidly
evolving market requires an effective planning and management process. We
expect that we will need to continue to refine and expand our financial,
managerial and manufacturing controls and reporting systems. If we are unable
to implement adequate control systems in an efficient and timely manner, our
growth could be impaired.
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.
We believe our future success will also depend, in large part, on our
ability to identify, attract and retain sufficient numbers of highly-skilled
employees, particularly qualified sales and engineering personnel. Competition
for these individuals is intense in our industry. We may not succeed in
identifying, attracting and retaining these personnel. Further, competitors and
other entities may attempt to recruit our employees. If we are unable to hire
any of these required personnel, we may not be able to increase sales of our
products, which would seriously harm our business.
Our future success depends to a significant degree on the skills and
efforts of Harry J. Carr, our Chief Executive Officer and Chairman of the
Board, Krishna Bala, our Chief Technology Officer, and other key executive
officers and members of our senior management. These employees have critical
industry experience and relationships that we rely on to implement our business
plan. We currently do not have "key person" life insurance policies covering
any of our employees. If we lose the services of Mr. Carr, Dr. Bala or one or
more of our other key executive officers and senior management members, we may
not be able to grow our business as we expect, and our ability to compete could
be harmed.
If we become subject to unfair hiring claims, we could incur substantial costs
in defending ourselves.
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices
or inappropriately taken or benefited from confidential or proprietary
information. We may receive claims of this kind in the future as we seek to
hire qualified personnel. These claims may result in material litigation or
judgments against us. We could incur substantial costs in defending ourselves
or our employees against these claims, regardless of the merits of the claims.
In addition, defending ourselves from these claims could divert the attention
of our management away from our core business.
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We do not have significant experience in international markets and may have
unexpected costs and difficulties in developing international revenues.
We plan to expand the marketing and sales of our products internationally.
This expansion will require significant management attention and financial
resources to successfully develop international sales and support channels. In
expanding internationally, we will face risks and challenges that could harm
our business, including:
. currency fluctuations and exchange control regulations;
. changes in regulatory requirements in international markets;
. expenses associated with developing and customizing our products for
foreign countries;
. reduced protection for intellectual property rights; and
. compliance with international technical and regulatory standards that
differ from domestic standards.
We may not be able to obtain additional capital to fund our existing and future
operations.
At June 30, 2000, we had approximately $30.2 million in cash, cash
equivalents and marketable securities. We believe that our available cash,
including the proceeds from our recent private placement of Series E preferred
stock, combined with net proceeds from this offering, our line of credit
facilities and cash anticipated to be available from future operations, will
enable us to meet our working capital requirements for the next 12 months.
However, the development and marketing of new and enhanced products and the
expansion of our direct sales operation and associated support personnel will
require a significant commitment of resources. As a result, we may need to
raise substantial additional capital. We may not be able to obtain additional
capital at all, or upon acceptable terms. If we are unable to obtain additional
capital on acceptable terms, we may be required to reduce the scope of our
planned product development and marketing and sales efforts, which would harm
our business. To the extent that we raise additional capital through the sale
of equity or convertible debt securities, the issuance of additional securities
could result in dilution to our existing stockholders. If additional funds are
raised through the issuance of debt securities, their terms could impose
additional restrictions on our operations.
Any acquisitions we make could disrupt our business.
We may, from time to time, consider investments in complementary
businesses, products or technologies. In the event of any future acquisitions,
we could:
. issue stock that would dilute our current stockholders' percentage
ownership;
. incur debt that will give rise to interest charges and may impose
material restrictions on the manner in which we operate our business;
. assume liabilities;
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
We also face numerous risks, including the following, in operating any
acquired business:
. problems combining the acquired operations, technologies or products;
. diversion of management's time and 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 acquired
companies.
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We recently entered into an agreement to acquire Astarte. The acquisition
of Astarte is subject to most of these risks. We may not be able to
successfully integrate Astarte, or any businesses, products, technologies or
personnel that we might acquire in the future. If we fail to do so, our
business would be harmed.
The communications industry is subject to government regulations which could
harm our business.
The Federal Communications Commission, or FCC, has jurisdiction over the
entire communications industry and, as a result, our products and our
customers' products are subject to FCC rules and regulations. Current and
future FCC rules and regulations affecting communications services or our
customers' businesses or products could negatively affect our business. In
addition, international regulatory standards could impair our ability to
develop products for international service providers in the future. Delays
caused by our compliance and our customers' compliance with regulatory
requirements could result in postponements or cancellations of product orders,
which would harm our business and financial results. Further, we cannot
guarantee that we will be successful in obtaining or maintaining any regulatory
approvals that may, in the future, be required to operate our business.
Risks Related to Our Product Manufacturing
One of our suppliers, Lucent Technologies, is both an important source for our
key components and a major competitor. If Lucent stops supplying us with
components, our business could be harmed.
We currently contract with Lucent Technologies, Inc. to supply us with
optical transceivers. We recently terminated a reseller relationship with
Lucent which had resulted in no revenue to either party. Lucent is an important
supplier of optical transceivers, which are a critical component of our optical
networking switches. Lucent is also one of our major competitors since it
develops and markets products similar to ours. If Lucent determines not to
supply us with optical transceivers, we will rely on other sources, and may
experience difficulties and delays in manufacturing our products, which could
damage our customer relationships.
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 manufacturers 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 relationship with our
contract manufacturers and component vendors due to reduced future orders. If
we underestimate our requirements, we may have an inadequate inventory of
components and optical assemblies, which 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.
Some of the optical components used in our products are in short supply.
There is currently an industry-wide shortage of some optical components due
to rapidly increasing demand. For some of these components, there can be
waiting periods of six months or more between placement of an order and receipt
of the components. In the case of some optical components in short supply,
component suppliers have imposed strict allocations that limit the
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number of these components they will supply to a given customer in a specified
time period. These suppliers may choose to increase allocations to larger, more
established companies, which could reduce our allocations and harm our ability
to manufacture our products.
Any disruption in our manufacturing relationships may cause us to fail to meet
our customers' demands and damage our customer relationships.
We rely on a small number of contract manufacturers to manufacture our
products in accordance with our specifications and to fill orders on a timely
basis. We recently entered into an agreement to subcontract the manufacturing
of a substantial portion of our products to Solectron Corporation, an
independent manufacturer. The agreement has a one-year term, is renewable
annually and can be terminated with 90 days notice by either party. Solectron
or our other contract manufacturers may not always have sufficient quantities
of inventory available to fill our orders or may not allocate their internal
resources to fill these orders on a timely basis. We currently do not have
long-term contracts with any of our manufacturers. As a result, our contract
manufacturers are not obligated to supply products to us for any specific
period, in any specific quantity or at any specific price, except as may be
provided in a particular purchase order. If for any reason these manufacturers
were to stop satisfying our needs without providing us with sufficient warning
to procure an alternate source, our ability to sell our products could be
harmed. In addition, any failure by our contract manufacturers to supply us
with our products on a timely basis could result in late deliveries. Our
inability to meet our delivery deadlines could adversely affect our customer
relationships and in some instances result in termination of these
relationships or, potentially subject us to litigation. Qualifying a new
contract manufacturer and commencing volume production is expensive and time
consuming and could significantly interrupt the supply of our products. If we
are required or choose to change contract manufacturers, we may damage our
customer relationships and lose revenues.
We purchase several of our key components from single or limited sources. If we
are unable to obtain these components on a timely basis, we will not be able to
meet our customers' product delivery requirements, which could harm our
business.
We currently purchase several key components from single or, in some cases,
limited sources. From time to time we experience delays in receiving these
products. We currently do not have long-term supply contracts for these
components. If any of our sole or limited source suppliers experience capacity
constraints, work stoppages or any other reduction or disruption in output,
they may not be able to meet our delivery schedules. Our suppliers may:
. enter into exclusive arrangements with our competitors;
. be acquired by our competitors;
. stop selling their products or components to us at commercially
reasonable prices;
. refuse to sell their products or components to us at any price; or
. be unable to obtain or have difficulty obtaining components for their
products from their suppliers.
If supply for these key components is disrupted, our ability to deliver our
products to our customers would be severely impaired. Even if alternate
suppliers are available to us, we may have difficulty identifying them in a
timely manner and we may experience difficulties or delays in manufacturing our
products. Any failure to meet our customers' delivery requirements could harm
our reputation and decrease our sales, which would harm our business.
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Our ability to compete could be jeopardized and our business adversely affected
if we are unable to protect our intellectual property rights from third-party
challenges.
We rely on a combination of patent, copyright, trademark and trade secret
laws and contractual restrictions to protect our intellectual property rights.
For example, we enter into confidentiality or license agreements with our
employees, consultants, corporate partners and customers 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. Monitoring unauthorized use of our products is
difficult, and the steps we have taken may not prevent unauthorized use of our
technology. Effective patent, trademark, copyright and trade secret protection
may not be available in some countries in which our products are distributed.
Furthermore, our competitors may independently develop similar technologies
that limit the value of our intellectual property or design around patents
issued to us. If competitors are able to use our technology, our ability to
compete effectively could be harmed. Because the technology and intellectual
property associated with our optical networking products is evolving and
rapidly changing, our ability to protect our intellectual property rights may
be limited.
We face uncertainties regarding the legal enforceability of our intellectual
property rights.
It is possible that no patents or trademarks will be issued from our
currently pending or future patent or trademark applications. Moreover, any
issued patents or trademarks may not provide us with any competitive advantages
over, or may be challenged by, third parties. Litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Because legal standards relating to the validity, enforceability and
scope of protection of patent and intellectual property rights in new
technologies are uncertain and still evolving, the future viability or value of
our intellectual property rights is uncertain.
If necessary licenses of third-party technology are not available to us or are
very expensive, our products could become obsolete and our business seriously
harmed.
We currently license technology and, from time to time, we may be required
to license additional technology from third parties, or expand the scope of
current licenses to sell or develop our products or product enhancements.
Existing and future third-party licenses may not be available to us on
commercially reasonable terms, if at all. Our inability to maintain, expand or
obtain any third-party license required to sell or develop our products and
product enhancements could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, or limit or cease the sale
or development of certain products or services, any of which could seriously
harm the competitiveness of our products and our business.
We could become subject to litigation regarding intellectual property rights,
which could seriously harm our business.
In recent years, there has been significant litigation in the United States
involving patents, copyright, trademark and other intellectual property rights.
Although we have not been involved in any intellectual property litigation, we
or our customers may be a party to litigation in the future to protect our
intellectual property or as a result of an allegation that we infringe the
intellectual property of others. Any parties asserting that our products
infringe upon their proprietary rights could force us to defend ourselves and
possibly our customers or manufacturers against the alleged infringement. These
claims and any resulting lawsuit, if successful, could subject us to
significant liability for damages and weaken the extent of or lose the
protection offered by our proprietary rights. These lawsuits, regardless of
their success, would likely be time-consuming and expensive to resolve and
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would divert our management's time and attention. Any potential intellectual
property litigation also could force us to do one or more of the following:
. stop selling, incorporating or using our products that use the
challenged intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to make, use or sell the relevant technology, which license may
not be available on reasonable terms, or at all;
. redesign those products that use such technology; and
. pay monetary damages for past infringement of third-party intellectual
property rights.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed.
Our ability to differentiate our products and services and our business could
be adversely affected by confusingly similar trademarks.
We rely on registered trademarks and other trademarks to identify and
market our products and to differentiate our products from our competitors'
products. Given the large number of companies and products in the
communication industry, it is becoming increasingly more difficult to develop
and protect unique trademarks. We cannot provide complete assurance that a
desired trademark will be available for our use and will not infringe the
rights of a third party. If one of our trademarks is alleged to infringe a
third party trademark, we could be forced to defend ourselves and possibly our
resellers and distributors against the alleged infringement. Any resulting
lawsuit could be expensive and time-consuming, and result in significant
liability for damages, as well as require us to change our trademark. Changing
a trademark for an established product can be expensive and can negatively
impact sales and marketing for that product. Likewise, we monitor for
unauthorized use of our trademarks by third parties, but monitoring is
expensive and difficult, and we cannot assure you that the steps we have taken
will prevent unauthorized use of our trademarks, or that we will be able to
prevent such third parties from continuing to use our trademarks. If we are
unable to effectively police and enforce our trademark rights, our ability to
compete effectively could be harmed.
Risks Related to this Offering
Insiders will continue to have substantial control over us after this offering
and could limit your ability to influence the outcome of key transactions,
including changes of control.
Our directors and principal stockholders and entities affiliated with them
will own approximately % of the outstanding shares of our common stock
after this offering. As a result, these stockholders, if acting together, will
be able to control all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions. These stockholders or their affiliates may
acquire additional equity in the future. The concentration of ownership may
also 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.
Stock market volatility has increased, making your investment more risky and
litigation more likely.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology companies in particular, has
experienced substantial price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of
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many technology, networking and Internet-related companies and have often been
unrelated or disproportionate to the operating performance of those companies.
Volatility in the market price of our common stock may prevent investors from
being able to sell their common stock at or above the initial public offering
price. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been brought
against that company. Due to the potential volatility of our stock price, we
may be the target of securities litigation in the future. Securities litigation
could result in substantial costs and divert management's attention and
resources from our business.
If a substantial number of shares becomes available for sale and is sold in a
short period of time, the market price of our common stock could decline.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could decrease. Based on shares outstanding as of June 30, 2000, upon
consummation of this offering, we will have outstanding shares of
common stock. Other than the shares of common stock sold in this offering,
approximately shares will immediately be eligible for sale in the
public market. Most of our stockholders will be subject to agreements with the
underwriters or us that restrict their ability to transfer their stock for
periods varying from 90 to 180 days from the date of this prospectus, subject
to a few exceptions. For a detailed description of these exceptions, see
"Underwriting". After these agreements expire, an additional shares
will be eligible for sale in the public market. For a detailed discussion of
the shares eligible for future sale, see "Shares Eligible for Future Sale".
Management will have broad discretion as to how we use the proceeds of this
offering, and we may not use these proceeds effectively.
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.
We cannot assure you that a market will develop for our common stock or what
the market price of our common stock will be.
Before this offering, there was no public trading market for our common
stock, and we cannot assure you that one will develop or be sustained after
this offering. We cannot predict the prices at which our common stock will
trade. The initial public offering price for our common stock will be
determined through our negotiations with the underwriters and may not bear any
relationship to the market price at which it will trade after this offering or
to any other established criteria of our value.
As a new investor, you will incur substantial dilution as a result of this
offering and future equity issuances.
The initial public offering price will be substantially higher than the pro
forma net tangible book value per share of our outstanding common stock. As a
result, investors purchasing common stock in this offering will incur immediate
dilution of $ a share, assuming a public offering price of $ .
The exercise of outstanding options and warrants and future equity issuances
will result in further dilution.
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We have various mechanisms in place to discourage takeover attempts that could
suppress our stock price and make it more difficult to acquire us.
Our certificate of incorporation and our bylaws to be effective on the
completion of this offering will contain provisions that could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. These provisions will include:
. authorizing the issuance of shares of blank check preferred stock;
. prohibiting cumulative voting in the election of directors;
. prohibiting stockholders from calling stockholders meetings;
. providing for a classified board of directors with staggered, three-year
terms; and
. prohibiting stockholder action by written consent.
In addition, Section 203 of the Delaware General Corporation Law prohibits
us from engaging in a business combination with any of our interested
stockholders for three years after such stockholder became an interested
stockholder unless specified conditions are met. For information regarding
these and other provisions, see "Description of Capital Stock".
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements are not
historical facts, but rather are based on current expectations, estimates and
projections about our industry, our beliefs and our assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks" and
"estimates", and variations of these words and similar expressions, are
intended to identify forward-looking statements. This prospectus also contains
forward-looking statements attributed to third parties relating to their
estimates regarding the growth of Internet use and telecommunications data
traffic. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control and difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in "Risk
Factors" and elsewhere in this prospectus. You should not place undue reliance
on these forward-looking statements, which apply only as of the date of this
prospectus.
RECENT DEVELOPMENTS
On August 29, 2000, we entered into an agreement to acquire Astarte. The
closing of the acquisition remains subject to several conditions. If those
conditions are satisfied and the acquisition closes, we will issue 3,750,000
shares of our common stock to the stockholders of Astarte. We have granted some
of the stockholders of Astarte the right to include their shares of common
stock in future registration statements that we may file. The principal assets
of Astarte that we will acquire if the acquisition closes are intellectual
property rights.
On September 1, 2000, we issued 1,500,000 shares of our common stock to
AT&T as consideration for the license of intellectual property from AT&T. We
have granted to AT&T the right to include these shares in future registration
statements that we may file.
On September 20, 2000, we completed a private placement of 7,274,413 shares
of Series E preferred stock at a price per preferred share of $30.00 for an
aggregate purchase price of approximately $218.0 million. Upon the completion
of this offering, the shares of Series E preferred stock will automatically
convert into shares of common stock at the initial public offering price. We
have agreed to file a shelf registration statement covering resales of the
shares of common stock to be issued upon conversion of the Series E preferred
stock. We will use our reasonable best efforts to cause the shelf registration
statement to become effective within 90 days of the completion of this
offering, and to keep it effective for a two-year period.
In September 2000, we entered into a five-year contract with Cable &
Wireless. Under the terms of this contract, Cable & Wireless has a minimum
purchase commitment of $350 million for the worldwide deployment of our
products, including the Aurora Optical Switch, the Wavelength Management System
and the StarNet Operating System. Cable & Wireless has the right to reduce its
minimum purchase commitment to $200 million if we do not maintain a
technological edge so that there exists in the marketplace superior technology
that we have not matched. However, if the minimum purchase commitment under our
agreement is reduced, then at the end of the contract term, all purchases made
by Cable & Wireless, including prior purchases, will be repriced at a higher
rate.
In September 2000, we also entered into a contract with Qwest, under which
Qwest agreed to purchase $300 million of our products, including the Aurora
Optical Switch, the Aurora Full-Spectrum Switch and the StarNet Operating
System over the next three years. In connection with this contract, we issued
two warrants to a wholly-owned subsidiary of Qwest to purchase 2,000,000 shares
of our common stock at an exercise price of $30.00 per share. We also sold
333,333 shares of common stock to officers and affiliates of Qwest for $30.00
per share.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock we are offering at an assumed initial public offering price of
$ will be approximately $ million, or $ million if the
underwriters exercise their over-allotment option in full, after deducting the
estimated underwriting discount and offering expenses.
The principal purposes of this offering are to:
. increase working capital;
. create a public market for our common stock;
. enhance our ability to acquire other businesses, products or
technologies; and
. facilitate future access to public equity markets.
We expect to use the net proceeds from this offering for general corporate
purposes, including working capital. We may also use a portion of the net
proceeds from this offering to acquire or invest in businesses, technologies or
products that are complementary to our business. We have not determined the
amounts we plan to spend on any of the uses described above or the timing of
these expenditures. Accordingly, our management will have considerable
discretion in the application of the net proceeds of this offering. Pending
these uses, we intend to invest the net proceeds of this offering in short-
term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock or
other securities and do not anticipate paying any cash dividends in the
foreseeable future. We intend to retain future earnings, if any, to finance the
expansion and development of our business.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
. on an actual basis;
. on a pro forma basis to reflect:
. the automatic conversion of our Series A, B, C and D preferred stock
outstanding as of June 30, 2000 into 56,694,924 shares of common
stock based on a one-to-three conversion ratio upon the completion
of this offering;
. the automatic conversion of 7,274,413 shares of our Series E
preferred stock into shares of common stock upon the completion
of this offering, assuming an initial public offering price of $
per share;
. the issuance of 1,500,000 shares of common stock to AT&T in
connection with our license of intellectual property from AT&T;
. 3,750,000 shares of common stock that are issuable to stockholders
of Astarte if our acquisition of Astarte closes; and
. 333,333 shares of common stock issued to officers and affiliates of
Qwest;
. on a pro forma as adjusted basis to reflect:
. the sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share, after
deducting the estimated underwriting discount and offering expenses.
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
------------ ----- -----------
<S> <C> <C> <C>
Long-term portion of notes payable............. $ 912,808 $ $
Long-term portion of capital lease
obligations................................... 1,080,160
Stockholder's Equity:
Common stock, $0.001 par value 250,000,000
authorized, 22,965,348 shares issued and
outstanding................................. 7,655
Preferred stock, Series A, $0.001 par value,
10,433,334 shares authorized, 10,089,584
shares issued and outstanding............... 10,091
Preferred stock, Series B, $0.001 par value,
250,000 shares authorized, 233,333 shares
issued and outstanding...................... 233
Preferred stock, Series C, $0.001 par value,
4,403,934 shares authorized, 2,564,465
shares issued and outstanding............... 2,565
Preferred stock, Series D, $0.001 par value,
6,025,000 shares authorized, 6,010,926
shares issued and outstanding............... 6,011
Preferred stock, Series E, $0.001 par value,
7,500,000 shares authorized, 7,274,413
shares issued and outstanding...............
Additional paid-in capital..................... 150,280,858
Notes receivable............................... (37,995,430)
Accumulated deficit............................ (65,019,587)
Deferred employee compensation................. (7,606,228)
------------ ----- -----
Total stockholders' equity................. 39,686,168
------------ ----- -----
Total capitalization..................... $ 41,679,136 $ $
============ ===== =====
</TABLE>
22
<PAGE>
The outstanding share information in the preceding table excludes:
. 15,846,528 shares of common stock subject to options outstanding under
our stock option plan with a weighted average exercise price of $1.89
per share;
. 2,759,160 shares of common stock reserved for future issuance under our
stock option plan;
. 225,000 shares of common stock subject to options that were issued
outside of our stock option plan;
. 5,226,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $3.05 per share;
. 88,527 shares of common stock subject to outstanding warrants to
purchase Series C preferred stock at an exercise price of $3.05 per
share;
. 2,000,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $30.00 per share; and
. shares of common stock to be issued according to the over-
allotment option.
23
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per
share of our common stock immediately after this offering.
The pro forma net tangible book value of our common stock as of June 30,
2000 was $ million, or approximately $ per share assuming the
conversion of all outstanding shares of preferred stock into shares of common
stock. Pro forma net tangible book value per share represents the amount of our
total tangible assets less our total liabilities divided by the pro forma
number of shares of common stock outstanding after giving effect to:
. the automatic conversion of our Series A, B, C and D preferred stock
outstanding as of June 30, 2000 into 56,694,924 shares of common stock
based on a one-to-three conversion ratio upon the completion of this
offering;
. the automatic conversion of 7,274,413 shares of our Series E preferred
stock into shares of common stock upon the completion of this
offering, assuming an initial public offering price of $ per share;
. the issuance of 1,500,000 shares of common stock to AT&T in connection
with our license of intellectual property from AT&T;
. 3,750,000 shares of common stock issuable to stockholders of Astarte if
our acquisition of Astarte closes; and
. 333,333 shares of common stock issued to officers and affiliates of
Qwest.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of common stock
immediately after the completion of this offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us and after deducting the estimated underwriting discount and
offering expenses payable by us, our pro forma net tangible book value as of
June 30, 2000 would have been $ million, or $ per share. This represents
an immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors purchasing shares in this offering. If the initial public offering
price is higher or lower, the dilution to the new investors will be greater or
less, respectively. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Pro forma net tangible book value per share as of June 30,
2000........................................................ $
Increase in pro forma net tangible book value per share
attributable to new investors in this offering..............
-------
Pro forma as adjusted net tangible book value per share after
the offering..................................................
---
Dilution per share to new investors in this offering........... $
---
</TABLE>
The following table summarizes, as of June 30, 2000, on the pro forma basis
described above, the total number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid to us
by the existing stockholders and by the investors purchasing shares of common
stock in this offering. The calculation below is based on and assumed
24
<PAGE>
initial public offering price of $ per share, before deducting the estimated
underwriting discount and offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ --------------------- Average Price
Number Percent Amount Percent Per Share
-------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... % $ % $
New Investors...........
-------- -------- ---------- ---------
Total................. % $ %
======== ======== ========== =========
</TABLE>
The discussion and table assume no exercise of any stock options or
warrants outstanding. As of June 30, 2000, there were options outstanding to
purchase a total of 15,846,528 shares of our common stock, with a weighted
average exercise price of $1.89 per share, warrants outstanding to purchase a
total of 5,226,000 shares of our common stock at an exercise price of $3.05 per
share, and warrants outstanding to purchase a total of 29,509 shares of our
Series C Preferred stock at an exercise price of $9.15 per share, which shares
are convertible into 88,527 shares of our common stock. From July 1, 2000
through August 31, 2000, we granted options to purchase 2,084,000 shares of
common stock with an exercise price of $2.14 per share. To the extent that any
options or warrants are exercised, there will be further dilution to new public
investors.
25
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data should be read with our financial
statements and related notes thereto appearing elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The statement of operations data set forth below for the period
from May 8, 1997 (inception) to December 31, 1997 and for the fiscal year ended
December 31, 1998 and the balance sheet data as of December 31, 1998 have been
derived from our financial statements, which were audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this prospectus. The
statement of operations data set forth below for the fiscal year ended December
31, 1999 and the balance sheet data as of December 31, 1999 have been derived
from our financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the periods ended June 30, 1999 and 2000, and
the balance sheet data as of June 30, 2000, are unaudited but include all
adjustments, consisting only of normal recurring adjustments, which are
considered necessary for a fair presentation of the data. The historical
results are not necessarily indicative of results to be expected for any future
period.
<TABLE>
<CAPTION>
Period from
May 8, 1997
(Inception) Year Ended Six Months
to December 31, Ended June 30,
December 31, ---------------- ----------------
1997 1998 1999 1999 2000
------------ ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenue...................... $ 55 $ 1,364 $ 5,227 $ 1,063 $ 7,585
Non-cash charges related to
equity issuances............ -- -- 559 -- 371
------- ------- ------- ------- -------
Revenue, net of non-cash
charges..................... 55 1,364 4,668 1,063 7,214
Cost of revenue.............. 12 1,260 3,882 911 5,061
------- ------- ------- ------- -------
Gross profit................ 43 104 786 152 2,153
Operating expenses:
Research and development.... 4,540 14,765 10,119 5,099 12,741
Sales and marketing......... 202 2,041 4,114 1,254 4,247
General and
administrative............. 1,671 4,081 6,190 3,076 6,237
------- ------- ------- ------- -------
Total operating expenses.. 6,413 20,887 20,423 9,429 23,225
Operating loss............... 6,370 20,783 19,637 9,277 21,072
Other (income) expense,
net:........................ (802) (7) -- -- --
Interest (income) expense,
net......................... (303) (266) 162 151 (1,627)
------- ------- ------- ------- -------
Net loss..................... $ 5,265 $20,510 $19,799 $ 9,428 $19,445
======= ======= ======= ======= =======
Basic and diluted net loss
per share................... $ (3.39) $ (9.66) $ (7.42) $ (3.57) $ (2.00)
======= ======= ======= ======= =======
Weighted average shares
outstanding used in
computing basic and diluted
net loss per share.......... 1,554 2,123 2,668 2,642 9,727
======= ======= ======= ======= =======
Pro forma basic and diluted
net loss per share
(unaudited)................. $ (0.36) $ (0.29)
======= =======
Weighted average shares
outstanding used in
computing pro forma basic
and diluted net loss per
share (unaudited)........... 54,947 66,422
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1997 1998 1999 2000
------- ------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Balance sheet data
Cash and cash equivalents................ $ 8,424 $ 7,733 $45,239 $30,228
Working capital (deficiency)............. 7,790 (3,120) 45,295 34,628
Total assets............................. 9,475 10,781 53,234 53,412
Long term debt and obligations under
capital leases, less current portion.... 74 9,465 1,339 1,993
Total stockholders' equity (deficiency).. $ 8,619 $(9,858) $47,674 $39,686
</TABLE>
26
<PAGE>
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 in conjunction with "Selected Financial
Data" and our financial statements and the notes thereto appearing elsewhere in
this prospectus. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. Our actual
results may differ materially from those anticipated in these forward looking
statements as a result of many factors, including, but not limited to, those
set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
We design, develop and market high-speed, high-capacity, intelligent
optical switching solutions that enable network service providers to quickly
and cost-effectively deliver new high-speed services. From May 1997 to
September 1999, we developed and manufactured wave division multiplexing
products and the initial versions of our Aurora 32 optical switch for the U.S.
Department of Defense. Accordingly, substantially all of our revenue in 1998
and the first two quarters of 1999 was derived from product sales under our
contract with the U.S. Department of Defense. Substantially all of our
obligations under this contract have been satisfied, and we do not anticipate
recognizing future revenue from equipment and product sales under this
contract. During the second quarter of 1999, we decided to focus on the
development of optical switches and discontinued the manufacture of wave
division multiplexing products. In September 1999, we shipped our Aurora 32
optical switch to Extant and, in the third quarter of 2000, we delivered our
next generation Aurora Optical Switch to Extant for evaluation in its
laboratories. Our future revenue growth depends on the commercial success of
our optical switches. Although we are developing and plan to introduce new
products and enhancements, we may not be successful in these efforts.
We currently have three customers, Cable & Wireless, Extant and Qwest. In
September 2000, we entered into a five-year contract with Cable & Wireless, a
multinational provider of voice, data and network services. Under the terms of
this contract, Cable & Wireless has a minimum purchase commitment of $350
million for the worldwide deployment of our products, including the Aurora
Optical Switch, the Wavelength Management System and the StarNet Operating
System. Cable & Wireless is conducting laboratory testing of the Aurora Optical
Switch. We expect to commence commercial shipment to Cable & Wireless during
the first quarter of 2001. In September 1999, we entered into a five-year
contract with Extant, a U.S.-based wholesale service provider. We expect Extant
will purchase approximately $250 million of products under the contract,
although it has no obligation to do so. However, under the terms of this
contract, Extant is required to purchase its full requirements for optical
switches from us during the first three years of the contract. Our Aurora 32,
Wavelength Management System, PlaNet and StarNet Operating System have been in
service in the Extant network since April 2000. Extant is conducting laboratory
testing on the Aurora Optical Switch, and we expect to commence commercial
shipment during the first quarter of 2001. In August 2000, Extant announced
that it is being acquired by Dynegy, Inc., a public company that provides power
services. Our contract with Extant is transferable to Dynegy upon the
completion of the acquisition. We have a three-year contract with Qwest, a
multinational provider of voice, data and network services. Under the terms of
this contract, Qwest has a minimum purchase commitment of $300 million for the
deployment of our products, including the Aurora Optical Switch, the Aurora
Full-Spectrum and the StarNet Operating System. We expect to commence
commercial shipment under this contract during the first quarter of 2001.
We sell our products through a direct sales force. In the future, we
anticipate expanding our sales efforts to include resellers and distribution
partners in the U.S. and selected international
27
<PAGE>
markets. Customers' decisions to purchase our products to deploy in commercial
networks involve a significant commitment of resources and a lengthy
evaluation, testing and product qualification process. We believe these long
sales cycles, as well as our expectation that customers will tend to
sporadically place large orders with short lead times, will cause our revenue
and results of operations to vary significantly and unexpectedly from quarter
to quarter. In addition, we expect our revenues will be generated by sales to a
limited number of customers for the foreseeable future.
Since our inception, we have incurred significant losses and as of June 30,
2000, we had an accumulated deficit of approximately $65.0 million. We have not
achieved profitability on a quarterly or an annual basis, and anticipate that
we will continue to incur net losses for the foreseeable future. We have a
lengthy sales cycle for our products and accordingly we expect to incur sales
related costs and other expenses before we realize the related revenue. We also
expect 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.
On August 29, 2000, we entered into an agreement to acquire Astarte. The
closing of the acquisition remains subject to several conditions. If those
conditions are satisfied and the acquisition closes, we will issue 3,750,000
shares of our common stock to the stockholders of Astarte. The principal assets
of Astarte that we will acquire if the acquisition closes are intellectual
property rights. On September 1, 2000, we issued 1,500,000 shares of our common
stock to AT&T as consideration for the license of intellectual property from
AT&T.
In September 2000, we completed a private placement of 7,274,413 shares of
our Series E preferred stock to a number of investors for an aggregate purchase
price of approximately $218.0 million. Upon completion of this offering, the
shares of Series E preferred stock will automatically convert into common stock
at the initial public offering price.
Revenue
Our revenue is derived from the sale of optical switches and related software
and the provision of related services. We recognize revenue from equipment
sales when the product has been shipped. For transactions where we have not
obtained customer acceptance, revenue is deferred until the terms of acceptance
are satisfied.
Software license revenue for software embedded within our optical switches or
our stand alone software products is recognized when a purchase order has been
received or a sales contract has been executed, delivery of the product and
acceptance by the customer have occurred, the license fees are fixed and
determinable, and collection is probable. The portion of revenue that relates
to our obligations to provide customer support, if any, are deferred, based
upon the price charged for customer support when it is sold separately, and
recognized ratably over the maintenance period. Amounts received in excess of
revenue recognized are included as deferred revenue on our balance sheet.
Revenue from technical support and maintenance contracts is deferred and
recognized ratably over the maintenance period. Maintenance and warranty
periods are generally one year and five years, respectively. Estimated warranty
costs are recorded as a cost of revenue at the time the related revenue is
recognized.
Non-cash Charges Related to Equity Issuances
Non-cash charges related to a warrant issued to a customer significantly
affect our reporting of revenue. In conjunction with the execution of our
contract with Extant in September 1999, we granted a warrant to purchase up to
5,226,000 shares of our common stock at an exercise price of $3.05 per share.
Upon execution of the Extant contract, 1,045,200 of the shares subject to the
warrant vested, and as there was no purchase commitment, a charge of
approximately $1.1 million was recorded to
sales and marketing expense for the year ended December 31, 1999 to reflect the
fair value of the warrants at the grant date. Charges of $559,000 and $371,000
have been recorded as an offset to
28
<PAGE>
revenue for the year ended December 31, 1999 and the six month period ending
June 30, 2000, respectively, to reflect the fair value of the warrants earned
by Extant based upon purchases through that date. As the vesting of the
remaining warrants is dependent upon future purchases made by the customer,
variable accounting will be used and related charges will vary each accounting
period until the final measurement date, based in part on the fair value of our
common stock on each measurement date. The final measurement date occurs when
Extant's purchases reach specified levels. If these non-cash charges exceed the
amount of revenue received from Extant, the total amount of revenues from
Extant would be offset in its entirety and any remaining charges would be
included as a cost of revenue and would adversely impact our gross margins.
Cost of Revenue
Our cost of revenue includes manufacturing expenses which consist of
amounts paid to third-party manufacturers for assembly and testing, warranty
and maintenance expense, manufacturing start-up expenses, manufacturing
personnel and related costs and costs of our customer support group. A
significant portion of our manufacturing expenses consists of payments to
third-party contract manufacturers.
We anticipate our cost of revenue to increase in future periods as our
revenue increases. We believe that our gross margins will be affected by
several factors including:
. the demand for our products;
. new product introductions both by us and by our competitors;
. changes in our pricing policies and those of our competitors;
. the mix of product configurations sold;
. the volume of manufacturing;
. our ability to reduce our manufacturing and component costs; and
. non-cash charges related to customer warrants.
Research and Development Expense
Research and development expense consists primarily of salaries and related
personnel costs, prototype costs and other costs related to the design,
development, testing and enhancement of our products. We have expensed our
research and development costs as they were incurred. Several components of our
research and development effort, including the purchase of testing equipment
for our products, require significant expenditures, the timing of which can
cause variability in our quarterly expenses. We are devoting substantial
resources to the continued development and enhancement of our products. We
believe that research and development is critical to our strategic product
development objectives and we intend to enhance our technology to meet the
changing requirements of our customers. As a result, we expect our research and
development expense to increase in absolute dollars in the future.
Sales and Marketing Expense
Sales and marketing expense consists primarily of salaries and the related
costs of sales and marketing personnel, commissions, promotions, travel and
other marketing expenses and recruiting expenses. We expect that sales and
marketing expense will increase in absolute dollars in the future as we
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.
29
<PAGE>
General and Administrative Expense
General and administrative expense consists primarily of salaries and
related expenses for personnel, recruiting expenses and professional fees. We
expect that general and administrative expense will 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.
Stock-Based Compensation
During 1998 and 1999, we recorded deferred stock-based compensation expense
of approximately $2.1 million and $6.2 million, respectively. We recorded an
additional $4.0 million of deferred compensation expense in the six months
ended June 30, 2000. Deferred stock-based compensation expense consists of
charges resulting from the grant of stock options and the issuance of
restricted shares with exercise or sales prices deemed to be below the fair
value of our common stock on the date of grant. These amounts are being
amortized ratably over the vesting periods of the applicable options, which
vary depending on vesting schedules. Typically 25% of the options granted vest
on the first anniversary of the date of grant and the remainder vest at either
1/36 monthly thereafter or 25% on each anniversary of the grant date. Based on
the unamortized deferred compensation expense as of June 30, 2000, we expect to
recognize additional deferred compensation expense in future periods as
follows:
. 2000--$2.4 million;
. 2001--$2.2 million;
. 2002--$2.2 million;
. 2003--$1.7 million; and
. 2004--$0.5 million.
The amortization of deferred stock-based compensation expense is allocated
to cost of revenue, research and development, sales and marketing or general
and administrative expense, as appropriate.
Results of Operations
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue
In the six months ended June 30, 2000, we recognized revenue in the amount
of approximately $7.6 million. This represents an increase of approximately
$6.5 million over the same period in 1999 due primarily to the commencement of
shipments of our Aurora 32 optical switches to Extant in the third quarter of
1999. Substantially all of our revenue in the six months ended June 30, 2000
related to the Aurora 32 product shipments to Extant. In the first six months
of 1999, we recognized revenue in the amount of $1.1 million, the majority of
which was derived from sales of wave division multiplexing products.
During the six months ended June 30, 2000, we recognized as an offset to
revenue $371,000 of non-cash charges related to the warrants issued to Extant.
Cost of Revenue
In the six months ended June 30, 2000, we incurred cost of revenue of
approximately $5.1 million, which represented an increase of approximately $4.2
million over the same period in 1999. This increase in cost of revenue was
directly related to the increase in personnel and production equipment costs.
Cost of revenue for the six months ended June 30, 2000 includes amortization of
stock-based compensation expense of $49,000.
30
<PAGE>
Research and Development Expense
In the six months ended June 30, 2000, we incurred research and development
expense of approximately $12.7 million of which $6.6 million represented
personnel costs, $4.0 million represented prototype development expense, and
$402,000 represented amortization of deferred stock-based compensation expense.
This represented an increase of approximately $7.6 million over the same period
in 1999. The increased expenses were primarily associated with a significant
increase in personnel related expenses of approximately $4.6 million and an
increase of approximately $2.7 million in prototype expenses for the design and
development of our Aurora optical switches. As of June 30, 2000, the number of
employees dedicated to research and development was 124 people, as compared to
40 people at June 30, 1999.
Sales and Marketing Expense
In the six months ended June 30, 2000, we incurred sales and marketing
expense of approximately $4.2 million, of which $1.8 million represented
expenses for sales and marketing personnel, $1.3 million represented costs
related to marketing programs and $102,000 represented amortization of deferred
stock-based compensation expense. This represented an increase of approximately
$3.0 million over the same period in 1999. The increase resulted from costs
associated with the hiring of additional sales and marketing personnel of
approximately $1.4 million and marketing program costs, including trade shows
and product launch activities, of approximately $1.6 million. As of June 30,
2000, the number of sales and marketing personnel was 53 people, as compared to
12 people at June 30, 1999.
General and Administrative Expense
In the six months ended June 30, 2000, we incurred general and
administrative expense of approximately $6.2 million of which $3.3 million
represented expenses for personnel and professional fees, $407,000 represented
depreciation and $735,000 represented amortization of deferred stock- based
compensation expense. This represented an increase of approximately $3.2
million from the same period in 1999. The increase resulted from the hiring of
additional general and administrative personnel, and increased professional
fees and expenses necessary to accommodate our growing operations.
Interest Income, Net
In the six months ended June 30, 2000, we recorded interest income, net of
interest expense, of approximately $1.6 million, as compared to net interest
expense of $152,000 in the six months ended June 30, 1999. Net interest income
consists of interest earned on our cash balances and marketable securities
offset by interest expense related to outstanding borrowings. The increase in
our interest income during the six months ended June 30, 2000 is primarily
attributable to the interest income on the cash proceeds from our Series D
preferred stock issuance in December 1999 and January 2000. This interest
income was offset by interest expense related to an equipment loan arrangement
we secured in November 1999 for up to $6.0 million.
Income Taxes
We have recorded no income tax provision or benefit for the six months
ended June 30, 1999 and June 30, 2000, respectively, due to our operating loss
position and the uncertainty of our ability to utilize our net operating loss
carry forwards.
31
<PAGE>
Period From Inception (May 8, 1997) Through December 31, 1997, the Year Ended
December 31, 1998 and the Year Ended December 31, 1999
Revenue
In 1997, we recognized revenue of $54,600 related to consulting work we
performed for an affiliate. In 1998, we recognized approximately $1.4 million
in revenue under our contract with the U.S. Department of Defense.
In 1999, we recognized revenue of approximately $5.2 million, which
comprised $964,000 in revenue recognized under our contract with the U.S.
Department of Defense, $3.1 million in revenue from shipments of our Aurora 32
switches and related software to Extant, and $1.1 million in revenue from the
sale of our remaining wave division multiplexing inventory.
In 1999, we recognized an offset to revenue of $559,000 of non-cash charges
related to the warrants issued to Extant.
Cost of Revenue
Cost of revenue was $11,500 in 1997. In 1998, we incurred cost of revenue
of approximately $1.4 million.
In 1999, we incurred cost of revenue of approximately $3.9 million, of
which $3.4 million represented materials, labor and production overhead and
warranty costs and $100,000 represented amortization of deferred stock-based
compensation expense.
Research and Development Expense
Research and development expense was approximately $4.5 million in 1997. In
1998, we incurred research and development expense of approximately $14.8
million.
In 1999, we incurred research and development expense of approximately
$10.1 million, of which $5.5 million represented personnel costs, $2.4 million
represented prototype development expenses and approximately $500,000
represented amortization of deferred stock-based compensation expense. Research
and development expenses represented approximately 71%, 71% and 50% of total
operating expenses for 1997, 1998 and 1999, respectively. The decrease in
expenses in 1999 relative to 1998 was attributable to costs incurred in 1998
related to the purchase, development, and fabrication of wave division
multiplexing products, which were discontinued in 1999. This decrease was
offset by increased costs associated with a significant increase in personnel
and personnel related expenses.
Sales and Marketing Expense
Sales and marketing expense was $202,000 in 1997. In 1998, we incurred
sales and marketing expense of approximately $2.0 million.
In 1999, we incurred sales and marketing expense of approximately $4.1
million of which $1.5 million represented expenses for sales and marketing
personnel, $1.7 million represented costs related to marketing programs and
approximately $300,000 represented amortization of deferred stock-based
compensation expense. Sales and marketing expenses represented approximately
3%, 10% and 20% of total operating expenses for 1997, 1998 and 1999,
respectively. The increase in expense in 1999 represents the hiring of
additional sales and marketing personnel, sales-based commissions and marketing
program costs, including trade shows and product launch activities. Sales and
marketing expense for the year ended December 31, 1999, includes a charge of
approximately $1.1 million representing the fair value of warrants earned by
Extant.
32
<PAGE>
General and Administrative Expense
General and administrative expense was approximately $1.7 million in 1997.
In 1998, we incurred general and administrative expense of approximately $4.1
million.
In 1999, we incurred general and administrative expense of approximately
$6.2 million, of which $1.5 million represented expenses for personnel costs
and professional fees, $1.1 million represented depreciation and $1.8 million
represented amortization of deferred stock-based compensation expense. General
and administrative expenses represented approximately 26%, 20% and 30% of total
operating expenses in 1997, 1998 and 1999, respectively. The increase in
expense in 1999 reflects the hiring of additional administrative personnel and
expenses necessary to scale our growing operations.
Interest Income (Expense), Net
Interest income, net of interest expense, was $303,000 in 1997, $266,000 in
1998 and ($163,000) in 1999. The significant decrease in 1999 relates to our
decreasing cash reserves in 1999 as well as the increased interest expense
related to a $5.0 million loan in 1999.
Other Income
Other income was $802,000 in 1997, which was related to fees paid to us
under a non-exclusive license agreement and a gain on a sale of equipment.
Income Taxes
We have recorded no income tax provision or benefit for the years ended
1997, 1998 and 1999 due to our operating loss position and the uncertainty of
our ability to utilize our net operating loss carryforwards.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of our capital stock. As of June 30, 2000, our cash, cash equivalents and
marketable securities totaled approximately $30.2 million, and for the six
months ended June 30, 2000, our working capital totaled $34.6 million. In
addition, in September 2000, we received approximately $213.0 million in net
proceeds from the private placement of our capital stock.
Cash used in operating activities for the six months ended June 30, 2000
was approximately $23.9 million and was approximately $20.5 million in 1999.
The increased use of cash in operating activities for the six months ended June
30, 2000 related primarily to our continued investment in the growth of our
business.
Cash used in investing activities was approximately $2.4 million for the
first six months of 2000 and was approximately $1.7 million in 1999. The
increase in net cash used for investing activities reflected increased
purchases of property and equipment, primarily for computers and test equipment
for our development and manufacturing activities. Our projected capital
expenditures for the twelve months ending December 31, 2000 are approximately
$5.4 million.
Cash provided by financing activities in the six months ended June 30, 2000
was approximately $11.3 million and was approximately $59.7 million in 1999. In
1999, we raised net proceeds of approximately $23.2 million from the sale of
our Series C preferred stock and net proceeds of approximately $49.7 million
from the sale of our Series D preferred stock. In January 2000, we issued an
additional $5.0 million of Series D preferred stock and in June 2000, we issued
approximately $4.1 million of Series A preferred stock to existing shareholders
upon the exercise of warrants.
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In November 1999, we entered into a financing arrangement with Comdisco,
Inc. We raised approximately $1.8 million through the issuance of secured
promissory notes that bear interest at 7.5% and are payable in installments
through 2002. Additionally, we entered into a lease line of credit with
Comdisco that allows us to finance up to $4.0 million of equipment purchases.
The line bears an interest rate of 7.5% and expires in November 2002. As of
June 30, 2000, $3.2 million was outstanding under this facility.
During the six months ended June 30, 2000, we entered into a $10.0 million
line of credit with Commerce Bank. The line of credit bears interest at 6.75%
and expires on June 30, 2001. As of June 30, 2000, $2.0 million was outstanding
under this line of credit.
We believe that our available cash, including the proceeds from our recent
private placement of Series E preferred stock, combined with net proceeds from
this offering, our line of credit facilities and cash anticipated to be
available from future operations, will enable us to meet our working capital
requirements for the next 12 months. Our expenses have exceeded, and in the
foreseeable future are expected to exceed, our revenue. Accordingly, we do not
expect to be able to fund our operations solely from internally generated funds
for the foreseeable future. Our future liquidity and capital requirements will
depend upon numerous factors, including expansion of operations, product
development and sales and marketing. Also we may need additional capital to
fund cash acquisitions of complementary businesses and technologies, although
we currently have no commitments or agreements for any cash acquisitions. If
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. Any additional equity
financing may be dilutive to our stockholders and debt financing, if available,
may involve restrictive covenants with respect to dividends, raising capital
and other financial and operational matters that could restrict our operations.
Recent Accounting Developments
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. In 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133.
Additionally, in June 2000, the FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities--an amendment of
FASB Statement No. 133. SFAS No. 133, as amended, is effective for January 1,
2001. SFAS No. 133 establishes new disclosure requirements, which provide a
comprehensive standard for recognition and measurement of derivatives and
hedging activities. This will require all derivatives to be recorded on the
balance sheet at fair value and special accounting for some types of hedges. We
do not believe that SFAS No. 133, as amended, will have a material effect on
our consolidated financial statements.
Qualitative and Quantitative Disclosures about Market Risk
We have assessed our vulnerability to many market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents. Due to the short-term nature of these investments and other
investment policies and procedures, we have determined that the risks
associated with interest rate fluctuations related to these financial
instruments are not material to our business.
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BUSINESS
Overview
We design, develop and market high-speed, high-capacity, intelligent
optical switching solutions that enable network service providers to quickly
and cost-effectively deliver new high-speed services. With the growth of the
Internet and the global deregulation of telecommunications services, there
continues to be a dramatic increase in data traffic, as well as accelerating
demand for new and complex services and network capacity. Our service provider
customers are under increasing pressure to improve and expand data service
offerings and to upgrade their network infrastructure in a timely and cost-
effective manner. We believe that traditional networking solutions do not offer
service providers the means to improve their data service offerings and upgrade
their infrastructure in a timely and cost-effective manner.
Our products are based on a highly reliable set of hardware combined with
feature-rich software, both of which scale to enable service providers to grow
and manage their networks quickly and efficiently in order to keep pace with
the dynamic requirements of data services. We have designed our products to be
cost-effective for emerging service providers as they begin to build out their
networks, as well as for established service providers to expand and enhance
the capabilities of their existing networks. Our optical switching solutions
operate with existing optical networking equipment to provide a migration path
from older network architectures to advanced, intelligent optical networking
architectures. This migration path protects service providers' prior investment
in fiber optic paths and transmission equipment. Our optical switching
solutions are easily upgradable, providing our customers with the ability to
adopt new technologies and features without the need to replace our equipment.
Our objective is to be the leading provider of intelligent optical
switching solutions for global public telecommunications networks.
Industry Background
Increase in Data Traffic is Leading to Increased Demand for Network Capacity
The rapid global adoption of the Internet and the World Wide Web is
dramatically increasing data traffic in the world's public telecommunications
networks. RHK, Inc., an industry research firm, estimates that North American
data traffic capacity reached 350,000 terabytes per month in December 1999,
compared to 50,000 terabytes per month for voice traffic in the same period.
Data traffic capacity is expected to increase to approximately 16 million
terabytes per month in 2003.
Consumers and businesses are increasingly using the Internet for
applications such as electronic mail, electronic commerce, application hosting,
telephony and real-time multimedia. This additional traffic demand is expected
to accelerate with the development, deployment and increased use of high-
capacity network access technologies, such as cable modems and digital
subscriber lines, or DSL, that enable commercial and consumer users to transmit
and receive large volumes of information. Substantial growth is expected to
increase the demand for capacity, or bandwidth, at all levels of public
networks. According to RHK, Internet traffic alone is growing at approximately
200% per year. Thus, public network bandwidth will have to increase at least as
fast to satisfy expected Internet and other data traffic requirements.
Deregulation Has Resulted in Increased Competition
Deregulation of the telecommunications industry worldwide has opened
markets to new providers and permitted existing service providers to offer
competing services in expanded geographic areas. The ability to create and
offer new services quickly and cost-effectively has become an important
competitive advantage among service providers. Competition has also reduced
prices for service offerings, decreasing margins and forcing service providers
to look to new technology to provide increased operating efficiencies.
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Today's Optical Network
Optical networking technology generally refers to the use of fiber optic
cables and connections that use light, rather than electricity, as a data
communications medium. These fiber optic cables are in turn connected to
equipment and components that filter, amplify and switch the streams of data
carried by the light flowing over the fiber optic cables. The high performance
of optical networking technology has led to rapid deployment of fiber optic
networks.
Today, network service providers employ two primary methods for managing
and transporting traffic within their optical networks: SONET/SDH for
operational features and DWDM for additional capacity. Synchronous Optical
Network, or SONET, in North America and Synchronous Digital Hierarchy, or SDH,
in Europe and other countries, is based on standards that govern the management
of traffic within an optical network. SONET/SDH equipment aggregates multiple,
low-speed signals onto higher-speed connections for transport across the
optical network.
Dense Wave Division Multiplexing, or DWDM, is an optical transport
technology that dramatically multiplies the amount of traffic that can be
carried over a fiber optic network by dividing each beam of light into
multiple, discrete channels. Service providers have widely deployed DWDM
technology to relieve capacity constraints within their long-distance networks.
However, as hundreds of channels are added and changed across the network,
complexities and inefficiencies increase. DWDM equipment alone is incapable of
performing key SONET/SDH functions, including performance monitoring, fault
location and service restoration, that would ensure reliable network
operations. For this reason, service providers have typically deployed both
SONET/SDH and DWDM equipment in their optical networks.
Limitations of Existing Optical Network Architecture
The existing network infrastructure limits service providers' ability to
grow their networks to cost effectively and efficiently meet increasing
capacity and service demands. The following are key limitations of the existing
network architecture:
. SONET/SDH systems were designed to support voice traffic. SONET/SDH
systems convert and aggregate multiple dedicated voice channels into
higher-speed channels. While these standards provide quality delivery of
traditional voice traffic, SONET/SDH standards are very inefficient for
unpredictable and dynamic data traffic that does not fit neatly into
channels. Moreover, voice and data signals are broken down and
recombined at each network intersection or node, negatively impacting
performance of the network. Data traffic exhibits enormous peaks in
demand that SONET/SDH standards cannot support in an efficient manner at
reasonable cost.
. Current networks use ring architectures. SONET/SDH equipment is
typically configured in a ring architecture to connect several
intersections, or nodes, in a network. Optical paths are linked in rings
so that in the event of a single fiber cut or single equipment failure
between two points on the ring, the signal can be immediately redirected
through the reverse "protection path" of the ring. There are several
disadvantages to ring architectures. The provisioning of high-speed
services across many fixed nodes takes months to test and deploy. In
addition, to provide redundancy, every SONET/SDH service channel is
duplicated on a backup channel which forces half of the overall capacity
of the network to be dedicated to backup capacity that is rarely used.
. Current network upgrades are difficult and expensive. All of the
SONET/SDH equipment operating in the same part of the network must
operate at the same speed. Therefore, if a service provider needs to
increase the speed in one part of the network, the service provider must
replace every part of the network with new, costly, higher-speed
equipment in order for the upgrade to be effective. This process can
take months of intense planning and
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deployment, slowing a service provider's ability to respond to
substantial or unplanned increases in the demand for higher capacity. As
each new DWDM channel is put into service, it must be permanently
connected or "hardwired" to the existing network, a time and labor-
intensive process. As end users' data demands change and grow, these
permanent connections limit service providers' ability to respond to
service requests quickly. Service providers therefore must route new
services across their networks in inefficient ways, using more equipment
and connections and creating more points of failure in order to achieve
the desired connection.
. Current networks are difficult to provision. Current networks contain
large numbers of individual pieces of equipment, each of which must be
separately configured, provisioned, connected and reconnected in
response to each new customer order. These efforts require a "truck
roll", where technicians are dispatched to multiple locations in the
network to reconnect paths, install hardware and configure software, a
process that often requires hundreds of separate tasks. Provisioning
time is often measured in months and requires the efforts of a large,
highly-skilled workforce equipped with specialized tools and knowledge.
. SONET/SDH equipment currently requires substantial central office space
and power. Service providers' central offices are increasingly crowded
with many types of equipment that must be connected to the network. In
addition, deregulation has forced service providers to share their
facilities with competitors. As a result, space for equipment has become
scarce and expensive. SONET/SDH equipment occupies a large amount of
space which becomes problematic as the network expands. The increase in
amount of equipment has also resulted in additional power consumption,
cooling requirements and other related overhead costs.
As a result of these limitations, service providers face considerable costs
of building and managing networks, which are unlikely to be recovered over an
acceptable period of time. In addition, each day of delay in service delivery
is a day of lost revenue and negatively impacts customer satisfaction. To date,
the steps that service providers have used to address these limitations have
largely been tactical and incremental, such as buying more fiber, installing
new SONET/SDH rings, increasing the speed of existing rings and employing more
DWDM to increase fiber capacity. Service providers are seeking more strategic
solutions that remove these limitations by upgrading the architecture of their
optical networks in a cost-effective manner.
[GRAPHIC: SONET RINGS]
[Three separate circles, representing active paths, each with an outer
circle, representing an idle protection path. The circles have groups of boxes
on them which represent traditional SONET equipment. Each of the three large
circles is connected by an octagon representing a traditional cross connect.
Rectangles representing telephony, IP and ATM equipment are located at the four
corners.]
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Service Provider Requirements for the New Optical Network
To overcome existing network limitations, service providers need a
migration path to a new network architecture optimized for data traffic rather
than traditional voice traffic. The network must support the ability to deliver
optical services, anywhere, at any time, for any customer. In addition,
emerging service providers need a network architecture that allows them to grow
quickly with relatively low up-front capital costs and reliable, modular
equipment that reduces their operating expenses while increasing their revenue
opportunities. Specifically, the new optical network architecture must:
. Rapidly provision and restore bandwidth. The new network architecture
must allow service providers to more rapidly provision and restore high-
performance bandwidth to end users on a real-time basis, while
significantly reducing manual provisioning and other time-intensive
processes.
. Enable the development of new optical services. As competition among
service providers increases, the new network architecture must be
flexible enough to allow service providers to differentiate themselves
and increase revenues by providing their customers with new value-added
services.
. Reduce operational and maintenance costs. The new network architecture
must have operational and maintenance costs substantially lower than the
current architecture with respect to "truck rolls," personnel, space
occupied, power consumption and cooling requirements.
. Reduce capital costs. The new network architecture must allow service
providers to reduce the amount of equipment required to deploy and
expand the network, allowing service providers to reallocate capital and
assets for new services and additional capacity.
. Provide an upgrade path. The new network architecture must enable the
network to be continually upgraded to accommodate emerging technologies
and enable future services. Today's network architectures are generally
fixed in nature, with limited ability to implement breakthrough
technologies such as all-optical switching. Service providers seek a
solution that is consistent and upgradeable without major disruption to
the design of the network. This approach reduces obsolescence and
related capital replacement costs.
. Deploy proven, reliable solutions. Given the many pressures that service
providers face, they do not want to risk their networks by deploying
unproven technology or products. They seek solutions that have been
thoroughly tested and verified through previous deployments and
comprehensive testing and evaluation.
The Tellium Solution
We design, develop and market high-speed, high-capacity, intelligent
optical switching solutions that enable network service providers to quickly
and cost-effectively deliver new high-speed services. Our first-generation
products are field-proven, having been in service for more than one year. Our
second-generation products are currently undergoing laboratory evaluation with
global service providers. These products benefit from the experience gathered
from over a year of live service of our first-generation solutions. We have a
world-class technology team that has pioneered many innovations in optical
network engineering and has a strong heritage in the telecommunications
industry. Our optical switches provide the following key benefits to service
providers:
. Enable optical mesh network architecture. Our optical switching
solutions are designed to enable service providers to reduce their costs
by deploying mesh architectures rather than SONET/SDH rings. In a mesh
architecture, nodes are connected to any number of other nodes, allowing
for multiple paths through the network. With this "any-to-any" design,
mesh
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architectures are more efficient in their utilization of protection
capacity while still achieving the same goal of rapidly restoring service
after a network failure. In addition, mesh networks are simpler to
operate, administer and maintain than SONET/SDH ring networks.
. Simplified delivery of new services. Our optical switching solutions
help service providers create scalable and flexible optical networks,
enabling reliable, fast, cost-effective delivery of new and existing
optical data services. Our optical switching solutions enable a new
generation of high-speed Internet Protocol, or IP, routers and
Asynchronous Transfer Mode, or ATM, switches to deliver data directly to
the optical network and bypass costly SONET/SDH equipment. Service
providers can combine their existing equipment with our optical
switching products that deliver data services with improved scalability,
flexibility and survivability.
. Fast provisioning. Our optical switching solutions are designed to allow
service providers to provision services across their networks in a
matter of minutes, replacing a process which can often take up to
several months. Our advanced administration and management software
allows service providers to add or reduce capacity from a central
management workstation in anticipation of changing end-user needs. This
capability can save costly and time-consuming "truck rolls". As a
result, re-routing traffic around network bottlenecks or failure points
becomes easier, allowing service providers to offer their customers on-
demand provisioning and real-time restoration functions. More efficient
and rapid provisioning leads to direct cost savings and revenue
opportunities for our customers. In a highly competitive industry, our
customers are able to differentiate themselves from their competitors by
offering faster, more reliable services with increased flexibility.
. Scalability. Our optical switching solutions are designed to help
service providers scale their networks rapidly, enabling new revenue-
generating services that meet their customers' needs. Our solutions
convert the optical network from a "hardwired" system, which is costly
and difficult to change, to a dynamic system in which it is easy to add
or change configuration and components. Our Aurora Optical Switch, for
example, offers the same or more capacity in a physical configuration
that is smaller and consumes less power than other systems on the
market, and at a lower cost per connection.
. Cost-effectiveness. Our optical switching solutions are designed to
enable service providers to eliminate multiple costly SONET/SDH
equipment layers while retaining the functionality that service
providers expect. Our solutions include modular, configurable products
that allow our customers to retain their investments as they expand
capacity and automate operations, while also significantly reducing the
cost of service delivery. Our mesh restoration software algorithms
provide for the efficient use of bandwidth and maximize the availability
of revenue-generating assets. Using our solutions, service providers can
install the capability to restore traffic with less capital equipment
and less floor space, reducing both capital and ongoing costs while
maintaining fast restoration time.
. Compatibility with existing networks. Our optical switching solutions
can be deployed quickly in networks today because they are compatible
with existing network components and architectures. Our solutions are
designed to support and enable mesh architectures and interoperate with
existing ring architectures. Our equipment interoperates with a wide
range of network hardware, such as DWDM systems, IP routers, ATM
switches and all major types of SONET/SDH products. In addition, we
offer comprehensive network management, planning and administration
software that communicates with existing network management systems
through common standard interfaces.
. Flexible platform. Our optical switching solutions are designed to be
highly flexible in their configuration and upgrade capability. For
example, it is easy for a technician to add or remove modules in our
switches without interrupting or compromising the performance of the
network. Our switches are designed to be upgradable to all-optical
technology when this
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technology becomes fully available in a sufficiently reliable form. All
of our products share a common provisioning and management system, from
the smallest to the largest configuration. A service provider can "start
small", using our products from the initial deployment through future
network expansion. As our equipment is upgraded, there is no requirement
to reprogram the connections between our products and other equipment and
software systems in the network.
[GRAPHIC: MESH ARCHITECTURE]
[Various intersecting lines representing shared active and protection
paths. Where the lines intersect, there are diamonds representing Tellium
Optical switches. Rectangles representing telephony, IP and ATM equipment are
located at the four corners.]
Strategy
Our objective is to be the leading provider of intelligent optical
switching solutions for global public telecommunications networks. The key
elements of our strategy include the following:
. Leverage our first mover advantage and technology leadership. We were
the first optical switching vendor to place into service a high-
performance optical switch, the Aurora 32. We are currently shipping for
lab evaluations our high-capacity second-generation switch, the Aurora
Optical Switch. We intend to maintain and extend this leadership
position by continuing to invest in research and development. We may
also make acquisitions in order to expand our base of technology
expertise, intellectual property and product capability.
. Maintain a tight focus on optical switching. We are focused on providing
optical switching solutions for the high-performance optical network. We
intend to commit a substantial portion of our research and product
development efforts toward the goal of creating an industry-leading
optical switching product line. We believe that our focus gives us a
time-to-market advantage over our competitors whose efforts are more
broadly dispersed over multiple product lines.
. Build on our heritage. Our founders and first employees were pioneers of
optical networking at Bellcore. Our technical staff and management team
come from leading companies in the optical engineering and
telecommunications equipment industries, prominent service providers and
renowned academic institutions. We believe that this heritage provides
us with a depth of expertise and proven operating experience that is
unique in our industry. We will continue to build on this heritage of
excellence throughout our engineering and management staff by
aggressively recruiting top talent from around the world.
. Build on our relationships with our customers. Our management,
engineering and sales forces have strong contacts and long-standing
relationships with key people in the networking and optics industries,
as well as in our customer base. We believe that our experience and
relationships will enable us to sell additional solutions to our
existing customers, add new customers and bring innovative products to
market that meet our customers' needs.
. Expand our sales force and distribution channels. We intend to continue
building an experienced sales force that specializes in selling optical
switching solutions to service providers. We will also add to our
systems engineering force in order to help our customers implement our
products. Additionally, we intend to build our distribution network in
order to reach a broader base of customers, particularly in
international markets.
. Maximize the scalability of our operations. We outsource our
manufacturing and purchase some key components from third parties.
Outsourcing enables us to focus on our core competencies, including
product development, marketing and sales, and allows us to rapidly scale
our ability to meet demand for our products.
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Tellium Products
Our product suite includes highly-reliable hardware and standards-based
software designed to deliver intelligent optical switching and integrated
network management for public telecommunications networks. Our products consist
of optical switches that intelligently route data traffic between network nodes
and enable service providers to rapidly plan, provision, manage and restore
services. Our optical switching products deliver the operational benefits of
today's SONET/SDH protocols, including performance monitoring, fault location
and service restoration, while eliminating complex and expensive SONET/SDH
equipment. Our products also enable service providers to rapidly plan and
provision new, revenue generating services to their customers. Our line of
optical switches is designed for use in a wide variety of networks, including
metropolitan, regional and national networks.
Optical Switching Products Summary
We sell the following optical switching and software products:
<TABLE>
<CAPTION>
Product Name Capabilities Status
------------ ------------ ------
<S> <C> <C>
Hardware Products:
Aurora 32 OC-3, OC-12 and OC-48 (SONET) In service
STM-1, STM-4 and STM-16 (SDH) Development complete
Aurora Optical Switch OC-48 (SONET) In customer
OC-192 (SONET) evaluation
STM-16 and STM-64 (SDH) In development
In development
Aurora Full-Spectrum OC-192 and OC-768 (SONET) In development
STM-64 and STM-256 (SDH) In development
Transparent Optical Paths In development
Software Products:
StarNet Operating System End-to-end service delivery and In service
restoration
Wavelength Management System End-to-end wavelength management In service
PlaNet Network planning and design In service
</TABLE>
Our line of Aurora optical switches enables service providers to automate
the delivery of optical services, reduce their costs by enabling optical mesh
networking, restore optical services in the event of network failures and
redirect traffic around network bottlenecks. Our Aurora optical switches also
provide the ability to connect high-speed IP routers and ATM switches directly
to the optical network without requiring additional expensive SONET/SDH
equipment.
Our hardware and software products are standards-based and are designed to
seamlessly interoperate with existing optical networking equipment, protecting
service providers' prior investment in fiber optic and transmission equipment.
Our products are scalable and grow in service from a single optical switch
channel to thousands of optical channels. Our systems are also modular and grow
from the smallest configurations to the largest ones in increments of
individual optical channels.
Our suite of software products, coupled with our optical switches, supports
rapid, automated planning, provisioning and restoration of the optical network
using point and click operations. This capability addresses the time-to-market
requirements that our service provider customers must meet. In addition, our
product suite reduces service providers' costs by delivering mesh restoration
and
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eliminating expensive SONET/SDH equipment while still providing all of the
operational features needed to manage networks.
Aurora 32. The Aurora 32 is a compact optical switch designed to connect
optical paths primarily in small central offices or metropolitan networks. The
Aurora 32 is designed for service providers that require a small equipment
footprint in order to maximize the efficiency of their central office floor
space. This system switches 32 optical channels that vary in speed from 155
Mbps up to 2.5 Gbps under software control to support the rapidly changing
environment of the metropolitan areas. Through simple software commands,
service providers can upgrade the speed of an optical channel without changing
any hardware. The Aurora 32 is commercially available and has been carrying
live traffic in customer networks since the first quarter of 1999.
Aurora Optical Switch. The Aurora Optical Switch is designed to provide
automated service delivery and restoration of optical services in primarily
regional and national networks. Its initial capacity delivers 1.28 terabits of
switching bandwidth or 512 optical channels at 2.5 Gbps. Each of the channels
supports either SONET or SDH signals under software control. The Aurora Optical
Switch operates at optical signal speeds up to 10 Gbps and is designed for
service providers that anticipate high rates of growth in their network
locations. The Aurora Optical Switch is modular and designed to grow to many
times its initial capacity while the network and product remain in service. The
Aurora Optical Switch is currently in lab evaluation at a customer site and has
undergone customer evaluations at our facility.
Aurora Full-Spectrum. The Aurora Full-Spectrum is an all-optical switch
currently in development. The Aurora Full-Spectrum will feature a pure optical
switch matrix that will be designed to switch at OC-768 and faster signal
speeds. It supports the mesh networking features and intelligence found in our
other products, while switching optical traffic at more than 40 Gbps.
StarNet Operating System--Service Delivery and Restoration
Software. StarNet is the operating system software for our optical switches.
StarNet is purchased by service providers in conjunction with our optical
switches. The StarNet software provides communication between switches, routes
optical signals around network failures and bottlenecks and performs optical
service provisioning for the mesh networks. Our StarNet mesh algorithms allow
many working paths to share a single protection path, saving much of the
equipment cost of traditional ring networks. StarNet is currently in service.
Wavelength Management System--Network Management Software. Our Wavelength
Management System provides fault location, network configuration, performance
monitoring and analysis, and network security. In addition, this system
provides the capability to operate, administer, maintain and provision the
entire optical switching network, not just individual network elements. Our
Wavelength Management System is currently in service.
PlaNet--Software Planning Tool for Optical Networks. PlaNet allows
customers to plan and design networks with optical switches. This tool allows
the user to optimize the network plan for minimum cost and provides the user
with graphical network architecture cost comparisons so they can compare
SONET/SDH ring architectures with optical mesh architectures. PlaNet is
currently in service.
Customers
Our target customer base includes emerging and established service
providers. These include long-distance carriers, wholesale service providers,
competitive local exchange carries, Internet service providers and cable
operators. We have been shipping our products since January 1999 and our
products have been in service and carrying live traffic for more than one year.
In 1999, two
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customers, Extant and the U.S. Department of Defense, accounted for 63% and 27%
of our revenues, respectively, and revenues from Extant represented
approximately 99% of our revenues for the six months ended June 30, 2000.
We have a five-year contract with Cable & Wireless, a multinational
provider of voice, data and network services. Under the terms of this contract,
Cable & Wireless has a minimum purchase commitment of $350 million for the
worldwide deployment of our products, including the Aurora Optical Switch, the
Wavelength Management System and the StarNet Operating System. Cable & Wireless
is conducting laboratory testing of our Aurora Optical Switch. We expect to
commence commercial shipment under this contract during the first quarter of
2001. Our agreement with Cable & Wireless gives it the right to reduce its
minimum purchase commitment from $350 million to $200 million if we do not
maintain a technological edge so that there exists in the marketplace superior
technology that we have not matched. However, if the minimum purchase
commitment under our agreement is reduced, then, at the end of the contract
term, all purchases made by Cable & Wireless, including prior purchases, will
be repriced at a higher rate. Cable & Wireless has the right to terminate the
agreement if we breach our obligations under the contract and fail to remedy
the breach within 30 days, we are prevented by forces beyond our control from
performing our obligations under the contract for more than 60 days or we
persistently breach our obligations under the contract, whether or not cured.
We have a five-year contract with Extant, a U.S.-based wholesale service
provider. We expect Extant will purchase approximately $250 million of products
under the contract, although it has no obligation to do so. However, under the
terms of this contract, Extant is required to purchase its full requirements
for optical switches from us during the first three years of the contract.
Extant has the right to terminate the agreement if, among other things, we
breach a material obligation under the contract and fail to remedy the breach
within 30 days, we violate any applicable law and so materially impair Extant's
ability to perform its material obligations or receive its material benefits
under the contract or Extant cannot obtain acceptable financing for the
transaction. Our Aurora 32, Wavelength Management System, PlaNet and StarNet
Operating System have been in service in the Extant network since April 2000.
Extant is conducting laboratory testing of our Aurora Optical Switch, and we
expect to commence commercial shipment under this contract during the first
quarter of 2001. Extant has announced that it is being acquired by Dynegy, a
public company that provides power services. Our contract with Extant is
transferable to Dynegy upon the completion of the acquisition.
We have a three-year contract with Qwest, a multinational provider of
voice, data and network services. Under the terms of this contract, Qwest has a
minimum purchase commitment of $300 million for the deployment of our products,
including the Aurora Optical Switch, the Aurora Full-Spectrum and the StarNet
Operating System. We expect to commence commercial shipment under this contract
during the first quarter of 2001. If we breach our obligations under the
contract and fail to remedy the breach within 30 days, Qwest, through binding
arbitration, may have the right to terminate the agreement.
We also have shipped our Aurora 32 optical switch and other custom products
to the U.S. Department of Defense as part of their high-speed optical
networking program, known as MONET. Shipments are completed for this contract.
We have an agreement with the U.S. Department of Defense to provide maintenance
until November 1, 2000.
43
<PAGE>
Sales and Marketing
We sell our products through a direct sales force. We intend to establish
relationships with selected distribution and marketing partners, both
domestically and internationally, to extend our reach and serve new markets. As
of June 30, 2000, our sales and marketing organization consisted of 53
employees, 14 of whom are located in our headquarters in Oceanport, New Jersey
and 39 are located in other sales and support offices around the United States.
We intend to expand our sales force in Europe and may also expand our sales
force into other international markets.
Our marketing objectives include building market awareness and acceptance
of our company and our products by working very closely with our prospective
customers, industry analysts and consultants. We use our Web site as a major
communications vehicle, speak at relevant industry events and participate
actively in relevant standards organizations such as the Optical
Internetworking Forum, or OIF, the Internet Engineering Task Force, or IETF,
and the Telecommunications Management Forum, or TMF. We also conduct public
relations activities, including interviews, presentations at industry forums
and investor conferences, and demonstrations for industry analysts. In
addition, our senior executives and our sales people have significant industry
contacts as a result of their prior experience.
Customer Service and Support
Our customer service team works collaboratively with our existing and
prospective customers to support their ongoing network deployments and help
them identify and create new high-speed services that they can offer to their
customers. We believe that this assistance is an integral aspect of our sales
and marketing efforts, which drives additional demand for our products. We have
assembled a nationwide team of dedicated customer engineers, and we are
expanding internationally to target new markets and support multinational
customers. As of June 30, 2000, our customer service and support organization
consisted of 20 employees.
Research and Development
We believe that to be successful we must continue to enhance our existing
products and develop new products that meet the rapidly evolving needs of our
customers. We have made, and will continue to make, a substantial investment in
research and development. We have assembled a team of highly skilled engineers
drawn from approximately 50 companies that have significant data communications
and telecommunications industry experience. Our engineers have expertise in
fields such as optical system design, optical network design, hardware
development and software development, including key IP routing expertise. As of
June 30, 2000, we had 124 employees and 10 full-time contractors responsible
for product development and quality assurance. We are focused on enhancing the
scalability, performance and reliability of our intelligent optical switching
products.
Intellectual Property, Proprietary Rights and Licensing
We have created and acquired intellectual property related to optical
networking products and technology.
Our success and ability to compete depends on our ability to develop and
maintain the proprietary aspects of our technology and product marketing, and
to operate without infringing on the proprietary rights of others. In addition,
we must continue to create and acquire rights to intellectual property in the
areas of optical networking products, such as mesh networking, optical
switching, switch architecture, control systems and signaling algorithms. We
rely on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our intellectual
44
<PAGE>
property. We license our intellectual property, including patents and software,
under license agreements, which impose restrictions on the licensee's ability
to utilize the intellectual property. Finally, we seek to limit disclosure of
our intellectual property by requiring employees and consultants with access to
our proprietary information to execute confidentiality agreements with us and
by restricting access to our proprietary information.
These legal protections afford only limited protection for our technology
and products. For example, others may independently develop similar or
competing technology, or attempt to copy or use aspects of our products or
technology that we regard as proprietary. Furthermore, intellectual property
law may not fully protect products or technology that we consider to be our
own.
We also currently license intellectual property from third parties, some of
which may subject us to royalty payments. The intellectual property associated
with optical networking products is evolving rapidly, so protection under a
license that was once adequate may be insufficient in the future.
Given the rapid technological changes in this industry, establishing and
maintaining a technology leadership position through the technological and
creative skills of our personnel, new product developments and enhancements to
existing products will be more important to us than excessive reliance on
legally protecting our technology.
Competition
Competition in the market for public network infrastructure is intense. Our
competitors include Alcatel, CIENA Corporation, Cisco Systems, Inc., Lucent,
Nortel Networks Corporation and Sycamore Networks, Inc. The market for optical
switching is expected to grow rapidly and as such will continue to attract
competitors who will continue to introduce new products. Therefore, we expect
the level of competition to intensify over time. Our established competitors
have longer operating histories, greater name recognition, larger customer
bases and greater financial, technical, sales, marketing and manufacturing
resources, including more resources devoted to research and development of new
products, than we do. In addition, unlike some of our competitors, we have only
a limited ability to provide vendor-sponsored financing, which may influence
the purchasing decision of prospective customers. Our competitors could develop
new technologies that compete with our products or even render our products
obsolete. Finally, some of our competitors have more significant customer
relationships and broader product lines than we have.
For us to compete successfully in this market, we must continue to deliver
optical switching solutions that:
. scale easily and efficiently at low cost to meet the ever-increasing
demands driven by data services;
. lower a service provider's cost of building and operating an optical
network by reducing its complexity and increasing its flexibility;
. deliver a range of cost-effective solutions for small and large
networks;
. interoperate with existing equipment and network architectures;
. comply with all applicable standards;
. increase the level of network reliability for data services;
. allow optical services to be delivered much faster than they are today;
and
. provide software tools for service providers to plan, design and operate
their optical networks.
45
<PAGE>
Manufacturing
We outsource almost all of the manufacturing of our products. We design,
specify and monitor all of the tests that are required to meet our internal and
external quality standards.
In August 2000, we signed a contract with Solectron Corporation, a leading
contract manufacturer of high-quality, technology-based equipment, to
manufacture printed circuit boards. Solectron will provide comprehensive
manufacturing services, including assembly, test, control and shipment to our
customers, and procure materials on our behalf. Under our contract with
Solectron, we have the option to move final assembly and test functions to
Solectron.
We are currently negotiating with another vendor for chassis assembly and
are also negotiating with several other vendors and distributors to establish
relationships that will support our future growth. In addition, we are
investing in automation, testing and data collection equipment to enable us to
further improve product quality as quickly as possible.
We believe that our relationship with Solectron and the continued
outsourcing of our manufacturing will enable us to:
. expand our access to key components;
. conserve the working capital that would be required to purchase
inventory or develop manufacturing facilities of our own;
. better adjust manufacturing volumes to meet changes in demand; and
. build and deliver our products more quickly.
We currently purchase products through purchase orders. We cannot assure
you that we will be able to continue this arrangement on a long-term basis on
terms acceptable to us, if at all.
We are in the process of registering with the International Organization
for Standardization, or ISO, for ISO 9001 quality certification.
Employees
As of June 30, 2000, we had 234 employees, of which:
. 124 were in research and development;
. 53 were in sales and marketing, customer service and support;
. 36 were in manufacturing, quality assurance and documentation; and
. 21 were in finance and administration.
We believe our relations with our employees are good. None of our employees
is covered by a collective bargaining agreement. Generally, our employees are
retained on an at-will basis. Only one of our key employees is subject to an
employment agreement. All of our employees are required to sign
confidentiality, non-competition and intellectual property agreements.
Properties
Our headquarters are located in Oceanport, New Jersey and consist of
approximately 72,000 square feet of leased space, the lease for which expires
in April 2003. We also have a major facility adjacent to our headquarters,
which consists of approximately 68,000 square feet. This lease expires in
November 2006.
Legal Proceedings
We are not a party to any pending material legal proceedings.
46
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their respective ages and
positions, are set forth below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Harry J. Carr................... 44 Chief Executive Officer and Chairman of the
Board of Directors
Richard W. Barcus............... 53 President and Chief Operating Officer
Krishna Bala.................... 36 Chief Technology Officer
Michael J. Losch................ 45 Chief Financial Officer, Secretary and
Treasurer
William B. Bunting.............. 42 Director
Michael M. Connors.............. 59 Director
Jeffrey A. Feldman.............. 37 Director
Edward F. Glassmeyer............ 59 Director
William A. Roper, Jr............ 54 Director
Richard C. Smith................ 58 Director
Michael G. Albers............... 39 Senior Vice President, Sales
Grace M. Carr................... 53 Vice President, Marketing
Thomas J. Cassa................. 51 Vice President, Engineering
Anthony J. DeMambro............. 58 Vice President, Operations
Nicholas P. DeVito.............. 37 Vice President, Product Management and
Business Development
</TABLE>
Harry J. Carr has served as Chairman and Chief Executive Officer of our
company since January 2000. From 1998 to 2000, Mr. Carr served as Chief
Operating Officer and then President of Lucent Technologies, Inc.'s Broadband
Carrier Networks unit, Lucent Technologies' service provider-focused data
switching business. From 1997 to 1998, Mr. Carr served as President, Chief
Operating Officer and Director of Yurie Systems, Inc., a network equipment
provider. From 1992 to 1997, he served in various executive positions at AT&T
Corp., a telecommunications provider, including Market Development Vice
President for the Atlantic States region, National Program Manager of AT&T
Local Services and Vice President of AT&T's Defense Markets Division. Mr. Carr
earned a B.S. in Finance from Fairfield University and a J.D. from the
University of Connecticut Law School.
Richard W. Barcus has served as President and Chief Operating Officer of
our company since May 1999. He originally joined our company in February 1998
as Vice President of Marketing and Product Management. From 1992 to 1998,
Mr. Barcus was employed at ADC Telecommunications, Inc., a communications
equipment provider, where he served as General Manager, Americas, from 1997 to
1998, Vice President of Marketing from 1996 to 1997 and Vice President of Sales
from 1995 to 1996. Mr. Barcus earned a B.A. from Aurora University and an
M.B.A. from George Mason University.
Krishna Bala has served as Chief Technology Officer of our company since
December 1999. Dr. Bala is the lead system architect for our Aurora Optical
Switch. From 1997 to 1999, Dr. Bala served as our Manager of Optical Cross-
Connect Product development. Prior to joining our company, Dr. Bala was a
scientist with Bellcore's Optical Networking Group, a research and
telecommunications services provider, from 1992 to 1997. Dr. Bala earned a
Bachelors in Electrical Engineering from Bombay University in India, a Masters
in Electrical Engineering from Columbia University and a Ph.D. in Electrical
Engineering from Columbia University for his work on optical wavelength
routing.
Michael J. Losch joined our company as Chief Financial Officer, Secretary
and Treasurer in October 1999. From 1998 to 1999, he served as Chief Financial
Officer and Chief Operating Officer
47
<PAGE>
of IDF International, an investment company. From 1997 to 1998, Mr. Losch was
Vice President, Finance and Administration of Cardre, Inc., a cosmetics
manufacturing company. From 1978 to 1997, Mr. Losch served in various
capacities with Bell Atlantic Corporation, a telecommunications company,
including Special Assistant to New Jersey Governor's Office of Business
Ombudsman from 1996 to 1997, Executive Director for Bell Atlantic-New Jersey's
Cable Telecom Project from 1995 to 1996 and Chief Financial Officer of Bell
Atlantic-New Jersey from 1993 to 1995. Mr. Losch earned both a B.S. and an
M.B.A. from Lehigh University.
William B. Bunting has been a member of our company's board of directors
since December 1999. Mr. Bunting has served as a partner of Thomas Weisel
Partners Group LLC, a merchant bank, since 1998. From 1987 to 1998, Mr. Bunting
held a number of positions with Montgomery Securities in the private equity,
corporate finance and mergers and acquisitions departments. Mr. Bunting
currently serves on the board of directors for Hostcentric, Inc., a Web site
hosting company, OptCom, Inc., a manufacturer of thin film, and General
Bandwidth, Inc., a broadband telephony company. Previously, Mr. Bunting served
on the board of directors of Netcom Systems, a network analysis company. He
earned an A.B. from Stanford University and an M.B.A. from the Harvard Business
School.
Michael M. Connors has been a member of our company's board of directors
since June 2000. From 1992 to 1998, he held the office of president of AOL
Technologies, an Internet service provider, where he led the creation and
growth of AOLnet and the development of AOL software and services. Dr. Connors
is currently a member of the board of directors of the AOL Foundation and
MedSpecialists, an Internet-based provider of medical information. In 1999, he
was appointed Chairman of the board of Webley Systems, a communications
provider. He is also a director of The Connors Foundation and a member of the
advisory board of the European Technology Fund. Mr. Connors earned a B.S. in
Engineering, an M.S. in Statistics and a Ph.D. in Applied Mathematics from
Stanford University.
Jeffrey A. Feldman has been a member of our company's board of directors
since December 1999. He has served as President and Chief Executive Officer of
Everest Broadband Networks, a telecom services provider, since 2000. Dr.
Feldman has also served as a member of the General Partnership of Pequot
Venture Partners, L.P., the venture fund at Pequot Capital Management, since
1998. From 1997 to 1998, Dr. Feldman served as Investment Director for Digital
Media Capital, LLC. From 1995 to 1996, he served as an Associate at Canaan
Partners, an investment firm. Dr. Feldman currently serves on the board of
directors of Alidian Networks, an optical networking provider, Ennovate
Networks, a data communications company, and Sphera Optical Networks, an
optical local exchange carrier. Dr. Feldman earned a B.S. and a Ph.D. from the
University of Connecticut and an M.B.A. from the Yale School of Management.
Edward F. Glassmeyer has been a member of our company's board of directors
since May 1997. Mr. Glassmeyer is a founding general partner of Oak Investment
Partners, a venture capital firm, where he has served as a general partner or
managing member of various affiliated funds since 1978. Mr. Glassmeyer serves
on the board of directors of Mobius Management Systems, a Web-based software
solutions provider, The Street.com, a financial news and analysis Web site, and
several private Oak portfolio companies in the information technology and
Internet infrastructure sectors. Since 1996, Mr. Glassmeyer has served as
Overseer of The Tuck School at Dartmouth College. Mr. Glassmeyer earned a B.A.
from Princeton University and an M.B.A. from the Tuck School at Dartmouth
College.
William A. Roper, Jr. has been a member of our company's board of directors
since September 1998. Mr. Roper has served as Corporate Executive Vice
President and Chief Financial Officer of Science Applications International
Corporation, or SAIC, a technology services company,
48
<PAGE>
since 2000. From 1990 to 1999, Mr. Roper served as Senior Vice President and
Chief Financial Officer of SAIC and from 1999 to 2000, he served as Executive
Vice President of SAIC. Mr. Roper currently serves on the boards of directors
of Daleen Technologies, Inc., an eBusiness software provider, Verisign, Inc., a
provider of Internet-based trust services, Intrusion.com, a computer networking
company, VocalData, Inc., a communications hardware provider, and several other
corporations and non-profit institutions. Mr. Roper earned a B.A. in
Mathematics from the University of Mississippi, and has graduated from
Southwestern Graduate School of Banking at Southern Methodist University and
Stanford University, Financial Management Program.
Richard C. Smith has been a member of our company's board of directors
since February 2000. Since 1998, he has served as Chief Executive Officer of
Telcordia Technologies, a telecommunications software provider acquired by SAIC
in 1997. Prior to joining Telcordia Technologies, from 1991 to 1997, Dr. Smith
was a Senior Vice President at Sprint Corp., a telecommunications company,
where he was responsible for brand investment strategy and management, public
relations, training and education, total quality management and the Sprint
Foundation. Dr. Smith earned a B.E. from Vanderbilt University and an M.S. and
a Ph.D. from the Department of Engineering and Applied Science at Yale
University.
Michael G. Albers has served as Senior Vice President of Sales for our
company since March 2000. Prior to joining our company, from 1999 to 2000, Mr.
Albers served as a Vice President of Sales for Lucent Technologies, a
communications company. From 1995 to 1999, Mr. Albers served as Vice President
of Sales at Ascend Communications, a data networking company. Mr. Albers earned
a B.S. in Computer Science from the University of Maryland.
Grace M. Carr joined our company as Vice President of Marketing in March
2000. Prior to joining our company, from 1998 to 2000, Ms. Carr was Vice
President of Sales and Marketing at Northchurch Communications, a data
communications provider acquired by Newbridge Networks in 1999. From 1996 to
1998, Ms. Carr was Vice President of Corporate Marketing at Bay Networks, a
data communications company. From 1994 to 1996, Ms. Carr was Vice President of
Sales and Marketing at Xylogics, a data communications company acquired by Bay
Networks in December 1995. Ms. Carr earned a B.A. in Mathematics from Douglass
College.
Thomas J. Cassa joined our company as Vice President of Engineering in
April 2000. Prior to joining our company, from 1999 to 2000, he was Vice
President of Engineering at Northchurch Communications, a data communications
company acquired by Newbridge Networks in 1999. From 1998 to 1999, Mr. Cassa
was Vice President of Engineering at Telco Systems, a telecommunications
company. From 1997 to 1998, Mr. Cassa held senior engineering positions and led
engineering teams at Argon Networks, acquired by Siemens in March 1999. From
1995 to 1997, he held senior engineering positions at Nexion, an Internet
hardware provider. Mr. Cassa earned his B.E.E. from City University of New
York.
Anthony J. DeMambro joined our company as Vice President of Operations in
January 2000. From 1998 to 2000, he served as Vice President of Operations for
Lucent Technologies, Data Network System Carrier Products. From 1996 to 1998,
he served as Vice President of Operations for Yurie Systems, a network
equipment provider. From 1993 to 1996, he was Vice President of Operations for
Steinbrecher Corporation, now Tellabs Wireless, Inc., a cellular equipment
manufacturer.
Nicholas P. DeVito has served as our Vice President, Product Management and
Business Development since January 2000. Mr. DeVito joined our company as
Director of Product Management in August 1998. From 1985 to 1998, he held
senior positions at Bell Laboratories, a research and development organization,
and AT&T, a telecommunications provider, in network engineering, local services
delivery, network design and operations, product management and network
restoration and reliability. He earned a B.S. and an M.S. in Electrical
Engineering from Columbia University and an M.B.A. from New York University.
49
<PAGE>
Board of Directors
Our board of directors consists of seven 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 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 between any of our directors or officers.
Board Committees
Our board of directors has established a compensation committee and will
establish an audit committee. The current members of our compensation committee
are Messrs. Carr, Bunting and Glassmeyer. Our compensation committee reviews
and makes recommendations to our board regarding compensation for our executive
officers. The compensation committee also administers our stock option plans.
Our audit committee will review and monitor our financial statements and
accounting practices, make recommendations to our board regarding the selection
of independent auditors and review the results and scope of the audit and other
services provided by our independent auditors.
Compensation Committee Interlocks and Insider Participation
Except for Mr. Carr, none of the members of our compensation committee are,
or have ever been at any time since our incorporation, one of our officers or
employees. No member of our compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or more
of our executive officers serving as a member of its board of directors or
compensation committee.
Director Compensation
Our board of directors determines the amount of any fees, whether payable
in cash, shares of common stock or options to purchase common stock, and
expense reimbursements that directors receive for attending meetings of the
board of directors or committees of the board. To date, we have not paid any
fees to our directors, but have reimbursed them for their reasonable expenses
in attending board and board committee meetings. We have not granted options to
our directors in the past, but we may do so in the future.
50
<PAGE>
Executive Compensation
The following table sets forth the total compensation paid to our former
Chief Executive Officer and to our former Chairman who served in 1999 and each
of the four other most highly-compensated executive officers who served in 1999
and whose annual salary and bonus exceeded $100,000 for services rendered to us
in all capacities during the year ended December 31, 1999. Harry J. Carr was
appointed as our Chairman and Chief Executive Officer in January 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Other Securities
------------------ Annual Underlying
Name and Principal Position Salary($) Bonus($) Compensation($) Options(#)
--------------------------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Michael Hodges(1)
Former Chief Executive
Officer....................... $266,297 $ 12,500 $ 30,810(4) 1,090,410
Farouque Mesiya(2)
Former Chairman............... 232,029 -- -- --
Richard W. Barcus(3)
President and Chief Operating
Officer....................... 150,078 37,000 -- 1,200,000
John K. Kostibas
Vice President, Sales......... 152,763 112,500 -- 495,000
Krishna Bala
Chief Technology Officer...... 126,900 -- -- 1,350,000
Nicholas P. DeVito
Vice President, Product
Management and Business
Development................... 125,458 30,000 -- 465,000
</TABLE>
--------
(1) Mr. Hodges was our Chief Executive Officer and President from January 1999
until May 1999.
(2) Mr. Mesiya was our Chairman from January 1999 until June 1999. We conducted
a search for our Chairman from July 1999 to December 1999.
(3) Mr. Barcus was appointed as our President and Chief Operating Officer in
May 1999.
(4) We provided Mr. Hodges with a car allowance of $13,694 and a housing
allowance of $17,116.
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<PAGE>
Option Grants
The following table sets forth information regarding options we granted to
the executive officers named in the Summary Compensation Table during 1999. The
potential realizable value is calculated based on the term of the option at its
time of grant. It is calculated assuming that the fair market value of common
stock on the date of grant appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. These numbers
are calculated based on the requirements of the Securities and Exchange
Commission and do not reflect our estimate of future stock price growth. The
percentage of total options granted to our employees in the last fiscal year is
based on options to purchase an aggregate of 12,071,508 shares of common stock
granted under our 1997 employee stock option plan for fiscal year 1999. We have
never granted any stock appreciation rights.
<TABLE>
<CAPTION>
Option Grants
in Last Fiscal Year
Individual grants
-----------------------------------------------
Percent Potential Realizable
of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted Stock Price
Underlying to Appreciation for
Options Employees Exercise Market Option Term
Granted in Fiscal Price Price Expiration --------------------------------
Name (#) Year ($/Sh) ($/Sh) Date 0% ($) 5% ($) 10% ($)
---- ---------- --------- -------- ------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Hodges.......... 1,090,410 9.03% $0.17 $2.14 05/05/09 $2,148,108 $3,615,619 $5,867,070
Farouque Mesiya......... -- -- -- -- -- -- -- --
Richard W. Barcus....... 68,100 0.56 0.17 2.14 05/05/09 134,157 225,808 366,419
225,000 1.86 0.17 2.14 06/23/09 443,250 746,063 1,210,637
906,900 7.51 2.14 2.14 12/08/09 -- 1,220,537 3,093,081
John K. Kostibas........ 102,000 0.85 0.17 2.14 05/05/09 200,940 388,215 548,822
41,100 0.34 0.17 2.14 06/23/09 80,967 136,281 221,143
351,900 2.92 2.14 2.14 12/08/09 -- 473,599 1,200,193
Krishna Bala............ 60,000 0.50 0.17 2.14 05/05/09 118,200 198,950 322,837
81,000 0.67 0.17 2.14 06/23/09 159,570 265,583 435,829
1,209,000 10.02 2.14 2.14 12/08/09 -- 1,627,114 4,123,426
Nicholas P. DeVito...... 36,000 0.30 0.17 2.14 05/05/09 70,920 119,370 193,702
90,000 0.75 0.17 2.14 06/23/09 177,300 298,425 484,255
339,000 2.81 2.14 2.14 12/08/09 -- 456,238 1,156,196
</TABLE>
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<PAGE>
Fiscal Year-End Option Values
The following table provides some information with respect to options held
by the executive officers named in the Summary Compensation Table as of
December 31, 1999. No options were exercised during 1999 by any of these
executive officers. 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 the common stock as of December 31, 1999. Accordingly, the values set forth
below were calculated based on an assumed initial public offering price of $
per share, less the exercise price per share, multiplied by the number of
shares underlying the options.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at Fiscal the-Money Options at
Year-End (#) Fiscal Year-End ($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael Hodges.............. 1,090,410 -- $ $ --
Farouque Mesiya............. -- -- -- --
Richard W. Barcus........... 315,000 1,185,000
John K. Kostibas............ 123,750 821,250
Krishna Bala................ -- 1,350,000 --
Nicholas P. DeVito.......... 7,500 487,500
</TABLE>
Employment Agreements
Harry J. Carr. We entered into an executive employment agreement with Mr.
Carr, dated December 21, 1999, which provides for his employment as Chairman of
the Board and Chief Executive Officer beginning in January 2000 for a period of
two years or until he resigns, is disabled, dies or is terminated by us for any
reason. The agreement will be renewed automatically for one-year periods unless
we or Mr. Carr give notice of intent not to renew at least 90 days before the
end of an employment term.
Mr. Carr began to receive an annual base salary of $300,000 in January
2000, subject to increases as determined by our board of directors based upon
Mr. Carr's performance and other factors described in the agreement. In
addition, we granted options to purchase 6,600,000 shares of our common stock
to Mr. Carr at an exercise price of $2.14 per share, which Mr. Carr exercised
on April 4, 2000. Mr. Carr will also be eligible to receive a bonus of up to
66-2/3% of his base salary each year during the term of employment in which we
and Mr. Carr achieve objectives mutually agreed upon by Mr. Carr and our board
of directors for such fiscal year. If Mr. Carr exceeds the agreed upon
objectives, the board of directors may provide for an additional bonus. The
agreement also provides for benefits, the reimbursement of expenses and the
payment of the rental costs of Mr. Carr's residence near our offices.
The employment agreement also prohibits Mr. Carr, during his employment
with us and for one year after his employment ends, from soliciting any of our
employees, or interfering with any of our business relationships. The agreement
also requires that Mr. Carr protect Tellium's trade secrets and confidential
information during his employment with us, and for one year after his
employment ends.
Pursuant to the employment agreement, if we terminate Mr. Carr's employment
for any reason or if Mr. Carr exercises his right to terminate the agreement
within six months of the occurrence of any of the following:
. an adverse change in Mr. Carr's title, position, duties, powers and
authority, reporting relationship or the scope of his responsibilities,
. the occurrence of a change of control,
53
<PAGE>
. a failure by our successor to assume Mr. Carr's employment agreement in
a situation other than a change in control, or
. a material breach of the employment agreement that remains uncured for
14 days following our receipt of notice of the breach,
Mr. Carr is entitled to receive, among other things, his annual base salary for
one year paid ratably over this period, any unpaid bonuses earned prior to
termination, any unpaid benefits under group health and life insurance plans
for one year after termination, any unpaid benefits under employee benefit
plans and any reimbursable expenses.
According to the employment agreement, if Mr. Carr dies or becomes
disabled, he is entitled to receive all of the amounts described above, except
that he will only be entitled to receive his then-current salary through the
last day of the month he died or became disabled and any unpaid bonus for that
portion of the year that the death or disability occurred.
Mr. Carr may also terminate the employment agreement at any time upon 30
days written notice. In that event, he will be entitled to receive his salary
as of the date of termination, any unpaid bonus earned with respect to prior
years, any unpaid benefits under group health and life insurance plans or
employee benefit plans and any reimbursable expenses.
The employment agreement also provides that if Mr. Carr receives a payment
or benefit upon a change of control that is subject to an excise or similar-
purpose tax, we will pay Mr. Carr such additional compensation as is necessary
to place him in the same after-tax position he would have been in had no such
taxes been paid or incurred.
Employee Benefit Plans
Amended and Restated 1997 Employee Stock Incentive Plan (effective June 22,
2000)
We have an Amended and Restated 1997 Employee Stock Incentive Plan. The
following is a summary description of the material terms of the plan.
Overview. The purpose of the plan is to provide an additional incentive to
key employees and consultants to further our growth, development and financial
success and to enable us to obtain and retain the services of key employees
considered essential to our long-range success by offering them an opportunity
to own options to purchase our common stock and restricted stock.
Share Reserve. As of August 31, 2000, 17,930,528 stock options were
outstanding and 675,160 shares were available for future grant.
Eligibility. Employees, officers and consultants of Tellium are eligible to
receive awards under our stock option plan.
Options. Unless determined by our board of directors or the compensation
committee in its sole discretion, options to purchase our common stock granted
under the plan are exercisable in cumulative installments, one-quarter on the
first anniversary of the date of option grant and the remainder in 36 equal
monthly installments commencing on the first day of the 13th month following
the date of option grant. At any time after the grant of an option, our board
or the compensation committee may, in its sole discretion, accelerate the
period during which an option vests. There are options outstanding that have
different vesting schedules, including vesting 25% per year over four years.
54
<PAGE>
Restricted Stock. Our board of directors or the compensation committee may
grant restricted stock under our stock option plan and may condition the grant
or vesting upon the attainment of performance goals as established by the
compensation committee. Our board or the compensation committee may also
condition the grant of restricted stock upon the continued service of the
grantee. The terms of the stock option plan state that the conditions for grant
or vesting need not be the same with respect to each recipient. In addition,
our board of directors or the compensation committee may, at any time and in
its sole discretion, accelerate or waive any of the foregoing restrictions.
Administration. Our stock option plan will be administered by our board of
directors or by the compensation committee. Under the stock option plan, the
board or committee has the authority to, among other things:
. select the employees, officers and consultants to whom stock options and
restricted stock awards will be granted;
. determine the type, size and the terms and conditions of stock options
and restricted stock awards; and
. establish the terms for treatment of stock options and restricted stock
awards upon termination of employment or change in control.
Corporate Events. In the event of a transaction in which:
. we are not the surviving entity,
. we sell all or substantially all of our assets,
. we liquidate or dissolve or
. we are the surviving entity but in which a majority of our stockholders
prior to the transaction do not hold a majority of our voting power
after the transaction,
our board of directors or compensation committee, in their sole discretion, may
provide:
. for the purchase of any option for a cash amount equal to the amount
that a share of common stock would receive in the transaction, assuming
the option was exercised, after deducting the exercise price of the
option;
. that an option cannot be exercised after the event;
. for the replacement of the option with other rights or property;
. for the exercise of the option for a specified period of time prior to
the transaction;
. that an option or award will be assumed by the successor corporation or
that the successor corporation will provide a substituted option;
. that the restriction applicable to any outstanding restricted stock
shall lapse and that all restricted shares shall become fully vested and
transferable; or
. for adjustments in the terms and conditions of awards.
Termination and Amendment. The stock option plan will terminate after the
expiration of 10 years from the date of its adoption by our board of directors.
Our board of directors or the compensation committee will be able to, at any
time and from time to time, amend or terminate the stock option plan. However,
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 restricted stock awards previously granted, except with the consent of the
grantee.
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Related-Party Transactions
We paid approximately $118,000 in consulting expenses to Telcordia
Technologies, Inc., an affiliate of Science Applications International
Corporation, or SAIC, and Telcordia Venture Capital Corporation during 1999.
Telcordia Technologies was formerly known as Bellcore, one of our original
investors that was subsequently acquired by SAIC.
Approximately $1.4 million of our revenues in 1999 were derived from sales
to MONET, an affiliate of SAIC and Telcordia Technologies. We also purchased
approximately $360,000 of product from Telcordia Technologies in 1999.
On our board of directors, we have one representative from SAIC and one
representative from Telcordia Technologies.
Securities Transactions
Issuance of warrants and Series C preferred stock. On February 9, 1999, in
connection with a December 1998 $16.0 million bridge financing under which our
then preferred stockholders received senior convertible promissory notes from
us, we issued warrants to purchase shares of our Series A preferred stock at an
exercise price of $4.58 to the following persons who own of record or
beneficially more than five percent of our securities:
. warrants to purchase an aggregate of 139,233 shares of Series A
preferred stock to entities affiliated with Accel V L.P.;
. warrants to purchase an aggregate of 185,370 shares of Series A
preferred stock to entities affiliated with Oak Investment Partners;
. a warrant to purchase 93,750 shares of Series A preferred stock to Ortel
Corporation, which was recently acquired by Lucent Technologies, Inc.;
and
. a warrant to purchase an aggregate of 484,020 shares of Series A
preferred stock to SAIC.
On February 11, 1999, we sold shares of our Series C preferred stock at a
purchase price of $9.15 per share for cash and conversion of our senior
convertible promissory notes originally issued in December 1998, including
accrued and unpaid interest, to the following persons who own of record or
beneficially more than five percent of our securities:
. 248,012 shares to entities affiliated with Accel V L.P. in exchange for
the conversion of our senior promissory notes in the aggregate amount of
$2,269,309;
. 330,194 shares to entities affiliated with Oak Investment Partners in
exchange for the conversion of our senior promissory notes in the
aggregate amount of $3,021,275;
. 166,475 shares to Ortel Corporation, in exchange for the conversion of
our senior promissory note in the aggregate amount of $1,523,246; and
. 861,961 shares to SAIC and various of its affiliates in exchange for the
conversion of our senior promissory note in the aggregate amount of
$7,886,943.
Issuance of senior promissory notes. On June 30, 1999, we sold senior
promissory notes with an annual interest rate of 9.75%, to the following
persons who own of record or beneficially more than five percent of our
securities in the following amounts:
. $620,152 to entities affiliated with Accel V L.P.;
. $825,646 to entities affiliated with Oak Investment Partners;
. $960,231 to Ortel Corporation; and
. $2,155,853 to SAIC.
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<PAGE>
Issuance of Series D preferred stock. In December 1999, we sold shares of
our Series D preferred stock at a purchase price of $9.15 per share for cash
and conversion of our senior promissory notes to the following persons who own
of record or beneficially more than five percent of our securities:
. 70,601 shares to entities affiliated with Accel V L.P. in exchange for
our senior promissory notes in the aggregate amount of $645,999;
. 478,596 shares to entities affiliated with Oak Investment Partners in
exchange for $3,519,071 in cash and our senior promissory notes in the
aggregate amount of $860,082;
. 524,736 shares to Ortel Corporation in exchange for $3,801,054 in cash
and our senior promissory note in the aggregate amount of $1,000,280;
. 518,663 shares to SAIC in exchange for $2,500,000 in cash and our senior
promissory note in the aggregate amount of $2,245,766; and
. 2,732,241 shares to entities affiliated with Thomas Weisel Capital
Partners LLC in exchange for $25,000,005 in cash.
Issuance of Series A preferred stock. On June 30, 2000, substantially all
of the holders of the Series A preferred stock warrants, which were originally
issued on February 9, 1999, exercised these warrants, and we issued shares of
our Series A preferred stock to the following persons who own of record or
beneficially more than five percent of our securities:
. 139,233 shares to entities affiliated with Accel V L.P.;
. 185,370 shares to entities affiliated with Oak Investment Partners; and
. 484,020 shares to SAIC.
Issuance of Series E preferred stock. On September 20, 2000, we sold shares
of our Series E preferred stock at a purchase price of $30.00 per preferred
share to the following persons who own of record or beneficially more than five
percent of our securities:
. 33,333 shares to entities affiliated with Thomas Weisel Capital Partners
LLC in exchange for $999,990 in cash; Thomas Weisel Partners LLC, an
affiliate of Thomas Weisel Capital Partners LLC, also received 91,375
shares of Series E preferred stock as the fee for its services as co-
placement agent in the Series E preferred stock offering; and
. 166,666 shares to Mr. Connors in exchange for cash in the aggregate
amount of $4,999,980.
Restricted Stock Agreements
Harry J. Carr. On December 21, 1999, we granted stock options to Mr. Carr
to purchase an aggregate of 6,600,000 shares of our common stock at an exercise
price of $2.14 per share. On April 4, 2000, Mr. Carr exercised these stock
options in full and received 6,600,000 shares of our common stock, which are
subject to two restricted stock agreements. In connection with the stock
purchases, Mr. Carr delivered two promissory notes to us in the aggregate
amount of $14,099,800, less the par value of the stock purchased, which was
paid in cash. Each promissory note is secured by a pledge of the purchased
stock.
Mr. Carr purchased 6,000,000 shares of our common stock under a restricted
stock agreement dated April 4, 2000. Under the terms of this agreement,
3,000,000 shares vested as of January 2, 2000. Of the remaining 3,000,000
shares, 750,000 will vest on December 21, 2000, and 2,250,000 will vest ratably
on a monthly basis over the succeeding three years.
The restricted stock agreement provides that Mr. Carr may only transfer his
unvested shares to us or by will or laws of descent and distribution, under a
domestic relations order, by gift to members of his family, to trusts solely
for the benefit of his family members, to persons with whom he has had a
significant pre-existing business or personal relationship, to entities in
which such family members, friends and/or trusts are the only partners and to
charitable organizations.
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<PAGE>
Under the terms of the restricted stock agreement, we have the right to
repurchase any unvested shares of restricted stock, at a per share price equal
to the exercise price per share paid by Mr. Carr, plus accrued interest, if Mr.
Carr voluntarily terminates his employment with us. Our repurchase right is
exercisable only during the one-year period following such termination.
The restricted stock agreement also provides that all of the unvested
shares will immediately vest, and Tellium's right of repurchase shall lapse,
upon the occurrence of any of the following:
. the sale or acquisition of beneficial ownership of our equity securities
constituting 50% or more of the total voting power of our stockholders
by a party or group of related parties (other than us or a person that
directly or indirectly controls, is controlled by, or is under common
control with us);
. a merger or consolidation of Tellium with or into another entity and the
holders of our equity securities prior to such transaction possess less
than 50% of the total voting power of the surviving company after such
transaction;
. a complete liquidation or dissolution of Tellium;
. a sale of all or substantially all of our assets; or
. a change in the composition of our board of directors over a 36-month
period such that a majority of the board is no longer comprised of
persons who either have been board members continuously since the
beginning of such period or have been elected or nominated for election
as board members during such period by at least a majority of the
persons who have been board members over that same period.
If, as a result of the acceleration of the vesting of the then-unvested shares
due to a corporate transaction as described above, Mr. Carr is required to pay
an excise tax with respect to the accelerated shares, then Mr. Carr is entitled
to receive an additional payment from us in an amount as is necessary to place
him in the same after-tax position he would have been in had no such excise
taxes been paid or incurred.
Mr. Carr also purchased 600,000 shares of our common stock under a second
restricted stock agreement dated April 4, 2000. The terms and conditions of
this agreement are substantially similar to those in the restricted stock
agreement with Mr. Carr described above. The differences are outlined below.
Under the terms of the restricted stock agreement under which Mr. Carr
purchased 600,000 shares, those shares will vest according to the following
vesting schedule:
. 600,000 shares of common stock will vest upon the conclusion of a
written or oral general equipment purchase agreement involving the sale
of hardware and other equipment by Tellium with one of the large
telecommunications service providers described in the restricted stock
agreement, and the receipt by the service provider of its first
commercial shipment, each to have occurred prior to December 21, 2001;
. 300,000 shares of restricted common stock will vest upon the conclusion
of each written or oral general equipment purchase agreement involving
the sale of hardware and other equipment by Tellium with each of the
smaller telecommunications service providers described in the restricted
stock agreement, and the receipt by the service provider of its first
commercial shipment, each to have occurred prior to December 21, 2001;
and
. no more than 600,000 shares will be issued under the restricted stock
agreement.
Under the terms of the 600,000 share restricted stock agreement, we have
the right to repurchase any unvested shares of restricted stock, at a per share
price equal to the exercise price per share paid by Mr. Carr, plus accrued
interest, within one year of Mr. Carr's employment with us being terminated for
any of the following reasons:
. Mr. Carr dies or becomes disabled during the term of his employment
agreement with us;
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<PAGE>
. we terminate Mr. Carr's employment at any time with or without cause,
including our failure to renew Mr. Carr's employment agreement with us;
. Mr. Carr terminates his employment with us within six months after the
occurrence of any of the following events:
. an adverse change in Mr. Carr's title, position, duties, powers and
authority, reporting relationship or the scope of his
responsibilities;
. the occurrence of a change of control;
. a failure by our successor to assume Mr. Carr's employment agreement
in a situation other than change of control; or
. a material breach of the employment agreement that remains uncured for
14 days following our receipt of notice of breach; or
. Mr. Carr voluntarily terminates his employment with us.
Our right to repurchase unvested shares under this agreement terminates on
April 13, 2002.
Other Restricted Stock Agreements. We have also entered into restricted
stock agreements with each of Messrs. Albers, Bala, Barcus, Cassa, DeMambro,
DeVito and Losch and Ms. Carr. In connection with these restricted stock
agreements, each executive delivered a promissory note to us for the full
amount of the purchase price, less the par value of the stock purchased. The
loans are for the following amounts:
<TABLE>
<CAPTION>
Aggregate
Name Loan Amount
---- -----------
<S> <C>
Michael G. Albers................................................... $ 3,204,500
Krishna Bala........................................................ 2,582,827
Richard W. Barcus................................................... 2,010,093
Grace M. Carr....................................................... 1,922,700
Thomas J. Cassa..................................................... 2,082,925
Anthony J. DeMambro................................................. 1,922,700
Nicholas P. DeVito.................................................. 1,612,183
Michael J. Losch.................................................... 1,922,700
-----------
Total............................................................. $17,260,628
</TABLE>
Each promissory note is secured by a pledge of the purchased stock. Each
executive is obligated to repay his or her loans, plus a fixed rate of interest
of 7.5% per annum on the outstanding principal balance:
. upon the occurrence of a liquidity event (with respect to the portion of
the principal attributable to the shares of restricted stock that are
sold); or
. on the termination date of each such executive's restricted stock
agreement.
Each restricted stock agreement also contains restrictions on the transfer
of shares, except to permitted transferees, such as to his or her executors or
beneficiaries upon death, to his or her spouse and persons with whom he or she
has had a significant pre-existing business or personal relationship.
Each restricted stock agreement provides us the right to repurchase any of
the executive's unvested shares at a per share price equal to the exercise
price per share paid by the executive, plus accrued interest, during the one-
year period after the executive's employment with us is terminated for any
reason, with or without cause.
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<PAGE>
Our right to repurchase the executive's unvested shares shall lapse with
respect to, and the executive, if he or she is then employed with us, shall
acquire a vested interest in, 50% of the then-unvested shares if any of the
following corporate transactions occur:
. the sale or acquisition of beneficial ownership of our equity securities
constituting 50% or more of the total voting power of our stockholders
by a party or group of related parties (other than us or a person that
directly or indirectly controls, is controlled by, or is under common
control with us);
. a merger or consolidation of Tellium with or into another entity and the
holders of our equity securities prior to such transaction possess less
than 50% of the total voting power of the surviving company after such
transaction;
. a complete liquidation or dissolution of Tellium;
. a sale of all or substantially all of our assets; or
. a change in the composition of our board of directors over a 36-month
period such that a majority of the board is no longer comprised of
persons who either have been board members continuously since the
beginning of such period or have been elected or nominated for election
as board members during such period by at least a majority of the
persons who have been board members over that same period.
If, as a result of the transactions described above, the executive is required
to pay an excise tax with respect to the shares that vested as a result of such
transactions, the executive is entitled to receive an additional payment from
us in an amount as is necessary to place him or her in the same after-tax
position he or she would have been in had no such excise taxes been paid or
incurred.
Our right to repurchase shall lapse with respect to, and the executive, if
he or she is then employed with us, shall acquire a vested interest in, the
remaining 50% of the executive's unvested shares if:
. there is a meaningful alteration that is adverse to the executive in the
nature or status of his or her responsibilities or in his or her
position with us from those in effect immediately prior to a corporate
transaction described above;
. a requirement by us, after a corporate transaction, that the executive
perform his or her responsibilities for us at a location that is more
than 60 miles from the location of the executive's employment at the
time of such transaction; or
. we breach a material term of such executive's restricted stock agreement
and fail to cure within 30 days after notice from the executive of such
breach.
Under the terms of each restricted stock agreement, we have the right to
repurchase any or all of the executive's vested shares of restricted stock at a
per share price equal to the fair market value if:
. the executive's employment with us is or could be terminated by us for
cause; or
. the executive attempts to transfer any vested shares other than as
permitted under the executive's restricted stock agreement.
Under the terms of the restricted stock agreements, the shares will vest,
unless vested earlier, according to the following schedule:
. 25% of the shares will vest on the first anniversary of the date set
forth in the restricted stock agreements as the vesting measurement
date, if the executive is then employed by us;
. 1/36th of the remaining shares will vest on the last day of each
calendar month commencing with the thirteenth month anniversary of the
vesting measurement date and ending on the 48th month anniversary of the
vesting measurement date, if, on each monthly vesting date, the
executive is then employed by us.
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<PAGE>
Management Investor Subscription Agreements
We have also entered into management investor subscription agreements with
each of Messrs. Bala and Mesiya. In connection with these management investor
subscription agreements, these management investors purchased 150,000 and
750,000 shares, respectively, of our common stock for an aggregate purchase
price of $50 and $250, respectively.
Each management investor subscription agreement provides that any unvested
shares become vested shares 120 days after the management investor's employment
is terminated as follows:
. without cause;
. due to a voluntary resignation by the management investor; or
. by reason of the management investor's death or disability.
Under the terms of the management investor subscription agreements, the
shares will vest, unless vested earlier, over four years according to the
following vesting schedule:
. 20% immediately upon issuance of the shares under the agreement;
. 40% on the first anniversary of the agreement date;
. 60% on the second anniversary of the agreement date;
. 80% on the third anniversary of the agreement date; and
. 100% on the fourth anniversary of the agreement date.
Stockholders' Agreement
The Stockholders' Agreement grants our stockholders rights to register
their shares of common stock for future sale as described in "Shares Eligible
for Future Sale--Stockholder Registration Rights".
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of August 31, 2000, information with
respect to the beneficial ownership of our common stock by:
. each person known to us to beneficially own more than 5% of the
outstanding shares of our common stock;
. each director of Tellium and each executive officer named in the Summary
Compensation Table; and
. all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Common stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of August 31, 2000 are
deemed to be outstanding and beneficially owned by the person holding such
options or warrants. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Percentage
of beneficial ownership is based on 80,193,297 shares of common stock
outstanding as of August 31, 2000, and shares of common stock to be
outstanding after the offering. Shares of our preferred stock are counted on an
as-converted basis, assuming a one-to-three conversion ratio.
Unless otherwise indicated, each stockholder has sole voting and investment
power with respect to the shares beneficially owned by the stockholder and has
the same address as Tellium. Our address is 2 Crescent Place, Oceanport, New
Jersey 07757-0901.
<TABLE>
<CAPTION>
Percent
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Science Applications International
Corporation(1)
10260 Campus Point Drive
San Diego, CA 92121............................ 17,343,933 21.6% %
Lucent Technologies, Inc.(2)
2015 West Chestnut Street
Alhambra, CA 91803............................. 8,323,632 10.4
Entities affiliated with Oak Investment
Partners(3)
One Gorham Island
Westport, CT 06880............................. 7,482,480 9.3
Entities affiliated with Accel V L.P.(4)
428 University Avenue
Palo Alto, CA 94301............................ 4,753,539 5.9
Entities affiliated with Thomas Weisel Capital
Partners LLC(5)
One Montgomery Street,
Suite 3700
San Francisco, CA 94104........................ 8,196,723 10.2
Harry J. Carr(6)................................ 6,600,000 8.2
Richard W. Barcus(7)............................ 1,500,000 1.9
Krishna Bala(8)................................. 1,394,250 1.7
William B. Bunting(5)........................... 8,196,723 10.2
Michael M. Connors.............................. 0 *
Jeffrey A. Feldman(9)........................... 2,459,016 3.1
Edward F. Glassmeyer(3)......................... 7,482,480 9.3
William A. Roper, Jr.(1)........................ 17,343,933 21.6
Richard C. Smith(1)............................. 17,343,933 21.6
Nicholas P. DeVito(10).......................... 900,000 1.1
Michael Hodges(11).............................. 1,090,410 1.4
John K. Kostibas................................ 258,600 *
Farouque Mesiya(12)............................. 828,126 1.0
Executive officers and directors as a group (15
persons)....................................... 51,051,402 63.6
</TABLE>
--------
* Represents less than one percent.
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(1) SAIC is the beneficial owner of the shares held by Telcordia Venture
Capital Corporation, the record owner of these shares. Mr. Roper is an
Executive Vice President and Chief Financial Officer of SAIC and as such
he may be deemed to exercise voting and investment power over the shares
held by Telcordia Venture Capital. Mr. Roper disclaims beneficial
ownership of these shares except to the extent of his proportionate
interest in SAIC. Mr. Smith is the Chief Executive Officer of Telcordia
Technologies, Inc., which is a wholly-owned subsidiary of SAIC and wholly
owns Telcordia Venture Capital, and as such he may be deemed to exercise
voting and investment power over the shares held by Telcordia Venture
Capital. Mr. Smith disclaims beneficial ownership of these shares except
to the extent of his proportionate interest in Telcordia Technologies.
(2) Ortel Corporation, the record owner of these shares, was acquired by
Lucent Technologies in April 2000.
(3) Includes (a) 7,299,159 shares held by Oak Investment Partners VII, Limited
Partnership; and (b) 183,321 shares held by Oak VII Affiliates Fund,
Limited Partnership. Mr. Glassmeyer is a managing member of the Oak
Investment Partners entities and as such he may be deemed to exercise
voting and investment power over the shares held by these entities. Mr.
Glassmeyer disclaims beneficial ownership of these shares except to the
extent of his proportionate interest in the Oak Investment Partners
entities.
(4) Includes (a) 3,831,360 shares held by Accel V L.P.; (b) 228,168 shares
held by Accel Investors "96 L.P.; (c) 513,381 shares held by Accel
Internet/Strategic Technology Fund L.P.; (d) 76,056 shares held by Accel
Keiretsu V L.P.; and (e) 104,574 shares held by Ellmore C. Patterson
Partners.
(5) Includes (a) 6,935,457 shares held by Thomas Weisel Capital Partners,
L.P., (b) 160,236 shares held by TWP CEO Founders' Circle (AI), L.P., (c)
585,426 shares held by TWP CEO Founders' Circle (QP), L.P.; (d) 162,255
shares held by Thomas Weisel Capital Partners (Dutch), L.P.; (e) 162,255
shares held by Thomas Weisel Capital Partners (Dutch II), L.P.; (f) 65,265
shares held by Thomas Weisel Capital Partners Employee Fund, L.P.; (g)
104,517 shares held by TWP 2000 Co-Investment Fund, L.P. and (h) 21,312
shares held by TWP Tellium Investors. Thomas Weisel Capital Partners LLC
is the general partner of each of these entities and as such may be deemed
to exercise voting and investment power over the shares held by these
entities. Mr. Bunting is a partner in Thomas Weisel Partners Group, LLC,
of which Thomas Weisel Capital Partners LLC is a wholly-owned subsidiary.
Mr. Bunting disclaims beneficial ownership of these shares except to the
extent of his proportionate interest in the Thomas Weisel Partners Group,
LLC.
(6) Includes (a) 233,787 shares held by Marietta Partners LLC; (b) 54,000
shares held by Pluto Partners LLC; and (c) 344,037 shares held by the
Deborah A. Carr 2000 Family Trust. Of these shares, 3,000,000 shares are
vested and 3,600,000 shares are unvested under restricted stock agreements
between us and Mr. Carr. Mr. Carr may be deemed to beneficially own these
shares.
(7) Includes (a) 450,000 shares held by Julie C. Barcus; (b) 300,000 shares
held by the Barcus Family Limited Partnership No. 2, L.L.L.P.; and (c)
350,000 shares held by the Barcus Family Limited Partnership No. 1,
L.L.L.P. Of these shares, 433,275 shares are vested and 1,066,725 shares
are unvested under a restricted stock agreement between us and Mr. Barcus.
Mr. Barcus may be deemed to beneficially own these shares.
(8) Upon the completion of this offering, (a) 604,500 shares will be vested
and 604,500 shares will be unvested under a restricted stock agreement
between us and Dr. Bala; (b) 75,000 shares will be vested and 75,000
shares will be unvested under a management investor subscription agreement
between us and Dr. Bala; and (c) 70,500 shares will be vested and 70,500
shares will be unvested under option agreements between us and Dr. Bala.
(9) Mr. Feldman is a general partner of Pequot Venture Partners, L.P., an
affiliate of Pequot Private Equity Fund II, L.P., which holds 2,459,016
shares of Series D preferred stock. As such, Mr. Feldman may be deemed to
exercise voting and investment power over the shares held by Pequot
Private Equity Fund II, L.P. Mr. Feldman disclaims beneficial ownership of
these shares except to the extent of his proportionate interest in Pequot
Private Equity Fund II, L.P.
(10) Includes (a) 489,000 shares held by NCAL, LLC and (b) 85,800 shares held
by KD Family LLC. Of these shares, 46,500 shares are vested and 846,000
shares are unvested under a restricted stock agreement between us and Mr.
DeVito. Mr. DeVito may be deemed to beneficially own these shares.
(11) Includes 178,863 shares that are vested pursuant to option agreements
between us and Mr. Hodges.
(12) Includes 750,000 shares that are vested pursuant to a management investor
subscription agreement between us and Mr. Mesiya.
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DESCRIPTION OF CAPITAL STOCK
General
As of August 31, 2000, our authorized capital stock consisted of
250,000,000 shares of common stock, par value $.001 per share, and 21,112,268
shares of preferred stock, par value $.001 per share. After this offering,
there will be authorized and unissued shares of preferred stock. Also
after this offering, there will be issued and outstanding shares of
common stock. As of August 31, 2000, there were 23,498,373 shares of common
stock outstanding that were held of record by approximately 148 stockholders
and an aggregate of 18,898,308 shares of preferred stock held of record by
approximately 23 stockholders.
The number of shares of common stock outstanding as of August 31, 2000
does not include:
. 56,694,924 shares of common stock into which the shares of Series A, B,
C and D preferred stock will automatically convert based on a one-to-
three conversion ratio upon the completion of this offering;
. shares of common stock into which the shares of Series E preferred
stock will automatically convert assuming an initial public offering
price of $ per share;
. 1,500,000 shares of common stock issued to AT&T in connection with our
license of intellectual property from AT&T;
. 3,750,000 shares of common stock issuable to shareholders of Astarte
upon the closing of our acquisition of Astarte;
. 17,930,528 shares of common stock subject to options outstanding under
our 1997 employee stock option plan with a weighted average exercise
price of $1.89 per share and 675,160 shares of common stock available
for future grant under this plan;
. 225,000 shares of common stock subject to options that were issued
outside of our employee stock option plan;
. 5,226,000 shares of common stock subject to an outstanding warrant to
purchase common stock at an exercise price of $3.05 per share;
. 88,527 shares of common stock subject to outstanding warrants to
purchase Series C preferred stock at an exercise price of $3.05 per
share;
. 333,333 shares of common stock issued to officers and affiliates of
Qwest;
. 2,000,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $30.00 per share; and
. shares of common stock to be issued under the over-allotment option.
The descriptions of common stock and preferred stock reflect changes to
our capital structure that will occur upon completion of this offering in
accordance with the amended and restated certificate of incorporation that we
will adopt immediately prior to this offering.
Common Stock
Under the terms of our amended and restated certificate of incorporation,
to be effective upon completion of this offering, 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
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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 Tellium, the holders of common stock
are entitled to receive ratably our net assets 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 any series of preferred stock which we may designate and issue in the
future. A significant percentage of the holders of our common stock have the
right to require us to register their shares of common stock under the
Securities Act in specified circumstances.
Preferred Stock
Under the terms of our amended and restated certificate of incorporation,
to be effective upon completion of this offering, our board of directors is
authorized to issue shares of preferred stock in one or more series without
stockholder approval. The board has discretion to determine the rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences of
each series of preferred stock. The purpose of authorizing the board of
directors to issue preferred stock and determine its rights and preferences is
to eliminate delays associated with a stockholder vote on specific issuances.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could make
it more difficult for a third party to acquire, or could discourage a third
party from acquiring, a majority of our outstanding voting stock.
Warrants
On September 21, 1999, we issued a warrant to purchase 5,226,000 shares of
our common stock to Extant, one of our customers, at a purchase price of $3.05
per share, as consideration for the transactions under our purchase agreement
with Extant. As of June 30, 2000, 1,829,100 shares have vested and the
remaining shares will vest in accordance with a vesting schedule based on
purchase milestones set forth in the agreement. This warrant expires on
September 21, 2005.
On November 11, 1999, we issued two warrants to purchase an aggregate of
29,509 shares of our Series C preferred stock to Comdisco, Inc., at a purchase
price of $9.15 per share, as consideration for a lease line of credit. Under
the terms of each of these warrants, Comdisco also has the right to purchase
additional shares of our Series C preferred stock if the total cost of
equipment we lease from Comdisco exceeds specified amounts. The warrant is
exercisable at any time and expires on the earlier of five years after this
offering or ten years from the date the warrant was issued.
As part of our agreement with Qwest, we issued two warrants to a wholly-
owned subsidiary of Qwest to purchase 2,000,000 shares of our common stock at
an exercise price of $30.00 per share. The warrants to purchase 2,000,000
shares were vested when we issued the warrants and become exercisable as Qwest
meets specified milestones during the term of our procurement contract. The
first warrant expires September 18, 2005, and the second warrant expires the
later of six months after the last day the warrant becomes exercisable or
September 18, 2005.
Delaware Law And Certain Charter And Bylaw 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
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<PAGE>
other transactions resulting in a financial benefit to the interested
stockholder. Subject to exceptions, an "interested stockholder" is a person
who, together with his 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 bylaws to be
effective upon completion 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;
. 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
. any vacancy on the board of directors, however the vacancy occurs,
including a vacancy due to 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 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 bylaws, both effective upon completion of this offering, also provide
that, after 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 bylaws, effective upon completion 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 bylaws, unless a corporation's
certificate of incorporation or bylaws requires a greater percentage. Our
amended and restated certificate of incorporation, effective upon completion of
this offering, permits our board of directors to amend or repeal our bylaws 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 bylaws. Generally our amended and
restated certificate of incorporation, effective upon completion 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 bylaws, as amended and restated
upon completion of this offering, would be in addition to any separate class
vote that might in the future be required under the terms of any series
preferred stock that might be outstanding at the time any such amendments are
submitted to stockholders.
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation, effective upon
completion of this offering, provides that our directors and officers shall be
indemnified by us to the fullest extent authorized by
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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 completion 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.
Delaware law also provides that indemnification permitted under the law
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. Our amended and restated certificate of
incorporation, effective upon completion of this offering, provides that we
shall fully 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 such person is or was one of our directors or officers or is or was
serving at our request as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding.
Our amended and restated bylaws, effective upon completion of this
offering, permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions,
regardless of whether the Delaware General Corporation Law would permit
indemnification. We have obtained liability insurance for our officers and
directors.
At present, we are not the subject of any pending litigation or proceeding
involving any director, officer, employee or agent as to which indemnification
will be required or permitted under our certificate of incorporation. We are
not aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect the market price of our common stock and could impair our
future ability to raise capital through the sale of our equity securities.
Upon consummation of this offering, we will have shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants. Of these shares, the
shares to be sold in this offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, as
amended, except that any shares purchased by our affiliates may generally only
be sold in compliance with the limitations of Rule 144 described below. An
affiliate is defined under Rule 144 as a person that controls, is controlled by
or is under common control with Tellium. The remaining 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, shares will be subject to "lock-up" agreements
described below on the effective date of this offering. Upon expiration of the
lock-up agreements, as described below, the shares in the amounts set forth
below will become eligible for sale subject in most cases to the limitations of
either Rule 144 or Rule 701 under the Securities Act. In addition, holders of
stock options could exercise such options and sell the shares issued upon
exercise as described below under "Stock Options".
Sales of Restricted Shares
<TABLE>
<CAPTION>
Number of Shares Date of Availability for Resale into the Public Market
---------------- ------------------------------------------------------
<S> <C>
On effectiveness
90 days after effectiveness
180 days after effectiveness
</TABLE>
of the shares listed in the foregoing table as not saleable until 180
days after effectiveness may become saleable earlier as described below under
"Lock-up Agreements".
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, 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:
. one percent of the then outstanding shares of common stock, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of such sale on Form 144 is filed,
provided the 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 requirements, in order to sell shares of common stock which
are not restricted securities.
Under Rule 144(k), a person who is not one of our affiliates and has not
been one of our affiliates 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
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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 limitations.
Stock Options
As soon as practicable following the date of this prospectus, we intend to
file a registration statement on Form S-8 under the Securities Act to register
up to shares of our common stock issuable under our employee stock option
plans, including the shares of common stock subject to immediately
exercisable options as of . The registration statement is expected
to become effective upon filing.
At August 31, 2000, options to purchase 17,930,528 shares were issued and
outstanding under our plan. All of these shares will be eligible for sale in
the public market from time to time, subject to vesting provisions, Rule 144
volume limitations applicable to our affiliates and, in the case of some of the
options, the expiration of lock-up agreements.
Lock-up Agreements
Stockholders holding an aggregate of shares of common stock or warrants
to acquire common stock are subject to contractual restrictions on resale
contained in lock-up agreements with the underwriters, which are described in
the section entitled "Underwriting". These lock-up agreements generally provide
that the stockholders will not dispose of or hedge their shares for a period
ranging from 90 to 180 days. Taking into account the lock-up agreements, the
following shares will be eligible for sale in the public market at the
following times:
. on the date of this prospectus, the shares sold in the offering will be
immediately available for sale in the public market;
. on the date of this prospectus, shares of common stock purchased in
connection with our directed share program, other than purchases by
directors, executive officers and their spouses and children, will be
immediately available for sale in the public market;
. 90 days after the date of this prospectus, the following shares shall be
released from the contractual restrictions under the lock-up agreements;
. shares held by employees who are not executives;
. shares acquired upon conversion of our Series E preferred stock; and
. any shares acquired upon exercise of the Qwest warrant and shares of
common stock sold to officers and affiliates of Qwest in a recent
private placement;
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. 90 days after the date of this prospectus, 10% of the shares held by
persons who acquired common stock upon the conversion of our Series A,
B, C and D preferred stock or upon the exercise of warrants, except for
the Qwest warrant, shall be released from the lock-up if the last
reported sale price of our common stock on the Nasdaq National Market is
greater than per share for 20 of the 30 consecutive trading days
preceding the 90th day after the date of this prospectus; and
. 180 days after the date of this prospectus, any shares of common stock
not previously released from the contractual restrictions under the
lock-up agreements shall be released.
Stockholder Registration Rights
Following this offering, the holders of shares of outstanding common
stock and warrants to purchase shares of common stock will, under some
circumstances, have the right to require us to register their shares for future
sale.
All of our preferred stock will convert into shares of common stock upon
the consummation of this offering. Our amended stockholders' agreement with the
holders of our preferred stock and others provides that at any time after six
months following the consummation of this offering, one or more of those
stockholders have the right to demand that we file a registration statement
with the Securities and Exchange Commission to register all or part of their
shares of common stock. We are obligated to effect two demand registrations for
these stockholders. In addition, Thomas Weisel Capital Partners LLC and its
affiliates and transferees also have the right to demand that we file one
registration statement with the Securities and Exchange Commission to register
all or part of their shares of common stock obtained upon conversion of their
Series D preferred stock. The amended stockholders' agreement also provides
that these stockholders have the right to demand that we register their common
stock on a Form S-3 registration statement if we qualify to use that form and
if the anticipated gross offering price of the securities expected to be
registered exceeds $1,000,000. We will not be required to file more than one
Form S-3 registration statement in any one-year period. In addition, if we
propose to register securities for our own account, the stockholders may be
entitled to include their shares in that registration. AT&T and some of the
stockholders of Astarte also have the right to include their shares of common
stock on future registration statements that we may file. All of these
registration rights are subject to conditions and limitations, among them our
right or the right of the underwriters of an offering to limit the number of
shares included in a registration under some circumstances.
We have agreed to file a shelf registration statement covering resales of
the shares of common stock to be issued upon conversion of the Series E
preferred stock. We have agreed to use our reasonable best efforts to cause the
shelf registration statement to become effective within 90 days of the
completion of this offering and to keep it effective for a two-year period.
Qwest and the officers and affiliates of Qwest that participated in a recent
private placement of our common stock have the right to include their shares on
this shelf registration statement.
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UNDERWRITING
Tellium and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to some conditions,
each underwriter has severally agreed to purchase the number of shares
indicated in the following table. Goldman, Sachs & Co., Thomas Weisel Partners
LLC, J.P. Morgan Securities Inc., CIBC World Markets Corp. and Wit SoundView
Corporation are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .................................................
Thomas Weisel Partners LLC............................................
J.P. Morgan Securities Inc. ..........................................
CIBC World Markets Corp. .............................................
Wit SoundView Corporation.............................................
---
Total...............................................................
===
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Tellium to cover such sales. They may exercise that
option for 30 days. If any shares are purchased under this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Tellium. The amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Tellium
-----------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per Share................................................ $ $
Total.................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.
Tellium and its directors, officers, employees and stockholders holding
shares have agreed not to dispose of or hedge any shares of common stock, or
any options or warrants to purchase any shares of common stock, or any
securities convertible into, exchangeable for or that represent the right to
receive shares of common stock which are owned directly or indirectly by such
directors, employees and stockholders. Shares of the Company's common stock
will be released from this contractual lock-up as set forth below:
. for directors, executive officers and their spouses and children, their
shares of common stock will be released from the lock-up 180 days after
the date of this prospectus;
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. for persons who acquired the Company's common stock upon the conversion
of our Series A, B, C and D preferred stock or upon exercise of
warrants, except for the Qwest warrant, their shares will be released
from the lock-up 180 days from the date of this prospectus except that,
if 90 days after the date of this prospectus the last reported sales
price of the Company's common stock on the Nasdaq National Market has
been greater than for 20 of the preceding 30 consecutive trading
days, then 10% of the shares of common stock owned by these holders will
be released from lock-up; and
. shares acquired upon the conversion of our Series E preferred stock, for
employees who are not executive officers and for all other stockholders,
their shares of common stock will be released from the lock-up 90 days
after the date of this prospectus.
The restrictions described in the preceding paragraphs do not apply to:
. shares of common stock purchased in the initial public offering;
. shares of common stock purchased in the open market following the
initial public offering; and
. except for the Company's directors and executive officers and their
spouses and children, shares of common stock purchased in connection
with our directed share program.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Tellium and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Tellium's historical performance, estimates of the business
potential and earnings prospects of Tellium, an assessment of the management of
Tellium and the consideration of the above factors in relation to market
valuation of companies in related businesses.
Tellium has applied to list its common stock on the Nasdaq National Market
under the symbol "TELM".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from Tellium in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the overallotment option. "Naked" short
sales are any sales in excess of such option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchase of
common stock made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
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Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of
Tellium's stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock.
As a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
At the request of Tellium, the underwriters are reserving up to
shares of common stock for sale at the initial public offering price to
individuals designated by Tellium who have expressed an interest in purchasing
the shares of common stock in the offering through a directed share program.
The number of shares available for sale to the general public in the public
offering will be reduced to the extent these persons purchase these reserved
shares. Any shares not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered hereby.
The underwriters do not expect sales to discretionary accounts to exceed
percent of the total number of shares offered.
Tellium estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $
million.
Goldman, Sachs & Co. and Thomas Weisel Partners LLC acted as placement
agents for Tellium in connection with the private placement of shares of
Tellium's Series E preferred stock in September 2000. Tellium incurred
customary placement fees payable to Goldman, Sachs & Co. and Thomas Weisel
Partners LLC for such services. Tellium paid the fees in shares of Series E
preferred stock priced at the private placement price of $30.00 per preferred
share. In addition, entities affiliated with Thomas Weisel Capital Partners LLC
beneficially own 2,732,241 shares of Tellium's Series D preferred stock and
33,333 shares of Tellium's Series E preferred stock.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 177 filed public offerings of equity securities, of which 141 have
been completed and has acted as a syndicate member in an additional 117 public
offerings of equity securities.
A prospectus in electronic format may be made available on Web sites
maintained by one or more underwriters or selected dealers. The representatives
may agree to allocate a number of shares to underwriters or selected dealers to
sell to their online brokerage account holders. Internet distributions will be
allocated by the lead managers to underwriters that may make Internet
distributions on the same basis as other allocations.
Tellium has agreed to indemnify the several underwriters against specific
liabilities, including liabilities under the Securities Act of 1933.
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VALIDITY OF COMMON STOCK
The validity of the issuance of the shares of our common stock offered by
this prospectus will be passed upon for Tellium by Fried, Frank, Harris,
Shriver & Jacobson (a partnership including professional corporations),
Washington, DC. The validity of the issuance of the shares of our common stock
offered by this prospectus will be passed upon for the underwriters by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, New York, New
York.
EXPERTS
The financial statements of Tellium, Inc. as of and for the year ended
December 31, 1999, included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
and elsewhere in the registration statement, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of Tellium, Inc. at December 31, 1998, and for the
year ended December 31, 1998 and the period from May 8, 1997 (inception) to
December 31, 1997, appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and such financial statements and
selected financial data are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The audited financial statements for Astarte Fiber Networks, Inc. included
in this prospectus and elsewhere in the registration statement as of and for
the years ended December 31, 1998 and December 31, 1999 have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
CHANGE IN INDEPENDENT AUDITORS
On March 9, 2000, we changed our auditors to Deloitte & Touche LLP from
Ernst & Young LLP. The decision to dismiss Ernst & Young LLP and engage
Deloitte & Touche LLP was approved by our board of directors.
We believe that for the period from May 8, 1997 (inception) through the
date of the change in auditors, Ernst & Young did not have any disagreement
with us on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Ernst & Young, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report on our financial statements. Ernst & Young's original report on our 1998
financial statements dated August 22, 1999, contained an explanatory paragraph
indicating there was substantial doubt regarding our ability to continue as a
going concern. Ernst & Young reissued their report on our 1998 financial
statements on September 21, 2000 indicating that the conditions that raised the
substantial doubt about whether we will continue as a going concern no longer
exist.
74
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 and the rules and
regulations promulgated under the Securities Act with respect to our common
stock offered by this prospectus. This prospectus, which constitutes a part of
the registration statement, does not contain all of the information set forth
in the registration statement and its exhibits and schedules. For further
information with respect to Tellium and its common stock, we refer you to the
registration statement and the exhibits and the schedules filed as a part of
the registration statement. You may read and copy the registration statement at
the Securities and Exchange Commission's following locations:
Public Reference Room OfficeNew York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Washington, DC 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
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, DC 20549 or by telephone at 1-800-
SEC-0330. The registration statement is 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. Upon approval of our common
stock for quotation on The Nasdaq Stock Market's National Market, you can read
Tellium's filings with the Securities and Exchange Commission at the office of
Nasdaq Operations, 1734 K Street, N.W., Washington, DC 20006.
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.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
TELLIUM, INC.
FINANCIAL STATEMENTS FOR THE PERIOD FROM MAY 8, 1997 (INCEPTION) TO
DECEMBER 31, 1997, FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 (UNAUDITED) AND 1999
(UNAUDITED):
Independent Auditors' Report Of Deloitte & Touche LLP................. F-2
Independent Auditors' Report Of Ernst & Young LLP..................... F-3
Balance Sheets........................................................ F-4
Statements of Operations.............................................. F-5
Statements of Changes in Stockholders' Equity (Deficiency)............ F-6
Statements of Cash Flows.............................................. F-7
Notes to Financial Statements......................................... F-8-21
ASTARTE FIBER NETWORKS, INC.
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998,
AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 (UNAUDITED) AND
1999 (UNAUDITED)
Report of Independent Public Accountants.............................. F-22
Balance Sheets........................................................ F-23-24
Statements of Operations.............................................. F-25
Statements of Stockholders' Deficit................................... F-26
Statements of Cash Flows.............................................. F-27-28
Notes to Financial Statements......................................... F-29-38
UNAUDITED PRO-FORMA CONDENSED FINANCIAL STATEMENTS
Unaudited Pro-Forma Condensed Financial Data.......................... F-39
Unaudited Pro-Forma Condensed Balance Sheet........................... F-40
Unaudited Pro-Forma Condensed Statement of Operations for the Six-
Month Period Ended June 30, 2000..................................... F-41
Unaudited Pro-Forma Condensed Statement of Operations for the Year
Ended December 31, 1999.............................................. F-42
Notes to Unaudited Pro-Forma Condensed Financial Data................. F-43
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Tellium, Inc.
We have audited the accompanying balance sheet of Tellium, Inc. (the
"Company") as of December 31, 1999, and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 28, 2000
(August 11, 2000 as to Note 12)
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tellium, Inc.
We have audited the accompanying balance sheet of Tellium, Inc. as of December
31, 1998, and the related statements of operations, changes in stockholders'
(deficiency) equity and cash flows for the year ended December 31, 1998 and the
period from May 8, 1997 (inception) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying 1998 financial
statements and initial issuance of our report thereon dated August 22, 1999,
which report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern, the Company, as discussed in Notes 6 and 13,
has completed two private placements of its preferred stock resulting in net
proceeds of approximately $268 million and has entered into a $10 million line
of credit with a bank. Therefore, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no longer exist.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tellium, Inc. at December 31,
1998 and the results of its operations and its cash flows for the year ended
December 31, 1998 and the period from May 8, 1997 (inception) to December 31,
1997 in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
MetroPark, New Jersey
August 22, 1999,
except for Notes 6 and 13, as to which
the date is September 21, 2000
F-3
<PAGE>
TELLIUM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, Pro Forma
------------------------ June 30, at June 30,
1998 1999 2000 2000
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.............. $ 7,733,475 $45,239,281 $30,228,378
Due from stockholder...... 274,400 10,000 --
Accounts receivable, less
allowance for doubtful
accounts of $60,000 as of
December 31, 1999 and
June 30, 2000............ -- 2,115,755 7,073,575
Inventories............... -- 1,901,242 6,203,265
Prepaid expenses and other
current assets........... 46,794 241,732 2,850,785
----------- ----------- -----------
Total current assets...... 8,054,669 49,508,010 46,356,003
PROPERTY AND EQUIPMENT--
Net....................... 2,674,986 3,449,143 6,723,755
OTHER ASSETS............... 51,754 277,327 332,540
----------- ----------- -----------
TOTAL ASSETS............... $10,781,409 $53,234,480 $53,412,298
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Trade accounts payable.... $ 3,286,433 $ 2,212,058 $ 5,958,786
Accrued expenses and other
current liabilities...... 2,835,874 1,300,722 2,520,700
Current portion of notes
payable.................. 5,000,000 583,798 2,609,143
Current portion of capital
lease obligations........ 52,274 116,603 638,906
----------- ----------- -----------
Total current
liabilities.............. 11,174,581 4,213,181 11,727,535
LONG-TERM PORTION OF NOTES
PAYABLE................... 9,392,030 1,223,071 912,808
LONG-TERM PORTION OF
CAPITAL LEASE
OBLIGATIONS............... 72,560 116,110 1,080,160
OTHER LONG-TERM
LIABILITIES............... -- 7,900 5,627
----------- ----------- -----------
Total liabilities......... 20,639,171 5,560,262 13,726,130
----------- ----------- -----------
COMMITMENTS AND
CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
(DEFICIENCY):
Common stock, $0.001 par
value, 250,000,000 shares
authorized 2,604,000,
2,727,675, 22,965,348
(unaudited) and
79,660,275 (unaudited)
issued and outstanding at
December 31, 1998, 1999,
June 30, 2000 and June
30, 2000 pro-forma....... 868 909 7,655 $ 26,555
Series A Preferred Stock,
$0.001 par value
($22,040,002 liquidation
preference), 10,433,334
shares authorized,
9,183,334 shares issued
and outstanding as of
December 31, 1998 and
1999; 10,089,584
(unaudited) and -0-
(unaudited) shares
outstanding at June 30,
2000 and June 30, 2000
pro-forma................ 9,183 9,183 10,091
Series B Preferred Stock,
$0.001 par value
($559,999 liquidation
preference), 250,000
shares authorized,
233,333 shares issued and
outstanding as of
December 31, 1998 and
1999; 233,333 and -0-
shares issued and
outstanding as of June
30, 2000 (unaudited) and
June 30, 2000 pro-forma
(unaudited).............. 233 233 233
Series C Preferred Stock,
$0.001 par value
($23,289,852 liquidation
preference) 4,403,934
shares authorized, -0-
shares issued and
outstanding as of
December 31, 1998;
2,545,339 shares issued
and outstanding as of
December 31, 1999;
2,564,465 and -0- shares
issued and outstanding as
of June 30, 2000
(unaudited) and June 30,
2000 pro-forma
(unaudited).............. -- 2,546 2,565
Series D Preferred Stock,
$0.001 par value
($49,999,983 liquidation
preference), 6,025,000
shares authorized, -0-
shares issued and
outstanding as of
December 31, 1998;
5,464,479 shares issued
and outstanding as of
December 31, 1999;
6,010,926 and -0- shares
issued and outstanding as
of June 30, 2000
(unaudited) and June 30,
2000 pro-forma
(unaudited).............. -- 5,465 6,011
Additional paid-in
capital................... 17,087,427 98,034,733 150,280,858 150,280,858
Notes receivable........... -- -- (37,995,430) (37,995,430)
Accumulated deficit........ (25,775,473) (45,574,767) (65,019,587) (65,019,587)
Deferred employee
compensation.............. (1,180,000) (4,804,084) (7,606,228) (7,606,228)
----------- ----------- ----------- -----------
Total stockholders' equity
(deficiency)............. (9,857,762) 47,674,218 39,686,168 $39,686,168
----------- ----------- ----------- ===========
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY).............. $10,781,409 $53,234,480 $53,412,298
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
TELLIUM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
May 8, 1997 Six Months Ended June
(Inception) to Year Ended December 31, 30,
December 31, ------------------------ ------------------------
1997 1998 1999 1999 2000
-------------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE................. $ 54,553 $ 1,364,480 $ 5,226,735 $ 1,063,056 $ 7,585,160
Non-cash charges
related to equity
issuances............ -- -- 558,961 -- 370,925
----------- ----------- ----------- ----------- -----------
REVENUE, net of non-cash
charges related to
equity issuances....... 54,553 1,364,480 4,667,774 1,063,056 7,214,235
COST OF REVENUE......... 11,546 1,259,941 3,881,637 911,172 5,061,390
----------- ----------- ----------- ----------- -----------
Gross profit........ 43,007 104,539 786,137 151,884 2,152,845
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and
development.......... 4,540,079 14,765,477 10,119,508 5,098,461 12,741,418
Sales and marketing... 202,359 2,040,839 4,113,571 1,254,214 4,246,602
General and
administrative....... 1,670,975 4,080,943 6,189,714 3,075,968 6,236,444
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 6,413,413 20,887,259 20,422,793 9,428,643 23,224,464
----------- ----------- ----------- ----------- -----------
OPERATING LOSS.......... 6,370,406 20,782,720 19,636,656 9,276,759 21,071,619
----------- ----------- ----------- ----------- -----------
OTHER (INCOME) EXPENSE:
Other income.......... (802,627) (6,819) -- -- --
Interest income....... (302,780) (289,340) (359,685) (149,679) (1,806,173)
Interest expense...... -- 23,913 522,323 301,180 179,374
----------- ----------- ----------- ----------- -----------
Total other (income)
expense............ (1,105,407) (272,246) 162,638 151,501 (1,626,799)
----------- ----------- ----------- ----------- -----------
NET LOSS................ $ 5,264,999 $20,510,474 $19,799,294 $ 9,428,260 $19,444,820
=========== =========== =========== =========== ===========
BASIC AND DILUTED LOSS
PER SHARE.............. $ (3.39) $ (9.66) $ (7.42) $ (3.57) $ (2.00)
=========== =========== =========== =========== ===========
BASIC AND DILUTED
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 1,554,000 2,122,749 2,667,615 2,642,475 9,726,730
=========== =========== =========== =========== ===========
UNAUDITED PROFORMA BASIC
AND DILUTED LOSS PER
SHARE.................. $ (0.36) $ (0.29)
=========== ===========
UNAUDITED PROFORMA BASIC
AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING............ 54,947,073 66,421,656
=========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
TELLIUM, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
----------------- ------------------
Series A Series B Series C Series D Additional
------------------ -------------- ---------------- ---------------- Paid-in
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
---------- ------ ---------- ------- ------- ------ --------- ------ --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Series A
Preferred Stock
at inception to
cash investors
at $2.40 per
share........... -- $ -- 4,850,000 $ 4,850 -- $-- -- $ -- -- $ -- $ 11,635,150
Issuance of
Series A
Preferred Stock
at inception to
noncash
investors for
contribution of
intellectual
property........ -- -- 392,882 393 -- -- -- -- -- -- --
Issuance of
Series A
Preferred Stock
at inception to
noncash
investors for
contribution of
equipment....... -- -- 3,523,785 3,524 -- -- -- -- -- -- 1,696,476
Issuance of
Series B
Preferred Stock
at inception to
cash investors
at $2.40 per
share........... -- -- -- -- 233,333 233 -- -- -- -- 559,767
Issuance of
Common Stock at
par value....... 1,554,000 518 -- -- -- -- -- -- -- -- --
Financing cost.. -- -- -- (17,200)
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ------ ---------- ------- ------- ---- --------- ------ --------- ------ ------------
DECEMBER 31,
1997............ 1,554,000 518 8,766,667 8,767 233,333 233 -- -- -- -- 13,874,193
Issuance of
Series A
Preferred Stock
to cash
investors at
$2.40 per
share........... -- -- 416,667 416 -- -- -- -- -- -- 999,584
Issuance of
Common Stock at
partnership
value........... 1,050,000 350 -- -- -- -- -- -- -- -- 83,650
Deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- 2,130,000
Amortization of
deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ------ ---------- ------- ------- ---- --------- ------ --------- ------ ------------
DECEMBER 31,
1998............ 2,604,000 868 9,183,334 9,183 233,333 233 -- -- -- -- 17,087,427
Issuance of
Series C
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- -- -- -- 2,545,339 2,546 -- -- 23,177,638
Issuance of
Series D
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- -- -- -- -- -- 5,464,479 5,465 49,658,877
Exercise of
stock options... 123,675 41 -- -- -- -- -- -- -- -- 12,013
Warrant cost
related to third
parties......... -- -- -- -- -- -- -- -- -- -- 1,652,967
Issuance of
warrants........ -- -- -- -- -- -- -- -- -- -- 150,196
Issuance of
options to
employees....... -- -- -- -- -- -- -- -- -- -- 61,700
Deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- 6,233,915
Amortization of
deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ------ ---------- ------- ------- ---- --------- ------ --------- ------ ------------
DECEMBER 31,
1999............ 2,727,675 909 9,183,334 9,183 233,333 233 2,545,339 2,546 5,464,479 5,465 98,034,733
SIX MONTHS
UNAUDITED:
Exercise of
warrants........ -- -- 906,250 908 -- -- -- -- -- -- 4,145,212
Issuance of
Series D
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- -- -- -- -- -- 546,447 546 4,999,454
Issuance of
Series C
Preferred Stock
to cash
investors at
$9.15 per
share........... -- -- -- -- -- -- 19,126 19 -- -- 174,981
Deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- 4,091,030
Amortization of
deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- --
Exercise of
stock options... 20,237,673 6,746 -- -- -- -- -- -- -- -- 462,872
Issuance of
restricted
stock........... -- -- -- -- -- -- -- -- -- -- 37,995,430
Warrant cost
related to third
parties......... -- -- -- -- -- -- -- -- -- -- 377,146
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ------ ---------- ------- ------- ---- --------- ------ --------- ------ ------------
JUNE 30, 2000
(UNAUDITED)..... 22,965,348 $7,655 10,089,584 $10,091 233,333 $233 2,564,465 $2,565 6,010,926 $6,011 $150,280,858
========== ====== ========== ======= ======= ==== ========= ====== ========= ====== ============
<CAPTION>
Total
Deferred Stockholders'
Accumulated Employee Notes (Deficiency)
Deficit Compensation Receivable Equity
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Issuance of
Series A
Preferred Stock
at inception to
cash investors
at $2.40 per
share........... $ -- $ -- $ -- $11,640,000
Issuance of
Series A
Preferred Stock
at inception to
noncash
investors for
contribution of
intellectual
property........ -- -- -- 393
Issuance of
Series A
Preferred Stock
at inception to
noncash
investors for
contribution of
equipment....... -- -- -- 1,700,000
Issuance of
Series B
Preferred Stock
at inception to
cash investors
at $2.40 per
share........... -- -- -- 560,000
Issuance of
Common Stock at
par value....... -- -- -- 518
Financing cost.. -- -- -- (17,200)
Net loss........ (5,264,999) -- -- (5,264,999)
------------- ------------- ------------- -------------
DECEMBER 31,
1997............ (5,264,999) -- -- 8,618,712
Issuance of
Series A
Preferred Stock
to cash
investors at
$2.40 per
share........... -- -- -- 1,000,000
Issuance of
Common Stock at
partnership
value........... -- -- -- 84,000
Deferred
employee
compensation.... -- (2,130,000) -- --
Amortization of
deferred
employee
compensation.... -- 950,000 -- 950,000
Net loss........ (20,510,474) -- -- (20,510,474)
------------- ------------- ------------- -------------
DECEMBER 31,
1998............ (25,775,473) (1,180,000) -- (9,857,762)
Issuance of
Series C
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- 23,180,184
Issuance of
Series D
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- 49,664,342
Exercise of
stock options... -- -- -- 12,054
Warrant cost
related to third
parties......... -- -- -- 1,652,967
Issuance of
warrants........ -- -- -- 150,196
Issuance of
options to
employees....... -- -- -- 61,700
Deferred
employee
compensation.... -- (6,233,915) -- --
Amortization of
deferred
employee
compensation.... -- 2,609,831 -- 2,609,831
Net loss........ (19,799,294) -- -- (19,799,294)
------------- ------------- ------------- -------------
DECEMBER 31,
1999............ (45,574,767) (4,804,084) -- 47,674,218
SIX MONTHS
UNAUDITED:
Exercise of
warrants........ -- -- -- 4,146,120
Issuance of
Series D
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- 5,000,000
Issuance of
Series C
Preferred Stock
to cash
investors at
$9.15 per
share........... -- -- -- 175,000
Deferred
employee
compensation.... -- (4,091,030) -- --
Amortization of
deferred
employee
compensation.... -- 1,288,886 -- 1,288,886
Exercise of
stock options... -- -- -- 469,618
Issuance of
restricted
stock........... -- -- $(37,995,430) --
Warrant cost
related to third
parties......... -- -- -- 377,146
Net loss........ (19,444,820) -- -- (19,444,820)
------------- ------------- ------------- -------------
JUNE 30, 2000
(UNAUDITED)..... $(65,019,587) $(7,606,228) $(37,995,430) $39,686,168
============= ============= ============= =============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
TELLIUM, INC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
May 8, 1997
(Inception) to Year Ended December 31, Six Months Ended June 30,
December 31, -------------------------- --------------------------
1997 1998 1999 1999 2000
-------------- ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $(5,264,999) $(20,510,474) $(19,799,294) $ (9,428,260) $(19,444,820)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 124,392 458,102 1,096,956 509,221 813,357
Provision for doubtful
accounts............. -- -- 60,000 -- --
Provision for
inventory valuation.. -- -- 256,057 -- --
Amortization of
deferred compensation
expense.............. -- 950,000 2,609,831 1,277,144 1,288,886
Stock based
compensation......... -- -- 61,700 45,299 6,221
Warrant cost related
to third parties..... -- -- 1,652,967 -- 370,925
Interest incurred for
bridge financing..... -- -- 498,404 289,516 --
Gain on disposal of
fixed assets......... (160,260) -- -- -- --
Write-down of in-
process research and
development expense.. 2,400,393 -- -- -- --
Changes in assets and
liabilities:
Decrease (increase)
in due from
stockholder......... (84,954) (189,446) 264,400 (70,000) 10,000
Decrease (increase)
in accounts
receivable.......... -- -- (2,175,755) (421,167) (4,957,820)
Decrease (increase)
in inventory........ -- -- (1,901,242) (1,998,576) (4,302,023)
Decrease (increase)
in prepaid expenses
and other current
assets.............. (62,900) 16,106 (400,930) (42,549) (2,609,053)
Decrease (increase)
in other assets..... (30,645) (21,109) (129,607) (806) (55,213)
(Decrease) increase
in accounts
payable............. 258,543 3,027,890 (1,074,375) (1,542,239) 3,746,728
(Decrease) increase
in accrued expenses
and other current
liabilities......... 471,861 2,430,463 (1,535,175) (1,331,801) 1,219,978
(Decrease) increase
in other long-term
liabilities......... -- -- 7,900 5,932 (2,273)
----------- ------------ ------------ ------------ ------------
Net cash used in
operating
activities......... (2,348,569) (13,838,468) (20,508,163) (12,708,286) (23,915,107)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (435,170) (2,200,343) (1,708,432) (1,244,555) (2,420,738)
Purchase of
intellectual
property............. (2,400,000) -- -- -- --
Proceeds from fees
under nonexclusive
licensing agreement.. 600,000 -- -- -- --
Proceeds from the sale
of fixed assets...... 1,424,835 -- -- -- --
----------- ------------ ------------ ------------ ------------
Net cash used in
investing
activities......... (810,335) (2,200,343) (1,708,432) (1,244,555) (2,420,738)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal payments on
debt................. (617,711) (43,997) (5,000,000) (5,000,000) (284,920)
Principal payments on
capital lease
obligations.......... -- -- (50,631) (14,508) (180,876)
Proceeds from long-
term borrowings...... -- 5,000,000 1,806,871 -- 2,000,000
Proceeds under bridge
financing
agreements........... -- 9,392,030 11,607,970 10,757,028 --
Issuance of Series A
Preferred Stock...... 11,640,000 1,000,000 -- -- 4,146,118
Issuance of Series B
Preferred Stock...... 560,000 -- -- -- --
Issuance of Series C
Preferred Stock,
net.................. -- -- 6,890,343 6,890,343 175,002
Issuance of Series D
Preferred Stock,
net.................. -- -- 44,455,794 -- 5,000,000
Issuance of common
stock................ 518 350 12,054 11,962 469,618
----------- ------------ ------------ ------------ ------------
Net cash provided by
financing
activities......... 11,582,807 15,348,383 59,722,401 12,644,825 11,324,942
----------- ------------ ------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 8,423,903 (690,428) 37,505,806 (1,308,016) (15,010,903)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. -- 8,423,903 7,733,475 7,733,475 45,239,281
----------- ------------ ------------ ------------ ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 8,423,903 $ 7,733,475 $ 45,239,281 $ 6,425,459 $ 30,228,378
=========== ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION--
Cash paid for
interest............. $ 19,800 $ 23,913 $ 26,296 $ 11,318 $ 105,940
=========== ============ ============ ============ ============
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Series C
and D Preferred Stock
in exchange for
senior convertible
notes................ -- -- $ 21,498,389 $ 16,289,868 --
Acquisition of
property and
equipment under a
capital lease........ -- -- $ 164,159 $ 12,900 $ 1,667,228
</TABLE>
See notes to financial statements.
F-7
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 8, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND FOR
THE YEARS ENDED DECEMBER 31, 1998 AND 1999
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Tellium, Inc. (the "Company" or "Tellium"), a Delaware corporation, was
incorporated on May 8, 1997 (inception date). Tellium designs, develops and
markets high-speed, high-capacity, intelligent optical switching solutions that
enable network service providers to quickly and cost-effectively deliver new
high-speed services.
Tellium has invested a significant amount of its effort and cash in
research and development activities. At December 31, 1999, the Company has
cumulative losses of approximately $46 million. For the year ended December 31,
1999, the Company incurred a negative cash flow from operations of
approximately $21 million. Operating losses are expected to continue in 2000.
The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology, development
of markets and distribution channels, dependence on key personnel, and the
ability to obtain additional capital as needed to meet its product plans. The
Company's ultimate success is dependent upon its ability to successfully
develop and market its products and to raise additional capital. To date, the
Company has been funded principally by private equity financing. Management
believes that it has several alternatives available to obtain required capital,
including private placement financing, debt financing, and/or an initial public
offering ("IPO").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information--The financial statements as of
June 30, 2000 and for the six months ended June 30, 1999 and 2000 are unaudited
but, in the opinion of management, include all normal recurring adjustments
necessary for a fair presentation of financial position, results of operations,
and cash flows. The results of operations for the six months ended June 30,
2000 are not necessarily indicative of results to be expected for the full
calendar year 2000 or any other future period.
Based on operating losses incurred through June 30, 2000 and projected for
the year ended December 31, 2000, the Company did not record an income tax
provision for the six-month period ended June 30, 2000. All deferred tax assets
are offset by a valuation allowance.
Unaudited Pro Forma Stockholders' Equity (Deficiency)--If the offering
contemplated by this prospectus is consummated, all of the Series A, Series B,
Series C, and Series D Preferred Stock outstanding as of the consummation date
of the offering will automatically be converted into common stock. Each share
of preferred stock outstanding converts into three shares of common stock.
Based on Series A, Series B, Series C, and Series D Preferred Stock outstanding
at June 30, 2000, an aggregate of 56,694,924 shares of common stock will be
issued upon conversion. Unaudited pro forma stockholders' equity (deficiency)
at June 30, 2000, assuming the conversion of Series A, Series B, Series C, and
Series D Preferred Stock into common stock, is disclosed on the balance sheet.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents--The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. The majority of the
F-8
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company's cash equivalents are invested in overnight repurchase agreements,
which are secured by the U.S. Government.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) method.
Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets. Maintenance and repair costs
are charged to expense as incurred and renewals and improvements that extend
the useful life of the assets are capitalized. Upon sale or retirement, the
cost and related accumulated depreciation and amortization are eliminated from
the respective accounts and a resulting gain or loss is reported as income or
expense. Leasehold improvements are amortized over the shorter of the estimated
useful life of the property or the term of the lease.
The estimated useful lives for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Equipment......................................................... 3-5 years
Furniture and fixtures............................................ 3-5 years
Acquired software................................................. 3 years
Leasehold improvements............................................ 3-7 years
</TABLE>
Revenue Recognition--The Company recognizes revenue from equipment sales
when the product has been shipped. For transactions where the Company has yet
to obtain customer acceptance, revenue is deferred until terms of acceptance
are satisfied. Sales contracts do not permit the right of return of product by
the customer.
Software license revenue for software embedded within the Company's optical
switches or its stand alone software products is recognized when a purchase
order has been received or a sales contract has been executed, delivery of the
product and acceptance by the customer have occurred, the license fees are
fixed and determinable, and collection is probable. The portion of revenue that
relates to the Company's obligations to provide customer support, if any, are
deferred, based upon the price charged for customer support when it is sold
separately, and recognized ratably over the maintenance period. Amounts
received in excess of revenue recognized are included as deferred revenue in
the accompanying balance sheet. Revenue from technical support and maintenance
contracts is deferred and recognized ratably over the maintenance period.
Revenue and estimated profits on long-term contracts are recognized under
the percentage of completion method of accounting. Profit estimates are revised
periodically based on changes in facts. Any losses on contracts are recognized
immediately. The Company does not have any long-term contracts in process at
December 31, 1999 and June 30, 2000.
The Company has granted warrants to a customer in connection with a supply
contract. The fair value of the warrants earned under the agreement are
recorded as an offset to revenue in the accompanying statement of operations.
Product Warranty--The Company provides for estimated costs to fulfill
customer warranty obligations upon the recognition of related equipment
revenue. Actual warranty costs incurred are charged against the accrual when
paid.
Income Taxes--The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences attributable to differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and their respective tax bases, and for operating loss and
F-9
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
tax credit carryforwards. A valuation allowance is recorded if it is "more
likely than not" that a portion or all of a deferred tax asset will not be
realized.
Fair Value of Financial Instruments--In the opinion of management, the
estimated fair value of the Company's financial instruments, which include cash
equivalents, accounts receivable, and accounts payable, approximates their
carrying value.
Research and Development Costs--Research and development costs are charged
to expense as incurred.
Concentration of Credit Risk--Financial instruments which potentially
subject the Company to credit risk consist principally of accounts receivable.
For 1998, one customer accounted for all revenues. For 1999, two customers
accounted for 63% and 27% of revenues, respectively. Accounts receivables from
one customer represented 93% of the outstanding balance at December 31, 1999.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. The Company
maintains reserves for potential credit losses based upon the credit risk of
specified customers. The Company's entire cash and cash equivalents balance at
December 31, 1999 were on deposit with one financial institution. One customer
accounted for all of the Company's accounts receivable at June 30, 2000 and
approximately 99% of the Company's revenue for the six months ended June 30,
2000.
Equity-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. Under APB Opinion No. 25, compensation expense is based on the
difference, if any, generally on the date of grant, between the fair value of
the Company's stock and the exercise price of the option. The Company accounts
for equity instruments issued to nonemployees in accordance with the provisions
of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18,
Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. All transactions
in which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the fair value
of the equity instrument issued is the date on which the counterparty's
performance is complete.
Software Development Costs--SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs incurred subsequent to the
date technological feasibility is established and prior to the date the product
is generally available for sale. The capitalized cost is then amortized over
the estimated product life. The Company defines technological feasibility as
being attained at the time a working model is completed. To date, the period
between achieving technological feasibility and the general availability of
such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Net Loss Per Share--Basic net loss per share is computed by dividing the
net loss 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
F-10
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
equivalent shares are composed of the incremental common shares issuable upon
the conversion of preferred stock and the exercise of stock options and
warrants, using the treasury stock method. As the effect of common equivalent
shares is anti-dilutive, basic and net loss per share are the same. For the
period from May 8, 1997 through December 31, 1997, for the years ended December
31, 1998 and 1999, and for the six month period ended June 30, 2000,
potentially dilutive shares of 27,030,000, 33,660,426, 73,903,226 and
77,879,979, respectively, were excluded from the diluted weighted average
shares outstanding calculation.
Unaudited pro forma basic and diluted loss per common share are computed as
described above, and also gives effect to the conversion of Series A, Series B,
Series C, and Series D Preferred Stock. Each share of Preferred Stock
outstanding automatically converts to three shares of common stock upon
completion of an initial public offering.
Segments--The Company has adopted SFAS No.131, Disclosure about Segments of
an Enterprise and Related Information, which requires companies to report
selected information about operating segments, as well as enterprise-wide
disclosures about products, services, geographic areas, and major customers.
Operating segments are determined based on the way management organizes its
business for making operating decisions and assessing performance. The Company
has determined that it conducts its operations in one business segment, the
telecommunications network segment. All of the Company's revenues are derived
from customers based in the United States.
Recent Financial Accounting Pronouncements--In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of these
instruments at fair value. The statement, as amended, is effective for fiscal
years beginning after June 15, 2000. The Company is required to adopt this
standard, as amended, effective January 1, 2001. Management believes that
adopting this statement will not have a material impact on the financial
position, results of operations, or cash flows of the Company.
Long-Lived Assets--Whenever events indicate that the carrying values of
long-lived assets may not be recoverable, the Company evaluates the carrying
value of such assets using future undiscounted cash flows. If the sum of the
expected undiscounted future cash flows is less than the carrying amount of the
asset, the Company will recognize an impairment loss equal to the difference
between the fair value and the carrying value of such asset. Management
believes that as of December 31, 1999 the carrying values of long-lived assets
are appropriate.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30,
1999 2000
---------- -----------
(Unaudited)
<S> <C> <C>
Raw materials......................................... $ 567,850 $3,789,943
Work-in-process....................................... 289,199 1,576,023
Finished goods........................................ 1,044,193 837,299
---------- ----------
$1,901,242 $6,203,265
========== ==========
</TABLE>
F-11
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1998 1999 2000
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Equipment................................ $2,163,239 $3,440,860 $6,115,526
Furniture and fixtures................... 243,055 324,020 438,515
Acquired software........................ 628,041 1,112,883 2,311,380
Leasehold improvements................... 165,633 183,936 284,245
---------- ---------- ----------
3,199,968 5,061,699 9,149,666
Less accumulated depreciation and
amortization............................ 524,982 1,612,556 2,425,911
---------- ---------- ----------
Property, plant and equipment--Net....... $2,674,986 $3,449,143 $6,723,755
========== ========== ==========
</TABLE>
Equipment includes approximately $118,000 and $283,065 of assets acquired
through capital leases as of December 31, 1998 and 1999, respectively.
Accumulated amortization related to these assets was $46,923 and $56,255 at
December 31, 1998 and 1999, respectively.
Depreciation and amortization expenses for 1997, 1998 and 1999 related to
property and equipment totaled $124,392, $458,102, and $1,090,922,
respectively.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1998 1999 2000
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Accrued professional fees................ $ 535,584 $ 527,237 $ 550,676
Accrued compensation and related
expenses................................ 405,129 432,657 1,029,292
Accrued purchases........................ 950,135 -- --
Deferred revenue......................... 450,000 73,500 239,998
Warranty reserve......................... -- 100,000 394,911
Other.................................... 495,026 167,328 305,823
---------- ---------- ----------
$2,835,874 $1,300,722 $2,520,700
========== ========== ==========
</TABLE>
6. STOCKHOLDERS' EQUITY
Common Stock--On May 8, 1997, the founders of the Company purchased
1,554,000 shares of common stock under a Management Investor Subscription
Agreement. Under this agreement, these shares are subject to a vesting schedule
over a three-year or four-year period and the Company has the right to
repurchase any non-vested shares at the price paid by the founder when a
founder leaves the Company. During 1998, an additional 1,050,000 shares of
common stock were purchased under this agreement. During 1999, employees
exercised 123,675 stock options increasing the total amount of outstanding
shares of common stock to 2,727,675.
Preferred Stock--The Company is authorized to issue 10,433,334 shares of
$.001 par value Series A Preferred Stock, 250,000 shares of $.001 par value
Series B Preferred Stock, 4,403,934 shares of $.001 par value Series C
Preferred Stock, and 6,025,000 shares of $.001 par value Series D Preferred
Stock.
F-12
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On May 8, 1997, the initial investors in the Company entered into a stock
purchase and contribution agreement (the "Agreement"). In accordance with the
Agreement, cash investors were issued 4,850,000 shares of Series A Preferred
Stock at $2.40 per share and 233,333 shares of Series B Preferred Stock at
$2.40 per share. Non-cash investors were issued 3,916,667 shares of Series A
Preferred Stock and contributed intellectual property and equipment which were
valued at the contributor's historical cost of $1,700,393.
On May 20, 1998, a cash investor was issued 416,667 shares of Series A
Preferred Stock at $2.40 per share for a total investment of $1 million.
On February 11, 1999, the Company issued 765,027 shares of Series C
Preferred Stock at $9.15 per share. Simultaneously, a Senior Convertible Note
plus accrued interest of $16,289,847 was converted into 1,780,312 shares of
Series C Preferred Stock at $9.15 per share (see Note 7). The total number of
shares issued was 2,545,339 and the total dollar value of the transactions,
net of issuance costs of $109,660, was $23,180,184.
On November 30, 1999, the Company issued 4,895,239 shares of Series D
Preferred Stock at $9.15 per share. Simultaneously, a Senior Promissory Note
plus accrued interest of $5,208,542 was converted into 569,240 shares of
Series D Preferred Stock at $9.15 per share. The total number of shares issued
was 5,464,479 and the total dollar value of the transaction, net of issuance
costs of $335,638, was $49,664,342.
Significant terms of Series A, Series B, Series C and Series D Preferred
Stock are as follows:
. Each share of Series A, Series C, and Series D Preferred Stock is
convertible at the option of the holder, at any time, into three shares
of common stock (see note 12) at the conversion price of $2.40 per share
for Series A and $9.15 per share for Series C and Series D. The
conversion price is subject to adjustments for events of dilution as
specified in the certificate of incorporation. Each share of Series B
Preferred Stock is convertible at the option of the holder, at any time,
into one share of Series A Preferred Stock.
All shares of Series A, Series C, and Series D Preferred Stock
automatically convert, without any action by the holder, into common
stock based on the then applicable Series A, Series C, and Series D
Conversion Price in the event of either a qualified IPO (as defined) or
upon the conversion of specified percentages of the related Preferred
Stock. All shares of Series B Preferred Stock automatically convert,
without any action by the holder, into Common Stock based on the then
applicable conversion price for the Series A Preferred Stock in the event
of the automatic conversion of Series A, Series C, and Series D Preferred
Stock.
. The holders of Series A, Series C, and Series D Preferred Stock have
voting rights equal to the equivalent number of shares of common stock
while Series B Preferred Stock has no voting rights.
. Dividends may be declared at the discretion of the Board of Directors
and are noncumulative. Dividends for Preferred Stock have to be paid and
declared equivalent to the per-share dividend on Common Stock.
. In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series A, Series B, Series C,
and Series D Preferred Stock are entitled to receive out of the assets
of the Company, whether such assets derive from capital or surplus, an
amount equal to $2.40 per share in the case of Series A and Series B
F-13
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Preferred Stock and $9.15 per share in the case of Series C and Series D
Preferred Stock (subject to adjustment for any stock splits, reverse
splits or similar capitalization affecting such shares), plus any
declared but unpaid dividends on such shares. Payment of the liquidation
preference to holders of Series A, Series B, Series C, and Series D
Preferred Stock will be made pro rata among the Series A, Series B,
Series C, and Series D Preferred Stock based on the respective
liquidation preference of each such class until each such class receives
its full liquidation, before any payment is made or any assets
distributed to the holders of common stock or any other shares ranking on
liquidation junior to the Series A, Series B, Series C, and Series D
Preferred Stock.
After payment of the liquidation preference to holders of Series A,
Series B, Series C, and Series D Preferred Stock, the holders of Series
A, Series B, Series C, and Series D Preferred Stock are entitled to share
in the distribution of any remaining assets of the Corporation on the
same basis as if the holders of Series A, Series B, Series C, and Series
D Preferred Stock had converted their shares into common stock.
1997 Employee Stock Option Plan--On May 8, 1997, the Company adopted the
1997 Employee Stock Option Plan (the "Option Plan"). The Option Plan authorized
the granting of both incentive and nonqualified stock options for an aggregate
of 3,000,000 shares of common stock, subject to authorization by the
Compensation Committee of the Board of Directors (the "Compensation
Committee"). Options generally vest over a four-year period from the grant
date. The Board approved adding 396,000 shares to the 1997 Employee Stock
Option Plan on July 15, 1998.
During the year ended December 31, 1999, the number of shares authorized
under the Stock Plan was amended by the Compensation Committee to allow a total
of 17,925,000 options to be granted under the plan.
F-14
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock option activity regarding the Option Plan is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
----------- --------
<S> <C> <C>
Options granted..................................... 30,000 $0.08
Options exercised................................... -- --
Options cancelled................................... -- --
----------- -----
Outstanding as of December 31, 1997................... 30,000 0.08
----------- -----
Options granted..................................... 2,748,000 0.14
Options exercised................................... -- --
Options cancelled................................... (367,575) 0.08
----------- -----
Outstanding as of December 31, 1998................... 2,410,425 0.14
----------- -----
Options granted..................................... 12,071,508 1.56
Options exercised................................... (123,675) 0.10
Options cancelled................................... (1,072,974) 0.16
----------- -----
Outstanding as of December 31, 1999................... 13,285,284 $1.43
----------- -----
Options granted..................................... 24,795,600 2.14
Options exercised................................... (20,237,673) 1.90
Options cancelled................................... (1,996,683) 1.81
----------- -----
Outstanding as of June 30, 2000....................... 15,846,528 1.89
----------- -----
Exerciseable as of December 31, 1999.................. 1,436,964
Available for future grants as of December 31, 1999... 4,516,041
Exercisable as of June 30, 2000....................... 628,938
Available for future grants as of June 30, 2000....... 2,759,160
</TABLE>
At December 31, 1999, stock options outstanding were as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Contractual Average
Exercise Options Life Exercisable Exercise
Prices Outstanding (Years) Options Price
-------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
$0.08 1,265,751 8.23 425,751 $0.08
0.17 3,232,410 9.39 819,963 0.17
0.33 144,000 9.08 15,750 0.33
0.80 175,125 8.75 25,500 0.80
2.14 8,467,998 9.91 150,000 2.14
---------- ---- --------- -----
13,285,284 9.60 1,436,964 0.36
========== ==== ========= =====
</TABLE>
In connection with the grant of certain stock options to employees in 1998
and 1999, the Company recorded deferred stock compensation of $2,130,000 and
$6,233,915 in 1998 and 1999, respectively, for the difference between the
exercise price and the fair value of the underlying common stock at the date of
the grant. Such amount is presented as a reduction of stockholders' equity and
is amortized over the vesting period of the related stock options. Non-cash
compensation expense of $950,000 and $2,671,531 were recorded in the statement
of operations for the years ended December 31, 1998 and 1999, respectively.
F-15
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Had the Company elected to recognize compensation expense for stock options
according to SFAS 123, based on the fair value at the grant dates of the
awards, net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported..................... $(5,264,999) $(20,510,474) $(19,799,294)
Pro forma....................... (5,266,600) (20,850,000) (21,976,600)
Net loss per basic and diluted
share:
As reported..................... $ (3.39) $ (9.66) $ (7.42)
Pro forma....................... (3.39) (9.82) (8.24)
</TABLE>
The weighted average fair value of the Company's stock options was
calculated using the Black-Scholes Model with the following weighted average
assumptions used for grants: no dividend yield; expected volatility of 0%
(minimum value); a risk free interest rate of 6.25%; and expected lives of 4
years. The weighted average fair value of options granted during the years
ended December 31, 1997, 1998 and 1999 was $0.05, $1.74 and $2.76 per share,
respectively.
Warrants--Set forth below is a summary of the Company's outstanding
warrants at December 31, 1999:
<TABLE>
<CAPTION>
Exercise
Underlying Security Price Warrants Expiration Date
------------------- -------- --------- ------------------
<S> <C> <C> <C>
Common Stock (1)....................... $3.05 5,226,000 September 21, 2005
Preferred Stock C (2).................. 9.15 29,509 November 10, 2009
Preferred Stock A (3).................. 4.57 1,000,000 June 30, 2000
</TABLE>
--------
(1) In conjunction with executing a supply contract with a customer in
September 1999, the Company granted a warrant to purchase up to 5,226,000
shares of the Company's common stock at an exercise price of $3.05 per
share. Upon execution of the agreement, 1,045,200 of the shares subject to
the warrant vested, with the vesting of the remaining shares dependent upon
the volume of the customer's purchases from the Company. As the 1,045,200
warrants vested upon execution of the supply agreement and are not subject
to forfeiture, a measurement date has occurred for those warrants, and a
charge of $1,048,707 was recorded to sales and marketing expense for the
year ended December 31, 1999 to reflect the fair value of the warrants at
grant date. As the vesting of the remaining warrants are dependent upon
purchases made by the customer, variable plan accounting is used and
related charges will vary each accounting period until the final
measurement date. A measurement date occurs when customer purchases reach
certain specified levels. Charges of $558,961 have been recorded as an
offset to gross revenue for the year ended December 31, 1999 to reflect the
fair value of the warrants earned by the customer based upon purchases
through that date.
(2) Issued in connection with Tellium's November 1999 financing agreement (see
Note 7).
(3) Issued in connection with Tellium's December 1998 convertible note issuance
(see Note 7).
F-16
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. NOTES PAYABLE
a. Senior Convertible Notes--Stockholders
On December 30, 1998, the Company entered into a $16 million bridge
financing with the then preferred stockholders. At December 31, 1998,
$9,392,030 of proceeds were received, with the remaining financing received in
January 1999. The bridge financing agreement took the form of Senior
Convertible Notes with an interest rate of 18% per annum and was scheduled to
mature upon the earlier of the closing of a next round of financing, June 30,
1999, or a sale transaction (as defined in the agreement). As part of this
transaction, the providers of the bridge financing received warrants to
purchase 1 million shares of Series A Preferred Stock at an exercise price
equal to 50% of the price paid for preferred stock in the succeeding round of
financing, or $2.40 per share if a preferred stock financing transaction did
not take place by June 30, 1999. The warrants are exercisable at any time at
the option of the holder and expire on June 30, 2000 or in the event of a
qualified IPO.
In conjunction with the issuance of Series C Preferred Stock on February
11, 1999 (see Note 6), the $16 million bridge financing and related accrued
interest were converted into Series C Preferred Stock at $9.15 per share.
As part of the bridge financing agreement, the Company approved the
authorization of 7 million shares of Series C Preferred Stock and an additional
authorization of 1.5 million shares of Series A Preferred Stock, both with a
par value of $0.001.
On June 30, 1999, the Company entered into a $5 million bridge financing
agreement with current preferred stockholders. The bridge financing agreement
was secured via a Senior Promissory Note with an interest rate of 9.75% per
annum and was scheduled to mature upon the earlier of December 26, 1999 or the
closing of a sale transaction (as defined in the agreement). In conjunction
with the issuance of Series D Preferred Stock on November 30, 1999 (see Note
6), the $5 million Senior Promissory Note and accrued interest were converted
into Series D Preferred Stock at $9.15 per share.
b. Debt--Nokia, Inc.
During 1998, the Company borrowed $5,000,000 from Nokia, Inc. under a
series of note agreements. These borrowings were paid off in January 1999.
c. Secured Promissory Notes--Comdisco, Inc.
On November 23, 1999, the Company issued two secured promissory notes to
Comdisco. The notes are collateralized by substantially all of the Company's
equipment and bear interest of 7.5% per annum. The principal amounts of
$1,401,536 and $405,335 are payable in monthly installments through December 1,
2002 and June 1, 2002, respectively, commencing January 1, 2000.
Future annual maturities at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 583,798
2001.............................................................. 632,347
2002.............................................................. 590,726
----------
$1,806,871
==========
</TABLE>
F-17
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
d. Lines of Credit
On November 11, 1999, Tellium obtained a $4,000,000 lease-line of credit
from Comdisco, Inc. ("Comdisco"). The line of credit bears an interest rate of
7.5% and expires on November 10, 2002. At December 31, 1999 the Company had not
drawn any amount under this agreement.
In consideration of such line of credit, Tellium issued warrants to
Comdisco to purchase 29,509 shares of Series C preferred stock at an exercise
price of $9.15 per share. The warrants vested immediately upon execution of the
agreement. Vested warrants are exercisable at any time at the option of the
holder and expire on November 10, 2009; or after five years from the effective
date of the Company's qualified IPO (as defined), whichever is earlier. The
Company recorded deferred financing expense of $150,196 based on the fair value
of the warrants. Such cost are included in other assets in the accompanying
balance sheet and are amortized over the life of the line of credit.
Amortization expense was $4,172 for the year ended December 31, 1999.
8. EMPLOYEE BENEFIT PLAN
In July 1997, the Company adopted a 401(k) defined contribution plan
covering all qualified employees. The Company matches 50% of the participating
employees' contribution up to 5% of participants' contributions, capped at a
maximum 2.5% of the employee's annual salary. Company matching contributions
for 1997, 1998 and 1999 amounted to $19,879, $276,088 and $130,355,
respectively.
9. INCOME TAXES
A reconciliation of the Company's income tax provision computed at the U.S.
federal statutory rates to the recorded income tax provision for the period
from inception to December 31, 1997 and for the years ended December 31, 1998
and 1999, and is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Tax at U.S. statutory rate.......... $(1,790,000) $(6,973,000) $(6,732,000)
State income taxes, net of federal
benefit............................ (315,000) (1,218,000) (1,210,000)
Research and development credits and
other.............................. -- (863,000) (1,424,000)
Valuation allowance recorded........ 2,105,000 9,054,000 9,366,000
----------- ----------- -----------
Recorded tax provision.............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-18
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the Company's deferred tax asset at December 31, 1998 and
1999, is as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liability:
Deferred rent.................................. $ -- $ (11,000)
Deferred revenue............................... -- (31,600)
Warranty reserve............................... -- (43,000)
Fixed assets................................... (82,000) --
Deferred tax assets:
Net operating loss carryforwards............... 8,953,000 16,400,000
Intangible assets.............................. 874,000 900,000
Compensation expenses.......................... 380,000 1,550,000
Fixed assets................................... -- 150,000
Research and development credits............... 900,000 1,400,000
Accrued expenses............................... 134,000 --
Allowance for bad debt......................... -- 25,800
Inventory reserve.............................. -- 78,800
Inventory capitalization....................... -- 125,000
----------- -----------
Total net deferred tax assets................... 11,159,000 20,544,000
Less valuation allowance........................ (11,159,000) (20,544,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
At December 31, 1999, the Company has available U.S. net operating loss
carryforwards of approximately $38 million, approximately $16 million of which
will expire in 2019, $19 million of which will expire in 2018 and $2.7 million
which will expire in 2012. In addition, the Company also has available research
and development tax credit carryforwards of approximately $1.4 million, of
which $500,000 will expire in 2019 and $900,000 will expire in 2018.
10. RELATED PARTY TRANSACTIONS
On May 8, 1997, the Company purchased intellectual property from one of its
stockholders for $2.4 million in cash and a secured promissory note for
$600,000. The note bore interest at the bank's prime rate and was secured by
certain fabrication equipment.
On May 8, 1997, the Company entered into a nine-month lease agreement with
one of its stockholders to rent certain office space within the stockholder's
location at a base rent of $68,872 per month, plus sales, use and occupancy
tax. The lease could be terminated with 30 days written notice, and was
terminated on July 31, 1997. The total rental expense and other miscellaneous
costs for this lease were approximately $153,000.
On May 8, 1997, the Company entered into an agreement with one of its
stockholders to hire one of their employees at a fee of $16,666 per month plus
expenses. The total expense under this contract from inception to December 31,
1997 totaled approximately $150,000.
The Company paid a stockholder $75,000 for reimbursement of legal expenses
during the period ended December 31, 1997. The Company also purchased
approximately $100,000 of furniture from two stockholders for the period ended
December 31, 1997.
F-19
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company paid approximately $100,000, $525,000 and $118,059 in
consulting expenses to one of its stockholders during 1997, 1998 and 1999,
respectively.
The Company entered into a three-year employment agreement with a former
employee of one of its stockholders. As part of this agreement, the Company
agreed to pay 80% of the employee's COBRA until a health plan was in place. The
stockholder agreed to pay annually $30,400 of additional compensation for the
employee commencing on July 28, 1997 and ending on July 28, 1999.
Approximately $1.4 million of the Company's revenue in 1999 and all of the
Company's revenue in 1998 were derived from sales to an affiliate of one of
Tellium's stockholders. In addition, Tellium purchased approximately $134,000
and $360,000 of product from this Company in 1998 and 1999, respectively.
Tellium has entered into a series of agreements with some of its
stockholders for joint development of technology, consulting agreements, master
collaborative agreements, technology transfer agreements and certain specific
project agreements under various terms for periods up to five years. Some of
these agreements provide for discounts for products sold to Tellium and for
royalties to be paid to Tellium, with amounts and terms to be determined. No
significant transactions have occurred under these agreements through December
31, 1999.
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain telephone, computer and other equipment under
long-term capital leases and has the option to purchase such equipment at a
nominal cost at the termination of the leases. In addition, the Company is
obligated under an operating lease for a facility. The Company terminated an
operating lease for office space that was to expire in 2002 and, on February 6,
1998, the Company signed a new, noncancelable lease for a facility in
Oceanport, New Jersey that expires in 2003.
Future minimum lease payments for the capital and operating leases with
initial or remaining terms in excess of one year as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
2000.................................................... $132,746 $ 348,866
2001.................................................... 95,321 348,866
2002.................................................... 51,016 348,866
2003.................................................... 10,082 87,217
2004.................................................... 380 --
Thereafter.............................................. -- --
-------- ----------
Total future minimum lease payments..................... $289,545 $1,133,815
======== ==========
Amount representing interest............................ $ 56,832
========
Present value of minimum lease payments................. $232,713
========
Current portion of capital lease obligation............. $116,603
========
Noncurrent portion of capital lease obligation.......... $116,110
========
</TABLE>
Rent expense for the period from inception through December 31, 1997 and
for the years ended December 31, 1998 and 1999 were $236,007, $294,641 and
$340,989, respectively.
F-20
<PAGE>
TELLIUM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. OTHER EQUITY TRANSACTIONS
In January 2000, the Company issued 546,447 shares of Series D Preferred
Stock at $9.15 per share. The proceeds to the Company were $5,000,000. The
Series D Preferred Stock has identical terms to the Series D Preferred Stock
that was issued during 1999.
On June 22, 2000 the Company's board of directors approved a 3 for 1 common
stock split for shareholders of record as of that date. The stock split became
effective August 11, 2000. Shares of outstanding Series A, Series B, Series C,
and Series D Preferred Stock, which were originally convertible into common
stock on a 1 for 1 basis, were amended to be convertible into common stock on a
3 for 1 basis. All share, and per share information included in these financial
statements have been restated to include the effects of the stock split for all
periods presented.
13. SUBSEQUENT EVENTS--UNAUDITED
During the six months ended June 30, 2000, the number of shares authorized
under the 1997 Employee Stock Option Plan was amended to allow a total of
32,925,000 options to be granted under the plan.
During the quarter ended June 30, 2000, certain employees exercised stock
options for 18,588,600 shares of common stock. The consideration given by
employees were full recourse notes with a 7.5% interest rate. Upon exercise,
the employees received 18,588,600 shares of restricted common stock with
substantially the same terms and vesting period as the exercised options.
During the quarter ended June 30, 2000, the company entered into a
$10,000,000 line of credit facility with Commerce Bank. The line of credit
bears interest at 6.75% and expires on June 30, 2001. The company borrowed
$2,000,000 under this line in the quarter ended June 30, 2000.
On August 29, 2000, the Company entered into an agreement to acquire all of
the outstanding common stock of Astarte Fiber Networks in exchange for
3,750,000 shares of Tellium common stock for an estimated purchase price of
$112.5 million. The acquisition of Astarte will be recorded using the purchase
method.
On September 1, 2000, the Company entered into an agreement with AT&T Corp.
to license certain intellectual property in exchange for 1,500,000 shares of
Tellium common stock with an estimated fair value of $45 million.
During September 2000, the Company sold 7,274,413 shares of Series E
Preferred Stock in a private placement offering, raising proceeds of
approximately $213.0 million. The Series E Preferred Stock will automatically
convert into common stock upon completion of an initial public offering, at the
initial public offering price.
During September 2000, in conjunction with executing a customer supply
agreement, the Company granted a warrant for 2,000,000 shares of common stock
exercisable at $30.00 per share and sold 333,333 shares of common stock to
officers and affiliates of the customer. The fair value of the 2,000,000
warrants will be recorded as an offset to revenue as the customer makes
purchases under the agreement.
The Company has granted approximately 2,655,500 stock options to employees
subsequent to June 30, 2000. The Company will record deferred stock
compensation expense of approximately $73 million for the difference between
the exercise price and the fair value of the underlying common stock at the
date of the grant. This amount will be amortized over the vesting period of the
related stock options.
* * * * * *
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Astarte Fiber Networks, Inc.:
We have audited the accompanying balance sheets of Astarte Fiber Networks,
Inc. (a Colorado corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Astarte Fiber Networks,
Inc. as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and operating cash flow deficits that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1; however, there can be no guarantee that these
plans will be successful. As discussed in Note 1, on August 29, 2000, the
Company signed a definitive agreement which, if consummated, would result in
the acquisition of the Company. Such consummation is expected to occur in
September 2000, but there can be no guarantee thereof. The financial statements
do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
/s/ Arthur Andersen
Denver, Colorado,
September 14, 2000.
F-22
<PAGE>
Page 1 of 2
ASTARTE FIBER NETWORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
ASSETS 1999 1998 2000
------ ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $ 601,600 $1,696,868 $ 300,206
Trade accounts receivable, net of
allowance of $20,369, $20,369 and
$20,369, respectively................... 130,206 474,733 30,909
Inventories.............................. 663,773 1,377,948 442,099
---------- ---------- ----------
Total current assets................... 1,395,579 3,549,549 773,214
---------- ---------- ----------
PROPERTY, FIXTURES AND EQUIPMENT:
Computers and computer software.......... 411,996 381,195 413,067
Furniture, fixtures and equipment........ 401,482 392,858 403,272
Leasehold improvements................... 74,457 54,772 74,457
---------- ---------- ----------
887,935 828,825 890,796
Less--Accumulated depreciation........... (680,266) (534,178) (721,987)
---------- ---------- ----------
Property, fixtures and equipment, net.. 207,669 294,647 168,809
DEPOSITS AND OTHER ASSETS.................. 53,625 49,845 58,068
---------- ---------- ----------
Total assets........................... $1,656,873 $3,894,041 $1,000,091
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-23
<PAGE>
Page 2 of 2
ASTARTE FIBER NETWORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
Liabilities and Stockholders Deficit 1999 1998 2000
------------------------------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable....................... $ 149,705 $ 82,789 $ 181,198
Accrued liabilities.................... 238,551 551,522 327,392
Accrued interest on notes payable to
stockholders and other related
parties............................... 86,657 32,601 186,259
Line of credit......................... -- -- 300,000
Notes payable to stockholders and other
related parties, net of unamortized
discount of $93,415, $0 and $93,168,
respectively.......................... 633,192 241,134 1,133,438
Current portion of capital lease
obligations........................... 22,280 19,188 22,280
------------ ------------ ------------
Total current liabilities............ 1,130,385 927,234 2,150,567
CAPITAL LEASE OBLIGATIONS, net of current
portion................................. 46,995 69,301 36,165
------------ ------------ ------------
Total liabilities.................... 1,177,380 996,535 2,186,732
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE SERIES A
CONVERTIBLE PREFERRED STOCK, par value
$.0001, 60,000,000 shares authorized,
35,436,075 shares issued and
outstanding; liquidation value of
$14,026,641............................. 16,607,584 15,203,348 17,306,995
WARRANTS to purchase 2,009,592, 0 and
4,009,592 shares of series A convertible
preferred stock......................... 79,060 -- 157,743
MANDATORILY REDEEMABLE SERIES B
CONVERTIBLE PREFERRED STOCK, par value
$.0001, 40,000,000 shares authorized,
23,594,398 shares issued and
outstanding; liquidation value of
$7,695,763.............................. 9,615,798 8,846,223 9,999,532
STOCKHOLDERS' DEFICIT (Note 5):
Common stock, par value $.0001,
50,000,000 shares authorized,
27,646,879, 26,642,435 and 28,259,499
shares issued and outstanding,
respectively........................... 2,765 2,664 2,826
Additional paid-in capital.............. 22,760 12,816 429,059
Accumulated deficit..................... (25,848,474) (21,167,545) (29,082,796)
------------ ------------ ------------
Total stockholders' deficit.......... (25,822,949) (21,152,065) (28,650,911)
------------ ------------ ------------
Total liabilities and stockholders'
deficit............................. $ 1,656,873 $ 3,894,041 $ 1,000,091
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-24
<PAGE>
ASTARTE FIBER NETWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1999 1998 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
SALES, net................ $ 1,909,820 $ 2,697,721 $ 683,798 $ 369,982
COSTS AND EXPENSES:
Cost of goods sold...... 1,787,173 2,020,340 504,510 966,461
Research and
development............ 1,708,179 1,452,776 1,271,314 936,710
General and
administrative......... 742,393 1,155,794 823,545 406,856
Sales and marketing..... 127,275 397,755 51,032 75,649
----------- ----------- ----------- -----------
Total costs and
expenses............. 4,365,020 5,026,665 2,650,401 2,385,676
----------- ----------- ----------- -----------
Net operating loss.... (2,455,200) (2,328,944) (1,966,603) (2,015,694)
INTEREST (EXPENSE) INCOME:
Interest expense........ (66,779) (416,834) (184,724) (36,479)
Interest income......... 14,861 20,665 150 14,744
----------- ----------- ----------- -----------
Interest (expense)
income, net............ (51,918) (396,169) (184,574) (21,735)
----------- ----------- ----------- -----------
NET LOSS.................. (2,507,118) (2,725,113) (2,151,177) (2,037,429)
ACCRETION OF PREFERRED
STOCK.................... (2,173,811) (1,583,693) (1,083,145) (1,077,193)
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS...... $(4,680,929) $(4,308,806) $(3,234,322) $(3,114,622)
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-25
<PAGE>
ASTARTE FIBER NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31,
1997................... 24,748,795 $2,475 $ -- $(16,858,739) $(16,856,264)
Exercise of employee
stock options......... 1,294,461 129 12,816 -- 12,945
Issuance of common
stock................. 599,179 60 -- -- 60
Accretion of Series A
and Series B Preferred
Stock to redemption
value................. -- -- -- (1,583,693) (1,583,693)
Net loss............... -- -- -- (2,725,113) (2,725,113)
---------- ------ -------- ------------ ------------
BALANCES, December 31,
1998................... 26,642,435 2,664 12,816 (21,167,545) (21,152,065)
Exercise of employee
stock options......... 1,004,444 101 9,944 -- 10,045
Accretion of Series A
and Series B Preferred
Stock to redemption
value................. -- -- -- (2,173,811) (2,173,811)
Net loss............... -- -- -- (2,507,118) (2,507,118)
---------- ------ -------- ------------ ------------
BALANCES, December 31,
1999................... 27,646,879 2,765 22,760 (25,848,474) (25,822,949)
Exercise of employee
stock options
(unaudited)........... 612,620 61 6,299 -- 6,360
Stock-based
compensation
(unaudited)........... -- -- 400,000 -- 400,000
Accretion of Series A
and Series B Preferred
Stock to redemption
value (unaudited)..... -- -- -- (1,083,145) (1,083,145)
Net loss (unaudited)... -- -- -- (2,151,177) (2,151,177)
---------- ------ -------- ------------ ------------
BALANCES, June 30, 2000
(unaudited)............ 28,259,499 $2,826 $429,059 $(29,082,796) $(28,650,911)
========== ====== ======== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-26
<PAGE>
Page 1 of 2
ASTARTE FIBER NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1999 1998 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.................. $(2,507,118) $(2,725,113) $(2,151,177) $(2,037,429)
Adjustments to reconcile
net loss to net cash
used in operating
activities-
Depreciation and
amortization........... 146,088 131,473 41,721 56,757
Amortization of discount
on notes payable....... 10,765 30,181 103,930 --
Provision for excess and
obsolete inventories... 400,000 118,995 -- 400,000
Stock-based
compensation........... -- -- 400,000 --
Changes in operating
assets and liabilities-
Decrease (increase) in
trade accounts
receivable.............. 344,527 (334,280) 99,297 378,590
Decrease (increase) in
inventories............. 314,175 371,989 221,674 (157,873)
(Increase) decrease in
deposits and other
assets.................. (3,780) 84,593 (4,443) (3,687)
Increase (decrease) in
accounts payable........ 66,916 (533,920) 31,493 27,035
(Decrease) increase in
accrued liabilities..... (312,971) 90,327 88,841 (316,838)
Decrease in customer
deposits................ -- (47,589) -- --
Increase in accrued
interest on notes
payable to stockholders
and other related
parties................. 28,936 199,449 74,601 7,284
----------- ----------- ----------- -----------
Net cash used in
operating activities.. (1,512,462) (2,613,895) (1,094,063) (1,646,161)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property,
fixtures and equipment... (59,110) (110,968) (2,861) (59,110)
----------- ----------- ----------- -----------
Net cash used in
investing activities.. (59,110) (110,968) (2,861) (59,110)
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-27
<PAGE>
Page 2 of 2
ASTARTE FIBER NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December Six Months Ended June
31, 30,
---------------------- ----------------------
1999 1998 2000 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common stock................. $ 10,045 $ 13,005 $ 6,360 $ 10,045
Proceeds from issuance of
preferred stock.............. -- 4,000,000 -- --
Proceeds from notes payable to
stockholders and other
related parties.............. 502,398 581,040 800,000 --
Repayments to related
parties...................... -- -- (300,000) (16,926)
Principal and accrued interest
payments on notes payable to
stockholders and other
related parties.............. (16,925) (210,912) -- --
Borrowings under bank
financing facilities......... 689,735 -- 300,000 --
Repayments under bank
financing facilities......... (689,735) -- -- 76,115
Principal payments on capital
lease obligations............ (19,214) (12,368) (10,830) (9,200)
---------- ---------- ---------- ----------
Net cash provided by
financing activities...... 476,304 4,370,765 795,530 60,034
---------- ---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH
AND
CASH EQUIVALENTS.............. (1,095,268) 1,645,902 (301,394) (1,645,237)
CASH AND CASH EQUIVALENTS,
beginning of period........... 1,696,868 50,966 601,600 1,696,868
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of period................. $ 601,600 $1,696,868 $ 300,206 $ 51,631
========== ========== ========== ==========
SUPPLEMENTAL CASHFLOW
DISCLOSURES:
Cash interest payments........ $ 27,078 $ 29,597 $ 6,159 $ 28,282
Preferred stock issued through
conversion of debt and
accrued interest............. $ -- $6,969,310 $ -- $ --
Accretion of preferred stock.. $2,173,811 $1,583,693 $1,083,145 $1,077,193
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-28
<PAGE>
ASTARTE FIBER NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and June 30, 2000 is unaudited)
1. DESCRIPTION OF BUSINESS AND RISK FACTORS:
Description of Business
Astarte Fiber Networks, Inc. (the "Company"), was incorporated in October
1990 to design, manufacture and sell optical ("photonic") switches for use in
fiber optic networks. Current customers are users of fiber optic networks such
as companies in the telephone, cable television, aerospace and financial
services industries, as well as civilian and governmental data communication
computer centers. The Company completed the release of its initial generation
of switches and began generating revenues during 1995. The Company's current
activities are primarily focused on developing a next generation of switches,
which are expected to provide substantially expanded switching capacity. These
larger capacity, single mode switches are expected to be used primarily by the
telecommunications industry.
On August 29, 2000, the Company signed a definitive agreement which, if
consummated, would result in the acquisition of the Company by a
telecommunications equipment and service provider in an exchange of shares
intended to constitute a tax free reorganization under Internal Revenue Service
regulations. Such consummation is expected to occur in September 2000, but
there can be no guarantee thereof.
Continuing Operating Losses
Although the Company generates revenues from operations, it has sustained
operating losses since inception and will, in the future, continue to be
subject to various risks and uncertainties. Among others, these include:
. participation in a business environment that is characterized by rapid
technological change and intense competition;
. dependence on additional funding for the required investment in
engineering personnel, materials and other expenses related to
developing new products and technology;
. the Company's ability to attract and retain qualified engineering and
other personnel;
. concentration of the Company's customer base among a relatively few key
customers;
. dependence on sole source suppliers for key components; and
. the Company's ability and access to sufficient resources to successfully
market new products, once developed.
During 1997 and 1998, the Company held discussions with major
telecommunication equipment suppliers regarding investments and distribution
agreements that would enable the continued development and future marketing of
the Company's next generation of optical switches. These discussions led to a
$4.0 million investment in the Company in the second half of 1998. However, no
satisfactory agreement could be reached regarding further investments or
product sales commitments. Therefore, in order to conserve operating capital
and focus resources on new product development, the Company in early 1999
significantly reduced the manufacturing, sales and marketing staffs for its
current product line.
The Company has continued to sell its current product line and, until
December 1999, was able to maintain its reduced level of operations without
additional funding. In December 1999 and January 2000, the Company raised
additional interim working capital through a $1.0 million debt offering to
existing shareholders.
F-29
<PAGE>
In late 1999, the Company determined that it needed to obtain significant
additional funding and/or identify a company to acquire or merge with the
Company. An investment banker was retained to assist in this effort. These
efforts have culminated in the licensing agreement discussed in Note 8,
Subsequent Events; and the merger agreement discussed above. However, as of
September 14, 2000, there can be no guarantee that the closing conditions, to
which the agreements are subject, will be met. If the merger is not
consummated, the Company would be required to seek alternative sources of
funding.
The Company has incurred substantial losses since inception and has
required a combination of privately placed debt and equity to fund its
operations. The Company's products must achieve a level of market acceptance
that will allow it to generate a significant amount of revenue. The Company has
not achieved revenues sufficient to cover its operating costs, nor is there any
assurance that it will be able to do so. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
The unaudited interim financial statements as of June 30, 2000 and for the
six months ended June 30, 1999 and 2000 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with accounting principles
generally accepted in the United States. The results of operations for the six
months ended June 30, 2000 are not necessarily indicative of the operating
results to be expected for the year ended December 31, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities, disclosures
of contingent assets and liabilities at the date of the financial statements,
and reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid instruments
with an original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method of
valuation) or market, and consist primarily of raw materials such as printed
circuit boards and other electronic components. Writedowns for excess and
obsolete inventories are charged to expense in the period when conditions
giving rise to the writedowns are first recognized.
The following is a summary of inventories at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials..................................... $ 830,208 $ 849,819
Work in process................................... 98,667 309,215
Finished goods.................................... 626,396 745,834
---------- ----------
Total before inventory reserves............... 1,555,271 1,904,868
Less inventory reserves........................... (891,498) (526,920)
---------- ----------
Inventories, net.............................. $ 663,773 $1,377,948
========== ==========
</TABLE>
F-30
<PAGE>
Property, Fixtures and Equipment
Significant additions and improvements are capitalized at cost, while
maintenance and repairs that do not improve or extend the life of the
respective assets are charged to operations as incurred.
Property, fixtures and equipment are depreciated on a straight-line basis
over the following estimated useful lives:
<TABLE>
<S> <C>
Computers and computer
software..................... 3 to 5 years
Furniture, fixtures and
equipment.................... 5 to 7 years
Leasehold improvements........ Shorter of economic life or term of lease
</TABLE>
Income Taxes
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 109, which requires deferred income tax assets and liabilities to be
recorded for the estimated future income tax effects of temporary differences
between the tax basis of assets and liabilities and amounts reported in the
accompanying balance sheets, and for operating loss and tax credit
carryforwards.
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each
year.
The change in deferred income tax assets and liabilities for the period
measures the deferred income tax provision or benefit for the period. Effects
of changes in enacted tax laws on deferred income tax assets or liabilities are
reflected as adjustments to the tax provision or benefit in the period of
enactment. The measurement of deferred income tax assets may be reduced by a
valuation allowance, based on judgmental assessment of available evidence, to
the extent it is more likely than not that some or all of the deferred income
tax assets will not be realized (Note 6).
Fair Value of Financial Instruments
The estimated fair value of cash and cash equivalents, accounts receivable,
accounts payable and short-term debt approximate their carrying amounts as of
December 31, 1999 and 1998.
Revenue Recognition
The Company recognizes revenue when products are shipped, evidence of an
arrangement exists, the selling price is fixed, and collectibility is
reasonably assured.
Research and Development
Research and development costs, consisting primarily of salaries, supplies
and contract services, are expensed as incurred.
Concentration of Credit Risk and Sales
The Company performs ongoing evaluations of its customers' financial
condition and generally does not require collateral. Its accounts receivable
balances are primarily domestic and are due from the U. S. Navy and large
telecommunications and research and development companies. As of December 31,
1999 and 1998, three or fewer customers accounted for approximately 70% and
87%, respectively, of the Company's accounts receivable balances and for 83%
and 49%, respectively, of the Company's sales during the years then ended. The
Company has no significant off-balance sheet concentration of credit risk such
as foreign exchange, option, or other foreign hedging contracts.
F-31
<PAGE>
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation arrangements using
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), under which,
generally, no compensation is recognized if the exercise price of options
granted equals or exceeds the fair value of the underlying stock on date of
grant. The Company has adopted the disclosure option of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 requires companies that do not account for stock-based
compensation under the fair value method prescribed by the statement to
disclose pro forma earnings as if the fair value method had been adopted.
Additionally, certain other disclosures are required with respect to stock
compensation and the assumptions used to determine the pro forma effects of
SFAS 123.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in a financial statement. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. For all periods presented, net loss is the same as
comprehensive loss.
Reclassifications
Certain reclassifications have been made in the 1998 financial statements
to conform to the current year presentation. These reclassifications had no
impact on the Company's net loss or stockholders' equity as previously
reported.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. It also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 may not be applied retroactively, and must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before
January 1, 1998). SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. The Company has not historically utilized such instruments, and
has no current plans to do so. Accordingly, management believes that the impact
of SFAS No. 133 will not significantly affect its financial reporting.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No. 44"). FIN No. 44
clarifies the applications of APB No. 25 for certain issues related to equity-
based instruments issued to employees. FIN No. 44 is effective on July 1, 2000,
except for certain transactions, and will be applied on a prospective basis.
F-32
<PAGE>
3. DEBT:
Bank Financing Facility
During 1999, the Company borrowed $689,735 under a bank line of credit,
which bore interest at rates ranging from 7.75% to 8.0%. These borrowings,
which were secured by personal assets of a stockholder and member of the Board
of Directors, were repaid during that year. The line of credit expired during
1999.
Capital Lease Obligations
During 1997, the Company entered into three capital lease obligations for
computer equipment. Minimum payments are $2,717 per month, including imputed
interest of 17.3% per annum. The leases mature in July 2002 and have as
collateral the related assets, which had a net book value of $51,755 and
$69,925 at December 31, 1999 and 1998, respectively.
The following is a schedule of future minimum lease payments for the years
ending December 31:
<TABLE>
<S> <C>
2000............................................................ $ 32,604
2001............................................................ 32,604
2002............................................................ 20,329
--------
Total payments.................................................. 85,537
Less interest................................................... (16,262)
--------
Total principal................................................. 69,275
Less current portion............................................ (22,280)
--------
Long-term capital lease obligations............................. $ 46,995
========
</TABLE>
Notes Payable to Stockholders and Other Related Parties
The Company has from time to time arranged for borrowings from stockholders
and other related parties. A summary of those transactions is as follows:
Debt Converted Into Series A and B Preferred Stock
In 1990, the Company entered into a borrowing facility with four
stockholders, whereby loans could be drawn at any time until maturity, up to a
maximum principal amount of $6.5 million. These notes, which bore interest at
10%, were secured by substantially all the assets of the Company. In 1994,
unsecured additional stockholder loans were made to the Company, also bearing
interest at 10%. During 1998, all remaining balances, totaling $2,121,005,
including accrued interest of $237,991, under these borrowing arrangements were
converted to 4,328,582 shares of Series A Preferred Stock at $.49 per share.
In 1993, the Company arranged for unsecured borrowings from related parties
totaling $156,164, which bore interest at 10%. The outstanding balances,
totaling $179,643, including accrued interest of $23,477, were converted to
366,619 shares of Series A Preferred Stock in June 1998 at $.49 per share.
During 1995 and continuing into 1996, under a similar private placement,
the Company raised $900,000 and incurred an additional $100,000 of debt as a
finder's fee to the same member of the Board of Directors noted previously.
Interest of 10% on the $1.0 million of debt, which was unsecured, was payable
quarterly beginning in 1997. The note holders received an aggregate of 2.1
million shares of the Company's common stock as of January 1, 1996. The Company
has the right of first refusal on the subsequent sale of shares issued under
this agreement. Under terms of the loan,
F-33
<PAGE>
$1.0 million of this debt was converted to 2,040,815 shares of Series B
Preferred Stock in June 1998 at $.49 per share, and minor amounts were paid in
cash in 1997 and 1998. As of December 31, 1999 and 1998, amounts due related to
these obligations totaled $258,338 (including accrued interest of $34,130) and
$253,393, respectively.
During 1996, the Company raised an additional $1,700,000 in an unsecured
private placement offering. A finder's fee of $97,500, accounted for as
interest expense since the debt was due on demand, was paid to a member of the
Board of Directors. The debt bore interest at 12%. Debt holders were given the
opportunity to convert the debt and accrued interest to shares of Series A
Preferred Stock at $.30 per share. Substantially all of the remaining balance
not converted in 1997, totaling $695,627, including accrued interest of
$120,627, was converted in March 1998 to 2,318,757 shares of Series A Preferred
Stock at $.30 per share. Remaining interest obligations under this facility
were $22,384 and $20,342, respectively, as of December 31, 1999 and 1998.
From time to time during 1997 and 1998, the Company borrowed additional
funds for working capital purposes from related parties under short-term
agreements, at interest rates ranging from 10% to 12%. During 1998,
substantially all of the debt payable to these related parties, totaling
$1,913,035, including accrued interest of $116,310, was converted to 2,991,185
shares of Series A Preferred Stock and 912,968 shares of Series B stock in June
1998 at $.49 per share.
In June 1998, $1,062,500 of notes payable to a bank, which had been secured
by personal assets and guarantees of two stockholders who are also members of
the Board of Directors, were assumed by those individuals. Substantially all of
the resulting debt payable to these stockholders was converted to 1,867,347
shares of Series A Preferred Stock and 295,918 shares of Series B Preferred
Stock at $.49 per share in June 1998.
Interim Financing By Related Parties
In December 1999, the Company offered existing shareholders and option
holders the opportunity to participate in an interim financing arrangement.
Notes issued under the arrangement have a stated interest rate of 12%, and are
due on November 30, 2000. Under this offer, the Company received proceeds of
$502,398 in December 1999 and $500,000 in January 2000.
In addition to the interest, the note holders will also receive 5% of the
amount loaned ("Additional Interest") which is included in accrued interest on
the balance sheet. In addition, for every dollar loaned, the note holders
receive warrants to buy four shares of Series A Preferred Stock at a price of
$.50 per share. Therefore, the Company has attributed a portion of the proceeds
from the debt offering to the fair value of the warrants. Using the Black-
Scholes option pricing model, the 2,009,592 warrants issued in December 1999
were valued at $79,060. The 2,000,000 warrants issued in January 2000 were
valued at $78,683. For purposes of valuation, the following assumptions were
used: risk-free interest rate of approximately 6%, contractual life of 3 years,
expected volatility rate of 60%, and expected dividends of 0%. Both the
Additional Interest of $25,120 and the fair value of the warrants as of
December 31, 1999 have been recorded as an initial discount to the carrying
value of the related debt. This initial discount is being amortized over the
one-year term of the note, using the effective interest-rate method.
The Company may prepay the loans without penalty. In the event of default,
interest on the unpaid balance is payable at 18%.
F-34
<PAGE>
4. EMPLOYEE BENEFIT PLANS:
Employee Stock Option Plan
The Company's Employee Stock Option Plan (the "Plan"), adopted effective
December 31, 1996, authorizes the granting to eligible employees of incentive
and nonqualified stock options or restricted stock to acquire up to 9,000,000
shares of its common stock. Administration of the Plan is by the Incentive Plan
Committee, consisting of two disinterested members of the Board of Directors.
The Incentive Plan Committee, in its sole discretion, selects Participants, the
form and amount of each award, and any other terms considered necessary or
desirable, consistent with the terms of the Plan. Awards granted prior to 1997
vested immediately. Awards after December 31, 1996 vest 25% twelve months from
the date of grant, with the remainder vesting in equal monthly installments
over the following 36 months, or upon specified Transfers of Control. The
options generally terminate after 10 years. Incentive stock options may be
granted at an exercise price not less than fair market value on the date of
grant.
A summary of the status of the Plan as of December 31, 1999 and 1998 and
activity during the years then ended is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Weighted Weighted
Number Average Number Average
Of Exercise of Exercise
Options Price Options Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at January 1........... 4,345,425 $.01 6,695,300 $.01
Granted............................ 1,355,250 .05 716,250 .01
Exercised.......................... (1,004,444) .01 (1,294,461) .01
Canceled........................... (2,010,979) .02 (1,771,664) .01
---------- ----------
Outstanding at December 31......... 2,685,252 .02 4,345,425 .01
========== ==========
Exercisable at December 31......... 794,863 .01 1,925,425 .01
========== ==========
</TABLE>
If the fair value method had been used for options granted during 1999 and
1998, the fair value of options granted would have been $29,924 and $3,891,
respectively. The pro forma effect on the reported net loss would have been
additional expense of $4,745 and $5,645, in 1999 and 1998, respectively. The
risk-free interest rate, expected volatility rate, expected life and expected
dividends are approximately 6%, .001%, 10 years and 0%, respectively, for both
years. The weighted average remaining contractual life for stock options
outstanding as of December 31, 1999 was 7.96 years.
Other Stock Option Awards
In December 1998, the Board of Directors granted to the Company's president
an option to acquire 1,728,945 shares of the Company's common stock at $.15 per
share. The option vests in 25% increments on the anniversary of the grant. As
of December 31, 1999, 432,236 options were vested and exercisable. Because the
option agreement permits either cash or cashless exercise, compensation expense
is required to be measured at interim financial reporting dates, under the
rules of variable plan accounting. If the value of the Company's common stock
exceeds the option exercise price before the options are exercised,
compensation expense will be recorded as the difference between the value of
the underlying common stock and the grant price, times the number of remaining
options, notwithstanding their exercisability. No compensation expense was
recorded during 1999 or 1998 under this award. However, the Company did record
a $400,000 charge during the six-month period ended June 30, 2000 under this
award (unaudited).
F-35
<PAGE>
A 1995 employment agreement with a former executive provided for a grant of
options based on the number of diluted shares of the Company's stock
outstanding. In December 1999, in satisfaction of obligations under the
employment agreement, the Company granted the former executive a non-qualified
option to acquire up to 210,000 shares of the Company's common stock at $.30
per share. The options are exercisable at any time prior to January 1, 2001.
401(k) Profit Sharing Plan
Effective January 1, 1998, the Company established the Astarte, Inc. 401(k)
Profit Sharing Plan, which is governed by Section 401(k) of the Internal
Revenue Code. Employees with a minimum of one month of service as of a semi-
annual Entry Date may participate. Employees are also eligible to receive
discretionary employer contributions, provided they are employed as of the last
day of a plan year during which they have worked at least 1,000 hours. Employee
and discretionary employer contributions to the plan are immediately vested.
The Company made discretionary matching contributions of $15,910 and $17,821
for 1999 and 1998, respectively.
5. CAPITAL STOCK:
The Company's Articles of Incorporation, as amended, (the "Articles")
authorize three classes of stock: common, Series A Convertible Preferred, and
Series B Convertible Preferred, and designate the number of authorized shares
to be 50,000,000 for common stock, 60,000,000 for Class A Convertible
Preferred, and 40,000,000 for Class B Convertible Preferred. The Articles
further authorize the Board of Directors to adjust the number of shares of each
class, provided that the rights of any class may not be decreased and no more
than 150,000,000 may be outstanding.
Rights, preferences, and privileges of the various categories of stock are
as follows:
Dividends. Holders of Series A and Series B Preferred Stock are entitled to
dividends only in the event that, and to the extent of, any dividends on common
stock.
Voting Rights. Holders of Series A and Series B Preferred Stock are
entitled to vote with holders of common stock as a single voting group on the
basis of the number of common shares into which the shares of preferred stock
may be converted.
Liquidation Rights. In the event of a liquidation or winding up of the
Company or a consolidation or merger where the Company is not the surviving
entity, the order of liquidation rights is as follows:
. holders of Series A Preferred Stock are first entitled to receive the
acquisition price of their shares plus any declared but unpaid
dividends,
. holders of Series B Preferred Stock are then entitled to receive the
acquisition price of their shares plus any declared but unpaid
dividends, and
. any remainder is then to be distributed ratably among holders of the
Company's common stock.
Preferred Stock Redemption Rights. Holders of Series A and Series B
Preferred Stock may, after four years and five years, respectively, from the
date of issuance, redeem their shares at the acquisition price of the shares,
plus 10% per annum since the date of issuance. The recorded amounts are
accreted to the redemption price using the effective interest method. The
accretion is charged to retained earnings and deducted in arriving at net loss
applicable to common stockholders.
Preferred Stock Conversion Rights. Shares of both Series A and Series B
Preferred Stock may at any time be converted into common stock on a one-for-one
basis, subject to anti-dilution provisions. All preferred shares will
automatically convert upon the earlier of: (1) the closing of an underwriting
of common stock in which the aggregate price paid by the public is at least
$5.0 million and the offering price is at least 150% of the then applicable
redemption value or (2) the written consent of holders of at least two thirds
of the shares of each series of Preferred Stock with respect to that series.
F-36
<PAGE>
Warrants
In December 1999 and January 2000, the Company issued 2,009,592 and
2,000,000 warrants, respectively, to note holders in conjuction with issuance
of debt on those dates (see Note 3).
6. INCOME TAXES:
Effective January 1, 1996 the Company became a C corporation. As of
December 31, 1999, federal net operating loss carry-forwards generated since
January 1, 1996 are approximately $11,600,000.
A tax benefit has not been recognized in 1999 or 1998 due to the
establishment of valuation allowances.
Deferred income taxes primarily result from basis differences in
inventories, certain accruals not currently deductible for tax purposes and net
operating loss carry-forwards. The deferred tax asset, approximately $4,490,000
and $3,419,000, respectively, at December 31, 1999 and 1998, has been fully
offset by a valuation allowance, due to the Company's history of operating
losses.
The Company's net operating loss carry-forwards expire at various dates
beginning in 2005 and continuing through 2019. The Tax Reform Act of 1986
contains provisions that may limit the net operating loss carry-forwards
available for use in any given year if certain events occur, including changes
in ownership interests.
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
As of December 31, 1999, the Company occupied approximately 24,000 square
feet of manufacturing and office space under a lease that extends until March
2004. Effective August 1, 2000, the Company reduced the square feet leased to
10,745. Including its pro rata share of operating expenses, the Company paid
approximately $313,000 and $206,000 during 1999 and 1998, respectively, under
terms of this lease. Future minimum lease payments (excluding operating
expenses, and reflective of the August 1, 2000 amendment) are as follows:
<TABLE>
<S> <C>
2000............................................................. $209,587
2001............................................................. 123,236
2002............................................................. 126,933
2003............................................................. 130,741
2004............................................................. 21,896
--------
Total........................................................ $612,393
========
</TABLE>
Purchase Commitments
In the normal course of business, the Company enters into various long-term
commitments with vendors to provide customized components for use in the
Company's products. Dependence on vendors as sole source suppliers or the
Company's inability to meet minimum volume requirements under purchase
commitments could have a materially adverse effect on the Company's results of
operations or financial condition.
In 1996, the Company entered into an agreement for the development and
supply of a micro-electromechanical system for use in its next generation of
optical switches. Under the agreement, the Company must purchase all of its
requirements for this component from this vendor. Further, to retain exclusive
rights to this technology in optical switch applications, the Company must meet
as yet to be determined minimum volume commitments.
F-37
<PAGE>
Royalty and License Agreement
Under a royalty and license agreement with a former key employee and
current consultant and stockholder, royalties accrue and are payable on a
monthly basis at a rate of 2 1/2% of net sales, as defined, subject to a
minimum royalty of $100,000 per year. This minimum royalty was paid in 1999 and
1998. This agreement provides that there will be no royalty during any period
when the individual is an employee. Since March 1997, this individual has been
a consultant to the Company, under terms of a consulting agreement that was
terminated on June 2, 2000.
Litigation
From time to time, the Company is involved in certain litigious actions in
the ordinary course of business. Management believes that resolution of such
actions would not have a significant adverse effect on the Company's financial
position or results of operations.
8. SUBSEQUENT EVENTS:
On June 19, 2000, the Company borrowed $300,000 under a line of credit,
which bears interest at 9.5%, and is secured by a certificate of deposit in the
name of a related party. The note is further secured by all of the Company's
accounts receivable. Although the loan matured on August 19, 2000, the Company
believes it will be successful in extending the loan on similar terms.
In August 2000, the Company signed a letter of intent with a major company
in the optical networking industry that will result in the licensing of certain
of its technology for a minimum of $12.5 million. It is anticipated that these
funds will be used to pay off existing indebtedness, including certain taxes
and other liabilities associated with the transaction. The remainder is
expected to be distributed to the shareholders. The transaction also provides
for additional payments contingent upon future outcomes with respect to other
intellectual property of the Company. This latter technology has been
transferred to a limited liability company, the ownership of which will be
distributed to the shareholders.
F-38
<PAGE>
Unaudited Pro Forma Condensed Financial Data
The following Unaudited Pro Forma Condensed Financial Data consists of an
Unaudited Pro Forma Condensed Balance Sheet as of June 30, 2000 and Unaudited
Pro Forma Condensed Statements of Operations for the year ended December 31,
1999 and the six months ended June 30, 2000 (collectively, the "Pro Forma
Statements"). The Unaudited Pro Forma Condensed Balance Sheet gives effect to
the acquisition of Astarte and to the license of intellectual property from
AT&T, as if they occurred on June 30, 2000. The Unaudited Pro Forma Condensed
Statements of Operations give effect to the acquisition of Astarte and to the
license of intellectual property from AT&T, as if they occurred on January 1,
1999.
A preliminary allocation of the purchase price for the above transactions
has been made to major categories of assets and liabilities in the accompanying
Pro Forma Statements based on currently available information. The actual
allocation of purchase price and the resulting effect on income from operations
may differ significantly from the pro forma amounts included herein. These pro
forma adjustments represent management's preliminary determination of purchase
accounting adjustments and are based upon available information and certain
assumptions that management believes to be reasonable.
The pro forma financial data is presented for informational purposes only
and does not purport to represent what the Company's financial position or
results of operations would have been had the Astarte acquisition and the
license of intellectual property from AT&T, in fact occurred on the dates
assumed or that may result from future operations. The pro forma data should be
read in conjunction with the Company's Financial Statements and Astarte's
financial statements and related notes thereto, both of which are included
elsewhere in the Prospectus.
F-39
<PAGE>
Unaudited Pro Forma Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------------------------------
The Company Astarte Adjustments Pro Forma
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS A
CURRENT ASSETS:
Cash and cash
equivalents........... $ 30,228,378 $ 300,206 $ $ 30,528,584
Accounts receivable.... 7,073,575 30,909 7,104,484
Inventories............ 6,203,265 442,099 6,645,364
Prepaid expenses and
other current assets.. 2,850,785 2,850,785
------------ ----------- ------------ ------------
Total current
assets............. 46,356,003 773,214 47,129,217
PROPERTY AND EQUIPMENT--
Net.................... 6,723,755 168,809 6,892,564
GOODWILL AND OTHER
INTANGIBLE ASSETS...... 113,686,641 (B)
45,000,000 (C) 158,686,641
OTHER ASSETS............ 332,540 58,068 390,608
------------ ----------- ------------ ------------
TOTAL ASSETS............ $ 53,412,298 $ 1,000,091 $158,686,641 213,099,030
============ =========== ============ ============
LIABILITIES AND
STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Trade accounts
payable............... $ 5,958,786 $ 181,198 $ $ 6,139,984
Accrued expenses and
other current
liabilities........... 2,520,700 513,651 3,034,351
Current portion of
notes payable......... 2,609,143 1,433,438 4,042,581
Current portion of
capital lease
obligations 638,906 22,280 661,186
------------ ----------- ------------ ------------
Total current
liabilities........ 11,727,535 2,150,567 13,878,102
LONG-TERM PORTION OF
NOTES PAYABLE.......... 912,808 912,808
LONG-TERM PORTION OF
CAPITAL LEASE
OBLIGATIONS............ 1,080,160 36,165 1,116,325
OTHER LONG-TERM
LIABILITIES............ 5,627 5,627
------------ ----------- ------------ ------------
Total liabilities... 13,726,130 2,186,732 15,912,862
------------ ----------- ------------ ------------
COMMITMENTS AND
CONTINGENCIES
MANDATORILY REDEEMABLE
SERIES A
CONVERTIBLE PREFERRED
STOCK.................. 17,306,995 (17,306,995)(B)
WARRANTS--SERIES A
CONVERTIBLE
PREFERRED STOCK........ 157,743 (157,743)(B)
MANDATORILY REDEEMABLE
SERIES B
CONVERTIBLE PREFERRED
STOCK.................. 9,999,532 (9,999,532)(B)
STOCKHOLDERS' EQUITY:
Common stock........... 7,655 2,826 924 (B)
1,500 (C) 12,905
Series A Preferred
Stock................. 10,091 10,091
Series B Preferred
Stock................. 233 233
Series C Preferred
Stock................. 2,565 2,565
Series D Preferred
Stock................. 6,011 6,011
Additional paid-in
capital............... 150,280,858 429,059 112,067,191 (B)
44,998,500 (C) 307,775,608
Notes receivable....... (37,995,430) (37,995,430)
Accumulated deficit.... (65,019,587) (29,082,796) 29,082,796 (B) (65,019,587)
Deferred employee
compensation.......... (7,606,228) (7,606,228)
------------ ----------- ------------ ------------
Total stockholders'
equity (deficit)... 39,686,168 (28,650,911) 186,150,911 197,186,168
------------ ----------- ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY:................ $ 53,412,298 $ 1,000,091 158 ,686,641 $213,099,030
============ =========== ============ ============
</TABLE>
F-40
<PAGE>
Unaudited Pro Forma Condensed Statement of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
------------------------------------------------
The Company Astarte Adjustments Pro Forma
----------- ---------- ----------- -----------
D E
<S> <C> <C> <C> <C>
REVENUE..................... $ 7,585,160 $ 683,798 $ $ 8,268,958
Non-cash charges related to
equity issuances.......... 370,925 370,925
----------- ---------- ----------- -----------
REVENUE, net of non-cash
charges related to equity
issuances.................. 7,214,235 683,798 7,898,033
COST OF REVENUE............. 5,061,390 504,510 5,565,900
----------- ---------- ----------- -----------
Gross profit............ 2,152,845 179,288 2,332,133
----------- ---------- ----------- -----------
OPERATING EXPENSES:
Research and development... 12,741,418 1,271,314 14,012,732
Sales and marketing........ 4,246,602 51,032 4,297,634
General and
administrative............ 6,236,444 823,545 7,059,989
Amortization expense....... 15,868,664 15,868,664
----------- ---------- ----------- -----------
Total operating
expenses............... 23,224,464 2,145,891 15,868,664 41,239,019
----------- ---------- ----------- -----------
OPERATING LOSS.............. 21,071,619 1,966,603 15,868,664 38,906,886
----------- ---------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest income............ (1,806,173) (150) (1,806,323)
Interest expense........... 179,374 184,724 364,098
----------- ---------- ----------- -----------
Total other (income)
expense................ (1,626,799) 184,574 (1,442,225)
----------- ---------- ----------- -----------
NET LOSS.................... $19,444,820 $2,151,177 $15,868,664 $37,464,661
=========== ========== =========== ===========
BASIC AND DILUTED LOSS PER
SHARE...................... $ (2.00) $ (2.50)
=========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING................ 9,726,730 14,976,730
=========== ===========
</TABLE>
F-41
<PAGE>
Unaudited Pro Forma Condensed Statement of Operations
<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------------------------
The Company Astarte Adjustments Pro Forma
----------- ---------- ----------- -----------
D E
<S> <C> <C> <C> <C>
REVENUE..................... $ 5,226,735 $1,909,820 $ $ 7,136,555
Non-cash charges related to
equity issuances.......... 558,961 558,961
----------- ---------- ----------- -----------
REVENUE, net of non-cash
charges related to equity
issuances.................. 4,667,774 1,909,820 6,577,594
COST OF REVENUE............. 3,881,637 1,787,173 5,668,810
----------- ---------- ----------- -----------
Gross profit............ 786,137 122,647 908,784
----------- ---------- ----------- -----------
OPERATING EXPENSES:
Research and development... 10,119,508 1,708,179 11,827,687
Sales and marketing........ 4,113,571 127,275 4,240,846
General and
administrative............ 6,189,714 742,393 6,932,107
Amortization expense....... 31,737,328 31,737,328
----------- ---------- ----------- -----------
Total operating
expenses............... 20,422,793 2,577,847 31,737,328 54,737,968
----------- ---------- ----------- -----------
OPERATING LOSS.............. 19,636,656 2,455,200 31,737,328 53,829,184
----------- ---------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest income............ (359,685) (14,861) (374,546)
Interest expense........... 522,323 66,779 589,102
----------- ---------- ----------- -----------
Total other (income)
expense................ 162,638 51,918 214,556
----------- ---------- ----------- -----------
NET LOSS.................... $19,799,294 $2,507,118 $31,737,328 $54,043,740
=========== ========== =========== ===========
BASIC AND DILUTED LOSS PER
SHARE...................... $ (7.42) $ (6.83)
=========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING................ 2,667,615 7,917,615
=========== ===========
</TABLE>
F-42
<PAGE>
Notes to Unaudited Pro Forma Condensed Financial Statements
The following adjustments have been reflected in the Unaudited Pro Forma
Condensed Balance Sheet:
A.To reflect the historical balance sheet of Astarte.
B.To reflect the Astarte acquisition, in a transaction whose closing is subject
to several conditions that should be satisfied prior to the completion of
this offering. We will issue 3,750,000 shares of our common stock to the
stockholders of Astarte Fiber Networks.
We will account for the acquisition using the purchase method whereby the
net tangible and identifiable assets acquired and liabilities assumed are
recognized at their estimated fair market values at the date of acquisition.
The allocation of purchase price to the fair value of the assets acquired and
liabilities assumed is preliminary and will be finalized following the
completion of a definitive valuation of the assets and liabilities of Astarte
(including an allocation to in-process research and development). The excess of
the aggregate purchase price over the fair value of net assets acquired of
approximately $113.7 million, based upon the preliminary purchase price
allocation, will be amortized on a straight-line basis over five years.
<TABLE>
<S> <C>
Current assets.............................................. $ 773,214
Fixed assets and other non-current assets................... 226,877
Current liabilities......................................... (2,150,567)
Long-term liabilities....................................... (36,165)
Goodwill.................................................... 113,686,641
------------
Total purchase price.................................... $112,500,000
============
</TABLE>
C.To reflect the license of intellectual property from AT&T in a transaction
that will close prior to the completion of this offering, we will issue
1,500,000 shares of our common stock to AT&T Corp.
The following adjustments have been reflected in the Unaudited Pro Forma
Condensed Statements of Operations:
D.To reflect the historical results of operations of Astarte for the periods
presented.
E.To reflect the incremental amortization of goodwill and other intangible
assets resulting from the acquisition of Astarte and the license of
intellectual property from AT&T. An amortization period of five years has
been used for the purposes of the pro forma financial information. The
acquisition of Astarte will be accounted for using the purchase method
whereby the net tangible and identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair values at the
date of acquisition. The allocation of purchase price and the amortization
period for assets acquired may change upon completion of a final valuation.
F-43
<PAGE>
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 20
Recent Developments...................................................... 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 24
Selected Financial Data.................................................. 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 35
Management............................................................... 47
Certain Relationships and Transactions................................... 56
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 71
Validity of Common Stock................................................. 74
Experts.................................................................. 74
Change in Independent Auditors........................................... 74
Where You Can Find Additional Information................................ 75
Index to Financial Statements............................................ F-1
</TABLE>
-----------
Through and including , 2000, the 25th day after the date of this
prospectus, all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.
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Shares
Tellium, Inc.
Common Stock
-----------
[logo]
-----------
Goldman, Sachs & Co.
Thomas Weisel Partners LLC
J.P. Morgan & Co.
CIBC World Markets
Wit SoundView
Representatives of the Underwriters
-------------------------------------------------------------------------------
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<PAGE>
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............................ $66,000.00
NASD filing fee.................................................. 25,500.00
Nasdaq National Market listing fee............................... *
Legal fees and expenses.......................................... *
Road show expenses............................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Printing and engraving expenses.................................. *
Registrar and transfer agent fees and expenses................... *
Miscellaneous expenses........................................... *
----------
Total.......................................................... *
==========
</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 specific other persons
to the extent and under the circumstances set forth therein.
Under Section 102(b)(7) of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation, as amended and restated upon the
closing of this offering, eliminates the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liabilities arising (a) from any
breach of the director's duty of loyalty to the corporation or its
stockholders; (b) from acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (c) under Section 174 of
the Delaware General Corporation Law; or (d) from any transaction from which
the director derived an improper personal benefit.
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.
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
II-1
<PAGE>
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 another corporation,
partnership, joint venture, trust or other enterprise, if such person makes
written application for such indemnification to the Registrant's Board of
Directors and the Registrant's 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 stockholders 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 Bylaws, 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 some
liabilities they may incur in their capacity as directors and officers. Under
such policies, the insurer, on behalf of the Registrant, 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 securities in the following
transactions, each of which was exempt from the registration requirements of
the Securities Act of 1933, as amended, under Section 4(2) of the Securities
Act, as transactions by an issuer not involving any public offering, or under
Rules 701 and 506 thereunder. All of the below-referenced securities are deemed
restricted securities for the purposes of the Securities Act. The common stock
share numbers summarized below have been adjusted to reflect the three-for-one
stock split of the Registrant's common stock that became effective on August
11, 2000. No underwriters were involved in any of the below-referenced sales of
securities. For the sale of the Registrant's Series E preferred stock in
September 2000, Goldman Sachs & Co. and Thomas Weisel Partners LLC served as
placement agents.
On May 8, 1997, June 18, 1997, July 11, 1998 and August 10, 1998, the
Registrant issued an aggregate of 2,604,000 shares of its common stock to its
founders in the following amounts and for the following consideration: (1)
150,000 shares to Krishna Bala for an aggregate purchase price of $50; (2)
600,000 shares to Charles Brackett for an aggregate purchase price of $200; (3)
24,000 shares to Lyn Curtis for an aggregate purchase price of $8; (4) 150,000
shares to John Gamelin for an aggregate purchase price of $50; (5) 24,000
shares to Chris Gibbons for an aggregate purchase
II-2
<PAGE>
price of $8; (6) 45,000 shares to Paul Grabbe for an aggregate purchase price
of $15; (7) 75,000 shares to Sarry Habiby for an aggregate purchase price of
$25; (8) 24,000 shares to Andrew Rajhel for an aggregate purchase price of $8;
(9) 36,000 shares to Jim Ringo for an aggregate purchase price of $12; (10)
24,000 shares to Howard Shirokmann for an aggregate purchase price of $8; (11)
45,000 shares to Julian Soole for an aggregate purchase price of $15; (12)
105,000 shares to W. John Tomlinson for an aggregate purchase price of $35;
(13) 27,000 shares to Elizabeth Van Pelt for an aggregate purchase price of $9;
(14) 105,000 shares to Rich Vodhanel for an aggregate purchase price of $35;
(15) 120,000 shares to Michael Koblentz for an aggregate purchase price of $40;
(16) 300,000 shares to William J. Kelly for an aggregate purchase price of
$100; and (17) 750,000 shares to Farouque Mesiya for an aggregate purchase
price of $250.
On May 8, 1997, the Registrant issued an aggregate of 8,766,667 shares of
Series A preferred stock to 14 investors in the following amounts and for the
following consideration: (1) 392,882 shares to Bell Communications Research in
exchange for intellectual property with an aggregate value of $942,917; (2)
3,523,785 shares to Science Applications International Corporation in exchange
for equipment with an aggregate value of $8,457,084; (3) 572,260 shares to
Accel V L.P. for an aggregate purchase price of $1,373,424; (4) 76,680 shares
to Accel Internet/Strategic Technology Fund L.P. for an aggregate purchase
price of $184,032; (5) 11,360 shares to Accel Keiretsu V L.P. for an aggregate
purchase price of $27,264; (6) 34,080 shares to Accel Investors '96 L.P. for an
aggregate purchase price of $81,792; (7) 15,620 shares to Ellmore C. Patterson
Partners for an aggregate purchase price of $37,488; (8) 333,333 shares to Blue
Rock Capital, L.P. for an aggregate purchase price of $799,999; (9) 1,500,000
shares to Oak Investment Partners VII Limited Partnership for an aggregate
purchase price of $3,600,000; (10) 1,850,000 shares to Ortel Corporation, for
an aggregate purchase price of $4,440,000; (11) 40,000 shares to John Wallace
for an aggregate purchase price of $96,000; (12) 282,316 shares to Worldview
Technology Partners I, L.P. for an aggregate purchase price of $677,558; (13)
110,034 shares to Worldview Technology International I, L.P. for an aggregate
purchase price of $264,082; and (14) 24,317 shares to Worldview Strategic
Partners I, L.P. for an aggregate purchase price of $58,361.
On May 8, 1997, the Registrant issued an aggregate of 233,333 shares of
Series B preferred stock to one of its stockholders, Ortel Corporation, for an
aggregate purchase price of $559,999.
On May 20, 1998, the Registrant issued an aggregate of 416,667 shares of
its Series A preferred stock to 5 of its stockholders in the following amounts
and for the following consideration: (1) 335,834 shares to Accel V L.P. for an
aggregate purchase price of $806,002; (2) 45,000 shares to Accel
Internet/Strategic Technology Fund, L.P. for an aggregate purchase price of
$108,000; (3) 6,667 shares to Accel Keiretsu V L.P. for an aggregate purchase
price of $16,001; (4) 20,000 shares to Accel Investors '96 L.P. for an
aggregate purchase price of $48,000; and (5) 9,166 shares to Ellmore C.
Patterson Partners for an aggregate purchase price of $21,998.
On December 30, 1998, the Registrant issued senior convertible notes in the
aggregate principal amount of $16,000,000 to 14 of its stockholders as follows:
(1) Oak Investment Partners VII, Limited Partnership ($2,893,244); (2) Oak VII
Affiliates Fund, Limited Partnership ($72,665); (3) Accel Investors '96 L.P.
($106,931); (4) Accel V L.P. ($1,795,548); (5) Accel Internet/Strategic
Technology Fund L.P. ($240,595); (6) Accel Keiretsu V L.P. ($35,644); (7)
Science Applications Research Inc. ($7,744,318); (8) Worldview Technology
International I, L.P. ($217,567); (9) Worldview Technology Partners I, L.P.
($558,215); (10) Worldview Strategic Partners I ($48,082); (11) Blue Rock
Capital, L.P. ($659,090); (12) Ellmore C. Patterson Partners ($49,010); (13)
Ortel Corporation ($1,500,000); and (14) John Wallace ($79,091). All of these
notes were converted into shares of Series C preferred stock as of February 11,
1999, at a conversion price of $9.15 per share as described below.
On February 9, 1999, the Registrant issued warrants to purchase an
aggregate of 1,000,000 shares of its Series A preferred stock to 14 of its
stockholders at an exercise price of $4.58 per share in the following amounts:
(1) 180,828 shares to Oak Investment Partners VII, Limited Partnership;
II-3
<PAGE>
(2) 4,542 shares to Oak VII Affiliates Fund, Limited Partnership; (3) 6,683
shares to Accel Investors '96 L.P., (4) 112,222 shares to Accel V L.P., (5)
15,037 shares to Accel Internet/Strategic Technology Fund L.P.; (6) 2,228
shares to Accel Keiretsu V L.P.; (7) 484,020 shares to Science Applications
Research Inc.; (8) 13,598 shares to Worldview Technology International I, L.P.;
(9) 34,888 shares to Worldview Technology Partners I, L.P.; (10) 3,005 shares
to Worldview Strategic Partners I; (11) 41,193 shares to Blue Rock Capital,
L.P.; (12) 3,063 shares to Ellmore C. Patterson Partners; (13) 93,750 shares to
Ortel Corporation; and (14) 4,943 shares to John Wallace. All of these
warrants, except the warrant issued to Ortel Corporation, were subsequently
exercised for shares of its Series A preferred stock at an exercise price of
$2.40 per share.
On February 11, 1999, the Registrant issued an aggregate of 2,545,339
shares of Series C preferred stock to 15 of its stockholders in the following
amounts and for the following consideration: (1) 765,027 shares to Cisco
Systems for an aggregate purchase price of $6,999,997 in cash; (2) 322,104
shares to Oak Investment Partners VII, Limited Partnership in exchange for the
conversion of a senior promissory note in the aggregate amount of $2,947,252;
(3) 8,090 shares to Oak VII Affiliates Fund, Limited Partnership in exchange
for the conversion of a senior promissory note in the aggregate amount of
$74,024; (4) 11,905 shares to Accel Investors '96 L.P. in exchange for the
conversion of a senior promissory note in the aggregate amount of $108,931; (5)
199,898 shares to Accel V L.P. in exchange for the conversion of a senior
promissory note in the aggregate amount of $1,829,067; (6) 26,785 shares to
Accel Internet/Strategic Technology Fund L.P. in exchange for the conversion of
a senior promissory note in the aggregate amount of $245,083; (7) 3,968 shares
to Accel Keiretsu VI in exchange for the conversion of a senior promissory note
in the aggregate amount of $36,307; (8) 5,456 shares to Ellmore C. Patterson
Partners in exchange for the conversion of a senior promissory note in the
aggregate amount of $49,922; (9) 861,961 shares to Science Applications
International Corporation in exchange for the conversion of a senior promissory
note in the aggregate amount of $7,886,943; (10) 24,162 shares to Worldview
Technology International I, L.P. in exchange for the conversion of a senior
promissory note in the aggregate amount of $221,082; (11) 61,993 shares to
Worldview Technology Partners I, L.P. in exchange for the conversion of a
senior promissory note in the aggregate amount of $567,236; (12) 5,340 shares
to Worldview Strategic Partners I, L.P. in exchange for the conversion of a
senior promissory note in the aggregate amount of $48,861; (13) 73,374 shares
to Blue Rock Capital, L.P. in exchange for the conversion of a senior
promissory note in the aggregate amount of $671,372; (14) 166,475 shares to
Ortel Corporation in exchange for the conversion of a senior promissory note in
the aggregate amount of $1,523,246; and (15) 8,801 shares to John Wallace in
exchange for the conversion of a senior promissory note in the aggregate amount
of $80,529.
On June 30, 1999, the Registrant issued senior convertible notes in the
aggregate principal amount of $5,000,000 to 14 of its stockholders in the
following amounts: (1) Oak Investment Partners VII, Limited Partnership
($805,418); (2) Oak VII Affiliates Fund, Limited Partnership ($20,228);
(3) Accel Investors '96 L.P. ($29,767); (4) Accel V L.P. ($499,843); (5) Accel
Internet/Strategic Technology Fund L.P. ($66,976); (6) Accel Keiretsu V L.P.
($9,922); (7) Science Applications International Corporation ($2,155,853); (8)
Worldview Technology International I, L.P. ($60,566); (9) Worldview Technology
Partners I, L.P. ($155,395); (10) Worldview Strategic Partners I ($13,385);
(11) Blue Rock Capital, L.P. ($183,476); (12) Ellmore C. Patterson Partners
($13,643); (13) Ortel Corporation ($960,231); and (14) John Wallace ($25,296).
All of these notes were converted into shares of its Series D preferred stock
as of December 2, 1999 at a conversion price of $9.15 per share.
On September 21, 1999, the Registrant issued a warrant to purchase an
aggregate of 5,226,000 shares of its common stock to Extant, Inc., with an
exercise price of $3.05 per share, as consideration for the transactions
contemplated by the Purchase Agreement dated as of September 21, 1999 between
Tellium and Extant, Inc.
II-4
<PAGE>
On November 11, 1999, the Registrant issued two warrants to purchase an
aggregate of 29,509 shares of its Series C preferred stock to Comdisco, Inc.
with an exercise price of $9.15 per share as consideration for an equipment
lease line of credit.
On December 2, 1999, December 8, 1999, December 15, 1999 and January 14,
2000, the Registrant issued an aggregate of 6,010,926 shares of Series D
preferred stock to 22 investors and stockholders in the following amounts and
for the following consideration: (1) 1,684,522 shares to Thomas Weisel Capital
Partners, L.P. in exchange for $15,413,376 in cash; (2) 203,364 shares to TWP
CEO Founders' Circle (AI), L.P. in exchange for $1,860,781 in cash; (3) 787,251
shares to TWP CEO Founders' Circle (QP), L.P. in exchange for $7,203,347 in
cash; (4) 57,104 shares to Thomas Weisel Partners Group LLC in exchange for
$522,502 in cash; (5) 54,645 shares to RB Investment Partners II, LLC in
exchange for $500,002 in cash; (6) 27,322 shares to Comdisco, Inc. in exchange
for $249,996 in cash; (7) 466,871 shares to Oak Investment Partners VII,
Limited Partnership in exchange for $3,432,859 in cash and for the conversion
of a senior promissory note in the aggregate amount of $839,011; (8) 11,725
shares to Oak VII Affiliates Fund, Limited Partnership in exchange for $86,212
in cash and for the conversion of a senior promissory note in the aggregate
amount of $21,072; (9) 3,388 shares to Accel Investors '96 L.P. in exchange for
the conversion of a senior promissory note in the aggregate amount of $31,009;
(10) 56,906 shares to Accel V L.P. in exchange for the conversion of a senior
promissory note in the aggregate amount of $520,691; (11) 7,625 shares to Accel
Internet/Strategic Technology Fund L.P. in exchange for the conversion of a
senior promissory note in the aggregate amount of $69,769; (12) 1,129 shares to
Accel Keiretsu VI in exchange for the conversion of a senior promissory note in
the aggregate amount of $10,336; (13) 518,663 shares to Science Applications
International Corporation in exchange for $2,500,000 in cash and for the
conversion of a senior promissory note in the aggregate amount of $2,245,770;
(14) 33,093 shares to Worldview Technology International I, L.P. in exchange
for $239,709 in cash and for the conversion of a senior promissory note in the
aggregate amount of $63,092; (15) 84,907 shares to Worldview Technology
Partners I, L.P. in exchange for $615,023 in cash and for the conversion of a
senior promissory note in the aggregate amount of $161,876; (16) 7,314 shares
to Worldview Strategic Partners I, L.P. in exchange for $52,980 in cash and for
the conversion of a senior promissory note in the aggregate amount of $13,943;
(17) 100,282 shares to Blue Rock Capital, L.P. in exchange for $726,452 in cash
and for the conversion of a senior promissory note in the aggregate amount of
$191,128; (18) 1,553 shares to Ellmore C. Patterson Partners in exchange for
the conversion of a senior promissory note in the aggregate amount of $14,212;
(19) 524,736 shares to Ortel Corporation in exchange for $3,801,054 in cash and
for the conversion of a senior promissory note in the aggregate amount of
$1,000,281; (20) 12,406 shares to John Wallace in exchange for $87,164 in cash
and for the conversion of a senior promissory note in the aggregate amount of
$26,351; (21) 819,672 shares to Pequot Private Equity Fund II, L.P. in exchange
for $7,499,999 in cash; and (22) 546,448 shares to SJJ LLC in exchange for
$4,999,999 in cash.
On April 4, 2000, the Registrant issued an aggregate of 6,600,000 shares of
its common stock to Harry J. Carr under exercises of options for an aggregate
purchase price of $14,102,000.
On May 1, 2000, the Registrant issued an aggregate of 19,126 shares of
Series C preferred stock to Taylor Winfield Inc. in cash for an aggregate
purchase price of $175,003 to the Registrant.
On June 30, 2000, the Registrant issued an aggregate of 906,250 shares of
Series A preferred stock to its stockholders upon the exercise of warrants to
purchase 906,250 shares of Series A preferred stock at an exercise price of
$4.58 per share, in the following amounts and for the following consideration:
(1) 180,828 shares to Oak Investment Partners VII, Limited Partnership for an
aggregate purchase price of $828,192; (2) 4,542 shares to Oak VII Affiliates
Fund, Limited Partnership, for an aggregate purchase price of $20,802; (3)
6,683 shares to Accel Investors '96 L.P. for an aggregate purchase price of
$30,608; (4) 112,222 shares to Accel V L.P. for an aggregate
II-5
<PAGE>
purchase price of $513,977; (5) 15,037 shares to Accel Internet/Strategic
Technology Fund L.P. for an aggregate purchase price of $68,869; (6) 2,228
shares to Accel Keiretsu V L.P. for an aggregate purchase price of $10,204, (7)
484,020 shares to Science Applications Research Inc. for an aggregate purchase
price of $2,216,812; (8) 13,598 shares to Worldview Technology International I,
L.P. for an aggregate purchase price of $62,279; (9) 34,888 shares to Worldview
Technology Partners I, L.P. for an aggregate purchase price of $159,787; (10)
3,005 shares to Worldview Strategic Partners I for an aggregate purchase price
of $13,763; (11) 41,193 shares to Blue Rock Capital, L.P. for an aggregate
purchase price of $188,664; (12) 3,063 shares to Ellmore C. Patterson Partners
for an aggregate purchase price of $14,029; and (13) 4,943 shares to John
Wallace for an aggregate purchase price of $22,639.
On September 1, 2000, the Registrant issued an aggregate of 1,500,000
shares of its common stock to AT&T Corp. in consideration for a license of
intellectual property.
On September 18, 2000, as part of our agreement with Qwest, the Registrant
issued two warrants to purchase a total of 2,000,000 shares of its common stock
to U.S. Telesource, Inc., a wholly-owned subsidiary of Qwest, with an exercise
price of $30.00 per share. On September 18, 2000, the Registrant also issued an
aggregate of 333,333 shares of common stock to 7 officers and affiliates of
Qwest for an aggregate purchase price of $9,999,990.
On September 20, 2000, the Registrant issued an aggregate of 7,274,413
shares of its Series E preferred stock to 57 qualified institutional buyers and
other accredited investors for an aggregate purchase price of $218.0 million.
From May 8, 1997 (inception) to August 31, 2000, the Registrant granted
stock options to purchase 35,245,108 shares of common stock at exercise prices
ranging from $.08 to $2.14 per share to employees under its Amended and
Restated 1997 Employee Stock Incentive Plan. During this time period, the
Registrant also granted options to purchase: (1) 300,000 shares of common stock
at an exercise price of $2.14 per share to consultants and contractors and (2)
6,600,000 shares of common stock at an exercise price of $2.14 per share to an
employee outside of its Amended and Restated 1997 Employee Stock Incentive
Plan.
From April 1, 2000 through August 31, 2000, the Registrant issued an
aggregate of 18,888,600 shares of its common stock to some of its executive
officers under exercises of options under its Amended and Restated 1997
Employee Stock Incentive Plan for an aggregate purchase price of $38,659,233.
From May 8, 1997 (inception) to August 31, 2000, the Registrant issued and
sold an aggregate of 1,625,148 shares of its common stock to other employees
for aggregate consideration of $.08 to $2.14 per share under exercises of
options granted under its Amended and Restated 1997 Employee Stock Incentive
Plan.
Item 16. Exhibits and Financial Statement Schedules.
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of Tellium,
Inc. to be effective upon completion of this offering
3.2* Form of Amended and Restated Bylaws of Tellium, Inc. to be effective
upon completion of this offering
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
4.1* Specimen common stock certificate
4.2* Amended and Restated Stockholders' Agreement dated as of September 19,
2000 by and among Tellium, Inc. and certain stockholders of Tellium,
Inc.
4.3* Supplemental Stockholders' Agreement dated as of August 29, 2000 by
and among Tellium, Inc. and certain former stockholders of Astarte
Fiber Networks, Inc.
5.1* Opinion of Fried, Frank, Harris, Shriver & Jacobson
10.1 Amended and Restated Securities Purchase Agreement dated as of
February 10, 1999, among Tellium, Inc. and the purchasers named
therein
10.2 Stock Purchase Agreement dated as of February 11, 1999 by and among
Tellium, Inc., Cisco Systems, Inc. and other investors, as amended
pursuant to Amendment No. 1 dated May 5, 1999 to the Stock Purchase
Agreement
10.3 Stock Purchase Agreement dated as of December 2, 1999 by and among
Tellium, Inc. and certain investors
10.4+ Purchase Agreement dated as of September 21, 1999 between Tellium,
Inc. and Extant, Inc.
10.5+ Agreement dated as of August 7, 2000 between Tellium, Inc. and Cable &
Wireless Global Networks Limited
10.6+ Contract Manufacturing Agreement dated as of August 1, 2000 between
Tellium, Inc. and Solectron Corporation
10.7 Business Loan Agreement dated June 1, 2000 by and among Tellium, Inc.
and Commerce Bank/Shore N.A.
10.8* Amended and Restated 1997 Employee Stock Incentive Plan
10.9 Executive Employment Agreement dated as of December 31, 1999 between
Tellium, Inc. and Harry J. Carr
10.10 Restricted Stock Agreement (Time Vested Shares) dated as of April 4,
2000 by and between Tellium, Inc. and Harry J. Carr
10.11 Restricted Stock Agreement (Performance Shares) dated as of April 4,
2000 by and between Tellium, Inc. and Harry J. Carr, and Amendment
Number 1 to the Restricted Stock Agreement dated September 18, 2000
10.12 Form of Restricted Stock Agreement for Executives
10.13+ Restated and Amended Intellectual Property Agreement dated December
30, 1998 between Bell Communications Research Inc. and Tellium, Inc.
10.14+ Procurement Agreement between Qwest Communications Corporation and
Tellium, Inc.
10.15 Form of Supplemental Stockholders Agreement, dated as of September 18,
2000, by and among Tellium, Inc. and U.S. Telesource, Inc.
10.16 Form of Supplemental Stockholders Agreement, dated as of September 18,
2000, by and among Tellium, Inc. and the Holders listed therein
10.17+ "A" Warrants to Purchase Common Stock granted to U.S. Telesource,
Inc., dated as of September 18, 2000
10.18+ "B" Warrants to Purchase Common Stock granted to U.S. Telesource,
Inc., dated as of September 18, 2000
10.19* Lease Agreement dated February 9, 1998 between Tellium, Inc. and G.B.
Ltd., L.L.C. (as amended)
10.20 Lease Agreement dated August 3, 2000 between 185 Monmouth Parkway
Associates, L.P. and Tellium, Inc.
10.21 Stock Purchase Agreement dated September 1, 2000 by and between
Tellium, Inc. and AT&T Corp.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.22* Agreement and Plan of Merger dated as of August 29, 2000 by and among
Tellium, Inc., Astarte Acquisition Corporation, Astarte Fiber
Networks, Inc., AFN LLC and Aron B. Katz
10.23+ Warrant to Purchase Common Stock granted to Extant, Inc. dated
September 21, 1999
10.24 Patent License Agreement dated September 1, 2000 by and between
Tellium, Inc. and AT&T Corp.
10.25 Stock Purchase Agreement dated as of September 19, 2000 by and among
Tellium, Inc. and certain investors
16.1 Letter re: change in certifying accountant
21.1 Subsidiaries of Tellium, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Arthur Andersen LLP
23.4* Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1 above)
23.5 Consent of RHK, Inc.
24.1 Power of Attorney (included on signature page of this registration
statement)
27.1 Financial data schedule
</TABLE>
--------
* To be filed by amendment.
+ Subject to a confidential treatment request.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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:
(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
of 1933, 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 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For purposes of determining any liability under the Securities Act
of 1933, 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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oceanport, State of New
Jersey, on September 21, 2000.
TELLIUM, INC.
By: _________________________________
Harry J. Carr
Chief Executive Officer
The undersigned directors and officers of Tellium, Inc. hereby constitute
and appoint Harry J. Carr and Richard W. Barcus 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 of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Chief Executive Officer September 21, 2000
______________________________________ and Chairman of the Board
Harry J. Carr of Directors (Principal
Executive Officer)
/s/ President and Chief September 21, 2000
______________________________________ Operating Officer
Richard W. Barcus
/s/ Director September 21, 2000
______________________________________
Michael M. Connors
/s/ Director September 21, 2000
______________________________________
William B. Bunting
/s/ Director September 21, 2000
______________________________________
Jeffrey A. Feldman
/s/ Director September 21, 2000
______________________________________
Edward F. Glassmeyer
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Director September 21, 2000
______________________________________
Richard C. Smith
/s/ Director September 21, 2000
______________________________________
William A. Roper, Jr.
/s/ Chief Financial Officer September 21, 2000
______________________________________ (Principal Financial and
</TABLE> Michael J. Losch Accounting Officer)
II-10
<PAGE>
INDEX TO EXHIBITS
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of Tellium,
Inc. to be effective upon completion of this offering
3.2* Form of Amended and Restated Bylaws of Tellium, Inc. to be effective
upon completion of this offering
4.1* Specimen common stock certificate
4.2* Amended and Restated Stockholders' Agreement dated as of September 19,
2000 by and among Tellium, Inc. and certain stockholders of Tellium,
Inc.
4.3* Supplemental Stockholders' Agreement dated as of August 29, 2000 by
and among Tellium, Inc. and certain former stockholders of Astarte
Fiber Networks, Inc.
5.1* Opinion of Fried, Frank, Harris, Shriver & Jacobson
10.1 Amended and Restated Securities Purchase Agreement dated as of
February 10, 1999, among Tellium, Inc. and the purchasers named
therein
10.2 Stock Purchase Agreement dated as of February 11, 1999 by and among
Tellium, Inc., Cisco Systems, Inc. and other investors, as amended
pursuant to Amendment No. 1 dated May 5, 1999 to the Stock Purchase
Agreement
10.3 Stock Purchase Agreement dated as of December 2, 1999 by and among
Tellium, Inc. and certain investors
10.4+ Purchase Agreement dated as of September 21, 1999 between Tellium,
Inc. and Extant, Inc.
10.5+ Agreement dated as of August 7, 2000 between Tellium, Inc. and Cable &
Wireless Global Networks Limited
10.6+ Contract Manufacturing Agreement dated as of August 1, 2000 between
Tellium, Inc. and Solectron Corporation
10.7 Business Loan Agreement dated June 1, 2000 by and among Tellium, Inc.
and Commerce Bank/Shore N.A.
10.8* Amended and Restated 1997 Employee Stock Incentive Plan
10.9 Executive Employment Agreement dated as of December 31, 1999 between
Tellium, Inc. and Harry J. Carr
10.10 Restricted Stock Agreement (Time Vested Shares) dated as of April 4,
2000 by and between Tellium, Inc. and Harry J. Carr
10.11 Restricted Stock Agreement (Performance Shares) dated as of April 4,
2000 by and between Tellium, Inc. and Harry J. Carr, and Amendment
Number 1 to the Restricted Stock Agreement dated September 18, 2000
10.12 Form of Restricted Stock Agreement for Executives
10.13+ Restated and Amended Intellectual Property Agreement dated December
30, 1998 between Bell Communications Research Inc. and Tellium, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.14+ Procurement Agreement between Qwest Communications Corporation and
Tellium, Inc.
10.15 Form of Supplemental Stockholders Agreement, dated as of September 18,
2000, by and among Tellium, Inc. and U.S. Telesource, Inc.
10.16 Form of Supplemental Stockholders Agreement, dated as of September 18,
2000, by and among Tellium, Inc. and the Holders listed therein
10.17+ "A" Warrants to Purchase Common Stock granted to U.S. Telesource,
Inc., dated as of September 18, 2000
10.18+ "B" Warrants to Purchase Common Stock granted to U.S. Telesource,
Inc., dated as of September 18, 2000
10.19* Lease Agreement dated February 9, 1998 between Tellium, Inc. and G.B.
Ltd., L.L.C. (as amended)
10.20 Lease Agreement dated August 3, 2000 between 185 Monmouth Parkway
Associates, L.P. and Tellium, Inc.
10.21 Stock Purchase Agreement dated September 1, 2000 by and between
Tellium, Inc. and AT&T Corp.
10.22* Agreement and Plan of Merger dated as of August 29, 2000 by and among
Tellium, Inc., Astarte Acquisition Corporation, Astarte Fiber
Networks, Inc., AFN LLC and Aron B. Katz
10.23+ Warrant to Purchase Common Stock granted to Extant, Inc. dated
September 21, 1999
10.24 Patent License Agreement dated September 1, 2000 by and between
Tellium, Inc. and AT&T Corp.
10.25 Stock Purchase Agreement dated as of September 19, 2000 by and among
Tellium, Inc. and certain investors
16.1 Letter re: change in certifying accountant
21.1 Subsidiaries of Tellium, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Arthur Andersen LLP
23.4* Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1 above)
23.5 Consent of RHK, Inc.
24.1 Power of Attorney (included on signature page of this registration
statement)
27.1 Financial data schedule
</TABLE>
--------
* To be filed by amendment.
+ Subject to a confidential treatment request.
