<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 2000
REGISTRATION NO. 333-
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ANDA NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3576 77-0476695
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2708 ORCHARD PARKWAY
SAN JOSE, CA 95134
(408) 519-4900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES R. KENMORE, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ANDA NETWORKS, INC.
2708 ORCHARD PARKWAY
SAN JOSE, CA 95134
(408) 519-4900
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT V. GUNDERSON, JR. BRUCE CZACHOR
BENNETT L. YEE SHEARMAN & STERLING
BRANDI L. GALVIN 1550 EL CAMINO REAL
AMY S. COHEN MENLO PARK, CA 94025
BROOKE D. COLEMAN (650) 330-2200
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
155 CONSTITUTION DRIVE
MENLO PARK, CA 94025
(650) 321-2400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
------------------------
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,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
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------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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Common Stock, $0.0001 par value......................... $100,000,000 $26,400
------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
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 August 15, 2000.
Shares
[LOGO]
ANDA NETWORKS, INC.
Common Stock
------------------------
This is an initial public offering of shares of common stock of ANDA
Networks, Inc. All of the shares of common stock are being sold by ANDA
Networks.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $ and $ . ANDA Networks has applied for quotation
on the Nasdaq National Market under the symbol "ANDA".
See "Risk Factors" beginning on page 5 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 discounts...................................... $ $
Proceeds, before expenses, to ANDA Networks................. $ $
</TABLE>
To the extent that the underwriters sell more than shares of
common stock, the underwriters have the option to purchase up to an additional
shares from ANDA Networks at the initial public offering price, less
the underwriting discount.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
ROBERTSON STEPHENS
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
------------------------
Prospectus dated , 2000.
<PAGE> 3
ANDA Networks(TM) and OPS(TM) are trademarks of ANDA Networks. All other brand
names or trademarks appearing in this prospectus are the property of their
respective holders.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding ANDA Networks and the financial statements and the notes
to the financial statements appearing elsewhere in this prospectus. References
in this prospectus to "we", "us" or "our" refer to ANDA Networks, Inc. unless
otherwise noted.
ANDA NETWORKS, INC.
We develop, market and sell a comprehensive network access platform that
enables communication service providers to rapidly and cost-effectively deliver
integrated voice and data services over a single access network. Our Universal
Access Platform, or UAP, is comprised of a chassis, service and line cards and
network management and service delivery software. Our UAP enables service
providers to deliver both toll quality voice and high speed data over a single,
integrated access network.
In recent years, the volume of traffic on communications networks has grown
significantly due to the growth of the Internet. For example, Ryan Hankin Kent,
an independent consulting firm, estimates that the total amount of Internet
traffic in North America will increase from approximately 350,000 terabytes per
month in 1999 to approximately 15,000,000 terabytes per month by 2003. The
growth in communications traffic is also a result of continuing domestic and
international telecommunications deregulation, which is driving increased
network deployment and expanded service offerings. As the number of Internet
users continues to grow and service offerings continue to expand, service
providers have been faced with the challenge of handling higher volumes of
communications traffic. To accommodate the increase in communications traffic,
service providers have expanded their network capacity by installing fiber optic
cable and by implementing optical technologies at the core of their network, or
backbone, significantly increasing the amount of traffic that can be carried.
However, the access portion of their networks, which connects enterprise
networks and subscribers to the backbone, has not been expanded to keep pace
with the growth in backbone capacity. These access networks, often referred to
as the last mile, still consist largely of legacy systems, which were designed
solely to handle individual circuit-based, voice connections between two
endpoints in the network.
To differentiate themselves and reduce subscriber turnover in an
increasingly competitive environment, service providers, which currently include
incumbent local exchange carriers and competitive local exchange carriers, need
to rapidly deliver new services and provide existing services more efficiently.
Since a significant portion of service providers' revenue continues to be
generated from circuit-switched voice services, any modifications to a service
provider's access network to accommodate expanded services cannot impact their
ability to deliver high quality voice services, known as toll quality voice. To
avoid impacting their revenue generating voice networks, many service providers
have constructed separate overlay access networks to carry packet data traffic
using high speed data technologies, such as a digital transmission standard
known as T1 access and digital subscriber line, or DSL, and protocols such as
asynchronus transfer mode, known as ATM, and frame relay. Using overlay, or
parallel, access networks for data services allows data to be transmitted at
high speeds while leaving the voice services of service providers' existing
networks largely unaffected. This approach has led service providers to
implement and operate multiple access networks, consisting of distinct devices
for accessing each service at the customer premises and for consolidating each
service at the service provider's facility.
Deploying and operating multiple overlay access networks presents a number
of challenges for service providers, including:
- limited network flexibility;
- high capital costs;
1
<PAGE> 5
- high operating costs;
- limited physical space; and
- complex and expensive service provisioning and network management.
To date, products designed to offer service providers an integrated access
solution have largely used packet-based technologies. While these products
enable voice and data services to be delivered over a single access network,
they do not accommodate the circuit-switched voice networks in which service
providers have invested heavily and are reluctant to abandon. We believe service
providers seek a single, consolidated, cost-effective platform solution from
which existing voice services can easily be delivered and new data services can
be added as desired.
Our Universal Access Platform has been optimized for operating integrated
access networks and combines our flexible and scaleable architecture and our
Open Provisioning Standard, or OPS, a remote service provisioning specification.
The key benefits to service providers of our solution include:
- flexible migration from operating multiple overlay voice and data access
networks to a single, integrated access network;
- compact platform for the delivery of a comprehensive suite of voice and
data services;
- reduced capital costs;
- reduced operating costs;
- scalable highly reliable solution optimized for operating in a service
provider's network; and
- ease of service provisioning and system management.
Our Universal Access Platform enables service providers to rapidly and
cost-effectively transition from separate overlay access networks to a single,
integrated access network. Our UAP also enables service providers to easily add
value added services, such as Internet access, virtual private networks and
personalized voice services. We believe that the ability to provide a complete
suite of services will increase subscribers' loyalty to their service provider
and reduce the likelihood that they will seek a lower cost provider of voice or
data services. Furthermore, we believe the ability to offer additional services
to existing subscribers will help service providers to increase the amount of
revenue that they receive from each of their subscribers.
Our objective is to be the leading provider of access platforms capable of
allowing service providers worldwide to deliver multiple services over an
integrated access network to their subscribers. Key elements of our strategy
include:
- broadening our addressable market by developing additional features;
- broadening our customer base through expanded direct sales efforts;
- expanding our international presence;
- expanding our relationships with key technology companies; and
- promoting the adoption of our Open Provisioning Standard.
OTHER INFORMATION
We were incorporated in Delaware in January 1998. Our principal executive
offices are located at 2708 Orchard Parkway, San Jose, CA 95134. Our telephone
number at that location is (408) 519-4900.
2
<PAGE> 6
THE OFFERING
Common stock offered........ shares
Common stock to be
outstanding after the
offering.................. shares
Use of proceeds............. We intend to use the proceeds for general
corporate purposes, principally working capital
and other capital expenditures.
Proposed Nasdaq National
Market symbol............. ANDA
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 2000, and does not
include the following:
- 2,361,271 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 2000 at a weighted average exercise price of
$1.57 per share;
- 140,000 shares of common stock issuable upon exercise of stock options
granted between June 30, 2000 and July 31, 2000 at a weighted average
exercise price of $5.50 per share; and
- a total of 10,786,326 shares available for future issuance under our
various stock plans as of July 31, 2000, excluding the annual increases
in the number of shares authorized under each of our plans beginning
January 1, 2001.
Unless otherwise noted, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- reflects the automatic conversion of our outstanding preferred stock into
common stock upon the closing of this offering; and
- assumes the exercise of a warrant to purchase 15,000 shares of common
stock which expires upon the closing of this offering.
3
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table is a summary of our statement of operations. The pro
forma share amounts in the statement of operations data reflect the assumed
conversion of our preferred stock into common stock.
<TABLE>
<CAPTION>
SIX MONTH
JANUARY 28 PERIOD ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ------------------
1998 1999 1999 2000
-------------- ------------ ------- --------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ -- $ 1,248 $ 101 $ 8,329
Cost of revenue..................................... -- 837 116 4,042
------- -------- ------- --------
Gross profit (loss)................................. -- 411 (15) 4,287
Loss from operations................................ (2,830) (12,873) (4,422) (13,422)
Net loss............................................ (2,799) (12,140) (4,150) (12,125)
Net loss attributable to common stockholders........ (2,799) (15,367) (4,252) (25,825)
Net loss per share attributable to common
stockholders -- basic and diluted................. $ (1.65) $ (3.34) $ (1.18) $ (3.58)
Weighted average common shares outstanding -- basic
and diluted....................................... 1,696 4,601 3,613 7,211
Pro forma net loss per share -- basic and diluted
(unaudited)....................................... $ (0.42) $ (0.33)
Pro forma weighted average common shares
outstanding -- basic and diluted (unaudited)...... 28,787 36,646
</TABLE>
See note 2 of the notes to our financial statements for an explanation of
the determination of the number of weighted average shares used in computing per
share data.
The following table is a summary of our balance sheet as of June 30, 2000:
- on an actual basis;
- on a pro forma basis to give effect to the automatic conversion of all
outstanding mandatorily redeemable convertible preferred stock into
common stock upon the closing of the offering and the exercise of a
warrant to purchase 15,000 shares of common stock; and
- on a pro forma as adjusted basis to reflect this automatic conversion and
warrant exercise and the sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share
after deducting underwriting discounts and estimated offering expenses.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
--------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- ------- -----------
(in thousands)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 74,021 $74,021 $
Working capital............................................. 76,006 76,006
Total assets................................................ 84,794 84,794
Mandatorily redeemable convertible preferred stock.......... 112,945 --
Total stockholders' equity (deficit)........................ (34,913) 78,050
</TABLE>
4
<PAGE> 8
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the risks and uncertainties described
below and the other information in this prospectus before deciding whether to
invest in shares of our common stock. If any of the following risks actually
occur, our business, financial condition or operating results could be harmed,
which could cause the trading price of our common stock to decline and could
cause you to lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AND WE ONLY RECENTLY BEGAN SELLING OUR
UNIVERSAL ACCESS PLATFORM, MAKING AN EVALUATION OF OUR BUSINESS AND OUR
PROSPECTS DIFFICULT.
We were founded in January 1998 and only began volume shipments of our
Universal Access Platform, or UAP, comprised of a chassis, service and line
cards and network management and service delivery software, in the fourth
quarter of 1999. As of July 31, 2000, only eight service providers had deployed
our UAP. Our limited operating history and this limited number of users makes it
difficult to determine if our UAP will gain widespread market acceptance.
Further, our business strategy may be unsuccessful and we may not successfully
address the risks we face.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT SIGNIFICANT INCREASES IN COSTS AND
EXPENSES WHICH WILL RESULT IN CONTINUED LOSSES. WE CANNOT ASSURE YOU THAT WE
WILL EVER ACHIEVE OR SUSTAIN PROFITABILITY.
We have had substantial losses since our inception. We currently expect our
operating losses to increase over at least the next twelve months and we cannot
assure you that we will ever achieve or sustain profitability. We incurred net
losses of $12.1 million in 1999 and $12.1 million during the six months ended
June 30, 2000, and we had an accumulated deficit of $27.1 million as of June 30,
2000. The extent of future losses will depend, in part, on the amount of growth
in our revenue. The growth in our revenue, in turn, will primarily depend on the
increased acceptance of the use of our Universal Access Platform and related
products and services. The extent of future losses will also be contingent, in
part, on the amount of growth in our operating expenses and cost of revenue. We
expect our operating expenses to increase significantly as we expand our
professional staff, acquire new office space, enhance our products and services,
expand our direct sales efforts and expand international activities. In
addition, we may be required to spend more in research and development than
originally budgeted in order to respond to industry trends. If our revenue grows
more slowly than we anticipate, or our operating expenses increase without a
corresponding increase in our revenue, our losses may be larger than we expect.
OUR QUARTERLY RESULTS ARE UNPREDICTABLE AND MAY NEGATIVELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK.
Our quarterly operating results have fluctuated in the past and are likely
to fluctuate significantly in the future due to a variety of factors,
particularly those set forth in this "Risk Factors" section, many of which are
outside of our control. We believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful and that such comparisons may
not be accurate indicators of future performance. You should not rely on our
results for one quarter as any indication of our future performance. It is
likely that in some future quarter our operating results may fall below the
expectations of investors and, as a result, the price of our common stock may
fall.
5
<PAGE> 9
BECAUSE OUR ABILITY TO ACCURATELY FORECAST OUR QUARTERLY SALES IS LIMITED AND
OUR COSTS ARE RELATIVELY FIXED IN THE SHORT TERM, OUR QUARTERLY OPERATING
RESULTS WILL LIKELY FLUCTUATE, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.
Because of our limited operating history and the new and rapidly evolving
market for our Universal Access Platform, our ability to accurately forecast our
quarterly revenue is limited. In addition, we cannot forecast operating expenses
based on historical results, and most of our costs are for personnel and
facilities, which are relatively fixed in the short term. If we have a shortfall
in revenue in relation to our expenses, we may be unable to reduce our expenses
quickly enough to avoid lower quarterly operating results. We do no know whether
our business will grow rapidly enough to absorb the costs of these employees and
facilities. As a result, our quarterly operating results could fluctuate, and
such fluctuation may cause the market price of our common stock to decline.
WE ARE DEPENDENT ON A VERY LIMITED NUMBER OF SERVICE PROVIDERS AND PURCHASES BY
AXXENT FROM OUR VALUE ADDED RESELLER, PAIRGAIN TECHNOLOGIES, REPRESENT
SUBSTANTIALLY ALL OF OUR REVENUE. A DECREASE IN PURCHASES OF OUR UNIVERSAL
ACCESS PLATFORM BY AXXENT COULD SIGNIFICANTLY HARM OUR BUSINESS AND OPERATING
RESULTS.
Our UAP has been sold to only a small number of service providers, and, as
of July 31, 2000, only eight service providers had deployed our platform.
Purchases of our UAP by AXXENT Corp., formerly OpTel, Inc., from our value added
reseller, PairGain Technologies, which was recently acquired by ADC
Telecommunications, represented 31% of our total revenue for 1999 and 41% of our
total revenue for the six month period ended June 30, 2000. As a result, any
decrease in purchases by AXXENT could significantly harm our business and
operating results. Neither AXXENT nor any other service providers using our UAP
is obligated to purchase any of our platforms in the future. Until we can expand
the number of service providers using our UAP, we will continue to depend on
sales of our UAP to a small number of service providers.
SUBSTANTIALLY ALL OF OUR SALES ARE MADE THROUGH OUR VALUE ADDED RESELLER
AGREEMENT WITH PAIRGAIN TECHNOLOGIES AND ANY DISRUPTION OF THIS AGREEMENT COULD
NEGATIVELY IMPACT OUR BUSINESS.
PairGain Technologies has been a primary reseller of our Universal Access
Platform since the first quarter of 1999. A significant amount of our revenue,
representing 95% for 1999 and 97% for the six month period ended June 30, 2000,
has been and is expected to be derived from sales to PairGain Technologies.
PairGain Technologies has recently been acquired by ADC Telecommunications,
Inc. and our agreement with PairGain Technologies has been assigned to ADC
Telecommunications. Although we expect revenues from ADC Telecommunications to
decrease as a percentage of our total revenues in the future, if ADC
Telecommunications fails to continue to successfully sell our UAP or if our
relationship with ADC Telecommunications is disrupted for any reason, our
revenue could decrease significantly. In addition, ADC Telecommunications may
not pursue sales opportunities as aggressively and successfully as PairGain
Technologies or actively sell our UAP.
In March 1999, we entered into a value added reseller agreement with
PairGain Technologies which covers versions 0 and 1 of our Universal Access
Platform and we are currently shipping version 1.0. If we release versions of
our UAP in the future not covered by this agreement we will need to renegotiate
with ADC Telecommunications at that time. Further, if our agreement with ADC
Telecommunications is terminated for any reason, our business and operating
results could suffer.
In addition to our agreement with ADC Telecommunications, we have a
reseller agreement with Optical Solutions, Inc. Our failure to increase our
number of distribution relationships or maintain our existing relationships
could seriously harm our business and operating results.
6
<PAGE> 10
THE SALES CYCLE FOR OUR UNIVERSAL ACCESS PLATFORM HAS RANGED FROM THREE TO NINE
MONTHS AND ANY DELAY IN EXPECTED SALES COULD SIGNIFICANTLY HARM OUR OPERATING
RESULTS.
An end user's decision to purchase our Universal Access Platform involves a
significant commitment of its resources and in some cases a lengthy evaluation
and product qualification process. As a result, our sales cycle has generally
ranged from three to nine months and can be longer. We may incur substantial
sales expenses and expend significant management effort without any guarantee of
a sale. Further, before end users decide to purchase our UAP in volume, they
typically purchase one or more of our UAPs for use in testing and then based
upon test results determine whether to deploy our UAP for use with live
communications traffic. Even after making the decision to purchase, our end
users tend to deploy the UAP slowly and deliberately. Timing of deployment can
vary widely and depends on:
- the skill set of our end users;
- the size of the network deployment;
- the complexity of our end users' network environment;
- the degree of hardware and software configuration necessary to deploy our
UAP; and
- our end users' ability to finance their purchase of our UAP.
Our long sales cycles may cause our revenue and operating results to vary
significantly and unexpectedly from quarter to quarter which could cause our
stock price to decline.
WE EXPECT TO RECEIVE SIGNIFICANT PURCHASE ORDERS ON AN IRREGULAR AND
UNPREDICTABLE BASIS, WHICH WILL CAUSE OUR OPERATING RESULTS TO FLUCTUATE AND
COULD LEAD TO MANUFACTURING AND SUPPLY SHORTAGES.
End users with large networks usually modify their networks on a periodic
basis. Accordingly, we expect to receive purchase orders for significant dollar
amounts on an irregular basis. Because of our limited operating history, we
cannot predict these sales and development cycles. End users sporadically
placing large orders with short lead times may cause our revenue and operating
results to vary significantly and unexpectedly from quarter to quarter which
could cause our stock price to decline. In addition, we may face manufacturing
or supply shortages and may not be able to fill these orders on a timely basis,
which could damage our reputation and customer base.
OUR BUSINESS IS DEPENDENT ON THE ADOPTION BY COMMUNICATIONS SERVICE PROVIDERS OF
OUR UNIVERSAL ACCESS PLATFORM AS A MEANS TO PROVIDE INTEGRATED VOICE AND DATA
SERVICES OVER A SINGLE ACCESS NETWORK. SERVICE PROVIDERS MAY ADOPT ALTERNATE
SOLUTIONS TO ACHIEVE THIS INTEGRATION WHICH WOULD CAUSE SALES OF OUR UNIVERSAL
ACCESS PLATFORM TO DECLINE.
Our success will depend, in part, on increased demand for our Universal
Access Platform by communications service providers as a means to provide
integrated voice and data services over a single access network. Demand for our
UAP, however, is affected by many factors outside of our control, including:
- budgetary cycles and the availability of sufficient capital to service
providers for purchases of our UAP, including through lines of credit
which are frequently provided by some of our competitors and as a result
could be withheld in general or for purchases of our UAP.
- the availability of adequate space in an incumbent local exchange
carrier's central office or co-location facility for competitive local
exchange carriers to locate our UAP;
- significant reduction in switching costs which could result in decreased
need for our solution; and
7
<PAGE> 11
- failure to achieve widespread adoption of our Open Provisioning Standard
by integrated access device vendors.
In addition to these factors, demand for our product would decrease if
service providers adopt alternate solutions to provide integrated voice and data
services. These factors may decrease demand for our Universal Access Platform
and thereby negatively impact our business and operating results.
IF WE FAIL TO ENHANCE OUR EXISTING UNIVERSAL ACCESS PLATFORM OR DEVELOP AND
INTRODUCE NEW PRODUCTS THAT MEET CHANGING CUSTOMER REQUIREMENTS AND
TECHNOLOGICAL ADVANCES, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our markets are characterized by rapid technological advances, evolving
industry standards, changes in end-user requirements, frequent new product
introductions and changes in voice and data service offerings by service
providers. Our future success will significantly depend on our ability to
anticipate or adapt to these changes and to offer, on a timely and
cost-effective basis, products that meet changing customer demands and industry
standards. The timely development of new or enhanced products is a complex and
uncertain process and we may not have sufficient resources to successfully and
accurately anticipate technological and market trends, or to successfully manage
long development cycles. We may also experience design, manufacturing, marketing
and other difficulties that could delay or prevent our development, introduction
or marketing of new products and enhancements. The introduction of new or
enhanced products also requires that we manage the transition from older
products to these new or enhanced products. The failure to do so may cause
disruptions in end-user ordering patterns and inadequate supplies of new
products being available for delivery to meet anticipated customer demand. We
have collaborated with third parties, over which we have only limited control
and some of which are our competitors, to develop product features and, as a
result we rely on these arrangements for the timely development and introduction
of new products and product enhancements. We may also be required to work with
third parties in the future to develop our products. We may not be able to
develop these products on a timely and cost-effective basis. We have recently
announced the introduction of voice gateway capabilities, although we have not
yet deployed this feature and we cannot be certain that this feature will be
competitive. We are currently developing new product features such as
asynchronous transfer mode and frame relay. We are also currently developing an
international version of our GR-303 technology, known as V5.2, which optimizes
the capacity of connection lines to the central office and any delay in the
release of this technology could affect our planned revenue for 2001. Further,
we are developing some features which have yet to receive market acceptance,
such as G.SHDSL, an international version of HDSL-2 technology, and, as a
result, could expend resources on development without any opportunity to
generate revenue from these features. If we are not able to develop these
features or new products on a timely and cost-effective basis, or if our new
products or enhancements fail to achieve market acceptance, our business would
suffer.
WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY COMPONENTS, AND IF
WE OR OUR CONTRACT MANUFACTURERS ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY
BASIS, WE WILL NOT BE ABLE TO DELIVER OUR UNIVERSAL ACCESS PLATFORM TO OUR
CUSTOMERS.
Several of the key components used in our Universal Access Platform,
including Motorola processors, flash memory chips, and tantalum capacitors are
sourced from single or limited sources of supply. Furthermore, there is a
shortage of flash memory chips and we expect that it may be difficult to obtain
these components for the foreseeable future. We do not have guaranteed supply
arrangements with any suppliers, and we and our contract manufacturers may not
be able to obtain necessary supplies in a timely and cost-effective manner. In
addition, lead times for some key components, including our tantalum capacitors,
can be up to twelve months. As a result, we may be required to pay higher than
expected costs for these components which could adversely impact our gross
margin. Financial or other difficulties faced by these suppliers or significant
changes in demand for these components could limit the availability of these
components. In addition, any of our sole-
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source suppliers could be acquired by, or enter into exclusive arrangements
with, our competitors, stop selling their products or components to us at
commercially reasonable prices, or refuse to sell their products or components
to us altogether. Any interruption or delay in the supply of any of these
components, or the inability to obtain these components from alternate sources
at acceptable prices and within a reasonable amount of time, would impede our
ability to meet scheduled product deliveries to our customers and cause our
reputation to suffer and our revenue to decline. In addition, qualifying
additional suppliers is time-consuming and expensive and exposes us to potential
supplier production difficulties or quality degradation. It is also possible
that a source may not be available for us to be in a position to satisfy our
production requirements at acceptable prices, which could cause our operating
margins to suffer.
BECAUSE WE DEPEND UPON A SMALL NUMBER OF OUTSIDE CONTRACTORS TO MANUFACTURE OUR
PRODUCTS, OUR OPERATIONS COULD BE DISRUPTED IF WE ENCOUNTER PROBLEMS WITH THESE
CONTRACTORS.
We currently rely on Flextronics International, Flash Electronics, Dynamic
Details Incorporated, or DDI, and Sanmina to build our products. Our reliance on
these manufacturers involves a number of risks, including the absence of
adequate capacity, the unavailability of or interruptions in access to some
process technologies and reduced control over component availability, delivery
schedules, manufacturing yields and costs. We currently have contracts providing
for turn-key manufacturing with Flextronics, Flash Electronics and DDI which
provide that these manufacturers are responsible for procuring all components
and completing manufacturing and testing of our products. We currently have a
manufacturing consignment arrangement, but no written contract, with Sanmina
which provides that we procure all components and Sanmina performs assembly and
testing services. We do not have long-term supply arrangements with Flextronics,
Flash Electronics, DDI, or Sanmina. Consequently, these manufacturers are not
obligated to supply products to us for any specific period, in any specific
quantity or at any predetermined price, except as may be provided in a
particular purchase order. If Flextronics, Flash Electronics, DDI or Sanmina is
unable or unwilling to continue manufacturing our product in required volumes
and at high quality levels, we will have to identify, qualify and select
acceptable alternative manufacturers, which is costly and could take more than
six months. Qualifying a new contract manufacturer and commencing volume
production exposes us to potential production delays and quality degradation. It
is possible that an alternate source may not be available to us to satisfy our
production requirements at acceptable prices and quality. Furthermore, although
we are currently seeking to add outside manufacturers for our products, we may
not be able to add these manufacturers on a timely basis or at comparable price
levels. Any significant interruption in manufacturing would result in us having
to reduce our supply of our products to our customers, which in turn could
negatively affect our customer relations, and cause our sales to decline.
Furthermore, an increase in our cost of revenue would cause our operating
margins to decline.
Flextronics, Flash Electronics, DDI, and Sanmina also build products for
other companies, and we cannot be sure that they will always have sufficient
quantities of inventory available to fill orders placed by our customers, or
that they will allocate their internal resources to fill our orders on a timely
basis. We currently provide a rolling forecast of our demand to these
manufacturers 12 months before scheduled delivery of products to our customers.
If we overestimate our component requirements, these contract manufacturers may
purchase excess inventory. For those parts which are unique to our products, we
could be required to pay for these excess parts and recognize related inventory
write-down costs. If we underestimate our requirements, our contract
manufacturers may have an inadequate inventory, which could interrupt
manufacturing of our products and result in delays in shipments and revenue.
We may not be able to effectively manage our relationships with our
contract manufacturers and they may not meet our future requirements for timely
delivery. Any significant interruption in the operations of our contract
manufacturers would harm our ability to meet our scheduled product deliveries to
our customers, including reseller and end-user customers, which could damage our
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reputation and cause the loss of existing or potential customers. In addition,
if our contract manufacturers fail to build products with sufficient quality,
our reputation could suffer and we could lose existing or potential customers.
WE MAY EXPERIENCE PRODUCTION DELAYS OR DISRUPTIONS IN RELOCATING OUR CONTRACT
MANUFACTURING TO OFFSHORE FACILITIES, WHICH COULD RESULT IN LOST REVENUE.
We anticipate that we will relocate a portion of our manufacturing
operations to offshore manufacturing facilities during 2001. We could experience
difficulties and disruptions in the manufacture of our products while we
transition to these new locations. Manufacturing disruptions could prevent us
from achieving timely delivery of products and could result in lost revenue and
damage to our reputation.
IF SERVICE PROVIDERS CHOOSE TO REPLACE THEIR LEGACY NETWORK EQUIPMENT, SALES OF
OUR UNIVERSAL ACCESS PLATFORM WOULD BE SIGNIFICANTLY HARMED.
Our UAP is designed to interoperate with legacy networks. As a result, our
ability to acquire and retain additional customers will depend on our potential
customers' desire to upgrade existing systems, necessitating a solution which
interoperates with the current network rather than deploy newly-installed
networks. Various factors, including primarily cost, may affect a customer's
decision to upgrade an existing network or deploy a new network. If service
providers choose to replace their legacy networks, or to use a solution which
does not require interoperability with legacy networks, sales of our Universal
Access Platform would be significantly harmed.
WE FACE INTENSE COMPETITION WHICH COULD RESULT IN PRICE REDUCTIONS, REDUCED
MARGINS AND LOSS OF END-USER CUSTOMERS AND MARKET SHARE.
We may be unable to compete successfully with current or future
competitors. Competitive pressures may result in price reductions, reduced
margins and loss of end-user customers and market share. Currently, competition
in our market is intense. The multiservice access markets we are targeting are
new and rapidly evolving and we expect these markets to become increasingly
competitive in the future. In addition, we expect new competitors to emerge in
the multiservice access market as that market evolves due to technological
innovation and regulatory changes. We face actual and potential competition from
public and private companies providing single-purpose solutions and
multi-service access platforms.
Many of our competitors, including Cisco Systems, Inc., Lucent
Technologies, Inc., Nortel Networks and some companies that may compete with us
in the future, have longer operating histories and significantly greater
financial, technical, sales and marketing and other resources than we have. As a
result, these competitors are able to devote greater resources to the
development, promotion, sale and support of their products. In addition, many of
our competitors have significantly more established customer support and
professional services organization, as well as much greater name recognition, a
more extensive customer base and broader product offerings than we do. These
companies can leverage their customer bases and broader product offerings and
adopt aggressive pricing policies to gain market share. We have encountered, and
expect to continue to encounter, potential customers that, due to existing
relationships with our competitors, are committed to the product offerings of
these competitors. In addition, due to the rapidly evolving markets in which we
compete, additional competitors with significant market presence and financial
resources, including other large telecommunications equipment manufacturers, may
enter our markets, thereby further intensifying competition. Further, our
competitors that have large market capitalizations or cash reserves are much
better positioned than we are to acquire other companies, including other
competitors, and thereby acquire new technologies or products that may displace
our Universal Access Platform. Any of these acquisitions could give our
competitors a strategic advantage that would seriously harm our competitive
position.
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In addition, the markets in which we compete are characterized by
increasing consolidation, as exemplified by the recent acquisitions of Promatory
Communications, Inc., by Nortel Networks and FlowPoint Corporation by Efficient
Networks, Inc. and the recently completed acquisitions of PairGain Technologies,
Inc. by ADC Telecommunications, Inc. and Newbridge Networks Corp. by Alcatel. We
cannot predict how industry consolidation will affect our competitors and we may
not be able to compete successfully in an increasingly consolidated industry.
Because we are and will continue to be dependent on strategic and reseller
relationships with third parties in our industry, any consolidation involving
these parties could reduce the demand for our UAP and otherwise harm our
business. Any of these acquisitions could give our competitors a strategic
advantage that would seriously harm our business and operating results. For
additional discussion regarding our competition, including a list of current and
potential competitors, please see "Business -- Competition."
IF WE ARE UNABLE TO PROPERLY MANAGE OUR GROWTH OUR OPERATING RESULTS WOULD BE
HARMED.
We have expanded our operations rapidly since our inception and expect to
continue to do so. The number of our employees increased from 30 as of December
31, 1998 to 119 as of July 31, 2000. We intend to continue to expand in order to
pursue existing and potential market opportunities and are in the process of
hiring additional engineering, sales, marketing, support, financial and other
personnel. Our planned rapid growth places a significant demand on management
and financial and operational resources.
In order to grow and achieve future success, we must:
- expand manufacturing capacity;
- hire, train, manage and retain qualified personnel; and
- effectively manage an increasing number of relationships with customers,
suppliers and other third parties and an increasing number of complex
contracts.
In addition, in order to accommodate continued anticipated growth and
expansion we will be required to improve existing and implement new operational
and financial systems, procedures and controls. We are currently in the process
of implementing new accounting and financial reporting software. If we fail to
successfully implement and integrate this new financial reporting and
information systems with our existing systems or if we are not able to expand
these systems to accommodate our growth, we may not have adequate, accurate or
timely financial information. Our failure to have adequate, accurate or timely
financial information would harm our business and could lead to volatility in
our stock price. Further, if we are not able to install adequate systems,
procedures and controls to support our future operations in an efficient and
timely manner, or if we are unable to otherwise manage growth effectively, our
business and reputation would suffer. We have also recently moved our principal
offices to San Jose. This move has and may continue to require a significant
portion of our resources and could result in short term expenses and diversion
of attention which could harm our operating results.
IF WE ARE UNABLE TO HIRE AND RETAIN TECHNICAL, SALES AND MARKETING AND
OPERATIONAL PERSONNEL, OUR BUSINESS COULD BE HARMED.
We intend to continue to hire a significant number of additional personnel,
including engineering, sales, marketing, support and other personnel. In
addition, we are currently seeking to hire a chief financial officer, a vice
president of operations and a vice president of marketing. Our ability to
continue to attract and retain highly skilled personnel is a critical factor in
determining whether we will be successful in the future. Competition for these
individuals is intense, especially in the San Francisco Bay Area where we are
located. In particular, we have experienced difficulty in hiring hardware,
software, system, test and field systems engineers. We may fail to attract,
assimilate, or retain qualified personnel to fulfill our current or future
needs. If we so fail, our business could be seriously harmed.
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WE RELY ON THE SERVICES OF OUR KEY PERSONNEL, WHOSE KNOWLEDGE OF OUR BUSINESS
AND TECHNICAL EXPERTISE WOULD BE DIFFICULT TO REPLACE.
Our future success depends on our senior management and other key employees
effectively working together and successfully integrating new members. The loss
of one or more of our executive officers, particularly the loss of our president
and chief executive officer, Charles Kenmore, or other key personnel could
seriously harm our business and operating results. Any of our officers or key
personnel can quit at any time, and we cannot prevent them from joining our
competitors or otherwise competing with us. We do not maintain key life
insurance for any of our key employees. If we lose any of our key technical and
senior management personnel, our business could be harmed.
OUR ABILITY TO OPERATE AND GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS WITH THIRD PARTIES.
Our success depends on our ability to develop additional and maintain
current strategic relationships. For example, it is important that we continue
to use our value added reseller relationship with ADC Telecommunications to
support our sales operations. In addition, we intend to rely on current and
future third-party relationships to expand the capacity and capabilities of our
engineering team. We currently depend on our relationship with Trigon and Snow
City to provide us with many of our contract engineers and if either of these
relationships are disrupted for any reason we may incur unexpected expenses
related to the resulting loss of personnel. Further, we rely on third-party
relationships to provide product development services and we could be forced to
delay the launch of new products or features if any such relationships are
disrupted or terminated. We anticipate that we may be particularly reliant upon
our strategic relationships to grow our international operations both in terms
of engineering personnel and sales efforts.
The amount and timing of resources which our strategic partners devote to
our business is not within our control and our strategic partners may not
perform their obligations on a timely basis or as expected. In the event that
any strategic partner breaches or terminates its relationship with us, we may
not be able to sustain or grow our business. We may also not be able to maintain
our current strategic relationships or develop new ones when needed, or at all.
OUR UNIVERSAL ACCESS PLATFORM IS OUR ONLY PRODUCT, AND CONSEQUENTLY WE HAVE
RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF THIS PRODUCT FOR OUR REVENUE,
AND A DECLINE IN SALES OF THIS PRODUCT WOULD CAUSE OUR REVENUE TO FALL.
Historically, we have derived all of our revenue from sales of our UAP. We
expect that this product will continue to account for substantially all of our
total revenue for at least the next two fiscal years. Any factors negatively
impacting the pricing of or demand for our UAP, including competition or
technological change, would cause our revenue to decline and our business to
suffer.
IF WE DO NOT SUBSTANTIALLY EXPAND OUR DIRECT SALES OPERATIONS, AS WELL AS OUR
CUSTOMER SERVICE AND SUPPORT ORGANIZATION, WE WILL NOT BE ABLE TO ACHIEVE BRAND
AWARENESS FOR OUR UNIVERSAL ACCESS PLATFORM AND GENERATE ADDITIONAL SALES.
Our Universal Access Platform is highly technical in nature and therefore
requires a sophisticated sales effort targeted at several key people within each
of our prospective end users' organizations. We have recently created and are
continuing to expand our direct sales force. We hired our vice president of
sales, Stephen Gill, in September 1999 and as of July 31, 2000 we had only 11
sales personnel. As a result, we have only limited experience in conducting
direct sales. We plan to hire additional qualified sales personnel and system
and consulting engineers. We might not be able to hire the kind and number of
sales personnel and field system and consulting engineers we need. Further,
because our sales force is relatively new and has not had significant experience
selling our UAP, our direct sales efforts may not be successful.
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In addition, the complex nature of our UAP necessitates highly trained
customer service and support personnel. We currently have a small customer
service and support organization, as of July 31, 2000 we employed only six such
personnel, and we will need to increase our staff significantly to support new
end users and the expanding needs of existing end users. Hiring customer service
and support personnel is very competitive 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, our reputation may
suffer and sales of our UAP may decline.
IF OUR UNIVERSAL ACCESS PLATFORM DOES NOT INTEROPERATE WITH OUR END USERS'
NETWORKS, INSTALLATIONS MAY BE DELAYED OR CANCELLED WHICH WOULD HARM OUR
BUSINESS.
Our UAP is designed to interface with our end users' existing networks,
each of which has different specifications and utilizes multiple protocol
standards. Many of our end users' networks contain multiple generations of
products that have been added over time as these networks have grown and
evolved. Our UAP must interoperate with all of the products within these
networks as well as future products in order to meet our end users'
requirements. If we find errors in the existing software used in our end users'
networks, we may need to modify our Universal Access Platform to fix or overcome
these errors so that our product will interoperate and scale with the existing
software and hardware. If our product does not interoperate with our end users'
networks, installations could be delayed and orders for our UAP could be
cancelled. This would negatively impact our reputation, which could harm our
business and prospects.
BECAUSE OUR UNIVERSAL ACCESS PLATFORM IS COMPLEX AND IS DEPLOYED IN COMPLEX
ENVIRONMENTS, IT MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER FULL
DEPLOYMENT, WHICH COULD SERIOUSLY HARM OUR BUSINESS. WE MAY ALSO FACE POSSIBLE
PRODUCT LIABILITY CLAIMS AND DAMAGE TO OUR REPUTATION.
Our Universal Access Platform is highly complex and designed to be deployed
in very large and complex networks. Although we thoroughly test our UAP, because
of the nature of the product, it can only be fully tested when deployed in very
large networks with high amounts of traffic. Because of our short operating
history, our UAP has not yet been deployed broadly. Consequently, our end users
may discover errors or defects in our UAP after it has been fully deployed. In
addition, introduction of new product features, including our recently announced
voice gateway capabilities, could contain defects some of which may not be
detected until they are deployed. Further, our end users may use our products in
conjunction with products from other vendors. As a result, when problems occur,
it may be difficult to identify the source of the problem. Any defects or errors
in our UAP discovered in the future, or failures of our end users' networks,
whether caused by our product or another vendors' products, could result in:
- loss of, or delay in, revenue and loss of market share;
- loss of both end user and reseller customers;
- negative publicity regarding us and our UAP;
- unexpected expenses to remedy errors;
- diversion of our development resources;
- increased service warranty, costs and repair; and
- increased insurance costs.
In addition, because our UAP is designed to provide critical communications
services, we may be subject to significant liability claims. Our agreements with
customers typically contain provisions intended to limit our exposure to
liability claims. However, these limitations may not preclude all potential
claims resulting from a defect in our UAP. Our existing product liability
insurance may not be sufficient to cover us against all possible liability.
Liability claims could also require us to spend
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significant time and money in litigation or to pay significant damages. As a
result, any such claims, whether or not successful, could seriously damage our
reputation and cause our revenue to decline and our expenses to increase.
WE HAVE NO SIGNIFICANT EXPERIENCE OPERATING IN INTERNATIONAL MARKETS AND WE MAY
NOT BE ABLE TO SUCCESSFULLY ESTABLISH AND MANAGE OUR INTERNATIONAL OPERATIONS.
We intend to expand our international operations and enter new markets.
This expansion will require significant management attention and financial
resources and we may be delayed in our plans to enter international markets. We
are currently developing and manufacturing our international product platform.
As a result, we have no experience in marketing and distributing our product
internationally and in developing versions of our Universal Access Platform that
comply with local standards. If we fail to release our international platform as
planned our business and operating results could be seriously harmed.
In addition, our international operations will be subject to inherent
risks, including:
- difficulties and costs of staffing and managing foreign operations;
- certification requirements;
- longer sales cycles;
- expenses associated with customizing products for foreign countries;
- dependence on local vendors;
- additional complexity of establishing and maintaining strategic
relationships with international partners;
- protectionist laws and business practices that favor local competition;
- reduced protection for intellectual property rights in some countries;
- difficulties associated with enforcing agreements through foreign legal
systems;
- greater difficulty in collecting accounts receivable;
- fluctuations in currency exchange rates;
- difficulty in monitoring and complying with numerous and diverse
regulatory requirements;
- the impact of recessions in economies outside the United States;
- political and economic instability;
- import or export licensing requirements; and
- potential adverse tax consequences.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES OR TO SUCCESSFULLY
DEFEND AGAINST POSSIBLE INFRINGEMENT CLAIMS.
We rely on a combination of trade secret, copyright and trademark laws, and
contractual restrictions on disclosure to protect our intellectual property
rights. We enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, existing trade secret, copyright and
trademark laws afford only limited protection and unauthorized parties may
attempt to copy or otherwise obtain and use our product or technology.
Monitoring unauthorized use of our UAP is difficult and we cannot be certain
that the steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries
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where the laws may not protect our proprietary rights as fully as in the United
States. To date we have filed only one patent application. We cannot assure you
that this pending patent application will result in the issuance of the patent.
Further, even if issued, the resulting patent may not provide us with any
competitive advantage.
Although we have never been involved in any intellectual property
litigation, we may be a party to litigation in the future to protect our
intellectual property or as a result of an alleged infringement of others'
intellectual property. Claims for alleged infringement and any resulting
lawsuit, if successful, could subject us to significant liability for damages
and invalidation of our proprietary rights. Our liability for damages may also
arise from the indemnity we provide to our customers against any claims based
upon our intellectual property. These lawsuits, regardless of their success,
would likely be time-consuming and expensive to resolve and would divert
management time and attention. Any potential intellectual property litigation
could also 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 sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
- redesign those products that use such technology.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. For more information concerning our
intellectual property rights, see "Business -- Intellectual Property."
WE MAY INVEST A SIGNIFICANT AMOUNT OF OUR RESOURCES TO DEVELOP, MARKET AND SELL
OUR UNIVERSAL ACCESS PLATFORM AND MAY NOT REALIZE ANY RETURN ON THIS INVESTMENT.
We plan to invest a significant amount of our resources to develop, market
and sell our Universal Access Platform. Accordingly, our success will depend on
our ability to generate sufficient revenue from sales of our UAP to offset the
expenses associated with developing, marketing and selling them. There are many
risks that we face in doing so. We may expend funds for the development of new
products or product enhancements which fail to operate properly, or otherwise
fail to achieve market acceptance. In addition, the rapidly changing
technological environment in which we operate can require the frequent
introduction of new products, resulting in short product lifecycles.
Accordingly, if our UAP does not quickly achieve market acceptance, it may
become obsolete before we have generated enough revenue from sales of it to
realize a sufficient return on our investment.
As a result, we may incur significant expenses and losses due to lack of
customer demand, unusable purchased components for our UAP and the diversion of
our engineers from future product development efforts. If we incur substantial
development, sales, marketing and inventory expenses that we are not able to
recover, and we are not able to compensate for these expenses, our operating
results would be negatively impacted.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR OPERATING
RESULTS.
We may acquire or make investments in complementary companies, products or
technologies. We intend to enter into joint venture arrangements with other
companies to jointly develop new features for our Universal Access Platform and
to rely on the position of select partners in international markets to market
and sell our UAP. In the event of any such investments, acquisitions, or joint
ventures, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt;
- assume liabilities;
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- incur amortization expenses related to goodwill and other tangible
assets; or
- incur large and immediate write-offs.
These acquisitions or joint ventures also involve numerous risks,
including:
- problems combining the purchased operations, technologies or products
with ours;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- potential loss of key employees, particularly those of the acquired
organizations; and
- reliance to our disadvantage on the judgment and decisions of third
parties and our lack of control over the operations of a joint venture.
Any acquisition or joint venture may cause our financial results to suffer
as a result of these risks.
RISKS RELATED TO THE BROADBAND ACCESS INDUSTRY
SALES OF OUR UNIVERSAL ACCESS PLATFORM DEPEND ON THE WIDESPREAD ADOPTION OF
VOICE AND DATA ACCESS SERVICES AND IF THE DEMAND FOR MULTISERVICE BROADBAND
ACCESS SERVICES DOES NOT DEVELOP, THEN OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our business would be seriously harmed if the demand for voice and data
access services does not increase as rapidly as we anticipate, or if our end
users' multiservice broadband access service offerings are not well received in
the marketplace. Select critical factors will likely continue to affect the
development of the multiservice broadband access services market. These factors
include:
- the development of a viable business model for multiservice broadband
access services, including the capability to market, sell, install and
maintain these services;
- the extent that service providers are unable to deploy broadband access
using a digital subscriber line due to delays or other difficulties in
gaining access to the copper-pair infrastructure, which is the
communication network constructed over the past 100 years for the
transmission of voice calls, from incumbent local exchange carriers;
- cost constraints, such as installation, space and power requirements at
service provider facilities;
- ability to interoperate with equipment from multiple vendors in service
provider networks;
- evolving industry standards for digital subscriber line, T1 and other
transmission technologies;
- varying and uncertain conditions of the copper-pair infrastructure,
including size and length, electrical interference, and crossover
interference with voice and data telecommunications services; and
- domestic and foreign government regulation.
Even if these factors are adequately addressed, the market for multiservice
broadband access services may fail to develop or may develop more slowly than
anticipated. This could happen for a number of reasons. For instance, if our end
users, particularly competitive local exchange carriers, fail to obtain
sufficient capital, personnel and other resources to operate and grow their
business or fail to execute their business plans, our market may fail to develop
or may develop more slowly than anticipated.
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BECAUSE WE CURRENTLY PRIMARILY SELL OUR UNIVERSAL ACCESS PLATFORM TO COMPETITIVE
LOCAL EXCHANGE CARRIERS, WE RELY UPON THE CONTINUED EXPANSION OF THE COMPETITIVE
LOCAL EXCHANGE CARRIER MARKET. IF THIS EXPANSION DOES NOT OCCUR WE MAY BE UNABLE
TO GROW OUR SALES.
Substantially all of our end users to date have been competitive local
exchange carriers. The market for the services provided by competitive local
exchange carriers has only begun to emerge recently, and many of these service
providers are still building their infrastructure and rolling out their
services. These competitive local exchange carriers require substantial capital
for the development, construction and expansion of their networks and the
introduction of their services. Financing may not be available to emerging
competitive local exchange carriers on favorable terms, if at all. The inability
of our current or potential end users to acquire and keep customers, to
successfully raise needed funds, to obtain requisite space at an incumbent local
exchange carrier's facility, or to respond to any other trends such as price
reductions for their services or diminished demand for telecommunications
services generally, could adversely affect their operating results or cause them
to reduce their capital spending programs. If our end users are forced to defer
or curtail their capital spending programs, our sales would be adversely
affected. In addition, many of the industries in which competitive local
exchange carriers operate have recently experienced consolidation. If any of our
end users are acquired by one of the traditional telecommunications companies,
or incumbent local exchange carriers, our sales to this end user would be
reduced or eliminated as our UAP is not currently certified for use at an
incumbent local exchange carrier's facilities. The loss of one or more of our
end users, through industry consolidation or otherwise, could eliminate our
sales to this customer and consequently seriously harm our business.
IF WE FAIL TO COMPLY WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS, SALES OF
OUR EXISTING AND FUTURE PRODUCTS COULD BE NEGATIVELY IMPACTED.
The markets for our Universal Access Platform are characterized by a
significant number of communications regulations and standards, some of which
are evolving as new technologies are deployed. We are currently subject to
safety regulations promulgated by both the Federal Communications Commission, or
FCC, and Underwriters Laboratories, a not-for-profit private organization which
provides product safety and quality certification. While we believe that our UAP
complies with all current governmental laws, regulations and standards, we
cannot assure you that we will be able to continue to design our products to
comply with all necessary requirements in the future. In addition, both our end
user and reseller customers may require our UAP to comply with various
standards, including those established by Telcordia Technologies, Inc., a
communications software and solutions provider, or proprietary standards
promoted by our competitors. Our key competitors may establish proprietary
standards which they do not make available to us. As a result, we may not be
able to achieve interoperability with their products. Internationally, we may
also be required to comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the
International Telecommunication Union.
Our customers, both end users and resellers, may also require, or we may
otherwise deem it necessary or advisable, that we modify our Universal Access
Platform to address actual or anticipated changes in the regulatory environment.
Failure of our UAP to comply, or delays in compliance, with the various
existing, anticipated, and evolving industry regulations and standards could
negatively impact sales of our existing and future products. Moreover, the
enactment of new laws or regulations, changes in the interpretation of existing
laws or regulations or a reversal of the trend toward deregulation in the
telecommunications industry, could have a material adverse effect on our end
users, and thereby seriously harm our business.
OUR END USERS ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS THAT NEGATIVELY IMPACT OUR END USERS COULD SERIOUSLY
HARM OUR BUSINESS.
The jurisdiction of the FCC extends to the entire communications industry,
including our end users. Future FCC regulations affecting the broadband access
industry, our end users, or their service
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offerings, may seriously harm our business. For example, FCC regulatory policies
that affect the availability of data and Internet services may impede our end
users' penetration into some markets or affect the prices that they are able to
charge. In addition, international regulatory bodies are beginning to adopt
standards and regulations for the broadband access industry. These domestic and
foreign standards and regulations address various aspects of Internet use,
including issues relating to liability for information retrieved from or
transmitted over the Internet, online content regulation, user privacy,
taxation, consumer protection, security of data, access by law enforcement, as
well as intellectual property ownership, obscenity and libel. Resulting
standards and regulations, or judgments in favor of plaintiffs in lawsuits
against service providers, e-commerce and other Internet companies, could harm
the development of e-commerce and other uses of the Internet. This, in turn,
could directly or indirectly materially impact the broadband telecommunications
and data industry in which our end users operate. To the extent our end users
are adversely affected by laws or regulations regarding their business, products
or service offerings, this could seriously harm our business.
TELECOMMUNICATIONS COMPANIES ARE AFFECTED BY SEASONALITY WHICH COULD CAUSE OUR
STOCK PRICE TO DECLINE.
Telecommunications companies frequently experience seasonality in the sales
of their products. For example, in connection with international sales, sales
may decline during summer months, particularly in European markets. Sales may be
lower in the first fiscal quarter and higher in the fourth fiscal quarter due to
patterns in the capital budgeting and purchasing cycles of end users. These
seasonal variations in sales may lead to fluctuations in our quarterly operating
results which could cause our stock price to decline.
RISKS RELATED TO THIS OFFERING
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources, and could seriously harm
our business and operating results.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD DEPRESS OUR STOCK PRICE.
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 fall. Based on shares outstanding as of June 30, 2000, upon completion of
this offering, we will have outstanding shares of common stock. Upon
completion of this offering, shares of common stock, including the
shares being sold in this offering will be eligible for sale in the
public market immediately, unless purchased by our affiliates. Our stockholders
will be subject to agreements with the underwriters or us that restrict their
ability to transfer their stock for 180 days from the date of this prospectus.
After these agreements expire, an additional shares will be eligible
for sale in the public market.
SOME OF OUR EXISTING STOCKHOLDERS WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL
OVER ALL MATTERS REQUIRING STOCKHOLDER APPROVAL.
On completion of this offering, executive officers, directors and their
affiliates and 5% stockholders will beneficially own, in the aggregate,
approximately % of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to exercise significant control
18
<PAGE> 22
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions, which may have the
effect of delaying or preventing a third party from acquiring control over us
even if our other stockholders believe that it is desirable.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY.
Our certificate of incorporation and bylaws contain provisions which could
make it harder for a third party to acquire us or discourage a third party from
attempting to acquire us, including:
- the elimination of the ability of our stockholders to act by written
consent;
- the institution of a staggered board;
- the elimination of the ability of our stockholders to call a special
meeting;
- the authorization of our board of directors to issue and determine the
terms of shares of undesignated preferred stock without a vote of our
stockholders;
- providing that directors may be removed solely for cause and only
according to a supermajority stockholder vote; and
- providing that these provisions may only be amended by a supermajority
vote of our stockholders.
For more information regarding the anti-takeover effects of our charter and
bylaws and of Delaware Law, please see "Description of Capital
Stock -- Anti-Takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law."
INVESTORS IN THE OFFERING WILL EXPERIENCE IMMEDIATE DILUTION.
The initial public offering price will be substantially higher than the
book value per share of our outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
contribute % of our capital but will only own % of the shares outstanding.
The amount of this dilution in net tangible book value, based on an assumed per
share offering price of $ , will be $ per share. In addition, we have
issued options and warrants to acquire shares of common stock at prices
significantly below the initial public offering price and have additional shares
reserved under our 2000 Directors' Stock Option Plan, 2000 Employee Stock
Purchase Plan and 2000 Equity Incentive Plan, which will automatically increase
without stockholder approval. To the extent these shares are ultimately issued,
there will be further dilution to investors in this offering. See "Dilution" for
a more detailed description of how new stockholders will incur dilution.
OUR MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH
WHICH YOU MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A FAVORABLE RETURN.
Our management will retain broad discretion over the use of proceeds in
this offering. Our management may use the proceeds from this offering in ways
with which you may not agree. We cannot predict that the proceeds will be
invested to yield a favorable return. See "Use of Proceeds" for how we generally
intend to use the proceeds from this offering.
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<PAGE> 23
IF WE ARE NOT ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED, OUR ABILITY TO EFFECTIVELY OPERATE AND GROW OUR BUSINESS WILL BE
LIMITED.
We believe that proceeds from this offering, together with our existing
capital resources, will be sufficient to meet our capital requirements for at
least the next 12 months. However, our capital requirements depend on several
factors, including:
- the rate of market acceptance of our UAP;
- competitive pressures in our industry;
- our ability to expand our client base;
- the growth of our research and development and sales and marketing
organizations; and
- our acquisition of or investment in other technologies, products or
businesses.
If capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. Additional financing may
not be available when needed on terms favorable to us or at all. If adequate
funds are not available or are not on acceptable terms, we may be unable to
expand our business, develop or enhance our products and services, take
advantage of future opportunities or respond to competitive pressures.
IF WE ARE REQUIRED TO RAISE ADDITIONAL CAPITAL, OUR EXISTING STOCKHOLDERS MAY BE
HARMED.
We may be required to raise additional capital through the issuance of
stock, debt or a combination of the two. If additional funds are raised through
the issuance of equity securities, the percentage ownership of our stockholders
will be reduced. In addition, these newly issued equity securities may have
rights, preferences or privileges senior to those of the existing holders of our
common stock. If additional funds are raised through the issuance of debt
securities, these securities would have the rights, preferences and privileges
senior to those of the existing holders of our common stock and the terms of
such debt could impose restrictions on our operations.
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<PAGE> 24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. 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. 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. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our management's view only as of the
date of this prospectus. Except as required by law, we undertake no obligation
to update any forward-looking statement, whether as a result of new information,
future events or otherwise.
USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered by us
hereby at an assumed public offering price of $ per share are estimated to
be $ , or $ if the underwriters' over-allotment option is
exercised in full, after deducting the underwriting discount and estimated
offering expenses payable by us. We intend to use the net proceeds of this
offering for general corporate purposes, including working capital and other
capital expenditures. In addition, we may use a portion of the net proceeds to
acquire complementary technologies or businesses. However, we currently have no
commitments or agreements to engage in such a transaction. Pending use of the
net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. In
addition, the terms of our loan and security agreement restrict our ability to
pay dividends. We currently intend to retain all available funds and any future
earnings for use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
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<PAGE> 25
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 all
outstanding shares of preferred stock into shares of common stock upon
the closing of this offering and the exercise of a warrant to purchase
15,000 shares of common stock; and
- on a pro forma as adjusted basis to give effect to this automatic
conversion and warrant exercise and the receipt of the net proceeds from
the sale by us of shares of common stock at an assumed initial
public offering price of $ , after deducting underwriting discounts
and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- --------- -----------
(in thousands)
(unaudited)
<S> <C> <C> <C>
Note payable, net of current portion................. $ 854 $ 854 $
-------- -------- --------
Mandatorily redeemable convertible preferred stock,
$0.0001 par value, 31,848 shares authorized actual
and pro forma, 31,543 shares issued and
outstanding, actual; no shares authorized, pro
forma as adjusted, no shares issued and
outstanding, pro forma and pro forma as adjusted... 112,945 --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value, no shares
authorized, issued or outstanding actual and pro
forma; 10,000 shares authorized, pro forma as
adjusted no shares issued or outstanding, pro
forma as adjusted............................... -- -- --
Common Stock: $0.0001 par value, 55,000 shares
authorized, actual, 16,104 shares issued and
outstanding actual; 47,662 shares issued and
outstanding, pro forma; 200,000 shares
authorized pro forma and pro forma as adjusted,
shares issued and outstanding, pro
forma as adjusted............................... 2 5
Additional paid-in capital........................... 7,544 120,504
Receivables from stockholders........................ (60) (60)
Deferred stock-based compensation.................... (15,335) (15,335)
Accumulated deficit.................................. (27,064) (27,064)
-------- -------- --------
Total stockholders' equity (deficit)............ (34,913) 78,050
-------- -------- --------
Total capitalization............................ $ 78,886 $ 78,904 $
======== ======== ========
</TABLE>
This table excludes the following shares:
- 2,361,271 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 2000 at a weighted average exercise price of
$1.57 per share;
22
<PAGE> 26
- 140,000 shares of common stock issuable upon exercise of stock options
granted between June 30, 2000 and July 31, 2000 at a weighted average
exercise price of $5.50 per share; and
- a total of 10,786,326 shares available for future issuance under our
various stock plans as of July 31, 2000, excluding the annual increases
in the number of shares authorized under each of our plans beginning
January 1, 2001.
The above table below should be read in conjunction with the sections of
this prospectus entitled "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements included in this prospectus.
23
<PAGE> 27
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$ million or $ per share of common stock. "Net tangible book value"
per share represents the amount of our total tangible assets reduced by the
amount of our total liabilities and divided by the total number of shares of
common stock outstanding. 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 sale of the shares of common stock offered by us at
an assumed initial public offering price of $ per share, and after deducting
the underwriting discount and estimated offering expenses payable by us, our pro
forma net tangible book value at June 30, 2000 would have been $ or
approximately $ per share of common stock. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ per share to new investors of common stock.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering............................................... $
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table summarizes on a pro forma basis, as of June 30, 2000,
after giving effect to the conversion of all outstanding shares of preferred
stock into common stock and exercise of an outstanding warrant, the differences
between the existing stockholders and new investors with respect to the number
of shares of common stock purchased from us, the total consideration paid to us
and the average price per share paid by our existing stockholders and by new
investors, before deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, at an assumed initial public offering
price of $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 47,661,304 % $96,868,595 % $2.03
New investors...................
---------- ----- ----------- -----
Totals........................ 100.0% $ 100.0% $
========== ===== =========== =====
</TABLE>
In the event that we issue additional shares in the future, purchasers of
common stock in this offering will experience further dilution. As of July 31,
2000, there were 2,501,271 additional shares of common stock available for
issuance upon exercise of outstanding stock options at a weighted average
exercise price of $1.79 per share. As of July 31, 2000 there were 10,786,326
shares reserved for issuance under various stock plans, excluding the annual
increases in the number of shares authorized under each of our plans beginning
January 1, 2001.
Assuming the exercise in full of all outstanding options, our pro forma as
adjusted net tangible book value as of June 30, 2000 would have been $ per
share, representing an immediate increase in net tangible book value of
$ per share to our existing stockholders, and an immediate decrease in net
tangible book value of $ per share to the new investors.
24
<PAGE> 28
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes thereto included
elsewhere in this prospectus. We were incorporated in January 1998. The pro
forma share amounts in the statement of operations data reflect the assumed
conversion of our preferred stock into common stock.
The statement of operations data for the period from January 28, 1998
(inception) to December 31, 1998 and the year ended December 31, 1999, and the
balance sheet data for December 31, 1998 and 1999 have been derived from our
audited financial statements appearing elsewhere in this prospectus. The
statement of operations data for the six month period ended June 30, 1999 and
2000 and balance sheet data as of June 30, 2000 are derived from our unaudited
financial statements appearing elsewhere in this prospectus. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of our financial position and results of operations. The historical
results are not necessarily indicative of results to be expected for any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
JANUARY 28, SIX MONTH PERIOD
1998 ENDED
(INCEPTION) TO YEAR ENDED -------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 2000
-------------- ------------ -------- --------
(unaudited)
(in thousands except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue............................................... $ -- $ 1,248 $ 101 $ 8,329
Cost of revenue (including stock-based compensation of
$0, $16, $1 and $82 for the periods ended December
31, 1998 and 1999 and June 30, 1999 and 2000,
respectively)....................................... -- 837 116 4,042
------- -------- ------- --------
Gross profit (loss)................................. -- 411 (15) 4,287
Operating expenses:
Research and development (excluding stock-based
compensation of $0, $454, $105 and $1,885 for the
periods ended December 31, 1998 and 1999 and June
30, 1999 and 2000, respectively).................. 2,214 7,494 2,937 7,328
Sales and marketing (excluding stock-based
compensation of $0, $516, $52 and $1,598 for the
periods ended December 31, 1998 and 1999 and June
30, 1999 and 2000, respectively).................. 150 1,909 506 2,477
General and administrative (excluding stock-based
compensation of $0, $1,285, $39 and $2,471 for the
periods ended December 31, 1998 and 1999 and June
30, 1999 and 2000, respectively).................. 466 1,626 768 1,950
Stock-based compensation............................ -- 2,255 196 5,954
------- -------- ------- --------
Total operating expenses..................... 2,830 13,284 4,707 17,709
------- -------- ------- --------
Loss from operations.................................. (2,830) (12,873) (4,422) (13,422)
Interest and other income, net........................ 31 733 272 1,297
------- -------- ------- --------
Net loss.......................................... $(2,799) $(12,140) $(4,150) $(12,125)
------- -------- ------- --------
Accretion of mandatorily redeemable convertible
preferred stock..................................... -- (3,227) (102) (13,700)
------- -------- ------- --------
Net loss attributable to common stockholders.......... (2,799) (15,367) (4,252) (25,825)
------- -------- ------- --------
</TABLE>
25
<PAGE> 29
<TABLE>
<CAPTION>
JANUARY 28, SIX MONTH PERIOD
1998 ENDED
(INCEPTION) TO YEAR ENDED -------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 2000
-------------- ------------ -------- --------
(unaudited)
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net loss per share attributable to common
stockholders -- basic and diluted................... $ (1.65) $ (3.34) $ (1.18) $ (3.58)
Weighted average shares used to compute net loss per
share attributable to common stockholders -- basic
and diluted......................................... 1,696 4,601 3,613 7,211
Pro forma net loss per share attributable to common
stockholders -- basic and diluted (unaudited)....... $ (0.42) $ (0.33)
Weighted average shares used to compute net loss per
share attributable to common stockholders -- basic
and diluted (unaudited)............................. 28,787 36,646
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER
31, AS OF
------------------- JUNE 30,
1998 1999 2000
------- -------- -----------
(in thousands)
(unaudited)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and short-term investments........... $ 1,716 $ 13,787 $ 78,629
Working capital............................................. 1,334 13,206 76,006
Total assets................................................ 2,363 16,788 84,794
Mandatorily redeemable convertible preferred stock.......... 4,656 29,896 112,945
Total stockholders' deficit................................. (2,675) (15,513) (34,913)
</TABLE>
See note 2 of the notes to our financial statements for an explanation of
the determination of the number of weighted average shares used in computing per
share data.
26
<PAGE> 30
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 related notes included elsewhere in this
prospectus.
OVERVIEW
We develop, market and sell a comprehensive network access platform that
enables telecommunications service providers to rapidly and cost-effectively
deliver integrated voice and data services over a single access network. Our
Universal Access Platform, or UAP, is comprised of a chassis, service and line
cards and network management and service delivery software.
From inception in January 1998 through December 1999, our operating
activities consisted primarily of building a research and development
organization and our management team. We did not recognize any revenue until May
1999, and we did not commence volume shipment until the fourth quarter of 1999
when we recognized $1.0 million in revenue. Since inception, we have incurred
significant losses and as of June 30, 2000, we had an accumulated deficit of
$27.1 million. We have not achieved profitability on a quarterly or annual
basis. We expect to incur significant research and development, technology,
sales and marketing, and general and administrative expenses in the future and,
as a result, we will need to generate significantly higher revenue to achieve
and maintain profitability.
To date, we have derived substantially all of our revenue from sales of our
UAP and we believe that sales of our UAP will continue to account for
substantially all of our revenue for the foreseeable future. In the future, we
expect to derive additional revenue from the ongoing sale of service cards to
our end users as they desire to increase their services and expand their
platform configuration. We also intend to provide maintenance services to our
new and existing end users. End users will have a choice of the level of service
that we provide. The service levels will range from telephone technical support
during normal business hours to full on-site coverage including software
upgrades. We expect the services to be priced based on a percent of the list
price and level of service.
We recognize revenue at the time our products are shipped, provided that a
purchase order has been received, collectibility is deemed probable and
significant post-delivery obligations, if any, have been fulfilled. Currently,
all of our product sales provide for pricing and payment in U.S. dollars. We
have generally sold our UAP at a discount off of our list price based on a
variety of factors, including volume commitments, and our average sales price
has ranged from $25,000 to $100,000 depending on the hardware configuration.
Since we have no other products, our business and operating results are
dependent on acceptance of our UAP in the broadband access market. We provide
allowances for estimated sales returns and warranty costs at the time of revenue
recognition. To date, our sales returns and warranty expenditures have each been
less than 6% of net revenue in any quarter and our allowances have been
sufficient to cover these sales returns and warranty expenditures. However, our
past product return and warranty experience may not be indicative of future
product return rates and warranty costs. Although we have not generated any
service revenue to date, we plan to recognize service revenue ratably over the
contractual period.
To date, we have not generated any revenue from international sales.
However, we recently initiated sales and marketing and distribution efforts
internationally. For example, we have an arrangement with Armitel for joint
production of an enhancement to our Universal Access Platform as well as the
design of an international counterpart of GR-303 technology, known as V5.2. In
addition, we have an agreement with Snow City, a Chinese company, which covers
the development of high speed line cards which provide an interface to the
backbone of the network. We also intend to hire sales and marketing personnel in
each of our targeted international market segments.
27
<PAGE> 31
We have focused our selling efforts on competitive local exchange carriers,
or CLECs. To date, substantially all of our sales have been to our value added
resellers, or VARs. Our VARs are ADC Telecommunications, which in connection
with its recent acquisition of Pairgain Technologies assumed our agreement with
Pairgain Technologies, and Optical Solutions. Pairgain Technologies accounted
for 95% of our total revenue in 1999 and accounted for 97% of our total revenue
for the six months ended June 30, 2000. As a result of its acquisition of
Pairgain Technologies, ADC Telecommunications holds 4.8% of our outstanding
capital stock as of June 30, 2000. Any disruption of our relationship with ADC
Telecommunications could seriously harm our business and operating results,
although we do anticipate that sales to ADC Telecommunications will decrease in
the future. Sales to AXXENT Corp., which have historically been through Pairgain
Technologies, represented 31% of our total revenue for 1999 and 41% of our total
revenue for the six months ended June 30, 2000. We anticipate that our operating
results for a given period will continue to be dependent on a small number of
customers for the foreseeable future. We plan to increase our sales force to
increase the number of customers to whom we sell our UAP. As a result, we expect
our direct sales to increase in absolute dollars as well as increase as a
percentage of our total revenue.
Our cost of revenue includes all costs incurred in the manufacture of our
UAP including material costs, contract manufacture costs and overhead expenses
associated with our manufacturing personnel. Three contract manufacturers,
Flextronics International, Flash Electronics and Dynamic Details currently
produce portions of our UAP. These subcontracting arrangements include material
procurement and assembly. An additional manufacturer, Sanmina, performs assembly
and testing of our UAP. We have some key components that are purchased from sole
source suppliers for which alternative sources are unavailable or difficult to
secure. In addition, lead times for some of the components we use are long. We
use a rolling 12-month forecast based on anticipated product orders to determine
our product requirements. In the past our cost of revenue has been affected by
the limited availability and resulting increased cost of flash memory chips. The
price or availability of these chips, or of our other components, may increase
our cost of revenue in the future. We expect our gross margin will be affected
by component and contract manufacturing costs, the sales channel through which
our UAP is sold, and product configuration. In addition, new product
introductions by us or our competitors and competitive pricing pressures may
also affect our gross margin in the future.
Our research and development expenses include salaries and related
personnel costs, consulting costs and other costs related to the design,
development and testing of our UAP. We expense our research and development
costs as they are incurred. We believe that research and development is critical
to our strategic objectives and we devote substantial resources to the
development of new products and product features. As a result, we expect our
research and development costs to increase in the future in absolute dollars but
to continue to fluctuate from period to period as a percentage of our net
revenue.
Our sales and marketing expenses consist primarily of salaries and related
costs of our sales and marketing organizations, sales commissions, costs of our
marketing programs, including public relations, trade shows and collateral sales
materials. We intend to expand our direct sales operations and to maintain our
indirect sales channels in North America. In addition, we intend to
significantly expand our direct sales operations and to pursue alliances
internationally to expand our indirect sales channels. We expect that sales and
marketing expenses will increase substantially in absolute dollars over the next
year as we hire additional sales and marketing personnel, initiate additional
marketing programs and establish sales offices in additional domestic and
international locations but will continue to fluctuate from period to period as
a percentage of our net revenue.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and administrative personnel, costs
associated with expanding our information systems and legal and professional
services. We anticipate that general and administrative expenses will increase
significantly in the future in absolute dollars due to expenses associated with
increased
28
<PAGE> 32
staffing levels consistent with our planned growth and our operation as a public
company but will continue to fluctuate from period to period as a percentage of
our net revenue.
From inception to June 30, 2000, we recorded total deferred stock-based
compensation of approximately $23.6 million representing the difference between
the subsequently deemed fair value of common stock and the exercise price of
these options at the date of grant. Options granted are typically subject to a
four year vesting period. These stock options are immediately exercisable upon
grant and subject to our right to repurchase the stock at the original exercise
price. Generally, our repurchase right lapses ratably over the four year vesting
period. We amortized $2.3 million of deferred stock-based compensation in 1999.
During the six months ended June 30, 2000, we amortized $6.0 million of deferred
stock-based compensation. During the remainder of 2000 and in 2001, we expect to
amortize deferred stock-based compensation as follows:
<TABLE>
<CAPTION>
EXPECTED AMORTIZATION OF
FISCAL QUARTER ENDING STOCK-BASED COMPENSATION
--------------------- ------------------------
(in thousands)
<S> <C>
September 30, 2000............................. $2,795
December 31, 2000.............................. 2,717
March 31, 2001................................. 2,319
June 30, 2001.................................. 1,656
September 30, 2001............................. 1,242
December 31, 2001.............................. 1,056
</TABLE>
We expect aggregate stock-based compensation amortization of $2.6 million
during 2002, $904,000 during 2003 and $53,000 during 2004. The amount of
stock-based compensation expense to be recorded in future periods could decrease
if options for which accrued but unvested compensation has been recorded are
forfeited.
In addition, we recorded accretion charges relating to the redemption
feature of our preferred stock. Our net loss attributable to holders of common
stock includes accretion charges to increase over time the carrying amount of
our redeemable preferred stock to the amount we would be required to pay if the
preferred stock were to be redeemed. We recorded $3.2 million of accretion
charges in 1999. During the six months ended June 30, 2000 we recorded $13.7
million of accretion charges. As of June 16, 2000, we changed the terms of the
preferred stock to limit the redemption amount to its original issue price plus
10% of its original issue price per year plus accrued dividends. Upon completion
of this offering and the automatic conversion of our preferred stock we will no
longer record these charges.
As of December 31, 1999, we had approximately $12.1 million of federal and
$12.1 million of state net operating loss carryforwards for tax reporting
purposes available to offset future taxable income. These net operating loss
carryforwards expire beginning in 2018 for federal and 2005 for state. We have
not recognized any benefit from the future use of loss carryforwards for these
periods or for any other period since inception because of uncertainty
surrounding their realization. The amount of net operating losses that we can
utilize may be limited under tax regulations in circumstances including a
cumulative stock ownership change of more than 50% over a three year period. It
is possible that such a change may have already occurred or could occur as a
result of this offering.
We had 119 employees as of July 31, 2000, a substantial increase from 70 as
of December 31, 1999 and 30 as of December 31, 1998. This rapid growth has
placed significant demands on our management and operational resources. In order
to manage our growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite
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<PAGE> 33
our sequential quarterly revenue growth during 1999, we do not believe that
historical growth rates are necessarily sustainable or indicative of future
growth.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Revenue was $8.3 million for the six months ended June 30, 2000, an
increase of $8.2 million from the same period in 1999. We first recognized
revenue in the second quarter of 1999 when we began shipping our Universal
Access Platform. All of our revenue has been from one product, our UAP.
Cost of revenue, including stock-based compensation expenses, was $4.0
million for the six months ended June 30, 2000 resulting in a gross margin of
51% for the period. Cost of revenue was $116,000 for the six months ended June
30, 1999 and gross margin was (15%). This increase was due to our increased
sales during the 2000 period.
Research and development expenses were $7.3 million for the six months
ended June 30, 2000, an increase of $4.4 million from the six months ended June
30, 1999. Approximately $2.3 million of this increase was due to an increase in
the number of research and development personnel and consulting expenses and the
remaining increase resulted from costs of new product development.
Sales and marketing expenses were $2.5 million for the six months ended
June 30, 2000, an increase of $2.0 million from the six months ended June 30,
1999. Approximately $1.0 million of this increase was due to the increase in the
number of sales and marketing personnel, and the remaining increase resulted
from travel and tradeshow expenses.
General and administrative expenses were $2.0 million for the six months
ended June 30, 2000, an increase of $1.2 million from the six months ended June
30, 1999. Approximately $450,000 of this increase was due to additional
depreciation expense, rents and facility related expenses, while increased legal
and professional services accounted for approximately $270,000 of the increase,
with the remaining increase resulting from expensed computer equipment, supplies
and personnel expenses, which were partially offset by lower recruiting and
relocation expenses.
Stock-based compensation expenses were $6.0 million, including $82,000 of
stock-based compensation expense included in cost of revenue, for the six months
ended June 30, 2000, an increase of $5.8 million from $197,000 for the six
months ended June 30, 1999. The increase was due to the additional amortization
of deferred stock-based compensation resulting from additional stock option
grants.
Interest income, net includes income from cash and short-term investments.
Interest income, net of interest expense was $1.3 million for the six months
ended June 30, 2000, an increase of $1.0 million from the six months ended June
30, 1999. The increase resulted from a higher invested balance due to our
issuance of preferred stock in the first quarter of 2000.
PERIOD FROM JANUARY 28, 1998 (INCEPTION), TO DECEMBER 31, 1998 AND YEAR ENDED
DECEMBER 31, 1999
We began recognizing revenue in the second quarter of 1999. As a result, we
did not recognize any revenue in 1998. Revenue was $1.2 million in 1999.
Cost of revenue, including stock-based compensation expense, was $837,000
in 1999 resulting in a gross margin of 33% for the year. There was no cost of
revenue in 1998.
Research and development expenses were $7.5 million in 1999, an increase of
$5.3 million from $2.2 million in 1998. Approximately $3.3 million of this
increase was due to an increase in the number of research and development
personnel and consulting expenses and the remaining increase resulted from costs
associated with new product development.
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Sales and marketing expenses were $1.9 million in 1999, an increase of $1.8
million, from $150,000 in 1998. Approximately $757,000 of this increase was due
to an increase in the number of sales and marketing personnel, and the remaining
increase resulted from increased sales expenses, public relations activities,
travel and entertainment and tradeshows.
General and administrative expenses were $1.6 million in 1999, an increase
of $1.2 million from $466,000 in 1998. Approximately $450,000 of this increase
was due to an increase in general and administrative personnel and the remaining
increase resulted from increased legal and professional services and facilities
costs.
In connection with the grant of stock options to employees at prices
subsequently deemed to be below fair market value on the date of grant, we
recorded stock-based compensation of approximately $2.3 million in 1999. We
recorded no stock-based compensation in 1998.
Interest income, net of interest expense, was $733,000 in 1999 and $31,000
in 1998. The increase resulted from a higher invested balance due to our
issuance of preferred stock during 1999.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the six
quarters in the period from January 1, 1999 through June 30, 2000. The
information in each of these quarters is unaudited and has been prepared on the
same basis as our audited financial statements elsewhere in the prospectus. This
table includes all adjustments, consisting of normal recurring adjustments, that
we consider necessary to present the unaudited quarterly operating results.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue..................... $ -- $ 101 $ 122 $ 1,025 $ 3,190 $ 5,139
Cost of revenue............. -- 116 183 538 1,552 2,490
------- ------- ------- ------- ------- -------
Gross profit (loss)......... -- (15) (61) 487 1,638 2,649
as a percentage of
revenue................... -- (15)% (50)% 48% 51% 52%
Operating expenses:
Research and development.. $ 1,426 $ 1,511 $ 2,066 $ 2,491 $ 3,100 $ 4,228
Sales and marketing....... 124 382 621 782 1,029 1,448
General and
administrative......... 410 358 364 494 701 1,249
Stock-based
compensation........... 22 174 302 1,757 1,773 4,181
------- ------- ------- ------- ------- -------
Total operating
expenses............... 1,982 2,425 3,353 5,524 6,603 11,106
------- ------- ------- ------- ------- -------
Loss from operations........ (1,982) (2,440) (3,414) (5,037) (4,965) (8,457)
Interest and other income
(expenses), net........... 10 262 249 212 190 1,107
Net loss.................... $(1,972) $(2,178) $(3,165) $(4,825) $(4,775) $(7,350)
======= ======= ======= ======= ======= =======
</TABLE>
Gross profit increased in each of the quarters ended December 31, 1999, March
31, 2000 and June 30, 2000 due to the increase in volume sales and changes in
product configuration.
Operating expenses increased in each of the six quarters ended June 30,
2000 primarily as a result of the addition of personnel in all parts of our
organization, amortization of deferred stock-based compensation, increased legal
and professional services, and increased product development expenses. All
operating expenses increased quarter to quarter except that general and
administrative expenses for the quarter ended June 30, 1999, decreased from the
prior quarter as a result of
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relocation expenses recognized in the quarter ended March 31, 1999 which did not
occur in other periods.
Our quarterly operating results are likely to vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control and any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the demand for our UAP; the timing of sales
of our UAP and the purchasing cycles of our customers. Due to the foregoing
factors, we believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. It is likely that in some
future quarters, our operating results may be below the expectations of public
market analysts and investors. In this event, the price of our common stock may
fall.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
placements of preferred stock totaling approximately $96 million and to a lesser
extent, common stock issued to employees on exercise of stock options and
equipment financing loans. We have a loan agreement which provides two separate
equipment lines each totaling $750,000. As of June 30, 2000, $1.5 million had
been drawn against the two equipment lines. Draw downs on each of these
equipment lines are collateralized first by the equipment purchased with the
funds, and second by the general assets of the corporation, excluding our
intellectual property.
Net cash used in operating activities was $2.3 million and $9.5 million for
the period from inception to December 31, 1998 and in 1999, primarily
attributable to net loss excluding amortization of stock-based compensation and
depreciation of fixed assets. For the six months ended June 30, 2000, net cash
used in operating activities was $3.8 million, attributable primarily to net
loss excluding charges for stock-based compensation and depreciation and, to a
lesser extent, to fund additional working capital requirements.
The $727,000 of net cash used in investing activities in 1998 related
entirely to purchases of property and equipment. Net cash used in investing
activities was $9.0 million in 1999 resulting from net purchases of short-term
investments of $7.6 million and $1.3 million for purchases of property and
equipment. For the six months ended June 30, 2000, net cash provided by
investing activities equaled $1.2 million, consisting of $3.0 million of cash
related to the maturity of short-term investments offset in part by purchases of
property and equipment.
Net cash provided by financing activities was $4.8 million for the period
from inception to December 31, 1998, $22.9 million in 1999, and $70.5 million in
the six months ended June 30, 2000, in each case primarily attributable to the
sale of preferred stock.
From inception, we have made capital expenditures of $3.0 million to
support our research and development, sales and marketing and administrative
activities. We expect to spend approximately $3.6 million relating to capital
expenditures for the remainder of 2000. We also anticipate that our capital
expenditures will increase over the next several years as we expand our
facilities and acquire equipment to support expansion of our sales and marketing
and research and development activities.
A portion of our cash may be used to acquire or invest in complementary
businesses, products or technologies. From time to time, in the ordinary course
of business, we may evaluate potential acquisitions of such businesses, products
or technologies. We have no current plans, agreements or commitments, and are
not currently engaged in any negotiations with respect to any such transaction.
We believe that proceeds from this offering, together with our existing
capital resources, will be sufficient to fund our capital requirements for at
least the next 12 months. We cannot assure you that additional funding, if
required, will be available to us in amounts or on terms acceptable to us. If
sufficient funds are not available on acceptable terms, our ability to fund our
expansion, take advantage of future opportunities, develop or enhance our
services or products, or respond to competitive pressures would be significantly
limited.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS 133
requires that all derivatives be recognized in the balance sheet at their fair
market value and the corresponding derivatives gains or losses be reported in
the statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect of such derivatives. In July 1999, the
FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement 133". SFAS 137
deferred the effective date until the quarter ending June 30, 2000. In June
2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities -- An Amendment of FASB Statement No. 133," which
deferred the effective date until the quarter ended March 31, 2001. Accordingly,
the Company will adopt SFAS 133 in its quarter ending March 31, 2001. To date,
the Company has not engaged in derivative or hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. In June 2000,
the SEC issued SAB 101B to defer the effective date for implementation of SAB
101 until the fourth quarter of fiscal 2000. We believe that SAB 101 will not
have a material effect on the financial position or results of operations of the
Company.
In April 1999, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation" an interpretation of APB 25, which provides
clarification of the definition of employee for purpose of applying Opinion 25,
the criteria for determining whether a plan qualifies as a noncompensatory plan,
the accounting consequences of various modifications to the terms of a
previously fixed stock option or award and the accounting for an exchange of
stock compensation in a business combination. The interpretation is effective
July 1, 2000.
In various areas, including revenue recognition and stock-based
compensation, accounting standards and practices continue to evolve. The SEC is
preparing to issue interpretive guidance relating to SAB 101, and the FASB
continues to address revenue and other related accounting issues. We believe we
are in compliance with all of the rules and related guidance as they currently
exist. However, any changes to generally accepted accounting principles in these
areas could affect our results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments. We generally
place our cash, cash equivalents and short-term investments in high quality
corporate bonds. We do not expect any material loss from these investments and
do not believe that normal movements in interest rates would have a material
impact upon the carrying value of these investments. Based on these factors, we
believe that our potential interest rate exposure is not material.
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BUSINESS
OVERVIEW
We develop, market and sell a comprehensive network access platform that
enables communication service providers to rapidly and cost-effectively deliver
integrated voice and data services over a single access network. Our Universal
Access Platform, or UAP, is designed to work with existing circuit-switched
voice services as well as with broadband packet-based data services. Our UAP is
comprised of a chassis, service and line cards and network management and
service delivery software. Our access platform gives service providers the
flexibility to migrate customers from separate overlay access networks to a
single, integrated access network, reducing a service provider's capital and
operating costs, as well as simplifying service provisioning and systems
management tasks.
INDUSTRY BACKGROUND
GROWTH IN COMMUNICATIONS TRAFFIC
In recent years, the volume of traffic on communications networks has grown
significantly due to the growth of the Internet. Ryan Hankin Kent, an
independent consulting firm, estimates that the total amount of Internet traffic
in North America will increase from approximately 350,000 terabytes per month in
1999 to approximately 15,000,000 terabytes per month by 2003. This rapid growth
in traffic volume is being driven largely by a dramatic increase in the number
of users and devices conducting electronic commerce transactions, Web browsing
and email. For example, International Data Corporation, or IDC, estimates that
there were 239 million Internet users worldwide at the end of 1999 and
anticipates that this number will increase to approximately 602 million by the
end of 2003.
The growth in communications traffic is also a result of continuing
domestic and international deregulation, which is driving increased network
deployment and expanded service offerings. In the United States, incumbent local
exchange carriers, or ILECs, once controlled the market for communications
services. With the passage of the Telecommunications Act of 1996, the number of
competitive local exchange carriers, known as CLECs, has increased
significantly. In Asia, Latin America and Western Europe, deregulation is also
proceeding, enabling new service providers to enter the market, challenging the
incumbent service providers.
As the number of Internet users continues to grow and service offerings
continue to expand, service providers have been faced with the challenge of
handling higher volumes of communications traffic. To accommodate the increase
in communications traffic, service providers have expanded their network
capacity by installing fiber optic cable and by implementing optical
technologies at the core of their network, or backbone, significantly increasing
the amount of traffic that can be carried. However, the access portion of their
networks, which connects enterprise networks and subscribers to the backbone,
has not been expanded to keep pace with the growth in backbone capacity. These
access networks, often referred to as the last mile, still consist largely of
legacy systems, which were designed solely to handle individual voice, or
circuit-based, connections between two endpoints in the network.
IMPACT ON ACCESS NETWORKS
To differentiate themselves and reduce subscriber turnover in an
increasingly competitive environment, service providers, which currently include
ILECs and CLECs, need to quickly offer new services and deliver existing
services more efficiently. Since a significant portion of service providers'
revenue continues to be generated from circuit-based voice services, any
modifications to a service provider's access network to accommodate expanded
services cannot impact their ability to deliver toll quality voice services. To
avoid impacting their revenue generating voice networks, many service providers
have constructed separate overlay access networks to carry packet-based data
traffic using high speed data technologies, such as a digital transmission
standard known as T1 access and digital
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subscriber line, or DSL, and protocols such as asynchronus transfer mode, known
as ATM, and frame relay. Using overlay, or parallel, access networks for data
services allows data to be transmitted at high speeds while leaving the voice
services of service providers' existing networks largely unaffected.
This approach has led service providers to implement and operate multiple
access networks. Each access network consists of a distinct device for accessing
the service at the customer premises and a separate piece of equipment at a
service provider's facility to aggregate, or multiplex, multiple subscriber
lines and connect them to the backbone networks.
Existing access network solutions consist largely of single purpose
products optimized to provide one access service, such as voice, DSL, ATM or
frame relay, over a particular media such as copper wire. Customer premise
equipment, which is generally owned and operated by the subscriber, is used to
aggregate and route traffic at the customer premises. The multiple types of
equipment within the overlay access networks located at a service provider's
facility, known as a central office, which are owned and operated by the service
provider, are used to aggregate and route traffic before entering the backbone
network. Deploying and operating multiple overlay access networks presents a
number of challenges for service providers, including:
Limited network flexibility. Both central office and customer premise
equipment have been designed to perform a single function and have limited
ability to be used for other purposes. Service providers who have initially
focused on providing data services only are now seeking to offer voice services.
In addition, service providers who have traditionally focused on providing voice
services are now seeking to expand their high speed data access offerings. The
limited flexibility of these service providers' installed base of single purpose
equipment is impacting their ability to broaden their service offerings. For
example, as service providers seek to provide voice service over DSL, they must
implement additional network elements in their central offices, such as voice
gateways, to enable voice services over data networks, further complicating
their network architectures.
High capital costs. Since distinct pieces of equipment are usually required
at the customer premises and in the central office for each of the overlay
access networks, multiple devices or network elements must be purchased for each
service resulting in high capital costs. In addition, interconnecting each of
these networks to the backbone network requires additional network elements,
further increasing the capital costs of network implementation and expansion.
High operating costs. Installing and operating multiple access networks
requires a significant amount of physical space in a service provider's central
office. For CLECs who lease space in an ILEC's central office, known as
co-locating, installation and operation of multiple access networks results in a
higher lease expense. Additionally, a CLEC must interconnect, or backhaul,
traffic from its co-location sites to its regional central office which results
in higher operating and service costs. Managing and servicing multiple access
networks also requires separate network management systems, increasing the
overall cost and complexity of the service provider's networks. In addition, as
service providers add new products to their portfolio, maintaining and operating
multiple provisioning and management systems requires additional personnel and
training to maintain acceptable service levels.
Limited ability to expand services. As service providers desire to expand
their service offerings, separate expansion bays or chassis must be deployed for
each service. Using overlay access networks to expand services requires large
amounts of physical space because these networks are built using separate pieces
of dedicated equipment. Physical space in a service provider's co-location site
or central office is often limited or costly and unavailable. As a result, a
service provider's ability to grow its subscriber base to thousands of customers
and to provide new services is limited.
Complex and expensive service delivery and network management. Each of the
separate access networks requires its own service delivery mechanism which adds
to the complexity and the time required when implementing new services for
customers. When delivering a new service, service providers typically dispatch a
service technician to a customer location to deploy the new access
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device and activate the service, known as a truck roll, which can delay service
delivery and introduce significant incremental costs.
EMERGENCE OF INTEGRATED ACCESS NETWORKS
To address the network challenges facing service providers, communications
equipment companies have introduced integrated packet-based access devices to
replace legacy circuit-based access devices. To transition from overlay access
networks to a single integrated access network which is capable of delivering
multiple services, service providers have recently begun implementing these
devices. While these platforms enable voice and data services to be delivered
over a single access network, they do not accommodate the circuit-switched voice
networks in which service providers have invested in heavily and are reluctant
to abandon.
These access platforms generally consist of a proprietary integrated access
device, or IAD, located at the customer premise and a chassis-based counterpart
in a service provider's central office. The IAD packetizes voice and data
traffic and transmits it using a proprietary protocol over a single integrated
access network to a service provider's central office. While these access
platforms are effective in establishing a single access network, they are based
on a proprietary protocol and require a service provider to implement both the
customer premise IAD and the central office counterpart from the same vendor. In
addition, since these access platforms use a proprietary solution, they are
generally not capable of handling voice and data traffic that did not originate
from a compatible IAD. Unless all subscribers are transitioned to the new
proprietary access platform, a service provider will still be required to
operate multiple access networks to handle other traffic.
As service providers seek to differentiate themselves in an increasingly
competitive environment, the need for an integrated access network that will
improve service delivery and capabilities and reduce network complexity is
becoming increasingly important, driving a new set of requirements for equipment
in the access network. We believe service providers seek a single integrated
broadband access solution that operates in both circuit and packet based
environments, from which existing voice services can easily be delivered and new
data services can be added as desired, enabling them to control the migration
from legacy networks to next generation access networks.
THE ANDA NETWORKS SOLUTION
Our Universal Access Platform, or UAP, enables service providers to rapidly
and cost-effectively transition from separate overlay access networks to a
single, integrated access network. Our UAP is comprised of a chassis, service
and line cards and network management and service delivery software which
enables service providers to deliver both toll quality voice and high speed data
services over a single integrated access network. Because our UAP is designed to
work with existing narrowband circuit-switched voice services as well as with
broadband packet-based data services, service providers can migrate customers
from separate access networks to a single access network as their needs require.
Our Universal Access Platform also enables service providers to expand
their existing service set by easily adding value added services, such as
Internet access, virtual private networks and personalized voice services. We
believe that the ability to provide a complete suite of services will increase
subscribers' loyalty to their service provider and reduce the likelihood that
they will seek a lower cost provider of voice or data services. Furthermore, we
believe the ability to offer additional services to existing subscribers will
help service providers to increase the amount of revenue that they receive from
each of their subscribers.
Our UAP has been optimized for operating integrated access networks and
combines our flexible and scaleable architecture and our Open Provisioning
Standard, or OPS, delivery specification. The key benefits to service providers
of our solution include:
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Flexible migration of network technology. We believe our products offer
service providers an extremely flexible, cost-effective way to migrate from
operating multiple overlay access networks to operating a single, integrated
access network. This flexibility enables service providers to transition
customers to a single, integrated multi-service access network and to expand the
services they offer as their customers' needs require, with minimal disruption
to the customer and the service provider's existing network. For example, as
service providers desire to introduce new services, such as voice over DSL, they
can do so by installing the appropriate service card into our UAP rather than
implementing an entire separate overlay network which would require dedicated
central office and customer premise equipment.
Comprehensive functionality in a compact platform. Our compact UAP is
designed to enable service providers to deliver a comprehensive suite of circuit
and packet-based voice and data services. Services currently available through
our UAP include plain old telephone service, or POTS, T1 access, digital
subscriber line and ATM access. Service providers are currently using our UAP to
deliver these services over copper telephone wire. We believe that our UAP can
be easily modified to deliver these services over other media such as fiber or
fixed wireless connections.
Reduced capital costs. Our Universal Access Platform combines the
functionality of several network elements commonly found in traditional overlay
access networks. As a result, our solution offers service providers significant
capital cost savings by reducing the need to buy separate discrete network
elements. Our UAP also incorporates GR-303 technology, which enables service
providers to support more customers per switch port and to use their
multi-million dollar Class 5 core network switches more efficiently. This
reduces the number of additional switch ports required as service providers
expand their networks, resulting in additional capital cost savings.
Reduced operating costs. By combining multiple network elements into a
single platform, our UAP allows significant physical space savings in a service
provider's co-location facility or central office, resulting in lower lease
expense. Additionally, the improved Class 5 switch port efficiency resulting
from our GR-303 technology enables service providers to significantly reduce
backhaul expenses incurred when interconnecting traffic from co-location sites
to a regional central office. It does this by reducing the number of connection
lines to the central office and optimizing the capacity of each connection line.
Our UAP also reduces a service provider's ongoing network operation and
maintenance costs since it replaces multiple network elements, each of which
requires separate management software and additional personnel.
Scaleable, carrier-class solution. We offer service providers a scaleable,
carrier-class, high density access platform for provisioning multiple toll
quality voice and broadband data services. Our system is designed to enable up
to 9,720 connections from each UAP with the ability to provide significantly
more connections in some applications. Our UAP has Network Equipment Building
System, or NEBS-3, certification, an industry standard which is required for
deployment in service providers' central offices. Our UAP has been certified to
be interoperable with voice switches manufactured by Lucent Technologies and
Nortel Networks, enabling service providers to maximize their existing switch
investments. Each UAP is equipped with distributed power supplies, redundant
central processing units and an internal communication link, or bus,
architecture which significantly improves network availability and reliability.
Ease of service provisioning and system management. To ease new service
delivery and system management, our Universal Access Platform incorporates our
Open Provisioning Standard. OPS enables service providers to quickly and
inexpensively provision and maintain new services from our UAP across multiple
network elements without requiring a truck roll. Our UAP is designed to work
with integrated access devices as well as non-integrated customer premise
equipment from multiple vendors, allowing service providers to choose their
preferred customer premise equipment vendor. To encourage widespread adoption of
our Open Provisioning Standard among integrated access device and customer
premise vendors, we have made OPS available over the Internet at no charge. To
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enable a smooth transition as service providers incorporate OPS-enabled devices
into their networks, our UAP is capable of interoperating with devices that do
not incorporate OPS.
THE ANDA NETWORKS STRATEGY
Our objective is to be the leading provider of access platforms capable of
allowing service providers worldwide to deliver multiple services over an
integrated access network to their subscribers. Key elements of our strategy
include:
Broadening addressable market by developing additional features. To make
our Universal Access Platform more valuable to a broader range of service
providers, we are currently developing and plan to offer new features to allow
service providers to offer a broader range of revenue generating services, such
as frame relay access, an advanced version of high bit rate digital subscriber
line known as HDSL-2, and passive optical networking. We also intend to
introduce higher capacity backbone interfaces on our UAP, known as OC-3 and
OC-12, and interfaces to support hybrid fiber coaxial cable used by cable
television service providers, known as HFC, and high speed wireless
technologies, known as broadband fixed wireless.
Broadening customer base through expanded direct sales efforts. We intend
to expand our direct sales efforts to diversify and grow our customer base. To
date most of our sales have been to value added resellers. We are currently
focusing our direct sales efforts on CLECs and intend to target selected ILECs
by pursuing those ILECs who operate out of their region as CLECs. We intend to
further deepen our relationships with service providers who have deployed our
UAP by selling additional products and feature sets.
Expanding international presence. We believe that the market for our
platform outside of North America is growing and will be significant in light of
recent international telecommunications deregulation. As a result, we intend to
expand our business internationally in the Asia Pacific region, Latin America
and Europe. Currently, we have relationships with foreign technology companies
for the development of products and features designed for international markets.
We also have arrangements to expand our international distribution capabilities,
particularly in Asia, and to establish indirect sales channels. To expand our
international presence, we intend to hire additional qualified sales and
marketing personnel, including managers and application system engineers,
residing in each of our different international market segments.
Expanding relationships with key technology companies. We plan to continue
to leverage our engineering expertise and the flexible architecture of our UAP
to integrate with the technology of key relationship companies to accelerate the
availability of new services for our end users. We have entered into various
technology alliances to expand the service features and capabilities of our
Universal Access Platform. We intend to continue to pursue relationships with
key technology companies to expand the service features and capabilities that
can be offered from our UAP. We are working with Adtran Inc. to develop our
HDSL-2 service card. We are also working with Optical Solutions to develop a
line card for delivering fiber to the home. In addition to developing and
expanding our technology alliances, from time to time, we may also seek to
acquire companies that have developed complimentary technologies as they become
available and economically attractive.
Promoting adoption of our Open Provisioning Standard. We plan to work with
service providers and integrated access device, or IAD, vendors to gain
widespread acceptance of our Open Provisioning Standard. We have entered into an
agreement with Ishoni Networks, a provider of chip sets to multiple IAD vendors,
to incorporate OPS into their chip sets. We plan to leverage our relationships
with service providers to encourage additional IADs and circuit manufacturers to
adopt our OPS. We intend to approach additional providers of integrated access
devices and communications integrated circuits to encourage them to adopt and
incorporate OPS into their products. We have submitted OPS to the Internet
Engineering Task Force and made this specification available over the Internet
to encourage its widespread adoption.
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<PAGE> 42
PRODUCTS AND TECHNOLOGIES
UAP Access Platform
Our Universal Access Platform is comprised of a chassis, service and line
cards and network management and service delivery software. Our UAP combines the
features of many single purpose access systems into a single, highly functional
and flexible platform. Our UAP is based on our innovative system architecture,
which enables it to carry various voice and data services by incorporating the
functionalities of multiple technologies and protocols including digital loop
carrier, digital cross connect, voice gateway, digital subscriber line access
multiplexer, fiber optic terminal or any combination of these distinct network
elements. Our UAP is installed in a service provider's central office and can be
configured differently depending on the size of the service provider and the
specific service offerings the service provider would like to offer its
customers. The average selling price for our UAP ranges from $25,000 to $100,000
depending on the hardware configuration. As of July 31, 2000, we have sold over
200 UAPs to approximately 12 service provider end users.
Our UAP incorporates the following technical features:
- multiple internal communication links, or bus, design;
- chassis and card design;
- carrier class features;
- flexible network management; and
- Open Provisioning Standard.
Multiple internal bus design. Our UAP is designed with four separate buses,
or internal communication links, three of which support different types of
external traffic and one of which processes communications traffic internally.
These communication links include:
- a synchronous optical network, or SONET, bus which transmits electrical
digital signals with capacity for speeds up to 622 million bits per
second, a transmission rate known as OC-12;
- a local area network, or LAN, bus which supports communication internally
within the UAP;
- a cell bus which supports ATM, frame relay and Internet Protocol, or IP,
services; and
- a time division multiplexing, or TDM, bus which can support up to 9,720
connections by interweaving pieces of each voice and data signal one
after another.
Our design reduces the cost and complexity of converting traffic from one
protocol to another and provides significant flexibility by enabling a service
provider to deliver multiple services and technologies from one platform in a
scaleable architecture. In an effort to provide additional efficiency and
flexibility, we are in the process of developing redundant buses for each of the
four separate internal buses.
Chassis and card design. Our UAP incorporates a chassis and card design
which offers service providers a modular, scalable and flexible service delivery
platform. Our chassis design provides a total of 22 slots, including 2 slots in
the center of the chassis used for system central processing unit or CPU cards.
All of the blades installed into a chassis connect with one or more of the four
buses. The UAP currently supports three types of cards:
- service cards which define the services delivered to subscribers over
line cards;
- line cards which consist of access cards that interface to subscribers
and trunk cards that interface to service provider backbones; and
- CPU cards which perform administrative functions and manage internal
chassis communications.
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<PAGE> 43
The multiple bus architecture with separate software-defined line cards and
service cards enables service providers to continue to deliver existing services
while eliminating the need to deploy multiple service platforms in the central
office as new services are introduced. To activate new services, providers can
install a service card into any available slot on the chassis. Through the
appropriate internal bus or buses, the service is made available to all ports on
all access cards in the chassis, reducing the number of line cards required. In
addition, depending on the implemented software, line cards can be used either
on the access or trunk side of the network.
Our line cards and service cards are designed to offer service providers
high performance and flexibility. Our architecture is designed to permit
efficient migration from one protocol to another and allows the same line card
to be used to carry a number of different services. We currently offer the
following cards: GR-303 switch interface, T1 access and ATM voice gateway. In
addition we are currently developing the following cards: V5.2 switch interface,
HDSL-2, an international version of HDSL-2 known as G.SHDSL, and fiber to the
home, known as FTTH.
Carrier class features. Our UAP has been designed to meet the stringent
requirements for operating in service providers' access networks. Key carrier
class features of our system include:
- Network Equipment Building System, or NEBS-3, certification, a
requirement for installation into a service provider's central office;
- interoperability certification for Lucent Technologies' #5ESS Class 5
switch and Nortel Networks' DMS100 Class 5 switch, both of which are
generally known as Class 5 switches;
- redundant CPU cards; and
- fully distributed power supplies.
Our Universal Access Platform also incorporates service aggregation
technology, known as GR-303, which enables our UAP to aggregate time division
multiplexing, or TDM, traffic and interconnect more efficiently into a service
provider's Class 5 switch. Using GR-303 technology to concentrate voice lines
into a service provider's Class 5 switch reduces the number of expensive switch
ports required and the backhaul costs incurred to interconnect to the central
office where the Class 5 switch is located.
Flexible network management. The UAP can be managed remotely through one of
several different protocols over a variety of network interfaces. A standard
service provider protocol known as common management information protocol, or
CMIP, is used to communicate with the UAP over the circuit switched voice
network. A variety of common protocols are used to communicate with the UAP over
a packet network, including simple network management protocol, or SNMP,
hypertext transfer protocol, or HTTP, and a common communications network
protocol known as TL1. Service providers can use their existing network
management systems to manage the UAP remotely, improving the flexibility of
their overall network operations.
Open Provisioning Standard. Our Open Provisioning Standard, or OPS, is
designed to significantly improve the ease with which new services can be
provisioned by service providers. The first version of OPS has been registered
with the Internet Engineering Task Force as an Internet draft in order to
promote its adoption as an industry standard and is currently available at no
charge over the Internet. When implemented on our UAP and integrated access
devices connected to a UAP, OPS enables carriers to rapidly and easily turn on
new services as they are installed in the UAP chassis in the central office.
This specification, known as a flow through provisioning specification, enables
a service provider to issue commands from a remote network operations center
which will be sent to the UAP and, in turn, to the integrated access device. We
believe our Open Provisioning Standard will offer service providers the
following benefits:
- end-to-end service provisioning;
- ability to select best-of-breed integrated access devices from the vendor
of choice;
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<PAGE> 44
- simplified network management; and
- reduced number of on-site service calls.
STRATEGIC RELATIONSHIPS
To leverage the highly flexible system architecture incorporated into our
Universal Access Platform, we have established strategic relationships with
third parties to develop and implement advanced technologies. We currently have
established relationships with both domestic and international companies.
Our relationship with Adtran, Inc. covers the development of line cards
that can be used with our chassis to deliver HDSL-2 and G.SHDSL services as well
as allowing for additional access options to our platform, including copper DSL
loops. HDSL-2 is an advanced version of high bit rate digital subscriber line
used by service providers to more cost-effectively deliver T1 service. G.SHDSL
is an international version of HDSL-2 that service providers use to deliver high
speed Internet access to residences. Our relationship with Optical Solutions
Inc. covers the development of a line card that can be used in our chassis to
enable our UAP to provide high speed fiber to the home, or FTTH, service as well
as the development of passive optical network access, or PON.
In addition to these North American relationships, as a part of our
strategy we have established joint venture relationships with foreign companies
to help us penetrate select foreign markets which have historically been closed
to U.S. telecommunications companies, particularly Asian markets. Our joint
product development relationship with Armitel, a Korean company, covers the
development of an asynchronous DSL, or ADSL, line card for our chassis and the
development of an international counterpart of GR-303 technology, known as V5.2.
We also have an arrangement with Armitel to manufacture select components and to
assemble our UAP. Our agreement with Snow City, a Chinese company, covers the
development of high speed line cards which provide an interface to the backbone
of the network.
RESEARCH AND DEVELOPMENT
We have assembled a team of highly experienced networking engineers. We
have, as of July 31, 2000, 67 full-time engineers and 18 contract engineers,
with plans to continue expanding all functional areas of the engineering
organization. This compares to 23 engineers at the beginning of 1999. During
1998 we spent $2.2 million and during 1999 we spent $7.5 million on research and
development.
Product development begins with a comprehensive functional product
specification based on input from the product management and sales
organizations. In addition, we actively solicit feedback from end users and have
incorporated a significant amount of requested functionality into our platform.
We are also active in industry bodies and standards committees including the
Internet Engineering Task Force and the ATM/DSL Forum and utilize information
from these organizations in the product development process.
SALES, MARKETING AND CUSTOMER SERVICE
We sell our Universal Access Platform through a direct sales force and
through reseller channels. Through our reseller agreement with ADC
Telecommunications, we have been able to leverage the reach of the larger ADC
Telecommunications sales organization to qualify prospects for our solution. We
are directly and actively involved during the sales of our platform through ADC
Telecommunications to the ultimate customer in the engineering, support and
design of their networks. To date, sales through this reseller agreement have
constituted the majority of our sales, accounting for 95% of our revenue for
1999 and 97% of our revenue for the six months ended June 30, 2000. In addition,
sales under our agreement with ADC Telecommunications to AXXENT represent 41% of
our revenue for the six months ended June 30, 2000. In addition to our
relationship
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<PAGE> 45
with ADC Telecommunications, we have entered into a reseller arrangement with
Optical Solutions which is targeting the fiber to the home, or FTTH, market for
multiple services, including video.
Our newly formed direct sales force is located in various cities throughout
North America and has initially targeted CLECs, although we intend in the future
to target ILECs operating out of their region as CLECs. As of July 31, 2000, our
direct sales force consisted of nine sales professionals. We intend to continue
expanding our direct sales force. We intend to increase our direct sales both
through the expansion of our customer base and through delivery of new features.
Our North American direct sales organization is divided into five U.S.
regions and one Canadian region. Sales directors who report directly to the vice
president of sales cover each of these specified geographic regions and focus on
pursuing large CLEC accounts. As part of our direct selling model, we use our
sales directors to establish contacts with a potential customer's business
organization. Our sales engineers provide potential customers with pre-sale
support, including network design and buildout proposals.
Our marketing team, which has dedicated marketing managers for both
domestic and international programs, uses a variety of marketing initiatives and
programs to support the sale and distribution of our UAP. The audience for these
activities includes strategic partners, resellers, joint venture companies,
current and prospective customers, the trade press and analysts. Marketing
activities include participation in technical and sales conferences, preparation
of sales tools and distributing marketing collateral including brochures,
interactive CDs, product bulletins, mail shots and Web site material. We also
participate in leading domestic and international industry tradeshows.
Our customer service and support organization, consisting primarily of
field systems engineers, installs and maintains products sold by our direct
sales force and provides on-site support and training. Our engineers are also
involved with our resellers in the deployment to the end user, including
installation and first-level, or preliminary, support to their customers.
Additionally, our field systems engineers work closely with our direct sales
personnel and with resellers to assist end users with post-sales support issues.
We also intend to provide maintenance services to our customers and expect to
enter into service contracts with new and existing customers for services
ranging from telephone technical support during normal business hours to full
on-site coverage. We believe that maintaining ongoing customer relationships
with our customers will be important to our success.
END USERS
Historically, sales of our Universal Access Platform have been primarily to
CLECs through our relationship with Pargain Technologies. In the future we
intend to target select ILECs, particularly those ILECs operating out of their
region as CLECs.
The following is a list of service providers that are using our UAP
systems:
<TABLE>
<S> <C>
- ACS Inc.*
- Airspan Networks Inc.
- AXXENT*
- Blackfoot Communications
- CapRock Communications
Corp.
- CenturyTel, Inc.*
- Consolidated Tel*
- Frontier Corporation*
- GCI, Inc.
- Matanuska Telephone
Association*
- NextLink Communications,
Inc.*
- Rural Telecommunications*
</TABLE>
---------------
* Service providers that have deployed revenue-generating services voice and/or
data services as of August 11, 2000.
Many service providers are expanding their networks. As these service
providers continue to build out their networks, we believe they will need to
purchase a significantly greater amount of equipment. Accordingly, we intend to
continue to provide our products to these service providers, including our
end-users, as they expand their networks.
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MANUFACTURING
We have entered into agreements with three contract manufacturers which
provide for turn-key solutions in which they procure all components and complete
initial assembly at their facilities. We currently have agreements to outsource
our manufacturing to the following third-party manufacturers: Flextronics
International, located in San Jose, California, Flash Electronics, located in
Fremont, California and Dynamic Details, or DDI, located in Milpitas,
California. Flextronics produces circuit boards, provides system assembly into
the chassis as well as chassis assembly. Our agreement with Flextronics, under
which Flextronics provides custom manufacturing services based on specific
purchase orders, requires us to submit on a rolling monthly basis a six month
forecast of our manufacturing requirements and permits Flextronics to reject a
purchase order when an order both was not forecast and is more than three times
the largest prior purchase order. This agreement allows us to cancel an existing
order upon approval from Flextronics and subject to payment for related charges,
including finished product, select non-returnable inventory and reasonable
expenses incurred by Flextronics. Flash Electronics builds and assembles the
circuit board, and the service, line and CPU cards for our UAP. Our agreement
with Flash Electronics, under which Flash Electronics provides custom
manufacturing services based on specific purchase orders, requires us to submit
on a rolling monthly basis a non-binding three month forecast of our quantity
requirements. This agreement allows us to cancel existing orders subject to
penalties of payment for the thirty day inventory on hand, any unique components
which Flash Electronics cannot cancel before receipt or return, and all work in
progress. DDI produces circuit boards and provides system assembly into the
chassis. Our agreement with DDI provides for manufacturing services based on
purchase orders we submit and allows for cancellation of existing orders upon
payment by us of related charges, including any non-cancelable and
non-refundable materials. In addition to these contract manufacturers we also
have a manufacturing consignment arrangement with Sanmina. This arrangement
involves our providing all components and Sanmina performing circuit board
assembly and testing. Flextronics, Flash Electronics, DDI, and Sanmina are each
registered as meeting the requirements of the International Standards
Organization, or ISO, for their manufacturing processes.
Our UAP uses a combination of standard parts and key components. Several of
our key components are purchased from sole or limited sources of supply,
including our micro-processors supplied by Motorola, the semiconductor devices
provided by Altera and the flash memory chips primarily supplied by AMD. Some of
these key components require extensive lead times of up to one year, including
in particular the tantalum capacitors. We use a rolling 12-month forecast based
on anticipated product orders to determine our product requirements. In turn, we
provide these forecasts to our contract manufacturers, and they procure all
material according to anticipated lead times.
Our arrangements with our existing contract manufacturers provide
sufficient capacity for our current manufacturing needs. We are pursuing
additional manufacturing contracts in order to ensure ongoing capacity as our
business expands and minimize dependence on any one manufacturer. Specifically,
we are currently involved in developing relationships with additional contract
manufacturers to have offshore manufacturing capabilities to meet our
anticipated manufacturing requirements both internationally and in North
America. The loss of any of our current third-party manufacturers would prevent
us from meeting our scheduled product deliveries to our customers and would
seriously harm our business.
Our in-house manufacturing operations consist primarily of prototype
development, materials planning, final assembly and packaging, testing and
quality control. Our test engineers and manufacturing personnel develop all test
procedures and design and build all equipment and stations required for the
in-house testing of our products. We conduct functional and system testing and
we outsource circuit testing to our contract manufacturers. Our test engineers
intend to integrate our manufacturing tests with our contract manufacturers'
build processes as we transition all testing to these third-party manufacturers.
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COMPETITION
The market for integrated multi-service access platforms is new, rapidly
evolving and highly competitive. In addition, we expect that new competitors
will emerge as the market for broadband access evolves due to technological
innovation and regulatory changes. Our comprehensive access platform offers
multiple functionalities and is compatible with varying protocols. As a result,
we encounter current or potential competition from many public and private
companies offering single-purpose, or point, solutions and access platforms
containing one or some of our multiple features.
Our current and potential competitors include the following:
- GR-303 Aggregation -- Lucent Technologies, Nortel Networks, the FIBEX
division of Cisco, and Zhone;
- Voice Gateways -- Accelerated Networks, Jetstream, Tollbridge and
CopperCom;
- Digital Subscriber Loop Access Multiplexer -- Lucent Technologies, Cisco
and Alcatel; and
- Digital Cross Connect -- Lucent Technologies and Tellabs.
We believe we compete favorably on the principal factors that will draw
service providers to multi-service access platforms which include:
- multi-function support;
- breadth of product lines;
- product ease of deployment;
- product features and enhancements, including product performance,
reliability, size, compatibility and scalability;
- technical support and service;
- product pricing;
- sales and distribution capability; and
- conformance to industry standards.
Some of our current and potential competitors are large public companies
that have longer operating histories and significantly greater financial,
technical support and service, marketing and other resources than we do. As a
result, these competitors are able to devote greater resources to the
development, promotion, sale and support of their products. In addition, many of
our competitors have much greater name recognition, a more extensive customer
base and broader product offerings than us, including relationships with many of
our current and potential customers. These companies can leverage their customer
relationships and broader product offerings and adopt aggressive pricing
policies to gain market share. In addition, our competitors with large market
capitalizations or cash reserves are much better positioned than we are to
acquire other companies, including our competitors, and thereby acquire new
technologies or products that may displace our UAP. Any of these acquisitions
could give the acquiring competitor a strategic advantage that would seriously
harm our business.
INTELLECTUAL PROPERTY
Our ability to compete and succeed in the market for telecommunication
access equipment depends on our ability to develop and protect our proprietary
technology, trade secret and know-how. We rely on a combination of trademark,
copyright and trade secret laws, employee and third-party nondisclosure
agreements and licensing arrangements to protect our intellectual property.
However, these legal protections afford only limited protection for our
proprietary intellectual properties. We have one patent application pending in
the United States, and are in the process of filing under the Paris
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<PAGE> 48
Convention Treaty for international protection in Europe, China, Taiwan, Korea
and Japan. Our pending patent application may not result in the issuance of the
patent. Even if the patent is issued, it might be invalidated or circumvented,
or fail to provide us with any meaningful protection. In addition, the laws of
many foreign jurisdictions do not protect intellectual property to the same
extent as the laws of the United States. Furthermore, we cannot be certain that
others will not independently develop substantially equivalent technology or
otherwise gain access to our trade secrets or intellectual property, or disclose
our intellectual property or trade secrets. Although we have and continue to
take measures designed to protect our intellectual property, our failure to
effectively do so could seriously harm our business, financial condition and
operating results.
We have licensed technologies from third parties for incorporation into our
current products. We expect to continue to enter into these agreements for
future products. Some of these licenses result in royalty payments to third
parties. If our license arrangements are not concluded on reasonable commercial
terms, or at all, our business, financial condition or operations could be
seriously harmed.
We may in the future be party to litigation arising in the course of our
business, including claims that we allegedly infringe third-party trademarks and
other intellectual property rights. These claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
GOVERNMENT REGULATION
The markets for our products are characterized by a significant number of
laws, regulations and standards, both domestic and international, some of which
are evolving as new technologies are deployed. Our products are required to
comply with these laws, regulations and standards, including those promulgated
by the Federal Communications Commission, or FCC. In some cases, we are required
to obtain certifications or authorizations before our products can be
introduced, marketed, or sold. We may not be able to continue to design our
products to comply with all necessary requirements in the future or we may have
delays in releasing products to comply with these regulations. Accordingly, any
of these laws, regulations and standards may directly affect our ability to
market or sell our products.
In addition, FCC regulatory policies that affect the availability of
broadband access for data and Internet services may impede our end users'
penetration into their markets, affect the prices that our end users are able to
charge, or otherwise affect their ability to market their products and grow
their business. For example, FCC regulations addressing interconnection of
competing networks, co-location, unbundling of network elements, and line
sharing impact our customer base. The FCC and the courts are also continuing to
review the access charges of ILECs that are paid by long distance carriers. Any
changes in the regulations of these access charges may affect other
telecommunications providers, including the viability of CLECs, resulting in an
impact on our customer base. In addition, the FCC has not clearly defined how or
whether some broadband services should be regulated. If the FCC decides to
regulate these emerging services, our customer base could be impacted. To the
extent that our end users are negatively impacted by these changes in the
regulatory environment, our business may suffer.
State regulation of telecommunications networks and service providers may
also affect the regulatory environment of our marketplace. State regulators, for
example, typically settle disputes for competitive access to some ILEC network
elements or co-location in ILEC offices, which CLECs use to offer various
services. State regulators may also regulate and arbitrate disputes concerning
interconnection of networks of ILECs and CLECs. To the extent that our end users
are negatively impacted by these changes in the regulatory environment, our
business may suffer.
In addition to federal and state telecommunications regulations, an
increasing number of other domestic laws and regulations are being adopted to
specifically address such broadband and telecommunications issues as liability
for information retrieved from or transmitted over the Internet, online content
regulation, user privacy, taxation, consumer protection, security of data,
access by law
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enforcement, as well as intellectual property ownership, obscenity, and libel.
For instance, the Federal Trade Commission recently recommended that Congress
enact legislation to ensure adequate protection of online privacy. The adoption
of this or other restrictive legislation could increase the costs of
communicating over the Internet or decrease the acceptance of the Internet as a
commercial and advertising medium, resulting in a dampening in the growth of the
Internet. Because our end users may use our products to facilitate both
commercial and personal uses of the Internet, our business could be harmed if
the growth of the Internet were adversely affected by these laws, regulations or
standards.
The applicability of laws, regulations and standards affecting the
broadband telecommunications and data industry in which we and our end users
operate is continuing to develop, both domestically and internationally. We
cannot predict the exact impact that current and future laws, regulations and
standards may have on us or our end users. These laws, regulations and standards
may directly impact our products and result in a material and adverse effect on
our business. In addition, should our current and potential end users be
negatively impacted by this regulation, our business would likely be negatively
impacted as well.
EMPLOYEES
As of July 31, 2000, we had 119 full-time employees, 24 of whom were in
sales, marketing and customer support, 67 of whom were in research and
development, 14 of whom were in manufacturing and 14 of whom were in general and
administrative. None of our employees is represented by a labor union. We have
not experienced any work stoppages and consider our employee relations to be
good.
FACILITIES
Our principal executive offices are located in San Jose, California, where
we lease approximately 102,291 square feet, approximately 42,500 of which we
intend to sublease, under a lease that expires in May 2003. In addition, we
lease approximately 9,500 square feet in Santa Clara under a lease which expires
in September 2000 and approximately 5,300 additional square feet in Santa Clara
under a lease that expires in September 2001.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings against us that,
individually or in the aggregate, would seriously harm our business and
operating results.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, their ages and the positions held by
them, as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Charles R. Kenmore................. 50 President, Chief Executive Officer, Chief Financial
Officer and Director
WuFu Chen.......................... 50 Chairman of the Board
George K. Chen..................... 55 Vice President of International Business Development
Tony Chern......................... 41 Vice President of Engineering
Stephen Gill....................... 39 Vice President of Sales
Swee Seng Ho....................... 34 Vice President of Worldwide Program Management
Dr. Rueiming Jamp.................. 50 Chief Technical Officer
Robert D. Simkavitz................ 45 Vice President of Business Development
George Bruno....................... 64 Director
Paul Maeder........................ 46 Director
Mike Pascoe........................ 47 Director
Anthony Sun........................ 47 Director
</TABLE>
CHARLES R. KENMORE has served as our chief executive officer since March
2000 and is also a member of our board of directors. Mr. Kenmore is also
currently serving as our chief financial officer. From January 1999 to March
2000, Mr. Kenmore served as our co-chief executive officer. From November 1997
to November 1998, Mr. Kenmore served as president of ADC Telecommunications
International, Inc., a telecommunications equipment manufacturer. From January
1995 to November 1997, Mr. Kenmore served as senior vice president and general
manager of the international division at Boca Research Inc., a data
communications and internet access product manufacturer. From January 1989 to
January 1995, Mr. Kenmore served as vice president and general manager,
international division, information systems group at Motorola, Inc., an
integrated communications solutions provider. Mr. Kenmore received a B.A. in
economics and international trade from the University of Malaysia.
WUFU CHEN is a co-founder and has served as chairman of the board since
August 1998. From August 1998 to March 2000, Mr. Chen served as our co-chief
executive officer. Since May 2000, Mr. Chen has served as the co-chief executive
officer of Navini, a broadband wireless access equipment company. Since February
1999, Mr. Chen has served as the co-chief executive officer of Geyser Networks,
Inc., a synchronous optical network technology company. From February 1999 to
February 2000, Mr. Chen served as the co-chief executive officer of Saneta, a
Class 5 switch company, and since February 2000, he served as co-chief executive
officer of OptiMight Communications, an optical networking company. From August
1998 to April 1999, Mr. Chen served as co-chief executive officer of Shasta
Networks, a subscriber service system provider. Prior to that, Mr. Chen served
as the vice president of technology at Cisco Systems, a networking equipment
provider, from July 1997 to August 1998. From August 1996 to July 1997, Mr. Chen
served as chief executive officer of Ardent Software, Inc., a networking
company, and from May 1995 to April 1996, Mr. Chen served as chief executive
officer of Arris Systems, Inc., a networking company. Mr. Chen received a B.S.
in electrical Engineering from National Taiwan University, as well as an M.S. in
electrical engineering from University of Florida.
GEORGE K. CHEN is a co-founder and has served as our vice president of
international business development since November 1998. From February 1998 to
November 1998, Mr. Chen served as our president and as a member of our board of
directors. Prior to that, Mr. Chen served as the vice president of business
development at E/O Networks, Inc., a telecommunications company, from December
1995 to June 1997. From February 1992 to December 1995, Mr. Chen served as vice
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<PAGE> 51
president of Alcatel Inc.'s managed network business division in Taiwan. Prior
to that, Mr. Chen served as vice president of the network planning and software
division at Fujitsu, a Nortel telecommunications systems, semiconductors and
software manufacturer. Mr. Chen received his B.S. in electrical engineering at
California State University, as well as an M.S. in computer science and an
M.B.A. from Santa Clara University.
TONY CHERN is a co-founder and has served as our vice president of
engineering since January 2000. Prior to that, Mr. Chern served as our vice
president of software development, from February 1998 to January 2000. From
August 1991 to December 1997, Mr. Chern served as the senior engineering manager
at Ericsson Inc., a telecommunications company. Mr. Chern received his M.S.
degree in electrical engineering from Syracuse University.
STEPHEN GILL has served as our vice president of sales since September
1999. From July 1997 to September 1999, Mr. Gill served as vice president,
service provider sales for Newbridge Networks, a DSL and broadband solutions
provider. Prior to that, at Newbridge Networks Corporation, Mr. Gill served as a
regional sales team leader responsible for the western United States and Midwest
territories from April 1994 to July 1997. Mr. Gill studied biology from
Northwestern University.
SWEE SENG HO has served as our vice president of worldwide program
management since May 2000. From 1998 to May 2000, Mr. Ho served as regional vice
president, Asia Pacific region at ADC Telecommunications, Inc., a
telecommunications equipment and broadband data manufacturer. Prior to that, Mr.
Ho served as managing director, Asia Pacific region at Boca Research Inc., a
data communications and internet access product manufacturer, from 1995 to 1998.
Mr. Ho received a B.A. in technology management from Staffordshire University.
DR. RUEIMING JAMP is a co-founder and has served as our chief technical
officer since February 1998. From October 1996 to February 1998, Dr. Jamp
co-founded and served as the chief technology officer of Structured
Internetworks, an internet service provider. Prior to that, Dr. Jamp served as
an engineer at Hewlett Packard Company, a computing systems and software
provider, from December 1981 to October 1996. Dr. Jamp received his B.S. in
electrical engineering from National Taiwan University and his M.S. and Ph.D. in
computer science from Pennsylvania State University.
ROBERT D. SIMKAVITZ has served as our vice president of business
development since February 1999. From January 1998 to February 1999, Mr.
Simkavitz served as vice president of marketing for ADC Technologies
International, Inc., a telecommunications equipment manufacturer. From July 1996
to January 1998, Mr. Simkavitz served as the director of strategy at Newbridge
Networks Corporation, a telecommunications company. Prior to that, Mr. Simkavitz
served as vice president of Motorola's multimedia group, from August 1990 to
January 1996. Mr. Simkavitz received an M.B.A. from University of Denver.
GEORGE BRUNO has served as a member of our board of directors since
February 2000. From September 1992 to present, Mr. Bruno has served as president
and chief executive officer of Bethany Business Group, a consulting company for
the communications industry. In addition, from September 1997 to August 1998,
Mr. Bruno served as president and chief executive officer of Commserve
Communications, a communications integrator company. Mr. Bruno served as
executive vice president of National Center for Real Estate Research from April
1995 to September 1997. Mr. Bruno received his B.A. in psychology from Regis
University.
PAUL MAEDER has served as a member of our board of directors since April
1999. Since January 1988, Mr. Maeder has been a founder and managing general
partner at Highland Capital Partners, a venture capital firm. From September
1984 to December 1987, Mr. Maeder was a general partner with Charles River
Ventures. Mr. Maeder currently serves as a member of the board of directors of
Digital Commerce Corporation. Mr. Maeder received a B.S.E., aerospace and
mechanical sciences from Princeton University, an M.S., mechanical engineering
from Stanford University and an M.B.A. from Harvard Business School.
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MIKE PASCOE has served as a member of our board of directors since June
2000. From December 1998 to June 2000, Mr. Pascoe served as president and chief
executive officer of PairGain Technologies, Inc., a telecommunications
manufacturer that was acquired by ADC Telecommunications, Inc. in June 2000.
Prior to that, Mr. Pascoe served as president of Newbridge Networks Corporation,
a telecommunications company, from September 1986 to October 1998. Mr. Pascoe
received a B.S. in electrical engineering from the University of Waterloo.
ANTHONY SUN has served as a member of our board of directors since
September 1998. Since August 1979, Mr. Sun has been a general partner at Venrock
Associates, a venture capital firm. Mr. Sun became a managing general partner of
Venrock Associates in January 1997. Mr. Sun currently serves as a member of the
board of directors of Cognex Corporation, Komag Inc., Phoenix Technologies Ltd.,
3Dfx Interactive Inc. and Ramp Networks Inc. Mr. Sun received a B.S., M.S. and
an advanced engineer degree in electrical engineering from Massachusetts
Institute of Technology, as well as an M.B.A. from Harvard Business School.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers.
CLASSIFIED BOARD OF DIRECTORS
Upon completion of this offering, our bylaws will provide for a board of
directors consisting of six members. Our certificate of incorporation will
provide for a classified board of directors consisting of three classes of
directors, each serving staggered three-year terms. As a result, approximately
one-third of the Company's Board of Directors will be elected each year. To
implement the classified structure, prior to the consummation of the offering,
approximately one-third of the nominees to the Board will be elected to one-year
terms, one-third will be elected to two-year terms and one-third will be elected
to three-year terms. Thereafter, directors will be elected for three-year terms.
Mike Pascoe and WuFu Chen have been designated Class I directors whose term
expires at the 2001 annual meeting of stockholders. Paul Maeder and George Bruno
have been designated Class II directors whose term expires at the 2002 annual
meeting of the stockholders. Charles Kenmore and Anthony Sun have been
designated Class III directors whose term expires at the 2003 annual meeting of
stockholders.
BOARD COMMITTEES
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors, including stock
compensation and loans. In addition, the compensation committee reviews and
makes recommendations on bonus and stock compensation arrangements for all of
our employees. As part of the foregoing, the compensation committee also
administers our 2000 Employee Stock Purchase Plan and 2000 Equity Incentive
Plan. The current members of the compensation committee are Messrs. Bruno,
Maeder and Pascoe, with Mr. Maeder serving as the chair of the committee.
Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external audits,
including, among other things, our internal audit and control functions, the
results and scope of the annual audit and other services provided by our
independent auditors and our compliance with legal matters that have a
significant impact on our financial reports. The audit committee also consults
with our management and our independent auditors prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the audit committee
recommends the appointment of, and reviews fee arrangements with, our
independent auditors. The
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current members of the audit committee are Messrs. Bruno, Maeder and Sun, with
Mr. Sun serving as the chair of the committee.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the board of
directors or any board committee, but they are entitled to reimbursement for all
reasonable out-of-pocket expenses incurred in connection with their attendance
at board of directors and board committee meetings. From time to time, directors
who are not our employees have received grants of options to purchase shares of
our common stock. Following this offering, directors who are not our employees
will receive automatic option grants under our 2000 Directors' Stock Option
Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Messrs. Bruno, Maeder and Pascoe. No interlocking relationship exists between
any member of our board of directors or our compensation committee and any
member of the board of directors or compensation committee of any other company,
and no such interlocking relationship has existed in the past.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
In February 1999, the board of directors authorized the indemnification
agreements entered into by us and each of our directors and executive officers.
The form of indemnification agreement provides that we will indemnify our
directors and executive officers against any and all of their expenses incurred
by reason of their status as a director or executive officer to the fullest
extent permitted by Delaware law, our certificate of incorporation and our
bylaws.
Our certificate of incorporation and bylaws each contain provisions
relating to the limitation of liability and indemnification of our directors and
officers. Our certificate of incorporation provides that our directors will not
be personally liable to us or our stockholders for monetary damages for any
breach of fiduciary duty as a director, except liability for:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of our
certificate of incorporation to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of our
directors will be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law. The foregoing provisions of our certificate of
incorporation are not intended to limit the liability of our directors or
officers for any violation of applicable federal securities laws.
In addition, as permitted by Section 145 of the Delaware General
Corporation Law, our bylaws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by the Delaware General Corporation Law;
- we may, in our discretion, indemnify other of our officers, employees and
agents as provided by the Delaware General Corporation Law;
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- to the fullest extent permitted by the Delaware General Corporation Law,
we are required to advance all expenses incurred by our directors and
officers in connection with legal proceedings (subject to certain
exceptions);
- the rights conferred in the bylaws are not exclusive;
- we are authorized to enter into indemnification agreements with our
directors, officers, employees and agents; and
- we may not retroactively amend our bylaw provisions relating to
indemnification.
Our bylaws provide that we must indemnify our directors to the fullest
extent permitted by Delaware General Corporation Law, including in circumstances
in which indemnification is otherwise discretionary under Delaware General
Corporation Law.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the fiscal year ended December 31, 1999 paid by us for services by each of the
individuals who served as our chief executive officer and our other executive
officers whose total salary and bonus for such fiscal year exceeded $100,000,
collectively referred to as the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ---------------------
------------------ SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- ------- ---------------------
<S> <C> <C> <C>
Charles R. Kenmore, President and
Chief Executive Officer......................... $156,515 $25,000 1,500,000
Tony Chern, Vice President, Engineering........... 120,000 -- --
Dr. Rueiming Jamp, Chief Technical Officer........ 120,000 -- --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1999, to each of the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES PRICE EXPIRATION ----------------------
NAME GRANTED IN 1999 PER SHARE DATE 5% 10%
---- ---------- --------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Kenmore...... 1,500,000 30% $0.033 1/17/2009 $31,130 $78,890
Tony Chern.............. -- -- -- -- -- --
Rueiming Jamp........... -- -- -- -- -- --
</TABLE>
Mr. Kenmore's option is immediately exercisable. We have the right to
repurchase all unvested shares at the original exercise price if his service
terminates. The term of the option is 10 years, subject to earlier termination
if Mr. Kenmore's service terminates. The option shares vest 20% after the first
12 months of service, 1.667% after each of the next 24 months and 3.333% after
each of the next 12 months, for a total vesting period of 48 months. If we are
subject to a change in control, the vested percentage thereafter will be
determined as if Mr. Kenmore had completed 12 months in
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addition to his actual period of service. If he is subject to an involuntary
termination within 12 months after the change in control, all option shares will
vest.
The percentage in the column entitled "Percentage of Total Options Granted
to Employees in 1999" is based on an aggregate of 5,056,000 options granted in
the 12 months ended December 31, 1999.
The amount listed in the column entitled "Exercise Price" was equal to the
fair market value of our common stock as valued by our board of directors on the
date of grant. In determining this fair market value, the board of directors
took into account the purchase price paid by investors for shares of our
preferred stock (taking into account the liquidation preferences and other
rights, privileges and preferences associated with such preferred stock) and an
evaluation by the board of directors of our revenue, operating history and
prospects.
We calculated the amounts listed in the column entitled "Potential
Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option
Term" based on the 10-year term of the option at the time of grant. For purposes
of this column, we assumed stock price appreciation of 5% and 10% pursuant to
rules promulgated by the Securities and Exchange Commission. These rates do not
represent our prediction of our stock price performance. We calculated the
potential realizable values at 5% and 10% appreciation by assuming that the
estimated fair market value on the date of grant appreciates at the indicated
rate for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated price.
Information on how we determined the fair market value of our common stock is
disclosed in the preceding paragraph. The price to the public in this offering
is higher than the estimated fair market value on the date of grant. Therefore,
the potential realizable value of the option grant would be significantly higher
than the numbers shown in the column if future stock prices were projected to
the end of the option term by applying the same annual rates of stock price
appreciation to the public offering price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for each of the named executive officers the
number of options exercised during the fiscal year ended December 31, 1999 and
the number and value of securities underlying unexercised options that were held
by the named executive officers as of December 31, 1999. No stock appreciation
rights were exercised by our named executive officers in fiscal year 1999, and
no stock appreciation rights were outstanding at the end of that year.
The numbers in the column entitled "Value Realized" are equal to the fair
market value of the purchased shares on the option exercise date minus the
exercise price paid for the shares.
The stock options were immediately exercisable. We have the right to
repurchase all unvested option shares at the original exercise price when the
optionee's service terminates. The heading "Vested" refers to shares no longer
subject to our right of repurchase; the heading "Unvested" refers to shares
subject to our right of repurchase as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, DECEMBER 31,
SHARES 1999(#) 1999($)
ACQUIRED ON VALUE --------------------- ---------------------
NAME EXERCISE REALIZED VESTED UNVESTED VESTED UNVESTED
---- ----------- -------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Kenmore..... 1,500,000 $ -- -- -- -- --
Tony Chern............. 950,000 7,600 -- -- -- --
Rueiming Jamp.......... 950,000 7,600 -- -- -- --
</TABLE>
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EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Charles R. Kenmore. Our president, chief executive officer and chief
financial officer, Charles R. Kenmore, was offered employment in a letter dated
January 5, 1999, which was supplemented on August 23, 1999 and March 30, 2000.
Pursuant to the letter, he was also appointed as a member of our board of
directors. His annual salary was set at $200,000 for the year 2000, and the
target amount of his annual incentive bonus is $150,000 for the year 2000. In
accordance with the letter, Mr. Kenmore received an option to purchase 1,500,000
shares of our common stock. The option shares vest 20% after the first 12 months
of service, 1.667% after each of the next 24 months, and 3.333% after each of
the next 12 months, for a total vesting period of 48 months. If ANDA is subject
to a change in control, the vested percentage thereafter will be determined as
if Mr. Kenmore had completed 12 months in addition to his actual period of
service. If he is subject to an involuntary termination within 12 months after
the change in control, all option shares will vest. A "change in control" occurs
if we are a party to a merger after which our stockholders own less than 50% of
the surviving corporation's stock or if we sell all or substantially all of our
assets. An "involuntary termination" occurs if Mr. Kenmore is discharged for
reasons other than his misconduct or if he resigns after a change in position
that materially reduces his level of responsibility, after a reduction in his
base salary or bonus opportunity, or after his place of employment is moved more
than 50 miles. Under the offer letter, Mr. Kenmore received two loans of $50,000
each from us, one in 1999 and one in 2000. The loans bear interest at the
applicable federal rate prescribed by the Internal Revenue Service, and they are
secured by any shares of our common stock that Mr. Kenmore may acquire. The
notes have a term of three years, but they become payable earlier if his
employment terminates or if there is a liquidity event with regard to our common
stock.
Other Named Executive Officers. In letters dated August 11, 1999, we
advised Tony Chern, our vice president, engineering, and Dr. Reuiming Jamp, our
chief technical officer, that our board of directors had amended their stock
options to provide for accelerated vesting under certain circumstances. If ANDA
is subject to a change in control during the officer's first year of employment,
his vested percentage will immediately increase to 25%. If he is subject to an
involuntary termination within 12 months after the change in control, all
remaining unvested option shares will vest.
INCENTIVE PLANS
2000 EQUITY INCENTIVE PLAN
Share Reserve. Our board of directors adopted our 2000 Equity Incentive
Plan on June 15, 2000. Our stockholders also approved this plan. We have
reserved 7,000,000 shares of our common stock for issuance under the 2000 Equity
Incentive Plan. Any shares not yet issued under our 1998 Stock Plan on the date
of this offering will also be available under the 2000 Equity Incentive Plan. On
January 1 of each year, starting with the year 2001, the number of shares in the
reserve will automatically increase by 5% of the total number of shares of
common stock that are outstanding at that time or, if less, by 7,000,000 shares.
In general, if options or shares awarded under the 2000 Equity Incentive Plan or
the 1998 Stock Plan are forfeited, then those options or shares will again
become available for awards under the 2000 Equity Incentive Plan. We have not
yet granted any options or other awards under the 2000 Equity Incentive Plan.
Administration. The compensation committee of our board of directors
administers the 2000 Equity Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation of
the 2000 Equity Incentive Plan. The committee has the discretion to determine
who will receive an award, what type of award it will be, how many shares will
be covered by the award, what the vesting requirements will be, if any, and what
the other features and conditions of each award will be. The compensation
committee may also reprice outstanding options and modify outstanding awards in
other ways.
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Eligibility. The following groups of individuals are eligible to
participate in the 2000 Equity Incentive Plan:
- Employees;
- Members of our board of directors who are not employees; and
- Consultants.
Types of Awards. The 2000 Equity Incentive Plan provides for the following
types of award:
- Options to purchase shares of our common stock;
- Stock appreciation rights;
- Restricted shares of our common stock; and
- Stock units (sometimes called phantom shares).
Options and Stock Appreciation Rights. Options may be incentive stock
options or nonstatutory stock options. An optionee who exercises an incentive
stock option may qualify for favorable tax treatment under Section 422 of the
Internal Revenue Code of 1986. On the other hand, nonstatutory stock options do
not qualify for such favorable tax treatment. The exercise price of incentive
stock options granted under the 2000 Equity Incentive Plan may not be less than
100% of the fair market value of our common stock on the option grant date. The
exercise price of nonstatutory stock options may not be less than 85% of the
fair market value of our common stock on the grant date. The compensation
committee determines the base price of stock appreciation rights. Optionees may
pay the exercise price by using:
- Cash;
- Shares of common stock that the optionee already owns;
- A full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- An immediate sale of the option shares through a broker designated by us;
or
- A loan from a broker designated by us, secured by the option shares.
Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options vest over the
four-year period following the date of grant. Options and stock appreciation
rights generally expire 10 years after they are granted, except that they
generally expire earlier if the optionee's service terminates earlier. The 2000
Equity Incentive Plan provides that no participant may receive options covering
more than 2,500,000 shares and stock appreciation rights covering more than
2,500,000 shares in the same year, except that a newly hired employee may
receive options covering up to 5,000,000 shares and stock appreciation rights
covering up to 5,000,000 shares in the first year of employment.
Restricted Shares and Stock Units. Restricted shares may be awarded under
the 2000 Equity Incentive Plan in return for:
- Cash;
- A full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- Services already provided to us; and
- In the case of treasury shares only, services to be provided to us in the
future.
Restricted shares and stock units vest at the time or times determined by the
compensation committee.
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Change in Control. If a change in control of ANDA occurs, an award under
the 2000 Equity Incentive Plan may vest on an accelerated basis to the extent
determined by the compensation committee. The compensation committee may
determine that outstanding grants will vest in full or in part at the time of
the change in control. It may also determine that the grants will vest on an
accelerated basis only if the participant is actually or constructively
discharged within a specified period of time after the change in control.
Finally, the committee may determine that the grants will remain outstanding
without acceleration of vesting. However, if the surviving corporation fails to
assume an outstanding award or replace it with a comparable award, then the
award will always become fully vested as a result of the change in control. A
change in control includes:
- A merger of ANDA after which our own stockholders own 50% or less of the
surviving corporation;
- A sale of all or substantially all of our assets;
- A proxy contest that results in the replacement of 50% or more of our
directors over a 24-month period; or
- An acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to ANDA, such as a holding company
owned by our stockholders.
Amendments or Termination. Our board may amend or terminate the 2000 Equity
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the amendment unless applicable law requires it.
The 2000 Equity Incentive Plan will continue in effect indefinitely, unless the
board decides to terminate the plan.
401(K) PLAN
We sponsor a defined contribution plan intended to qualify under Section
401 of the Internal Revenue Code. Participants may make pre-tax contributions to
the plan of up to 15% of their eligible earnings, subject to a statutorily
prescribed annual limit. Participants are fully vested in their contributions
and the investment earnings. We do not make matching contributions to the 401(k)
plan. Contributions by the participants to the 401(k) plan, and the income
earned on these contributions, are generally not taxable to the participants
until withdrawn. Contributions are held in trust as required by law. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
2000 EMPLOYEE STOCK PURCHASE PLAN
Share Reserve and Administration. Our board of directors adopted our 2000
Employee Stock Purchase Plan on June 15, 2000. Our 2000 Employee Stock Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code. We
have reserved 1,000,000 shares of our common stock for issuance under the plan.
On February 1 of each year, starting with the year 2001, the number of shares in
the reserve will automatically be restored to 1,000,000. In other words, the
reserve will be increased by the number of shares that have been issued under
the 2000 Employee Stock Purchase Plan during the prior 12-month period. The
compensation committee of our board of directors will administer the plan.
Eligibility. All of our employees are eligible to participate if we employ
them for more than 20 hours per week and for more than five months per year.
Eligible employees may begin participating in the 2000 Employee Stock Purchase
Plan at the start of any offering period. Each offering period lasts 24 months.
Overlapping offering periods start on February 1, May 1, August 1 and November 1
of each year. However, the first offering period will start on the effective
date of this offering and end on July 31, 2002.
Amount of Contributions. Our 2000 Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions
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may not exceed 20% of the employee's cash compensation. Purchases of our common
stock will occur on January 31, April 30, July 31 and October 31 of each year.
Each participant may purchase up to 1,500 shares on any purchase date (6,000
shares per year). But the value of the shares purchased in any calendar year
(measured as of the beginning of the applicable offering period) may not exceed
$25,000.
Purchase Price. The price of each share of common stock purchased under our
2000 Employee Stock Purchase Plan will be 85% of the lower of:
- The fair market value per share of common stock on the date immediately
before the first day of the applicable offering period, or
- The fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- The price per share to the public in this offering, or
- The fair market value per share of common stock on the purchase date.
Other Provisions. Employees may end their participation in the 2000
Employee Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with ANDA. If a change in control of ANDA occurs, our
2000 Employee Stock Purchase Plan will end and shares will be purchased with the
payroll deductions accumulated to date by participating employees, unless the
plan is assumed by the surviving corporation or its parent. Our board of
directors may amend or terminate the 2000 Employee Stock Purchase Plan at any
time. If our board increases the number of shares of common stock reserved for
issuance under the plan (except for the automatic increases described above), it
must seek the approval of our stockholders. The 2000 Employee Stock Purchase
Plan will continue in effect for 20 years, unless the board decides to terminate
the plan earlier.
2000 DIRECTORS' STOCK OPTION PLAN
Share Reserve. Our board of directors adopted our 2000 Directors' Stock
Option Plan on April 28, 2000. We have reserved 500,000 shares of our common
stock for issuance under the plan. On January 1 of each year, starting with the
year 2001, the number of shares in the reserve will automatically be restored to
500,000. In other words, the reserve will be increased by the number of shares
that have been optioned under the 2000 Directors' Stock Option Plan during the
prior 12-month period. In general, if options granted under the plan are
forfeited, then those options will again become available for grants under the
plan.
Administration and Eligibility. The compensation committee of our board of
directors will administer the 2000 Directors' Stock Option Plan, although all
grants under the plan are automatic and non-discretionary. Only the non-employee
members of our board of directors will be eligible for option grants under the
2000 Directors' Stock Option Plan.
Initial Grants. Each non-employee director who first joins our board after
the effective date of this offering will receive an initial option for 50,000
shares. That grant will occur when the director takes office. Each non-employee
director who joins one or more committees of our board after the effective date
of this offering will receive an initial option for 25,000 shares. That grant
will occur when the director assumes his or her first committee assignment. No
director receives more than one 25,000-share grant.
Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2001, each non-employee director who will continue to be a director
after that meeting will automatically be granted an option for 10,000 shares of
our common stock. However, a new non-employee director who is receiving the
50,000-share initial option will not receive the 10,000-share annual option in
the same calendar year. At the time of each of our annual stockholders'
meetings, beginning in 2001,
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each non-employee director who will be a member of one or more committees of the
board after that meeting will automatically be granted an option for 5,000
shares of our common stock. However, a new committee member who is receiving the
25,000-share initial option will not receive the 5,000-share annual option in
the same calendar year. At the time of each of our annual stockholders'
meetings, beginning in 2001, the chairman of our board of directors will
automatically be granted an option for 5,000 shares of our common stock.
Vesting. All options granted under the 2000 Directors' Stock Option Plan
vest in equal monthly installments over the four-year period of service
following the date of grant, except that all vesting for the first year occurs
at the close of that year. A director's service during a year is not credited
for vesting if he or she attends fewer than 75% of the board meetings in that
year (or fewer than 75% of the meetings of his or her committees, in the case of
options granted in recognition of service on committees). A non-employee
director's option will become fully vested in the event of his or her death. If
a change in control of ANDA occurs, all options granted under the 2000
Directors' Stock Option Plan will become fully vested if the surviving
corporation does not assume them. If the surviving corporation assumes the
options, they become 25% vested upon a change in control, if the director
otherwise would be less than 25% vested. In addition, if the surviving
corporation assumes the options, they will become fully vested if the director
loses his board seat at the time of the change in control or within 12 months
after the change in control.
Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the option
grant date. A director may pay the exercise price by using cash, shares of
common stock that the director already owns, or an immediate sale of the option
shares through a broker designated by us. The options have a 10-year term,
except that they expire one year after a director's death, six months after a
director leaves the board due to disability and three months after a director
leaves the board for any other reason.
Amendments or Termination. Our board may amend or terminate the 2000
Directors' Stock Option Plan at any time. If our board amends the plan, it does
not need to ask for stockholder approval of the amendment unless applicable law
requires it. The 2000 Directors' Stock Option Plan will continue in effect
indefinitely, unless the board decides to terminate the plan.
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<PAGE> 61
RELATED PARTY TRANSACTIONS
Since February 1, 1998 we have issued and sold securities to the following
persons who are our executive officers, directors or principal stockholders.
Each share of Series A, Series B, Series C and Series D Preferred Stock will
convert into one share of common stock upon the closing of this offering. These
figures reflect activity through June 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF SHARES OF NUMBER OF
SERIES A SERIES B SERIES C SERIES D SHARES OF TOTAL SHARES OF
PREFERRED PREFERRED PREFERRED PREFERRED COMMON COMMON STOCK
INVESTOR STOCK STOCK STOCK STOCK STOCK AS CONVERTED
-------- --------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Kenmore.................... -- -- -- -- 1,500,000 1,500,000
George Chen........................... 200,000 -- -- -- 400,000 600,000
Tony Chern............................ 200,000 -- -- -- 1,350,000 1,550,000
Dr. Rueiming Jamp..................... 200,000 -- -- -- 1,350,000 1,550,000
Stephen Gill.......................... -- -- -- -- 62,500 62,500
Robert Simkavitz...................... -- -- -- -- 280,000 280,000
Entities affiliated with
Venrock Associates.................. -- 6,756,757 1,500,000 218,658 -- 8,475,415
Entities affiliated with Highland
Capital............................. -- -- 4,500,000 364,431 -- 4,864,431
Acorn Venture Partners................ 4,800,000 -- -- -- -- 4,800,000
Chens, LLC............................ -- 1,450,000 -- -- 3,375,000 4,825,000
ADC Telecommunications Inc............ -- -- 2,500,000 -- -- 2,500,000
</TABLE>
Shares held by all affiliated persons and entities have been aggregated.
See "Principal Stockholders" for more detail on shares held by these purchasers.
Anthony Sun, one of our directors, is an affiliate of each of the entities
affiliated with Venrock Associates. Paul Maeder, one of our directors, is an
affiliate of each of the entities affiliated with Highland Capital. WuFu Chen,
our chairman of the board, is an affiliate of each of Acorn Venture Partners and
Chens, LLC.
In addition, we have granted options to certain of our executive officers.
See "Management -- Executive Compensation."
SERIES A FINANCING
On February 25, 1998, we issued and sold 5,600,000 shares of our Series A
Preferred Stock at a price of $0.25 per share to a group of investors, including
Acorn Venture Partners, with which WuFu Chen, our chairman of the board is
affiliated, Tony Chern, our vice president of engineering and Dr. Rueiming Jamp,
our chief technical officer.
SERIES B FINANCING
On September 30, 1998, we issued and sold 9,858,257 shares of our Series B
Preferred Stock at a price of $0.333 per share to a group of investors,
including entities affiliated with Venrock Associates, with which Anthony Sun,
one of our directors, is affiliated and Chens, LLC, an entity associated with
WuFu Chen, our Chairman of the Board, is affiliated.
SERIES C FINANCING
On March 25, 1999, we issued and sold 11,025,000 shares of our Series C
Preferred Stock at a price of $2.00 per share to a group of investors, including
entities affiliated with Highland Capital Partners with which Paul Maeder, one
of our directors, is affiliated, and entities affiliated with Venrock Associates
with which Anthony Sun, one of our directors, is affiliated. ADC
Telecommunications also purchased shares of our Series C Preferred Stock on
March 25, 1999. ADC Telecommunications is a value added reseller of our
Universal Access Platform. We derived 95% of our revenue in the fiscal year 1999
and 97% of our revenue in the six month period ending June 30, 2000 from sales
to PairGain Technologies which was recently acquired by ADC Telecommunications.
In addition, Mike Pascoe, one of our directors, served as president and chief
executive of PairGain Technologies from December 1998 to June 2000.
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<PAGE> 62
SERIES D FINANCING
On March 27, 2000, March 31, 2000 and April 3, 2000, we issued and sold
5,059,644 shares of our Series D Preferred Stock at a price of $13.72 per share
to a group of investors, including entities affiliated with Highland Associates,
with which Paul Maeder, one of our directors, is affiliated and entities
affiliated with Venrock Associates, with which Anthony Sun, one of our
directors, is affiliated.
LOANS TO EXECUTIVE OFFICERS
From February 28, 1999 to May 31, 1999, we advanced $93,311.38 to Charles
R. Kenmore, our president, chief executive officer and chief financial officer,
pursuant to four promissory notes and a Third Deed of Trust. These notes accrued
interest at the rates of 4.62%, 4.67%, 4.99% and 4.90%, respectively, per annum,
compounded annually. These loans were granted pursuant to Mr. Kenmore's offer
letter dated January 5, 1999 in order to pay for his relocation expenses.
Pursuant to the terms of the offer letter, these four notes were forgiven in
full on January 11, 2000 after a year of employment. On August 20, 1999 and May
11, 2000, we advanced two notes for $50,000 each to Mr. Kenmore pursuant to a
promissory note and third deed of trust. The principal balance of the first
note, together with interest accrued but unpaid to this date, is due and payable
on February 1, 2002 and for the second note, is due February 1, 2003. Interest
accrues under these notes at a rate of 5.43% per annum for the first note and
6.42% for the second note, compounded annually. The amount of this note is
currently outstanding, plus accrued interest.
On March 8, 2000, we advanced $59,970 to Robert Simkavitz, one of our
officers, pursuant to a full recourse promissory note and stock pledge
agreement. The principal balance of this note, together with interest accrued
but unpaid to this date, is due and payable March 7, 2005. Interest accrues
under the note at a rate of 6.80% per annum, compounded annually. The amount of
this note is currently outstanding, plus accrued interest.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with several of our executive
officers. See "Management -- Employment Agreements and Change in Control
Arrangements."
WARRANT AND OPTION GRANTS
In the past, we have granted options to our executive officers and
directors. We intend to grant additional options to our directors and officers
in the future. See "Management -- Option Grants in Last Fiscal Year" and
"Management -- Director Compensation."
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
We have entered into an Indemnification Agreement with each of our
executive officers and directors. See "Management -- Limitations on Directors
Liability and Indemnification."
------------------------
We believe that the transactions set forth above were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions, including loans between us and our officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the board of directors, and will continue to be on terms no less favorable to us
than could be obtained from unaffiliated third parties.
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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 2000 and as adjusted to
reflect the sale of the common stock offered in this prospectus, the beneficial
ownership of: (1) each person who is known by us to beneficially own more than
5% of our common stock; (2) each of our Named Executive Officers, (3) each of
our directors; and (4) all of our directors and executive officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, based on information furnished by such owners, have
sole voting and investment power with respect to such shares.
The percentage of beneficial ownership for the following table is based on
47,661,304 shares of common stock outstanding as of June 30, 2000, assuming
conversion of all outstanding shares of preferred stock into an equal number of
shares of common stock and shares of common stock outstanding after
the completion of this offering, assuming no exercise of the underwriters' over-
allotment option.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Common stock subject to options exercisable
within 60 days of April 30, 2000 are deemed outstanding for purposes of
computing the percentage ownership of the person holding such option but are not
deemed outstanding for purposes of computing the percentage ownership of any
other person. Except where indicated, and subject to community property laws
where applicable, the persons in the table above have sole voting and investment
power with respect to all common stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES --------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) BEFORE OFFERING OFFERING OFFERING
--------------------------- ------------------ -------- --------
<S> <C> <C> <C>
5% STOCKHOLDERS
Acorn Venture Partners(2)...................... 4,800,000 10.1%
3350 Scott Blvd., Bldg. 16
Santa Clara, CA 95054
Entities affiliated with
Highland Capital(3).......................... 4,864,431 10.2
Two International Place, Floor 22
Boston, MA 02110
Chens, L.L.C.(4)............................... 4,825,000 10.1
ADC Telecommunications Inc..................... 2,500,000 5.3
14402 Franklin Avenue
Tustin, CA 95780-7013
Entities affiliated with
Venrock Associates(5)........................ 8,475,415 17.8
30 Rockefeller Plaza, Room 5508
New York, NY 10012
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Charles R. Kenmore(6).......................... 1,500,000 3.2
WuFu Chen(7)................................... 9,625,000 20.2
Tony Chern(8).................................. 1,550,000 3.3
Dr. Rueiming Jamp(9)........................... 1,550,000 3.3
George Bruno(10)............................... 75,000 *
Mike Pascoe(11)................................ 75,000 *
</TABLE>
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<PAGE> 64
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES --------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) BEFORE OFFERING OFFERING OFFERING
--------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Paul Maeder(12)................................ 4,914,431 10.3
c/o Highland Capital
Two International Place, Floor 22
Boston, MA 02110
Anthony Sun(13)................................ 8,525,415 17.9
c/o Venrock Associates
30 Rockefeller Plaza, Room 5508
New York, NY 10012
All executive officers and directors as a group
(12 persons)(14)............................. 29,244,846 54.5
</TABLE>
---------------
* Represents beneficial ownership of less than 1%.
(1) Unless otherwise indicated, the address of each of the individuals listed
in the table is c/o ANDA Networks, Inc., 2708 Orchard Parkway, San Jose, CA
95134.
(2) Includes 4,800,000 shares of Series A Preferred Stock.
(3) Includes 4,320,000 shares of Series C Preferred Stock and 349,854 shares of
Series D Preferred Stock held by Highland Capital Partners IV, LP; 180,000
shares of Series C Preferred Stock and 14,577 shares of Series D Preferred
Stock held by Highland Entrepreneur's Fund IV, LP.
(4) Consists of 3,375,000 shares of Common Stock and 1,450,000 shares of Series
B Preferred Stock held by Chens, LLC.
(5) Includes 3,040,541 shares of Series B Preferred Stock, 615,000 shares of
Series C Preferred Stock and 86,064 shares of Series D Preferred Stock held
by Venrock Associates and 3,716,216 shares of Series B Preferred Stock,
885,000 shares of Series C Preferred Stock and 123,848 shares of Series D
Preferred Stock held by Venrock Associates II, L.P. and 8,746 shares of
Series D Preferred Stock held by Venrock Entrepreneurs Fund
(6) Consists of 1,500,000 shares of Common Stock held by Charles R. and Carolyn
Cooper Kenmore as joint tenants with right of survivorship.
(7) Consists of 3,375,000 shares of Common Stock, 1,450,000 shares of Series B
Preferred Stock held by Chens, LLC and 4,800,000 shares of Series A
Preferred Stock held by Acorn Venture Partners. Mr. Chen is a partner in
Acorn Venture Partners and our Chairman of the Board. Mr. Chen disclaims
beneficial ownership of the shares held by him except to the extent of his
proportionate interest therein.
(8) Consists of 761,112 shares of Common Stock held by Helen Chern and Tony
Chern, 188,888 shares of Common Stock held by Tony Chern as custodian for
Michelle Alice Chern under the California Uniform Transfers to Minors Act
and 400,000 shares of Common Stock and 200,000 shares of Series A Preferred
Stock held by Mr. Chern. Mr. Chern disclaims beneficial ownership of the
shares held by Mr. Chern as trustee for Michelle Alice Chern.
(9) Consists of 43,888 shares of Common Stock held by Patrick Jamp and 43,888
shares of Common Stock held by Joseph Jamp and includes 200,000 shares of
Series A Preferred Stock.
(10) Includes options immediately exercisable for 75,000 shares.
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<PAGE> 65
(11) Includes options immediately exercisable for 75,000 shares.
(12) Includes 4,320,000 shares of Series C Preferred Stock and 349,854 shares of
Series D Preferred Stock held by Highland Capital Partners IV, LP; 180,000
shares of Series C Preferred Stock and 14,577 shares of Series D Preferred
Stock held by Highland Entrepreneur's Fund IV, LP. Mr. Maeder is a Founder
and Managing General Partner of Highland Capital Partners and a director of
ANDA Networks. He disclaims beneficial ownership of the shares held by him
except to the extent of his proportionate interest therein. Includes
options immediately exerciseable for 50,000 shares.
(13) Includes 3,040,541 shares of Series B Preferred Stock, 615,000 shares of
Series C Preferred Stock and 86,064 shares of Series D Preferred Stock held
by Venrock Associates and 3,716,216 shares of Series B Preferred Stock,
885,000 shares of Series C Preferred Stock and 123,848 shares of Series D
Preferred Stock held by Venrock Associates II, L.P. and 8,746 shares of
Series D Preferred Stock held by Venrock Entrepreneurs Fund. Mr. Sun is a
Managing General Partner at Venrock Associates and a director of ANDA
Networks. He disclaims beneficial ownership of the shares held by him
except to the extent of his proportionate interest therein. Includes
options immediately exerciseable for 50,000 shares.
(14) Includes options immediately exercisable for 637,500 shares and shares
disclosed in notes 2 and 4.
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<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will
consist of 200,000,000 shares of common stock, $0.0001 par value, and 10,000,000
shares of preferred stock, $0.0001 par value. The following summary of our
common stock and preferred stock do not purport to be complete and is subject
to, and qualified in its entirety by, our certificate of incorporation and
bylaws and by the provisions of applicable law.
COMMON STOCK
As of June 30, 2000, there were 47,661,304 shares of common stock
outstanding that were held of record by approximately
stockholders. There will be shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment option and assuming no
exercise after June 30, 2000, of outstanding options) after giving effect to the
sale of the shares of common stock to the public in this offering and the
conversion of each share of our preferred stock into one share of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. ADC Telecommunications is subject
to an agreement under which it will vote its shares of our stock in the same
proportion as the votes cast by other of our stockholders with respect to the
approval of our acquisition by another company, whether by merger or a sale of
substantially all of our assets. Subject to preferences that may be applicable
to any outstanding preferred stock, the holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the board of directors out of funds legally available therefor. See "Dividend
Policy." In the event of the liquidation, dissolution or winding up of ANDA
Networks, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority to issue the preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of preferred stock may have the effect of delaying, deferring or preventing a
change in control of ANDA Networks without further action by the stockholders
and may adversely affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. At present, we have no plans to issue any
shares of preferred stock.
REGISTRATION RIGHTS
After this offering, assuming automatic conversion of all outstanding
preferred stock into common stock, the holders of 41,103,776 shares of common
stock will be entitled to rights with respect to the registration of these
shares under the Securities Act. Under the terms of our agreement with the
holders of these registrable securities, if we proposed to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of that registration and are entitled to include shares
of their registrable common stock therein. Holders of 31,557,901 shares of
common stock also have demand registration rights pursuant to which they may
require us to file a registration statement
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<PAGE> 67
under the Securities Act at our expense with respect to their shares of common
stock, and we are required to use our best efforts to effect that registration.
Further, the holders of these demand rights may require us to file additional
registration statements on Form S-3. All of these registration rights are
subject to conditions and limitations, including the right of the underwriters
of an offering to limit the number of shares included in that registration and
our right not to effect a requested registration within six months following an
offering of our securities, including this offering.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
The certificate of incorporation and bylaws provide that:
- all directors will be part of a classified board of directors that
results only in approximately one-third of our directors within the
classified board being elected at each annual meeting of stockholders;
- effective upon the closing of this offering, all stockholder actions must
be effected at a duly called meeting and not by a consent in writing;
- directors may only be removed for cause and only by a supermajority vote;
- provisions of the certificate of incorporation and bylaws may only be
amended by a supermajority vote; and
- a special meeting of the stockholders may only be called by the Chief
Executive Officer, the President, the Chairman of the Board of Directors
or a majority of the Board of Directors.
These provisions of the certificate of incorporation and bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of ANDA Networks. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the board of
directors and in the policies formulated by the board of directors and to
discourage transactions that may involve an actual or threatened change of
control of ANDA Networks. These provisions are designed to reduce the
vulnerability of ANDA Networks to an unsolicited acquisition proposal. The
provisions also are intended to discourage tactics that may be used in proxy
fights. However, these provisions could have the effect of discouraging others
from making tender offers for our shares and, as a consequence, they also may
inhibit an increase in the market price of our shares that could result from
actual or rumored takeover attempts. These provisions also may have the effect
of preventing changes in our management. See "Risk Factors -- Provisions in our
charter documents and Delaware law may delay or prevent an acquisition of our
company."
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, unless the stockholders adopt an amendment to the contrary, our stock is
no longer listed on a national securities exchange, or the stockholders consent
to such combination, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that the interested stockholder became an interested
stockholder, unless:
- prior to becoming an interested stockholder, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of
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<PAGE> 68
determining the number of shares outstanding those shares owned (1) by
persons who are directors and also officers and (2) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or
- on or subsequent to becoming an interested stockholder, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder
except pursuant to the exercise, exchange or conversion of securities
exercisable for, exchangeable for or convertible into stock of such
composition, pursuant to merger of a parent and a subsidiary, or pursuant
to an exchange offer by the company to purchase stock made on the same
terms to all holders of said stock;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is BancBoston, NA.
BancBoston, NA is located at 150 Royall Street in Canton, MA and its telephone
number is (781) 575-3400.
NASDAQ STOCK MARKET LISTING
We have applied to have our common stock listed on the Nasdaq National
Market for quotation under the symbol "ANDA".
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, we will have shares of
common stock outstanding, assuming the issuance of shares of common
stock offered hereby and no exercise of options after June 30, 2000. Of these
shares, the shares sold in the offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares held by our affiliates, as that term is defined under the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining shares of common stock are deemed restricted shares
under Rule 144. The number of shares of common stock available for sale in the
public market is limited by restrictions under the Securities Act and lock-up
agreements under which the holders of such shares have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this prospectus without the prior written consent of Goldman, Sachs & Co. On
the date of this prospectus, no shares other than the shares offered
hereby will be eligible for sale. Beginning 180 days after the date of this
prospectus, or earlier with the consent of Goldman, Sachs & Co.
restricted shares will become available for sale in the public market subject to
certain limitations of Rule 144 of the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock
(approximately shares after giving effect to this offering) and the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. Sales under Rule 144 of the
Securities Act are subject to certain restrictions relating to manner of sale,
notice and the availability of current public information about us. A person who
is not our affiliate at any time during the 90 days preceding a sale, and who
has beneficially owned shares for at least two years, would be entitled to sell
such shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act. However, the transfer agent may require an opinion of
counsel that a proposed sale of shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of such shares.
Prior to this offering, there has been no public market for our common
stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of our common stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
OPTIONS
As of June 30, 2000, there were a total of 2,021,271 shares of common stock
subject to outstanding options under our 1998 Stock Plan, of which 157,173 were
vested. However, all of these shares are subject to lock-up agreements.
Immediately after the completion of the offering, ANDA Networks intends to file
a registration statement on Form S-8 under the Securities Act to register all of
the shares of common stock reserved for future issuance under the 1998 Stock
Plan, 2000 Equity Incentive Plan, 2000 Employee Stock Purchase Plan and 2000
Directors' Stock Option Plan. On the date 180 days after the effective date of
the offering, a total of shares of common stock subject to outstanding
options outstanding as of June 30, 2000 will be vested. After the effective
dates of the registration statement on Form S-8, shares purchased upon exercise
of options and
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<PAGE> 70
shares purchased under the 2000 Employee Stock Purchase Plan generally would be
available for resale in the public market, subject to lock-up agreements, if
applicable.
Rule 701 under the Securities Act provides that shares of common stock
acquired before or after the date of this offering on the exercise of
outstanding options granted before the date of this offering may be resold by
persons other than our affiliates, beginning 90 days after the date of this
prospectus, subject only to the manner of sale provisions of Rule 144, and by
affiliates, beginning 90 days after the date of this prospectus, subject to all
provisions of Rule 144 except its one-year minimum holding period.
REGISTRATION RIGHTS
Following this offering, subject to specified blackout periods, holders of
31,557,901 shares of our outstanding common stock will have demand registration
rights with respect to their shares of our common stock, subject to the 180-day
lock-up arrangement described below, to require us to register their shares of
our common stock under the Securities Act, or rights to participate in any
future registration of securities by us. If the holders of these registrable
securities request that we register their shares, and if the registration is
effected, these shares will become freely tradable without restriction under the
Securities Act. Any sales of securities by these stockholders could have a
material adverse effect on the trading price of our common stock. See
"Description of Capital Stock -- Registration Rights."
LOCK-UP AGREEMENTS
We, each of our officers and directors and substantially all other
stockholders have agreed, subject to specified exceptions, not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this offering. Goldman, Sachs & Co., however, may in its sole discretion, at
any time without notice, release all or any portion of the shares subject to
lock-up agreements. See "Underwriting."
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UNDERWRITING
ANDA Networks and the underwriters named below have entered into an
underwriting agreement with respect to shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., FleetBoston
Robertson Stephens Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffray
Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .......................................
FleetBoston Robertson Stephens Inc. ........................
Chase Securities Inc. ......................................
U.S. Bancorp Piper Jaffray Inc. ............................
-------
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 ANDA Networks 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 ANDA Networks. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by ANDA Networks
----------------------------
No Exercise Full 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 of these
securities dealers may resell any shares purchased from the underwriters to
certain 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.
ANDA Networks and its directors, officers and substantially all other
stockholders have agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. This restriction does not apply to
any issuances by ANDA Networks under its existing employee benefit plans or
transfers by gift or to any trust for the benefit of each of the directors,
officers or stockholders or their immediate families, or for corporations,
transfers to any wholly-owned subsidiary of such corporation, provided that in
each case the transferee agrees to be bound by the restriction for any remaining
period and that any such transfer not involve a disposition for value. This
restriction also does not apply to shares of common stock purchased in this
offering or shares purchased in the open market after completion of this
offering. See "Shares Eligible for Future Sale" for a discussion of transfer
restrictions.
At ANDA Networks' request, the underwriters have reserved, at the initial
public offering price, up to shares of common stock for sale to select
directors, officers, employees, and friends of ANDA Networks. The number of
shares available for sale to the general public will be reduced to
68
<PAGE> 72
the extent these persons purchase the reserved shares. Any reserved shares not
so purchased will be offered to the general public on the same basis as the
other shares offered hereby.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among ANDA Networks and the
representatives of the underwriters. Among the factors to be considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, will be ANDA Networks' historical performance,
estimates of the business potential and earnings prospects of ANDA Networks, an
assessment of ANDA Networks' management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
ANDA Networks has applied for quotation of its common stock on the Nasdaq
National Market under the symbol "ANDA".
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 ANDA Networks 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 over allotment 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 purchases 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 this underwriter in stabilizing or short-sale covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of ANDA
Networks' 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 marker or otherwise.
A prospectus in electronic format may be made available on Internet web
sites maintained by one or more of the representatives of the underwriters of
this offering and may also be made available on Internet web sites maintained by
other underwriters or securities dealers. The representatives of the
underwriters may agree to allocate a number of shares to underwriters for sale
to their online brokerage account holders. Any Internet distributions will be
allocated by the representatives of the underwriters to underwriters that may
make Internet distributions on the same basis as other allocations. In addition,
shares may be sold by the underwriters to securities dealers who resell shares
to online brokerage account holders.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
69
<PAGE> 73
ANDA Networks estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
ANDA Networks has agreed to indemnify the underwriters against liabilities
under the Securities Act of 1933.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
California. As of the date of this prospectus, Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP beneficially owned an aggregate of 27,288
shares of our common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Shearman & Sterling, Menlo
Park, California.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for the year
ended December 31, 1999, and the period from January 28, 1998 (inception) to
December 31, 1998 included in this prospectus, have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given upon
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedule thereto. For further information with respect to ANDA Networks and the
common stock offered in this offering, reference is made to the registration
statement and to the attached exhibits and schedules. Statements made in this
prospectus concerning the contents of any document referred to herein are not
necessarily complete. With respect to each such document filed as an exhibit to
the registration statement, reference is made to the exhibit for a more complete
description of the matter involved. The registration statement and the attached
exhibits and schedules may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, NY 10048,
and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of the registration statement
may be obtained from the Securities and Exchange Commission upon payment of
prescribed fees. Reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission may also be
inspected without charge at a website maintained by the Securities and Exchange
Commission at http://www.sec.gov.
70
<PAGE> 74
ANDA NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Deficit........................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of ANDA Networks, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of mandatorily redeemable convertible preferred stock and
stockholders' deficit and of cash flows present fairly, in all material
respects, the financial position of ANDA Networks, Inc. at December 31, 1998 and
1999, and the results of operations and cash flows for the period from January
28, 1998 (inception) to December 31, 1998 and for the year ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 16, 2000
F-2
<PAGE> 76
ANDA NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
------- -------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,716 $ 6,155 $ 74,021
Short-term investments...................... -- 7,632 4,608
Accounts receivable, net of allowance for
doubtful accounts of $0, $0 and $60
(unaudited) at December 31, 1998 and 1999
and June 30, 2000, respectively.......... -- 914 1,797
Inventory................................... -- 170 1,059
Other current assets........................ -- 318 429
------- -------- --------
Total current assets..................... 1,716 15,189 81,914
Property and equipment, net................... 621 1,574 2,829
Other assets.................................. 26 25 51
------- -------- --------
Total assets............................. $ 2,363 $ 16,788 $ 84,794
======= ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable............................ $ 277 $ 811 $ 3,337
Accrued liabilities......................... 105 988 1,501
Note payable, current portion............... -- 184 500
Deferred revenue............................ -- -- 570
------- -------- --------
Total current liabilities................ 382 1,983 5,908
------- -------- --------
Note payable, net of current portion.......... -- 422 854
------- -------- --------
Total liabilities........................ 382 2,405 6,762
------- -------- --------
Commitments (Note 4)
Mandatorily Redeemable Convertible Preferred
Stock (Note 6) (Liquidation value at
December 31, 1999 of $26,733)............... 4,656 29,896 112,945 $ --
------- -------- -------- --------
Stockholders' equity (deficit):
Common Stock: $0.0001 par value; 55,000
shares authorized, 200,000 shares
authorized pro forma; 4,975, 13,990 and
16,104 (unaudited) issued and outstanding
at December 31, 1998, 1999 and June 30,
2000: 47,662 (unaudited) shares issued
and outstanding pro forma................ -- 1 2 5
Additional paid-in capital.................. 124 3,366 7,544 120,504
Receivables from stockholders............... -- -- (60) (60)
Deferred stock-based compensation........... -- (3,941) (15,335) (15,335)
Accumulated deficit......................... (2,799) (14,939) (27,064) (27,064)
------- -------- -------- --------
Total stockholders' equity (deficit)..... (2,675) (15,513) (34,913) $ 78,050
======= ======== ======== ========
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (deficit)......... $ 2,363 $ 16,788 $ 84,794
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 77
ANDA NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28, SIX MONTH PERIOD
1998 (INCEPTION) YEAR ENDED ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, -------------------------
1998 1999 1999 2000
---------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue..................................... $ -- $ 1,248 $ 101 $ 8,329
Cost of revenue:
Stock-based compensation.................. -- 16 1 82
Other cost of revenue..................... -- 821 115 3,960
------- -------- ------- --------
Total cost of revenue..................... -- 837 116 4,042
------- -------- ------- --------
Gross profit (loss)......................... -- 411 (15) 4,287
Operating expenses:
Research and development expenses
(exclusive of stock-based compensation
of $0, $454, $105 (unaudited) and $1,885
(unaudited) for the periods ended
December 31, 1998, December 31, 1999,
June 30, 1999 and June 30, 2000)........ 2,214 7,494 2,937 7,328
Sales and marketing expenses (exclusive of
stock-based compensation of $0, $516,
$52 (unaudited) and $1,598 (unaudited)
for the periods ended December 31, 1998,
December 31, 1999, June 30, 1999 and
June 30, 2000).......................... 150 1,909 506 2,477
General and administrative expenses:
stock-based compensation of $0, $1,285,
$39 (unaudited) and 2,471 (unaudited)
for the periods ended December 31, 1998,
December 31, 1999, June 30, 1999 and
June 30, 2000).......................... 466 1,626 768 1,950
Stock-based compensation.................. -- 2,255 196 5,954
------- -------- ------- --------
Total operating expenses........... 2,830 13,284 4,407 17,709
------- -------- ------- --------
Loss from operations........................ (2,830) (12,873) (4,422) (13,422)
Interest expense............................ -- (4) -- (43)
Interest income............................. 33 737 272 1,340
Other expense............................... (2) -- -- --
------- -------- ------- --------
Net loss.................................... (2,799) (12,140) (4,150) (12,125)
------- -------- ------- --------
Accretion of mandatorily redeemable
convertible preferred stock............... -- (3,227) (102) (13,700)
------- -------- ------- --------
Net loss attributable to common
stockholders.............................. $(2,799) $(15,367) $(4,252) $(25,825)
======= ======== ======= ========
Net loss per share attributable to common
stockholders -- basic and diluted......... $ (1.65) $ (3.34) $ (1.18) $ (3.58)
======= ======== ======= ========
Weighted average common shares
outstanding -- basic and diluted.......... 1,696 4,601 3,613 7,211
======= ======== ======= ========
Pro forma net loss per share -- basic and
diluted (unaudited)....................... $ (0.42) $ (0.33)
======== ========
Pro forma weighted average common shares
outstanding (unaudited)................... 28,787 36,646
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 78
ANDA NETWORKS, INC.
STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLES
----------------- --------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
------ -------- ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 28, 1998 (Inception)................... -- $ -- -- $-- $ -- --
Issuance of Common Stock at $0.025 per share............. -- -- 1,600 -- 40 --
Exercise of stock options................................ -- -- 3,375 -- 84 --
Issuance of Mandatorily Redeemable Convertible Preferred
Series A at $0.25 per share............................ 5,600 1,400 -- -- -- --
Issuance of Mandatorily Redeemable Convertible Preferred
Series B at $0.333 per share, net of issuance costs of
$27.................................................... 9,858 3,256 -- -- -- --
Net loss................................................. -- -- -- -- -- --
------ -------- ------ --- -------- ---
Balances, December 31, 1998.............................. 15,458 4,656 4,975 -- 124 --
Exercise of stock options................................ -- -- 10,443 1 294 --
Issuance of Mandatorily Redeemable Convertible Preferred
Series C at $2 per share, net of issuance costs of
$37.................................................... 11,025 22,013 -- -- -- --
Deferred stock-based compensation........................ -- -- -- -- 6,212 --
Amortization of deferred stock-based compensation........ -- -- -- -- -- --
Repurchase of common stock............................... -- -- (1,428) -- (37) --
Net loss................................................. -- -- -- -- -- --
Accretion of Mandatorily Redeemable Convertible Preferred
Stock.................................................. -- 3,227 -- -- (3,227) --
------ -------- ------ --- -------- ---
Balances, December 31, 1999.............................. 26,483 29,896 13,990 1 3,366 --
Exercise of stock options (unaudited).................... -- -- 2,376 1 493 (60)
Issuance of Mandatorily Redeemable Convertible Preferred
Stock Series D at $13.72 per share, net of issuance
costs of $70 (unaudited)............................... 5,060 69,349 -- -- -- --
Deferred stock-based compensation (unaudited)............ -- -- -- -- 17,430 --
Amortization of deferred stock-based compensation
(unaudited)............................................ -- -- -- -- -- --
Repurchase of Common Stock (unaudited)................... -- -- (262) -- (45) --
Net loss (unaudited)..................................... -- -- -- -- -- --
Accretion of Mandatorily Redeemable Convertible Preferred
Stock Series (unaudited)............................... -- 13,700 -- -- (13,700) --
------ -------- ------ --- -------- ---
Balances, June 30, 2000 (unaudited)...................... 31,543 $112,945 16,104 $ 2 $ 7,544 (60)
====== ======== ====== === ======== ===
<CAPTION>
DEFERRED
STOCK-
BASED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ----------- --------
<S> <C> <C> <C>
Balances, January 28, 1998 (Inception)................... $ -- $ -- $ --
Issuance of Common Stock at $0.025 per share............. -- -- 40
Exercise of stock options................................ -- -- 84
Issuance of Mandatorily Redeemable Convertible Preferred
Series A at $0.25 per share............................ -- -- --
Issuance of Mandatorily Redeemable Convertible Preferred
Series B at $0.333 per share, net of issuance costs of
$27.................................................... -- -- --
Net loss................................................. -- (2,799) (2,799)
-------- -------- --------
Balances, December 31, 1998.............................. -- (2,799) (2,675)
Exercise of stock options................................ -- -- 295
Issuance of Mandatorily Redeemable Convertible Preferred
Series C at $2 per share, net of issuance costs of
$37.................................................... -- -- --
Deferred stock-based compensation........................ (6,212) -- --
Amortization of deferred stock-based compensation........ 2,271 -- 2,271
Repurchase of common stock............................... -- -- (37)
Net loss................................................. -- (12,140) (12,140)
Accretion of Mandatorily Redeemable Convertible Preferred
Stock.................................................. -- -- (3,227)
-------- -------- --------
Balances, December 31, 1999.............................. (3,941) (14,939) (15,513)
Exercise of stock options (unaudited).................... -- -- 434
Issuance of Mandatorily Redeemable Convertible Preferred
Stock Series D at $13.72 per share, net of issuance
costs of $70 (unaudited)............................... -- -- --
Deferred stock-based compensation (unaudited)............ (17,430) -- --
Amortization of deferred stock-based compensation
(unaudited)............................................ 6,036 -- 6,036
Repurchase of Common Stock (unaudited)................... -- -- (45)
Net loss (unaudited)..................................... -- (12,125) (12,125)
Accretion of Mandatorily Redeemable Convertible Preferred
Stock Series (unaudited)............................... -- -- (13,700)
-------- -------- --------
Balances, June 30, 2000 (unaudited)...................... $(15,335) $(27,064) $(34,913)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 79
ANDA NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28, SIX MONTH PERIOD
1998 (INCEPTION) YEAR ENDED ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, --------------------------
1998 1999 1999 2000
---------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $(2,799) $(12,140) $(4,150) $(12,125)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 106 387 149 542
Amortization of deferred stock-based
compensation............................. -- 2,271 197 6,036
Provision for doubtful accounts............ -- -- -- 60
Loss on disposal of fixed assets........... -- 4 -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... -- (914) (101) (943)
Inventory................................ -- (170) (82) (889)
Other assets............................. (26) (318) (470) (137)
Accounts payable......................... 277 534 209 2,526
Accrued liabilities...................... 105 883 359 513
Deferred revenue......................... -- -- -- 570
------- -------- ------- --------
Net cash used in operating
activities.......................... (2,337) (9,463) (3,889) (3,847)
------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities........... -- (12,910) (7,219) --
Proceeds from the maturity of marketable
securities................................. -- 5,278 -- 3,024
Purchase of property and equipment........... (727) (1,343) (472) (1,797)
------- -------- ------- --------
Net cash (used in) provided by
investing activities................ (727) (8,975) (7,691) 1,227
------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock....... 124 295 282 434
Proceeds from issuance of mandatorily
redeemable convertible preferred stock, net
of issuance costs.......................... 4,656 22,013 22,013 69,349
Repurchase of common stock................... -- (37) (3) (45)
Proceeds from note payable................... -- 606 -- 894
Repayment of note payable.................... -- -- -- (146)
------- -------- ------- --------
Net cash provided by financing
activities.......................... 4,780 22,877 22,292 70,486
------- -------- ------- --------
Net increase in cash and cash equivalents...... 1,716 4,439 10,712 67,866
Cash and cash equivalents at beginning of
period....................................... -- 1,716 1,716 6,155
------- -------- ------- --------
Cash and cash equivalents at end of period..... $ 1,716 $ 6,155 $12,428 $ 74,021
======= ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Deferred stock-based compensation............ $ -- $ 6,212 $ 2,816 $ 17,430
======= ======== ======= ========
Accretion of mandatorily redeemable preferred
stock...................................... $ -- $ 3,227 $ 102 $ 13,700
======= ======== ======= ========
Exercise of stock options through issuance of
note receivable............................ $ -- $ -- $ -- $ 60
======= ======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................ $ -- $ 4 $ -- $ 43
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 80
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF THE BUSINESS:
ANDA Networks, Inc. (the "Company") was incorporated in Delaware on January
28, 1998. The Company designs, markets and sells a comprehensive network access
platform that enables telecommunications service providers to rapidly and cost
effectively deliver integrated voice and data services over a single access
network.
The Company's primary customer, ADC Telecommunications, is also a less than
10% stockholder of the Company. Revenue attributable to the customer totaled $0,
$1,186,000 and $8,047,000 (unaudited) during 1998, 1999 and the six month period
ended June 30, 2000, respectively. In addition, accounts receivable from the
customer totaled $0, $859,000 and $1,796,000 (unaudited) at December 31, 1998,
1999 and June 30, 2000, respectively.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments include high grade commercial paper and corporate
bonds. Investments are classified as held-to-maturity. These securities are
stated at amortized cost and mature within one year. The following table
summarizes investments held at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Commercial paper........................................... $-- $2,241
Corporate bonds............................................ -- 5,391
--- ------
$-- $7,632
=== ======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments
including accounts receivable, accounts payable and accrued liabilities
approximate fair value due to their short maturities. The carrying amount of the
note payable approximates fair value based on the terms of similar borrowing
arrangements available to the Company.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash, cash equivalents and
accounts receivable. The Company's cash and cash equivalents are deposited with
two financial institutions which, at times, may exceed federally insured limits.
F-7
<PAGE> 81
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company performs ongoing customer credit evaluations of its customers,
does not require collateral and maintains allowances for potential credit losses
when deemed necessary. To date, such losses have been within management's
expectations. At December 31, 1999, the Company had accounts receivable from two
customers representing 94% and 6% of total accounts receivable, respectively
(see Note 9).
REVENUE RECOGNITION
The Company recognizes revenue to value added resellers and customers upon
product shipment providing collection of the resulting receivable is probable.
All of the Company's shipping terms are FOB shipping point. The Company does not
provide value added resellers or customers with return or upgrade rights. The
Company does not have maintenance agreements with customers. The Company accrues
for warranty costs and other allowances at the time of shipment based on
management estimates and historical experience. Where significant post-delivery
obligations exist, revenue is deferred until such time that the post-delivery
obligations are fulfilled.
INVENTORY
All inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is
calculated using the straight-line method over the estimated useful lives of the
related assets ranging from two to five years. Leasehold improvements and assets
acquired under capital leases are amortized on a straight-line basis over the
term of the lease, or the useful life of the assets, whichever is shorter.
Maintenance and repairs are charged to expense as incurred, and improvements and
betterments are capitalized. When assets are retired or otherwise disposed of,
the cost and accumulated depreciation and amortization are removed from the
accounts and any resulting gain or loss is reflected in operations in the period
realized.
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved. Losses on
long-lived assets to be disposed of are determined in a similar manner, except
that fair values are reduced for the cost of disposal. No losses from impairment
have been recognized in the financial statements.
F-8
<PAGE> 82
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT
Costs incurred in the research and development of products are expensed as
incurred.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized.
CERTAIN RISKS AND UNCERTAINTIES
The Company's products are concentrated in an industry segment which is
characterized by rapid technological advances, changes in customer requirements,
evolving regulatory requirements and industry standards. These product depend in
part on third-party technology which the Company licenses from a limited number
of suppliers. In addition, the Company depends on sole source and limited
suppliers for key components. Also, the Company has depended on a limited number
of products and customers for substantially all revenue to date. Failure by the
Company to anticipate or to respond adequately to technological developments in
its industry, changes in customer or supplier requirements or changes in
regulatory requirements or industry standards, or any significant delays in the
development or introduction of products or services, could have a material
adverse effect on the Company's business and operating results.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB") 25,
"Accounting for Stock Issued to Employees," and Financial Accounting Standards
Board Interpretation ("FIN") 28, "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans", and complies with the disclosure
provisions of SFAS 123, "Accounting for Stock-Based Compensation." Under APB 25,
compensation expense is based on the difference, if any, on the date of grant,
between the estimated fair value of the Company's Common Stock and the exercise
price. SFAS 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity investment. The pro forma disclosures of
the difference between the compensation expense included in net loss and the
related cost measured by the fair value method are presented in Note 7. The
Company accounts for equity instruments issued to nonemployees in accordance
with the provisions of SFAS 123 and Emerging Issues Task Force ("EITF") 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
COMPREHENSIVE INCOME (LOSS)
There has been no difference between the Company's net loss and its total
comprehensive loss for all periods presented.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of shares of common stock
outstanding during the period. The calculation of diluted net loss per share
excludes potential common shares if the effect is antidilutive. Potential common
shares are comprised of common stock subject to repurchase rights, incremental
shares of
F-9
<PAGE> 83
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
common and preferred stock issuable upon the exercise of stock options or
warrants and shares issuable upon conversion of convertible preferred stock.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28, SIX MONTH PERIOD
1998 TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1998 1999 1999 2000
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders..................... $(2,799) $(15,367) $(4,252) $(25,825)
======= ======== ======= ========
Basic and diluted shares:
Weighted average common shares
outstanding................... 2,584 13,066 15,346 16,154
Weighted average unvested common
shares subject to
repurchase.................... 888 8,465 11,733 8,943
------- -------- ------- --------
Weighted average shares used to
compute basic and diluted net
loss per share................ 1,696 4,601 3,613 7,211
======= ======== ======= ========
Net loss per share attributable to
common stockholders -- basic and
diluted.......................... $ (1.65) $ (3.34) $ (1.18) $ (3.58)
======= ======== ======= ========
</TABLE>
The following table sets forth potential shares of common stock that are
not included in the diluted net loss per share attributable to common
stockholders above because to do so would be antidilutive for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------- ----------------
1998 1999 1999 2000
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Mandatorily redeemable convertible preferred stock
upon conversion to common stock.................... 15,458 26,483 26,483 31,543
Warrants to purchase mandatorily redeemable
convertible preferred stock........................ -- 15 15 15
Unvested common shares subject to repurchase......... 2,792 8,011 10,230 7,794
Options to purchase common stock..................... 8,716 3,244 2,030 2,361
------ ------ ------ ------
26,966 37,753 38,758 41,713
====== ====== ====== ======
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1999 and six
month period ended June 30, 2000 is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Convertible Preferred Stock into shares of Common
Stock effective upon the closing of the Company's initial public offering,
F-10
<PAGE> 84
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
as if such conversion occurred on January 1, 1999 or at the date of original
issuance, if later. The resulting pro forma adjustment includes an increase in
the weighted average shares used to compute pro forma basic net loss per share
of 24,186,000 and 29,435,000 shares for the year ended December 31, 1999 and six
month period ended June 30, 2000. The calculation of pro forma diluted net loss
per share excludes potential shares of Common Stock as their effect would be
antidilutive.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
The pro forma stockholders' equity as of June 30, 2000 reflects the
conversion of all outstanding shares of Mandatorily Redeemable Convertible
Preferred Stock into an aggregate of 31,543,000 shares of Common Stock, and the
assumed exercise of a warrant to purchase 15,000 shares of Series B Preferred
Stock which expires upon the closing of this offering (see Note 6).
SEGMENT REPORTING
The Company has one reporting segment, solely in the United States. The
Company identifies its operating segments based on business activities,
management's responsibility and geographic location. All revenues are derived
from customers located in and all long lived assets are held in the United
States. One customer accounted for 95% and 97% (unaudited) of the Company's
revenues for the year ended December 31, 1999 and six month period ended June
30, 2000 (see Note 9).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS 133
requires that all derivatives be recognized in the balance sheet at their fair
market value and the corresponding derivative gains or losses be either reported
in the statement of operations or as a deferred item depending on the type of
hedge relationship that exists with respect of such derivatives. In July 1999,
the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement 133." SFAS 137
deferred the effective date until fiscal years commencing after June 15, 2000.
In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- An Amendment of FASB Statement No.
133," which deferred the effective date until the quarter ending March 31, 2001.
Accordingly the Company will adopt SFAS 133 in its quarter ending March 31,
2001. To date, the Company has not engaged in derivative or hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. In June 2000,
the SEC issued SAB 101B to defer the effective date for implementation of SAB
101 until the fourth quarter of fiscal 2000. Management believes that SAB 101
will not have a material effect on the financial position or results of
operations of the Company.
In April 1999, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation" an
interpretation of APB 25, which provides clarification of the definition of
employee for purpose of applying Opinion 25, the criteria for determining
whether a plan qualifies as a noncompensatory plan, the accounting consequences
of various modifications to the terms of a previously fixed stock option or
award and the accounting for an exchange of stock compensation in a business
combination. The interpretation is effective July 1, 2000, except for
F-11
<PAGE> 85
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
certain provisions which were effective before that date. Management believes
that the provisions of FIN 44 have not and will not have a material effect on
the financial position or results of operations of the Company.
NOTE 3 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1998 1999 2000
---- ---- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
INVENTORY:
Raw materials............................... $-- $111 $ 346
Finished goods.............................. -- 59 713
-- ---- ------
$-- $170 $1,059
== ==== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
----- ------
(IN THOUSANDS)
<S> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computers and equipment................................... $ 375 $1,462
Software.................................................. 277 471
Furniture and fixtures.................................... 58 76
Leasehold improvements.................................... 17 58
----- ------
727 2,067
Less: Accumulated depreciation and amortization........... (106) (493)
----- ------
$ 621 $1,574
===== ======
</TABLE>
Depreciation expense was $106,000 and $387,000 during the period from
January 28, 1998 to December 31, 1998 for the year ended December 31, 1999,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
ACCRUED LIABILITIES:
Accrued payroll and related liabilities................... $105 $540
Accrued employee relocation costs......................... -- 174
Accrued outside service costs............................. -- 136
Other accrued liabilities................................. -- 138
---- ----
$105 $988
==== ====
</TABLE>
F-12
<PAGE> 86
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- COMMITMENTS
The Company leases its office facilities under noncancelable operating
lease agreements with expiration dates through 2001.
At December 31, 1999, the future minimum lease payments under all
noncancelable operating lease agreements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000........................................................ $220
2001........................................................ 71
----
Total minimum lease payments.............................. $291
====
</TABLE>
Rent expense under operating leases during the period from January 28, 1998
to December 31, 1998 and for the year ended December 31, 1999 was $101,000 and
$256,000, respectively.
NOTE 5 -- LOAN AND SECURITY AGREEMENT
On February 18, 1999, the Company entered into a Loan and Security
Agreement (the "Loan Agreement") which provided for a revolving line-of-credit
in the amount of $1,000,000 and a separate equipment line totaling $250,000. On
August 20, 1999, the Loan Agreement was amended to add an additional separate
equipment line totaling $750,000 and increase the initial equipment line to
$750,000. Borrowings under the equipment lines bear interest at the bank's prime
rate plus 0.50% (9.0% at December 31, 1999) and are payable over 36 months from
the date of the advance. Borrowings are collateralized by substantially all of
the Company's assets. There was no borrowing outstanding under the revolving
line-of-credit.
Future minimum payments under the Loan Agreement at December 31, 1999 is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000........................................................ $231
2001........................................................ 231
2002........................................................ 231
----
Total payments............................................ 693
Less: Amount representing interest.......................... (87)
----
Principle portion........................................... 606
Less: Current portion....................................... (184)
----
Non-current portion......................................... $422
====
</TABLE>
F-13
<PAGE> 87
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The following table summarizes Mandatorily Redeemable Convertible Preferred
Stock ("Preferred Stock") at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
SHARES
------------------------ LIQUIDATION
SERIES AUTHORIZED OUTSTANDING AMOUNT
------ ---------- ----------- -----------
<S> <C> <C> <C>
A.......................................... 5,600 5,600 $ 1,400
B.......................................... 10,000 9,858 3,283
C.......................................... 11,100 11,025 22,050
------ ------ -------
26,700 26,483 $26,733
====== ====== =======
</TABLE>
The rights, privileges and restrictions of holders of Series A, B, and C
Preferred Stock ("Series A," "Series B" and "Series C" respectively) are
summarized as follows:
VOTING
Each share of Preferred Stock has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes together
as one class with the Common Stock. In addition, at each annual election the
holders of the shares of Series A and Series B Preferred Stock each have the
right to elect two members of the Board of Directors, as long as at least a
majority of their shares originally issued remain outstanding. The holders of
the shares of Series C Preferred Stock each have the right to elect one member
of the Board of Directors at each annual election, as long as at least a
majority of the shares of Series C Preferred Stock originally issued remain
outstanding.
DIVIDENDS
Holders of Series A, Series B and Series C Preferred Stock are entitled to
receive a noncumulative dividend at the annual rate of $0.02, $0.03 and $0.20
per share, respectively, when and if declared by the Board of Directors. Such
dividends are payable in preference to any dividends for Common Stock declared
by the Board of Directors. There have been no dividends declared to date.
LIQUIDATION
In the event of liquidation, holders of Series A, Series B and Series C
Preferred Stock are entitled to a per share distribution in preference to
holders of Common Stock. This per share distribution is equal to the original
issue price of $0.25 per share for each share of Series A Preferred Stock,
$0.333 per share for each share of Series B Preferred Stock and $2.00 per share
for each share of Series C Preferred Stock, plus any declared but unpaid
dividends. In the event funds are sufficient to make a complete distribution to
the holders of Series A and Series B Preferred Stock as described above, the
remaining assets will be distributed ratably among the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common
Stock based on the number of shares of Common Stock held by each, assuming
conversion of shares of Series A, Series B and Series C Preferred Stock into
Common Stock. In the event that all distributions to holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are equal
to $0.50 per share, $0.666 and $4.00 per share, respectively, including payment
of liquidation preference, any remaining assets will be distributed solely among
the holders of Common Stock.
F-14
<PAGE> 88
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONVERSION
Each share of Series A, Series B and Series C Preferred Stock is
convertible at the option of the holder into shares of Common Stock based on a
formula which currently results in a one-for-one exchange ratio of Common Stock
for the Preferred Stock. This formula is subject to adjustment, as defined,
which essentially provides dilution protection for holders of the Preferred
Stock. Such conversion is automatic upon the closing date of a public offering
of the Company's Common Stock for which the aggregate proceeds are at least
$15,000,000 and the offering price per share is at least $4.00 or the date
specified by the holders of a majority of the then outstanding Preferred Stock.
At December 31, 1999, a total of 26,483,000 shares of Common Stock have been
reserved for issuance upon the conversion of Preferred Stock.
REDEMPTION
At any time after June 30, 2004, upon the written election of not less than
66 2/3% of the then outstanding Series A, Series B and Series C Preferred Stock,
the Company must redeem in three annual installments the shares of Series A,
Series B and Series C Preferred Stock by paying for each share in cash a minimum
amount equal to the greater of the original issue price of Series A, Series B or
Series C Preferred Stock compounded at an annual rate of 10% or the fair market
value of such shares on the redemption date. The carrying value of the Series A,
B and C Preferred Stock is being accreted to the redemption amount over the
period to redemption (see Note 10).
WARRANTS TO PURCHASE PREFERRED STOCK
The Company issued warrants to purchase 15,000 shares of Series B Preferred
Stock at $1.20 per share in February 1999, which expires on the earliest of the
Company's Initial Public Offering or February 2004, in connection with a loan
and security agreement (see Note 5). The warrants were fully vested at the date
of issuance. The Company valued the warrants using the Black-Scholes option
pricing model, applying an expected life of five years, a weighted average risk
free rate of 4.96%, a dividend yield of 0% and volatility of 75%. The fair value
of $10,000 was recorded as interest expense in the year ended December 31, 1999.
NOTE 7 -- STOCKHOLDER'S EQUITY (DEFICIT):
STOCK OPTION PLAN
At December 31, 1999, the Company has reserved 19,291,000 shares of its
Common Stock under the 1998 Stock Option Plan (the "Plan") for issuance of
incentive and nonstatutory stock options to employees and consultants. The Plan
expires in 2008. Options to purchase the Company's Common Stock may be granted
at prices not lower than 100% and 85% of fair market value at the date of grant
for incentive and nonstatutory stock options, respectively, as determined by the
Board of Directors. The per share exercise price of options granted to a person
who, at the time of grant of such option, owns stock representing more than ten
percent of the voting power of all classes of stock of the Company may not be
less than 110% of the fair market value per share on the date of grant. Options
vest as determined by the Board of Directors, but in no case at a rate less than
20% per annum over five years from the grant date. Options granted under the
Plan are exercisable at the date of grant and are generally subject to
repurchase by the Company at the option exercise price paid per share with such
repurchase right lapsing 25% after the first year and ratably each month over
the remaining vesting period. Options granted are exercisable for a maximum
period of ten years from the date of grant.
F-15
<PAGE> 89
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the activity under the Plan since its inception is set forth
below (in thousands except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
--------- --------- --------
<S> <C> <C> <C>
Options reserved at Plan inception........... 6,800 -- --
Additional options reserved................ 12,300 -- --
Options granted............................ (12,091) 12,091 $0.025
Options exercised.......................... -- (3,375) $0.025
------- ------- ------
Balance, December 31, 1998................... 7,009 8,716 $0.025
Options eliminated from Plan............... (2,809) -- --
Additional options reserved................ 3,000 -- --
Options granted............................ (5,056) 5,056 $ 0.15
Options exercised.......................... -- (10,443) $0.028
Options canceled........................... 85 (85) $ 0.31
Shares repurchased and returned to the
Plan.................................... 1,428 -- --
------- ------- ------
Balance, December 31, 1999................... 3,657 3,244 $ 0.20
Options granted (unaudited)................ (1,591) 1,591 $ 2.32
Options exercised (unaudited).............. -- (2,376) $ 0.21
Options canceled (unaudited)............... 98 (98) $ 1.27
Shares repurchased and returned to the Plan
(unaudited)............................. 262 -- --
------- ------- ------
Balance, June 30, 2000 (unaudited)........... 2,426 2,361 $ 1.57
======= ======= ======
</TABLE>
Option holders have the right to exercise unvested options, subject to a
repurchase right held by the Company at the original exercise price in the event
of voluntary or involuntary termination of employment of the stockholder. As of
December 31, 1998, 1999 and June 30, 2000, 2,792,000, 8,011,000 and 7,794,000
(unaudited) shares of common stock, respectively, were subject to repurchase at
an average price of $0.025, $0.029 and $0.073 (unaudited), respectively. Of the
total options exercised, options to purchase 300,000 shares were exercised in
exchange for a note receivable of $60,000. The note is full recourse and is
additionally collateralized by the underlying shares of common stock. The note
receivable is payable on March 7, 2005 and bears interest at a rate of 6.8% per
annum, compounded annually.
F-16
<PAGE> 90
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
NUMBER OF WEIGHTED WEIGHTED NUMBER OF
OPTIONS AVERAGE AVERAGE OPTIONS
EXERCISABLE REMAINING EXERCISE OUTSTANDING
EXERCISE AND CONTRACTUAL PRICE AND
PRICE OUTSTANDING LIFE (IN YEARS) PER SHARE VESTED
-------- ----------- --------------- --------- -----------
<S> <C> <C> <C> <C>
$0.025 702 8.69 $0.025 464
$0.033 115 9.09 $0.033 13
$0.20 1,155 9.42 $ 0.20 68
$0.25 713 9.66 $ 0.25 1
$0.40 559 9.88 $ 0.40 --
----- ---
$0.025 - $0.40 3,244 9.38 $ 0.20 546
===== ===
</TABLE>
At December 31, 1998 and 1999, 21,000 and 546,000 options outstanding were
fully vested.
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS 123, the Company's net loss attributable to common
stockholders would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28,
1998 TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Net loss attributable to common stockholders:
As reported..................................... $ (2,799) $(15,367)
Pro forma....................................... $ (2,814) $(15,422)
Net loss per share attributable to common
stockholders -- basic and diluted:
As reported.................................. $ (1.65) $ (3.34)
Pro forma.................................... $ (1.66) $ (3.35)
</TABLE>
The Company calculated the value of each option grant on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
the periods ended December 31, 1998 and 1999: dividend yield expected is 0% and
volatility of 0%; expected lives of five years and risk free interest rate of
4.45% to 6.68%. These pro forma amounts may not be representative of the effects
on reported net loss for future years as options vest over several years and
additional awards are generally made each year. The weighted average fair value
of options granted was $0.025 and $1.53 for the period ended December 31, 1998
and year ended December 31, 1999, respectively.
STOCK-BASED COMPENSATION
In connection with certain stock option grants to employees during the year
ended December 31, 1999, and six month period ended June 30, 2000, the Company
recognized
F-17
<PAGE> 91
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
approximately $6,212,000 and $17,430,000 (unaudited), respectively, of deferred
stock-based compensation for the excess of the deemed value of the shares of
common stock subject to such options above the exercise price of these options
at the date of grant. Such amounts are included as a reduction of stockholders'
equity (deficit) and are being amortized over the vesting period of generally
four years using the provisions of FIN 28. The Company recorded stock-based
compensation expense for options to employees of $1,898,000 and $4,155,000
(unaudited) for the year ended December 31, 1999 and the six month period ended
June 30, 2000, respectively.
Stock-based compensation expense related to stock options granted to
non-employees is recognized as earned. At each reporting date, the Company
revalues the stock-based compensation for the unearned element using the
Black-Scholes option pricing model. As a result, the stock-based compensation
expense will fluctuate as the fair market value of the Company's common stock
fluctuates. Options to non-employees generally vest ratably over a 24 month
period. The Company used the following assumptions to value the options granted;
weighted average risk-free rate of between 5.14 and 6.50% dividend yield of 0%
and volatility of 75%. The Company recorded stock-based compensation expense for
options to non-employees of $373,000 and $1,881,000 (unaudited) in the years
ended December 31, 1999 and six month period ended June 30, 2000.
The aggregate amortization of employee and non-employee stock-based
compensation is expected to be (unaudited) $5,512,000, $6,273,000, $2,593,000,
$904,000 and $53,000 in the remaining six months of 2000 and in 2001, 2002, 2003
and 2004, respectively, based on stock options granted as of June 30, 2000.
These amounts will change based on new issuances, cancellations, and/or
repurchases.
NOTE 8 -- INCOME TAXES
Deferred tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 1,085 $ 4,856
Credit carryforwards...................................... 199 878
Reserves and other........................................ 38 231
------- -------
Total deferred tax assets.............................. 1,322 5,965
Deferred tax liability:
Depreciation and amortization............................. (9) (41)
------- -------
Gross deferred tax asset.................................. 1,313 5,924
Valuation allowance....................................... (1,313) (5,924)
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
F-18
<PAGE> 92
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of the statutory federal income tax to the Company's
effective tax:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28,
1998 (INCEPTION) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1998 1999
---------------- ------------
<S> <C> <C>
Tax at federal statutory rate.................. (34)% (34)%
State, net of federal benefit.................. (11)% (7)%
Stock compensation charge...................... 0% 6%
Increase in valuation allowance................ 47% 38%
Research and development credit................ (2)% (3)%
---- ----
-- --
---- ----
</TABLE>
For financial reporting purposes, the Company has incurred a loss in each
year since inception. Based on the available objective evidence, management
believes it is more likely than not that the net deferred tax assets will not be
fully realizable. Accordingly, the Company has provided a full valuation
allowance against its net deferred tax assets at December 31, 1998 and December
31, 1999.
At December 31, 1999, the Company had approximately $12.1 million of
federal and $12.1 million of state net operating loss carryforwards available to
reduce future taxable income which will begin to expire in 2018 for federal and
2005 for state tax purposes, respectively. Under the Tax Reform Act of 1986, the
amounts of benefits from net operating loss carryforwards may be impaired or
limited as the Company has incurred a cumulative ownership change of more than
50%, as defined, over a three year period.
NOTE 9 -- RELATED PARTY TRANSACTIONS:
The Company's primary customer, ADC Telecommunications, is also a less than
10% stockholder of the Company. Revenue attributable to the customer totaled $0,
$1,186,000 and $8,047,000 (unaudited) during 1998, 1999 and the six month period
ended June 30, 2000, respectively. In addition, accounts receivable from the
customer totaled $0, $859,000 and $1,796,000 (unaudited) at December 31, 1998,
1999 and June 30, 2000, respectively.
From February 28, 1999 to March 31, 1999, the Company loaned to an officer
a sum of $93,000, pursuant to four promissory notes and a Third Deed of Trust,
for relocation costs. These notes accrued interest at the rates of 4.62%, 4.67%,
4.99% and 4.90%, respectively, per annum, compounded annually, and were
collateralized by certain assets of the officer. Pursuant to the terms of the
officer's offer letter, the principal and any accrued interest on these four
notes were forgiven in full on January 11, 2000 after a year of employment.
On August 20, 1999 and May 11, 2000, the Company loaned to the same officer
a sum of $100,000, pursuant to two promissory notes and a Third Deed of Trust.
The principal balance of the first $50,000 note, together with interest accrued
but unpaid to this date, is due and payable on February 1, 2002. The principal
balance of the second $50,000 note, together with interest accrued but unpaid to
this date, is due and payable on February 1, 2003. These notes accrue interest
at 5.43% and 6.42% per annum, respectively, compounded annually and are
collateralized by certain assets of the officer.
On March 14, 2000, the Company loaned to an officer a sum of $60,000 for
assistance in the exercise of stock options grants exercisable at that date.
Under the terms of the agreement the note is repayable in full on the earlier
of, March 7, 2005 or, 30 days after the officer's termination of
F-19
<PAGE> 93
ANDA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
employment with the Company. The principal of the note and any unpaid interest
bear interest at a rate of 6.80% per annum. The note is full recourse and is
collateralized by a Stock Pledge Agreement of the shares of Common Stock
exercised at that date.
NOTE 10 -- SUBSEQUENT EVENTS (UNAUDITED):
In March and April 2000, the Company sold 5,059,644 shares of Series D
Mandatorily Redeemable Convertible Preferred Stock at $13.72 per share for net
proceeds of approximately $69,348,754.
The rights and preference of Series D Convertible Preferred Stock are
substantially the same as those of Series A, Series B, and Series C Mandatorily
Redeemable Convertible Preferred Stock.
In April 2000, the Company increased its liability under the Loan and
Security Agreement described in Note 5 by drawing down the full $750,000
available under the second equipment line.
In May 2000, the Company entered into a three year lease for office space
commencing on June 1, 2000. The Company is obligated to make monthly payments
totaling approximately $2.4 million per year.
In May 2000, the Company modified the redemption requirements of its Series
A, B, C and D Mandatorily Redeemable Preferred Stock to remove the requirement
of redemption at fair market value such that the redemption amount is equal to
the original purchase price compounded at an annual rate of 10%.
In May 2000, the Company loaned to an officer a sum of $50,000 pursuant to
a promissory note and Third Deed of Trust.
F-20
<PAGE> 94
----------------------------------------------------------
----------------------------------------------------------
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............................ 5
Special Note Regarding Forward-Looking
Statements............................ 21
Use of Proceeds......................... 21
Dividend Policy......................... 21
Capitalization.......................... 21
Dilution................................ 24
Selected Financial Data................. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 27
Business................................ 34
Management.............................. 47
Related Party Transactions.............. 58
Principal Stockholders.................. 60
Description of Capital Stock............ 63
Shares Eligible for Future Sale......... 66
Underwriting............................ 68
Legal Matters........................... 70
Experts................................. 70
Additional Information.................. 70
Index to Financial Statements........... F-1
----------------------------------------------
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.
----------------------------------------------
----------------------------------------------
</TABLE>
----------------------------------------------------------
----------------------------------------------------------
Shares
ANDA NETWORKS, INC.
Common Stock
------------------------
[LOGO]
------------------------
GOLDMAN, SACHS & CO.
ROBERTSON STEPHENS
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
Representatives of the Underwriters
----------------------------------------------------------
----------------------------------------------------------
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by ANDA Networks, Inc. in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $26,400
NASD filing fee............................................. 10,500
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky qualification fees and expenses.................... *
Transfer Agent and Registrar fees........................... *
Miscellaneous fees and expenses............................. *
--------
Total............................................. $ *
========
</TABLE>
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article IX of our
Certificate of Incorporation (Exhibit 3.2 hereto) and Article VII of ANDA
Network's Bylaws (Exhibit 3.4 hereto) provide for indemnification of our
directors, officers, employees and other agents to the maximum extent permitted
by Delaware law. In addition, we have entered into Indemnification Agreements
(Exhibit 10.1 hereto) with our officers and directors. The Underwriting
Agreement (Exhibit 1.1 hereto) also provides for cross-indemnification among
ANDA Networks and the Underwriters for liabilities arising under the Securities
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since February 1, 1998, we have issued and sold the following securities:
1. On February 1, 1998, we issued 1,600,000 shares of Common Stock to
four individuals at a price of $0.25 per share under a common stock
purchase agreement.
2. On February 25, 1998, we issued and sold 5,600,000 shares of our
Series A Preferred Stock at a price of $0.25 per share to a group of
investors under a stock purchase agreement.
3. On September 30, 1998, we issued and sold 9,858,257 shares of our
Series B Preferred Stock at a price of $0.333 per share to a group of
investors pursuant to a stock purchase agreement.
4. On January 18, 1999, we issued a warrant to purchase 15,000 shares
of the Company's Series B Preferred Stock to Silicon Valley Bank with an
exercise price of $1.20 per share pursuant to a line of credit agreement.
The warrant will terminate upon the closing of this offering.
II-1
<PAGE> 96
5. On March 25, 1999, we issued and sold 11,025,000 shares of our
Series C Preferred Stock at a price of $2.00 per share to a group of
investors under a stock purchase agreement.
6. On March 27, 2000, March 31, 2000 and April 3, 2000, we issued and
sold 5,059,644 shares of our Series D Preferred Stock at a price of $13.72
per share to a group of investors under a stock purchase agreement.
7. As of June 30, 2000, we have granted stock options to purchase a
total of 18,397,946 shares of common stock at exercise prices ranging from
$0.025 to $4.50 per share to a total of 148 employees, consultants and
directors pursuant to our 1998 Stock Plan.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering,
with the exception of number 6 which was an issuance deemed to be exempt from
registration under the Securities Act in reliance on Rule 506 of Regulation D.
In addition, certain issuances described in Item 7 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed upon the closing of the offering
made pursuant to this Registration Statement.
3.3 Bylaws of the Registrant.
3.4 Bylaws of the Registrant to be filed upon the closing of the
offering made pursuant to this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* Specimen Stock Certificate.
4.3 Amended and Restated Investors' Rights Agreement dated March
27, 2000.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1 Form of Indemnification Agreement.
10.2 2000 Equity Incentive Plan.
10.3 2000 Employee Stock Purchase Plan.
10.4 2000 Directors' Stock Option Plan.
10.5 Lease between Kifer Industrials and Registrant dated
September 10, 1998.
10.6 Lease between Kifer Industrials and Registrant dated April
9, 1999.
10.7 Sublease between Boston Scientific Corporation and
Registrant dated May 30, 2000.
10.8** Reseller Agreement between PairGain Technologies Corporation
and Registrant dated March 26, 1999.
10.9** Agreement between Snow-City and Registrant dated December 5,
1999.
10.10** Software Development Agreement between Trigon Technology
Group and Registrant dated August 30, 1999.
10.11** Software Development Agreement between Trigon Technology
Group and Registrant dated February 20, 2000.
10.12** OPS Implementation Project Agreement between Trigon
Technology Group and ANDA dated February 20, 2000.
</TABLE>
II-2
<PAGE> 97
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.13 Loan and Security Agreement between Registrant and Silicon
Valley Bank dated February 18, 1999.
10.14 Loan Modification Agreement between Registrant and Silicon
Valley Bank dated July 19, 1999.
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
---------------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
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 Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) 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.
(2) For the purpose 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-3
<PAGE> 98
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 Santa Clara, State of
California on August 15, 2000.
ANDA NETWORKS, INC.
By: /s/ CHARLES R. KENMORE
------------------------------------
Charles R. Kenmore
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Charles
Kenmore, as his attorney-in-fact, with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this registration
statement (including post-effective amendments), and any and all registration
statements filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, in connection with or related to the offering contemplated by this
registration statement and its amendments, if any, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said registration statement.
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
--------- ----- ----
<C> <C> <S>
/s/ CHARLES R. KENMORE President, Chief Executive August 15, 2000
----------------------------------------------------- Officer and Chief Financial
Charles R. Kenmore Officer (Principal Executive,
Financial and Accounting
Officer)
/s/ WUFU CHEN Chairman of the Board August 15, 2000
-----------------------------------------------------
WuFu Chen
/s/ GEORGE BRUNO Director August 15, 2000
-----------------------------------------------------
George Bruno
/s/ PAUL MAEDER Director August 15, 2000
-----------------------------------------------------
Paul Maeder
/s/ ANTHONY SUN Director August 15, 2000
-----------------------------------------------------
Anthony Sun
/s/ MIKE PASCOE Director August 15, 2000
-----------------------------------------------------
Mike Pascoe
</TABLE>
II-4
<PAGE> 99
SCHEDULE II
ANDA NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM JANUARY 28, 1998 (INCEPTION) TO DECEMBER 31, 1998 AND THE
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGED CREDITED AT END
DESCRIPTION OF PERIOD TO EXPENSES TO EXPENSES OF PERIOD
----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable:
Period ended December 31, 1998... $ -- $ -- $ -- $ --
Year ended December 31, 1999..... $ -- $ 60 $ -- $ 60
Deferred tax valuation allowance:
Period ended December 31, 1998... $ -- $1,313 $ -- $1,313
Year ended December 31, 1999..... $1,313 $4,611 $ -- $5,924
</TABLE>
S-1
<PAGE> 100
REPORT OF FINANCIAL ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Our report on the financial statements of ANDA Networks, Inc. has been included
in this Form S-1 on page F-2. In connection with our audit of such financial
statements, we have also audited the related financial statement schedule listed
in the index page II-2 of this Form S-1. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly the information required to be
included therein.
PricewaterhouseCoopers LLP
San Jose, California
May 16, 2000
S-2
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed upon the closing of the offering
made pursuant to this Registration Statement.
3.3 Bylaws of the Registrant.
3.4 Bylaws of the Registrant to be filed upon the closing of the
offering made pursuant to this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* Specimen Stock Certificate.
4.3 Amended and Restated Investors' Rights Agreement dated March
27, 2000.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1 Form of Indemnification Agreement.
10.2 2000 Equity Incentive Plan.
10.3 2000 Employee Stock Purchase Plan.
10.4 2000 Directors' Stock Option Plan.
10.5 Lease between Kifer Industrials and Registrant dated
September 10, 1998.
10.6 Lease between Kifer Industrials and Registrant dated April
9, 1999.
10.7 Sublease between Boston Scientific Corporation and
Registrant dated May 30, 2000.
10.8** Reseller Agreement between PairGain Technologies Corporation
and Registrant dated March 26, 1999.
10.9** Agreement between Snow-City and Registrant dated December 5,
1999.
10.10** Software Development Agreement between Trigon Technology
Group and Registrant dated August 30, 1999.
10.11** Software Development Agreement between Trigon Technology
Group and Registrant dated February 20, 2000.
10.12** OPS Implementation Project Agreement between Trigon
Technology Group and ANDA dated February 20, 2000.
10.13 Loan and Security Agreement between Registrant and Silicon
Valley Bank dated February 18, 1999.
10.14 Loan Modification Agreement between Registrant and Silicon
Valley Bank dated July 19, 1999.
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
---------------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.
