<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 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
QUANTUM BRIDGE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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<S> <C> <C>
DELAWARE 3661 04-343-7895
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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2 TECH DRIVE
ANDOVER, MASSACHUSETTS 01810
(978) 688-9100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ANTHONY A. ZONA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
QUANTUM BRIDGE COMMUNICATIONS, INC.
2 TECH DRIVE
ANDOVER, MASSACHUSETTS 01810
(978) 688-9100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C> <C>
DAVID A. WESTENBERG, ESQ. MARTIN W. PEJKO, ESQ. KEITH F. HIGGINS, ESQ.
JOHN H. CHORY, ESQ. GENERAL COUNSEL ROPES & GRAY
HALE AND DORR LLP QUANTUM BRIDGE COMMUNICATIONS, INC. ONE INTERNATIONAL PLACE
60 STATE STREET 2 TECH DRIVE BOSTON, MA 02110
BOSTON, MA 02109 ANDOVER, MA 01810 TELEPHONE: (617) 951-7000
TELEPHONE: (617) 526-6000 TELEPHONE: (978) 688-9100 FACSIMILE: (617) 951-7050
FACSIMILE: (617) 526-5000 FACSIMILE: (978) 983-3047
</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,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1)(2) REGISTRATION FEE(2)
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<S> <C> <C>
Common Stock, par value $.001 per share..................... $115,000,000 $30,360
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</TABLE>
(1) Includes shares that the Underwriters have the option to purchase from the
Registrant and the selling stockholders solely to cover over-allotments, if
any.
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended, solely for the purpose of computing the amount of the registration
fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued , 2001
Shares
[QUANTUM BRIDGE LOGO]
COMMON STOCK
-------------------------
QUANTUM BRIDGE COMMUNICATIONS, INC. IS OFFERING SHARES OF ITS
COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING, AND NO PUBLIC MARKET
CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $ AND $ PER SHARE.
-------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK FOR QUOTATION ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "QBCI."
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
-------------------------
PRICE $ A SHARE
-------------------------
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<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Quantum Bridge
-------- ---------------------- --------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total.......................................... $ $ $
</TABLE>
Quantum Bridge and selling stockholders of Quantum Bridge have granted the
underwriters the right to purchase up to an additional shares to
cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on , 2001.
-------------------------
MORGAN STANLEY DEAN WITTER
J.P. MORGAN & CO.
ROBERTSON STEPHENS
UBS WARBURG LLC
LAZARD
, 2001
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 5
Special Note Regarding Forward-Looking
Statements........................... 14
Use of Proceeds........................ 16
Dividend Policy........................ 16
Capitalization......................... 17
Dilution............................... 18
Selected Financial Data................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 21
</TABLE>
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<CAPTION>
PAGE
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Business............................... 26
Management............................. 37
Principal and Selling Stockholders..... 45
Description of Capital Stock........... 47
Shares Eligible for Future Sale........ 50
Underwriters........................... 53
Legal Matters.......................... 56
Experts................................ 56
Where You Can Find More Information.... 56
Index to Financial Statements.......... F-1
</TABLE>
------------------------
UNTIL , 2001 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
i
<PAGE> 4
[INSIDE FRONT COVER PAGE OF PROSPECTUS]
[The artwork on the inside front cover page of the prospectus contains a picture
and a caption of the core, metro and access portions of the public network. A
ring represents each of these portions of, and the end users on, the public
network. The diagram contains pictures of our products between the ring
representing the access portion of the public network and the end users. The
products are shown connecting buildings to the core and metro networks. The
words "QB5000 Optical Access Switch" and "QB100 Intelligent Optical Terminal"
are located next to the pictures of our products. Our logo appears near the
bottom of the diagram.]
ii
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information about Quantum Bridge and the common stock being sold in this
offering and our financial statements and related notes included elsewhere in
this prospectus.
QUANTUM BRIDGE COMMUNICATIONS, INC.
We are a leading provider of high-speed optical access networking solutions
that enable communications service providers to offer greater bandwidth to
businesses in the access segment of the public network. This segment, also known
as the "last mile," spans the portion of the network between a service
provider's local points-of-presence and business end users. In recent years, the
extensive build out by service providers to address the growth in data traffic
has largely ignored the access segment, creating a transmission bottleneck that
significantly limits service providers' ability to offer new bandwidth-intensive
applications and services. This bottleneck is not adequately addressed by
traditional access technologies. Our comprehensive optical access hardware and
software solutions alleviate this bottleneck through passive optical networking,
or PON, technologies. PON technologies provide a cost-effective network access
solution by eliminating the use of active optical components, such as
amplifiers, lasers and modulators, in the transmission of data across fiber
optic cable. Our solutions can significantly reduce the cost of building and
managing fiber-based access networks, allowing service providers to leverage
their existing fiber assets to cost-effectively connect businesses of all sizes
to the public network via direct optical connections. Our solutions provide
businesses with the network capacity to implement bandwidth-intensive
applications, such as virtual private networks, e-commerce applications, video
streaming and storage area networks. As a result, our customers can offer
businesses a wide range of value-added voice, video and data services at much
faster speeds than other access technologies.
Our two commercially available products are the QB5000 Optical Access
Switch and the QB100 Intelligent Optical Terminal. The QB5000 is an optical
access and multi-service delivery product with integrated network management
software that resides in a service provider's central office. The QB100 is a
business services terminal that is located on the end user's premises.
We sell our optical access networking solutions primarily through our
direct sales force and we plan to use indirect channels to sell our solutions in
specific markets. We augment our sales efforts with a professional services
organization that assists our customers with network planning, design and
implementation and fiber utilization. We market our solutions to service
providers that typically have already installed or leased significant amounts of
fiber optic cable, such as cable companies, also called multiple system
operators, competitive local exchange carriers, incumbent local exchange
carriers, Internet service providers and utility companies. Our initial
customers are Comcast Business Communications and Advanced TelCom Group.
Our solutions provide our customers and their end users with the following
key benefits:
-- Leverages Investments in Existing Fiber to Create New Revenue
Opportunities. By allowing service providers to leverage their
existing fiber facilities while eliminating costly active optical
components, our optical access networking solutions enable them to
economically extend their fiber networks and offer a wide range of
new value-added services.
-- Ability to Scale Fiber Networks Opportunistically. Our use of
passive components and our fiber architecture enable service
providers to quickly extend fiber as they sign up customers,
substantially reducing the need for expensive capacity upgrades in
advance of customer orders. Our solutions are designed to scale to
support a number of additional wavelengths, which provides service
providers with greater flexibility in delivering dedicated
wavelengths to their customers.
-- Cost-Effective, Flexible Provisioning. Our flexible architecture
allows service providers to respond rapidly to end user requests to
increase or decrease bandwidth to accommodate fluctuations in
bandwidth consumption. Our software-based provisioning significantly
reduces service providers' costs because it eliminates the need for
labor-intensive manual upgrades.
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<PAGE> 6
-- Interoperability with Existing Infrastructure. Our solutions
interoperate with existing networking equipment, enabling service
providers to offer the bandwidth and scalability of direct optical
connections for voice and data services between the end user's
premises and the optical networking equipment in the core and metro
portions of the public network.
-- Comprehensive and Simplified Network Planning and Management
Capabilities. Our solutions include a comprehensive network planning
and management system that enables service providers to plan network
build outs, provision and monitor service and detect service
interruptions and outages.
-- Efficient Bundling of Voice, Data and Video Services. Our solutions
support the major protocols underlying voice, data and video
services, enabling service providers to offer bundled services to end
users without deploying separate equipment to support each service.
Our objective is to be the leading provider of optical access networking
solutions. To achieve this goal, we intend to:
-- extend our leadership in optical access networking technology;
-- broaden our product offerings to support new markets, customers and
network topologies and offer service providers a migration path to
the dynamic provisioning of wavelength services;
-- collaborate with service providers to help them identify, create and
deploy new high-speed data services;
-- target facilities-based service providers that are early adopters of
new technologies and can rapidly deploy our solutions to leverage
their existing fiber assets; and
-- utilize multiple distribution channels to expand our customer base
domestically and abroad.
We are a Delaware corporation. We were incorporated on October 22, 1998
under the name Metro Web Technologies, Inc. and we changed our name to Quantum
Bridge Communications, Inc. on January 14, 1999. Our principal executive offices
are located at 2 Tech Drive, Andover, Massachusetts 01810 and our telephone
number is (978) 688-9100. Our web site address is www.quantumbridge.com. The
information contained in our web site is not incorporated by reference into this
prospectus. Our web site address is included in this document as an inactive
textual reference only.
THE OFFERING
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Common stock offered........................ shares
Common stock to be outstanding after
this offering............................. shares
Use of proceeds............................. For general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...... QBCI
</TABLE>
The foregoing information is based upon the number of shares of common
stock outstanding as of September 30, 2000. This information excludes 8,032,325
shares of common stock issuable upon exercise of outstanding options at a
weighted average exercise price of $2.26 per share as of September 30, 2000.
2
<PAGE> 7
SUMMARY FINANCIAL DATA
The unaudited pro forma basic and diluted net loss per share in the table
below have been calculated assuming the conversion of all outstanding shares of
preferred stock into shares of common stock, as if the shares had converted
immediately upon issuance. Accordingly, accretion of dividends on preferred
stock has not been included in the calculation of unaudited pro forma basic and
diluted net loss per share.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 22, 1998) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------------
1998 1999 1999 2000
------------------ ------------ ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................. $ -- $ -- $ -- $ 654
---------- ----------- ---------- -----------
Total operating expenses............ 203 8,015 4,693 32,713
---------- ----------- ---------- -----------
Loss from operations................ (203) (8,015) (4,693) (32,590)
---------- ----------- ---------- -----------
Net loss............................ (177) (7,605) (4,482) (29,429)
---------- ----------- ---------- -----------
Net loss attributable to common
stockholders...................... $ (233) $ (8,575) $ (5,006) $ (34,623)
========== =========== ========== ===========
Basic and diluted net loss per
share............................. $ (0.14) $ (2.94) $ (1.80) $ (5.70)
========== =========== ========== ===========
Unaudited pro forma basic and
diluted net loss per share........ $ (0.31) $ (0.71)
=========== ===========
Shares used in computing basic and
diluted net loss per share........ 1,691,366 2,920,490 2,781,646 6,078,312
========== =========== ========== ===========
Shares used in computing unaudited
pro forma basic and diluted net
loss per share.................... 24,903,635 41,216,152
=========== ===========
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<PAGE> 8
The following table presents a summary of our balance sheet as of September
30, 2000:
-- on an actual basis;
-- on a pro forma basis to reflect the conversion of all outstanding
shares of preferred stock into 39,287,173 shares of common stock upon
the closing of this offering; and
-- on a pro forma basis as adjusted to reflect our sale of
shares of common stock in this offering at an assumed
initial public offering price of $ per share, after deducting
estimated underwriting discounts and offering expenses, and the
issuance of shares of common stock in connection with the
assumed exercise of warrants upon the closing of this offering.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 34,811 $ 34,811 $
Short-term investments................................. 60,450 60,450 60,450
Working capital........................................ 90,634 90,634
Total assets........................................... 112,713 112,713
Long-term debt......................................... 5,445 5,445 5,445
Redeemable convertible preferred stock................. 131,021 -- --
Total stockholders' equity (deficit)................... (35,527) 95,494
</TABLE>
------------------------
In this prospectus, "Quantum Bridge," "we," "us" and "our" refer to Quantum
Bridge Communications, Inc. and its subsidiaries and not to the underwriters.
Except as set forth in our financial statements or as otherwise indicated, all
information contained in this prospectus:
-- assumes that the underwriters do not exercise their over-allotment
option;
-- gives effect to the conversion of all outstanding shares of preferred
stock into 39,287,173 shares of common stock upon the closing of this
offering;
-- gives effect to the issuance of shares of common stock in
connection with the assumed exercise of warrants upon the closing of
this offering;
-- gives effect to a two-for-one stock split of our common stock
effected on December 21, 1999 and a three-for-two stock split of our
common stock effected on September 5, 2000; and
-- gives effect to the filing of our restated certificate of
incorporation upon the closing of this offering.
Quantum Bridge, the Quantum Bridge logo, Dynamic Wavelength Slicing, QB100,
QB3000, QB5000, QBCare and QBVision are our trademarks. This prospectus also
contains trademarks and trade names of other companies.
4
<PAGE> 9
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the other
information in this prospectus, including our financial statements and the
related notes, before investing in our common stock.
RISKS RELATED TO OUR BUSINESS
WE CURRENTLY HAVE ONLY TWO SIGNIFICANT CUSTOMERS, AND OUR REVENUE WILL NOT
GROW IF WE DO NOT SUCCESSFULLY SELL OUR SOLUTIONS TO THESE OR ADDITIONAL
CUSTOMERS.
We currently have only two significant customers, Comcast and Advanced
TelCom Group. As of September 30, 2000, these customers had accounted for all of
our revenue. Neither of these customers has contractually committed to purchase
any minimum quantities of products from us. We expect that for the foreseeable
future substantially all of our revenue will continue to depend on sales of our
optical access networking solutions to these two customers and a small number of
additional customers. The rate at which service providers purchase products from
us will depend, in part, on the demand for high bandwidth services by end users.
The failure of current or prospective customers to purchase our products for any
reason, any determination not to install our optical access networking solutions
in their networks, any difficulty we may incur in meeting their delivery
requirements or any downturn in their business would seriously harm our ability
to build a successful business.
WE ARE DEPENDENT ON OUR LINE OF OPTICAL ACCESS NETWORKING PRODUCTS AND OUR
FUTURE REVENUE DEPENDS ON THEIR COMMERCIAL SUCCESS.
Our future growth depends on the commercial success of our existing line of
optical access networking products. To date, our QB5000 Optical Access Switch
and QB100 Intelligent Optical Terminal products are the only products that we
have shipped to customers. Our customers have not yet deployed these products in
large access network environments and may choose not to do so. Even if our
customers do fully deploy our products, these products may not operate as
expected. The failure of our products to operate as expected could delay or
prevent their adoption.
We also intend to develop and introduce new products and enhancements to
existing products in the future, although we may not be successful in doing so
on a timely basis, or at all. If our target customers do not adopt, purchase and
successfully deploy our current and planned products, our revenue will not grow
significantly.
IF WE FAIL TO INCREASE OUR REVENUE, WE WILL NOT ACHIEVE OR MAINTAIN
PROFITABILITY.
We have incurred significant losses since inception and expect to continue
to incur significant losses in the future. As of September 30, 2000, we had an
accumulated deficit of $43.6 million. We first recognized revenue during the
quarter ended September 30, 2000. We have never achieved profitability on a
quarterly or annual basis. We have large fixed expenses and we expect to
continue to incur significant and increasing research and development, sales and
marketing, administrative and other expenses. As a result, we will need to
generate significantly higher revenue to achieve and maintain profitability. If
we fail to achieve significant increases in our revenue, the size of our
operating losses may be larger than expected. We may never achieve
profitability, and if we do achieve profitability in any period, we may not be
able to sustain or increase profitability on a quarterly or annual basis.
WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME AND YOUR BASIS FOR
EVALUATING US IS LIMITED.
We were founded in October 1998. We did not begin shipping our first
products, the QB5000 Optical Access Switch and QB100 Intelligent Optical
Terminal products, until August 2000. As a result, we have limited historical
financial data upon which to base projected revenue and planned operating
expenses, and upon which investors may evaluate us and our prospects. The
revenue and income potential of our business and market are unproven. You should
consider the risks and difficulties frequently encountered by companies
5
<PAGE> 10
like ours in the early stages of development and in a new and rapidly evolving
market before investing in our common stock.
THE LONG AND VARIABLE SALES CYCLE FOR OUR OPTICAL ACCESS NETWORKING SOLUTIONS
MAY CAUSE REVENUE AND OPERATING RESULTS TO VARY UNEXPECTEDLY FROM QUARTER TO
QUARTER, WHICH COULD NEGATIVELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
A customer's decision to purchase our optical access networking solutions
generally involves a significant commitment of its resources and a lengthy
evaluation, testing and product qualification process. As a result, our sales
cycle has been, and is likely to continue to be, lengthy. Throughout the sales
cycle, we spend considerable time and expense educating prospective customers
about the use and features of our products. Even after deciding to purchase our
products, our customers are likely to deploy our equipment slowly and
deliberately. Because of our limited operating history and the nature of our
business, we may not be able to accurately predict these sales and deployment
cycles. The long sales cycles may cause our revenue and results of operations to
vary significantly and unexpectedly from quarter to quarter, which could
adversely affect the market price of our common stock.
OUR REVENUE AND OPERATING RESULTS MAY VARY SIGNIFICANTLY FROM QUARTER TO
QUARTER, AND THE PRICE OF OUR COMMON STOCK COULD FALL IF QUARTERLY RESULTS ARE
LOWER THAN THE EXPECTATIONS OF INVESTORS OR SECURITIES ANALYSTS.
Our operating results are difficult to forecast and may fluctuate from
quarter to quarter due to a number of factors, many of which are beyond our
control. As a result of our limited operating history, we do not have historical
financial data for a significant number of periods upon which to forecast
quarterly financial performance. If our quarterly revenue or operating results
fall below the expectations of investors or securities analysts, the price of
our common stock could fall substantially. Among the factors that could cause
our quarterly operating results to fluctuate are:
-- fluctuation in demand for our optical access networking solutions;
-- the timing and size of customer orders for our solutions and
cancellations of orders;
-- the timing of recognizing revenue and deferred revenue;
-- our ability to install and successfully deploy our products;
-- the ability of our third-party manufacturers and suppliers to meet
their delivery and quality protection commitments;
-- the timing and level of research and development expenses;
-- the distribution channels through which we sell our solutions;
-- changes in our pricing policies or the pricing policies of our
competitors;
-- increases in the prices of the components we purchase;
-- our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner; and
-- general economic conditions, as well as those specific to the
telecommunications industry.
We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations,
broaden our customer support capabilities and develop new distribution channels.
We also plan to expand our general and administrative capabilities to address
the increased reporting and other administrative demands that will result from
the increasing size of our business. Most of our operating expenses do not vary
directly with revenue and are difficult to adjust in the short term. As a
result, if revenue for a particular quarter is below our expectations, we would
not be able to proportionately reduce operating expenses for that quarter, and
therefore any revenue shortfall would have a disproportionate effect on our
expected operating results for that quarter.
6
<PAGE> 11
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. You should not rely on our results or growth for one quarter as an
indication of our future performance. It is likely that in some future quarters,
our operating results may be below the expectations of securities analysts and
investors. In this event, the price of our common stock could decrease
substantially.
TECHNOLOGICAL BREAKTHROUGHS IN THE ACCESS NETWORKING MARKET COULD RENDER OUR
SOLUTIONS OBSOLETE, IN WHICH CASE WE WOULD BE UNABLE TO ATTRACT NEW CUSTOMERS.
The market for access networking solutions is characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of new products by competitors, market acceptance of
products based on new or alternative technologies or the emergence of new
industry standards could render our existing or future products obsolete.
Accordingly, we will be required to make significant and ongoing investments in
future periods in order to remain competitive. The development of new products
or technologies is a complex and uncertain process that requires the accurate
anticipation of technological and market trends. We may be unable to respond
quickly or cost-effectively to these developments, nor may we be able to obtain
the necessary funds to develop or acquire new technologies or products needed to
compete. We also cannot assure you that any products we do develop will gain
market acceptance.
In developing our products, we have made, and will continue to make,
assumptions about the standards that may be adopted by our customers and
competitors. If the standards adopted are different from those that we have
chosen to support, market acceptance of our solutions may be significantly
reduced or delayed and our business will be seriously harmed. In addition, in
order to introduce products incorporating new technologies and new industry
standards, we must be able to gain access to the latest technologies of our
existing and prospective customers, our suppliers and other network vendors. If
we fail to gain access to new technologies, we may be unable to develop
competitive products.
THERE IS INTENSE COMPETITION IN THE MARKET FOR OPTICAL ACCESS NETWORKING
PRODUCTS, AND IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUE COULD DECLINE AND
WE COULD EXPERIENCE ADDITIONAL LOSSES.
The market for optical access networking products is highly competitive. We
currently compete with a number of companies that have announced or that we
believe will announce products that address the same network access problems
that our solutions are designed to address. These competitors include a
subsidiary of NEC called eLUMINANT, a subsidiary of Mitsubishi Electric Company
called Paceon, Terawave and CS Communication & Systemes. In the future, large,
established network equipment vendors, such as Alcatel, Cisco, Fujitsu, Lucent,
Marconi, NTT and Nortel, may also focus on our target market, thereby further
intensifying competition.
Many of our current and potential competitors have significantly greater
selling, marketing, technical, manufacturing, financial and other resources than
we do, as well as more customers, greater market recognition and more
established relationships and alliances in the industry. As a result, these
competitors may be able to develop, enhance and expand their product offerings
more quickly, adapt more swiftly to new or emerging technologies and changes in
customer demands, devote greater resources to the marketing and sale of their
offerings, pursue acquisitions and other opportunities more readily and adopt
more aggressive pricing policies. In order to compete effectively with these
competitors, we must demonstrate that our optical access networking solutions
are superior in meeting the needs of service providers and that our solutions
provide high levels of performance, reliability, scalability and
interoperability in a cost-effective manner.
Increased competition from our current and future competitors could
materially and adversely affect our business by diverting sales from us, forcing
us to charge lower prices, reducing our gross margins and adversely affecting
our strategic relationships with contract manufacturers and others. If this
occurs, our revenue may not grow, our gross margins could decrease and we could
experience additional losses.
7
<PAGE> 12
CUSTOMER REQUIREMENTS ARE LIKELY TO EVOLVE, AND WE WILL NOT RETAIN CUSTOMERS
OR ATTRACT NEW CUSTOMERS IF WE DO NOT ANTICIPATE AND MEET SPECIFIC CUSTOMER
REQUIREMENTS.
Our future success will depend upon our ability to develop and manage key
customer relationships and to introduce new products and product enhancements
that address their increasingly sophisticated needs. Our current and prospective
customers may require product features and capabilities that our current
products do not have. We must effectively anticipate and adapt to customer
requirements and offer products and services that meet those demands in a timely
manner. Our failure to develop solutions or offer services that satisfy customer
requirements would seriously harm our ability to achieve market acceptance for
our solutions. In addition, we may experience design, manufacturing, marketing
and other difficulties that could delay or prevent the development, introduction
or marketing of new products and enhancements. Material delays in introducing
new products may cause customers to forego purchases of our solutions and
purchase those of our competitors, which could seriously harm our business. The
introduction of new or enhanced products also requires that we manage the
transition from older products in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. Our inability to effectively
manage this transition could cause us to lose current and prospective customers.
OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS OR MAY NOT INTEROPERATE WITH THE
NETWORKS OF OUR CUSTOMERS, WHICH COULD RESULT IN REDUCED DEMAND FOR OUR PRODUCTS
OR PRODUCT LIABILITY CLAIMS AGAINST US.
Our optical access networking products are complex and are designed to be
deployed in large communications networks. Because of the nature of our
products, they can only be fully tested when completely deployed in very large
networks with high amounts of diverse traffic. To date, our customers have used
our products primarily in test networks. Our customers may discover errors or
defects in our products, or the products may not operate as expected, after
having fully deployed them. Our products also must support multiple transmission
protocols and interoperate with other products within these networks that may be
based on various access, wide-area network and other technologies. If we
discover errors or defects in our products, or if we are unable to fix errors or
other problems that may be identified in full deployment, we could experience:
-- loss of or delay in revenue;
-- loss of market share;
-- loss of existing customers and an inability to attract new customers;
-- diversion of the attention of our engineering personnel from our
product development efforts;
-- increased service and warranty costs; and
-- increased insurance costs.
Because our solutions are critical to the networks of our customers, any
errors or defects in our products or the failure of our products to interoperate
within their networks could result in damage to our customers. These customers
could seek significant compensation for losses from us. The limitations that we
typically include in our purchase agreements may not be effective to limit our
exposure. In addition, even if unsuccessful, a product liability claim brought
against us would likely be costly, time-consuming and require our management to
spend time defending the claim rather than operating our business.
WE ARE LIKELY TO FACE DIFFICULTIES IN OBTAINING AND RETAINING CUSTOMERS IF WE
DO NOT EXPAND OUR SALES ORGANIZATION AND OUR PROFESSIONAL SERVICE AND TECHNICAL
SUPPORT OPERATIONS.
Our products and services require a sophisticated sales effort targeted at
a limited number of key individuals within our prospective customers'
organizations. This effort requires specialized sales personnel and consulting
engineers. Currently, our direct sales and sales administrative staff consists
of only 33 persons. Although we are seeking to expand our direct sales force,
competition for these individuals is intense, and we might not be able to hire
and train the kind and number of sales personnel and consulting engineers
required
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<PAGE> 13
for us to be successful. In addition, we believe that our future success depends
upon our ability to establish successful relationships with a variety of
distribution partners, particularly in foreign markets. We have entered into
agreements with only a small number of distribution partners. If we are unable
to expand our direct sales operations, or expand our indirect sales channels, we
may not be able to increase market awareness or sales of our solutions.
We currently have a small professional services and technical support
organization and will need to increase our staff to support new customers. The
support of our products requires highly trained professional services and
technical support personnel. Hiring these personnel is very competitive in the
optical access networking industry because there are a limited number of people
available with the necessary technical skills and understanding of our market.
Once we hire them, they may require extensive training in our optical access
networking products. If we are unable to expand our professional services and
technical support organization and train our personnel rapidly, we may not be
able to provide the customer service that our existing and potential future
customers require, which could adversely affect our reputation and our ability
to sell our solutions.
WE DEPEND UPON CONTRACT MANUFACTURERS AND ANY DISRUPTION IN THESE
RELATIONSHIPS MAY CAUSE US TO FAIL TO MEET THE DEMANDS OF OUR CUSTOMERS, WHICH
MAY DAMAGE OUR CUSTOMER RELATIONSHIPS.
We do not have internal volume manufacturing capabilities. We rely on a
small number of contract manufacturers to manufacture our products in accordance
with our specifications and to fill orders on a timely basis. We currently have
supply relationships with Solectron Corporation and SMTC Corporation to provide
comprehensive manufacturing services, including materials procurement, assembly,
test, control and shipment of our products to our customers. We may not be able
to effectively manage our relationships with these contract manufacturers and
they may not meet our future requirements for timely delivery and quality. Each
of our contract manufacturers also builds products for other companies, and
these manufacturers may not always have sufficient quantities of inventory
available to fill orders placed by our customers or may not allocate internal
resources to fill these orders on a timely basis. Except for our relationships
with Solectron and SMTC, we do not have any ongoing supply arrangements with any
contract manufacturers. At present, we purchase products from these contract
manufacturers on a purchase order basis. Qualifying a new contract manufacturer
and commencing volume production is expensive and time consuming, and could
result in a significant interruption in the supply of our products. If we are
required or choose to change one or both contract manufacturers, sales of our
products will likely be delayed and our customers may choose to purchase
products from our competitors instead of us.
WE RELY ON SINGLE OR LIMITED SOURCES FOR SUPPLY OF CERTAIN KEY COMPONENTS. IF
OUR SUPPLY OF ANY OF THESE COMPONENTS OR OTHER COMPONENTS IS DISRUPTED, WE WILL
NOT BE ABLE TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS WITHIN THE TIMEFRAMES
REQUIRED AND WE MAY EXPERIENCE ORDER CANCELLATIONS.
We currently purchase several key components, including microprocessors,
field programmable gate arrays, optical transmitters and receivers and special
purpose switching and communications semiconductors, from single or limited
sources. Specifically, we use integrated switching circuits from MMC Networks
and microprocessors from Motorola. We purchase these components on a purchase
order basis and have no long-term contracts for these components. If we are
unable to obtain sufficient quantities of these components, it is unlikely that
we would be able to ship our products to customers in accordance with their
volume and schedule requirements. This could result in lost or delayed revenue
and significant damage to our reputation and, given the limited number of
customers in our target market, we may not be able to replace any lost business
with new customers. In the event of a disruption in supply we may not be able to
procure an alternate source in a timely manner or at favorable prices. If we are
unable to obtain these components from other suppliers at economical prices, our
margins would be adversely impacted unless we could raise the prices of our
products in a commensurate manner. Competitive conditions may not permit us to
do so, in which case we may suffer increased losses or reduced profits. In
addition, our reliance on these suppliers exposes us to potential supplier
production difficulties or quality variations. Any such disruption in supply
would seriously impact present and future sales and revenue. Further, the
optical component industry is expanding rapidly, and manufacturers of
9
<PAGE> 14
optical components may be unable to meet the unpredictable and growing demand
for components. Because optical components are integrated into our products, a
shortage or decrease in supply would seriously impact our future sales and
revenue.
OUR COMPANY IS GROWING RAPIDLY AND WE MAY BE UNABLE TO MANAGE OUR GROWTH
EFFECTIVELY, WHICH COULD RESULT IN LOST SALES OR DISRUPTION TO OUR BUSINESS.
Our failure to effectively manage our recent and anticipated growth could
increase our expenses and adversely affect the quality of our solutions, our
relationships with customers and suppliers, our ability to retain key personnel
and our financial performance. From January 1, 2000 to September 30, 2000, the
number of our employees increased from 66 to 239. During the next 12 months, we
plan to continue to hire a significant number of employees. Our growth has
significantly increased our operating complexity and has placed, and will
continue to place, a significant strain on our management, operational systems
and other resources. We will not be able to successfully offer our solutions and
implement our business plan without an effective planning and management
process. We expect that we will need to continue to improve our financial,
managerial and manufacturing controls and reporting systems, and will need to
continue to expand, train and manage our work force. We may not be able to
implement adequate control and reporting systems in an efficient and timely
manner.
IF WE ARE UNABLE TO RETAIN OUR KEY EMPLOYEES AND TO HIRE AND RETAIN OTHER KEY
PERSONNEL, OUR ABILITY TO COMPETE COULD BE HARMED.
The growth of our business and revenue depends in large part upon our
ability to attract and retain sufficient numbers of highly skilled employees,
particularly qualified sales and engineering personnel. The competition for
highly skilled personnel in the optical network infrastructure market is
intense, especially in the New England area where our principal operations are
located. Our failure to attract, assimilate and retain qualified personnel to
fulfill our current or future needs could impair our growth.
In addition, our future success depends upon the continued services of our
executive officers and other key engineering, sales, marketing and support
personnel, who have critical industry experience and relationships that we rely
on to develop and sell our optical access networking solutions and implement our
business plan. The loss of the services of any of our key employees could have a
significant detrimental effect on our ability to execute our business strategy
and could delay the development and introduction of new products or negatively
impact our ability to sell our solutions.
OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
Although we have one issued patent and have filed eight additional patent
applications in the United States, as well as two patent applications
internationally, we cannot assure you that any additional patents will be issued
or that the issued patent or any future patents will provide meaningful
protection. We also 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 these precautions, it may be possible for a third party to copy or
otherwise misappropriate and use our products or technology without
authorization, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. We may need to resort
to litigation in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. If competitors are able to use our technology, our
ability to compete effectively could be harmed.
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<PAGE> 15
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR SIGNIFICANT
COSTS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we have not
been involved in any intellectual property litigation, we may be a party to
litigation in the future to enforce our intellectual property rights or as a
result of an allegation that we infringe others' intellectual property. Any
parties asserting that our products infringe their proprietary rights would
force us to defend ourselves and possibly our customers or manufacturers against
the alleged infringement. These claims and any resulting lawsuits, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time-consuming, expensive and divert management time
and attention away from our operations. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or may not
be adequate to protect us from all liability that may be imposed. In addition,
any potential intellectual property litigation also could force us to do one or
more of the following:
-- stop selling, incorporating or using the products that use the
infringed intellectual property;
-- seek to obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, although this
license may not be available on reasonable terms, or at all;
-- redesign those products that use the infringed intellectual property;
or
-- indemnify our customers, which could be very costly.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed.
WE MAY FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL EXPANSION THAT COULD
IMPAIR OUR ABILITY TO GROW OUR REVENUE ABROAD.
We intend to expand our sales into international markets. This expansion
will require significant management attention and financial resources to develop
direct and indirect international sales and support channels and to support
customers in international markets. We may not be able to develop international
market demand for our products.
We have limited experience in marketing, distributing and supporting our
solutions internationally, and to do so we expect that we will need to develop
versions of our products that comply with local standards. In addition,
international operations are subject to other inherent risks, including:
-- different regulatory environments that may restrict our ability to
provide optical access networking solutions;
-- greater difficulty in accounts receivable collection and longer
collection periods;
-- differences in technology standards;
-- difficulties and costs of staffing and managing foreign operations;
-- the impact of recessions in economies outside the United States;
-- certification requirements;
-- foreign currency exchange rate fluctuations;
-- reduced protection for intellectual property rights in some
countries;
-- potentially adverse tax consequences; and
-- political and economic instability.
We expect that our international sales will generally be denominated in
United States dollars. As a result, increases in the value of the United States
dollar relative to foreign currencies would cause our solutions to
11
<PAGE> 16
become less competitive in international markets. To the extent that we
denominate sales in foreign currencies, we will be exposed to risks of currency
fluctuations.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY HARM OUR
FINANCIAL CONDITION.
As part of our ongoing business development strategy, we consider
acquisitions of and strategic investments in complementary companies, products
or technologies. We do not currently have any agreements or commitments with
respect to any acquisition or investment. In the event of any acquisitions, we
could:
-- issue stock that would dilute the ownership of our current
stockholders;
-- incur debt;
-- assume liabilities;
-- incur amortization expenses related to goodwill and other intangible
assets; or
-- incur large and immediate write-offs.
Our operation of any acquired business would also involve numerous risks,
including:
-- problems integrating the purchased operations, technologies or
products;
-- unanticipated costs or liabilities;
-- diversion of management's attention from our core business;
-- adverse effects on existing business relationships with suppliers and
customers;
-- risks associated with entering markets in which we have no or limited
prior experience; and
-- potential loss of key employees, particularly those of the acquired
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and any failure to do so could disrupt our business and seriously harm
our financial condition.
RISKS RELATED TO THE SECURITIES MARKETS AND THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT
OR ABOVE THE PRICE YOU PAID.
Prior to this offering, you could not buy or sell our common stock
publicly. An active trading market for our common stock may not develop or be
sustained after this offering. We will negotiate and determine the initial
public offering price with the representatives of the underwriters. The initial
public offering price may not be indicative of the prices that will prevail in
the public market after this offering. You may be unable to sell your shares of
common stock at or above the initial public offering price, which may result in
substantial losses to you.
The price at which our common stock will trade following this offering is
likely to be highly volatile and may fluctuate substantially. The price of the
common stock that will prevail in the market after this offering may be higher
or lower than the price you pay, depending on many factors, some of which are
beyond our control. In particular, given the limited amount of our product sales
and our limited number of customers, the announcement of any significant
customer developments, awards or losses or of any significant partnerships or
acquisitions by us or our competitors could have a material adverse effect on
our stock price.
IF YOU INVEST IN THIS OFFERING, YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL
DILUTION AS A RESULT OF THIS OFFERING AND FUTURE EQUITY ISSUANCES.
The initial public offering price per share of our common stock is
substantially higher than the book value per share of the outstanding common
stock. As a result, investors purchasing common stock in this offering will pay
a price per share that substantially exceeds the value of our assets after
subtracting our liabilities.
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<PAGE> 17
We have issued options and warrants to acquire common stock at prices
significantly below the initial public offering price. To the extent these
outstanding options and warrants are exercised, there will be further dilution
to investors in this offering.
WE MAY INCUR SIGNIFICANT COSTS AND HARM TO OUR BUSINESS FROM CLASS ACTION
LITIGATION RELATING TO STOCK PRICE VOLATILITY.
Securities class action litigation is often initiated against companies
following periods of volatility in the market price of their securities. The
stock markets, and in particular the Nasdaq National Market, on which we expect
our common stock to be listed, have experienced extreme price and volume
fluctuations. These fluctuations have particularly affected the market prices of
equity securities of technology-related companies and have often been unrelated
or disproportionate to the operating performance of those companies. Securities
litigation could result in substantial costs and divert our management's
attention and resources, which could cause serious harm to our business. If
successful, securities litigation could cause us to incur significant costs of
damages.
WE MAY NEED ADDITIONAL FINANCING, WHICH COULD BE DIFFICULT TO OBTAIN.
We believe that the net proceeds from this offering, together with our
existing cash, cash equivalents, short-term investments, available equipment
line of credit and funds anticipated to be generated from operations, will be
sufficient to meet our cash requirements for at least 12 months following this
offering. We may need to raise additional funding at that time or earlier if we
decide to undertake more rapid expansion, including acquisitions of
complementary products or technologies, or if we increase our marketing or
research and development efforts in order to respond to competitive pressures.
We cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. We may obtain additional financing by issuing shares
of our common stock, which could dilute our existing stockholders. If financing
is not available, we may not be able to develop or enhance our products and
services, take advantage of future opportunities, grow our business or respond
to competitive pressures or unanticipated requirements, which would seriously
harm our business.
IF A SIGNIFICANT NUMBER OF SHARES BECOME AVAILABLE FOR SALE AND ARE SOLD IN A
SHORT PERIOD OF TIME, THE MARKET PRICE OF OUR STOCK COULD DECLINE.
The availability of a large number of shares of our common stock for sale
could depress the market price of our common stock. After this offering, there
will be outstanding approximately shares of our common stock. Of these
shares, the shares sold in this offering will be freely tradable without
restriction or registration, except for any shares purchased by our affiliates
as defined in Rule 144 under the Securities Act. Of the remaining 55,846,595
shares of common stock held by existing stockholders, will be eligible
for sale in the public markets 90 days after the date of this prospectus,
subject to the lock-up agreements with the underwriters. See "Shares Eligible
for Future Sale." Morgan Stanley & Co. Incorporated may, in its sole discretion,
at any time without notice, release all or any additional portion of the shares
subject to the lock-up agreements, which would result in more shares being
available for sale in the public market at an earlier date. Sales of common
stock by existing stockholders in the public market, or the availability of
these shares for sale, could materially and adversely affect the market price of
our stock.
THERE ARE PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW THAT COULD
DELAY OR PREVENT THE SALE OF OUR COMPANY AND DIMINISH THE VOTING RIGHTS OF THE
HOLDERS OF OUR COMMON STOCK.
There are provisions in our certificate of incorporation and by-laws that
may make it more difficult for a third party to acquire, or attempt to acquire,
control of our company, even if a change of control would result in the purchase
of your shares at a premium to the market price. For example, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock.
The board of directors can fix the price, rights, preferences, privileges and
restrictions of the preferred stock without any further vote or action by our
stockholders. The issuance of shares of preferred stock may delay or prevent a
change in control transaction. As a result, the market price of our common stock
and the voting and other rights of our stockholders may be
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<PAGE> 18
adversely affected. The issuance of preferred stock may result in the loss of
voting control to other stockholders.
Our charter documents contain other provisions that could have an
anti-takeover effect, including:
-- the members of only one of the three classes of directors are elected
each year;
-- stockholders have limited ability to remove directors;
-- stockholders cannot take actions by written consent;
-- stockholders cannot call a special meeting of stockholders; and
-- stockholders must give advance notice to nominate directors or submit
proposals for consideration at stockholder meetings.
In addition, we are subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which regulates corporate acquisitions.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. They could also have the
effect of discouraging others from making tender offers for our common stock.
These provisions may also prevent changes in our management.
OUR OFFICERS, DIRECTORS AND THEIR AFFILIATES HOLD A MAJORITY OF OUR STOCK AND,
AS A RESULT, CONTROL US. THIS COULD LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF KEY MATTERS, INCLUDING CHANGES OF CONTROL.
Upon completion of this offering, our officers, directors and individuals
or entities affiliated with our directors as a group will beneficially own
approximately % of our outstanding common stock. As a result, these
stockholders will be able to control all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may delay,
deter or prevent a change of control of us and may make some transactions more
difficult or even impossible without the support of these stockholders, and
could depress the price of our common stock.
OUR MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT
INCREASE OUR PROFITS OR MARKET VALUE.
Our management will have broad discretion in the application of the net
proceeds of this offering, and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. We plan to use the proceeds from this offering for general
corporate purposes. The net proceeds may be used for corporate purposes that do
not increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and in other sections of this prospectus that
are forward-looking statements. In some cases, you can identify these statements
by forward-looking words such as "may," "might," "will," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "intends," "predicts,"
"future," "potential" or "continue," the negative of these terms and other
comparable terminology. These forward-looking statements, which are subject to
risks, uncertainties and assumptions about us, may include, among other things,
statements regarding planned product release dates, projections of our future
financial performance, our anticipated growth strategies and anticipated trends
in our business. These statements are only predictions based on our current
expectations and projections about future events. Because these forward-looking
statements involve risks and uncertainties, there are important factors that
could cause our actual results, level of activity, performance or achievements
to differ materially from the results, level of activity, performance or
achievements expressed or implied by the forward-looking statements. These
factors include the factors discussed under the caption entitled "Risk Factors."
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<PAGE> 19
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as otherwise required by law, we
are under no duty to update any of these forward-looking statements after the
date of this prospectus to conform our prior statements to actual results or
revised expectations.
This prospectus also contains several projections of market development by
industry analysts. Those projections involve a number of assumptions and
limitations. We cannot assure you that those projections will be attained.
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<PAGE> 20
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock we are offering will be approximately $ , assuming an
initial public offering price of $ per share and after deducting estimated
underwriting discounts and $ of offering expenses payable by us. The primary
purposes of this offering are to obtain additional equity capital, create a
public market for our common stock and facilitate future access to public
markets. If the underwriters exercise the over-allotment option in full, we
estimate that our net proceeds will be $ and that the net proceeds to
the selling stockholders will be $ .
We expect to use the net proceeds from the sale of shares of common stock
offered by us for general corporate purposes, including to fund research and
development, expand our sales and marketing operations, broaden our customer
support capabilities and develop new distribution channels. We may use a portion
of the net proceeds to acquire or make investments in businesses, products or
technologies that we believe will complement our current or future business. We
do not currently have agreements or commitments with respect to any acquisition
or investment. We will retain broad discretion in the allocation of the net
proceeds of this offering. Pending these uses, we plan to invest the net
proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. Our credit agreement with a bank prohibits the payment of dividends. Any
future determination to pay cash dividends will be at the discretion of the
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business condition and other
factors the board of directors deems relevant.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
investments and capitalization as of September 30, 2000:
-- on an actual basis;
-- on a pro forma basis to reflect the conversion of all outstanding
shares of preferred stock into 39,287,173 shares of common stock upon
the closing of this offering; and
-- on a pro forma basis, as adjusted to reflect the sale of
shares of common stock in this offering at an assumed
initial public offering price of $ per share after deducting
estimated underwriting discounts and offering expenses payable by us,
and the issuance of shares of common stock in connection with
the assumed exercise of warrants upon the closing of this offering.
You should read this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes included elsewhere in this
prospectus.
The outstanding share information reflected in this table excludes
8,032,325 shares of common stock issuable upon the exercise of outstanding stock
options as of September 30, 2000 at a weighted average exercise price of $2.26
per share.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 34,811 $ 34,811 $
======== ======== ========
Short-term investments................................ $ 60,450 $ 60,450 $ 60,450
======== ======== ========
Long-term debt, less current portion.................. $ 5,445 $ 5,445 $ 5,445
Redeemable convertible preferred stock, $.001 par
value; 18,000,000 shares authorized; 16,885,449
shares issued and outstanding, actual; no shares
authorized, issued or outstanding pro forma or pro
forma as adjusted................................... 131,021 -- --
Stockholders' equity (deficit):
Preferred stock, $.001 par value; no shares
authorized, issued and outstanding, actual and pro
forma; 5,000,000 shares authorized and no shares
issued and outstanding, pro forma as adjusted....... -- -- --
Common stock, $.001 par value; 67,500,000 shares
authorized, 16,559,422 shares issued and
outstanding, actual; 500,000,000 shares authorized,
55,846,595 shares issued and outstanding, pro forma;
500,000,000 shares authorized, shares
issued and outstanding, pro forma as adjusted....... 16 56
Additional paid-in capital............................ 29,985 160,966
Common stock warrants................................. 1,223 1,223 --
Deferred compensation................................. (23,096) (23,096) (23,096)
Other comprehensive loss.............................. (24) (24) (24)
Accumulated deficit................................... (43,631) (43,631) (43,631)
-------- -------- --------
Total stockholders' equity (deficit).................. (35,527) 95,494
-------- -------- --------
Total capitalization.................................. $100,939 $100,939 $
======== ======== ========
</TABLE>
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DILUTION
The pro forma net tangible book value of our common stock as of September
30, 2000 was $95.5 million, or $1.71 per share. Pro forma net tangible book
value per share before the offering has been determined by dividing pro forma
net tangible book value, which is calculated as total tangible assets less total
liabilities, by the pro forma number of shares of common stock outstanding as of
September 30, 2000 after giving effect to the conversion of all outstanding
shares of preferred stock into 39,287,173 shares of common stock.
After giving effect to the sale of common stock pursuant to this offering
at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and offering expenses payable by us
and the issuance of shares of common stock in connection with the
assumed exercise of warrants upon the closing of this offering, the adjusted pro
forma net tangible book value as of September 30, 2000 would have been $ or
$ per share. This offering will result in an increase in pro forma net
tangible book value per share of $ to existing stockholders and dilution in
pro forma net tangible book value per share of $ to new investors who
purchase shares in this offering. Dilution is determined by subtracting pro
forma net tangible book value per share from the assumed initial public offering
price of $ per share. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of
September 30, 2000..................................... $1.71
Increase attributable to sale of common stock in this
offering............................................... $
-----
Pro forma net tangible book value per share after this
offering..................................................
-----
Dilution of net tangible book value per share to new
investors................................................. $
=====
</TABLE>
If the underwriters exercise their option to purchase additional shares in
this offering, the pro forma net tangible book value per share after the
offering would be $ per share, the increase in net tangible book value per
share to existing stockholders would be $ per share and the dilution to new
investors would be $ per share.
The following table summarizes, on a pro forma as adjusted basis as of
September 30, 2000, the differences between the total consideration paid and the
average price per share paid by the existing stockholders, including the holder
of common stock to be received upon the assumed exercise of warrants upon the
closing of this offering, and by the new investors purchasing shares of common
stock in this offering. The calculation is based upon an assumed initial public
offering price of $ per share before deducting estimated underwriting
discounts and offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders........ 55,846,595 % $125,155,312 % $2.24
New Stockholders.............
---------- ----- ------------ ------ -----
Total.............. 100.0% 100.0% $
========== ===== ============ ====== =====
</TABLE>
These tables assume no exercise of outstanding stock options. As of
September 30, 2000, there were 8,032,325 shares of common stock issuable upon
exercise of outstanding stock options at a weighted-average exercise price of
$2.26 per share. To the extent that outstanding options are exercised in the
future, there will be further dilution to new investors.
18
<PAGE> 23
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus. The statement of operations data for the period from inception
(October 22, 1998) through December 31, 1998 and the year ended December 31,
1999 and the balance sheet data as of December 31, 1998 and 1999 are derived
from our audited financial statements included elsewhere in this prospectus. The
statement of operations data for the nine months ended September 30, 1999 and
2000 and the balance sheet data as of September 30, 2000 are derived from our
unaudited financial statements included elsewhere in this prospectus. The
unaudited financial statements have been prepared on the same basis as our
audited financial statements and, in our opinion, include all adjustments,
consisting only of normal recurring adjustments, which we consider necessary for
a fair presentation of our results of operations and financial position for
these periods. These historical results are not necessarily indicative of
results to be expected for any future period.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of preferred stock
into shares of common stock, as if the shares had converted immediately upon
issuance. Accordingly, accretion of dividends on preferred stock has not been
included in the calculation of unaudited pro forma basic and diluted net loss
per share.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 22, NINE MONTHS ENDED
1998) THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1999 1999 2000
------------- ------------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $ -- $ -- $ -- $ 654
Cost of revenue................................... -- -- -- 531
------ ------- ------- --------
Gross profit.................................. -- -- -- 123
Operating expenses:
Research and development(1)..................... 98 5,810 3,407 16,599
Sales and marketing(1).......................... 32 1,201 595 6,679
General and administrative(1)................... 73 886 672 1,780
Stock-based consideration....................... -- 118 19 7,655
------ ------- ------- --------
Total operating expenses...................... 203 8,015 4,693 32,713
------ ------- ------- --------
Loss from operations.......................... (203) (8,015) (4,693) (32,590)
Interest income, net.............................. 26 410 211 3,161
------ ------- ------- --------
Net loss...................................... (177) (7,605) (4,482) (29,429)
------ ------- ------- --------
Accretion of dividends on preferred stock......... (56) (970) (524) (5,194)
------ ------- ------- --------
Net loss attributable to common
stockholders.................................... $ (233) $(8,575) $(5,006) $(34,623)
====== ======= ======= ========
Net loss per common share:
Basic and diluted............................... $(0.14) $ (2.94) $ (1.80) $ (5.70)
====== ======= ======= ========
Pro forma basic and diluted..................... $ (0.31) $ (0.71)
======= ========
Weighted average common shares outstanding:
Basic and diluted............................... 1,691 2,920 2,782 6,078
====== ======= ======= ========
Pro forma basic and diluted..................... 24,904 41,216
======= ========
(1) Excludes non-cash, stock-based consideration
as follows:
Research and development........................ $ -- $ 40 $ 7 $ 2,951
Sales and marketing............................. -- 39 6 3,319
General and administrative...................... -- 39 6 1,385
------ ------- ------- --------
$ -- $ 118 $ 19 $ 7,655
====== ======= ======= ========
</TABLE>
19
<PAGE> 24
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------- AS OF SEPTEMBER 30,
1998 1999 2000
------ ------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $5,732 $15,222 $ 34,811
Short-term investments.......................... -- -- 60,450
Working capital................................. 5,703 14,163 90,634
Total assets.................................... 5,878 17,407 112,713
Long-term debt.................................. -- 1,344 5,445
Redeemable convertible preferred stock.......... 6,056 23,276 131,021
Total stockholders' deficit..................... (247) (8,624) (35,527)
</TABLE>
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and related notes appearing elsewhere in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those indicated in
these forward-looking statements.
OVERVIEW
We are a leading provider of high-speed optical access networking solutions
that enable communications service providers to offer greater bandwidth to
businesses in the access segment of the public network. From our inception on
October 22, 1998 through August 1, 2000, our operating activities consisted
primarily of research and development and product design, development and
testing. During this period, we also expanded and trained our administrative,
marketing and sales personnel and began sales and marketing activities. We began
shipping our QB5000 Optical Access Switch and QB100 Intelligent Optical Terminal
products in August 2000. To date, all of our product revenue has been derived
from sales of these products to two customers. Since our inception, we have
incurred significant losses. As of September 30, 2000, we had an accumulated
deficit of $43.6 million. We have not achieved profitability on a quarterly or
an annual basis and we anticipate that we will continue to incur significant
operating losses for the foreseeable future.
We derive our revenue from sales of our optical access networking equipment
as well as from services fees for the installation, technical support and
maintenance of our products and other consulting services. Our policy is to
recognize revenue from product sales upon shipment provided that there is
persuasive evidence of an arrangement, the sales price is fixed or determinable
and collection of the related receivable is probable. If uncertainties regarding
customer acceptance exist, revenue is recognized when these uncertainties are
resolved. Revenue from installation and implementation services is recognized as
the services are performed. Revenue from support arrangements is recognized
ratably over the period of the related agreements. We record a warranty
liability for parts and labor on our hardware products. Our warranty begins on
the date of shipment and generally extends for one year for hardware. Hardware
warranty costs are recorded at the time of revenue recognition.
We have a lengthy sales cycle for our products and, accordingly, incur
sales and other expenses before we recognize the related revenue. We expect to
continue to incur significant sales and marketing, customer service, research
and development and general and administrative expenses. As a result, we will
need to generate significant revenue to achieve and maintain profitability.
We outsource our manufacturing operations to third-party contract
manufacturers that assemble and test our products in accordance with our
specifications. A significant portion of our cost of revenue involves payment to
these entities. We perform manufacturing and engineering documentation controls
at our facility in Andover, Massachusetts.
RESULTS OF OPERATIONS
PERIOD FROM INCEPTION (OCTOBER 22, 1998) THROUGH DECEMBER 31, 1998, THE YEAR
ENDED DECEMBER 31, 1999 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUE
We did not recognize any revenue in 1998 or 1999. We began shipping our
QB5000 Optical Access Switch and QB100 Intelligent Optical Terminal products in
August 2000. Revenue for the nine months ended September 30, 2000 was $654,000.
For the nine months ended September 30, 2000, product sales to two customers,
Comcast and Advanced TelCom Group, accounted for all of our revenue.
COST OF REVENUE
Cost of revenue consists of payments to third-party contract manufacturers,
personnel and related costs, certain customer service expenses and warranty
costs. We did not recognize any revenue prior to Decem-
21
<PAGE> 26
ber 31, 1999 and accordingly recorded no cost of revenue during that period.
Cost of revenue for the nine months ended September 30, 2000 was $531,000. We
expect cost of revenue as a percentage of revenue to decline in the future as
production volumes increase.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and related
personnel costs, prototype costs and other costs related to the design,
development, testing and enhancement of our products. To date, we have expensed
our research and development costs as they were incurred. Several components of
our research and development effort require significant expenditures, the timing
of which can cause significant quarterly variability in our expenses. We will
also continue to recognize significant depreciation expense in connection with
the purchase of testing equipment for our products. We believe that research and
development is critical to our strategic product development objectives and we
intend to enhance the functionality of our existing products and develop new
products to broaden our applications offered, target additional customers and
address new market segments. As a result, we expect our research and development
expenses to increase in absolute dollars in the future but to decline as a
percentage of revenue.
Research and development expenses increased from $98,000 in 1998 to $5.8
million in 1999, and from $3.4 million in the nine months ended September 30,
1999 to $16.6 million in the nine months ended September 30, 2000. These
increases were primarily due to increased costs associated with a significant
increase in personnel and personnel-related expenses, an increase in prototype
expenses for the design and development of our products and enhancements to
existing products and an increase in non-recurring engineering costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of salaries and the related
costs of sales, customer service and marketing personnel, commissions, and
promotional, travel and recruiting expenses. We expect that sales and marketing
expenses will increase in absolute dollars in the future but will decline as a
percentage of revenue as we increase our direct sales efforts, expand our
international operations, hire additional sales and marketing personnel, expand
our customer service and support organization, initiate additional marketing
programs and establish sales offices in new locations domestically and abroad.
Sales and marketing expenses increased from $32,000 in 1998 to $1.2 million
in 1999, and from $595,000 in the nine months ended September 30, 1999 to $6.7
million in the nine months ended September 30, 2000. These increases reflected
the hiring of additional sales, customer support and marketing personnel,
sales-based commissions and marketing program costs, including web development,
trade shows and product launch activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, legal, facilities, human resources and
information technology personnel, recruiting expenses and professional fees. We
expect that general and administrative expenses will increase in absolute
dollars but will decline as a percentage of revenue as we add personnel and
incur additional costs related to the growth of our business and our operation
as a public company.
General and administrative expenses increased from $73,000 in 1998 to
$886,000 in 1999 and from $672,000 in the nine months ended September 30, 1999
to $1.8 million in the nine months ended September 30, 2000. These increases
were primarily related to increases in personnel and increased legal,
information systems, facilities and consulting services associated with our
business activities.
STOCK-BASED CONSIDERATION
In connection with the granting of stock options at prices deemed below
fair market value on the dates of grant, we recorded deferred compensation of
$244,000 during the period from inception (October 22, 1998)
22
<PAGE> 27
through December 31, 1999 and $29.4 million during the nine months ended
September 30, 2000. We have continued to grant stock options after that date and
we may record additional deferred compensation in the period from October 1,
2000 through the closing of this offering. Deferred compensation represents the
difference between the deemed fair value of our common stock on the date of
grant and the exercise price of the stock options granted to employees and the
fair value of stock options granted to non-employees. We are amortizing the
deferred compensation over the vesting periods of the stock options which is
generally four years. We recorded total stock-based consideration of $118,000 in
1999, and $7.7 million in the nine months ended September 30, 2000 of which $6.5
million related to the amortization of deferred compensation. For purposes of
our statement of operations, we have allocated stock-based consideration to the
appropriate expense category based on the nature of the service provided to us
by each individual. The unamortized balance of deferred compensation at
September 30, 2000 was $23.1 million. We expect to record stock-based
consideration related to the amortization of deferred compensation of $3.5
million in the three months ended December 31, 2000, $10.6 million in 2001, $5.5
million in 2002, $2.7 million in 2003 and $842,000 in 2004.
We have awarded options to purchase 479,500 shares of common stock to
non-employee members of our Technical Advisory Board and consultants. These
options generally vest quarterly over a period of one to three years. We will
account for these options under EITF 96-18, which requires that we re-measure
the fair value of these options each quarter during the period over which they
vest based on changes in the fair value of our common stock and that we record
stock-based consideration equal to the total fair value of the options. The
total amount of the expense cannot be predicted because it will fluctuate with
the market price of our common stock.
In consideration for technical advice as well as assistance in assessing
the marketability of our QB5000 Optical Access Switch and QB100 Intelligent
Optical Terminal products during the development stage, in September 2000 we
issued a warrant to Comcast to purchase 166,297 shares of common stock at an
exercise price of $9.02 per share. The value of this warrant has been included
in stock-based consideration and allocated to sales and marketing expense. This
warrant is fully vested and not contingent upon future minimum purchase
commitments. The warrant will be exercisable until the earliest of September 1,
2001, immediately prior to the closing of this offering or immediately prior to
the closing of the sale of all or substantially all of our business or assets.
Because there are no future purchase commitments or performance obligations
associated with this warrant, the measurement date of the warrant was fixed at
the issuance date. We determined the fair value of the warrant using the
Black-Scholes option pricing model and recorded stock-based consideration of
$1.2 million during the nine months ended September 30, 2000.
In September 2000, in connection with the execution of a non-exclusive
systems and services agreement, we issued a second warrant to Comcast to
purchase shares of our common stock with a purchase price of up to $2.5 million.
The number of shares that may be purchased upon exercise of the warrant is
determined under a formula based on the achievement of specified performance
targets. As of September 30, 2000, Comcast had earned $1.25 million, or 50% of
the total warrant, and will be entitled to purchase shares of
common stock at the assumed initial public offering price per share upon the
closing of this offering. We determined the fair value of this warrant using the
Black-Scholes option pricing model and deferred $37,000, representing the fair
value of the warrant, which will be amortized in future periods as an offset to
revenue associated with the Comcast agreement.
INTEREST INCOME, NET
Interest income, net consists of interest earned on our cash balances and
marketable securities and interest expense associated with our equipment notes
payable. Interest income, net increased from $26,000 in 1998 to $410,000 in 1999
and from $211,000 in the nine months ended September 30, 1999 to $3.2 million in
the nine months ended September 30, 2000, reflecting higher interest income from
our invested balances offset by interest payments on our equipment notes
payable.
23
<PAGE> 28
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As of December 31, 1999, we had $7.6 million of state and federal net
operating loss carryforwards and $355,000 in research and development tax credit
carryforwards for tax reporting purposes available to offset future taxable
income, if any. These carryforwards expire at various dates through 2019, to the
extent that they are not utilized. We have not recognized any benefit from the
future use of these carryforwards for any periods since inception. Our
evaluation of the realizability of the tax benefits of these carryforwards
indicates that the underlying assumptions of future profitable operations
contain risks that do not provide sufficient assurance that allow us to
recognize the tax benefits currently.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through September 30, 2000, we have funded our operations
primarily through private sales of our equity securities, resulting in total net
proceeds of $125.0 million. We have also funded our operations through equipment
and leasehold improvement financings of $6.9 million. As of September 30, 2000,
we had $95.3 million in cash, cash equivalents and short-term investments and
$1.4 million in restricted cash. As of December 31, 1999, we had $15.2 million
in cash, cash equivalents and short-term investments, and $120,000 in restricted
cash.
During the nine months ended September 30, 2000, we used $20.6 million in
cash for operating activities compared to $3.6 million used in the nine months
ended September 30, 1999. In 1999, we used $6.5 million in cash for operating
activities, compared to $147,000 used in 1998. Net cash flows from operating
activities in each period reflected increasing net losses offset in part by
increases in accounts payable and accrued expenses. Net cash flows from
operating activities in the nine months ended September 30, 2000 also reflected
increases in inventories as well as an offset for stock-based consideration
related to the issuance of stock options and warrants.
During the nine months ended September 30, 2000, we used $67.5 million in
cash for investing activities compared to $1.2 million used in the nine months
ended September 30, 1999. In 1999, we used $2.0 million in cash for investing
activities compared to $106,000 used in 1998. The increase in net cash used for
investing activities reflected increased purchases of property and equipment,
primarily computers and test equipment for our development and manufacturing
activities. The increases in cash used for investing activities also reflected
increased purchases of marketable securities.
Net cash provided by financing activities was $107.8 million in the nine
months ended September 30, 2000 compared to $17.1 million in the nine months
ended September 30, 1999. In 1999, we generated $18.0 million from financing
activities, compared to $6.0 million in 1998. Cash provided by financing
activities included proceeds from sales of redeemable convertible preferred
stock, the largest of which was the sale of series C preferred stock in April
2000 with net proceeds of $102.4 million, as well as proceeds from the sale of
restricted common stock and the issuance of common stock upon stock option
exercises. Additional financing activities included borrowings under our
equipment line of credit and, in recent periods, payments on debt related to
these borrowings.
We have a $7.0 million equipment line of credit with a bank. Borrowings
under the equipment line of credit bear interest at the bank's prime rate, which
was 8.50% at December 31, 1999 and 9.50% at September 30, 2000, plus .75% and
are collateralized by substantially all of our assets. We borrowed a total of
$6.9 million under this agreement as of September 30, 2000. All principal
borrowings will be converted into term notes and are being repaid in 36 equal
monthly installments commencing on dates ranging from April 1, 2000 to July 1,
2001. As of September 30, 2000, approximately $6.8 million was outstanding under
this agreement.
Capital expenditures were $7.0 million in the nine months ended September
30, 2000 and $1.1 million in the nine months ended September 30, 1999. In 1999,
capital expenditures were $2.0 million compared to $26,000 in 1998. Our capital
expenditures consisted of purchases of computer hardware and software, office
and laboratory furniture and equipment and leasehold improvements. Purchases of
computer equipment have represented the largest component of our capital
expenditures. We expect this trend to continue as we increase
24
<PAGE> 29
the number of our employees, increase the size of our development and quality
assurance testing facilities and improve and expand our information systems.
Since inception, we have generally funded capital expenditures through the use
of cash provided by financing activities.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. We believe that the
net proceeds from this offering, together with our existing cash, cash
equivalents, short-term investments, available equipment line of credit and
funds anticipated to be generated from operations, will be sufficient to meet
our cash requirements for at least 12 months following this offering. However,
we could be required, or could elect, to raise additional capital during that
period and we may need to raise additional capital thereafter. In the event
additional capital is required, we may not be able to raise it on acceptable
terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25." The interpretation
clarifies the application of APB Opinion No. 25 in specified events, as defined.
The interpretation is effective July 1, 2000, but covers specific events
occurring during the period after December 15, 1998, but before the effective
date. The adoption of this pronouncement did not have a significant impact on
our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition." This bulletin summarizes
views of the Securities and Exchange Commission on applying generally accepted
accounting principles to revenue recognition in financial statements. We believe
that our current revenue recognition policy complies with the guidelines in the
bulletin.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. We do not currently engage in trading
market risk sensitive instruments or purchasing hedging instruments or "other
than trading" instruments that are likely to expose us to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
We may do so in the future as our operations expand domestically and abroad. We
will evaluate the impact of foreign currency exchange risk and other derivative
instrument risk on our results of operations when appropriate. We will adopt
SFAS No. 133 as required by SFAS No. 137, "Deferral of the effective date of the
FASB Statement No. 133," in 2001. The adoption of SFAS No. 133 is not expected
to have a material impact on our financial condition or results of operations.
MARKET RISK
We do not use derivative financial instruments. We generally place our
marketable security investments in high credit quality instruments, primarily
U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
25
<PAGE> 30
BUSINESS
OVERVIEW
We are a leading provider of high-speed optical access networking solutions
that enable communications service providers to offer greater bandwidth to
businesses in the access segment of the public network. This segment, also known
as the "last mile," spans the portion of the network between a service
provider's local points-of-presence and business end users. Our comprehensive
optical access hardware and software solutions are based on passive optical
networking, or PON, technologies. PON technologies provide a cost-effective
network access solution by eliminating the use of active optical components,
such as amplifiers, lasers and modulators, in the transmission of data across
fiber optic cable. Our solutions can significantly reduce the cost of building
and managing fiber-based access networks, allowing service providers to leverage
their existing fiber assets to cost-effectively connect businesses of all sizes
to the public network via direct optical connections. Our solutions provide
businesses with the network capacity to implement bandwidth-intensive
applications, such as virtual private networks, e-commerce applications, video
streaming and storage area networks. As a result, our customers can offer
businesses a wide range of value-added voice, video and data services at much
faster speeds than other access technologies allow.
We sell our optical access networking solutions primarily through our
direct sales force and we plan to use indirect channels to sell our solutions in
specific markets. We augment our sales efforts with a professional services
organization that assists our customers with network planning, design and
implementation and fiber utilization. Our initial customers are Comcast and
Advanced TelCom Group. We market our solutions to the following types of service
providers, which typically have already installed or leased significant amounts
of fiber optic cable:
-- cable companies, or multiple system operators, or MSOs;
-- competitive local exchange carriers, or CLECs;
-- incumbent local exchange carriers, or ILECs;
-- Internet service providers, or ISPs; and
-- utility companies.
INDUSTRY BACKGROUND
THE ACCESS BOTTLENECK
In recent years, increased Internet usage has driven exponential growth in
data traffic. RHK, a market research and consulting firm, estimates that
Internet traffic in North America will increase from 350,000 terabytes per month
in 1999 to 16 million terabytes per month by 2003. The growth in data traffic is
primarily attributable to increased Internet access, electronic mail, electronic
commerce and remote access by telecommuters. Moreover, the content being
transmitted over the Internet is increasing in size, richness, complexity and
variety, as businesses seek to implement data-intensive applications such as
virtual private networks, e-commerce applications, video streaming and storage
area networks, further increasing the demand for bandwidth within public
networks.
To handle the surge in data traffic, service providers have made
substantial investments to construct high-speed optical networks. Service
providers have focused their initial efforts on deploying fiber optic cable and
optical networking equipment in the core, or backbone, portion of their
networks. This spending has resulted in a substantial build-up of bandwidth
capacity in the core of their networks. However, the traditional copper-wire
based infrastructure in the access portion of the network is unable to keep pace
with the increased bandwidth capacity at the core of the public network. This
mismatch between bandwidth at the core of service providers' networks and the
access portion of their networks has created a transmission bottleneck that
significantly limits the ability of businesses to deploy new data-intensive
applications and services.
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<PAGE> 31
To alleviate this bottleneck, service providers are now seeking to extend
the benefits of high-bandwidth optical technology to the access portion of their
networks, which involves significant challenges. Service providers need to
address the demands of a large number of end users that require high-speed
access capabilities, rapid installation, low prices and the ability to upgrade
their bandwidth and services quickly and in the increments they need. These
demands require an access solution that has the flexibility to enable rapid and
dynamic bandwidth provisioning to meet actual demand. Furthermore, many end
users are located within multi-tenant unit buildings, with each building
possessing different types of wiring to deliver bandwidth to tenants. Service
providers therefore require access solutions that are interoperable with
copper-based, coaxial cable-based and fiber-based access infrastructures, such
as DSL and Ethernet, and that do not require the costly installation of new
wiring to accommodate bandwidth upgrades.
LIMITATIONS OF TRADITIONAL ACCESS TECHNOLOGIES
Service providers recognize that fiber optic cable provides the greatest
bandwidth capacity per dollar. Fiber is preferable to copper not only because of
its superior bandwidth capacity, but also for its abilities to scale to meet
future demand and transmit voice and data over longer distances. These
significant advantages of fiber, coupled with the need to remove the bandwidth
bottleneck at the access portion of the public network, are expected to lead to
substantial expenditures for optical access networking equipment. According to
RHK, carrier capital spending on access networks will grow from $10 billion in
1999 to $18 billion in 2001, a compound annual growth rate of 34%.
Despite fiber's substantial benefits, service providers have been unable to
cost-effectively deploy it in the access portion of the network on a broad
scale. Service providers have, to a limited extent, extended fiber in the access
portion of the network through the use of transmission equipment utilizing
high-cost optical terminals based on standards such as synchronous optical
network, or SONET, and synchronous digital hierarchy, or SDH. However, these
approaches have proven to be unfeasible, primarily due to their substantial
expense. A typical fiber extension using these traditional technologies involves
the following challenges for service providers:
-- fiber strands must be connected to multiple end points;
-- build out can consume substantial amounts of time;
-- build out must correctly anticipate demand;
-- long lead times require upgrades ahead of actual customer contracts;
and
-- substantial up-front capital expenditures are required for each
direct fiber connection.
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<PAGE> 32
[The artwork below contains a picture of a traditional fiber network utilizing
SONET with active electronics. A ring represents the metro and core voice and
data portions of the public network. A rectangle represents each of the SONETs.
The diagram contains pictures of fiber optic cables connecting the metro and
core voice and data portions of the public network to buildings that have either
a SONET or an integrated access device. The diagram also contains pictures of
copper wires connecting the metro and core voice and data portions of the public
network to buildings without an integrated access device.]
The following diagram illustrates a typical fiber extension using traditional
technologies:
[SONET GRAPH]
The high costs associated with traditional means of extending fiber to end
users have driven service providers to explore various other access
technologies, such as T-1 and E-1 lines, DSL and cable modems, to meet the
demand for bandwidth in the access portion of the public network. However,
because these technologies do not utilize fiber optic cable, they do not provide
sufficient bandwidth to meet anticipated demand or scale to provide access for
multiple end users. In addition, service providers employing these technologies
are unable to leverage their substantial fiber optic infrastructure.
NEEDS OF SERVICE PROVIDERS
Service providers are seeking to alleviate the access bottleneck by
leveraging their existing base of fiber to provide high bandwidth services to
end users. In order to remove the access bottleneck in a cost-effective manner,
service providers are demanding a solution with the following key attributes:
Reduced Capital Expenditure and Increased Returns on Investment. One of
the most expensive aspects of the build out of the public network has been the
installation of fiber optic cable. Service providers' substantial investments in
fiber optic cable provide the initial infrastructure needed to extend fiber
economically to end users. In November 2000, Vertical Systems Group, an industry
research firm, estimated that approximately 76% of all medium and large
businesses in the United States are located within one mile of existing fiber.
However, we believe that less than 5% of these businesses are currently
connected to existing fiber. This existing fiber represents a strategic asset
that service providers can leverage through limited additional capital
expenditures to generate returns on their investments.
Cost-Effective Scalability. Service providers must be able to rapidly
extend fiber to end users to satisfy customer demand for bandwidth. Given the
churn and variability of demand among end users, service providers also must be
able to scale their networks, install equipment and provision services quickly
as end users request additional network capacity.
Flexible Service Offerings. Service providers must be able to offer end
users variable levels of bandwidth. Unlike transport services in the core and
metro portions of the network, access services require a
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wide range of transmission speeds to match the spectrum of end user needs. In
addition, service providers require an access solution that can rapidly and
incrementally increase or decrease the amount of bandwidth made available to end
users based on actual demand, not technological limitations.
Interoperability with Existing Infrastructure. To preserve the value of
existing investments by service providers and end users, any new access
equipment must interoperate with existing business voice and data systems, as
well as the service provider's wide-area network infrastructure.
Comprehensive Network Planning and Management Systems. Network access
solutions require integrated software applications with comprehensive network
planning and management capabilities. Service providers require integrated
planning software that enables them to analyze predicted traffic demand, node
build out and available equipment options to match network expansion at the
access level with increases in actual demand. Furthermore, service providers
need a comprehensive network management system that can provide a single point
for provisioning, reporting, testing and monitoring all network elements in the
access portion of their networks, while interoperating with existing operations
support systems.
Service providers are searching for comprehensive solutions that address
the bandwidth bottleneck at the access portion of the public network. The
substantial base of existing fiber represents a strategic asset for service
providers that remains largely untapped as an access solution, primarily due to
the high costs and long deployment times required to extend fiber to end users.
Furthermore, next generation access solutions must be able to handle the
variation and churn in bandwidth demand that characterize the access portion of
the public network. Service providers are therefore looking for an access
solution that will provide the flexibility and incremental scalability necessary
to address this market opportunity cost-effectively.
THE QUANTUM BRIDGE SOLUTION
Our optical access networking solutions enable service providers to
economically provide their customers with high-bandwidth services capable of
rapidly transporting voice, data and video traffic. Our comprehensive optical
access networking solutions are based on PON technologies, which eliminate the
use of costly active optical components in the transmission of voice and data
across fiber optic cable in the access portion of the public network. Our
solutions allow service providers to leverage their existing fiber optic
infrastructure to connect end users of various sizes to their networks via
direct optical connections. By allowing service providers to build out the
access portion of their networks rapidly and cost-effectively, our optical
access networking solutions can help them to achieve rapid and substantial
returns on investment.
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[The artwork depicts a fiber network using fiber extensions with passive
components. A ring represents the metro and core voice and data portions of the
public network. The diagram depicts our products connecting the buildings to the
metro and core networks. The words "QB5000," "QB3000" and "QB100" are located in
the pictures of our products. The phrase "in development" is located underneath
our QB3000 product.]
QUANTUM BRIDGE OPTICAL ACCESS NETWORK
[FIBER EXTENSIONS GRAPH]
Our solutions provide our customers and their end users with the following
key benefits:
Leverages Investments in Existing Fiber to Create New Revenue
Opportunities. Our solutions allow service providers to leverage their existing
fiber assets to provide direct optical access services and other service
opportunities to end users through the addition of inexpensive fiber couplers
and incremental fiber extensions. By enabling service providers to offer a wide
range of new value-added services, our PON-based access solutions can
significantly increase the revenue generated by each fiber strand and accelerate
a service provider's return on investment. In addition, by allowing service
providers to leverage their existing fiber facilities while eliminating costly
active optical components, our optical access networking solutions enable
service providers to economically extend their fiber networks.
Ability to Scale Fiber Networks Opportunistically. Our use of passive
optical components and our fiber architecture enable service providers to
quickly extend fiber as they sign up customers, substantially reducing the need
for expensive capacity upgrades in advance of customer orders. Our solutions
also enable service providers to rapidly increase the number of passive optical
networking extensions within their networks and are designed to allow a service
provider to support hundreds of end users from a single optical access switch.
Our solutions permit in-service upgrades, including a variety of higher speed
wide-area network interfaces, larger switching fabrics and more end users,
without having to change any existing fiber or components. To further increase
available bandwidth, our solutions are designed to scale to support additional
wavelengths, which provides service providers with greater flexibility in
delivering dedicated wavelengths to their customers.
Cost-Effective, Flexible Provisioning. Our proprietary technology permits
individual wavelengths to be "sliced" or shared among multiple end users to
expand the capacity and number of end users that can be served over a given
wavelength and increase fiber utilization. This enables service providers
deploying our
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<PAGE> 35
solutions to offer end users the precise increments of initial or additional
bandwidth they need. In addition, our flexible architecture enables
software-based provisioning so that service providers can respond rapidly to end
user requests to increase or decrease bandwidth to accommodate fluctuations in
bandwidth consumption. Our software-based provisioning significantly reduces
service providers' costs because it eliminates the need for labor-intensive
manual upgrades.
Interoperability with Existing Infrastructure. The interoperability of our
solutions with existing networking equipment enables service providers to offer
the bandwidth and scalability of direct optical access connections for voice and
data services between the end user's premises and the optical networking
equipment in the core and metro portions of the public network. Since our
solutions are compatible with other networking technologies, such as T-1 and
Ethernet, end users do not need to replace the copper wiring within their own
buildings in order to benefit from our fiber-based access solutions.
Comprehensive and Simplified Network Planning and Management
Capabilities. Our solutions offer integrated access and control over multiple
pieces of equipment deployed throughout the entire access portion of the public
network, significantly simplifying administration, provisioning and monitoring
of service. In addition, our solutions include network planning and design tools
that help service providers plan network build outs, enabling them to more
accurately and efficiently match expansion of the access portion of their
networks to actual end user demand.
Efficient Bundling of Voice, Data and Video Services. Our solutions
support multiple transmission protocols, including Internet protocol,
asynchronous transfer mode, or ATM, and time division multiplexing, or TDM. Our
solutions provide the foundation for a full range of broadband services,
including high-speed Internet access, local-area interconnection and
voice-over-Internet protocol, as well as legacy services. The ability of our
solutions to operate across the major protocols underlying voice, video and data
services enables service providers to offer bundled services to end users
without deploying separate equipment to support each service, thereby reducing
service providers' capital expenditures.
STRATEGY
Our objective is to be the leading provider of optical access networking
solutions. We are seeking to achieve this goal by executing the following
strategies:
Extend Technology Leadership. We intend to extend our leadership in
optical access networking technology. We have achieved significant technological
milestones to date, such as the development of a technology that enables
individual wavelengths to be shared and thereby expands the number of end users
that can be served over a given wavelength. We intend to continue to innovate in
the areas of optics and opto-electronics, software and application-specific
integrated circuit, or ASIC, functionality as part of our product family. We
believe that these areas are critical to delivering superior performance,
reducing cost and risk, providing richer feature content and permitting rapid
deployment and response to new and changing customer needs. We will also
continue to take leadership roles in industry standard-setting bodies, including
Full Service Access Network, the International Telecommunication Union and the
Internet Engineering Task Force.
Broaden Product Offerings. We are developing future products based on our
proprietary hardware and software technologies to support new markets and
customers, as well as network topologies with different-sized switches, customer
premises terminals, physical packaging and service interfaces. We are partnering
with other leading telecommunications equipment vendors to integrate hardware
and software in order to provide additional functionality to our products. Our
goal is to offer service providers a migration path to the dynamic provisioning
of wavelength services, allowing them to provide more bandwidth, on demand, at a
lower overall cost to their business and residential end users.
Collaborate with Service Providers to Enable New Service Offerings. We are
expanding our professional services staff in order to help our customers
identify, create and deploy new high-speed data services. Our professional
services team provides assistance in areas such as network planning, design and
implementation and fiber utilization to create underlying infrastructure and
accelerate the introduction of new services. By
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helping our customers to create and deploy new services, we enable them to
generate additional revenue opportunities.
Target Facilities-Based Service Providers. We intend to expand our
penetration among service providers demanding additional capacity as well as
those seeking the means to deliver new services. We have initially focused on a
select group of service providers that are early adopters of new technologies
and can rapidly deploy our solutions to leverage their existing fiber assets. In
addition to our announced customers, we are currently participating in customer
trials in various stages of completion with other early adopters. We intend to
expand our sales focus to include other service providers, both domestic and
international, with fiber optic networks.
Utilize Multi-Channel Distribution. We currently sell our optical access
networking solutions through our direct sales force. In the future, we plan to
continue to use our direct sales force as our main domestic sales channel, while
seeking to leverage our initial customer base to encourage additional service
providers to adopt our solutions. In addition, we intend to expand our sales
through alliances with distributors, systems integrators and value-added
resellers. We plan to extend our business into global markets, including Europe
and Asia, by developing solutions with international packaging that complies
with international carrier class standards, employing our domestic direct sales
model abroad and utilizing indirect sales channels.
PRODUCTS AND TECHNOLOGY
We draw from core competencies in optics and opto-electronics, high speed
design, systems and software to create optical access networking solutions.
These solutions enable service providers to economically provide their customers
with high-bandwidth services capable of rapidly transporting voice, data and
video traffic.
PRODUCT ARCHITECTURE
Our products incorporate the following features:
Passive Optical Networking and Other Optical Innovations. Our products use
PON technology. This technology significantly reduces the cost of deploying
fiber-based infrastructure by eliminating the need for costly active optical
components requiring power, maintenance and upgrades in the outside plant. Our
innovations in optical technology, such as burst mode reception and low-cost
wavelength division multiplexing, reduce the costs of optical networking in the
access portion of the public network. In addition, our optical and
opto-electronic component integration and packaging reduces service provider
costs while improving the performance of optical access systems.
Dynamic Wavelength Slicing. Our innovative Dynamic Wavelength Slicing
protocol, which we refer to as DWS, allows individual wavelengths to be "sliced"
or shared to expand the number of end users that can be served over a given
wavelength. This allows service providers to utilize fiber resources more
efficiently by allocating the requested amount of bandwidth within a given
wavelength to each end user. DWS supports ATM, TDM and Internet protocol.
Flexible Bandwidth Delivery. Our products are designed to deliver
flexible, high-bandwidth services that can be scaled to meet the bandwidth needs
of each end user. The amount of bandwidth available to an end user can be
adjusted with software commands from the centralized optical access switch to
facilitate rapid provisioning of services.
Wide-Area Network Interconnectivity. Our products are designed to provide
standard wide-area network interfaces and to operate with various wide-area
networking equipment. Our products interface with SONET/SDH and operate with
ATM, TDM, Internet protocol and the public switch telephone network to support
various types of voice, data and video services.
Service-Enabling Network Management. Our network management software
supports the network planning, design and management of the optical access
portion of the public network, including our products and the products of our
alliance partners. The framework supported by our network management products
enables service providers to create, deploy and manage a wide variety of
high-value wholesale and retail
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service offerings over the optical access portion of the public network. Our
comprehensive network management software consists of integrated planning,
management and bandwidth and service provisioning tools. This software includes
bandwidth management algorithms that allow quick and efficient provisioning of
wavelength and fractional wavelength services, as well as wavelength restoration
and routing algorithms that permit rapid restoration of services in case of
network congestion or failure.
Multi-Service Delivery. Our products permit multiple services, including
voice, data and video, to be aggregated between the end user's premises and the
public network. These services can be transported in TDM, ATM or Internet
protocol formats to deliver the desired services to the end user.
High-Speed Design. Our products utilize mixed analog and digital
programmable ASIC technology that provides time-to-market advantages and allows
us to respond quickly to customer requests for additional features. Our products
have a high-speed backplane designed to be suitable for small form factor,
dense, high performance systems. In addition, our products are designed to be
electromagnetic compatible and electromagnetic interference compliant for
deployment in carrier class as well as end user environments.
OPTICAL ACCESS NETWORKING PRODUCTS
The following table briefly describes our current and planned products:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
PRODUCT APPLICATION SERVICE INTERFACES STATUS
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
QB5000 Optical Optical access and PON Commercially available
Access Switch multi- service delivery ----------------------- -----------------------
product with integrated Gigabit Ethernet In development
management software ----------------------- -----------------------
100 megabit Ethernet In development
----------------------- -----------------------
OC-12 ATM Commercially available
----------------------- -----------------------
OC-3 ATM In beta testing
----------------------- -----------------------
OC-3 SONET TDM In beta testing
------------------------------------------------------------------------------------------------
QB100 Intelligent PON services terminal 10/100 Ethernet Commercially available
Optical Terminal with integrated ----------------------- -----------------------
management software T1 Commercially available
----------------------- -----------------------
E1 In development
------------------------------------------------------------------------------------------------
QB3000 Optical Remote optical access PON In development
Access Switch and multi-service ----------------------- -----------------------
delivery product with Gigabit Ethernet In development
integrated management ----------------------- -----------------------
software designed for 100 megabit Ethernet In development
use in large, ----------------------- -----------------------
multi-tenant units OC-3 ATM In development
----------------------- -----------------------
OC-12 ATM In development
----------------------- -----------------------
OC-3 SONET TDM In development
----------------------- -----------------------
T1 In development
------------------------------------------------------------------------------------------------
QBVision Network management Provides end-to-end In beta testing
software system management of optical
access networks
------------------------------------------------------------------------------------------------
</TABLE>
PROFESSIONAL SERVICES
We believe that high-quality professional services and technical support
are critical factors in a service provider's decision to purchase optical access
networking solutions. Our QBCare professional services are designed to help
service providers succeed in deploying their optical access networks and
delivering services to end users. We assist our customers in the planning,
design, engineering, implementation, operation and optimization of complex,
end-to-end network access solutions based on our optical access networking
products. Our professional services include:
-- network design services;
-- engineering planning and implementation services;
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-- fiber utilization services;
-- installation services;
-- full life-cycle project management and operational services;
-- network audit services;
-- on-site resident engineers;
-- education regarding optical access solutions; and
-- network support services.
CUSTOMERS
Our target customer base consists of new and established local voice, data
and video service providers as well as long-distance providers, Internet service
providers, cable providers and local telephone service providers. Our two
initial customers are Comcast and Advanced TelCom Group. Comcast has purchased
our products to leverage its fiber assets to offer voice and data services to
end users. Advanced TelCom Group has purchased our products to provide
high-speed Internet access and voice services to end users.
Our contracts with Comcast and Advanced TelCom Group specify the terms and
conditions of any purchases they make from us, but do not require either
customer to purchase any minimum amount of products.
SALES AND MARKETING
We sell our solutions primarily through a direct sales force. We believe
that a direct sales force is critical for addressing our largest existing and
potential customers, helping to create demand in the marketplace for our
solutions and enabling us to address customer needs in our product development
efforts. We plan to use indirect sales channels, including distributors, systems
integrators and value-added resellers, to address specific markets, accounts
with which our resellers have strategic relationships, smaller accounts and
geographic areas that are more efficiently addressed indirectly than directly.
In North America, our direct sales teams are located in various regional
offices that cover specific geographic regions. In addition, one regional vice
president supports the eastern region sales teams and one supports the western
region sales teams. We have two sales teams assigned to specific major accounts
in North America. Each sales team typically consists of an account manager and a
sales engineer.
We are in the process of staffing our international direct sales force in
Europe and Asia. We intend to staff our international direct sales teams with
country managers, sales directors and systems engineers consistent with
anticipated customer demand in each region. We expect that indirect sales
channels will be increasingly important in selected foreign markets.
Our marketing and corporate communications programs are designed to build
brand awareness, convey our value proposition and technology leadership position
and create demand for our solutions. Our marketing efforts include:
-- press and analyst relations;
-- industry trade shows and forums;
-- direct mail and advertising;
-- brochures, data sheets and white papers; and
-- contributed articles to various industry and business publications.
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ALLIANCE PARTNERS
Our Quantum Bridge Access Alliance program is designed to accelerate our
sales and marketing efforts by integrating our solutions with other types of
communications equipment that are prevalent in the access portion of the public
network. To date, we have focused this program on selected communications
equipment vendors that offer integrated access devices or multi-tenant unit
access devices. These devices aggregate a building's voice, data and video
information streams for transmission over a single, high-capacity circuit. By
leveraging these relationships, we seek to facilitate customer acceptance of our
products and broaden our solutions without incurring significant research and
development expenditures. The Quantum Bridge Access Alliance consists of
technology interoperability testing, network management integration and
co-marketing efforts.
The following companies participate in the Quantum Bridge Access Alliance:
-- Integrated access device companies: Accelerated Networks, Carrier
Access Corp., Mariner Networks, Mariposa Technology (recently
acquired by Marconi), Sonoma Systems (recently acquired by Nortel)
and Vina Technologies.
-- Multi-tenant unit access device companies: Accelerated Networks,
AccessLan Communications, Copper Mountain and Tut Systems.
RESEARCH AND DEVELOPMENT
We have assembled a team of highly skilled and experienced engineers with
significant telecommunications, data communications and cable television
industry experience. The team has expertise in optics, opto-electronics, high
speed design, systems and embedded and application-level software. As of
September 30, 2000, our research and development team consisted of 141 engineers
responsible for product development, quality assurance, documentation and
product realization. Our engineering team is focused on adding new
customer-requested features to our current products and developing new products
to expand applications, customers and entry into new market segments in optical
access networking. We have made, and will continue to make, substantial
investments in research and development. Research and development expenses were
$16.6 million for the nine months ended September 30, 2000 and $3.4 million for
the nine months ended September 30, 1999.
MANUFACTURING
We outsource the manufacturing and assembly of our products to optical
sub-assemblers to reduce our costs and maintain our focus on product
development. We use Solectron and SMTC to provide us with assembly, test and
control and materials procurement services. We believe that by outsourcing our
manufacturing we are able to conserve the financial resources that would
otherwise be required to purchase capital equipment, rapidly adjust
manufacturing volumes to meet changes in demand, take advantage of volume
purchasing discounts and deliver products to our customers more quickly.
COMPETITION
The market for optical access networking solutions is rapidly evolving and
highly competitive. We expect competition to increase over time. We believe that
we compete successfully by providing solutions that cost-effectively provide the
following:
-- highly reliable network architecture with carrier class performance;
-- flexible, scalable network deployment and growth with minimal
disruption;
-- interoperability and compatibility with existing network access
standards, technologies and designs;
-- intelligent network management; and
-- comprehensive technical customer support and professional services.
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We compete with a subsidiary of NEC called eLUMINANT, a subsidiary of
Mitsubishi Electric Company called Paceon, Terawave and CS Communication &
Systemes. Each of these companies has announced or we believe will announce
products that address many of the same network access problems that our
solutions are designed to address.
INTELLECTUAL PROPERTY
We rely on a combination of patent, trademark, trade secret and copyright
laws and contractual restrictions to protect the proprietary aspects of our
technology. We have been granted one patent in the United States. In addition,
we have eight patent applications pending in the United States and two other
patent applications pending in foreign jurisdictions, although we cannot assure
that additional patents will be granted or that our current or future patents
will provide meaningful protection.
We license our software pursuant to signed or shrink-wrap license
agreements, which impose certain restrictions on the licensee's ability to
utilize the software. We also seek to limit disclosure of our intellectual
property by requiring employees, consultants and third parties with access to
our proprietary information to execute confidentiality agreements and by
restricting access to our source code. Due to rapid technological change, we
believe that the technological and creative skills of our personnel, new product
developments and enhancements to existing products are more important than legal
protections in establishing and maintaining a technology leadership position.
EMPLOYEES
As of September 30, 2000, we had a total of 239 employees. Our employees
are not represented by any labor union. We believe our relations with our
employees are good.
FACILITIES
Our headquarters are located in a leased facility in Andover, Massachusetts
consisting of approximately 106,000 square feet under a lease that expires May
31, 2007. We also lease another facility in North Andover, Massachusetts
consisting of approximately 33,000 square feet under a lease that expires
December 31, 2003. We believe that our existing facilities are adequate to meet
our current needs and that suitable additional space will be available on
acceptable terms when needed.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages and positions as of
September 30, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------- --- --------
<S> <C> <C>
Anthony A. Zona(1)................... 40 President, Chief Executive Officer and Director
John P. Delea........................ 39 Senior Vice President, Chief Financial Officer and
Treasurer
Jeffrey W. Gwynne.................... 40 Senior Vice President, Marketing
Jeffrey A. Masucci................... 36 Senior Vice President, Engineering, Chief Technology
Officer and Director
Charles C. Snell..................... 51 Vice President, Manufacturing and Operations
Randall B. Uram...................... 40 Senior Vice President, Worldwide Sales and Service
Gary Bowen(2)........................ 53 Chairman of the Board
James Cullen(3)(4)................... 58 Director
Michael Feinstein(3)................. 39 Director
Suzanne Hooper King(3)............... 36 Director
Russell E. Planitzer(2).............. 56 Director
Jeffrey A. Shaw(4)................... 36 Director
</TABLE>
------------
(1) Member of the option committee of the board of directors
(2) Member of the compensation committee of the board of directors
(3) Member of the audit committee of the board of directors
(4) Member of the nominating committee of the board of directors
Anthony A. Zona, one of our founders, has served as our president, chief
executive officer and director since our inception in October 1998. From 1985 to
October 1998, Mr. Zona served in a number of research and development and
management positions at Bell Laboratories and Lucent Technologies. From 1983 to
1985, Mr. Zona served as a systems engineer at Raytheon. Mr. Zona received a
BSEE from the University of Rhode Island, an MS in applied mathematics from the
University of Lowell and an MBA from Boston University.
John P. Delea has served as our chief financial officer and senior vice
president since September 2000. From December 1996 to August 2000, Mr. Delea
served as chief financial officer and vice president, finance and
administration, for NetGenesis Corp., an Internet infrastructure software and
services company. From 1994 to 1996, Mr. Delea served as business unit
controller at Bay Networks. Mr. Delea received a BA in economics and accounting
from College of the Holy Cross and an MBA in finance from the University of
Chicago Graduate School of Business.
Jeffrey W. Gwynne, one of our founders, has served as our senior vice
president of marketing since our inception in October 1998. From 1996 to October
1998, Mr. Gwynne was a consultant in the telecommunications industry,
co-founding Stout Technologies, a provider of outsourced engineering services to
the telecommunications industry, in 1996 and IPA Technologies, a provider of
outsourced engineering services to the telecommunications industry, in 1998
where he served as vice president of sales and marketing. From 1984 to 1996, Mr.
Gwynne was a member of technical staff at AT&T Bell Laboratories, where he held
various roles in systems engineering, and technical and product marketing. Mr.
Gwynne received a BA in physics from Bowdoin College and an MSEE from Worcester
Polytechnic Institute.
Jeffrey A. Masucci, one of our founders, has served as our senior vice
president of engineering, chief technology officer and director since our
inception in October 1998. From 1996 to October 1998, Mr. Masucci was a
consultant in the telecommunications industry, co-founding Stout Technologies in
1996 and IPA
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Technologies in 1998 where he served as President. From 1986 to 1996, Mr.
Masucci was a member of technical staff at AT&T Bell Laboratories, where he held
various roles in development, systems engineering and product management. Mr.
Masucci received a BS degree in physics and an MSEE from Rensselaer Polytechnic
Institute and an MBA from Boston University.
Charles C. Snell has served as our vice president of manufacturing and
operations since June 1999. From 1993 to June 1999, Mr. Snell served as vice
president of operations for Netaccess, a division of Brooktrout Technology, a
communications technology company. Mr. Snell received a BSME and MSME degrees
from the Massachusetts Institute of Technology and an MBA from Boston
University.
Randall B. Uram has served as our senior vice president of worldwide sales
and service since December 1998. From 1997 to December 1998, Mr. Uram served as
vice president of North American sales for New Oak Communications, a
manufacturer of access switches that was acquired by Bay Networks. From 1991 to
1997, Mr. Uram held regional director and area manager positions at Wellfleet
Communications/Bay Networks. From 1981 to 1991, Mr. Uram held various technical
and sales roles at Massachusetts Computer Corp., a designer and manufacturer of
high-performance workstations, and Bell Laboratories. Mr. Uram received a BS in
computer science and chemistry from the University of Pittsburgh and an MS in
computer science from Purdue University.
Gary Bowen has served as our director since November 1998 and as our
chairman of the board since April 2000. From January 1990 to October 1996, Mr.
Bowen served as executive vice president of marketing, sales and customer
support for Wellfleet Communications/Bay Networks. From October 1981 to December
1989, Mr. Bowen served as founder and vice president of marketing for
Massachusetts Computer Corp. Prior to that, Mr. Bowen held various sales and
marketing management positions at Hewlett-Packard.
James Cullen has served as our director since June 2000. From August 1997
to June 2000, Mr. Cullen served as the president and chief operating officer of
Bell Atlantic. From February 1995 to July 1997, Mr. Cullen served as the
president and chief executive officer in the Telecom Group of Bell Atlantic.
From February 1994 to February 1995, Mr. Cullen served as vice chairman of Bell
Atlantic. From April 1989 to February 1993, Mr. Cullen served as president of
New Jersey Bell.
Michael Feinstein has served as our director since August 1999. Mr.
Feinstein is a senior principal of Atlas Venture, a venture capital firm, which
he joined in April 1999. From January 1998 to April 1999, Mr. Feinstein served
as vice president of market development for Nortel Networks, a leading
communications equipment supplier. From February 1997 to January 1998, Mr.
Feinstein served as vice president of product marketing for New Oak
Communications, a network equipment company. From October 1990 to January 1997,
Mr. Feinstein served as vice president of product management and held various
other positions for Shiva, a remote access equipment supplier.
Suzanne Hooper King has served as our director since November 1998. Ms.
King has been a partner with New Enterprise Associates, a venture capital firm,
since July 1995. From October 1988 to June 1994, Ms. King served as controller
of XcelleNet, Inc., a developer of system management software for remote access.
From September 1986 to September 1988, Ms. King was a senior auditor for Arthur
Andersen LLP.
Russell E. Planitzer has served as our director since November 1998. Since
October 1997, Mr. Planitzer has been managing principal of Lazard Technology
Partners. From 1981 through 1993, Mr. Planitzer served as a general partner at
J.H. Whitney & Co., a venture capital firm. From October 1993 to October 1996,
Mr. Planitzer served as chief executive officer of Computervision.
Jeffrey A. Shaw has served as our director since April 2000. Since 1993,
Mr. Shaw has been a general partner at Texas Pacific Group, a principal
investments company. From September 1990 to July 1993, Mr. Shaw was a principal
at Acadia Partners/Oak Hill Partners, a venture capital firm. From September
1986 to June 1988, Mr. Shaw was an investment banker at Goldman, Sachs & Co. Mr.
Shaw also serves as a director of America West Airlines, Convergent
Communications, Del Monte Foods Corp. and Ryanair Holdings PLC.
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Each executive officer serves at the discretion of the board of directors.
There are no family relationships among any of our directors or executive
officers.
ELECTION OF DIRECTORS
The current members of our board of directors were elected by the holders
of our common stock and preferred stock pursuant to a voting agreement, which
will terminate upon the completion of this offering.
Following this offering, the board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Michael Feinstein, Suzanne Hooper King and Jeffrey A. Masucci will serve in the
class whose term expires in 2002; James Cullen, Russell E. Planitzer and Jeffrey
A. Shaw will serve in the class of directors whose term expires in 2003; and
Gary Bowen and Anthony A. Zona will serve in the class of directors whose term
expires in 2004.
BOARD COMMITTEES
Our board of directors has an audit committee, a compensation committee, an
option committee and a nominating committee.
Audit Committee. The audit committee reviews the professional services
provided by our independent accountants, the independence of our accountants,
our annual financial statements and our system of internal accounting controls.
The audit committee also reviews other matters with respect to our accounting,
auditing, and financial reporting practices and procedures as it may find
appropriate or may be brought to its attention. The audit committee currently
consists of James Cullen, Michael Feinstein and Suzanne Hooper King.
Compensation Committee. The compensation committee reviews executive
salaries, administers bonuses, incentive compensation and stock plans and
approves the salaries and other benefits of our executive officers. In addition,
the compensation committee consults with our management regarding our benefit
plans and compensation policies and practices. The compensation committee
currently consists of Gary Bowen and Russell E. Planitzer.
Option Committee. The option committee grants options and other awards
under the 2000 stock incentive plan to employees other than executive officers,
subject to specified limitations imposed by the board of directors or the
compensation committee. The sole member of the option committee is currently
Anthony A. Zona.
Nominating Committee. The nominating committee recommends the nominees for
election to the board of directors at each annual meeting of stockholders. The
nominating committee currently consists of James Cullen and Jeffrey A. Shaw.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, Messrs. Bowen, Planitzer and Zona were responsible
for the function of a compensation committee. No interlocking relationships
exists between any member of our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has any interlocking relationship existed in the past.
DIRECTOR COMPENSATION
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors and committee meetings. Directors
are eligible to participate in our stock incentive plans. In connection with his
election to the board of directors, we granted James Cullen an option to
purchase 150,000 shares of common stock at an exercise price of $3.83 per share.
Of these shares, 37,500 were vested on the date of grant and 112,500 vest over
three years from the date of grant.
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<PAGE> 44
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned for 1999 by our
chief executive officer and the three other executive officers whose total
salary and bonus for 1999 exceeded $100,000. We collectively refer to these
executives as the named executive officers.
In the table below, columns required by the regulations of the Securities
and Exchange Commission have been omitted where no information was required to
be disclosed under those columns. Amounts shown in the restricted stock award
column represent the value of the restricted stock award, based on the midpoint
of the estimated public offering price range less the purchase price paid.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ----------------
COMPENSATION AWARDS
------------------- ----------------
SALARY BONUS RESTRICTED STOCK
NAME AND PRINCIPAL POSITION ($) ($) AWARDS($)
----------------------------------------------------- -------- ------- ----------------
<S> <C> <C> <C>
Anthony A. Zona
President and Chief Executive Officer.............. $131,674 -- --
Jeffrey W. Gwynne
Senior Vice President, Marketing................... $131,674 -- --
Jeffrey A. Masucci
Senior Vice President, Engineering and Chief
Technology Officer.............................. $132,700 -- --
Randall B. Uram
Senior Vice President, Worldwide Sales and
Service......................................... $120,000 $30,000 $ (1)
</TABLE>
------------
(1) Twenty-five percent of the shares subject to this restricted stock award
vest nine months from the date of grant, and the remaining shares vest over
the following three years in equal monthly installments. Following an
acquisition of us, 25% of the then-unvested shares will become exercisable
and, if the acquiring entity does not make Mr. Uram a qualified offer of
employment, 100% of the then-unvested shares will become exercisable.
STOCK OPTIONS
We did not grant any stock options to any of the named executive officers
during 1999, and none of the named executive officers exercised any stock
options during 1999 or held any unexercised stock options as of December 31,
1999.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
We have employment agreements with Messrs. Zona, Gwynne and Masucci. The
term of each employment agreement is three years, expiring October 23, 2001. If
we terminate the employment of one of these executives before October 23, 2001
for any reason other than cause, or if one of these executives terminates his
employment for good reason, the terminated executive will be entitled to receive
his then current compensation and benefits for 12 months from the date of
termination. If the terminated executive is employed by another company six
months after termination of his employment, we will be permitted to reduce such
terminated executive's cash compensation to the extent he actually receives cash
compensation from his new employer. If the employment of one of these executives
is terminated for death or disability, the terminated executive will be entitled
to receive his then current compensation for 12 months from the date of
termination. The employment agreements prohibit the executives from working for
any other company that competes directly or indirectly with us for a period of
one year from termination of employment with us.
40
<PAGE> 45
STOCK AND BENEFIT PLANS
1998 STOCK INCENTIVE PLAN
Our 1998 stock incentive plan was originally adopted by our board of
directors and approved by our stockholders in November 1998. The 1998 plan
provides for the grant of incentive stock options to our employees and
nonstatutory stock options, restricted stock awards and other stock-based awards
to our employees, officers, directors, consultants and advisors.
We currently have 9,690,578 shares of our common stock reserved for
issuance under the 1998 plan. As of September 30, 2000, we had outstanding
options to purchase 8,032,325 shares of our common stock at a weighted average
exercise price of $2.26 per share. In addition, 3,959,422 shares of common stock
have been issued under the 1998 plan either through the issuance of shares of
restricted stock or through the exercise of stock options.
Options and restricted stock awards generally vest as to 25% of the shares
on the first anniversary of the grant date and, thereafter, pro-rata on a
monthly basis over the next 36 months.
The 1998 plan will terminate upon the closing of this offering although
outstanding stock options will continue in accordance with their terms.
2000 STOCK INCENTIVE PLAN
Our 2000 stock incentive plan was adopted by our board of directors in
December 2000 and approved by our stockholders in 2001. Up to
10,000,000 shares of our common stock, subject to adjustment in the event of
stock splits and other similar events, are reserved for issuance under the 2000
plan. In addition, shares under our 1998 plan not issued or subject to
outstanding grants upon the closing of this offering and any shares issued under
the 1998 plan that are forfeited or repurchased by us or that are issuable upon
exercise of options that become unexercisable for any reason without having been
exercised in full will be available for grant and issuance under our 2000 plan.
On January 1 of each year, commencing with January 1, 2002, the number of shares
available for issuance under the 2000 plan will be increased automatically by 5%
of the outstanding shares on such date or a lesser amount determined by our
board of directors. To date, we have not granted any options under the 2000
plan.
The 2000 plan provides for the grant of incentive stock options to our
employees and nonstatutory stock options, restricted stock awards and other
stock-based awards to our employees, officers, directors, consultants and
advisors.
Optionees receive the right to purchase a specified number of shares of our
common stock at a specified option price, subject to the terms and conditions of
the option grant. We may grant options at an exercise price less than, equal to
or greater than the fair market value of our common stock on the date of grant.
Under present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
may not be granted at an exercise price less than the fair market value of the
common stock on the date of grant, or less than 110% of the fair market value in
the case of incentive stock options granted to optionees holding more than 10%
of our voting power. The 2000 plan permits our board of directors to determine
how optionees may pay the exercise price of their options, including by cash,
check or in connection with a "cashless exercise" through a broker, by surrender
of shares of common stock to us, or by any combination of the permitted forms of
payment.
Our board of directors administers the 2000 plan. Our board of directors
has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the 2000 plan and to interpret its
provisions. It may delegate authority under the 2000 plan to one or more
committees of the board of directors. Our board of directors has authorized the
compensation committee to administer the 2000 plan, including the granting of
options to our executive officers. Our board of directors has authorized the
option committee to grant options and other awards under the 2000 plan to
employees other than executive officers. Subject to any applicable limitations
contained in the 2000 plan, our board of directors, our compensation
41
<PAGE> 46
committee or any other committee to whom our board of directors delegates
authority, as the case may be, selects the recipients of awards and determines:
-- the number of shares of common stock covered by options and the date
upon which such options become exercisable;
-- the exercise price of options;
-- the duration of options; and
-- the number of shares of common stock subject to any restricted or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.
In the event of a merger, consolidation or other acquisition event in which
the acquiring company does not assume or substitute for all outstanding options
and awards, the vesting of these options and awards will accelerate in full.
No award may be granted under the 2000 plan after December 1, 2010, but the
vesting and effectiveness of awards granted before those dates may extend beyond
those dates. Our board of directors may at any time amend, suspend or terminate
the 2000 plan.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 employee stock purchase plan was adopted by our board of directors
in December 2000 and approved by our stockholders in 2001. The
purchase plan authorizes the issuance of up to a total of 2,000,000 shares of
our common stock to participating employees. On January 1 of each year,
commencing with January 1, 2002, the number of shares available for issuance
under the purchase plan will be increased automatically by 2% of the outstanding
shares on such date or a lesser amount determined by our board of directors.
All of our employees, including our directors who are employees, and all
employees of any participating subsidiaries, whose customary employment is more
than 20 hours per week and for more than five months in any calendar year, are
eligible to participate in the purchase plan. Employees who would immediately
after the grant own 5% or more of the total combined voting power or value of
our stock or that of any subsidiary are not eligible to participate.
Our purchase plan will be implemented by consecutive, overlapping 24-month
offering periods with a new offering period commencing on the first trading day
on or after February 15 and August 15 of each year and terminating on the last
trading day in the respective period ending 24 months later. However, the first
offering period will commence with our initial public offering pursuant to this
prospectus. Each 24-month offering period consists of four purchase periods of
approximately six months duration.
Employees who participate in the purchase plan purchase common stock
through payroll deductions of up to 20% of their salary. Participating employees
receive an option to purchase by payment from existing funds in their payroll
deduction account up to a maximum number of shares per offering period
determined by dividing $50,000 by the fair market value of a share of common
stock on the first day of the offering period. The option becomes exercisable
for 25% of the shares purchased at the end of each six-month purchase period
within the offering period. The price of common stock purchased under the
purchase plan is 85% of the lower of the fair market value of the common stock
on the first day of each 24-month offering period (which will be the initial
public offering price for the first offering period under the purchase plan) and
the last day of the applicable six-month purchase period. To the extent the fair
market value of the common stock on the first day of the subsequent offering
period is lower than the fair market value of the common stock on the first day
of the current offering period, then all participants in such current offering
period will be automatically withdrawn from such offering period immediately
after the exercise of their options on the exercise date and automatically
re-enrolled in the subsequent offering periods as of the first day thereof.
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<PAGE> 47
An employee who is not a participant on the last day of the purchase period
is not entitled to exercise any option, and that employee's accumulated payroll
deductions will be refunded. An employee's rights under the purchase plan
terminate upon voluntary withdrawal from the purchase plan at any time, or when
the employee ceases employment for any reason, except that upon termination of
employment because of death, the employee's beneficiary has a right to elect to
exercise the option to purchase the shares which the accumulated payroll
deductions in the participant's account would purchase at the date of death.
Because participation in the purchase plan is voluntary, we cannot now
determine the number of shares of our common stock to be purchased by any of our
current executive officers, by all of our current executive officers as a group
or by our non-executive employees as a group.
401(k) PLAN
In January 1999 we adopted an employee savings and retirement plan
qualified under Section 401 of the Internal Revenue Code and covering all of our
employees. Pursuant to the 401(k) plan, employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit and have
the amount of this reduction contributed to the 401(k) plan. We may elect to
make discretionary contributions to the 401(k) plan. To date, we have made no
discretionary contributions to the 401(k) plan.
PREFERRED STOCK ISSUANCES
Sales of Preferred Stock. Upon the closing of this offering, all
outstanding shares of series A convertible preferred stock and series B
convertible preferred stock will automatically convert into shares of common
stock on a 3-for-1 basis. Upon the closing of this offering, all outstanding
shares of series C convertible preferred stock will automatically convert into
shares of common stock on a 3-for-2 basis. We sold preferred stock in the
following transactions:
-- Between November 1998 and March 1999, we sold 6,250,000 shares of
series A convertible preferred stock at a price of $1.00 per share
for a common stock-equivalent purchase price of $.333 per share.
-- In August 1999, we sold 3,056,000 shares of series B convertible
preferred stock at a price of $5.2356 per share for a common
stock-equivalent purchase price of $1.75 per share.
-- In April 2000, we sold 7,579,449 shares of series C convertible
preferred stock at a price of $13.53 per share for a common
stock-equivalent purchase price of $9.02 per share.
The following directors, executive officers and holders of more than 5% of
our common stock participated in these transactions:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Gary J. Bowen............................ 250,000 52,047 37,285
Funds affiliated with Atlas Venture...... -- 1,806,860 223,043
Funds affiliated with Lazard Freres & Co.
LLC.................................... 1,970,000 381,465 288,669
Funds affiliated with New Enterprise
Associates............................. 3,740,000 780,713 465,661
TPG-QB, LLC.............................. -- -- 2,956,393
</TABLE>
For more detail on the shares held by these investors, see "Principal and
Selling Stockholders."
Investor Rights Agreement. In connection with our sales of preferred stock
we entered into an investor rights agreement pursuant to which some holders of
our common stock granted the preferred stock investors rights of first refusal
and co-sale. The investor rights agreement terminates upon the completion of
this offering. None of the rights granted pursuant to the investor rights
agreement may be exercised in connection with this offering.
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<PAGE> 48
Voting Agreement. In connection with our sales of preferred stock we
entered into a voting agreement pursuant to which some holders of our common
stock and holders of our preferred stock agreed to vote for the election of one
director specified by each of Atlas Venture, New Enterprise Associates, Lazard
Freres and Texas Pacific Group; two directors specified by certain holders of
common stock; and two directors specified by certain holders of common stock and
the holders of preferred stock. The voting agreement terminates upon the
completion of this offering.
STOCK TRANSACTIONS INVOLVING EXECUTIVE OFFICERS
At our inception, we issued 3,639,000 shares of common stock to each of
Messrs. Zona, Gwynne and Masucci, our founders, at a purchase price of $.00033
per share. When issued, these shares were subject to forfeiture based on
conditions relating to the continued employment of these executive officers. As
of September 30, 2000, 1,971,124 of the shares held by each of Messrs. Zona,
Gwynne and Masucci remained subject to repurchase by us. Our purchase rights
will expire as to all shares held by Messrs. Zona, Gwynne and Masucci upon the
closing of this offering.
In May 2000, Messrs. Zona, Gwynne and Masucci each sold 554,324 shares of
common stock to investors, including those set forth below at a purchase price
of $9.02 per share:
<TABLE>
<CAPTION>
INVESTOR NUMBER OF SHARES
-------- ----------------
<S> <C>
Gary Bowen.................................................. 56,200
Funds affiliated with Atlas Venture......................... 336,194
Funds affiliated with Lazard Freres & Co. LLC............... 435,115
Funds affiliated with New Enterprise Associates............. 833,050
</TABLE>
The number of shares of restricted stock beneficially held by each of the
named executive officers as of December 31, 1999 and their value as of December
31, 1999, based on the midpoint of the estimated public offering price range,
were as follows: Mr. Zona, 3,639,000 shares, valued at $ ; Mr. Masucci,
3,639,000 shares, valued at $ ; Mr. Gwynne, 3,639,000 shares, valued at
$ ; and Mr. Uram, 900,000 shares, valued at $ . The holders of
those shares of restricted stock will be entitled to receive any dividends that
we pay on our common stock.
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<PAGE> 49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 30, 2000, assuming the conversion
of all our outstanding preferred stock, and as adjusted to reflect the sale of
the shares of common stock in this offering, by:
-- each person that owns beneficially more than 5% of our common stock;
-- each of our directors;
-- the named executive officers;
-- all directors and executive officers as a group; and
-- the stockholders who will sell shares of our common stock in this
offering if the over-allotment option is exercised.
Unless otherwise indicated, each person named in the table has sole voting
investment power, or shares this power with his or her spouse, with respect to
all shares of common stock listed as owned by such person. The address of each
of our named executive officers and directors is c/o Quantum Bridge
Communications, Inc., 2 Tech Drive, Andover, Massachusetts 01810.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission. The
information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting or investment power and any shares as
to which the individual has the right to acquire beneficial ownership within 60
days after September 30, 2000 through the exercise of any stock option or other
right. The fact that we have included these shares, however, does not constitute
an admission that the named stockholder is a direct or indirect beneficial owner
of the shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER THE
SHARES BENEFICIALLY NUMBER OF OFFERING IF THE OVER-
OWNED BEFORE THE SHARES OFFERED ALLOTMENT OPTION IS
OFFERING IN OVER- EXERCISED IN FULL
--------------------- ALLOTMENT ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OPTION NUMBER PERCENT
-------------------------------- ----------- ------- -------------- ----------- -------
<S> <C> <C> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS:
New Enterprise Associates(1).... 15,093,680 27.0% -- 15,093,680 %
Lazard Freres & Co. LLC(2)...... 7,922,513 14.2% -- 7,922,513 %
Atlas Venture(3)................ 6,091,338 10.9% -- 6,091,338 %
TPG-QB, LLC(4).................. 4,434,589 7.9% -- 4,434,589 %
DIRECTORS AND EXECUTIVE OFFICERS:
Suzanne Hooper King(5).......... 15,123,680 27.1% -- 15,123,680 %
Russell Planitzer(2)............ 7,922,513 14.2% -- 7,922,513 %
Michael Feinstein(3)............ 6,091,338 10.9% -- 6,091,338 %
Jeffrey Shaw(4)................. 4,434,589 7.9% -- 4,434,589 %
Anthony A. Zona(6).............. 3,084,676 5.5% 107,964 2,976,712 %
Jeffrey A. Masucci(7)........... 3,078,151 5.5% 153,908 2,924,243 %
Jeffrey W. Gwynne(8)............ 3,048,676 5.5% 152,434 2,896,242 %
Gary Bowen...................... 1,018,268 1.8% -- 1,018,268 %
Randall B. Uram(9).............. 897,000 1.6% 44,850 852,150 %
Charles C. Snell................ 255,000 * -- 255,000 *
James Cullen(10)................ 50,000 * -- 50,000 *
All directors and executive
officers as a group (12
persons)(11).................. 45,003,891 80.5% 459,156 44,544,735 %
</TABLE>
45
<PAGE> 50
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER THE
SHARES BENEFICIALLY NUMBER OF OFFERING IF THE OVER-
OWNED BEFORE THE SHARES OFFERED ALLOTMENT OPTION IS
OFFERING IN OVER- EXERCISED IN FULL
--------------------- ALLOTMENT ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OPTION NUMBER PERCENT
-------------------------------- ----------- ------- -------------- ----------- -------
<S> <C> <C> <C> <C> <C>
OTHER SELLING STOCKHOLDERS(12)
John F. Keisling................ 600,000 1.0% 30,000 570,000 *
Timothy F. Steele(13)........... 600,000 1.0% 30,000 570,000 *
S. Martin Mastenbrook........... 241,500 * 12,075 229,425 *
Barry D. Colella................ 241,500 * 12,075 229,425 *
</TABLE>
------------
* Less than 1%
(1) Consists of 14,057,269 shares held by New Enterprise Associates VIII,
Limited Partnership, 698,491 shares held by New Enterprise Associates 9,
Limited Partnership, 322,920 shares held by NEA President's Fund, L.P. and
15,000 shares held by NEA Ventures 1998, L.P. Ms. Hooper King is a limited
partner of a general partner of New Enterprise Associates VIII, Limited
Partnership and New Enterprise Associates 9, Limited Partnership and a
limited partner of NEA Ventures 1998, L.P. Ms. Hooper King does not have
voting or dispositive power with respect to the shares held by the NEA
funds and disclaims beneficial ownership of these shares, except to the
extent of her direct pecuniary interest therein. New Enterprise Associates'
address is 1119 St. Paul St., Baltimore, MD 21202.
(2) Russell E. Planitzer is a managing director of Lazard Freres & Co. LLC. Mr.
Planitzer has voting and dispositive power with respect to the shares held
by Lazard Freres & Co. LLC, but disclaims beneficial ownership of these
shares, except to the extent of his direct pecuniary interest therein.
Lazard Freres & Co. LLC's address is 30 Rockefeller Plaza, New York, NY
10022.
(3) Consists of 4,662,495 shares held by Atlas Venture Fund IV, L.P., 676,807
shares held by Atlas Venture Parallel Fund IV-A, C.V., 676,807 shares held
by Atlas Venture Parallel Fund IV-B, C.V. and 75,229 shares held by Atlas
Venture Entrepreneurs' Fund IV, L.P. Atlas Venture Associates IV, L.P. is
the general partner of each of these entities. Atlas Venture Associates IV,
Inc. is the general partner of Atlas Venture Associates IV, L.P. Michael
Feinstein is a limited partner of Atlas Venture Associates IV, L.P. and
does not have voting or dispositive power with respect to the shares held
by the Atlas Venture entities. Mr. Feinstein disclaims beneficial ownership
of these shares, except to the extent of his direct pecuniary interest
therein. Atlas Venture's address is 222 Berkeley Street, Boston, MA 02116.
(4) TPG-QB, LLC's managing member is TPG Partners III LP whose sole general
partner is TPG Genpar III LP. TPG Genpar III LP's sole general partner is
TPG Advisors III, Inc. Jeffrey A. Shaw is a limited partner of TPG Genpar
III LP and vice president of TPG Advisors III, Inc. Mr. Shaw disclaims
beneficial ownership of all shares held by TPG-QB, LLC, except to the
extent of his direct pecuniary interest therein. TPG-QB, LLC's address is
201 Main Street, Suite 2420, Fort Worth, TX 76102.
(5) Includes shares held by New Enterprise Associates VIII, New Enterprise
Associates 9, Limited Partnership, Limited Partnership, NEA President's
Fund, L.P. and NEA Ventures 1998, L.P. as described in note 1. Ms. Hooper
King disclaims beneficial ownership of these shares, except to the extent
of her direct pecuniary interest therein.
(6) Includes 226,410 shares held in trust for the benefit of Mr. Zona's
children. Mr. Zona is not a trustee of these trusts and disclaims
beneficial ownership of these shares.
(7) Includes 186,525 shares held in trust for the benefit of Mr. Masucci's
children. Mr. Masucci is not a trustee of these trusts and disclaims
beneficial ownership of these shares.
(8) Includes 209,550 shares held in trust for the benefit of Mr. Gwynne's
children. Mr. Gwynne is not a trustee of these trusts and disclaims
beneficial ownership of these shares.
(9) Includes 9,000 shares held in trust for the benefit of Mr. Uram's children.
Mr. Uram is not a trustee of this trust and disclaims beneficial ownership
of these shares.
(10) Includes 37,500 shares held by a limited partnership owned or controlled by
Mr. Cullen and his family. Also includes 12,500 shares issuable upon the
exercise of options that are currently exercisable or exercisable within 60
days after September 30, 2000.
(11) Includes 33,542,120 shares held by funds affiliated with certain directors
as described in notes 1-4 above. Also includes 12,500 shares issuable upon
the exercise of options that are currently exercisable or exercisable
within 60 days after September 30, 2000.
(12) Each of the selling stockholders is an employee of Quantum Bridge.
(13) Includes 45,008 shares held in trust for the benefit of Mr. Steele's family
members. Mr. Steele is not a trustee or beneficiary of these trusts and
disclaims beneficial ownership of these shares. Includes 45,000 shares held
in trust for the benefit of Mr. Steele and Mr. Steele's family members.
46
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
GENERAL
We will file a restated certificate of incorporation at the closing of this
offering. It authorizes the issuance of up to 500,000,000 shares of common
stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par
value $.001 per share. The following is a summary of the material features of
our capital stock. For more detail, please see our restated certificate of
incorporation and restated by-laws to be effective after the closing of this
offering, filed as exhibits to the registration statement of which this
prospectus is a part.
COMMON STOCK
As of September 30, 2000, there were 55,846,595 shares of common stock
outstanding held by 124 stockholders of record. Based upon the number of shares
outstanding as of that date, the issuance of the shares of common stock offered
by us in this offering and the assumed exercise of warrants upon the closing of
this offering, there will be shares of common stock outstanding upon
the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock. Upon
our liquidation, dissolution or winding up, the holders of common stock are
entitled to receive proportionately our net assets available after the payment
of all debts and other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. Our outstanding shares of common
stock are, and the shares offered by us in this offering will be, when issued
and paid for, validly issued, fully paid and nonassessable. The rights, powers,
preferences and privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock which we may designate and issue in the future.
PREFERRED STOCK
Upon the closing of this offering, our board of directors will be
authorized, subject to any limitations prescribed by law, to issue up to
5,000,000 shares of preferred stock without stockholder approval. The preferred
stock may be issued in one or more series and on one or more occasions. Our
board of directors has the power to determine the number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges of the series of preferred stock. These rights and
privileges may include, among others, dividend rights, voting rights, redemption
provisions, liquidation preferences, conversion rights and preemptive rights.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock may
provide desirable flexibility in connection with possible acquisitions and other
corporate purposes, but could have the effect of making it more difficult for a
third party to acquire, or could discourage a third party from acquiring, a
majority of our outstanding voting stock. We have no present plans to issue any
shares of preferred stock.
DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years after the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A business combination
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. An interested stockholder generally is a
person who, together with affiliates and associates, owns, or within the prior
three years did own, 15% or more of the corporation's voting stock.
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<PAGE> 52
Our certificate of incorporation and by-laws provide:
-- that the board of directors be divided into three classes, as nearly
as equal in size as possible, with staggered three-year terms;
-- that directors may be removed only for cause by the affirmative vote
of the holders of at least 75% of the shares of our capital stock
entitled to vote; and
-- that any vacancy on the board of directors, however occurring,
including a vacancy resulting from an enlargement of the board of
directors, may only be filled by vote of a majority of the directors
then in office.
The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making it
more difficult for a third party to acquire us, which could have the effect of
discouraging a third party from attempting to do so.
Our certificate of incorporation and by-laws also provide that:
-- any action required or permitted to be taken by the stockholders at
an annual meeting or special meeting of stockholders may only be
taken if it is properly brought before such meeting and may not be
taken by written action in lieu of a meeting;
-- special meetings of the stockholders may only be called by the
chairman of our board of directors, president or full board of
directors; and
-- in order for any matter to be considered properly brought before a
meeting, a stockholder must comply with requirements regarding
advance notice to us.
These provisions could delay until the next stockholders' meeting
stockholder actions which are favored by the holders of a majority of our
outstanding voting securities. These provisions may also discourage another
person or entity from making a tender offer for our common stock, because such
person or entity, even if it acquired a majority of our outstanding voting
securities, would be able to take action as a stockholder, such as electing new
directors or approving a merger, only at a duly called stockholders meeting, and
not by written consent.
Delaware's corporation law provides generally that the affirmative vote of
a majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Our certificate of incorporation requires the affirmative vote of
the holders of at least 75% of the shares of our capital stock entitled to vote
to amend or repeal any of the foregoing provisions of our certificate of
incorporation. Generally, our by-laws may be amended or repealed by a majority
vote of the board of directors or the holders of a majority of the shares of our
capital stock issued and outstanding and entitled to vote. To amend our by-laws
regarding special meetings of stockholders, written actions of stockholders in
lieu of a meeting, and the election, removal and classification of members of
the board of directors requires the affirmative vote of the holders of at least
75% of the shares of our capital stock entitled to vote. The stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any series of preferred stock that might be
outstanding at the time any such amendments are submitted to stockholders.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
-- any breach of their duty of loyalty to the corporation or its
stockholders;
-- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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<PAGE> 53
-- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
-- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies, including injunctive relief or rescission.
Our certificate of incorporation provides that we shall indemnify our
directors and officers for actions authorized by the board of directors to the
fullest extent permitted by law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
49
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of our common stock.
Upon completion of this offering, we will have shares of common
stock outstanding. Of these shares, the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, except for any shares purchased by our affiliates as that term
is defined in Rule 144 under the Securities Act.
The remaining 55,846,595 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. On the date of this prospectus,
all but of these shares will be subject to lock-up agreements
described below. Upon expiration of the lock-up agreements 180 days after the
effective date of this offering, shares will become eligible for sale
pursuant to Rule 144(k), and the remaining shares will become eligible for sale
subject in most cases to the limitations of either Rule 144 or Rule 701. In
addition, holders of stock options could exercise the options and sell some or
all of the shares of common stock issued upon exercise as described below:
-- after the date of this prospectus;
-- after 180 days from the date of this prospectus, subject in most
cases to the limitations of either Rule 144 or Rule 701; and
-- after 180 days from the date of this prospectus without Rule 144
volume limitations.
Certain of the shares listed in the table above as not eligible for sale
until 180 days after the date of this prospectus may become eligible for sale
earlier as described below under "Lock-Up Agreements."
LOCK-UP AGREEMENTS
All of our executive officers and directors and certain of our stockholders
and option holders have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, they will not, during the period ending 180 days
after the date of this prospectus, directly or indirectly, sell, offer, contract
or grant any option to sell, pledge, transfer, establish an open put equivalent
position, or otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock, or securities exchangeable or
exercisable for or convertible into shares of common stock currently or
hereafter owned either of record or beneficially, or publicly announce their
intention to do any of the foregoing. However, if the reported last sale price
of the common stock on the Nasdaq National Market is at least twice the initial
public offering price on the 90th day after the date of this prospectus and for
any 20 of the 30 trading days immediately preceding the 90th day after the date
of this prospectus, then 25% of the shares, or options to purchase shares, of
our common stock subject to the 180-day restriction described above will be
released from these restrictions, provided that the stockholder is not an
executive officer or director of our company. The early release of these shares
will occur on:
-- the 91st day after the date of this prospectus, if we make a public
release of our quarterly or annual results during the period
beginning on the eleventh trading day after the date of this
prospectus and ending on the day prior to the 90th day after the date
of this prospectus; or
-- otherwise, the second trading day after the first public release of
our quarterly or annual results occurring on or after the 91st day
after the date of this prospectus.
Morgan Stanley & Co. Incorporated may in its sole discretion choose to
release any or all of these shares from such restrictions prior to the
expiration of such 90-day or 180-day period. However, Morgan Stanley & Co.
Incorporated does not have any current intention to release shares of common
stock subject to lock-up agreements.
50
<PAGE> 55
In addition, for a period of 180 days from the date of this prospectus and
subject to certain exceptions, we have agreed that our board of directors will
not consent to any offer for sale, sale or other disposition, or any transaction
which is designed or could be expected to result in the disposition by any
person, directly or indirectly, of any shares of common stock without the prior
written consent of Morgan Stanley & Co. Incorporated.
RULE 144
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned shares of our common stock for
at least one year would be entitled to sell in broker's transactions or to
market makers, within any three-month period, a number of shares that does not
exceed the greater of:
-- 1% of the number of shares of common stock then outstanding, which
will equal shares immediately after this offering; or
-- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to the sale.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice filing provisions of Rule 144.
Therefore, subject to the contractual lock-up restrictions described above,
144(k) shares may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchased shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to sell those shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period and notice filing requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of Rule 144.
Rule 701 applies to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, along with the shares acquired upon exercise of those options, including
options exercised after the issuer becomes subject to the reporting
requirements.
REGISTRATION ON FORM S-8
As of September 30, 2000, options to purchase 8,032,325 shares of common
stock were outstanding under our stock plans, of which 570,125 were exercisable.
Immediately after the completion of this offering, we intend to file one or more
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our
stock plans. These registration statements will automatically become effective
upon filing. Shares registered under these registration statements will, subject
to Rule 144 volume limitations applicable to affiliates and the contractual
lock-up restrictions described above, be available for sale in the open market,
except to the extent the shares are subject to vesting restrictions.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 39,287,173 shares of
common stock have the right to require us to register those shares under the
Securities Act. Beginning 180 days after the date of this offering and subject
to limitations in the registration rights agreement between us and these
holders, the holders of at least 40% of the registrable shares may require us to
register their shares for public resale. These holders
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<PAGE> 56
cannot require us to effect more than two of these demand registrations.
Furthermore, once we become eligible to use a Form S-3 registration statement,
these holders may, subject to specified limitations, require us to register all
or a portion of their registrable securities on Form S-3 after this offering.
These holders cannot require us to effect more than two of these demand
registrations in any twelve-month period. In addition, if we register any shares
of our common stock for our own account or for the account of other security
holders, the parties to the registration rights agreement are entitled to
include their registrable shares in the registration, subject to specified
limitations.
We will bear all fees, costs and expenses of these registrations, other
than underwriting discounts and commissions. Upon the effectiveness of any
registration statement filed to register our common stock, these shares would
become freely tradable, without any restrictions imposed by the Securities Act.
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<PAGE> 57
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc., Robertson
Stephens, Inc., UBS Warburg LLC and Lazard Freres & Co. LLC are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, the respective number of shares of common stock set forth opposite the
names of the underwriters below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------ ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
J.P. Morgan Securities Inc. ................................
Robertson Stephens, Inc. ...................................
UBS Warburg LLC.............................................
Lazard Freres & Co. LLC.....................................
--------
Total.............................................
========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus are
subject to the approval of specified legal matters by their counsel and to other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus, other than those shares of common
stock covered by the over-allotment option described below, if any shares are
taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and part to dealers at a price that represents
a concession not in excess of $ a share under the initial public
offering price. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives. Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan
Stanley & Co. Incorporated, may act as a selected dealer in this offering to
facilitate the distribution of shares of common stock over the Internet to its
eligible account holders.
We and our selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to an
aggregate of additional shares of common stock at the initial
public offering price listed on the cover page of this prospectus, less
underwriting discounts and commissions. The selling stockholders are obligated,
severally, to sell the first 543,306 of the additional shares of common stock,
and we are obligated to sell the remaining additional shares of
common stock, as well as any portion that the selling stockholders fail to sell.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent this option is exercised,
each underwriter will become obligated, subject to specified conditions, to
purchase approximately the same percentage of the additional shares of common
stock as the number listed next to the name of the underwriter in the preceding
table bears to the total number of shares of common stock listed next to the
names of all underwriters in the preceding table. If the underwriters exercise
the option in full, the total price to the public would be $ , the
total underwriters' discounts would be $ , the total proceeds to
Quantum Bridge, before deducting estimated offering expenses, would be
$ and the total proceeds to the selling stockholders would be
$ .
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<PAGE> 58
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Quantum Bridge, our directors and officers and certain stockholders and
option holders have each agreed that, without the prior consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, it, he or she will
not, during the period ending 180 days after the date of this prospectus:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common
stock, whether such shares or any such securities are then owned by
such person or are thereafter acquired directly from us; or
-- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
the common stock,
whether any such transaction described above is to be settled by delivery of
shares of common stock or such other securities, in cash or otherwise. If the
last reported sale price of our common stock on the Nasdaq National Market is at
least two times the initial public offering price per share on the 90th day
after the date of this prospectus and for any 20 of the 30 trading days
immediately preceding the 90th day after the date of this prospectus, then 25%
of the shares, or options to purchase shares, of common stock subject to the
180-day restriction described above will be released from these restrictions,
provided that the stockholder is not an executive officer or director of our
company. This early release will occur on:
-- the 91st day after the date of this prospectus, if we make a public
release of our quarterly or annual results during the period
beginning on the eleventh trading day after the date of this
prospectus and ending on the day prior to the 90th day after the date
of this prospectus; or
-- otherwise, the second trading day after the first public release of
our quarterly or annual results occurring on or after the 91st day
after the date of this prospectus.
The restrictions described in the paragraph above do not apply to:
-- the sale of shares of common stock to the underwriters;
-- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on
the date of this prospectus of which the underwriters have been
advised in writing or in connection with any acquisitions we make,
provided in each case that the persons receiving such shares agree to
the lock-up restrictions described above;
-- the grant of options to purchase common stock under our stock plans
described in this prospectus, so long as the option is not
exercisable during the 180-day period or the option holders agree to
the lock-up restrictions described above, or the issuance by us of
shares of common stock upon the exercise of any such option;
-- our issuance of shares of common stock under our 2000 employee stock
purchase plan; and
-- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after
the completion of this offering.
Morgan Stanley & Co. Incorporated may, in its sole discretion, at any time
and without prior notice or announcement release all or any portion of the
shares of common stock subject to the lock-up agreements.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of our common stock. Specifically, the underwriters may sell more shares
of common stock than they are obligated to purchase under the underwriting
agreement, creating a short position in the common stock for their own account.
A short sale is covered if the short position is no greater than the number of
shares of common stock available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered short sale by
exercising the over-allotment option or purchasing shares in the open market. In
determining the source of shares of common stock to close out a
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<PAGE> 59
covered short sale, the underwriters will consider, among other things, the open
market price of shares of common stock compared to the price available under the
over-allotment option. The underwriters may sell shares in excess of the
over-allotment option, creating a naked short position. The underwriters also
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 our common stock
in the open market after pricing that could adversely affect investors who
purchase in this offering. As an additional means of facilitating this offering,
the underwriters may bid for, and purchase, shares of our common stock in the
open market to stabilize the price of our common stock. The underwriting
syndicate may also reclaim selling concessions allowed to an underwriter or a
dealer for distributing our common stock in this offering, if the syndicate
repurchases previously distributed common stock to cover syndicate short
positions or to stabilize the price of our common stock. These activities may
raise or maintain the market price of our common stock above independent market
levels or prevent or retard a decline in the market price of our common stock.
The underwriters are not required to engage in these activities, and may end any
of these activities at any time.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act and
to contribute to payments the underwriters may be required to make in respect
thereof.
At our request, the underwriters have reserved for sale up to 10% of the
shares of our common stock offered by this prospectus for sale at the initial
public offering price for our directors, officers, employees, business
associates and related persons. The number of shares of our common stock
available for sale to the general public will be reduced to the extent that
these persons purchase the reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered by this prospectus.
In April 2000, we sold shares of our series C preferred stock in a private
placement to investors at a price of $13.53 per share. Each share of series C
convertible preferred stock will automatically convert into 1.5 shares of common
stock upon the closing of this offering. Therefore, the common stock equivalent
purchase price for these shares was $9.02 per share. The investors in this
private placement included the following entities affiliated with underwriters
in this offering:
<TABLE>
<CAPTION>
SHARES OF
SERIES C CONVERTIBLE AGGREGATE
INVESTOR PREFERRED STOCK PURCHASE PRICE
-------- -------------------- --------------
<S> <C> <C>
Affiliates of Morgan Stanley & Co. Incorporated............. 739,098 $9,999,996
Affiliates of J.P. Morgan Securities Inc.................... 110,865 $1,500,003
Affiliates of Lazard Freres & Co. LLC....................... 288,669 $3,905,691
</TABLE>
Russell E. Planitzer, a member of our board of directors, is a managing
principal of Lazard Technology Partners.
In addition, in May 2000 Lazard Technology Partners LP, Lazard Technology
Partners LLC, Lazard Technology Investors (1999) LLC and Lazard Technology
Partners II purchased 435,115 shares of common stock from some of our executive
officers for $9.02 per share.
The funds affiliated with Lazard Freres & Co. LLC, one of the
representatives of the underwriters, beneficially own in the aggregate more than
10% of our outstanding shares of common stock, assuming conversion of all
outstanding shares of preferred stock into common stock in connection with this
offering. Accordingly, this offering must comply with the requirements of Rule
2710(c)(8) of The National Association of Securities Dealers Inc. Conduct Rules.
This rule provides generally that if an underwriter, together with its
affiliates, owns more than 10% of our outstanding common stock, then the initial
public offering price of the common stock may not be higher than recommended by
a "qualified independent underwriter" meeting specified standards. Accordingly,
Morgan Stanley & Co. Incorporated is assuming the responsibilities of acting as
the qualified independent underwriter in pricing this offering and conducting
due
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<PAGE> 60
diligence. The initial public offering price of the shares of our common stock
will be no higher than the price recommended by Morgan Stanley & Co.
Incorporated.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for shares of our
common stock. Consequently, the initial public offering price for the shares of
our common stock will be determined by negotiations between Quantum Bridge and
the representatives of the underwriters. The material factors to be considered
in determining the initial public offering price include the future prospects of
Quantum Bridge and its industry in general, sales, operating results and other
financial information of Quantum Bridge in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and the
financial and operating information of companies engaged in activities similar
to those of Quantum Bridge. The estimated initial public offering price range
indicated on the cover page of this preliminary prospectus is subject to change
as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts and for the underwriters
by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for the
period from inception (October 22, 1998) to December 31, 1998 and the year ended
December 31, 1999 included in this prospectus and elsewhere in the registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules that are part of the registration statement. Any
statements made in this prospectus as to the contents of any contract, agreement
or other document are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the registration
statement, we refer you to the exhibit for a more complete description of the
matter involved, and each statement in this prospectus shall be deemed qualified
in its entirety by this reference. You may read and copy all or any portion of
the registration statement or any reports, statements or other information in
the files at the following public reference facilities of the Securities and
Exchange Commission:
<TABLE>
<S> <C> <C>
Washington, D.C. New York, New York Chicago, Illinois
Room 1024, Judiciary Plaza Seven World Trade Center 500 West Madison Street
450 Fifth Street, N.W. Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
You can request copies of these documents upon payment of a duplicating fee
by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for
further information on the operation of its public reference rooms. Our filings,
including the Registration Statement, will also be available to you on the
Internet web site maintained by the Commission at www.sec.gov.
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<PAGE> 61
QUANTUM BRIDGE COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1998 and 1999, September
30, 2000 (unaudited) and pro forma as of September 30,
2000 (unaudited).......................................... F-3
Statements of Operations for the period from inception
(October 22, 1998) to December 31, 1998, the year ended
December 31, 1999 and for the nine months ended September
30, 1999 and 2000 (unaudited)............................. F-4
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the period from
inception (October 22, 1998) to December 31, 1998, the
year ended December 31, 1999, the nine months ended
September 30, 2000 (unaudited) and pro forma September 30,
2000 (unaudited).......................................... F-5
Statements of Cash Flows for the period from inception
(October 22, 1998) to December 31, 1998, the year ended
December 31, 1999 and the nine months ended September 30,
1999 and 2000 (unaudited)................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Quantum Bridge Communications, Inc.:
We have audited the accompanying balance sheets of Quantum Bridge
Communications, Inc. (a Delaware Corporation) (the Company) as of December 31,
1998 and 1999 and the related statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit) and cash flows for the period
from inception (October 22, 1998) through December 31, 1998 and for the year
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1998 and 1999 and the results of its operations and its cash flows for the
period from inception (October 22, 1998) through December 31, 1998 and for the
year ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 14, 2000 (except for the matter
discussed in Note 8, as to which the date
is April 11, 2000)
F-2
<PAGE> 63
QUANTUM BRIDGE COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------ SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
---------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $5,732,302 $15,222,100 $ 34,811,290 $ 34,811,290
Short-term investments............................. -- -- 60,449,702 60,449,702
Accounts receivable................................ -- -- 714,538 714,538
Inventory.......................................... -- -- 3,395,815 3,395,815
Prepaid expenses and other current assets.......... 40,406 302,269 2,773,368 2,773,368
---------- ----------- ------------ ------------
Total current assets........................ 5,772,708 15,524,369 102,144,713 102,144,713
Property and equipment, net.......................... 25,660 1,763,016 9,198,440 9,198,440
Restricted cash equivalents.......................... 80,000 120,000 1,370,000 1,370,000
---------- ----------- ------------ ------------
$5,878,368 $17,407,385 $112,713,153 $112,713,153
========== =========== ============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 32,760 $ 702,703 $ 6,705,337 $ 6,705,337
Accrued expenses................................... 36,906 354,542 3,476,891 3,476,891
Notes payable...................................... -- 303,983 1,328,269 1,328,269
---------- ----------- ------------ ------------
Total current liabilities................... 69,666 1,361,228 11,510,497 11,510,497
Notes payable, net of current portion................ -- 1,344,365 5,445,338 5,445,338
Deferred rent........................................ -- 49,832 263,126 263,126
Commitments (Note 7)
Redeemable convertible preferred stock, $0.001 par
value:
Authorized--18,000,000 shares
Issued and outstanding--6,000,000 shares, 9,306,000
shares and 16,885,449 shares at December 31, 1998
and 1999, and September 30, 2000, respectively
(at redemption value); none authorized, issued
and outstanding, pro forma....................... 6,056,087 23,276,402 131,020,819 --
Stockholders' equity (deficit):
Common stock, $0.001 par value--
Authorized--67,500,000 shares
Issued and outstanding--13,410,000 shares,
16,250,700 shares and 16,559,422 shares at
December 31, 1998 and 1999, and September 30,
2000, respectively; 55,846,595 shares pro
forma.......................................... 13,410 16,251 16,559 55,846
Additional paid-in capital......................... 17,790 370,739 29,984,614 160,966,146
Common stock warrants.............................. -- -- 1,223,428 1,223,428
Deferred compensation.............................. -- (125,938) (23,095,754) (23,095,754)
Other comprehensive loss........................... -- -- (24,338) (24,338)
Accumulated deficit................................ (278,585) (8,885,494) (43,631,136) (43,631,136)
---------- ----------- ------------ ------------
Total stockholders' equity (deficit)........ (247,385) (8,624,442) (35,526,627) 95,494,192
---------- ----------- ------------ ------------
$5,878,368 $17,407,385 $112,713,153 $112,713,153
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 64
QUANTUM BRIDGE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 22, NINE MONTHS ENDED
1998) THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, --------------------------
1998 1999 1999 2000
------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................. $ -- $ -- $ -- $ 654,121
Cost of revenue..................... -- -- -- 530,984
--------- ----------- ----------- ------------
Gross profit.............. -- -- -- 123,137
--------- ----------- ----------- ------------
Operating expenses:
Research and development(1)....... 98,463 5,809,835 3,406,840 16,599,157
Sales and marketing(1)............ 31,700 1,200,530 594,509 6,678,534
General and administrative(1)..... 72,510 886,319 672,335 1,779,768
Stock-based consideration......... -- 118,112 18,900 7,655,424
--------- ----------- ----------- ------------
Total operating
expenses................ 202,673 8,014,796 4,692,584 32,712,883
--------- ----------- ----------- ------------
Loss from operations...... (202,673) (8,014,796) (4,692,584) (32,589,746)
Interest income..................... 26,715 460,192 235,794 3,452,047
Interest and other expense.......... (975) (50,635) (24,681) (290,675)
--------- ----------- ----------- ------------
Net loss.................. (176,933) (7,605,239) (4,481,471) (29,428,374)
Accretion of dividends on preferred
stock............................. (56,087) (970,322) (524,442) (5,194,410)
--------- ----------- ----------- ------------
Net loss attributable to common
stockholders...................... $(233,020) $(8,575,561) $(5,005,913) $(34,622,784)
========= =========== =========== ============
Net loss per common share:
Basic and diluted................. $ (0.14) $ (2.94) $ (1.80) $ (5.70)
========= =========== =========== ============
Pro forma basic and diluted (Note
1(h)).......................... $ (0.31) $ (0.71)
=========== ============
Weighted average common shares
outstanding:
Basic and diluted................. 1,691,366 2,920,490 2,781,646 6,078,312
========= =========== =========== ============
Pro forma basic and diluted (Note
1(h)).......................... 24,903,635 41,216,152
=========== ============
(1)Excludes non-cash, stock-based
consideration as follows (Note
10(c)):
Research and development.......... $ -- $ 39,371 $ 6,300 $ 2,951,319
Sales and marketing............... -- 39,371 6,300 3,318,778
General and administrative........ -- 39,370 6,300 1,385,327
--------- ----------- ----------- ------------
$ -- $ 118,112 $ 18,900 $ 7,655,424
========= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 65
QUANTUM BRIDGE COMMUNICATIONS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDER'S EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE -----------------------------------------------------------------
PREFERRED STOCK COMMON STOCK
--------------------------- ---------------------- ADDITIONAL COMMON
CARRYING $ 0.001 PAID-IN STOCK DEFERRED
SHARES AMOUNT SHARES PAR VALUE CAPITAL WARRANTS COMPENSATION
----------- ------------- ---------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Founders' Shares.... -- $ -- 12,600,000 $12,600 $ (8,400) $ -- $ --
Sale of common stock.......... -- -- 810,000 810 26,190 -- --
Sale of Series A redeemable
convertible preferred stock,
net of issuance costs of
$45,565..................... 6,000,000 6,000,000 -- -- -- -- --
Accretion of dividends on
redeemable convertible
preferred stock............. -- 56,087 -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------------- ---------- ------- ------------ ---------- ------------
Balance, December 31, 1998...... 6,000,000 6,056,087 13,410,000 13,410 17,790 -- --
Exercise of common stock
options..................... -- -- 303,000 303 26,847 -- --
Sale of common stock.......... -- -- 2,537,700 2,538 82,052 -- --
Sale of Series A redeemable
convertible preferred
stock....................... 250,000 250,000 -- -- -- -- --
Sale of Series B redeemable
convertible preferred stock,
net of issuance costs of
$31,348..................... 3,056,000 15,999,993 -- -- -- -- --
Deferred compensation related
to stock options granted to
non-employees............... -- -- -- -- 244,050 -- (244,050)
Amortization of deferred
compensation................ -- -- -- -- -- -- 118,112
Accretion of dividends on
redeemable convertible
preferred stock............. -- 970,322 -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------------- ---------- ------- ------------ ---------- ------------
Balance, December 31, 1999...... 9,306,000 23,276,402 16,250,700 16,251 370,739 -- (125,938)
Exercise of common stock
options..................... -- -- 308,722 308 212,063 -- --
Issuance of common stock
warrants.................... -- -- -- -- -- 1,223,428 (37,122)
Sale of Series C redeemable
convertible preferred stock,
net of issuance costs of
$122,858.................... 7,579,449 102,550,007 -- -- -- -- --
Deferred compensation related
to stock options granted to
non-employees............... -- -- -- -- 3,817,799 -- (3,817,799)
Deferred compensation related
to stock options granted to
employees................... -- -- -- -- 25,584,013 -- (25,584,013)
Amortization of deferred
compensation................ -- -- -- -- -- -- 6,469,118
Accretion of dividends on
redeemable convertible
preferred stock............. -- 5,194,410 -- -- -- -- --
Unrealized loss on short-term
investments................. -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------------- ---------- ------- ------------ ---------- ------------
Balance, September 30, 2000
(unaudited)................... 16,885,449 131,020,819 16,559,422 16,559 29,984,614 1,223,428 (23,095,754)
=========== ============= ========== ======= ============ ========== ============
Conversion of redeemable
convertible preferred stock
into common stock
(unaudited)................. (16,885,449) (131,020,819) 39,287,173 39,287 130,981,532 -- --
----------- ------------- ---------- ------- ------------ ---------- ------------
Pro Forma Balance, September 30,
2000 (unaudited).............. -- $ -- 55,846,595 $55,846 $160,966,146 $1,223,428 $(23,095,754)
=========== ============= ========== ======= ============ ========== ============
<CAPTION>
STOCKHOLDER'S EQUITY (DEFICIT)
--------------------------------------------
TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED EQUITY
INCOME (LOSS) DEFICIT (DEFICIT)
------------- ------------ -------------
<S> <C> <C> <C>
Issuance of Founders' Shares.... $ -- $ -- $ 4,200
Sale of common stock.......... -- -- 27,000
Sale of Series A redeemable
convertible preferred stock,
net of issuance costs of
$45,565..................... -- (45,565) (45,565)
Accretion of dividends on
redeemable convertible
preferred stock............. -- (56,087) (56,087)
Net loss...................... -- (176,933) (176,933)
-------- ------------ ------------
Balance, December 31, 1998...... -- (278,585) (247,385)
Exercise of common stock
options..................... -- -- 27,150
Sale of common stock.......... -- -- 84,590
Sale of Series A redeemable
convertible preferred
stock....................... -- -- --
Sale of Series B redeemable
convertible preferred stock,
net of issuance costs of
$31,348..................... -- (31,348) (31,348)
Deferred compensation related
to stock options granted to
non-employees............... -- -- --
Amortization of deferred
compensation................ -- -- 118,112
Accretion of dividends on
redeemable convertible
preferred stock............. -- (970,322) (970,322)
Net loss...................... -- (7,605,239) (7,605,239)
-------- ------------ ------------
Balance, December 31, 1999...... -- (8,885,494) (8,624,442)
Exercise of common stock
options..................... -- -- 212,371
Issuance of common stock
warrants.................... -- -- 1,186,306
Sale of Series C redeemable
convertible preferred stock,
net of issuance costs of
$122,858.................... -- (122,858) (122,858)
Deferred compensation related
to stock options granted to
non-employees............... -- -- --
Deferred compensation related
to stock options granted to
employees................... -- -- --
Amortization of deferred
compensation................ -- -- 6,469,118
Accretion of dividends on
redeemable convertible
preferred stock............. -- (5,194,410) (5,194,410)
Unrealized loss on short-term
investments................. (24,338) -- (24,338)
Net loss...................... -- (29,428,374) (29,428,374)
-------- ------------ ------------
Balance, September 30, 2000
(unaudited)................... (24,338) (43,631,136) (35,526,627)
======== ============ ============
Conversion of redeemable
convertible preferred stock
into common stock
(unaudited)................. -- -- 131,020,819
-------- ------------ ------------
Pro Forma Balance, September 30,
2000 (unaudited).............. $(24,338) $(43,631,136) $ 95,494,192
======== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 66
QUANTUM BRIDGE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 22, NINE MONTHS ENDED
1998) THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, --------------------------
1998 1999 1999 2000
------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss....................................... $ (176,933) $(7,605,239) $(4,481,471) $(29,428,374)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization................ 397 233,232 113,972 973,175
Stock-based consideration.................... -- 118,112 18,900 7,655,424
Loss on disposal of fixed assets............. -- -- -- 41,340
Amortization of discount on short-term
investments................................ -- -- -- (1,185,193)
Deferred rent................................ -- 49,832 10,415 213,293
Changes in assets and liabilities--
Accounts receivable........................ -- -- -- (714,538)
Inventory.................................. -- -- -- (3,395,815)
Prepaid expenses and other current
assets.................................. (40,406) (261,863) (86,928) (1,627,099)
Accounts payable........................... 32,760 669,942 720,929 6,002,635
Accrued expenses........................... 36,906 317,636 112,493 827,544
---------- ----------- ----------- ------------
Net cash used in operating activities... (147,276) (6,478,348) (3,591,690) (20,637,608)
---------- ----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment............. (26,057) (1,970,587) (1,149,243) (6,999,137)
Purchase of short-term investments............. -- -- -- (59,288,843)
Increase in restricted cash.................... (80,000) (40,000) (40,000) (1,250,000)
---------- ----------- ----------- ------------
Net cash used in investing activities... (106,057) (2,010,587) (1,189,243) (67,537,980)
---------- ----------- ----------- ------------
Cash Flows from Financing Activities:
Net proceeds from sale of redeemable
convertible preferred stock.................. 5,954,435 16,218,645 16,218,645 102,427,149
Proceeds from sale of common stock and exercise
of common stock options...................... 31,200 111,740 98,913 212,371
Borrowings on notes payable.................... -- 1,648,348 804,940 5,291,880
Payments on notes payable...................... -- -- -- (166,622)
---------- ----------- ----------- ------------
Net cash provided by financing
activities............................ 5,985,635 17,978,733 17,122,498 107,764,778
---------- ----------- ----------- ------------
Net increase in cash and cash equivalents........ 5,732,302 9,489,798 12,341,565 19,589,190
Cash and cash equivalents, beginning of period... -- 5,732,302 5,732,302 15,222,100
---------- ----------- ----------- ------------
Cash and cash equivalents, end of period......... $5,732,302 $15,222,100 $18,073,867 $ 34,811,290
========== =========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest....... $ 800 $ 49,771 $ 17,781 $ 199,238
========== =========== =========== ============
Supplemental disclosure of noncash investing and
financing activities:
Deferred compensation related to stock
options...................................... $ -- $ 244,050 $ 59,020 $ 29,401,812
========== =========== =========== ============
Accretion of dividends on redeemable
convertible preferred stock.................. $ 56,087 $ 970,322 $ 524,442 $ 5,194,410
========== =========== =========== ============
Fair value of common stock warrants issued..... $ -- $ -- $ -- $ 37,122
========== =========== =========== ============
Equipment acquired that is included in accrued
expenses..................................... $ -- $ -- $ -- $ 1,435,680
========== =========== =========== ============
Unrealized loss on short-term investments...... $ -- $ -- $ -- $ (24,338)
========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 67
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Quantum Bridge Communications, Inc. (the "Company") was incorporated as a
Delaware corporation on October 22, 1998 and is engaged in the development,
design and marketing of optical access networking equipment. The Company sells
its solutions to service providers, including cable companies, competitive local
exchange carriers, incumbent local exchange carriers, Internet service providers
and utility companies.
The Company incurred net losses of approximately $177,000, $7.6 million and
$29.4 million for the period from inception (October 22, 1998) through December
31, 1998, the year ended December 31, 1999 and the nine months ended September
30, 2000, respectively. At September 30, 2000, the Company had an accumulated
deficit of approximately $43.6 million. In August 2000, the Company commenced
commercial shipment of its products and emerged from the development stage.
However, the Company continues to be subject to the risks and challenges similar
to other companies in a similar stage of development. These risks include, but
are not limited to, the Company's ability to successfully develop and sell its
products, technological change, dependence on key individuals, dependence on
contract manufacturers and key suppliers of integral components, the ability to
obtain adequate financing to support growth, and competition from substitute
products and larger companies with greater financial, technical, management and
marketing resources.
The accompanying financial statements reflect the application of certain
significant accounting policies as described in this note and elsewhere in these
notes to the financial statements.
(a) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of September 30, 2000, the statements of
operations and cash flows for the nine months ended September 30, 1999 and 2000
and the statement of redeemable convertible preferred stock and stockholder's
equity (deficit) for the nine months ended September 30, 2000 are unaudited. In
the opinion of management, these 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 the fair
presentation of the Company's financial position, operating results and cash
flows for such periods. Operating results for the nine-month period ended
September 30, 2000 are not necessarily indicative of results to be expected for
the full year 2000 or any future period. The data disclosed in the notes to
these financial statements for these periods are unaudited.
(c) UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma balance sheet and the unaudited pro forma statement
of redeemable convertible preferred stock and stockholder's equity (deficit) as
of September 30, 2000 reflect the automatic conversion of all outstanding shares
of Series A, Series B, and Series C redeemable convertible preferred stock into
39,287,173 shares of common stock that will occur upon the closing of the
Company's proposed initial public offering.
F-7
<PAGE> 68
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
(d) REVENUE RECOGNITION
The Company derives its revenue from sales of optical access networking
equipment, as well as from service fees for the installation, technical support
and maintenance of its products and other consulting services.
The Company follows the provisions of the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition. Accordingly, the Company recognizes revenue from product sales upon
shipment, provided that there are no uncertainties regarding customer
acceptance, there is persuasive evidence of an arrangement, the sales price is
fixed or determinable and collection of the related receivable is probable. If
uncertainties exist, the Company recognizes revenue when those uncertainties are
resolved. In multiple element arrangements that contain product and service
elements, the Company uses the residual method prescribed by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions, when vendor-specific objective evidence of fair value does not
exist for one of the delivered elements in the arrangement. Under the residual
method, the fair value of the undelivered elements is deferred and subsequently
recognized.
The Company offers certain installation, implementation and support
services. These services are not essential to the functionality of the Company's
products. Revenue from installation and implementation services is recognized as
the services are performed. Revenue from support arrangements is recognized
ratably over the terms of the support contracts. Amounts collected or billed
prior to satisfying the above revenue recognition criteria are reflected as
deferred revenue.
Hardware warranty costs are estimated and recorded by the Company at the
time of product revenue recognition.
(e) CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. Cash equivalents at
December 31, 1998 and 1999 and September 30, 2000 include investment-grade
commercial paper.
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company's short-term investments are classified as
available-for-sale and are recorded at fair market value. As of September 30,
2000, short-term investments consisted of the following:
<TABLE>
<CAPTION>
AVERAGE
REMAINING FAIR
AVAILABLE FOR MATURITIES AMORTIZED UNREALIZED MARKET
SALE SECURITIES (DAYS) COST GAIN/(LOSS) VALUE
----------------------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial Paper............. 78 $27,305,334 $(29,172) $27,276,162
U.S. Government.............. 62 20,410,357 (2,557) 20,407,800
Obligations Corporate
Bonds...................... 186 12,758,349 7,391 12,765,740
----------- -------- -----------
Total.............. $60,474,040 $(24,338) $60,449,702
=========== ======== ===========
</TABLE>
During the period from inception (October 22, 1998) through December 31,
1998, the year ended December 31, 1999 and the nine month period ended September
30, 2000, the Company had no realized gains or losses.
F-8
<PAGE> 69
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
(f) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation by charging to operations on a
straight-line basis amounts estimated to allocate the cost of the assets over
their estimated useful lives, as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
---------------------------------------------------- ---------------------------
<S> <C>
Test equipment...................................... 3 years
Computer and office equipment....................... 3 years
Purchased software.................................. 3 years
Furniture and fixtures.............................. 5 years
Leasehold improvements.............................. Shorter of life of lease or
useful life of asset
</TABLE>
The costs of significant additions and improvements are capitalized and
depreciated while expenditures for maintenance and repairs are charged to
expense as incurred.
(g) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
The costs of the development of hardware products and enhancements to
existing hardware products are expensed as incurred. In accordance with SFAS No.
86, Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed, the costs for the development of new software that is
included in the hardware products and substantial enhancements to such existing
software are expensed as incurred until technological feasibility has been
established, at which time any additional qualified costs would be capitalized.
The Company determines that technological feasibility has been established when
a working model of the software has been completed. Because the Company believes
its current process for developing software is completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
(h) NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earnings per Share, for all periods presented. In accordance with SFAS
No. 128, basic and diluted net loss per common share was determined by dividing
net loss attributable to common stockholders by the weighted average common
shares outstanding during the period, less shares subject to repurchase. For
periods in which a net loss has been incurred, basic and diluted net loss per
share are the same because all outstanding common stock equivalents have been
excluded, as they are considered antidilutive.
Common stock equivalents include (i) shares of common stock issuable upon
the exercise of outstanding stock options and warrants, (ii) shares of common
stock issuable upon the conversion of outstanding redeemable convertible
preferred stock and (iii) shares of common stock subject to repurchase by the
F-9
<PAGE> 70
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
Company under restricted common stock agreements. The calculations of diluted
weighted average shares outstanding exclude the following potential common stock
equivalents:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 22, NINE MONTHS ENDED
1998) THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------------
1998 1999 1999 2000
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Stock options............... -- 3,034,800 2,331,300 8,032,325
Stock warrants.............. -- -- -- 443,458
Redeemable convertible
preferred stock........... 18,000,000 27,918,000 27,918,000 39,287,173
Unvested restricted common
stock..................... 10,680,750 12,310,202 13,218,450 8,862,281
---------- ---------- ---------- ----------
28,680,750 43,263,002 43,467,750 56,625,237
========== ========== ========== ==========
</TABLE>
In accordance with Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 98, Earnings per Share in an Initial Public Offering,
the Company has determined that there were no nominal issuances of the Company's
common stock since inception.
The Company's historical capital structure is not indicative of its capital
structure after the proposed initial public offering due to the automatic
conversion of all shares of redeemable convertible preferred stock into common
stock concurrent with the closing of the Company's proposed initial public
offering. Accordingly, pro forma net loss per share is presented for the year
ended December 31, 1999 and the nine-month period ended September 30, 2000. Pro
forma net loss per share is computed by dividing the net loss for the period by
the pro forma weighted average common shares outstanding, assuming the
conversion of all outstanding shares of Series A, Series B and Series C
redeemable convertible preferred stock into common stock upon the closing of the
Company's proposed initial public offering using the if-converted method from
the respective dates of issuance.
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of unaudited pro forma basic
and diluted net loss per share:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Shares used in computing basic and diluted net loss
per share........................................... 2,920,490 6,078,312
Add--Weighted average common shares issued upon the
conversion of redeemable convertible preferred
stock............................................... 21,983,145 35,137,840
---------- ----------
Shares used in computing pro forma basic and diluted
net loss per share.................................. 24,903,635 41,216,152
========== ==========
</TABLE>
(i) CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company's principal credit risk relates to its cash, cash
equivalents, accounts receivable and short-term investments. The Company
mitigates its risk with respect to short-term
F-10
<PAGE> 71
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
investments by investing in commercial grade paper. The Company has no
significant off-balance sheet concentrations such as foreign exchange contracts,
options contracts, or other foreign hedging arrangements. For the nine-month
period ended September 30, 2000, the Company had two customers that accounted
for 100% of revenue and at September 30, 2000, the two customers accounted for
100% of accounts receivable. To reduce risk, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
credit risk exposure is mitigated. The Company has not experienced any material
credit losses.
(j) SINGLE SOURCE SUPPLIERS AND CONTRACT MANUFACTURERS
The Company relies on single or limited sources for supply of certain key
components used in the Company's products, and the Company relies on a small
number of contract manufacturers for the assembly of its products. The failure
of a supplier, including a contract manufacturer, to deliver on schedule could
delay or interrupt the Company's delivery of products and thereby adversely
affect the Company's revenues and operating results.
(k) COMPREHENSIVE LOSS
SFAS No. 130, Reporting Comprehensive Income, establishes standards for the
reporting and display of comprehensive income (loss) and its components.
Comprehensive income (loss), as defined, includes all changes in equity
(deficit) during a period from nonowner sources. The comprehensive loss for the
period from inception (October 22, 1998) through December 31, 1998 and for the
year ended December 31, 1999 does not differ from the reported net loss. For the
nine months ended September 30, 2000, comprehensive loss was approximately
$29,453,000 and differed from the Company's reported net loss due to unrealized
holding losses on available-for-sale securities.
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of the Company's financial
instruments, which consist of cash and cash equivalents, short-term investments,
accounts receivable, restricted cash, notes payable and accounts payable. The
estimated fair value of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximates their carrying value at September
30, 2000 due to the short-term nature of these instruments. The fair value of
the Company's short-term investments at September 30, 2000 is disclosed in Note
1(e) to the financial statements and approximates the carrying value at
September 30, 2000. The fair value of the Company's notes payable approximates
their carrying value due to the fact that the stated interest rate fluctuates
with the bank's prime rate.
(m) STOCK-BASED COMPENSATION FOR GOODS AND SERVICES
The Company accounts for stock-based compensation arrangements with
employees in accordance with provisions of Accounting Principles Board (APB) No.
25, Accounting for Stock Issued to Employees, and follows the provisions of SFAS
No. 123, Accounting for Stock-Based Compensation and FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation -- An
Interpretation of APB Opinion No. 25, 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, for non-
employee stock-based awards.
(n) SEGMENT AND GEOGRAPHIC INFORMATION
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information regarding operating
segments and for related disclosures about products
F-11
<PAGE> 72
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
and services and geographical areas. Operating segments are determined based on
the way management organizes its business for making operating decisions and
assessing performance. The Company has determined that it conducts its
operations in one business segment, which is the sale and service of optical
access networking equipment. The Company had no revenue from customers outside
of the United States during the nine-month period ended September 30, 2000. All
of the Company's assets are located within the United States.
(o) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--An Interpretation of APB Opinion No. 25. The interpretation
clarifies the application of APB Opinion No. 25 in specified events, as defined.
The interpretation is effective July 1, 2000, but covers certain events
occurring during the period after December 15, 1998, but before the effective
date. The adoption of this pronouncement did not have a significant impact on
the Company's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition. This bulletin summarizes certain views of the Staff on
applying accounting principles generally accepted in the United States to
revenue recognition in financial statements. The Company believes that its
current revenue recognition policy complies with SAB No. 101.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. The Company currently does not
engage in trading market risk sensitive instruments or purchasing hedging
instruments or "other than trading" instruments that are likely to expose them
to market risk, whether interest rate, foreign currency exchange, commodity
price or equity price risk. The Company may do so in the future to the extent
that operations expand domestically and abroad. The Company will adopt SFAS No.
133, as required by SFAS No. 137, in fiscal year 2001. The adoption of SFAS No.
133 is not expected to have a material impact on the Company's financial
condition or results of operations.
(2) INVENTORY
Inventory principally includes the cost of raw materials, sub-assemblies
and the cost of third-party contract manufacturers. Inventory is stated at the
lower of cost (first-in, first-out) or market and consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1998 1999 2000
---- ---- -------------
<S> <C> <C> <C>
Raw materials......................................... $-- $-- $2,264,123
Finished goods........................................ -- -- 1,131,692
-- -- ----------
$-- $-- $3,395,815
== == ==========
</TABLE>
F-12
<PAGE> 73
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1998 1999 2000
------- ---------- -------------
<S> <C> <C> <C>
Test equipment................................ $ -- $ 644,225 $3,898,226
Computer and office equipment................. 13,272 539,508 1,584,721
Purchased software............................ 12,485 420,677 1,084,013
Furniture and fixtures........................ 300 221,876 350,608
Leasehold improvements........................ -- 170,358 336,760
Construction-in-progress...................... -- -- 3,126,802
------- ---------- ----------
26,057 1,996,644 10,381,130
Less accumulated depreciation and
amortization................................ 397 233,628 1,182,690
------- ---------- ----------
$25,660 $1,763,016 $9,198,440
======= ========== ==========
</TABLE>
Construction-in-progress represents costs incurred to build out new
facilities that have not been placed in service. Once placed in service, such
costs will be classified as leasehold improvements and amortized over the
shorter of the life of the lease or the estimated useful life of the assets.
(4) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
------- -------- -------------
<S> <C> <C> <C>
Accrued construction-in-progress................ $ -- $ -- $2,294,803
Payroll and payroll-related..................... -- 111,375 841,456
Other........................................... 36,906 243,167 340,632
------- -------- ----------
$36,906 $354,542 $3,476,891
======= ======== ==========
</TABLE>
(5) NOTES PAYABLE
The Company has a $7,000,000 equipment line of credit with a bank.
Borrowings under the equipment line of credit bear interest at the bank's prime
rate (8.50% at December 31, 1999 and 9.50% at September 30, 2000) plus 0.75% and
are collateralized by substantially all assets of the Company. The Company has
drawn down a total of $6,940,000 as of September 30, 2000. All principal
borrowings will be converted into term notes payable and will be repaid in 36
equal monthly installments commencing on dates ranging from April 1, 2000 to
July 1, 2001. As of September 30, 2000, approximately $6,774,000 was outstanding
under this agreement.
The Company is required to comply with certain financial and restrictive
covenants, as set forth in the line of credit agreement. As of December 31, 1999
and September 30, 2000, the Company was in compliance with these financial and
restrictive covenants.
F-13
<PAGE> 74
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
At September 30, 2000, the future principal payments to be made under the
equipment line of credit are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Quarter ending December 31, 2000............................ $ 249,972
Fiscal 2001................................................. 1,656,649
Fiscal 2002................................................. 2,313,409
Fiscal 2003................................................. 1,896,816
Fiscal 2004................................................. 656,761
----------
Total............................................. $6,773,607
==========
</TABLE>
(6) INCOME TAXES
The Company accounts for federal and state income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax
assets or liabilities are computed based on the differences between the
financial statement and income tax bases of assets and liabilities using
currently enacted tax rates. Deferred income tax expense or credits are based on
changes in the asset or liability from period to period.
No provision for federal or state income taxes has been recorded, as the
Company has incurred net operating losses for all periods presented.
As of December 31, 1999, the Company had available federal and state net
operating loss carryforwards of approximately $7,646,000 to offset future
taxable income, if any, and research and development tax credit carryforwards of
approximately $355,000. The net operating loss carryforwards expire through 2019
and are subject to review and possible adjustment by the Internal Revenue
Service (IRS). The Tax Reform Act of 1986 contains provisions that may limit the
net operating loss carryforwards available to be used in any given year in the
event of significant changes in ownership interest, as defined. Due to the
uncertainty surrounding the realization of the deferred tax assets, the Company
has provided a full valuation allowance against these amounts for December 31,
1998 and 1999.
The components of the Company's net deferred tax assets are approximately
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
-------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $ 64,300 $ 3,058,080
Research credit carryforwards............................... 4,300 355,000
Other temporary differences................................. 6,200 47,920
-------- -----------
Gross deferred tax assets................................. 74,800 3,461,000
Valuation allowance......................................... (74,800) (3,461,000)
-------- -----------
$ -- $ --
======== ===========
</TABLE>
(7) COMMITMENTS
LEASE COMMITMENTS
The Company conducts its operations in leased facilities and is obligated
to pay monthly rent through May 31, 2007. Rent expense charged to operations was
approximately $2,000 for the period from inception (October 22, 1998) through
December 31, 1998, $175,000 for the year ended December 31, 1999 and
F-14
<PAGE> 75
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
$1,123,000 for the nine-month period ended September 30, 2000. At September 30,
2000, the future minimum rental payments under the noncancelable operating
leases are approximately as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Quarter ending December 31, 2000.......................... $ 583,000
Fiscal 2001............................................... 2,179,000
Fiscal 2002............................................... 2,041,000
Fiscal 2003............................................... 2,085,000
Fiscal 2004............................................... 1,715,000
Thereafter................................................ 4,144,000
-----------
Total............................................. $12,747,000
===========
</TABLE>
In order to secure its original facility lease, the Company was required to
issue a letter of credit in the amount of $80,000. During 1999, the Company
amended the lease to provide for additional space. In connection with the
amendment, the Company increased the letter of credit to $120,000. The required
amount of the letter of credit will be reduced over the lease term and is
collateralized by a certificate of deposit in the amount of $120,000 that is
held by the bank issuing the letter of credit.
In April 2000, the Company entered into a lease for an additional facility.
This lease is also collateralized by a letter of credit in the amount of
$1,250,000. The required amount of the letter of credit will be reduced over the
lease term and is collateralized by an equal investment in commercial paper. The
letters of credits are included in restricted cash equivalents in the
accompanying balance sheet.
PURCHASE COMMITMENTS
As of September 30, 2000, the Company has entered into a non-cancelable
purchase commitment of approximately $1.3 million for certain components used in
its products. Additionally, the Company has entered into non-cancelable purchase
commitments of approximately $4.7 million for leasehold improvements and
furnishings for a leased facility, of which $2.3 million is included in accrued
expenses at September 30, 2000.
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has 18,000,000 authorized shares of redeemable convertible
preferred stock, of which 6,250,000, 3,056,000 and 7,579,449 shares have been
designated as Series A redeemable convertible preferred stock (Series A
Preferred Stock), Series B redeemable convertible preferred stock (Series B
Preferred Stock) and Series C redeemable convertible preferred stock (Series C
Preferred Stock), respectively, and the remaining shares are undesignated.
From November 1998 to March 1999, the Company sold 6,250,000 shares of
Series A Preferred Stock at $1.00 per share resulting in net proceeds to the
Company of approximately $6,204,000. In August 1999, the Company sold 3,056,000
shares of Series B Preferred Stock at $5.24 per share resulting in net proceeds
to the Company of approximately $15,969,000. On April 11, 2000, the Company sold
7,579,449 shares of Series C Preferred Stock at $13.53 per share resulting in
net proceeds to the Company of approximately $102,427,000.
F-15
<PAGE> 76
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
The rights and preferences of the Series A, Series B and Series C Preferred
Stock are listed below:
DIVIDENDS
The Company shall not declare or pay any dividends on shares of common
stock unless the holders of the Series A, Series B, and Series C Preferred Stock
then outstanding receive an amount equal to the dividends declared or paid on
common stock. A dividend in the per share amount of $0.08, $0.42 and $1.08 per
year for Series A, Series B, and Series C Preferred Stock, respectively, shall
accrue from the date of issuance up to the date of redemption, shall be
cumulative and shall be paid when, as and if declared by the Company's Board of
Directors. As of September 30, 2000, cumulative dividends of approximately
$6,221,000 have accrued and no dividends have been declared or paid.
VOTING
The holders of Series A, Series B and Series C Preferred Stock are entitled
to vote on all matters with the common stockholders as if they were one class of
stock. The holders of Series A, Series B, and Series C Preferred Stock are
entitled to the number of votes equal to the number of shares of common stock
into which each share of the Series A, Series B and Series C Preferred Stock is
then convertible.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the corporation, as defined, the holders of the Series A, Series B
and Series C Preferred Stock then outstanding will be entitled to be paid prior
to any payment to common stockholders a liquidation preference payment equal to
$1.00 per share, $5.24 per share and $13.53 per share, respectively, plus any
accrued and unpaid dividends thereon. Amounts remaining after the preference
payment to the holders of Series A, Series B and Series C Preferred Stock, if
any, will be shared on a proportional basis among all stockholders including the
holders of Series A, Series B, and Series C Preferred Stock, whose portion will
be determined based on the number of shares of common stock into which the
Series A, Series B, and Series C Preferred Stock is then convertible. The
liquidation preferences are subject to adjustment in the event of any stock
dividend, split, combination or other similar recapitalization.
CONVERSION
Each share of Series A and Series B Preferred Stock is convertible at the
option of the holder, at any time, into three shares of common stock, adjusted
for certain dilutive events, as defined. Each share of Series C Preferred Stock
is convertible at the option of the holder, at any time, into 1.5 shares of
common stock, adjusted for certain dilutive events, as defined. In addition, all
shares of Series A, Series B and Series C Preferred Stock shall be automatically
converted into shares of common stock upon the closing of an underwritten public
offering of common stock in which the per share price to the public is not less
than $18.04 and the aggregate proceeds to the Company are not less than
$50,000,000.
F-16
<PAGE> 77
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
The following table details the number of shares of Series A, Series B, and
Series C Preferred Stock outstanding at September 30, 2000, and the number of
shares of common stock into which each series of preferred stock is convertible:
<TABLE>
<CAPTION>
SHARES
OUTSTANDING AT COMMON
SEPTEMBER 30, CONVERSION EQUIVALENT
2000 RATIO SHARES
-------------- ---------- ----------
<S> <C> <C> <C>
Series A Preferred Stock.................. 6,250,000 3:1 18,750,000
Series B Preferred Stock.................. 3,056,000 3:1 9,168,000
Series C Preferred Stock.................. 7,579,449 3:2 11,369,173
---------- ----------
Total........................... 16,885,449 39,287,173
========== ==========
</TABLE>
REDEMPTION RIGHTS
Subject to certain conditions, beginning on August 18, 2006, the Company
will be required to redeem the percentage of Series A, Series B and Series C
Preferred Stock listed in the following table at a price equal to $1.00 per
share for the Series A Preferred Stock, $5.24 per share for the Series B
Preferred Stock and $13.53 per share for the Series C Preferred Stock, plus all
accrued and unpaid dividends thereon.
<TABLE>
<CAPTION>
MANDATORY PORTION OF SHARES OF PREFERRED
REDEMPTION DATE STOCK TO BE REDEEMED
----------------------------------------------- ------------------------------
<S> <C>
August 18, 2006................................ 33.33%
August 18, 2007................................ 50.00%
August 18, 2008................................ All shares then outstanding
</TABLE>
The redemption value of each series of redeemable convertible preferred
stock is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1998 1999 2000
---------- ----------- -------------
<S> <C> <C> <C>
Series A Preferred Stock................... $6,056,087 $ 6,802,065 $ 7,177,065
Series B Preferred Stock................... -- 16,474,337 17,436,977
Series C Preferred Stock................... -- -- 106,406,777
---------- ----------- ------------
$6,056,087 $23,276,402 $131,020,819
========== =========== ============
</TABLE>
(9) STOCKHOLDERS' EQUITY (DEFICIT)
(a) COMMON STOCK
The Company has authorized 67,500,000 shares of common stock, of which a
total of 16,559,422 shares were issued and outstanding as of September 30, 2000.
(b) STOCK SPLIT
On December 21, 1999, the Company's Board of Directors approved a
two-for-one split of the outstanding common stock, effected in the form of a
stock dividend to the common stockholders of record on December 21, 1999.
F-17
<PAGE> 78
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
On September 5, 2000, the Company's Board of Directors approved a
three-for-two split of the outstanding common stock, effected in the form of a
stock dividend to the common stockholders of record on September 5, 2000.
All common share and per share amounts in the accompanying financial
statements have been retroactively adjusted to reflect these splits.
(c) RESERVED SHARES
The Company had reserved the following number of shares of common stock for
the conversion of preferred stock, the exercise of outstanding stock options and
warrants and the remaining shares issuable under the 1998 Stock Incentive Plan
at September 30, 2000:
<TABLE>
<S> <C>
Series A Preferred Stock.................................... 18,750,000
Series B Preferred Stock.................................... 9,168,000
Series C Preferred Stock.................................... 11,369,173
Outstanding stock options and warrants...................... 8,475,783
Shares issuable under the 1998 Stock Incentive Plan......... 1,658,253
----------
49,421,209
==========
</TABLE>
(d) FOUNDERS' SHARES
On October 23, 1998, the Company sold a total of 12,600,000 shares of
restricted common stock to its three founders and four additional founding
employees at $0.00033 per share, which represented the fair value of the common
stock as determined by the Board of Directors on the date of sale. The Company
entered into restricted stock repurchase agreements with its three founders that
provide for the vesting to each founder of 25% of the unvested shares upon the
closing of the Series A Preferred Stock financing (November 18, 1998). The
remaining shares vest monthly over 36 months beginning on December 1, 1999. The
Company also entered into restricted stock repurchase agreements with its four
founding employees that provide for the vesting to each founding employee of 25%
of the unvested shares upon the first anniversary of the closing of the Series A
Preferred Stock financing (November 18, 1999). The remaining shares vest monthly
over 36 months beginning on December 1, 1999. In accordance with the October
1998 restricted stock agreements, if the employment of any of the founders or
founding employees is terminated, the Company has the right to repurchase, at
the original purchase price through January 1, 2003, the total number of shares
that have not vested. In June 2000, the Board of Directors approved an amendment
to the three founders' restricted stock agreements to provide that in the event
that a founder is terminated without cause, as defined, the founders' unvested
shares shall vest in full. As of September 30, 2000, none of these individuals
have terminated their employment with the Company. Shares subject to repurchase
at December 31, 1998 and 1999, and September 30, 2000, were 9,870,750, 9,187,502
and 6,824,996 shares, respectively.
(10) 1998 STOCK INCENTIVE PLAN
In November 1998, the Company's Board of Directors approved the 1998 Stock
Incentive Plan (the 1998 Stock Plan). The 1998 Stock Plan currently provides for
the issuance of up to 13,650,000 shares of common stock, including the sale of
restricted common stock to employees, directors, officers and consultants and
the granting of incentive stock options (ISOs) to employees and nonqualified
(NQs) stock options to employees, officers, directors, advisors and consultants
of the Company.
At September 30, 2000, 1,658,253 shares of common stock remained available
for future grant under the 1998 Stock Plan.
F-18
<PAGE> 79
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
(a) RESTRICTED COMMON STOCK
Under the 1998 Stock Plan, the Board of Directors may authorize the sale of
common stock to key employees, directors and consultants of the Company. The
Board of Directors will determine both the purchase price and the terms under
which the Company may repurchase such shares.
The Company sold 810,000 shares of restricted common stock during 1998 and
2,537,700 shares of restricted common stock during the first half of 1999 to
various employees under the 1998 Stock Plan. The shares were sold at $0.033 per
share, which represented the fair market value of the common stock as determined
by the Board of Directors on the date of sale. All of these shares are subject
to restricted stock agreements which generally expire over four years, except
that upon a change of control, as defined, generally 25% of the original shares
purchased are subject to acceleration provisions. The shares vest in the amount
of 25% of the total grant one year from the purchase date and then ratably over
the 36 months thereafter. Shares subject to repurchase at December 31, 1998 and
1999, and September 30, 2000, were 810,000, 3,122,700 and 2,037,285 shares,
respectively.
(b) STOCK OPTIONS
Under the 1998 Stock Plan, the Board of Directors may grant ISOs to
employees and nonqualified stock options to employees, directors, consultants
and advisors of the Company. ISOs may be granted only to employees who do not
own stock representing more than 10% of the voting interest or more than 10% of
the value of all classes of stock of the Company, unless the purchase price is
at least 110% of its fair value at the time the option is granted and the option
is not exercisable more than five years from the grant date. The Board of
Directors shall determine the exercise price for each award at the time the
award is granted. All stock options issued under the 1998 Stock Plan expire 10
years from the date of grant, with the exception of those ISOs that expire five
years from the date of grant, as defined above.
Generally, 25% of the stock options granted under the 1998 Stock Plan will
vest one year from the date of grant and the remaining 75% will vest in 36 equal
installments over a three-year period. In the event of a change in control, as
defined, approximately 25% of the original stock options granted will
accelerate.
Stock option activity under the 1998 Stock Plan is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER EXERCISE PRICE PRICE PER
OF SHARES PER SHARE SHARE
--------- -------------- ---------
<S> <C> <C> <C>
Outstanding, December 31, 1998............. -- $ -- $ --
Granted.................................. 3,352,800 0.03 - 0.18 0.08
Exercised................................ (303,000) 0.03 - 0.18 0.09
Canceled................................. (15,000) 0.03 0.03
--------- -----
Outstanding, December 31, 1999............. 3,034,800 0.03 - 0.18 0.08
Granted.................................. 5,426,250 0.63 - 11.33 3.35
Exercised................................ (308,722) 0.63 - 11.33 0.69
Canceled................................. (120,003) 0.18 0.18
--------- -----
Outstanding, September 30, 2000............ 8,032,325 $0.03 - $ 9.02 $2.26
========= =====
Exercisable, September 30, 2000............ 570,125 $0.03 - $ 3.83 $0.21
========= =====
Exercisable, December 31, 1999............. 87,750 $0.03 - $ 0.18 $0.04
========= =====
</TABLE>
F-19
<PAGE> 80
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
The following table summarizes information relating to outstanding and
exercisable stock options as of September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------- EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES LIFE (YEARS) PRICE OF SHARES PRICE
--------------- --------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.03 - $0.18........ 2,664,075 8.79 $0.08 539,875 $0.04
0.63 - 1.33........ 1,100,250 9.33 1.03 -- --
3.00 - 3.83........ 2,564,250 9.65 3.39 30,250 3.17
4.00 1,230,000 9.85 4.00 -- --
5.00 265,250 9.98 5.00 -- --
9.02 208,500 9.84 9.02 -- --
--------------------- --------- ---- ----- ------- -----
$0.03 - $9.02........ 8,032,325 9.36 $2.26 570,125 $0.21
===================== ========= ==== ===== ======= =====
</TABLE>
The Company follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, which requires the measurement of the fair value of
stock options granted to employees be included in the statement of operations or
disclosed in the notes to the financial statements. The Company accounts for
stock-based compensation for employees under APB No. 25, Accounting for Stock
Issued to Employees, and follows the disclosure-only alternative under SFAS No.
123.
The assumptions used to calculate the fair value of options granted to
employees and the weighted average fair value of options granted are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Risk-free interest rate.................................... 5.67%
Expected dividend yield.................................... --
Expected lives............................................. 4 years
Expected volatility........................................ 100%
Weighted average fair value of options granted............. $ 0.07
</TABLE>
If compensation cost had been determined for option grants to employees
based on the provisions of SFAS No. 123, the Company's net loss and net loss per
share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Net loss--
As reported.............................................. $(7,605,239)
Pro forma................................................ $(7,632,438)
Basic and diluted net loss per share--
As reported.............................................. $ (2.94)
Pro forma................................................ $ (2.95)
</TABLE>
F-20
<PAGE> 81
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's employee option grants have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee option grants.
(c) STOCK-BASED CONSIDERATION
Stock-based consideration expense includes the amortization of deferred
compensation related to stock options granted to employees, the fair value of
stock options granted to non-employees for services and the value of a warrant
granted to a customer.
In connection with certain stock option grants made to both employees and
non-employees during the year ended December 31, 1999 and the nine-month period
ended September 30, 2000, the Company recorded deferred compensation in the
accompanying financial statements of $244,050 and $29,401,812, respectively.
Deferred compensation represents the aggregate difference between the deemed
fair value of the Company's common stock and the exercise price of stock options
granted to employees and the fair value of stock options granted to
non-employees. Deferred compensation will be recognized as an expense over the
vesting period of the underlying common stock and stock options using the
accelerated method prescribed under FASB Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans--An
Interpretation of APB Opinion Nos. 15 and 25. The Company may record additional
deferred compensation during the period from October 1, 2000 through the closing
of the Company's initial public offering related to the issuance of additional
stock options with exercise prices below deemed fair value. In addition, the
Company will mark to market the fair value of grants to non-employees in
accordance with EITF 96-18.
The Company recorded total stock-based consideration related to the
amortization of deferred compensation of approximately $118,000 in the year
ended December 31, 1999, $19,000 in the nine-month period ended September 30,
1999, and $6,469,000 in the nine-month period ended September 30, 2000. For
purposes of the footnote disclosure in the Company's statement of operations,
the Company has allocated stock-based consideration expense to the appropriate
expense category based on each employee's function within the organization or
for non-employees, the nature of the services performed. Additionally, the value
of the initial warrant discussed in Note 11 has been allocated to sales and
marketing expense for purposes of this footnote disclosure. The Company expects
to record the following stock-based consideration expense related to deferred
compensation as of September 30, 2000 as follows:
<TABLE>
<S> <C>
Quarter ending December 31, 2000............................ $ 3,494,374
Fiscal 2001................................................. 10,573,282
Fiscal 2002................................................. 5,464,948
Fiscal 2003................................................. 2,721,372
Fiscal 2004................................................. 841,778
-----------
$23,095,754
===========
</TABLE>
(11) WARRANTS
In September 2000, in consideration for technical advice as well as
assistance in assessing the marketability of the Company's optical access switch
and intelligent optical terminal products during their
F-21
<PAGE> 82
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
development stage, the Company issued a warrant to Comcast Business
Communications (Comcast) to purchase 166,297 shares of common stock at $9.02 per
share. The warrant is fully vested, is not contingent upon product purchases by
Comcast and is exercisable until the earliest of (i) September 1, 2001, (ii)
immediately prior to the closing of the Company's initial public offering (IPO)
of shares of common stock, or (iii) immediately prior to the closing of the sale
of all or substantially all of the assets or business of the Company. As there
are no future purchase commitments or performance obligations, the measurement
date of the warrant was fixed at the issuance date. The Company determined the
fair value of the warrant using the Black-Scholes valuation method, utilizing a
volatility factor of 100%, risk-free interest rate of 6.50% and expected life of
one year. The Company recorded the fair value of the warrant, $1,186,306, as an
operating expense included in stock-based consideration during the nine-month
period ended September 30, 2000.
In September 2000, in connection with the execution of a non-exclusive
systems and services agreement (the Agreement) and specific marketing activities
related to the Agreement, the Company issued a second warrant to Comcast to
purchase up to a number of shares of the Company's common stock to be determined
by dividing up to $2,500,000 by the exercise price, as defined. The Agreement
between the Company and Comcast provides the customer with the ability, but not
the obligation, to purchase equipment from the Company. This warrant becomes
exercisable immediately prior to the earlier to occur of (i) the IPO or (ii) the
closing of the sale of all or substantially all of the Company's business or
assets. The warrant expires on the earliest to occur of the (i) closing of the
IPO, (ii) the closing of the sale of all of the Company's business or assets, or
(iii) September 1, 2003. The number of shares that may be issued upon exercise
of the warrant depends on the achievement of certain performance targets as
follows:
(a) up to 25% of the shares issuable pursuant to the warrant may be
issued if, prior to September 29, 2000, the Company and Comcast issue a
mutually agreed upon press release announcing their relationship;
(b) up to an additional 25% of the shares issuable pursuant to the
warrant may be issued if, prior to September 29, 2000, Comcast has
delivered a non-cancellable purchase order to the Company for the purchase
of a specified minimum amount of the Company's products with a requested
delivery date on or before December 29, 2000; and
(c) up to an additional 50% of the shares issuable pursuant to the
warrant may be issued if, prior to December 29, 2000, Comcast has delivered
the purchase order required pursuant to clause (b) above and has delivered
a subsequent purchase order to the Company for the purchase of a specified
minimum amount of additional products with a requested delivery date on or
before March 30, 2001.
As of September 30, 2000, Comcast had satisfied the performance targets set
forth in clauses (a) and (b) above.
The exercise price of the second warrant shall be equal to the price per
share to the public of the Company's common stock in the proposed IPO or the
fair market value of the consideration per share of Company's common stock to be
received in a sale of the Company, as the case may be; provided that in no event
shall the exercise price per share be less than $9.02. As of September 30, 2000,
the fair value of the second warrant was calculated to be approximately $37,000
using the Black-Scholes valuation method, utilizing a volatility factor of 100%,
risk-free interest rate of 6.50% and expected life of one day. The fair value of
this warrant as of September 30, 2000 has been deferred and will be amortized in
future periods as an offset to gross revenue as the revenue associated with the
initial purchase orders discussed in clauses (b) and (c) above is recognized.
F-22
<PAGE> 83
QUANTUM BRIDGE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA RELATED TO UNAUDITED PERIODS)
(12) 401(k) PLAN
In January 1999, the Board of Directors adopted the Quantum Bridge
Communications, Inc. 401(k) Plan (the 401(k) Plan) for eligible employees, as
defined. Each participant may elect to contribute a portion of their annual
compensation, subject to IRS limitations. The Company may elect to make
discretionary contributions to the 401(k) Plan. There have been no discretionary
contributions made by the Company to date.
(13) SUBSEQUENT EVENTS
On December 1, 2000, the Company's Board of Directors approved the
following, subject to stockholder approval:
- 2000 STOCK INCENTIVE PLAN
The 2000 Stock Incentive Plan (the 2000 Stock Plan), pursuant to which up
to 10,000,000 shares of the Company's common stock, subject to adjustment in the
event of stock splits and other similar events, are reserved for issuance. On
January 1 of each year, commencing with January 1, 2002, the number of shares
available for issuance under the 2000 Stock Plan will be increased automatically
by 5% of the outstanding shares on such date or a lesser amount determined by
our Board of Directors. In addition, shares under the Company's 1998 Stock Plan
not issued or subject to outstanding grants upon the closing of the Company's
IPO and any shares issued under the 1998 Stock Plan that are forfeited or
repurchased by the Company or that are issuable upon exercise of options that
become unexercisable for any reason without having been exercised in full will
be available for grant and issuance under the Company's 2000 Stock Plan. The
2000 Stock Plan provides for the grant of incentive stock options to the
Company's employees and nonstatutory stock options, restricted stock awards and
other stock-based awards to the Company's employees, officers, directors,
consultants and advisors.
- 2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan (the Purchase Plan), which authorizes
the issuance of up to a total of 2,000,000 shares of the Company's common stock
to participating employees. On January 1 of each year, commencing with January
1, 2002, the number of shares available for issuance under the Purchase Plan
will be increased automatically by 2% of the outstanding shares on such date or
a lesser amount determined by the Board of Directors. All of the Company's
employees, including directors who are employees, and all employees of any
participating subsidiaries, whose customary employment is more than 20 hours per
week and for more than five months in any calendar year, are eligible to
participate in the Purchase Plan.
- AMENDMENT TO CHARTER
Amendment to the Certificate of Incorporation increasing the number of
authorized shares of common stock, $.001 par value per share, from 67,500,000
shares to 500,000,000 shares, and authorizing 5,000,000 shares of undesignated
preferred stock, $.001 par value per share.
- AMENDMENT AND RESTATEMENT OF CHARTER
Amendment and restatement of the Certificate of Incorporation to be
effective upon the closing of the Company's proposed initial public offering to:
- eliminate all references to the Series Convertible Preferred Stock;
and
- establish the authorized capitalization of the Company at 500,000,000
shares of common stock, $.001 par value per share, and 5,000,000
shares of undesignated preferred stock, $.001 par value per share.
F-23
<PAGE> 84
[QUANTUM BRIDGE COMMUNICATIONS LOGO]
<PAGE> 85
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 Quantum Bridge in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $30,360
NASD filing fee............................................. 12,000
Nasdaq National Market listing fee.......................... *
Printing and engraving costs................................ *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. *
Transfer Agent and Registrar fees........................... *
Miscellaneous expenses...................................... *
Total............................................. $ *
=======
</TABLE>
------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law. Section
145 of the Delaware General Corporation Law provides that a corporation has the
power to indemnify a director, officer, employee or agent of the corporation and
certain other persons serving at the request of the corporation in related
capacities against amounts paid and expenses incurred in connection with an
action or proceeding to which he is or is threatened to be made a party by
reason of such position, if such person shall have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, in any criminal proceeding, if such person had no
reasonable cause to believe his conduct was unlawful; provided that, in the case
of actions brought by or in the right of the corporation, no indemnification
shall be made with respect to any matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
adjudicating court determine that such indemnification is proper under the
circumstances.
The registrant's Third Amended and Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the registrant and its executive officers and directors, and by the
registrant of the underwriters for certain liabilities, including liabilities
arising under the Securities Act, in connection with matters specifically
provided in writing by the Underwriters for inclusion in the Registration
Statement. Reference is made to the form of Underwriting Agreement filed as
Exhibit 1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, the registrant has issued the following securities that
were not registered under the Securities Act of 1933, as amended:
(a) Issuances of Capital Stock.
II-1
<PAGE> 86
PREFERRED STOCK ISSUANCES
Between November 1998 and March 1999, the registrant issued 6,250,000
shares of its series A convertible preferred stock, par value $.001 per share,
to 16 investors at a purchase price of $1.00 per share, for aggregate
consideration of $6,250,000. Each investor represented to the registrant that
such investor is an accredited investor. Upon the closing of this offering, the
6,250,000 shares of series A convertible preferred stock will automatically
convert into 18,750,000 shares of common stock.
In August 1999, the registrant issued 3,056,000 shares of series B
convertible preferred stock, par value $.001 per share to 15 investors, at a
purchase price of $5.2356 per share, for aggregate consideration of
$15,999,993.60. Each investor represented to the registrant that such investor
is an accredited investor. Upon the closing of this offering, the 3,056,000
shares of series B convertible preferred stock will automatically convert into
9,168,000 shares of common stock.
In April 2000, the registrant issued 7,579,449 shares of series C
convertible preferred stock, par value $.001 per share, to 28 investors at a
purchase price of $13.53 per share, for aggregate consideration of
$102,549,944.97. Each investor represented to the registrant that such investor
is an accredited investor. Upon the closing of this offering, the 7,579,449
shares of series C convertible preferred stock will automatically convert into
11,369,173 shares of common stock.
Common Stock Issuances
From inception to September 30, 2000, the registrant sold an aggregate of
15,947,700 shares of common stock pursuant to restricted stock agreements to
employees for a weighted average purchase price of $0.007 per share and
aggregate consideration of $115,790.
Issuance of Warrants
On September 1, 2000, the registrant issued a warrant to purchase an
aggregate of 166,297 shares of common stock, which number is adjusted for a
subsequent stock split, at an exercise price of $9.02 per share to Comcast
Business Communications, Inc. This warrant will be exercised for 166,297 shares
of common stock immediately before the closing of this offering.
On September 1, 2000 the registrant issued a warrant to purchase up to
$2,500,000 worth of shares of common stock at a purchase price per share equal
to the price per share to the public of the common stock in this offering to
Comcast Business Communications, Inc.
Grants and Exercise of Stock Options
As of September 30, 2000, the registrant had outstanding options to
purchase an aggregate of 8,032,325 shares of common stock under its 1998 stock
incentive plan, as amended, exercisable at a weighted average exercise price of
$2.26 per share. From inception to September 30, 2000, the registrant issued
611,722 shares of common stock for a weighted average exercise price of $.39 per
share pursuant to the exercise of stock options.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the registrant believes
that each transaction was exempt from registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 promulgated under Section 3(b)
thereof, pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients in such
transactions represented their intention 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 instruments issued in such transactions. All recipients had
adequate access, through their relationship with the registrant, to information
about the registrant.
II-2
<PAGE> 87
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
---------- -----------
<C> <S>
1 Form of Underwriting Agreement
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant, as amended
3.2 Form of Certificate of Amendment
3.3 Form of Third Amended and Restated Certificate of
Incorporation
3.4 Amended and Restated Bylaws
3.5 Form of Second Amended and Restated Bylaws
4.1* Specimen certificate for shares of common stock
4.2 Description of capital stock (contained in the Form of Third
Amended and Restated Certificate of Incorporation filed as
Exhibit 3.2)
5* Opinion of Hale and Dorr LLP
10.1+ Second Amended and Restated 1998 Incentive Stock Plan, as
amended
10.2+ 2000 Stock Incentive Plan
10.3+ 2000 Employee Stock Purchase Plan
10.4 Second Amended and Restated Registration Rights Agreement,
dated April 10, 2000, by and among Registrant and the
stockholders named therein
10.5+ Form of Restricted Stock Agreement by and among the
Registrant and each of Anthony A. Zona, Jeffrey W. Gwynne
and Jeffrey A. Masucci
10.6+ Form of Employment Agreement by and among the Registrant and
each of Anthony A. Zona, Jeffrey W. Gwynne and Jeffrey A.
Masucci
10.7 Loan Agreement, dated April 1, 1999 by and between
Registrant and Fleet National Bank, as modified to date
23.1* Consent of Hale and Dorr LLP (contained in Exhibit 5)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (contained on page II-6)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
------------
* To be filed by amendment.
+ Indicates a management contract, compensatory plan or arrangement.
2. Financial Statement Schedule.
Financial Statement Schedules are not listed 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 agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions referenced in
Item 14 of this registration statement 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
II-3
<PAGE> 88
Securities Act of 1933, 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 a director, officer or controlling person in
connection with the securities being registered hereunder, 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 of 1933 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 of 1933 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-4
<PAGE> 89
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 Andover, Commonwealth of
Massachusetts, on the 19th day of December, 2000.
QUANTUM BRIDGE COMMUNICATIONS, INC.
By: /s/ ANTHONY A. ZONA
------------------------------------
Anthony A. Zona
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Quantum Bridge
Communications, Inc., hereby severally constitute and appoint Anthony A. Zona,
John P. Delea, Martin W. Pejko and David A. Westenberg, and each of them
individually, with full powers of substitution and resubstitution, our true and
lawful attorneys, with full powers to them and each of them to sign for us, in
our names and in the capacities indicated below, the registration statement on
Form S-1 filed with the Securities and Exchange Commission, and any or all
amendments to said registration statement (including post-effective amendments),
and any registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, in connection with the registration under
the Securities Act of 1933, as amended, of equity securities of Quantum Bridge
Communications, Inc., and to file or cause to be filed the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents the full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the foregoing, as to all
intents and purposes as each of them might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ ANTHONY A. ZONA President, Chief Executive December 19, 2000
--------------------------------------------------- Officer and Director
Anthony A. Zona (Principal Executive
Officer)
/s/ JOHN P. DELEA Vice President, Chief December 19, 2000
--------------------------------------------------- Financial Officer and
John P. Delea Treasurer (Principal
Financial and Accounting
Officer)
/s/ GARY BOWEN Director December 19, 2000
---------------------------------------------------
Gary Bowen
/s/ JAMES CULLEN Director December 19, 2000
---------------------------------------------------
James Cullen
/s/ MICHAEL FEINSTEIN Director December 19, 2000
---------------------------------------------------
Michael Feinstein
</TABLE>
II-5
<PAGE> 90
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ SUZANNE HOOPER KING Director December 19, 2000
---------------------------------------------------
Suzanne Hooper King
/s/ JEFFREY A. MASUCCI Director December 19, 2000
---------------------------------------------------
Jeffrey A. Masucci
/s/ RUSSELL E. PLANITZER Director December 19, 2000
---------------------------------------------------
Russell E. Planitzer
/s/ JEFFREY A. SHAW Director December 19, 2000
---------------------------------------------------
Jeffrey A. Shaw
</TABLE>
II-6
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
---------- -----------
<C> <S>
1 Form of Underwriting Agreement
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant, as amended
3.2 Form of Certificate of Amendment
3.3 Form of Third Amended and Restated Certificate of
Incorporation
3.4 Amended and Restated Bylaws
3.5 Form of Second Amended and Restated Bylaws
4.1* Specimen certificate for shares of common stock
4.2 Description of capital stock (contained in the Form of Third
Amended and Restated Certificate of Incorporation filed as
Exhibit 3.2)
5* Opinion of Hale and Dorr LLP
10.1+ Second Amended and Restated 1998 Incentive Stock Plan, as
amended
10.2+ 2000 Stock Incentive Plan
10.3+ 2000 Employee Stock Purchase Plan
10.4 Second Amended and Restated Registration Rights Agreement,
dated April 10, 2000, by and among Registrant and the
stockholders named therein
10.5+ Form of Restricted Stock Agreement by and among the
Registrant and each of Anthony A. Zona, Jeffrey W. Gwynne
and Jeffrey A. Masucci
10.6+ Form of Employment Agreement by and among the Registrant and
each of Anthony A. Zona, Jeffrey W. Gwynne and Jeffrey A.
Masucci
10.7 Loan Agreement, dated April 1, 1999 by and between
Registrant and Fleet National Bank, as modified to date
23.1* Consent of Hale and Dorr LLP (contained in Exhibit 5)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (contained on page II-6)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
------------
* To be filed by amendment.
+ Indicates a management contract, compensatory plan or arrangement.
