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SECURITIES AND EXCHANGE COMMISION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-32743
TELLIUM, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3509099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Crescent Place
Oceanport, New Jersey 07757-0901
(Address of principal executive offices, zip code)
(732) 923-4100
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
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Common Stock, Par Value $.001
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregated market value of the 112,471,660 shares of Common Stock of the
Registrant issued and outstanding as of February 28, 2002, excluding 39,293,435
shares of Common Stock held by affiliates of the Registrant was $152,942,490.
This amount is based on the last reported sales price of the Common Stock on
the Nasdaq Stock Market of $2.09 per share on February 28, 2002.
For purposes of this computation, shares held by certain stockholders and by
directors and executive officers of the registrant have been excluded. Such
exclusion of shares held by such persons is not intended, nor shall it be
deemed, to be an admission that such persons are affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates by reference information from
registrant's definitive Proxy Statement which will be furnished to stockholders
in connection with the Annual Meeting of Stockholders of the registrant.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business............................................................................. 2
Item 2. Properties........................................................................... 14
Item 3. Legal Proceedings.................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................. 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 15
Item 6. Selected Financial Data.............................................................. 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk............................ 36
Item 8. Financial Statements and Supplementary Data.......................................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 36
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 37
Item 11. Executive Compensation............................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 37
Item 13. Certain Relationships and Related Transactions....................................... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... F-1
EXHIBIT INDEX................................................................................. II-2
SIGNATURES.................................................................................... II-4
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-K are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based on
current expectations, forecasts and assumptions of the Company that involve
risks and uncertainties. We consider all statements regarding anticipated or
future matters, including without limitation the following, to be
forward-looking statements:
- --our expected future financial position, revenue growth, earnings, earnings
per share, liquidity, results of operations, profitability, cash flows
and other financial items;
- --financing plans and capital expenditures;
- --business strategy;
- --plans and objectives of management for future operations;
- --growth opportunities for existing products and services;
- --benefits from new technology; and
- --any statements using forward-looking words, such as "anticipate", "believe",
"could", "estimate", "intend", "may", "should", "will", "would",
"projects", "expects", "plans", or other similar words.
These forward-looking statements involve risks and uncertainties which could
cause actual results to differ materially, including without limitation, the
risk that:
- --customers could fail to place expected orders for our products;
- --we are unable to reach commercially acceptable contract terms with new
customers;
- --we must lower prices for our products, or we experience a decline in market
share, due to competition or price pressure by customers;
- --our products fail to meet contract specifications or industry standards that
may emerge;
- --general economic conditions or conditions within our industry continue to
worsen, or improve more slowly than we expect; and
- --we are unable to develop new and enhanced products.
Other factors which could materially affect such forward-looking statements
can be found under the heading "Risk Factors" in the "Management's Discussion
and Analysis of Results of Operations and Financial Condition" section of this
Form 10-K. Shareholders, potential investors and other readers are urged to
consider these factors carefully in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements in this Form 10-K are only made as
of this date, and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
1
PART I
ITEM 1. BUSINESS
Overview
We design, develop and market high-speed, high-capacity, intelligent optical
switches that enable telecommunications service providers to quickly and cost-
effectively deliver new high-speed services. Intelligent optical switches are
products that are installed in the core, or center, of telecommunications
networks to manage the flow of optical signals, which are beams of light
transmitted over fiber optic cables. With the growth of the Internet and the
global deregulation of telecommunications services, there continues to be an
increase in data traffic, as well as accelerating demand for new and complex
services and network capacity. Our service provider customers are under
increasing pressure to improve and expand data services and to upgrade their
networks in a timely and cost-effective manner. We believe that the network
equipment that service providers are currently using does not offer them
sufficient flexibility to improve their data service offerings and upgrade
their networks in a timely and cost-effective manner.
Our products include highly reliable hardware, standards-based operating
software and integrated network planning and network management tools designed
to deliver intelligent optical switching for public telecommunications
networks. Our products are specifically designed to manage very high-speed
optical signals and can be easily expanded, enabling service providers to grow
and manage their networks quickly and efficiently to keep pace with dynamic
requirements of data services. We have designed our products to be
cost-effective for emerging service providers as they begin to build out their
networks, as well as for established service providers to expand and enhance
the capabilities of their existing networks. Our optical switches operate with
existing optical networking equipment to support the transition from older
networks to advanced, intelligent optical networks without service disruption.
This capability protects service providers' prior investment in fiber optics
and transmission equipment. Our optical switches are easily upgraded, providing
our customers with the ability to adopt new technologies and features without
the need to replace our equipment.
We were incorporated in Delaware on April 21, 1997 as MWD, Inc. and began
business operations on May 8, 1997. We changed our name to Tellium, Inc. on
June 3, 1997. Our principal executive offices are located at 2 Crescent Place,
Oceanport, New Jersey 07757-0901 and 185 Route 36, Building D, West Long
Branch, New Jersey 07764, and our telephone number is (732) 923-4100. Our World
Wide Web site address is www.tellium.com. Information contained in our Web site
is not incorporated by reference into this report, and you should not consider
information contained in our Web site as part of this report.
Industry Background
Increase in Data Traffic is Leading to Increased Demand for Network Capacity
The global adoption of the Internet and the World Wide Web continues to
increase data traffic in the world's public telecommunications networks.
Consumers and businesses are increasingly using the Internet for applications
such as electronic mail, electronic commerce and other voice, video and data
services. This additional traffic demand continues to accelerate with the
ongoing deployment and increased use of high-capacity network access
technologies, such as cable modems and digital subscriber lines, that enable
commercial and consumer users to transmit and receive large volumes of
information. This growth is expected to increase the demand for capacity, or
bandwidth, at all levels of public networks.
Deregulation Has Resulted in Increased Competition
Deregulation of the telecommunications industry worldwide has opened markets
to new providers and permitted existing service providers to offer competing
services in expanded geographic areas. The ability to create and offer new
services quickly and cost-effectively is an important competitive advantage
among service providers. Competition has also reduced prices for service
offerings, decreasing margins and forcing service providers to look to new
technology to provide increased operating efficiencies.
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Today's Optical Network
Optical networking refers to the use of fiber optic cables and connections
that use light, rather than electricity, to transfer information. These fiber
optic cables are connected to equipment that sends the streams of data carried
by light over the fiber optic cables. The high performance of optical
networking has led to rapid deployment of fiber optic networks.
Today, service providers employ two primary methods for managing and
transporting traffic within their optical networks. SONET/SDH, which stands for
synchronous optical network/synchronous digital hierarchy, is used to provide
operational features. DWDM, which stands for dense wave division multiplexing,
is used to add capacity.
SONET, in North America, and SDH, in Europe and other countries, are
standards that govern the management of traffic within an optical network.
SONET/SDH equipment combines multiple, low-speed signals into higher-speed
connections to transport these signals across the optical network. SONET/SDH
also provides the ability to restore services in the event of failures in the
signal path.
Dense wave division multiplexing is an optical transport technology that
dramatically multiplies the amount of traffic that can be carried over a fiber
optic network by dividing each beam of light into multiple, discrete beams of
light, referred to as channels. Service providers have widely deployed dense
wave division multiplexing technology to increase capacity within their long-
distance networks. However, as hundreds of channels are added across the
network, complexities and inefficiencies increase. Dense wave division
multiplexing equipment alone is incapable of performing key functions that
SONET/SDH equipment performs, such as performance monitoring, identification of
faults and restoration of service, that ensure reliable network operations. For
this reason, service providers have typically deployed both SONET/SDH and dense
wave division multiplexing equipment in their optical networks.
Reduction of capital and operating expenses is paramount
Carriers are under increasing pressure to reduce their capital and operating
expenses while increasing their service offerings. They are under intense
pressure to hold or decrease their annual expenses in order to improve their
overall business model.
Limitations of Existing Optical Networks
Many aspects of today's network designs limit service providers' ability to
cost effectively expand their networks and efficiently meet increasing capacity
and service demands. The following are key limitations of the existing networks:
. SONET/SDH systems were designed to support voice traffic. SONET/SDH
systems combine multiple dedicated voice channels into higher-speed
channels. While this approach provides quality delivery of traditional
voice traffic, SONET/SDH standards are very inefficient for unpredictable
and dynamic data traffic that does not fit neatly into channels.
Moreover, the multiple signals are broken down and recombined at every
network intersection, negatively impacting performance of the network.
Data traffic exhibits enormous peaks in demand that SONET/SDH standards
cannot support in an efficient manner at reasonable cost.
. Current networks use a ring design. SONET/SDH equipment is typically set
up in what is called a ring to connect several intersections in a
network. Optical paths are linked in rings so that in the event of a
single fiber cut or single equipment failure between two points on the
ring, the signal can be immediately directed through another path, called
the protection path of the ring. However, there are several disadvantages
to ring networks. The delivery of high-speed services across many of
these network intersections takes months to test and deploy due to the
amount and complexity of the equipment that must be connected to the
rings. In addition, for every service path in a ring a duplicated path
for protection is reserved, which forces half of the overall capacity of
the network to be dedicated to protection capacity that is rarely used.
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. Current network upgrades are difficult and expensive. All of the
SONET/SDH equipment operating in the same part of the network must
transmit and receive data at the same speed. Therefore, if a service
provider needs to increase the speed in one part of the network, the
service provider must replace every part of the network with new, costly,
higher-speed equipment in order for the upgrade to be effective. This
process can take months of intense planning and deployment, slowing a
service provider's ability to respond to substantial or unplanned
increases in the demand for higher capacity. As each new dense wave
division multiplexing channel is put into service, it must be permanently
connected to the existing network, a time and labor-intensive process. As
end users' data demands change and grow, these permanent connections
limit service providers' abilities to change their network quickly in
response to service requests. Service providers therefore must route new
services across their networks in inefficient ways, using more equipment
and connections and creating more points of failure in order to achieve
the desired connection.
. Current networks are difficult to set up. Current networks contain large
numbers of individual pieces of equipment, each of which must be
separately set up, connected and reconnected in response to each new
customer order. This complex process is referred to as provisioning.
These efforts require technicians to visit multiple locations in the
network to reconnect paths and install hardware and software, a process
that often requires hundreds of separate tasks. This process can take
months and requires the efforts of a large, highly-skilled workforce
equipped with specialized tools and knowledge.
. SONET/SDH equipment currently requires substantial central office space
and power. Service providers' central office facilities are increasingly
crowded with many types of equipment that must be connected to the
network. In addition, deregulation has forced service providers to share
their facilities with competitors. As a result, space for equipment has
become scarce and expensive. SONET/SDH equipment occupies a large amount
of space, which limits capacity for network expansion. The increase in
amount of equipment has also resulted in additional power consumption,
cooling requirements and other related overhead costs.
As a result of these limitations, service providers face considerable costs
of building and managing networks, which are unlikely to be recovered over an
acceptable period of time. In addition, each day of delay in service delivery
is a day of lost revenue and negatively impacts customer satisfaction. To date,
the steps that service providers have used to address these limitations have
largely been tactical and incremental, such as buying more fiber, installing
new SONET/SDH rings, increasing the speed of existing rings and employing more
dense wave division multiplexing to increase fiber capacity. Service providers
are seeking more strategic solutions that remove these limitations by upgrading
the overall network in a cost-effective manner.
Service Provider Requirements for the New Optical Network
To overcome existing network limitations, service providers need a way to
build a new network that is designed for data traffic rather than traditional
voice traffic without disrupting current voice and data services. The network
must support the ability to deliver optical services, anywhere, at any time,
for any customer. In addition, emerging service providers need a network that
allows them to grow quickly with lower capital costs and reliable, modular
equipment that reduces their operating expenses while increasing their revenue
opportunities. Specifically, the new optical network must:
. Reduce operational and maintenance costs. The new network must have
operational and maintenance costs that are substantially lower than the
current network incurs with respect to personnel, space occupied, power
consumption and cooling requirements. The new network also must limit the
number of times personnel need to be dispatched to other locations by
providing the capability to easily and automatically make changes in
support of service delivery, maintenance and administration.
. Reduce capital costs. The new network must allow service providers to
reduce the amount of equipment required to deploy and expand the network,
allowing service providers to reallocate capital for new services and
additional capacity.
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. Rapidly provision and restore optical services. The new network must
allow service providers to provision and restore optical services to end
users quickly, while significantly reducing manual labor-intensive
activities.
. Enable the development of new optical services. As competition among
service providers increases, the new network must be flexible enough to
allow service providers to differentiate themselves and increase revenues
by providing their customers with new value-added services.
. Provide for easy upgrades. The new network must be easy to upgrade in
order to accommodate emerging technologies and enable future services.
Today's networks are generally rigid in design, with limited ability to
implement breakthrough technologies such as optical switching. Service
providers typically seek a network that is upgradable without major
disruption to the design and layout of the network. This approach extends
the life of the products, reduces capital replacement costs and
simplifies the introduction of new technologies.
. Deploy proven, reliable products. Given the many pressures that service
providers face, they do not want to risk their networks by deploying
unproven products. They seek products that have been thoroughly tested
and verified through previous deployments and comprehensive testing and
evaluation.
The Tellium Solution
We design, develop and market high-speed, high-capacity, intelligent optical
switches that enable network service providers to quickly and cost-effectively
deliver new high-speed services. Our first-generation products are
field-proven, having been in service since 1999. Our second-generation products
are both in deployments and laboratory evaluation with global service
providers. These products benefit from the experience gathered from nearly
three years of live service of our first-generation products. Our products are
designed specifically to manage very high-speed optical signals in the core, or
center, of high-capacity communications networks. Our products do not provide
other network functions such as combining low-speed electrical signals into
higher speed optical signals. Service providers who do not deploy high-capacity
networks or do not need high-capacity optical switching are unlikely to use our
optical switching products. We have a world-class technology team that has
pioneered many innovations in optical network engineering and has a strong
heritage in the telecommunications industry. Our optical switches provide the
following key benefits to service providers:
. Improved network design. Our optical switches are designed to enable
service providers to reduce their costs by deploying a network that is
more efficient than SONET/SDH rings. In this approach, called shared mesh
architecture, each network junction is connected to any number of other
network junctions, allowing for multiple paths through the network. With
this design, shared mesh networks are more efficient in their utilization
of equipment, while still achieving the important goal of rapidly
restoring service after a network failure. In addition, shared mesh
networks are simpler to operate, administer and maintain than SONET/SDH
ring networks.
. Simplified delivery of new services. Our optical switches help service
providers to create flexible optical networks, enabling reliable, fast,
cost-effective delivery of new and existing optical data services. Our
optical switches enable a new generation of data networking equipment to
deliver data directly to the optical network and bypass costly SONET/SDH
equipment. Service providers can combine their existing equipment with
our optical switches to deliver data services with improved
expandability, flexibility and survivability.
. Fast provisioning of new services. Our optical switches are designed to
allow service providers to provision services across their networks in a
matter of minutes, replacing a process which can often take up to several
months. Our advanced administration and management software allows
service providers to provision their networks from a central management
workstation in anticipation of changing end-user needs, eliminating the
requirement to dispatch personnel to remote locations. As a result,
re-routing traffic around network bottlenecks or failure points becomes
easier, allowing service providers to offer their customers on-demand
service delivery and fast recovery from network failures. More efficient
and
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rapid network provisioning can lead to direct cost savings and revenue
opportunities for our customers. In a highly competitive industry, our
customers are able to differentiate themselves from their competitors by
offering faster, more reliable services with increased flexibility.
. Easy network expansion. Our optical switches are designed to help
service providers expand their networks rapidly, enabling new
revenue-generating services that meet their customers' needs. Our
products convert the optical network from a system requiring manual
changes to a dynamic system in which it is easy to add or change
components. Our Aurora Optical Switch, for example, offers the same or
greater capacity than other systems on the market, in a physical
configuration that is smaller, consumes less power and has a lower cost
per connection.
. Cost-effectiveness. Our optical switches are designed to enable service
providers to eliminate costly SONET/SDH equipment while retaining the
features that service providers expect. Our products include modular,
configurable hardware and software that allow our customers to retain
their investments as they expand capacity and automate operations, while
also significantly reducing the cost of service delivery. Our software
reduces the amount of equipment required by operating in a mesh network.
Service providers can install the capability to restore traffic with less
capital equipment and less floor space, reducing both capital and ongoing
costs while maintaining fast restoration time.
. Compatibility with existing networks. Our optical switches can be
deployed quickly because they are compatible with existing networks. Our
products are designed to support and enable mesh networks and operate
with existing ring networks. Our equipment interoperates with a wide
range of network hardware, such as dense wave division multiplexing
systems, data network equipment, and all major types of SONET/SDH
products. In addition, we offer comprehensive network management,
planning and administration software that communicates with existing
network management systems through common standards.
. Flexible products. Our optical switches are designed to be highly
flexible and upgradable. For example, it is easy for a technician to add
or remove components in our switches without interrupting or compromising
the performance of the network. All of our products share a common
management software system. A service provider can start small, using our
products from the initial deployment through future network expansion. As
our equipment is upgraded, there is no requirement to reprogram the
connections between our products and other equipment and software systems
in the network.
Strategy
Our objective is to be a leading provider of intelligent optical switching
solutions for global public telecommunications networks. The key elements of
our strategy include the following:
. Maximize our first mover advantage. We were the first optical switching
vendor to place into service a high-performance optical switch, the
Aurora 32. We are currently shipping for commercial deployments and lab
evaluations our high-capacity second-generation switch, the Aurora
Optical Switch and our Aurora 128, a cost-efficient, compact alternative
for smaller offices. We intend to maintain and extend this leadership
position by continuing to invest in research and development. We may also
make acquisitions in order to expand our base of technology expertise,
intellectual property and product capability.
. Maintain a tight focus on optical switching. We are focused on providing
a full range of optical switches for the high-performance optical
network. We intend to commit a substantial portion of our research and
product development efforts toward the goal of creating an
industry-leading optical switching product line. We believe that our
focus gives us a time-to-market advantage over our competitors whose
efforts are more broadly dispersed over multiple product lines.
. Build on our heritage. Our founders and first employees were pioneers of
optical networking at Bellcore. Our technical staff and management team
comes from leading companies in the optical
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engineering and telecommunications equipment industries, prominent
service providers and renowned academic institutions. We believe that
this heritage provides us with a depth of expertise and proven operating
experience that is unique in our industry. We will continue to build on
this heritage of excellence throughout our engineering and management
staff by aggressively recruiting top talent from around the world.
. Build on our relationships with our customers. Our management,
engineering and sales forces have strong contacts and long-standing
relationships with key people in the networking and optics industries, as
well as in our customer base. We believe that our experience and
relationships will enable us to sell additional products to our existing
customers, add new customers and bring innovative products to market that
meet our customers' needs.
. Expand our sales force and distribution channels. We intend to continue
building an experienced sales force that specializes in selling optical
switches to service providers. We will also add to our systems
engineering force in order to help our customers implement our products.
Additionally, we intend to expand our distribution network in order to
reach a broader base of customers, particularly in international markets.
. Maximize our ability to expand our operations. We outsource our
manufacturing and purchase some key components from third parties.
Outsourcing enables us to focus on our core competencies, including
product development, marketing and sales and allows us to rapidly
increase our ability to meet demand for our products.
Tellium Products
Our products include highly reliable hardware, standards-based operating
software and network planning and integrated network management tools designed
to deliver intelligent optical switching for public telecommunications
networks. Our products consist of optical switches that intelligently route
optical traffic between network intersections and enable service providers to
rapidly plan, provision, manage and restore services. Our optical switching
products deliver the operational benefits of today's SONET/SDH standards,
including performance monitoring, identification of faults and service
restoration, while eliminating complex and expensive SONET/SDH equipment. Our
products also enable service providers to rapidly plan and provide new, revenue
generating services to their customers. Our line of optical switches is
specifically designed for use in the core, or center, of a wide variety of
networks, including metropolitan, regional and national networks.
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Optical Switching Products Summary
All of our products go through a development and customer evaluation process
before the customer begins using the product in its operations. The length of
this process will vary, depending on the product and the customer. For purposes
of the following chart, a product is described as "in development" if our
engineers currently are preparing and developing the product for eventual
customer use. A product is described as "in service" if the customer has begun
commercial use of the product.
We sell the following optical switching and software products:
Hardware Products
Product Name Capabilities Status
- ------------ ----------------- ------
Aurora 32/TM/ OC-3, OC-12 and OC-48 (SONET) STM-1, In service
STM-4 and STM-16 (SDH)
Aurora Optical Switch/TM/ OC-48 (SONET), OC-192 (SONET), STM- In service
16 and STM-64 (SDH)
Aurora 128/TM/ OC-48 (SONET), OC-192 (SONET), STM- In service
16 and STM-64 (SDH)
Aurora Full-Spectrum/TM/ OC-192 and OC-768 (SONET) STM-64 and In development
STM-256 (SDH) Transparent Optical Paths
Software Products
Product Name Capabilities Status
- ------------ ----------------- ------
StarNet Operating System/TM/ End-to-end service delivery and restoration In service
StarNet Wavelength Management System/TM/ End-to-end wavelength management In service
StarNet Design Tools/TM/ Network planning and design In service
Our line of Aurora optical switches enables service providers to automate
the delivery of optical services, reduce their costs by enabling optical shared
mesh networking, restore optical services in the event of network failures and
redirect traffic around network bottlenecks. Our Aurora optical switches also
provide the ability to connect high-speed data networking equipment directly to
the optical network without requiring additional expensive SONET/SDH equipment.
Our hardware and software products are designed to seamlessly operate within
existing optical networking equipment, protecting service providers' prior
investment in fiber optic and transmission equipment. Our systems are modular,
enabling in-service growth, from a single optical switch channel to thousands
of optical channels, in increments as small as one channel at a time.
Our software products, combined with our optical switches, support rapid,
automated planning, provision and restoration of the optical network using
point and click operations. This capability addresses the time-to-market
requirements that our service provider customers must meet. In addition, our
products reduce service providers' costs by delivering shared mesh networking
and eliminating expensive SONET/SDH equipment while still providing all of the
operational features needed to manage networks.
Aurora 32. The Aurora 32 is a compact optical switch designed to connect
optical paths primarily in small central offices or metropolitan networks. The
Aurora 32 is designed for service providers that desire equipment that occupies
a small amount of floor space. This system switches 32 optical channels under
software control that can carry data with speeds ranging from 155 megabits per
second up to 2.5 gigabits per second to support the rapidly changing
environment of metropolitan areas. Through simple software commands, service
providers can upgrade the speed of an optical channel without changing any
hardware. The Aurora 32 is in service and has been carrying live traffic in
customer networks since April 1999.
Aurora 128. The Aurora 128 is a compact version of the Aurora Optical
Switch, supporting all of the same features and functions. Its capacity is 320
gigabits per second of switching bandwidth or 128 optical channels at
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2.5 gigabits per second. Each channel supports either SONET or SDH signals
under software control. The Aurora 128 operates at optical signal speeds up to
10 gigabits per second. We announced the development of the Aurora 128 in May
2001 and it is carrying live traffic.
Aurora Optical Switch. The Aurora Optical Switch is designed to provide
automated service delivery and restoration of optical services in primarily
regional and national networks. Its initial capacity delivers 1.28 terabits per
second of switching bandwidth or 512 optical channels at 2.5 gigabits per
second. Each of the channels supports either SONET or SDH signals under
software control. The Aurora Optical Switch operates at optical signal speeds
up to 10 gigabits per second and is designed for service providers that
anticipate high rates of growth in their network locations. The Aurora Optical
Switch is designed to grow to many times its initial capacity while the network
and product remain in service. The Aurora Optical Switch is in service and is
carrying live traffic.
Aurora Full-Spectrum. The Aurora Full-Spectrum is an all-optical switch
currently in development. The Aurora Full-Spectrum will feature an all-optical
switch that is being designed to switch at OC-768 and faster signal speeds. It
supports the mesh networking features and intelligence found in our other
products, while switching optical traffic at more than 40 gigabits per second.
StarNet Operating System--Service Delivery and Restoration Software. Our
StarNet Operating System is purchased by service providers in conjunction with
our optical switches. The StarNet Operating System software provides
communication between switches, routes optical signals around network failures
and bottlenecks, performs optical service provisioning for the mesh networks,
and supports the full range of Aurora switches. Our StarNet Operating System
software allows a single path, called the protection path, to serve as backup
to several working paths, saving much of the equipment cost of traditional ring
networks. The StarNet Operating System is currently in service.
StarNet Wavelength Management System--Network Management Software. Our
StarNet Wavelength Management System provides fault location, network
configuration, performance monitoring and analysis and network security. In
addition, this system provides the capability to operate, administer, maintain
and provision the entire optical switching network, not just individual network
elements. Our StarNet Wavelength Management System is currently in service.
StarNet Design Tools--Software Planning and Design Tools for Optical
Networks. StarNet Design Tools allow customers to plan and design networks
with optical switches. These tools allow the user to optimize the network plan
for minimum cost and provide the user with graphical network comparisons so
they can compare SONET/SDH ring architectures with optical mesh architectures.
The StarNet Design Tools consist of two modules, the StarNet Planner and the
StarNet Modeler. The Planner is used to create and plan the optical layer of a
telecommunications network. The Modeler is used to simulate and optimize a
network's performance prior to field deployment. Both of these products work in
conjunction with the StarNet Wavelength Management System. StarNet Design Tools
are currently in service.
Customers
Our target customer base includes emerging and established service
providers. These include long-distance carriers and wholesale service
providers, Internet service providers and cable operators. We have been
shipping our products since January 1999, and our products have been in service
and carrying live traffic for three years.
In August 2000, we entered into a five-year contract with Cable & Wireless,
a multinational provider of voice, data and network services. Under the terms
of this contract, Cable & Wireless has a minimum purchase commitment of $350
million for the worldwide deployment of our products, including the Aurora
Optical Switch, the StarNet Wavelength Management System and the StarNet
Operating System. Cable & Wireless has conducted laboratory testing of our
Aurora Optical Switch at our facilities. We expect to commence commercial
shipment under this contract during 2002. Our agreement with Cable & Wireless
gives it the right to reduce its
9
minimum purchase commitment from $350 million to $200 million if we do not
maintain a technological edge so that there exists in the marketplace superior
technology that we have not matched. However, if the minimum purchase
commitment under our agreement is reduced, then, at the end of the contract
term, all purchases made by Cable & Wireless, including prior purchases, will
be repriced at a higher rate. Cable & Wireless has the right to terminate the
agreement if we breach our obligations under the contract and fail to remedy
the breach within 30 days, we are prevented by forces beyond our control from
performing our obligations under the contract for more than 60 days or we
persistently breach our obligations under the contract, whether or not cured.
In September 1999, we entered into a five-year contract with Extant. On
September 29, 2000, Extant was acquired by Dynegy Global Communications, a
wholly-owned subsidiary of Dynegy, a publicly-traded energy company. As part of
the acquisition, our contract with Extant was transferred to Dynegy Connect, a
limited partnership owned 80% by subsidiaries of Dynegy and 20% by Telstra
Corporation, an Australian telecommunications and information services company.
Dynegy is proceeding with Extant's network build-out and in October of 2001
announced the commercial availability of its 44 city network spanning 16,000
miles with Tellium products at the core. Including prior purchases, we expect
Dynegy Connect will purchase approximately $250 million of products under the
contract, although it has no obligation to do so. However, under the terms of
this contract, Dynegy Connect is required to purchase its full requirements for
optical switches from us until November 1, 2003. Dynegy Connect has the right
to terminate the agreement if, among other things, we breach a material
obligation under the contract and fail to remedy the breach within 30 days, or
we violate any applicable law and so materially impair Dynegy Connect's ability
to perform its material obligations or receive its material benefits under the
contract. Our Aurora Optical Switch, Aurora 128, Aurora 32, StarNet Wavelength
Management System, StarNet Design Tools and StarNet Operating System have been
in service in the Dynegy Connect network since April 2000 (for the Aurora 32
and related software) and October 2001 (for the Aurora Optical Switch, Aurora
128 and related software). Dynegy Connect conducted laboratory testing of our
Aurora Optical Switch in the fourth quarter of 2000 and we commenced commercial
shipment under this contract during the first quarter of 2001. In the second
quarter of 2001, we commenced commercial shipment of the Aurora 128 to Dynegy
Connect. In 1999 we granted to affiliates of Dynegy Connect a warrant to
purchase 5,226,000 shares of our common stock at an exercise price of $3.05 per
share.
In September 2000, we entered into a contract with Qwest, a multinational
provider of voice, data and network services, relating to the sale of our
products. This contract was amended in April and in December 2001. Under the
terms of the contract as amended in April 2001, Qwest had a minimum purchase
commitment of $300 million over the first three years of the contract and,
subject to extensions under a limited circumstance, an additional $100 million
over the following two years of the contract for the deployment of our
products. As the contract was amended in December 2001, Qwest has agreed to
purchase approximately $400 million (including prior purchases) of our products
over the term of the contract, subject to reaching agreement on pricing and
technical specifications, and also on the schedule of development, production
and deployment of our Aurora Full-Spectrum switches. This contract expires on
December 31, 2005. Under the amendment, we have also agreed to give Qwest
additional flexibility to extend or terminate the remainder of the commitment
in a variety of circumstances. Products covered under the amended contract
include the Aurora Optical Switch, the StarNet Software Suite, including the
StarNet Wavelength Management System and the StarNet Operating System, and
Tellium's next generation all-optical switch, the Aurora Full-Spectrum. Qwest
began conducting laboratory testing of our Aurora Optical Switch in the fourth
quarter of 2000, and all products except the Aurora Full-Spectrum are currently
shipping. The Aurora Full-Spectrum is currently in development. As part of our
previous contract with Qwest, we had issued three warrants to a wholly-owned
subsidiary of Qwest to purchase 2,375,000 shares of our common stock at an
exercise price of $14.00 per share. Of those shares, one million relate to the
first warrant and are currently vested and exercisable. The remaining two
warrants representing 1,375,000 shares were terminated coincident with the
December 2001 contract amendment.
We also have shipped our Aurora 32 optical switch and other custom products
to the U.S. Department of Defense as part of their high-speed optical
networking program. Shipments are completed for this contract. Our agreement
with the U.S. Department of Defense to provide maintenance expired on November
1, 2000.
10
Advisory Board
In the first half of 2000, we established an advisory board with members
having various expertise to provide us with advice and to consult with us on
our business, including the development of our technology and marketing of our
products and services. We believe that this advisory board provides necessary
customer and industry guidance and is critical to the success of our business.
Individuals who are employees or affiliates of current or potential customers
have joined our advisory board, including Qwest in March 2001. All members of
our advisory board were granted options to purchase our common stock. In the
future, we may add additional individuals who are employees or affiliates of
current or potential customers to our advisory board. We reimburse the members
of our advisory board for reasonable out-of-pocket expenses they incur in
connection with their services. We may in the future grant additional stock
options to our advisory board members.
Sales and Marketing
We sell our products through a direct sales force. We have offices in
several locations around the world and we intend to establish relationships
with selected distribution and marketing partners, both domestically and
internationally, in order to extend our reach and serve new markets. As of
December 31, 2001, our sales and marketing organization consisted of 46
employees. We intend to further expand our sales force in Europe and may also
expand our sales force into other international markets.
Our marketing objectives include building market awareness and acceptance of
our company and our products by working very closely with our prospective
customers, industry analysts and consultants. We use our Web site as a major
communications vehicle, speak at relevant industry events and participate
actively in relevant standards organizations such as the Optical
Internetworking Forum, the Internet Engineering Task Force and the
Telecommunications Management Forum. We also conduct public relations
activities, including interviews, presentations at industry forums and investor
conferences and demonstrations for industry analysts. In addition, our senior
executives and our sales people have significant industry contacts as a result
of their prior experience.
Customer Service and Support
Our customer service team works collaboratively with our existing and
prospective customers to support their ongoing network deployments and help
them identify and create new high-speed services that they can offer to their
customers. We believe that this assistance is an integral aspect of our sales
and marketing efforts and can drive additional demand for our products. We have
assembled a nationwide team of dedicated customer engineers, and we are
expanding internationally to target new markets and support multinational
customers. As of December 31, 2001, our customer service and support
organization consisted of 64 employees.
Research and Development
We believe that to be successful we must continue to enhance our existing
products and develop new products that meet the rapidly evolving needs of our
customers. We have made, and will continue to make, a substantial investment in
research and development. We have assembled a team of highly-skilled engineers
who have significant data communications and telecommunications industry
experience drawn from approximately 40 companies. Our engineers have expertise
in fields such as optical system design, optical network design, hardware
development and software development, including key Internet protocol routing
expertise. As of December 31, 2001, we had 312 employees responsible for
product research and development. We are focused on enhancing the scalability,
performance and reliability of our intelligent optical switching products.
Intellectual Property, Proprietary Rights and Licensing
Our intellectual property portfolio includes rights to over 60 patents and
more than 90 patents pending. Our patents and patent applications are in the
fields of optical switching, algorithms for mesh networking and optical device
technology. The remaining duration of our patents generally ranges from 10 to
17 years. Our intellectual
11
property licenses are in the field of mesh networking and optical switching
devices and generally last for the life of the patents unless terminated
earlier in accordance with the terms of the licenses.
Our success and ability to compete depends on our ability to develop and
maintain the proprietary aspects of our technology and product marketing and to
operate without infringing on the proprietary rights of others. In addition, we
must continue to create and acquire rights to intellectual property in the
areas of optical networking technology, such as mesh networking, optical
switching, switch architecture, control systems and signaling algorithms. We
rely on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our intellectual property. We license our
intellectual property, including patents and software, under license
agreements, which impose restrictions on the licensee's ability to utilize the
intellectual property. Finally, we seek to limit disclosure of our intellectual
property by requiring employees and consultants with access to our proprietary
information to execute confidentiality agreements with us and by restricting
access to our proprietary information.
These legal protections afford only limited protection for our technology
and products. For example, others may independently develop similar or
competing technology or attempt to copy or use aspects of our products or
technology that we regard as proprietary. Furthermore, intellectual property
law may not fully protect products or technology that we consider to be our
own, and claims of intellectual property infringement may be asserted against
us or against our customers in connection with their use of our products.
Although we have not been involved in any intellectual property litigation,
we or our customers may be a party to litigation in the future to protect our
intellectual property rights or as a result of an allegation that we infringe
the intellectual property of others. Any parties asserting that our products
infringe upon their proprietary rights could force us to defend ourselves and,
pursuant to the indemnification provisions of some of our customer and supplier
contracts, possibly our customers or manufacturers against the alleged
infringement. These claims and any resulting lawsuit, if successful, could
subject us to significant liability for damages and weaken the extent of, or
lose the protection offered by, our proprietary rights. These lawsuits,
regardless of their success, would likely be time-consuming and expensive to
resolve and would divert our management's time and attention. This litigation
could also compel us to do one or more of the following:
. stop selling, incorporating or using our products that use the challenged
intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to make, use or sell the relevant technology, which license may
not be available on reasonable terms, or at all;
. redesign those products that use the technology; and
. pay monetary damages for past infringement of third-party intellectual
property rights.
We also currently license intellectual property from third parties, some of
which may subject us to royalty payments. The intellectual property associated
with optical networking products is evolving rapidly, so protection under a
license that was once adequate may be insufficient in the future. We may be
required to license additional intellectual property from third parties to
develop new products or enhance our existing products. These additional third-
party licenses may not be, and our existing third-party licenses may not
continue to be, available to us on commercially-reasonable terms.
Given the rapid technological changes in this industry, establishing and
maintaining a technology leadership position through the technological and
creative skills of our personnel, new product developments and enhancements to
existing products will be very important to us.
Competition
Competition in the market for public network infrastructure is intense. Our
competitors include Alcatel, CIENA Corporation, Corvis, Lucent Technologies
Inc., Nortel Networks Corporation, Sycamore Networks, Inc. and several new
companies such as Calient Networks, Inc. and Brightlink Networks. The market
for optical
12
switching continues to grow and therefore will continue to attract competitors
who will continue to introduce new products. Therefore, we expect the level of
competition to intensify over time. Our established competitors have longer
operating histories, greater name recognition, larger customer bases and
greater financial, technical, sales, marketing and manufacturing resources,
including more resources devoted to research and development of new products,
than we do. Our competitors could develop new technologies that compete with
our products or even render our products obsolete. In addition, some of our
competitors have more significant customer relationships and broader product
lines than we have.
Our objective is to become a leading provider of intelligent optical
switches for global telecommunications networks. We believe that we have
achieved a number of milestones that will position us to meet this objective.
For example, we were the first in our industry to ship an optical switch to a
customer and the first in our industry to ship a high capacity, expandable
512-port switch to a customer. In addition, we were the provider of the first
optical switch to carry commercial traffic in a customer's network. We have
also entered into purchase contracts with three well-known service providers,
Cable & Wireless, Dynegy Connect and Qwest.
For us to continue to compete successfully in this market, we must continue
to deliver optical switches that:
. can be easily expanded at low cost to meet the ever-increasing demands
driven by data services;
. lower a service provider's cost of building and operating an optical
network by reducing its complexity and increasing its flexibility;
. deliver a range of cost-effective solutions for small and large networks;
. operate with existing equipment and networks;
. comply with all applicable standards;
. increase the level of network reliability for data services;
. allow optical services to be delivered much more quickly and easily than
they are today; and
. provide software tools for service providers to plan, design and operate
their optical networks.
Manufacturing
We outsource almost all of the manufacturing of our products. We design,
specify and monitor all of the tests that are required to meet our internal and
external quality standards.
In 2001, we entered into an arrangement with Jabil Circuits, Inc., a leading
contract manufacturer of high-quality, technology-based equipment, to
manufacture printed circuit boards. Jabil provides comprehensive manufacturing
services, including assembly, test, control and shipment to our customers and
procure materials on our behalf. Under our agreement with Jabil, we have the
option to move final assembly and test functions to Jabil.
We are currently negotiating with several other vendors and distributors to
establish relationships that will support our future growth. In addition, we
are investing in automation, testing and data collection equipment to enable us
to further improve product quality as quickly as possible.
We believe that our relationship with Jabil and the continued outsourcing of
our manufacturing will enable us to:
. expand our access to key components;
. conserve the working capital that would be required to purchase inventory
or develop manufacturing facilities of our own; and
. better adjust manufacturing volumes to meet changes in demand.
13
We currently purchase products through purchase orders. We cannot assure you
that we will be able to continue this arrangement on a long-term basis on terms
acceptable to us, if at all.
In December 2000, we received ISO 9001 certification in conformance with
quality standards set by the International Organization for Standardization.
Employees
As of December 31, 2001, we had 544 employees, of which:
. 312 were in research and development;
. 110 were in sales and marketing, customer service and support;
. 65 were in manufacturing, quality assurance and documentation; and
. 57 were in finance and administration.
We believe our relations with our employees are good. None of our employees
is covered by a collective bargaining agreement. Generally, our employees are
retained on an at-will basis. All of our employees are required to sign
confidentiality and intellectual property agreements.
ITEM 2. PROPERTIES
Our headquarters are located in Oceanport, New Jersey and consist of
approximately 72,000 square feet of leased space, the lease for which expires
in June 2005. We also have a major facility across the street from our
Oceanport headquarters in West Long Branch, New Jersey, which consists of
approximately 68,000 square feet of manufacturing and training space and 25,000
square feet of office space. The lease for the manufacturing and training space
expires in November 2006. The lease for the office space expires in October
2005.
ITEM 3. LEGAL PROCEEDINGS
To our knowledge, there are no material pending legal proceedings to which
we or our subsidiaries are a party or of which any of our property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our shareholders during the
fourth quarter of the fiscal year ended December 31, 2001.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted and traded on the Nasdaq National Market
under the symbol "TELM" since May 17, 2001. The following sets forth the high
and low sales prices for our common stock as reported by Nasdaq for the fiscal
quarters indicated.
Price Range of
Common Stock
--------------
High Low
------ ------
Fiscal Year 2001
Second Quarter ended June 30, 2001........ $27.10 $15.30
Third Quarter ended September 30, 2001.... 19.30 4.06
Fourth Quarter ended December 31, 2001.... 8.62 4.40
The closing sale price for the common stock on January 2, 2002 was $6.50.
The market price of our common stock has fluctuated significantly and may be
subject to significant fluctuations in the future.
As of December 31, 2001, there were approximately 482 holders of record of
our common stock. Such number does not include persons whose shares are held of
record by a bank, brokerage house or clearing agency, but does include such
banks, brokerage houses and clearing agencies.
We have never declared or paid any cash dividends on our capital stock or
other securities and do not anticipate paying any cash dividends in the
foreseeable future. We intend to retain future earnings, if any, to finance the
expansion and development of our business.
On September 26, 2001, we issued 71,316 shares of common stock to Comdisco,
Inc. upon the cashless exercise of two warrants to purchase 29,509 shares of
our Series C preferred stock based on an exercise price of $3.05 per share. The
issuance of these shares was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read with our
financial statements and related notes thereto appearing elsewhere in this
report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The statement of operations data set forth below for
the period from May 8, 1997 (inception) to December 31, 1997 and for the fiscal
year ended December 31, 1998 and the balance sheet data as of December 31, 1997
and 1998 have been derived from our financial statements, which were audited by
Ernst & Young LLP, independent auditors. The statement of operations data set
forth below for the fiscal years ended December 31, 1999, 2000 and 2001 and the
balance sheet data as of December 31, 2000 and 2001 have been derived from our
financial statements, which have been audited by Deloitte & Touche LLP,
independent auditors, and are included elsewhere in this report. The historical
results are not necessarily indicative of results to be expected for any future
period.
Period from
May 8, 1997
(Inception) to Year Ended December 31,
December 31, ----------------------------------------
1997 1998 1999 2000 2001
-------------- -------- -------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Revenue......................................... $ 55 $ 1,364 $ 5,227 $ 15,605 $ 136,403
Non-cash charges related to equity issuances.... -- -- 584 2,774 60,758
------- -------- -------- --------- ---------
Revenue, net of non-cash charges................ 55 1,364 4,643 12,831 75,645
Cost of revenue................................. 12 1,260 3,890 15,731 87,347
------- -------- -------- --------- ---------
Gross profit (loss).......................... 43 104 753 (2,900) (11,702)
Operating expenses:
Research and development..................... 4,540 14,461 9,600 43,648 61,244
Sales and marketing.......................... 202 1,858 3,843 14,038 29,714
General and administrative................... 1,671 3,644 4,386 15,878 25,729
Amortization of intangible assets............ -- -- -- 8,037 31,667
Stock-based compensation expense............. -- 924 2,772 32,864 59,948
------- -------- -------- --------- ---------
Total operating expenses................. 6,413 20,887 20,601 114,465 208,302
Operating loss.................................. (6,370) (20,783) (19,848) (117,365) (220,004)
Other income (expense), net..................... 802 7 -- 5 40
Interest income (expense), net.................. 303 266 (162) 6,997 8,975
------- -------- -------- --------- ---------
Net loss........................................ $(5,265) $(20,510) $(20,010) $(110,363) $(210,989)
======= ======== ======== ========= =========
Basic and diluted net loss per share............ $(17.08) $ (13.56) $ (8.78) $ (13.96) $ (2.98)
Weighted average shares outstanding used in
computing basic and diluted net loss per share 309 1,512 2,279 7,906 70,887
December 31,
-------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- --------- ---------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents........................... $ 8,424 $ 7,733 $ 45,239 $ 188,175 $ 218,708
Working capital (deficiency)........................ 7,790 (3,120) 45,295 192,681 244,979
Total assets........................................ 9,475 10,781 53,234 546,298 553,839
Long term debt and obligations under capital leases,
less current portion.............................. 74 9,465 1,339 2,701 708
Preferred stock..................................... 13,883 14,883 87,728 309,544 --
Total stockholders' equity (deficiency)............. (5,264) (24,741) (40,054) 179,936 494,739
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview
We design, develop and market high-speed, high-capacity, intelligent optical
switches that enable network service providers to quickly and cost-effectively
deliver new high-speed services. Our product line consists of several hardware
products and related software tools. From May 1997 to September 1999, we
developed and manufactured dense wave division multiplexing products and the
initial versions of our Aurora 32 optical switch for the U.S. Department of
Defense. Accordingly, substantially all of our revenue in 1998 and the first
two quarters of 1999 was derived from product sales to Telcordia Technologies,
Inc., in connection with a project with the U.S. Department of Defense. All of
our obligations under this contract have been satisfied, and we do not
anticipate recognizing future revenue from equipment and product sales under
this contract. During the second quarter of 1999, we decided to focus on the
development of optical switches and discontinued the manufacture of dense wave
division multiplexing products. In September 1999, we shipped our Aurora 32
optical switch to Extant (now Dynegy Connect), and in the third and fourth
quarters of 2000, we delivered our next-generation Aurora Optical Switch to
Extant and Qwest, respectively, for evaluation in their laboratories. In the
second quarter of 2001, we shipped our Aurora 128 to Dynegy Connect. We
currently market and sell all of these products. Our future revenue growth
depends on the commercial success of our optical switches. Although we are
developing and plan to introduce new products and enhancements, we may not be
successful in these efforts.
We have purchase contracts with the following three customers: Cable &
Wireless, Dynegy Connect, an affiliate of Dynegy Global Communications, and
Qwest. Under the terms of this contract, Cable & Wireless has a minimum
purchase commitment of $350 million for the worldwide deployment of our
products, including the Aurora Optical Switch, the StarNet Wavelength
Management System and the StarNet Operating System. Cable & Wireless has
conducted laboratory testing of the Aurora Optical Switch. We expect to
commence commercial shipment to Cable & Wireless during 2002. Including prior
purchases, we expect Dynegy Connect will purchase approximately $250 million of
products under our contract, although it has no obligation to do so. However,
under the terms of this contract, Dynegy Connect is required to purchase its
full requirements for optical switches from us until November 1, 2003. Our
Aurora 32 optical switch, StarNet Wavelength Management System, StarNet Design
Tools and StarNet Operating System have been in service in the Dynegy Connect
network since April 2000. Dynegy Connect conducted laboratory testing on the
Aurora Optical Switch during the fourth quarter of 2000. We commenced
commercial shipment to Dynegy Connect of the Aurora Optical Switch during the
first quarter of 2001 and of the Aurora 128 in the second quarter of 2001. We
have a five-year contract with Qwest, a multinational provider of voice, data
and network services. Under the terms of this contract, Qwest has agreed to
purchase approximately $400 million of our products (including prior purchases)
over the term of the contract, as amended on December 14, 2001, including the
Aurora Optical Switch, the StarNet Wavelength Management System, the Aurora
Full-Spectrum and the StarNet Operating System. Qwest began conducting
laboratory testing of the Aurora Optical Switch in the fourth quarter of 2000,
and we commenced commercial shipment under this contract during the first
quarter of 2001. We expect that our revenues will be generated by sales to a
limited number of customers for the foreseeable future.
Since our inception, we have incurred significant losses and as of December
31, 2001, we had an accumulated deficit of approximately $367.1 million. We
have not achieved profitability on a quarterly or an annual basis and
anticipate that we will continue to incur net losses for the foreseeable
future. We have a lengthy sales cycle for our products and, accordingly, we
expect to incur sales related costs and other expenses before we realize the
related revenue. We also expect to incur significant sales and marketing,
research and development and general and administrative expenses and, as a
result, we will need to generate significant revenues to achieve and maintain
profitability.
On May 17, 2001, we completed an initial public offering of our common
stock, which generated net cash proceeds of approximately $139.3 million.
17
Results of Operations
We plan to continue to fund meaningful levels of research and development,
enhance our sales and marketing operations, broaden our customer support
capabilities and develop new distribution channels. We also plan to enhance our
general and administrative functions to address the increased reporting and
other administrative demands that result from being a publicly traded company
and the increasing size of our business. Our operating expenses are largely
based on anticipated revenue trends and a high percentage of our expenses are,
and will continue to be, fixed in the short term. In addition, we expect to
generate revenues from a limited number of customers for the foreseeable
future. As a result of these factors, we expect to continue generating
operating losses in the short term.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenue
For the years ended December 31, 2001 and 2000, we recognized gross revenue
before non-cash charges related to equity issuances of approximately $136.4
million and $15.6 million, respectively. The approximate $120.8 million
increase from 2000 to 2001 is due to sales of our Aurora Optical Switch and
Aurora-128 to Dynegy Connect and Qwest in 2001, whereas sales for 2000 were
comprised mainly of our Aurora-32 and the first shipment of our Aurora Optical
Switch in the second half of 2000. Non-cash charges related to warrant
issuances to customers totaled approximately $60.8 million for the year ended
December 31, 2001 compared to approximately $2.8 million for the same period in
2000. The increase from 2000 to 2001 is primarily due to higher revenue levels
from the customers for which these charges apply as well as a $19.2 million
charge related to the forfeiture of warrants in conjunction with the amendment
of a customer supply contract. In 2002 we expect that substantially all of our
revenue will come from a limited number of customers.
Cost of Revenue
For the years ended December 31, 2001 and 2000, we incurred cost of revenue
of approximately $87.3 million and approximately $15.7 million, respectively,
which represented an increase of approximately $71.6 million. The increase was
directly related to the corresponding increase in revenue and includes
increased material costs of approximately $54.4 million, increased personnel
costs of approximately $5.6 million and increased overhead costs of
approximately $7.1 million. Cost of revenue for the years ended December 31,
2001 and 2000 include amortization of stock-based compensation of approximately
$5.8 million and approximately $1.2 million. Gross Margins improved from 2000
to 2001 primarily as a result of the scale up of revenues and improved
production efficiencies. We expect our cost of revenue to increase in absolute
dollars as our revenue increases. We expect our revenue growth to exceed our
cost of revenue growth in 2002, although actual results could vary
significantly depending on changing conditions in our business.
Research and Development Expense
For the years ended December 31, 2001 and 2000, we incurred research and
development expense of approximately $61.2 million and approximately $43.6
million, respectively, which represented an increase of approximately $17.6
million. The increase is attributed primarily to an increase in personnel costs
of approximately $25.1 million and increased depreciation and was partly offset
by decreased prototype expenses of approximately $13.5 million as a result of
the release of our Aurora Optical Switch in the second half of the year 2000.
As of December 31, 2001, the number of employees dedicated to research and
development was 312, as compared to 249 at December 31, 2000. In future periods
the Company expects to incur research and development expense which may be
greater than spending levels in 2001, although actual results could vary
significantly depending on changing conditions in our business.
Sales and Marketing Expense
For the years ended December 31, 2001 and 2000, we incurred sales and
marketing expense of approximately $29.7 million and $14.0 million,
respectively. This represented an increase in sales and marketing
18
expense of approximately $15.7 million over the same period in 2000. The
increase resulted primarily from approximately $11.1 million of costs
associated with the hiring of additional sales and marketing personnel, as well
as increases in marketing program costs of approximately $2.4 million.
Marketing program costs included an increase of approximately $1.0 million for
travel and $1.4 million for advertising and promotion. As of December 31, 2001,
the number of sales and marketing personnel was 82 people, as compared to 70
people at December 31, 2000. The Company expects to incur sales and marketing
expense in future periods at levels consistent with spending levels in 2001,
although actual results could vary significantly depending on changing
conditions in our business.
General and Administrative Expense
For the years ended December 31, 2001 and 2000, we incurred general and
administrative expense of approximately $25.7 million and approximately $15.9
million, respectively. This represented an increase in general and
administrative expense of approximately $9.8 million over the same period in
2000, of which approximately $2.2 million resulted from the hiring of
additional general and administrative personnel, approximately $1.5 million
resulted from increased facility expenses and approximately $3.3 million
represented increased depreciation. The Company expects to incur general and
administrative expense in future periods at levels consistent with spending
levels in 2001, although actual results could vary significantly depending on
changing conditions in our business.
Amortization of Intangible Assets and Goodwill
For the years ended December 31, 2001 and 2000, we incurred amortization
expense of approximately $31.7 million and $8.0 million, respectively. Of these
amounts, approximately $15.4 million and approximately $3.4 million relate to
the amortization of goodwill for the years 2001 and 2000, respectively.
Goodwill relates solely to our acquisition of Astarte in 2000 and has been
amortized over an estimated useful life of 5 years. Amortization of
identifiable intangible assets, related to our acquisition of Astarte and an
intellectual property license from AT&T in 2000, totaled approximately $16.3
million and approximately $4.6 million for the years 2001 and 2000.
Effective January 1, 2002, we will not record any additional amortization
expense related to goodwill in accordance with SFAS No. 142 "Goodwill and Other
Intangible Assets", however, impairment reviews may result in future periodic
write downs. We expect amortization expense for intangible assets to be
approximately $16.3 million for the year 2002, based on the identifiable
intangible assets we carry on our balance sheet at December 31, 2001.
Stock-Based Compensation Expense
For the years ended December 31, 2001 and 2000, we recorded approximately
$59.9 million and approximately $32.9 million of stock-based compensation
expense. The increase of approximately $27.0 million resulted primarily from
the issuance of additional options with an exercise price less than the deemed
fair market value of our stock at the time of the grant during the latter part
of 2000 and the first half of 2001. We currently expect to incur similar
charges in the future.
Interest Income, Net
For the year ended December 31, 2001, we recorded interest income, net of
interest expense, of approximately $9.0 million, as compared to interest
income, net of interest expense, of approximately $7.0 million for the same
period in 2000. Net interest income consists of interest earned on our cash and
cash equivalent balances offset by interest expense related to outstanding
borrowings. The increase in our interest income for this period is primarily
attributable to the interest income on the cash proceeds from our Series E
preferred stock issuance in September 2000 and our initial public offering in
May 2001.
19
Income Taxes
We have recorded no income tax provision or benefit for the years ended
December 31, 2001 and 2001, due to our operating loss position and the
uncertainty of our ability to realize our deferred income tax assets, including
our net operating loss carry forwards.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue
For the year ended December 31, 2000, we recognized revenue in the amount of
approximately $15.6 million. This represents an increase of approximately $10.4
million compared to the year ended December 31, 1999. This increase was
primarily due to increased sales of our Aurora 32 optical switches to Dynegy
and sales of our Aurora Optical Switch to Dynegy and Qwest in 2000. Our revenue
for the year ended December 31, 2000 consisted of approximately $7.3 million
related to Aurora 32 product sales and approximately $6.2 million related to
Aurora Optical Switch product sales. For the year ended December 31, 1999, we
recognized revenue of approximately $5.2 million, of which approximately $3.2
million related to Aurora 32 product sales and approximately $2.0 million to
our contract with the U.S. Department of Defense.
For the year ended December 31, 2000, we recognized as an offset to revenue
approximately $2.8 million of non-cash charges related to the warrants issued
to Dynegy Global Communications and Qwest compared to approximately $584,000
for the year ended December 31, 1999.
Cost of Revenue
For the year ended December 31, 2000, we incurred cost of revenue of
approximately $15.7 million, which represented an increase of approximately
$11.8 million over the same period in 1999. This increase was directly related
to the corresponding increase in revenue. The increase was primarily due to an
increase in material costs of approximately $6.1 million, manufacturing expense
of approximately $3.2 million and personnel costs of approximately $1.4
million. Cost of revenue for the year ended December 31, 2000 includes
amortization of stock-based compensation expense of approximately $1.2 million
compared to charges of approximately $85,000 for the year ended December 31,
1999.
Research and Development Expense
For the year ended December 31, 2000, we incurred research and development
expense of approximately $43.6 million, of which approximately $17.6 million
represented personnel costs and approximately $23.0 million represented
prototype development expense. This represented an increase of approximately
$34.0 million over the same period in 1999. The increased expenses were
primarily associated with a significant increase in personnel-related expenses
of approximately $11.8 million and an increase of approximately $20.0 million
in prototype expenses for the design and development of our Aurora Optical
Switch. As of December 31, 2000, the number of employees dedicated to research
and development was 249, as compared to 59 at December 31, 1999.
Sales and Marketing Expense
For the year ended December 31, 2000, we incurred sales and marketing
expense of approximately $14.0 million, of which approximately $7.1 million
represented personnel costs and approximately $5.7 million represented costs
related to marketing programs. This represented an increase of approximately
$10.2 million over the same period in 1999. The increase resulted from costs
associated with the hiring of additional sales and marketing personnel of
approximately $5.7 million as well as marketing program costs. Increases in
marketing program costs included an increase of approximately $1.2 million for
travel, approximately $300,000 for outside consulting services and
approximately $2.9 million on advertising and promotion. As of December 31,
2000, the number of sales and marketing personnel was 70 people, as compared to
11 people at December 31, 1999.
20
General and Administrative Expense
For the year ended December 31, 2000, we incurred general and administrative
expense of approximately $15.9 million, of which approximately $4.5 million
represented expenses for personnel, approximately $3.6 million represented
professional fees and approximately $1.5 million represented depreciation. This
represented an increase of approximately $11.5 million from the same period in
1999. Approximately $3.1 million resulted from the hiring of additional general
and administrative personnel and approximately $2.4 million resulted from
increased professional fees.
Amortization of Intangible Assets and Goodwill
For the year ended December 31, 2000, we incurred amortization expense of
approximately $8.0 million, of which approximately $3.0 million related to the
acquisition of an intellectual property license from AT&T and approximately
$5.0 million related to the goodwill and intangible assets related to our
acquisition of Astarte. We did not incur any amortization expense during the
year ended December 31, 1999.
Stock-Based Compensation Expense
For the year ended December 31, 2000, we recorded approximately $32.9
million stock-based compensation expense. This represents an increase of
approximately $30.1 million over the same period in 1999. The increase resulted
primarily from the issuance of additional options during the year ended
December 31, 2000 with an exercise price less than the deemed fair market value
of our stock at the time of the grant.
Interest Income, Net
For the year ended December 31, 2000, we recorded interest income, net of
interest expense, of approximately $7.0 million, as compared to net interest
expense of approximately $162,000 for the year ended December 31, 1999. Net
interest income consists of interest earned on our cash and cash equivalent
balances offset by interest expense related to outstanding borrowings. The
increase in our interest income for the year ended December 31, 2000 is
primarily attributable to the interest income on the cash proceeds from our
Series D preferred stock issuance in December 1999 and January 2000 and Series
E preferred stock issuance in September 2000. This interest income was offset
by interest expense related to an equipment financing arrangement we secured in
November 1999 for up to $6.0 million.
Income Taxes
We have recorded no income tax provision or benefit for the years ended
December 31, 1999 and 2000 due to our operating loss position and the
uncertainty of our ability to realize our deferred income tax assets, including
our net operating loss carry forwards.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through sales of
our capital stock. As of December 31, 2001, our cash and cash equivalents
totaled approximately $218.7 million and our working capital totaled
approximately $245.0 million.
Cash used in operating activities for the years ended December 31, 2001 and
2000 was approximately $64.3 million and $79.9 million, respectively. Our
improved cash from operating activities resulted primarily from increased
revenue and an improved profit margin while our net loss increased as a result
of significant non cash charges.
Cash used in investing activities for the years ended December 31, 2001 and
2000 was approximately $55.0 million and approximately $12.2 million,
respectively. The increase in net cash used for investing activities
21
reflects primarily increased purchases of property and equipment primarily for
computer and test equipment for our development and manufacturing activities as
well as leasehold improvements related to the buildout of our office space.
Cash provided by financing activities for the years ended December 31, 2001
and 2000 was approximately $149.8 million and $235.1 million, respectively. In
January 2000, we issued an additional $5.0 million of Series D preferred stock
and in June 2000, we issued approximately $4.1 million of Series A preferred
stock to existing shareholders upon the exercise of warrants. In September
2000, we raised net proceeds of approximately $212.5 million from the sale of
our Series E preferred stock. For the year ended December 31, 2000, we raised
net proceeds of approximately $10.9 million from the sale of our common stock.
On May 17, 2001 we completed an initial public offering of 10,350,000 shares of
common stock at a price of $15.00 per share. Net proceeds from this public
offering were approximately $139.3 million, after deducting underwriting fees,
commissions and offering expenses. Pending our use of the net proceeds, we have
invested them in interest bearing securities with maturities of less than 30
days. For the year ended December 31, 2001, we received approximately $6.7
million from the exercise of stock options.
In November 1999, we entered into a lease line of credit with Comdisco that
allows us to finance up to $4.0 million of equipment purchases. The line bears
an interest rate of 7.5% and expires in November 2002. As of December 31, 2000
and 2001 approximately $3.6 million and $0, respectively, were outstanding
under this facility.
During the year ended December 31, 2000, we entered into a $10.0 million
line of credit with Commerce Bank. The line of credit bears interest at 6.75%
and expires on June 30, 2002. As of December 31, 2000 and 2001, approximately
$4.0 million and approximately $8.0 million, respectively, was outstanding
under this line of credit. Management expects to continue this line of credit
throughout 2002.
We have not entered into any agreements for derivative financial
instruments, have no obligations to provide vendor financing to our customers
and have no obligations other than recorded on our balance sheet, except for
our operating lease agreements described in Note 12 to our consolidated
financial statements. Our contractual cash obligations as of December 31, 2001
are as follows:
Payments Due by Period
------------------------------------------------------------------
Contractual Obligations Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
- ----------------------- ----------- ---------------- ----------- ----------- -------------
Notes Payable and Bank Line of Credit $ 9,185,246 $ 8,601,847 $ 583,399 $ -- $ --
Operating Leases..................... 11,757,781 2,597,460 5,355,307 3,432,991 372,023
Capital Lease Obligations............ 220,125 95,612 124,513 -- --
----------- ----------- ---------- ---------- --------
Total Contractual Cash Obligations... $21,163,152 $11,294,919 $6,063,219 $3,432,991 $372,023
=========== =========== ========== ========== ========
We expect to use our available cash, our line of credit facilities and cash
anticipated to be available from future operations, primarily to fund operating
losses and for working capital and other general corporate purposes. We may
also use a portion of our available cash to acquire or invest in businesses,
technologies or products that are complementary to our business. We have not
determined the amounts we plan to spend on any of the uses described above or
the timing of these expenditures.
We believe that our available cash, our line of credit facilities and cash
anticipated to be available from future operations, will enable us to meet our
working capital requirements for the next 12 months. Our expenses have
exceeded, and in the foreseeable future are expected to exceed, our revenue.
Our future liquidity and capital requirements will depend upon numerous
factors, including expansion of operations, product development and sales and
marketing. Also, we may need additional capital to fund cash acquisitions of
complementary businesses and technologies, although we currently have no
commitments or agreements for any cash acquisitions. If capital requirements
vary materially from those currently planned, we may require additional
financing sooner than
22
anticipated. Any additional equity financing may be dilutive to our
stockholders and debt financing, if available, may involve restrictive
covenants with respect to dividends, raising capital and other financial and
operational matters that could restrict our operations.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements. However, certain of our accounting
policies are particularly important to the portrayal of our financial position
and results of operations and require the application of significant judgment
by our management; as a result they are subject to an inherent degree of
uncertainty. In applying those policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of
certain estimates. Those estimates are based on our historical experience,
terms of existing contracts, our observance of trends in the industry,
information provided by our customers and information available from other
outside sources, as appropriate. Our significant accounting policies include:
. Inventories--Inventories are stated at the lower of cost or market, cost
being determined on the first-in, first-out method. We regularly review
inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast of product
demand and production requirements for the next twelve months. A
significant increase in the demand for our products could result in a
short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount
of excess inventory quantities on hand. In addition, our industry is
characterized by rapid technological change, frequent new product
development, and rapid product obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand.
Therefore, although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes
in demand or technological developments could have a significant impact
on the value of our inventory and our reported operating results.
. Revenue Recognition--The Company recognizes revenue from equipment sales
when the product has been shipped. For transactions where we have yet to
obtain customer acceptance in accordance with the terms of an agreement,
revenue is deferred until terms of acceptance are satisfied. Sales
contracts do not permit the right of return of product by the customer
once the terms of acceptance are satisfied, if applicable. Software
license revenue for software embedded within our optical switches or its
stand alone software products is recognized when a purchase order has
been received or a sales contract has been executed, delivery of the
product and acceptance by the customer have occurred, the license fees
are fixed and determinable, and collection is probable. The portion of
revenue that relates to our obligations to provide customer support, if
any, is deferred, based upon the price charged for customer support when
it is sold separately, and recognized ratably over the maintenance
period. Amounts received in excess of revenue recognized are included as
deferred revenue in the accompanying balance sheet. Revenue from
technical support and maintenance contracts is deferred and recognized
ratably over the maintenance period. Revenue results are difficult to
predict, and any shortfall in revenue or delay in recognizing revenue
could cause our operating results to vary significantly from quarter to
quarter and could result in future operating losses.
. Customer Warrant Grants--The Company has granted warrants to customers in
conjunction with the execution of customer supply agreements. As
management believes that the customers will fulfill their commitments
under the supply agreements the fair value of the warrants has been
deferred and is being recorded as contra revenue as the customers make
purchases from us. The fair values of the warrants were determined
utilizing a Black-Scholes option pricing model. The Black-Scholes option
pricing model was developed for use in estimating the fair value of
options that have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes option pricing model requires the input of
highly subjective assumptions, including, volatility, expected life and
risk-free interest rates. Because our warrants 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 customer
warrant grants.
23
. Warranties--We offer warranties of various lengths to our customers
depending upon the specific product and terms of the customer purchase
agreement. Our standard warranties may require us to repair or replace
defective product returned to us during such warranty period at no cost
to the customer. We record an estimate for warranty related costs based
on our historical experience and estimated repair costs at the time of
sale. While our warranty costs have historically been within our
expectations and the provisions established, we cannot guarantee that we
will continue to experience the same warranty return rates or repair
costs that we have in the past. A significant increase in product
failure, or a significant increase in the costs to repair our products,
could have a material adverse impact on our operating results for the
period or periods in which such returns or additional costs materialize.
Recent Accounting Pronouncements
On June 29, 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" was approved by the Financial Accounting Standards
Board ("FASB"). SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets, arising from these business combinations, will
remain on the balance sheet and not be amortized. On an annual basis, and when
there is reason to suspect that their values have been diminished or impaired,
these assets must be tested for impairment, and write-downs may be necessary.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill and
indefinite lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations and indefinite lived intangible assets, will
cease upon adoption of this statement. Identifiable intangible assets will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". The Company is required to
implement SFAS No. 142 on January 1, 2002. If SFAS No. 142 had been in effect
for the years ended December 31, 2000 and 2001, amortization expense related to
goodwill and net loss would have been reduced by approximately $3.4 million and
$15.5 million, respectively; however, impairment reviews may result in future
periodic write downs. The Company is currently evaluating the impact that the
adoption of SFAS No. 142 on January 1, 2002 will have on its results of
operations and financial position.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations and costs associated with the retirement of tangible
long-lived assets. The Company is required to implement SFAS No. 143 for fiscal
years beginning after June 15, 2002 and has not yet determined the impact that
this statement will have on its results of operations and financial position.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" and establishes accounting and reporting standards for
long-lived assets to be disposed of by sale. This standard applies to all
long-lived assets, including discontinued operations. SFAS No. 144 requires
that those assets be measured at the lower of carrying amount or fair value
less cost to sell. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company is
required to implement SFAS No. 144 for fiscal years beginning after December
15, 2001. The adoption of this standard on January 1, 2002 had no impact on the
Company's financial position, results of operations, or cash flows.
24
RISK FACTORS
Risks Related to Our Business and Financial Results
We have incurred significant losses to date and expect to continue to incur
losses in the future, which may cause our stock price to decline.
We have incurred significant losses to date and expect to continue to incur
losses in the future. We had net losses of approximately $110.4 million for the
year ended December 31, 2000 and approximately $211.0 million for the year
ended December 31, 2001. As of December 31, 2000 and December 31, 2001, we had
an accumulated deficit of approximately $156.1 million and $367.1 million,
respectively. We have large fixed expenses and expect to continue to incur
significant manufacturing, research and development, sales and marketing,
administrative and other expenses in connection with the ongoing development
and expansion of our business. We expect these operating expenses to increase
as we increase our spending in order to develop and grow our business. In order
to become profitable, we will need to generate and sustain higher revenue. If
we do not generate sufficient revenues to achieve or sustain profitability, our
stock price will likely decline.
Our limited operating history makes forecasting our future revenues and
operating results difficult, which may impair our ability to manage our
business and your ability to assess our prospects.
We began our business operations in May 1997 and shipped our first optical
switch in January 1999. We have limited meaningful historical financial and
operational data upon which we can base projected revenues and planned
operating expenses and upon which you may evaluate us and our prospects. As a
young company in the new and rapidly evolving optical switching industry, we
face risks relating to our ability to implement our business plan, including
our ability to continue to develop and upgrade our technology and our ability
to maintain and develop customer and supplier relationships. You should
consider our business and prospects in light of the heightened risks and
unexpected expenses and problems we may face as a company in an early stage of
development in our industry.
We expect that substantially all of our revenues will be generated from a
limited number of customers, including Cable & Wireless, Dynegy Connect and
Qwest. The termination or deterioration of our relationship with these
customers will have a significant negative impact on our revenue and cause us
to continue to incur substantial operating losses.
For the years ended December 31, 2000 and 2001, we have derived significant
revenue from sales under our contract with Extant, which was transferred to
Dynegy Connect in September 2000. We anticipate that a majority of our revenues
for the foreseeable future will be derived from Cable & Wireless, Dynegy
Connect and Qwest.
Although Dynegy Connect has agreed to purchase its full requirements for
optical switches from us until November 1, 2003, Dynegy Connect is not
contractually obligated to purchase future products or services from us and may
discontinue doing so at any time. Dynegy Connect is permitted to terminate the
agreement for, among other things, a breach of our material obligations under
the contract.
Under our agreement with Cable & Wireless, Cable & Wireless has made a
commitment to purchase a minimum of $350 million of our optical switches by
August 7, 2005. Our agreement with Cable & Wireless gives Cable & Wireless the
right to reduce its minimum purchase commitment from $350 million to $200
million if we do not maintain a technological edge so that there exists in the
marketplace superior technology that we have not matched. This agreement also
permits Cable & Wireless to terminate the agreement upon breach of a variety of
our obligations under the contract.
Under our agreement with Qwest, Qwest has agreed to purchase approximately
$400 million (including prior purchases) of our optical switches over the term
of the contract, subject to reaching agreement on price and technical
specifications, and also on the schedule of development, production and
deployment of our Aurora Full-Spectrum switches. Under our agreement, we have
also agreed to give Qwest additional flexibility to extend or terminate the
commitment in a variety of circumstances.
25
If any of these customers elects to terminate its contract with us or if a
customer fails to purchase our products for any reason, we would lose
significant revenue and incur substantial operating losses, which would
seriously harm our ability to build a successful business.
If we do not attract new customers, our revenue may not increase.
We are currently very dependent on three customers. We must expand our
customer base in order to succeed. If we are not able to attract new customers
who are willing to make significant commitments to purchase our products and
services for any reason, including if there is a downturn in their businesses,
our business will not grow and our revenue will not increase. Our customer base
and revenue will not grow if:
. customers are unwilling or slow to utilize our products;
. we experience delays or difficulties in completing the development and
introduction of our planned products or product enhancements;
. our competitors introduce new products that are superior to our products;
. our products do not perform as expected; or
. we do not meet our customers' delivery requirements.
In the past, we issued warrants to some customers. We may not be able to
attract new customers and expand our sales with our existing customers if we do
not provide warrants or other incentives.
If our line of optical switches or their future enhancements are not
successfully developed, they will not be accepted by our customers and our
target market, and our future revenue will not grow.
We began to focus on the marketing and the selling of optical switches in
the second quarter of 1999. Our future revenue growth depends on the commercial
success and adoption of our optical switches.
We are developing new products and enhancements to existing products. We may
not be able to develop new products or product enhancements in a timely manner,
or at all. For example, our Aurora Full-Spectrum switch depends on advancements
in optical components, including micro-electromechanical systems, which have
not yet been proven for telecommunications products. Any failure to develop new
products or product enhancements will substantially decrease market acceptance
and sales of our present and future products. Any failure to develop new
products or product enhancements could also delay purchases by our customers
under their contracts, or, in some cases, could cause us to be in breach under
our contracts with our customers. Even if we are able to develop and
commercially introduce new products and enhancements, these new products or
enhancements may not achieve widespread market acceptance and may not be
satisfactory to our customers. Any failure of our future products to achieve
market acceptance or be satisfactory to our customers could slow or eliminate
our revenue growth.
Due to the long and variable sales cycles for our products, our revenues and
operating results may vary significantly from quarter to quarter. As a result,
our quarterly results may be below the expectations of market analysts and
investors, causing the price of our common stock to decline.
Our sales cycle is lengthy because a customer's decision to purchase our
products involves a significant commitment of its resources and a lengthy
evaluation, testing and product qualification process. We may incur substantial
expenses and devote senior management attention to potential relationships that
may never materialize, in which event our investments will largely be lost and
we may miss other opportunities. In addition, after we enter into a contract
with a customer, the timing of purchases and deployment of our products may
vary widely and will depend on a number of factors, many of which are beyond
our control, including:
. specific network deployment plans of the customer;
. installation skills of the customer;
26
. size of the network deployment;
. complexity of the customer's network;
. degree of hardware and software changes required; and
. new product availability.
For example, customers with significant or complex networks usually expand
their networks in large increments on a periodic basis. Accordingly, we may
receive purchase orders for significant dollar amounts on an irregular and
unpredictable basis. The long sales cycles, as well as the placement of large
orders with short lead times on an irregular and unpredictable basis, may cause
our revenues and operating results to vary significantly and unexpectedly from
quarter to quarter. As a result, it is likely that in some future quarters our
operating results may be below the expectations of market analysts and
investors, which could cause the trading price of our common stock to decline.
We expect the average selling prices of our products to decline, which may
reduce revenues and gross margins.
Our industry has experienced a rapid erosion of average product selling
prices. Consistent with this general trend, we anticipate that the average
selling prices of our products will decline in response to a number of factors,
including:
. competitive pressures;
. increased sales discounts; and
. new product introductions by our competitors.
If we are unable to achieve sufficient cost reductions and increases in
sales volumes, this decline in average selling prices of our products will
reduce our revenues and gross margins.
We will be required to record significant non-cash charges as a result of
warrants, options and other equity issuances. These non-cash charges will
adversely affect our future operating results and investors may consider this
impact material, in which case the price of our common stock could decline.
The warrant held by affiliates of Dynegy Connect allows them to purchase
5,226,000 shares of our common stock at $3.05 per share. When we granted the
warrant, the majority of shares subject to the warrant were scheduled to become
vested and exercisable as Dynegy Connect met specified milestones during the
term of our contract. As of November 2, 2000, we amended the warrant agreement
to immediately vest all of the remaining shares subject to the warrant. The
revised agreement provides that the warrant becomes exercisable based on the
schedule of milestones previously contained in the warrant. If the milestones
are not reached by March 31, 2005, the remaining unexercised shares subject to
the warrant shall then become exercisable. In connection with the execution of
this amendment, we recorded deferred warrant expenses of approximately $90.6
million. This charge has been and will be continued to be recorded as a
reduction of revenue as we realize revenue from this contract.
As part of our agreement with Qwest, we issued three warrants to a
wholly-owned subsidiary of Qwest to purchase 2,375,000 shares of our common
stock at an exercise price of $14.00 per share. The 2,375,000 shares subject to
the warrants were vested when we issued the warrants. One of the warrants is
exercisable as to 1,000,000 shares. On December 20, 2001 in connection with the
Qwest contract amendment, we cancelled warrants for 1,375,000 shares of common
stock and recorded approximately $19.2 million as an offset to gross revenue.
The fair market value of the remaining issued warrant, approximately $17.3
million, will be recorded as a reduction of revenue as we realize revenue from
the Qwest procurement contract.
We will incur significant additional non-cash charges as a result of our
acquisition of Astarte and our acquisition of an intellectual property license
from AT&T. The goodwill and intangible assets associated with the
27
Astarte acquisition are approximately $113.3 million. The identifiable
intangible asset associated with the acquisition of the AT&T license is
approximately $45.0 million. Amortization of goodwill, ceased on January 1,
2002, upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets".
Beginning in 2002, goodwill will only be subject to periodic impairment reviews
in accordance with SFAS No. 142. At December 31, 2001, we had recorded
goodwill, net of accumulated amortization, of approximately $58.4 million.
In addition, we have recorded deferred compensation expense and have begun
to amortize non-cash charges to earnings as a result of options and other
equity awards granted to employees and non-employee directors at prices deemed
to be below fair market value on the dates of grant. Our future operating
results will reflect the continued amortization of those charges over the
vesting period of these options and awards. At December 31, 2001, we had
recorded deferred compensation expense of approximately $144.5 million, which
will be amortized to compensation expense between 2001 and 2005.
All of the non-cash charges referred to above will negatively impact future
operating results. It is possible that some investors might consider the impact
on operating results to be material, which could result in a decline in the
price of our common stock.
Economic Recession or Downturns Could Harm Our Operating Results.
Our customers may be susceptible to economic slowdowns or recessions and
could lead to a decrease in revenue. The terrorist attacks of September 11,
2001 on New York City and Washington, D.C., and the continuing acts and threats
of terrorism are having an adverse effect on the U.S. economy and could
possibly induce or accelerate the advent of a more severe economic recession.
Our government's political, social, military and economic policies and policy
changes as a result of these circumstances could have consequences that we
cannot predict, including causing further weakness in the economy. As a result
of these events our customers and potential customers have reduced or slowed
the rate of their capital expenditures. The long-term impact of these events on
our business, including on the industry section in which we focus and our
customers and prospective customers, is uncertain. Our operating results and
financial condition consequently could be materially and adversely affected in
ways we cannot foresee.
We Have Experienced and Expect to Continue to Experience Volatility in Our
Stock Price Which Makes an Investment in Our Stock More Risky and Litigation
More Likely.
The market price of our common stock has fluctuated significantly in the
past and may fluctuate significantly in the future in response to a number of
factors, some of which are beyond our control, including: changes in financial
estimates by securities analysts; changes in market valuations of
communications and Internet infrastructure-related companies; announcements, by
us or our competitors, of new products or of significant acquisitions,
strategic partnerships or joint ventures; volume fluctuations, which are
particularly common among highly volatile securities of Internet-related
companies; and volatility of stock markets, particularly the Nasdaq National
Market on which our common stock is listed. Following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against that company. We are currently not named in
securities class action lawsuits. Any future litigation, if instituted, could
result in substantial costs and a diversion of management's attention.
Insiders have substantial control over us and could limit your ability to
influence the outcome of key transactions, including changes of control.
Our directors, executive officers and principal stockholders and entities
affiliated with them own approximately 31% of the outstanding shares of our
common stock. As a result, these stockholders, if acting together, may
influence matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions. These stockholders or their affiliates may acquire additional
equity in the future. The concentration of ownership may also have the effect
of delaying, preventing or deterring a change of control of our company, could
deprive our stockholders of an opportunity to
28
receive a premium for their common stock as part of a sale of our company and
might ultimately affect the market price of our common stock.
Risks Related to Our Products
Our products may have errors or defects that we find only after full
deployment, or problems may arise from the use of our products in conjunction
with other vendors' products, which could, among other things, make us lose
customers and revenues.
Our products are complex and are designed to be deployed in large and
complex networks. Our products can only be fully tested when completely
deployed in these networks with high amounts of traffic. Networking products
frequently contain undetected software or hardware errors when first introduced
or as new versions are released. Our customers may discover errors or defects
in our software or hardware, or our products may not operate as expected after
they have used them extensively in their networks. In addition, service
providers typically use our products in conjunction with products from other
vendors. As a result, if problems occur, it may be difficult to identify the
source of the problem.
If we are unable to fix any defects or errors or other problems arise, we
could:
. lose revenues;
. lose existing customers;
. fail to attract new customers and achieve market acceptance;
. divert development resources;
. increase service and repair, warranty and insurance costs; and
. be subjected to legal actions for damages by our customers.
If our products do not operate within our customers' networks, installations
will be delayed or cancelled, reducing our revenues, or we may have to modify
some of our product designs. Product modifications could increase our expenses
and reduce the margins on our products.
Our customers require that our products be designed to operate within their
existing networks, each of which may have different specifications. Our
customers' networks contain multiple generations of products that have been
added over time as these networks have grown and evolved. If our products do
not operate within our customers' networks, installations could be delayed and
orders for our products could be cancelled, causing our revenues to decline.
The requirement that we modify product designs in order to achieve a sale may
result in a longer sales cycle, increased research and development expense and
reduced margins on our products.
If our products do not meet industry standards that may emerge, or if some
industry standards are not ultimately adopted, we will not gain market
acceptance and our revenues will not grow.
Our success depends, in part, on both the adoption of industry standards for
new technologies in our market and our products' compliance with industry
standards. To date, no industry standards have been adopted related to some
functions of our products. The absence of industry standards may prevent market
acceptance of our products if potential customers delay purchases of new
equipment until standards are adopted. In addition, in developing our products,
we have made, and will continue to make, assumptions about the industry
standards that may be adopted by our competitors and existing and potential
customers. If the standards adopted are different from those, which we have
chosen to support, customers may not choose our products, and our sales and
related revenues will be significantly reduced.
29
If we do not establish and increase our market share in the intensively
competitive optical networking market, we will experience, among other things,
reduced revenues and gross margins.
If we do not compete successfully in the intensely competitive market for
public telecommunications network equipment, we may lose any advantage that we
might have by being the first to market with an optical switch prior to
achieving significant market penetration. In addition to losing any competitive
advantage, we may also:
. not be able to obtain or retain customers;
. experience price reductions for our products;
. experience order cancellations;
. experience increased expenses; and
. experience reduced gross margins.
Many of our competitors, in comparison to us, have:
. longer operating histories;
. greater name recognition;
. larger customer bases; and
. significantly greater financial, technical, sales, marketing,
manufacturing and other resources.
These competitors may be able to reduce our market share by adopting more
aggressive pricing policies than we can or by developing products that gain
wider market acceptance than our products.
Risks Related to the Expansion of Our Business
If the optical switching market does not develop as we expect, our operating
results will be negatively affected and our stock price could decline.
The market for optical switching is new and rapidly evolving. Optical
switching may not be widely adopted as a method by which service providers
address their data capacity requirements. In addition, most service providers
have made substantial investments in their current network and are typically
reluctant to adopt new and unproven technologies. They may elect to remain with
their current network design or to adopt a new design, like ours, in limited
stages or over extended periods of time. A decision by a customer to purchase
our product involves a significant capital investment. We will need to convince
service providers of the benefits of our products for future network upgrades,
and if we are unable to do so, a viable market for our products may not develop
or be sustainable. If the market for optical switching does not develop, or
develops more slowly than we expect, our operating results will be below our
expectations and the price of our stock could decline.
If we are not successful in rapidly developing new and enhanced products that
respond to customer requirements and technological changes, customers will not
buy our products and we could lose revenue.
The market for optical switching is characterized by rapidly changing
technologies, frequent new product introductions and evolving customer and
industry standards. We may be unable to anticipate or respond quickly or
effectively to rapid technological changes. Also, we may experience design,
manufacturing, marketing and other difficulties that could delay or prevent our
development and introduction of new products and enhancements. In addition, if
our competitors introduce products based on new or alternative technologies,
our existing and future products could become obsolete and our sales could
decrease.
Our customers require some product features and capabilities that our
current products do not have. If we fail to develop or enhance our products or
to offer services that satisfy evolving customer demands, we will not
30
be able to satisfy our existing customers' requirements or increase demand for
our products. If this happens, we will lose customers and breach our existing
contracts with our customers, our operating results will be negatively impacted
and the price of our stock could decline.
If we do not expand our sales, marketing and distribution channels, we may be
unable to increase market awareness and sales of our products, which may
prevent us from increasing our sales and achieving and maintaining
profitability.
Our products require a sophisticated sales and marketing effort targeted
towards a limited number of key individuals within our current and prospective
customers' organizations. Our success will depend, in part, on our ability to
develop and manage these relationships. We continue to build our direct sales
and marketing force and plan to hire additional sales and marketing personnel
and consulting engineers. Competition for these individuals is intense because
there is a limited number of people available with the necessary technical
skills and understanding of the optical switching market. In addition, we
believe that our success will depend on our ability to establish successful
relationships with various distribution partners. If we are unable to expand
our sales, marketing and distribution operations, we may not be able to
effectively market and sell our products, which may prevent us from increasing
our sales and achieving and maintaining profitability.
If we do not expand our customer service and support organization, we may be
unable to increase our sales.
We currently have a small customer service and support organization and will
need to increase our staff to support new and existing customers. Our products
are complex and our customers need highly-trained customer service and support
personnel to be available at all hours. We are likely to have difficulty hiring
customer service and support personnel because of the limited number of people
available with the necessary technical skills. If we are unable to expand our
customer service and support organization and rapidly train these personnel, we
may not be able to increase our sales, which could cause the price of our stock
to decline.
Our failure to manage our growth, improve existing processes and implement new
systems could result in lost sales or disruptions to our business.
We have expanded our operations rapidly since our inception in May 1997. Our
growth has placed, and we anticipate that our growth will continue to place, a
significant strain on our management systems and resources. Our ability to
successfully sell our products and implement our business plan in a rapidly
evolving market requires an effective planning and management process. From
December 31, 2000 to December 31, 2001, the number of our employees increased
from 444 to 544. We expect that we will need to continue to refine and expand
our financial, managerial and manufacturing controls and reporting systems. If
we are unable to implement adequate control systems in an efficient and timely
manner, our operations could be adversely affected and our growth could be
impaired, which could cause the price of our stock to decline.
If we are not able to hire and retain qualified personnel, or if we lose key
personnel, we may be unable to compete or grow our business.
We believe our future success will also depend, in large part, on our
ability to identify, attract and retain sufficient numbers of highly-skilled
employees, particularly qualified sales and engineering personnel. We may not
succeed in identifying, attracting and retaining these personnel. Further,
competitors and other entities may attempt to recruit our employees. If we are
unable to hire and retain adequate staffing levels, we may not be able to
increase sales of our products, which could cause the price of our stock to
decline.
Our future success depends to a significant degree on the skills and efforts
of Harry J. Carr, our Chief Executive Officer and Chairman of the Board,
Krishna Bala, our Chief Technology Officer, and other key executive officers
and members of our senior management. These employees have critical industry
experience and relationships that we rely on to implement our business plan. We
currently do not have "key person" life
31
insurance policies covering any of our employees. If we lose the services of
Mr. Carr, Dr. Bala or one or more of our other key executive officers and
senior management members, we may not be able to grow our business as we
expect, and our ability to compete could be harmed, causing our stock price to
decline.
If we become subject to unfair hiring claims, we could incur substantial costs
in defending ourselves.
We may become subject to claims from companies in our industry whose
employees accept positions with us that we have engaged in unfair hiring
practices or inappropriately taken or benefited from confidential or
proprietary information. These claims may result in material litigation or
judgments against us. We could incur substantial costs in defending ourselves
or our employees against these claims, regardless of the merits of the claims.
In addition, defending ourselves from these claims could divert the attention
of our management away from our core business, which could cause our financial
performance to suffer.
We do not have significant experience in international markets and may have
unexpected costs and difficulties in developing international revenues.
We are expanding the marketing and sales of our products internationally.
This expansion will require significant management attention and financial
resources to successfully develop international sales and support channels. We
will face risks and challenges that we do not have to address in our U.S.
operations, including:
. currency fluctuations and exchange control regulations;
. changes in regulatory requirements in international markets;
. expenses associated with developing and customizing our products for
foreign countries;
. reduced protection for intellectual property rights; and
. compliance with international technical and regulatory standards that
differ from domestic standards.
If we do not successfully overcome these risks and challenges, our
international business will not achieve the revenue or profits that we expect.
We may not be able to obtain additional capital to fund our existing and future
operations.
At December 31, 2001, we had approximately $218.7 million in cash and cash
equivalents. We believe that our available cash, our line of credit facilities
and cash anticipated to be available from future operations, will enable us to
meet our working capital requirements for the next 12 months. The development
and marketing of new products, however, and the expansion of our direct sales
operation and associated customer support organization will require a
significant commitment of resources. As a result, we may need to raise
substantial additional capital. We may not be able to obtain additional capital
at all, or upon acceptable terms. If we are unable to obtain additional capital
on acceptable terms, we may be required to reduce the scope of our planned
product development and marketing and sales efforts. To the extent that we
raise additional capital through the sale of equity or convertible debt
securities, the issuance of additional securities could result in dilution to
our existing stockholders. If additional funds are raised through the issuance
of debt securities, their terms could impose additional restrictions on our
operations.
If we make acquisitions, our stockholders could be diluted and we could assume
additional contingent liabilities. In addition, if we fail to successfully
integrate or manage the acquisitions we make, our business would be disrupted
and we could lose sales.
We may, as we did with the acquisition of Astarte, consider investments in
complementary businesses, products or technologies. In the event of any future
acquisitions, we could:
. issue stock that would dilute our current stockholders' percentage
ownership;
. incur debt that will give rise to interest charges and may impose
material restrictions on the manner in which we operate our business;
32
. assume liabilities;
. incur amortization expenses related intangible assets; or
. incur large and immediate write-offs.
We also face numerous risks, including the following, in operating and
integrating any acquired business:
. problems combining the acquired operations, technologies or products;
. diversion of management's time and attention from our core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited
prior experience; and
. potential loss of key employees, particularly those of acquired companies.
We may not be able to successfully integrate businesses, products,
technologies or personnel that we might acquire in the future. If we fail to do
so, we could experience lost sales or disruptions to our business.
The communications industry is subject to government regulations. These
regulations could negatively affect our growth and reduce our revenues.
Our products and our customers' products are subject to Federal
Communications Commission rules and regulations. Current and future Federal
Communications Commission rules and regulations affecting communications
services or our customers' businesses or products could negatively affect our
business. In addition, international regulatory standards could impair our
ability to develop products for international service providers in the future.
We may not obtain or maintain all of the regulatory approvals that may, in the
future, be required to operate our business. Our inability to obtain these
approvals, as well as any delays caused by our compliance and our customers'
compliance with regulatory requirements could result in postponements or
cancellations of our product orders, which would significantly reduce our
revenues.
Risks Related to Our Product Manufacturing
If we fail to predict our manufacturing and component requirements accurately,
we could incur additional costs or experience manufacturing delays, which could
harm our customer relationships.
We provide forecasts of our demand to our contract manufacturers and
component vendors up to six months prior to scheduled delivery of products to
our customers. In addition, lead times for materials and components that we
order are long and depend on factors such as the procedures of, or contract
terms with, a specific supplier and demand for each component at a given time.
If we overestimate our requirements, we may have excess inventory, which could
increase our costs and harm our relationship with our contract manufacturers
and component vendors due to unexpectedly reduced future orders. If we
underestimate our requirements, we may have an inadequate inventory of
components and optical assemblies, which could interrupt manufacturing of our
products, result in delays in shipments to our customers and damage our
customer relationships.
Some of the optical components used in our products may be difficult to obtain.
This could inhibit our ability to manufacture our products and we could lose
revenue and market share.
Our industry has previously experienced shortages of optical components and
may again in the future. For some of these components, there previously were
long waiting periods between placement of an order and receipt of the
components. If such shortages should reoccur, component suppliers could impose
allocations that limit the number of components they supply to a given customer
in a specified time period. These suppliers could choose to increase
allocations to larger, more established companies, which could reduce our
allocations and harm our
33
ability to manufacture our products. If we are not able to manufacture and ship
our products on a timely basis, we could lose revenue, our reputation could be
harmed and customers may find our competitors' products more attractive.
Any disruption in our manufacturing relationships may cause us to fail to meet
our customers' demands, damage our customer relationships and cause us to lose
revenue.
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. Our contract manufacturers may not always have sufficient quantities of
inventory available to fill our orders or may not allocate their internal
resources to fill these orders on a timely basis.
We currently do not have long-term contracts with any of our manufacturers.
As a result, our contract manufacturers are not obligated to supply products to
us for any specific period, in any specific quantity or at any specific price,
except as may be provided in a particular purchase order. If for any reason
these manufacturers were to stop satisfying our needs without providing us with
sufficient warning to procure an alternate source, our ability to sell our
products could be harmed. In addition, any failure by our contract
manufacturers to supply us with our products on a timely basis could result in
late deliveries. Our inability to meet our delivery deadlines could adversely
affect our customer relationships and, in some instances, result in termination
of these relationships or potentially subject us to litigation. Qualifying a
new contract manufacturer and commencing volume production is expensive and
time-consuming and could significantly interrupt the supply of our products. If
we are required or choose to change contract manufacturers, we may damage our
customer relationships and lose revenue.
We purchase several of our key components from single or limited sources. If we
are unable to obtain these components on a timely basis, we will not be able to
meet our customers' product delivery requirements, which could harm our
reputation and decrease our sales.
We purchase several key components from single or, in some cases, limited
sources. We do not have long-term supply contracts for these components. If any
of our sole or limited source suppliers experience capacity constraints, work
stoppages or any other reduction or disruption in output, they may not be able
or may choose not to meet our delivery schedules. Also, our suppliers may:
. enter into exclusive arrangements with our competitors;
. be acquired by our competitors;
. stop selling their products or components to us at commercially
reasonable prices;
. refuse to sell their products or components to us at any price; or
. be unable to obtain or have difficulty obtaining components for their
products from their suppliers.
If supply for these key components is disrupted, we may be unable to
manufacture and deliver our products to our customers on a timely basis, which
could result in lost or delayed revenue, harm to our reputation, increased
manufacturing costs and exposure to claims by our customers. Even if alternate
suppliers are available to us, we may have difficulty identifying them in a
timely manner, we may incur significant additional expense and we may
experience difficulties or delays in manufacturing our products. Any failure to
meet our customers' delivery requirements could harm our reputation and
decrease our sales.
34
Our ability to compete could be jeopardized and our business plan seriously
compromised if we are unable to protect from third-party challenges the
development and maintenance of the proprietary aspects of the optical switching
products and technology we design.
Our products utilize a variety of proprietary rights that are critical to
our competitive position. Because the technology and intellectual property
associated with our optical switching products are evolving and rapidly
changing, our current intellectual property rights may not adequately protect
us in the future. We rely on a combination of patent, copyright, trademark and
trade secret laws and contractual restrictions to protect the intellectual
property utilized in our products. For example, we enter into confidentiality
or license agreements with our employees, consultants, corporate partners and
customers and control access to, and distribution of, our software,
documentation and other proprietary information. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Also, it is possible that no patents
or trademarks will be issued from our currently pending or future patent or
trademark applications. Because legal standards relating to the validity,
enforceability and scope of protection of patent and intellectual property
rights in new technologies are uncertain and still evolving, the future
viability or value of our intellectual property rights is uncertain. Moreover,
effective patent, trademark, copyright and trade secret protection may not be
available in some countries in which we distribute or may anticipate
distributing our products. Furthermore, our competitors may independently
develop similar technologies that limit the value of our intellectual property
or design around patents issued to us. If competitors are able to use our
technology, our competitive edge would be reduced or eliminated.
If necessary licenses of third-party technology are not available to us or are
very expensive, our products could become obsolete and our business seriously
harmed because we could have to limit or cease the development of some of our
products.
We currently license technology from several companies that is integrated
into our products. We may occasionally be required to license additional
technology from third parties or expand the scope of current licenses to sell
or develop our products. Existing and future third-party licenses may not be
available to us on commercially reasonable terms, if at all. The loss of our
current technology licenses or our inability to expand or obtain any
third-party license required to sell or develop our products could require us
to obtain substitute technology of lower quality or performance standards or at
greater cost or limit or cease the sale or development of certain products or
services. If these events occur, we may not be able to increase our sales and
our revenue could decline.
35
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We have not entered into contracts for derivative financial instruments. We
have assessed our vulnerability to market risks, including interest rate risk
associated with financial instruments included in cash and cash equivalents and
foreign currency risk. Due to the short-term nature of our investments and
other investment policies and procedures, we have determined that the risks
associated with interest rate fluctuations related to these financial
instruments are not material to our business. Additionally, as all sales
contracts are denominated in U.S. dollars and our European subsidiaries are not
significant in size compared to the consolidated company, we have determined
that foreign currency risk is not material to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information that are
required to be included pursuant to this Item 8 are listed in Item 14 under the
caption "Index to Consolidated Financial Statements" in this Annual Report on
Form 10-K, together with the respective pages in this Annual Report on Form
10-K where such information is located. The financial statements and
supplementary financial information specifically referenced in such list are
incorporated in this Item 8 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 9, 2000, we changed our auditors to Deloitte & Touche LLP from
Ernst & Young LLP. The decision to dismiss Ernst & Young LLP and engage
Deloitte & Touche LLP was approved by our board of directors.
We believe that for the period from May 8, 1997 (inception) through the date
of the change in auditors, Ernst & Young did not have any disagreement with us
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of Ernst & Young, would have caused it to make reference to
the subject matter of the disagreement in connection with its report on our
financial statements. Ernst & Young's original report on our 1998 financial
statements dated August 22, 1999, contained an explanatory paragraph indicating
there was substantial doubt regarding our ability to continue as a going
concern. Ernst & Young reissued their report on our 1998 financial statements
on September 21, 2000 indicating that the conditions that raised the
substantial doubt about whether we would continue as a going concern no longer
existed.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be included pursuant to this Item 10 relating to
the Company's directors, nominees for election as directors and executive
officers will be included under the captions "Election of Directors" and
"Executive Officers" in the Proxy Statement which will be furnished to
stockholders in connection with the Annual Meeting of Stockholders, and is
incorporated in this Item 10 by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be included pursuant to this Item 11 will be
included under the caption "Executive Compensation" in the Proxy Statement
which will be furnished to stockholders in connection with the Annual Meeting
of Stockholders, and is incorporated in this Item 11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to the security ownership of (1) beneficial
owners of more than 5% of our common stock, and (2) our directors and
management required to be included pursuant to this Item 12 will be included
under the caption "Security Ownership of Beneficial Owners and Management" in
the Proxy Statement which will be furnished to stockholders in connection with
the Annual Meeting of Stockholders, and is incorporated in this Item 12 by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be included pursuant to Item 13 will be included
under the caption "Certain Relationships and Related Transactions" in the Proxy
Statement which will be furnished to stockholders in connection with the Annual
Meeting of Stockholders, and is incorporated in this Item 13 by reference.
37
PART IV
ITEMS 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The following documents are filed as part of this Annual Report on Form 10-K:
1. Index To Consolidated Financial Statements
The following financial statements are included at the indicated page in
this Annual Report on Form 10-K and incorporated in this Item 14(a)1 by
reference:
Page
----
Independent Auditors' Report Of Deloitte & Touche LLP.................. F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
2. Financial Statement Schedule
Schedule II. Valuation and Qualifying Accounts
3. Exhibits
(b) REPORTS ON FORM 8-K
On October 25, 2001, the Company filed a report on Form 8-K relating to
relating to its announcement of financial results for the quarter ended
September 30, 2001.
On November 15, 2001, the Company filed a report on Form 8-K relating to its
filing on November 14, 2002 of a registration statement on Form S-8/S-3 to
register approximately 18,500,000 of its shares of common stock, and a separate
filing to register 3,100,000 shares underlying options.
On December 20, 2001, the Company filed a report on Form 8-K relating to the
amendment of its procurement contract with Qwest Communications International
Inc.
Subsequent to the end of the fiscal year, on February 1, 2002, the Company
filed a report on Form 8-K its announcement of financial results for the
quarter and fiscal year ended December 31, 2001.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Tellium, Inc.
We have audited the accompanying consolidated balance sheets of Tellium,
Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency), and cash flows for each of the three years in the period ended
December 31, 2001. Our audits also included the financial statement schedule
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Tellium, Inc. and subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001,
in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Deloitte & Touche LLP
January 31, 2002
F-2
TELLIUM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2000 2001
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 188,175,444 $ 218,708,074
Accounts receivable......................... 4,555,843 23,923,631
Inventories................................. 35,375,111 52,398,123
Prepaid expenses and other current assets,
less allowance for doubtful accounts of
$121,000 and $157,000 as of December 31,
2000 and December 31, 2001, respectively... 18,637,605 8,107,916
------------- --------------
Total current assets...................... 246,744,003 303,137,744
PROPERTY AND EQUIPMENT--Net.................... 24,945,298 65,085,402
INTANGIBLE ASSETS--Net......................... 76,400,000 60,200,000
GOODWILL--Net.................................. 73,898,628 58,433,967
DEFERRED WARRANT COST--Net..................... 123,005,149 65,704,572
OTHER ASSETS................................... 1,304,519 1,276,847
------------- --------------
TOTAL ASSETS................................... $ 546,297,597 $ 553,838,532
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Trade accounts payable...................... $ 39,223,675 $ 9,683,821
Accrued expenses and other current
liabilities................................ 8,699,149 39,777,417
Current portion of notes payable............ 632,346 601,847
Current portion of capital lease
obligations................................ 1,507,460 95,612
Bank line of credit......................... 4,000,000 8,000,000
------------- --------------
Total current liabilities................. 54,062,630 58,158,697
LONG-TERM PORTION OF NOTES PAYABLE............. 590,725 583,399
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS. 2,109,814 124,513
OTHER LONG-TERM LIABILITIES.................... 54,181 233,335
------------- --------------
Total liabilities......................... 56,817,350 59,099,944
COMMITMENTS AND CONTINGENCIES (Note 12)
SERIES A PREFERRED STOCK, $0.001 par value,
10,322,917 and 0 shares authorized as
of December 31, 2000 and 2001, 10,089,584
and 0 issued and outstanding as of December
31, 2000 and 2001............................. 18,471,513 --
SERIES B PREFERRED STOCK, $0.001 par value,
233,333 and 0 shares authorized as of
December 31, 2000 and 2001, 233,000 and 0
shares issued and outstanding as of December
31, 2000 and 2001............................. 557,800 --
SERIES C PREFERRED STOCK, $0.001 par value,
2,593,974 and 0 shares authorized as of
December 31, 2000 and 2001, 2,564,465 and 0
shares issued and outstanding as of December
31, 2000 and 2001............................. 23,355,184 --
SERIES D PREFERRED STOCK, $0.001 par value,
6,010,926 and 0 shares authorized as of
December 31, 2000 and 2001, 6,010,926 and 0
issued and outstanding as of December 31,
2000 and 2001................................. 54,664,342 --
SERIES E PREFERRED STOCK, $0.001 par value,
7,500,000 and 0 shares authorized as of
December 31, 2000 and 2001, 7,274,413 and 0
issued and outstanding as of December 31,
2000 and 2001................................. 212,495,174 --
STOCKHOLDERS' EQUITY:
Undesignated preferred stock, $0.001 par
value, 0 and 25,000,000 shares authorized
as of December 31, 2000 and 2001, 0
issued and outstanding as of December 31,
2000 and 2001.............................. -- --
Common stock, $0.001 par value,
900,000,000 shares authorized, 29,400,050
issued and outstanding as of December 31,
2000 and 114,495,282 issued and
112,446,449 outstanding as of
December 31, 2001.......................... 29,400 114,496
Additional paid-in capital.................. 573,327,781 1,043,900,812
Notes receivable............................ (38,669,929) (33,513,935)
Accumulated deficit......................... (156,148,970) (367,137,978)
Deferred employee compensation.............. (198,602,048) (144,495,721)
Common stock in treasury, at cost, 0 and
2,048,833 shares as of December 31, 2000
and 2001................................... -- (4,129,086)
------------- --------------
Total stockholders' equity................ 179,936,234 494,738,588
------------- --------------
TOTAL LIABILITIES, PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY.......................... $ 546,297,597 $ 553,838,532
============= ==============
See notes to consolidated financial statements.
F-3
TELLIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------
1999 2000 2001
------------ ------------- -------------
REVENUE $ 5,226,735 $ 15,604,734 $ 136,402,796
Non-cash charges related to equity issuances........... 584,062 2,773,778 60,757,487
------------ ------------- -------------
REVENUE, net of non-cash charges related to equity.....
issuances............................................. 4,642,673 12,830,956 75,645,309
COST OF REVENUE........................................ 3,889,965 15,731,008 87,346,868
------------ ------------- -------------
Gross profit (loss).................................... 752,708 (2,900,052) (11,701,559)
------------ ------------- -------------
OPERATING EXPENSES:
Research and development, excluding stock-based
compensation......................................... 9,599,664 43,648,093 61,243,867
Sales and marketing, excluding stock-based compensation 3,843,099 14,037,355 29,714,336
General and administrative, excluding stock-based
compensation......................................... 4,385,484 15,877,864 25,728,598
Amortization of intangible assets and goodwill......... -- 8,037,146 31,667,160
Stock-based compensation expense....................... 2,772,172 32,864,097 59,948,304
------------ ------------- -------------
Total operating expenses............................... 20,600,419 114,464,555 208,302,265
------------ ------------- -------------
OPERATING LOSS......................................... (19,847,711) (117,364,607) (220,003,824)
------------ ------------- -------------
OTHER INCOME (EXPENSE):
Other income--net...................................... -- 4,475 40,258
Interest income........................................ 359,685 7,451,487 9,675,173
Interest expense....................................... (522,323) (454,503) (700,615)
------------ ------------- -------------
Total other income (expense)........................... (162,638) 7,001,459 9,014,816
------------ ------------- -------------
NET LOSS............................................... $(20,010,349) $(110,363,148) $(210,989,008)
============ ============= =============
BASIC AND DILUTED LOSS PER SHARE....................... $ (8.78) $ (13.96) $ (2.98)
============ ============= =============
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING.......................................... 2,279,183 7,905,710 70,886,797
============ ============= =============
STOCK-BASED COMPENSATION EXPENSE:
Cost of revenue........................................ $ 85,313 $ 1,210,802 $ 5,801,105
Research and development............................... 641,675 10,097,088 36,480,255
Sales and marketing.................................... 288,860 8,619,910 14,068,180
General and administrative............................. 1,841,637 14,147,099 9,399,869
------------ ------------- -------------
$ 2,857,485 $ 34,074,899 $ 65,749,409
============ ============= =============
See notes to consolidated financial statements.
F-4
TELLIUM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock Treasury Stock Additional
-------------------- --------------------- Paid-in Accumulated Deferred
Shares Amount Shares Amount Capital Deficit Compensation
----------- -------- --------- ----------- -------------- ------------- -------------
JANUARY 1, 1999...................... 2,604,000 $ 2,604 -- $ -- $ 2,211,914 $ (25,775,473) $ (1,180,000)
Exercise of stock options............ 123,675 124 -- -- 11,930 -- --
Warrant cost related to third parties -- -- -- -- 1,678,068 -- --
Issuance of warrants................. -- -- -- -- 150,196 -- --
Issuance of options to employees..... -- -- -- -- 61,700 -- --
Deferred employee compensation....... -- -- -- -- 14,391,419 -- (14,391,419)
Amortization of deferred employee
compensation........................ -- -- -- -- -- -- 2,795,785
Net loss............................. -- -- -- -- -- (20,010,349) --
----------- -------- --------- ----------- -------------- ------------- -------------
DECEMBER 31, 1999.................... 2,727,675 2,728 -- -- 18,505,227 (45,785,822) (12,775,634)
Issuance of common stock............. 5,583,275 5,583 -- -- 167,494,407 -- --
Issuance of restricted stock......... -- -- -- -- 38,669,929 --
Exercise of stock options............ 21,089,100 21,089 -- -- 854,844 -- --
Forfeiture of unvested stock options. -- -- -- -- (2,408,731) -- 2,408,731
Warrant and option cost related
to third parties.................... -- -- -- -- 3,847,540 -- --
Deferred employee compensation....... -- -- -- -- 221,178,267 -- (221,178,267)
Amortization of deferred employee
compensation........................ -- -- -- -- -- -- 32,943,122
Deferred warrant cost................ -- -- -- -- 125,186,298 -- --
Net loss............................. -- -- -- -- -- (110,363,148) --
----------- -------- --------- ----------- -------------- ------------- -------------
DECEMBER 31, 2000.................... 29,400,050 29,400 -- -- 573,327,781 (156,148,970) (198,602,048)
Issuance of common stock............. 10,350,000 10,350 -- -- 139,309,872 -- --
Conversion of Series A, B, C, D, E
preferred stock into common stock... 71,208,879 71,209 -- -- 309,472,190 -- --
Exercise of stock options............ 3,536,353 3,537 -- -- 6,686,658 -- --
Forfeiture of unvested stock options. -- -- -- -- (20,978,655) 20,609,427
Warrant and option cost.............. -- -- -- -- 6,251,653 -- --
Deferred compensation................ -- -- -- -- 26,374,403 (26,374,403)
Amortization of deferred compensation -- -- -- -- -- -- 59,871,303
Deferred warrant cost................ -- -- -- -- 3,456,910 -- --
Repurchase of restricted stock....... -- -- 2,048,833 (4,129,086) -- -- --
Net loss............................. -- -- -- -- -- (210,989,008) --
----------- -------- --------- ----------- -------------- ------------- -------------
DECEMBER 31, 2001.................... 114,495,282 $114,496 2,048,833 $(4,129,086) $1,043,900,812 $(367,137,978) $(144,495,721)
=========== ======== ========= =========== ============== ============= =============
Stockholders'
Notes (Deficiency)
Receivable Equity
------------ -------------
JANUARY 1, 1999...................... $ -- $ (24,740,955)
Exercise of stock options............ -- 12,054
Warrant cost related to third parties -- 1,678,068
Issuance of warrants................. -- 150,196
Issuance of options to employees..... -- 61,700
Deferred employee compensation....... -- --
Amortization of deferred employee
compensation........................ -- 2,795,785
Net loss............................. -- (20,010,349)
------------ -------------
DECEMBER 31, 1999.................... -- (40,053,501)
Issuance of common stock............. -- 167,499,990
Issuance of restricted stock......... (38,669,929) --
Exercise of stock options............ -- 875,933
Forfeiture of unvested stock options. -- --
Warrant and option cost related
to third parties.................... -- 3,847,540
Deferred employee compensation....... -- --
Amortization of deferred employee
compensation........................ -- 32,943,122
Deferred warrant cost................ -- 125,186,298
Net loss............................. -- (110,363,148)
------------ -------------
DECEMBER 31, 2000.................... (38,669,929) 179,936,234
Issuance of common stock............. -- 139,320,222
Conversion of Series A, B, C, D, E
preferred stock into common stock... -- 309,543,399
Exercise of stock options............ -- 6,690,195
Forfeiture of unvested stock options. -- (369,228)
Warrant and option cost.............. -- 6,251,653
Deferred compensation................ -- --
Amortization of deferred compensation -- 59,871,303
Deferred warrant cost................ -- 3,456,910
Repurchase of restricted stock....... 5,155,994 1,026,908
Net loss............................. -- (210,989,008)
------------ -------------
DECEMBER 31, 2001.................... $(33,513,935) $ 494,738,588
============ =============
See notes to consolidated financial statements.
F-5
TELLIUM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------
1999 2000 2001
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $(20,010,349) $(110,363,148) $(210,989,008)
Adjustments to reconcile net loss to net cash used in operating activities:.....
Depreciation and amortization................................................ 1,096,956 10,963,348 47,092,696
Provision for doubtful accounts.............................................. 60,000 61,000 36,000
Amortization of deferred compensation expense................................ 2,795,785 32,943,122 59,502,075
Amortization of deferred warrant cost........................................ -- 2,181,149 60,757,487
Warrant and option cost related to third parties............................. 1,739,768 1,724,406 6,224,551
Interest incurred for bridge financing.......................................... 498,404 -- --
Changes in assets and liabilities:..............................................
Decrease in due from stockholder............................................. 264,400 10,000 1,026,908
Increase in accounts receivable.............................................. (2,175,755) (2,309,008) (19,246,788)
Increase in inventories...................................................... (1,645,185) (33,148,886) (17,023,012)
Decrease (increase) in prepaid expenses......................................
and other current assets.................................................... (400,930) (18,395,873) 6,585,612
(Increase) decrease in other assets.......................................... (129,607) (667,305) 27,672
Increase (decrease) in accounts payable...................................... (1,074,375) 33,562,861 (29,539,854)
Increase (decrease) in accrued expenses......................................
and other current liabilities............................................... (1,535,175) 3,445,661 31,078,268
Increase in other long-term liabilities...................................... 7,900 46,281 179,154
------------ ------------- -------------
Net cash used in operating activities..................................... (20,508,163) (79,946,392) (64,288,239)
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Astarte, net of cash acquired.................................... -- 5,906,286 --
Purchase of property and equipment.............................................. (1,708,432) (18,141,340) (55,001,037)
------------ ------------- -------------
Net cash used in investing activities..................................... (1,708,432) (12,235,054) (55,001,037)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:..............................................
Principal payments on debt and line of credit borrowings........................ (5,000,000) (883,798) (577,825)
Principal payments on capital lease obligations................................. (50,631) (690,806) (3,397,149)
Proceeds from long-term debt and line of credit borrowings...................... 1,806,871 4,000,000 4,000,000
Proceeds under bridge financing agreements...................................... 11,607,970 -- --
Issuance of Series A Preferred Stock............................................ -- 4,146,120 --
Issuance of Series C Preferred Stock, net....................................... 6,890,343 175,000 --
Issuance of Series D Preferred Stock, net....................................... 44,455,794 5,000,000 --
Issuance of Series E Preferred Stock, net....................................... -- 212,495,174 --
Issuance of common stock........................................................ 12,054 10,875,919 149,796,880
------------ ------------- -------------
Net cash provided by financing activities................................. 59,722,401 235,117,609 149,821,906
------------ ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......................................... 37,505,806 142,936,163 30,532,630
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................................... 7,733,475 45,239,281 188,175,444
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................... $ 45,239,281 $ 188,175,444 $ 218,708,074
============ ============= =============
SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION
Cash paid for interest.......................................................... $ 26,296 $ 476,770 $ 699,159
============ ============= =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Series C and D Preferred Stock in exchange for senior convertible notes $ 21,498,389 -- --
Acquisition of property and equipment under a capital lease........................ $ 164,159 $ 4,065,014 --
Repurchase of common stock by forfeiture of notes receivables...................... -- -- $ 4,129,086
Purchase of property and equipment under long-term loan............................ -- -- $ 540,000
See notes to consolidated financial statements.
F-6
TELLIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 2000, AND 2001
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Tellium, Inc. (the "Company" or "Tellium"), a Delaware corporation, was
incorporated on April 21, 1997 and began business operations on May 8, 1997
(inception date). Tellium designs, develops and markets high-speed,
high-capacity, intelligent optical switching solutions that enable network
service providers to quickly and cost-effectively deliver new high-speed
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and all of its subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates--The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires the Company
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash and Cash Equivalents--The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) method.
Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets. Maintenance and repair costs
are charged to expense as incurred and renewals and improvements that extend
the useful life of the assets are capitalized. Upon sale or retirement, the
cost and related accumulated depreciation and amortization are eliminated from
the respective accounts and a resulting gain or loss is reported in operations.
Leasehold improvements are amortized over the shorter of the estimated useful
life of the property or the term of the lease.
The estimated useful lives for financial reporting purposes are as follows:
Equipment............. 3-5 years
Furniture and fixtures 3-5 years
Acquired software..... 3 years
Leasehold improvements 3-7 years
Revenue Recognition--The Company recognizes revenue from equipment sales
when the product has been shipped. For transactions where the Company has yet
to obtain customer acceptance, revenue is deferred until terms of acceptance
are satisfied. Sales contracts do not permit the right of return of product by
the customer.
Software license revenue for software embedded within the Company's optical
switches or its stand alone software products is recognized when a purchase
order has been received or a sales contract has been executed, delivery of the
product and acceptance by the customer have occurred, the license fees are
fixed and determinable, and collection is probable. The portion of revenue that
relates to the Company's obligations to provide customer support, if any, is
deferred, based upon the price charged for customer support when it is sold
separately, and recognized ratably over the maintenance period. Amounts
received in excess of revenue
F-7
recognized are included as deferred revenue in the accompanying balance sheet.
Revenue from technical support and maintenance contracts is deferred and
recognized ratably over the maintenance period.
The Company has granted warrants to two customers in connection with supply
contracts. The fair value of the warrants earned under the agreement is
recorded as an offset to revenue in the accompanying consolidated statements of
operations.
Product Warranty--The Company provides for estimated costs to fulfill
customer warranty obligations upon the recognition of related equipment
revenue. Actual warranty costs incurred are charged against the accrual when
paid.
Income Taxes--The Company recognizes deferred tax assets and liabilities for
the expected future tax consequences attributable to differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
their respective tax bases, and for operating loss and tax credit
carryforwards. A valuation allowance is recorded if it is "more likely than
not" that a portion or all of a deferred tax asset will not be realized.
Intangible Assets--Intangible assets are comprised of a license for
intellectual property and purchased core technology which are being amortized
over their estimated useful lives of five years.
Goodwill--Goodwill represents the excess of cost over the fair value of net
assets acquired. Goodwill is amortized over an estimated useful life of five
years. Accumulated amortization was $18,901,807 and $3,437,146 as of December
31, 2001 and 2000, respectively.
Long-Lived Assets--Whenever events indicate that the carrying values of
long-lived assets, including fixed assets, goodwill and intangible assets, may
not be recoverable, the Company evaluates the carrying value of such assets
using expected future undiscounted cash flows. If the sum of the expected
undiscounted future cash flows is less than the carrying amount of the asset,
the Company will recognize an impairment loss equal to the difference between
the fair value and the carrying value of such asset. Management believes that
as of December 31, 2001 the carrying values of long-lived assets are
appropriate.
Fair Value of Financial Instruments--In the opinion of management, the
estimated fair value of the Company's financial instruments, which include cash
equivalents, accounts receivable, accounts payable and notes payable,
approximates their carrying value due to their short term nature.
Research and Development Costs--Research and development costs are charged
to expense as incurred.
Concentration of Credit Risk and Significant Customers--Financial
instruments which potentially subject the Company to credit risk consist
principally of accounts receivable. Accounts receivable from two customers
represented 55% and 44%, respectively, of the outstanding balance at December
31, 2001. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral from its customers.
The Company maintains reserves for potential credit losses based upon the
credit risk of specified customers. For the years ended December 31, 1999, 2000
and 2001, two customer each accounted for at least 10% of revenues and combined
accounted for 100%, 100% and 99% of the Company's revenue, respectively.
Equity-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. Under APB Opinion No. 25, compensation expense is based on the
difference, if any, generally on the date of grant, between the fair value of
the Company's stock and the exercise price of the option. The Company accounts
for equity
F-8
instruments issued to nonemployee vendors in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18,
Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. All transactions
in which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the fair value
of the equity instrument issued is the date on which the counterparty's
performance is complete.
Customer Warrant Grants--The Company has granted warrants to customers in
conjunction with the execution of customer supply agreements. Warrants granted
to customers are accounted for in accordance with SFAS No. 123 and EITF Issue
No. 96-18. In circumstances in which there is no contractual purchase
commitment by the customer, no past relationship between the companies, and no
consideration received for the warrants, the fair value of the warrant is
recorded as selling and marketing expense on the measurement date. If any of
the conditions described above are not met, the fair value of the warrants is
capitalized on the measurement date as deferred warrant costs. Deferred warrant
costs are amortized as a pro-rata reduction of revenue as the customer fulfills
its obligations under supply agreements. The Company evaluates the amortization
method for deferred warrant costs based on facts and circumstances. If it
appears that a customer may not be able to fulfill the amounts it agreed to
purchase, the Company will review the deferred warrant cost for impairment and
record adjustments as necessary. Under no circumstances would the amortization
period exceed the term of the supply agreement. At December 31, 2001 management
believes that customers with warrant grants will fulfill their obligations
under supply agreements.
Software Development Costs--SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs incurred subsequent to the
date technological feasibility is established and prior to the date the product
is generally available for sale. The capitalized cost is then amortized over
the estimated product life. The Company defines technological feasibility as
being attained at the time a working model is completed. To date, the period
between achieving technological feasibility and the general availability of
such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Net Loss Per Share--Basic net loss per share is computed by dividing the net
loss for the period by the weighted average number of common shares outstanding
during the period. Weighted average common shares outstanding for purposes of
computing basic net loss per share excludes the unvested portion of founders
stock and restricted stock (see Note 7). Outstanding shares of founders and
restricted stock excluded from the basic weighted average shares calculation
because they were not yet vested were 231,600, 13,367,235 and 5,494,151 for the
years ended December 31, 1999, 2000 and 2001, respectively. Diluted net loss
per share is computed by dividing the net loss for the period by the weighted
average number of common and potentially dilutive common shares outstanding
during the period, if dilutive. Potentially dilutive common shares are composed
of the incremental common shares issuable upon the conversion of preferred
stock and the exercise of stock options and warrants, using the treasury stock
method. Due to the Company's net loss the effect of potentially dilutive common
shares is anti-dilutive, therefore basic and diluted net loss per share are the
same. For the years ended December 31, 1999, 2000 and 2001, potentially
dilutive shares of 67,535,681, 83,332,293 and 6,572,576, respectively, were
excluded from the diluted weighted average shares outstanding calculation.
Segments--The Company has adopted SFAS No.131, Disclosure about Segments of
an Enterprise and Related Information, which requires companies to report
selected information about operating segments, as well as enterprise-wide
disclosures about products, services, geographic areas, and major customers.
Operating segments are determined based on the way management organizes its
business for making operating decisions and assessing performance. The Company
has determined that it conducts its operations in one business segment, the
telecommunications network segment. All of the Company's revenues to date are
derived from customers based in the United States.
F-9
Recent Financial Accounting Pronouncements--On June 29, 2001, Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" was
approved by the Financial Accounting Standards Board ("FASB"). SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Goodwill and certain intangible
assets, arising from these business combinations, will remain on the balance
sheet and not be amortized. On an annual basis, and when there is reason to
suspect that their values have been diminished or impaired, these assets must
be tested for impairment, and write-downs may be necessary.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill and
indefinite lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations and indefinite lived intangible assets, will
cease upon adoption of this statement. Identifiable intangible assets will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". The Company is required to
implement SFAS No. 142 on January 1, 2002. If SFAS No. 142 had been in effect
for the years ended December 31, 2000 and 2001, amortization expense related to
goodwill and net loss would have been reduced by approximately $3.4 million and
$15.5 million, respectively; however, impairment reviews may result in future
periodic write downs. The Company is currently evaluating the impact that the
adoption of SFAS No. 142 on January 1, 2002, had on its results of operations
or financial position.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations and costs associated with the retirement of tangible
long-lived assets. The Company is required to implement SFAS No. 143 for fiscal
years beginning after June 15, 2002 and has not yet determined the impact that
this statement will have on its results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" and establishes accounting and reporting standards for
long-lived assets to be disposed of by sale. This standard applies to all
long-lived assets, including discontinued operations. SFAS No. 144 requires
that those assets be measured at the lower of carrying amount or fair value
less cost to sell. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company is
required to implement SFAS No. 144 for fiscal years beginning after December
15, 2001. The adoption of this standard on January 1, 2002 had no impact on the
Company's financial position, results of operations, or cash flows.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current period presentation. Such reclassifications include the
presentation of Deferred Warrant Cost as an asset as opposed to a
contra-equity, in accordance with EITF Issue No. 00-18, "Accounting Recognition
for Certain Transactions involving Equity Instruments Granted to Other Non
Employees".
3. INVENTORIES
Inventories consist of the following:
December 31,
-----------------------
2000 2001
----------- -----------
Raw materials.. $14,652,573 $20,242,766
Work-in-process 10,508,549 21,743,663
Finished goods. 10,213,989 10,411,694
----------- -----------
$35,375,111 $52,398,123
=========== ===========
F-10
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
-----------------------
2000 2001
----------- -----------
Equipment..................................... $15,283,124 $46,576,810
Furniture and fixtures........................ 2,496,080 6,463,144
Acquired software............................. 4,912,567 9,747,235
Leasehold improvements........................ 4,132,450 15,716,203
Construction in progress...................... 2,629,796 6,518,764
----------- -----------
29,454,017 85,022,156
Less accumulated depreciation and amortization 4,508,719 19,936,754
----------- -----------
Property, plant and equipment--Net............ $24,945,298 $65,085,402
=========== ===========
Equipment includes approximately $4,180,188 and $373,275 of assets under
capital leases as of December 31, 2000 and 2001, respectively. Accumulated
amortization related to these assets was $792,080 and $150,320 at December 31,
2000 and 2001, respectively.
Depreciation and amortization expenses for 1999, 2000 and 2001 related to
property and equipment totaled $1,090,922, $2,926,202 and $15,428,035
respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
-----------------------
2000 2001
----------- -----------
Licenses..................... $45,000,000 $45,000,000
Core Technology.............. 36,000,000 36,000,000
----------- -----------
81,000,000 81,000,000
Less accumulated amortization 4,600,000 20,800,000
----------- -----------
$76,400,000 $60,200,000
=========== ===========
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
December 31,
----------------------
2000 2001
---------- -----------
Accrued professional fees................ $ 926,625 $ 754,129
Accrued compensation and related expenses 2,068,786 12,762,549
Accrued taxes............................ 3,500,000 1,175,895
Deferred revenue......................... 970,852 14,549,053
Warranty reserve......................... 700,604 8,466,615
Other.................................... 532,282 2,069,176
---------- -----------
$8,699,149 $39,777,417
========== ===========
F-11
7. STOCKHOLDERS' EQUITY
Stock Splits--On June 22, 2000, the Company's board of directors approved a
3 for 1 common stock split for shareholders of record of that date. The split
became effective August 11, 2000. On October 18, 2000, the Company's board of
directors approved a 2 for 1 common stock split for shareholders of record of
that date. The split became effective November 6, 2000. On April 25, 2001, the
Company's board of directors approved a 1 for 2 reverse common stock split for
shareholders of record as of that date. The split became effective April 25,
2001. All share and per share information included in these consolidated
financial statements have been restated to include the effects of the stock
splits and reverse split for all periods presented.
Founders' Stock--In May 1997, the founders of the Company purchased
2,604,000 shares of common stock under Management Investor Subscription
Agreements. Under each agreement, these shares are subject to a vesting
schedule principally over a four-year period. In the event of termination of
employment, the Company has the right to repurchase any unvested shares at par
value. If the termination was for cause (as defined), the Company holds the
right to repurchase for one year from the termination date. If the termination
was without cause, because of employee resignation or death/disability, the
Company holds the right to repurchase for 120 days. After the time period has
lapsed, all unvested shares become immediately vested. The Company's right to
repurchase unvested shares of founders' stock upon termination of employment
terminates upon completion of a qualified offering, as such all founders' stock
became nonforfeitable upon effectiveness of the Company's initial public
offering in May 2001.
Restricted Stock--During the year ended December 31, 2000, certain employees
exercised stock options for 19,090,599 shares of common stock. The
consideration given by the employees were full recourse notes at applicable
federal interest rates. Upon exercise, the employees received 19,090,599 shares
of restricted common stock. The restricted stock generally vests 25% on the
first anniversary of the issuance date and then pro-rata on a monthly basis
during the next three years. The Company has the right to repurchase any
unvested shares at the price per share paid by the employee, plus accrued
interest, during the one-year period following the termination of employment,
for any reason, with or without cause. The repurchase right lapses after one
year, and all unvested shares become immediately vested.
Preferred Stock--The Company was authorized to issue 10,322,917 shares of
$.001 par value Series A Preferred Stock, 233,333 shares of $.001 par value
Series B Preferred Stock, 2,593,974 shares of $.001 par value Series C
Preferred Stock, 6,010,926 shares of $.001 par value Series D Preferred Stock
and 7,500,000 shares of $.001 par value Series E Preferred Stock.
On May 8, 1997, the initial investors in the Company entered into a stock
purchase and contribution agreement (the "Agreement"). In accordance with the
Agreement, cash investors were issued 4,850,000 shares of Series A Preferred
Stock at $2.40 per share and 233,333 shares of Series B Preferred Stock at
$2.40 per share.
Non-cash investors were issued 3,916,667 shares of Series A Preferred Stock
and contributed intellectual property and equipment which were valued at the
contributor's historical cost of $1,700,393.
On May 20, 1998, a cash investor was issued 416,667 shares of Series A
Preferred Stock at $2.40 per share for a total investment of $1 million.
On February 11, 1999, the Company issued 765,027 shares of Series C
Preferred Stock at $9.15 per share. Simultaneously, a Senior Convertible Note
plus accrued interest of $16,289,847 was converted into 1,780,312 shares of
Series C Preferred Stock at $9.15 per share. The total number of shares issued
was 2,545,339 and the total dollar value of the transactions, net of issuance
costs of $109,660, was $23,180,184.
On December 2, 1999, the Company issued 4,895,239 shares of Series D
Preferred Stock at $9.15 per share. Simultaneously, a Senior Promissory Note
plus accrued interest of $5,208,542 was converted into 569,240 shares
F-12
of Series D Preferred Stock at $9.15 per share. The total number of shares
issued was 5,464,479 and the total dollar value of the transaction, net of
issuance costs of $335,638, was $49,664,342. In January 2000, the Company
issued an additional 546,447 shares of Series D Preferred Stock at $9.15 per
share. The proceeds to the Company were $5,000,000.
Significant terms of Series A, Series B, Series C and Series D Preferred
Stock were as follows:
. Each share of Series A, Series C, and Series D Preferred Stock is
convertible into common stock at the option of the holder, at any time,
at a conversion price of $2.40 per share for Series A and $9.15 per share
for Series C and Series D. The conversion price is subject to adjustments
for events of dilution as specified in the certificate of incorporation.
Each share of Series B Preferred Stock is convertible at the option of
the holder, at any time, into one share of Series A Preferred Stock.
All shares of Series A, Series C, and Series D Preferred Stock
automatically convert, without any action by the holder, into common
stock based on the then applicable Series A, Series C, and Series D
conversion price in the event of either a qualified IPO (as defined) or
upon the conversion of specified percentages of the related Preferred
Stock. Based on certain rights held by the holders of Series C Preferred
Stock, upon effectiveness of a qualified IPO and conversion of our
preferred stock, holders of Series C Preferred Stock will receive
approximately an additional 51,000 shares of common stock. All shares of
Series B Preferred Stock automatically convert, without any action by the
holder, into common stock based on the then applicable conversion price
for the Series A Preferred Stock in the event of the automatic conversion
of Series A, Series C, and Series D Preferred Stock.
. The holders of Series A, Series C, and Series D Preferred Stock have
voting rights equal to the equivalent number of shares of common stock
while Series B Preferred Stock has no voting rights.
. Dividends may be declared at the discretion of the Board of Directors and
are noncumulative. Dividends for Preferred Stock have to be paid and
declared equivalent to the per-share dividend on common stock.
. In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series A, Series B, Series C,
and Series D Preferred Stock are entitled to receive out of the assets of
the Company, whether such assets derive from capital or surplus, an
amount equal to $2.40 per share in the case of Series A and Series B
Preferred Stock and $9.15 per share in the case of Series C and Series D
Preferred Stock (subject to adjustment for any stock splits, reverse
splits or similar capitalization affecting such shares), plus any
declared but unpaid dividends on such shares. Payment of the liquidation
preference to holders of Series A, Series B, Series C, and Series D
Preferred Stock will be made pro rata among the Series A, Series B,
Series C, and Series D Preferred Stock based on the respective
liquidation preference of each such class until each such class receives
its full liquidation, before any payment is made or any assets
distributed to the holders of common stock or any other shares ranking on
liquidation junior to the Series A, Series B, Series C, and Series D
Preferred Stock.
After payment of the liquidation preference to holders of Series A,
Series B, Series C, and Series D Preferred Stock, the holders of Series
A, Series B, Series C, and Series D Preferred Stock are entitled to share
in the distribution of any remaining assets of the Company on the same
basis as if the holders of Series A, Series B, Series C, and Series D
Preferred Stock had converted their shares into common stock.
On September 20, 2000, the Company issued 7,274,413 shares of Series E
Preferred Stock at $30 per share. Proceeds raised were $212,495,174, net of
issuance costs of $5,737,216. The Series E Preferred Stock automatically
converts into common stock upon an IPO, based on the IPO price. If an IPO does
not occur by September 30, 2002, the Series E Preferred Stock converts into
common stock at $10 per share. Should the Series E Preferred Stock be
automatically converted to common stock on September 30, 2002, the Company will
record a deemed dividend to the holders of Series E Preferred Stock, reflecting
the embedded beneficial conversion feature. In the event of any liquidation,
dissolution, or winding up of the Company, holders of Series E Preferred Stock
will be entitled to receive a liquidation preference of $30 per share. If a
liquidation
F-13
event occurs prior to September 30, 2002, the consideration to be received by
Series E Preferred Stock holders is capped. The Series E Preferred Stock has
voting, dividend, and anti-dilution rights similar to the Series A, Series C,
and Series D Preferred Stock.
As the terms of the Series A, Series B, Series C, Series D, and Series E
Preferred Stock include deemed liquidation events where cash redemption of the
securities could be triggered by a merger, consolidation, or sale of
substantially all of the Company's assets, all classes of preferred stock have
been classified outside of stockholders' equity.
On September 26, 2001, we issued 71,316 shares of common stock to Comdisco,
Inc. upon the cashless exercise of two warrants to purchase 29,509 shares of
our Series C preferred stock based on an exercise price of $3.05 per share. The
issuance of these shares was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
Public Offering--On May 17, 2001, Tellium completed an initial public
offering ("IPO") of 10,350,000 shares of common stock at a price of $15.00 per
share less underwriters' discounts and commissions. Net proceeds from the
public offering were approximately $139.3 million after deducting underwriting
discounts, commissions and offering expenses.
Outstanding shares of Series A, Series B, Series C, Series D and Series E
Preferred Stock automatically converted, without any action by the holder, into
71,208,879 shares of common stock upon effectiveness of the Company's IPO.
Other Common Stock Issuances--In conjunction with the execution of a
customer supply agreement in September 2000, the Company sold 333,333 shares of
common stock to officers and affiliates of a customer at $30 per share. The
Company issued 1.5 million shares of common stock on September 1, 2000 to
acquire a license from AT&T. On October 10, 2000, the Company issued 3,749,942
shares of common stock to acquire all of the outstanding stock of Astarte Fiber
Networks, Inc. ("Astarte"). See Note 13.
1997 Employee Stock Option Plan--On May 8, 1997, the Company adopted the
1997 Employee Stock Option Plan, currently known as the Amended and Restated
1997 Employee Stock Incentive Plan (the "1997 Plan"). The 1997 Plan authorized
the granting of both incentive and nonqualified stock options for an aggregate
of 3,000,000 shares of common stock, subject to authorization by the
Compensation Committee of the Board of Directors (the "Compensation
Committee"). Options generally vest over a four-year period from the grant
date. The Compensation Committee has amended the number of shares authorized
under the 1997 Plan various times. The amended Option Plan allowed a total of
45,625,000 options to be granted under the 1997 Plan. As of December 31, 2001,
19,618,468 stock options were outstanding under the 1997 Plan, and no shares
were available for future grant under the 1997 Plan.
2001 Incentive Stock Plan--In February 2001, the Company adopted the 2001
Stock Incentive Plan, which became effective on March 12, 2001 (the "2001
Plan"). The 2001 Plan authorized the granting of both incentive and
nonqualified stock options and other awards for an aggregate of no more than
8,129,272 shares of common stock, subject to authorization by the Compensation
Committee. Options and other awards generally vest over a four-year period from
the grant date. As of December 31, 2001, 7,980,888 stock options were
outstanding under the 2001 Plan and 37,709 shares were available for future
grant under the 2001 Plan.
Special 2001 Stock Incentive Plan--In November 2001, the Company adopted the
Special 2001 Stock Incentive Plan, which became effective on November 14, 2001
(the "2001 Special Plan", together with the 2001 Plan and 1997 Plan, the
"Option Plans"). The 2001 Special Plan authorized the granting of both
incentive and nonqualified stock options and other awards for an aggregate of
no more than 1,737,500 shares of common stock, subject to authorization by the
Compensation Committee. As of December 31, 2001, 953,201 stock options were
outstanding under 2001 Special Plan, and 784,299 shares were available for
future grant under the 2001 Special Plan.
F-14
Stock option activity regarding the Option Plans is summarized as follows:
Weighted
Average
Exercise
Shares Price
----------- --------
Outstanding as of January 1, 1999.................. 2,410,425 0.14
-----------
Options granted................................. 12,071,508 1.56
Options exercised............................... (123,675) 0.10
Options cancelled............................... (1,072,974) 0.16
-----------
Outstanding as of December 31, 1999................ 13,285,284 1.44
-----------
Options granted................................. 26,498,526 2.80
Options exercised............................... (14,389,100) 1.74
Options cancelled............................... (2,021,658) 1.86
-----------
Outstanding as of December 31, 2000................ 23,373,052 2.76
-----------
Options granted................................. 10,887,748 8.04
Options exercised............................... (3,456,037) 2.07
Options cancelled............................... (2,252,206) 4.18
-----------
Outstanding as of December 31, 2001................ 28,552,557 4.74
-----------
Exercisable as of December 31, 2001................ 6,988,290
Available for future grants as of December 31, 2001 822,008
The Company has granted 267,500 and 508,142 options (included in the table
above) under the Option Plans to non-employees during the years ended December
31, 2000 and 2001, respectively. These options vest either as the non-employee
performs services for the Company or upon the attainment of performance
milestones. The measurement date of the fair value of the options is the date
on which the non-employees' performance is complete. At December 31, 2000 and
December 31, 2001, a measurement date has been reached and vesting has occurred
for 142,258 and 694,721 of these options, respectively. The fair value
recognized related to these vested options for the years ended December 31,
2000 and December 31, 2001 was $3,202,034 and $4,791,639, respectively.
At December 31, 2001, stock options outstanding were as follows:
Weighted Weighted
Average Average
Range of Options Contractual Exercisable Exercise
Exercise Prices Outstanding Life (Years) Options Price
--------------- ----------- ------------ ----------- --------
$ 0.08 - 2.10 1,111,468 7.19 344,850 $ 0.19
2.14 12,409,114 8.28 4,372,702 2.14
3.10 5,629,001 9.01 1,582,875 3.10
4.93 1,484,500 9.75 151,812 4.93
6.04 - 6.31 4,675,000 9.87 93,498 6.04
12.75 - 14.00 1,463,500 9.39 154,466 13.73
17.66 - 20.00 1,779,974 9.10 288,087 19.90
---------- ---- --------- ------
28,552,557 8.83 6,988,290 4.74
========== =========
In connection with the grant of stock options to employees and non-employee
directors in 1999, 2000 and 2001, the Company recorded deferred stock
compensation of $14,391,419, $221,178,267 and $26,374,403 respectively, for the
difference between the exercise price and the fair value of the underlying
common stock at the date of the grant. Such amount is presented as a reduction
of stockholders' equity and is amortized over the vesting period of the related
stock options. Non-cash compensation expense of $2,857,485, $32,943,122 and
$59,871,303 was recorded in the statement of operations for the years ended
December 31, 1999 and 2000 and 2001, respectively.
F-15
Had the Company elected to recognize compensation expense for stock options
according to SFAS No. 123, based on the fair value at the grant dates of the
awards, net loss and net loss per share would have been as follows:
Year Ended December 31,
------------------------------------------
1999 2000 2001
------------ ------------- -------------
Net loss:
As reported....................... $(20,010,349) $(110,363,148) $(210,989,008)
Pro forma......................... (22,187,655) (112,198,126) (227,370,157)
Net loss per basic and diluted share:
As reported....................... $ (8.78) $ (13.96) $ (2.98)
Pro forma......................... (9.74) (14.20) (3.21)
The weighted average fair value of the Company's stock options was
calculated using the Black-Scholes Model with the following weighted average
assumptions used for grants: no dividend yield; risk free interest rates
between 3.33% and of 6.25%; expected volatility of 0% (80% for grants issued
during and after September 2000); and expected lives of 4 years. The weighted
average fair value of options granted during the years ended December 31, 1999,
2000 and 2001 was $2.76, $6.53 and $5.82 per share, respectively.
Warrants--Set forth below is a summary of the Company's outstanding warrants
at December 31, 2001.
Exercise
Underlying Security Price Warrants Expiration Date
------------------- -------- --------- ------------------
Common Stock (1).. $ 3.05 5,226,000 September 21, 2005
Common Stock (2).. 14.00 1,000,000 N/A
- --------
(1) In conjunction with executing a supply contract with a customer in
September 1999, the Company granted a warrant to purchase up to 5,226,000
shares of the Company's common stock at an exercise price of $3.05 per
share. Upon execution of the agreement, 1,045,200 of the shares subject to
the warrant vested, with the vesting of the remaining shares dependent upon
the volume of the customer's purchases from the Company. As the 1,045,200
warrants vested upon execution of the supply agreement and are not subject
to forfeiture, a measurement date has occurred for those warrants, and a
charge of $1,048,707 was recorded to sales and marketing expense (as there
was no contractual purchase commitment) for the year ended December 31,
1999 to reflect the fair value of the warrants at grant date. Under the
terms of the original agreement, the vesting of the remaining warrants was
dependent upon purchases made by the customer. Therefore, variable plan
accounting was used and related charges varied each accounting period until
a measurement date occurred. A measurement date occurred when customer
purchases reached certain specified levels. In November 2000, the terms of
the Company's warrant agreement with the customer were amended, to
immediately vest all of the remaining shares subject to the warrants. The
shares subject to the warrants become exercisable based on the schedule of
milestones previously contained in the original agreement. If the
milestones are not reached by March 31, 2005, the remaining unexercised
shares subject to the warrant shall then become exercisable. As a result of
this amendment a measurement date has been reached. In connection with the
execution of this amendment, the Company recorded the fair value of the
warrants, $90.6 million, as deferred warrant costs. This charge is being
recorded as a reduction of revenue as the customer makes purchases under
the agreement. Fair value was determined utilizing a Black-Scholes option
pricing model. Assumptions utilized by the Company in its Black-Scholes
calculations include volatility of 80%, expected life of 3 years, and a
risk free interest rate of 6%.
(2) In conjunction with the execution of a customer supply agreement in
September 2000, the Company granted a warrant to purchase 2,000,000 shares
of common stock at an exercise price of $30 per share. All of the warrants
vested upon execution of the agreement. In addition, on April 10, 2001 the
Company issued a warrant to purchase 375,000 shares of our common stock at
an exercise price of $14.00 per share, and the exercise price of the
warrants to purchase 2,000,000 shares of our common stock referred to above
was adjusted to $14.00 pursuant to the terms of the warrants. As the
warrants vested upon execution of the
F-16
agreement and are not subject to forfeiture, fair values of approximately
$34.5 million and $3.5 million were determined upon execution of the
agreement in September 2000 and its amendment in April 2001, respectively.
The fair value of the warrants was calculated using the Black-Scholes Model
with the following assumptions used: no dividend yield; risk free interest
rates of 6.25% and 4.75%; expected volatilities of 80%; and expected lives
of 3.25 years and 4.25 years. The fair value of the warrants has been
capitalized as deferred warrant cost and is being recorded as an offset to
revenue as purchases are made. In December 2001, coincident with the
amendment of the customer supply agreement, warrants representing 1,375,000
shares of common stock were forfeited. The Company reduced the carrying
value of deferred warrant costs and recorded a charge of approximately $19.2
million as an offset to gross revenue related to the forfeited warrants. The
deferred warrant cost related to the 1,000,000 warrants that remain
outstanding will continue to be amortized as a reduction of revenue based on
customer purchases.
8. NOTES PAYABLE
a. Secured Promissory Notes-Comdisco, Inc.
On November 23, 1999, the Company issued two secured promissory notes to
Comdisco, Inc. ("Comdisco"). The notes are collateralized by substantially all
of the Company's equipment and bear interest of 7.5% per annum. The remaining
principal amounts of $543,614 and $101,632 are payable in monthly installments
through December 1, 2002 and June 1, 2002, respectively, which commenced
January 1, 2000.
b. Bank Loan
On January 22, 2001, the Company obtained a $540,000 bank loan, The loan is
collateralized by the fixed assets purchased with the proceeds and bears
interest of 8.5% per annum. The principal is payable in full on January 1,
2004, whereas interest is payable in monthly installments.
c. Lines of Credit
On November 11, 1999, Tellium obtained a $4,000,000 lease-line of credit
from Comdisco. The line of credit bears an interest rate of 7.5% and expires on
November 10, 2002. At December 31, 2000, the Company had drawn approximately
$3.6 million under this agreement. Such amounts were repaid during 2001. At
December 31, 2001, the Company had not drawn any amount under this agreement.
During the year ended December 31, 2000, the Company entered into a
$10,000,000 line of credit with a bank. The line of credit bears interest at
6.75% and expires on June 30, 2002. The outstanding balances on this line of
credit at December 31, 2000 and 2001 were $4,000,000 and $8,000,000,
respectively.
9. EMPLOYEE BENEFIT PLAN
In July 1997, the Company adopted a 401(k) defined contribution plan
covering all qualified employees. The Company matches 50% of the participating
employees' first 5% of contributions, capped at a maximum 2.5% of the
employee's annual salary. Company matching contributions for 1999, 2000 and
2001 amounted to $130,355, $328,076 and $868,531, respectively.
F-17
10. INCOME TAXES
A reconciliation of the Company's income tax provision computed at the U.S.
federal statutory rates to the recorded income tax provision for the years
ended December 31, 1999, 2000 and 2001 is as follows:
1999 2000 2001
----------- ------------ ------------
Tax at U.S. statutory rate................ $(6,804,000) $(38,900,000) $(73,333,000)
State income taxes, net of federal benefit (1,210,000) (6,670,000) (18,102,000)
Research and development credits and other (1,424,000) (2,276,000) (4,360,000)
Goodwill.................................. -- -- 5,413,000
Cancelled warrants........................ -- -- 6,702,000
Valuation allowance recorded.............. 9,438,000 47,846,000 83,680,000
----------- ------------ ------------
Recorded tax provision.................... $ -- $ -- $ --
=========== ============ ============
The components of the Company's deferred tax asset at December 31, 2000 and
2001 are as follows:
December 31
---------------------------
2000 2001
------------ -------------
Deferred tax assets:
Deferred revenue................. $ 398,000 $ 1,676,000
Deferred rent.................... 22,000 103,000
Warranty reserve................. 247,000 3,725,000
Net operating loss carryforwards. 39,632,000 57,373,000
Intangible assets................ 1,374,000 7,283,000
Fixed assets..................... 332,000 (1,095,000)
Research and development credits. 4,576,000 7,590,000
Deferred compensation............ 16,086,000 45,584,000
Deferred warrant costs........... 1,137,000 19,522,000
Other............................ 49,000 41,000
Inventory reserve................ 1,059,000 5,386,000
Inventory capitalization......... 4,378,000 5,782,000
------------ -------------
Total net deferred tax assets.... 69,290,000 152,970,000
Less valuation allowance......... (69,290,000) (152,970,000)
------------ -------------
$ -- $ --
============ =============
At December 31, 2001, the Company has available U.S. net operating loss
carryforwards of approximately $130 million, which will expire between 2017 and
2021 In addition, the Company also has available research and development tax
credit carryforwards of approximately $7.5 million,which will expire between
2018 and 2021. In addition, the use of federal net operating loss carryforwards
may be limited under IRC Section 382 due to certain changes in ownership.
11. RELATED PARTY TRANSACTIONS
The Company entered into a three-year employment agreement with a former
employee of one of its stockholders. As part of this agreement, the Company
agreed to pay 80% of the employee's COBRA until a health plan was in place. The
stockholder agreed to pay annually $30,400 of additional compensation for the
employee commencing on July 28, 1997 and ending on July 28, 1999.
Approximately $1.4 million of the Company's revenue in 1999 were derived
from sales to an affiliate of one of Tellium's stockholders. In addition,
Tellium purchased approximately $360,000 of product from this company in 1999.
F-18
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain telephone, computer and other equipment under
long-term capital leases and has the option to purchase such equipment at a
nominal cost at the termination of the leases. In addition, the Company is
obligated under non-cancelable operating leases expiring on various dates
through 2007 for facilities.
Future minimum lease payments for the capital and operating leases with
initial or remaining terms in excess of one year as of December 31, 2001 are as
follows:
Capital Operating
Leases Leases
-------- -----------
2002.......................................... $111,972 $ 2,597,460
2003.......................................... 80,928 2,776,126
2004.......................................... 45,279 2,579,181
2005.......................................... -- 2,001,918
2006.......................................... -- 1,431,073
Thereafter.................................... -- 372,023
-------- -----------
Total future minimum lease payments........... $238,179 $11,757,781
======== ===========
Amount representing interest.................. $ 18,054
========
Present value of minimum lease payments....... $220,125
========
Current portion of capital lease obligation... $ 95,612
========
Noncurrent portion of capital lease obligation $124,513
========
Rent expense for the years ended December 31, 1999, 2000 and 2001 was
$340,989, $739,261 and $2,937,868, respectively.
13. ACQUISITION AND LICENSE AGREEMENT
On September 1, 2000, the Company entered into an agreement with AT&T Corp.
to license certain intellectual property in exchange for 1,500,000 shares of
Tellium common stock with a fair value of $45 million. The license has been
recorded in intangible assets on the balance sheet and is being amortized over
its estimated useful life of five years.
On October 10, 2000, the Company acquired Astarte by issuing 3,749,942
shares of its common stock to acquire all of the outstanding stock of Astarte.
Astarte developed, manufactured, and sold switches for use in optical networks.
The Company has acquired Astarte primarily for its intellectual property. The
acquisition has been accounted for under the purchase method and the results of
operations for Astarte are included with the Company beginning October 10,
2000. The common stock issued by the Company was valued at $112.5 million.
Identifiable intangible assets will be amortized over their estimated useful
life of five years. Goodwill had been amortized until December 31, 2001. Upon
implementation of SFAS No. 142 the accounting for goodwill will be changed from
an amortization method to an impairment-only approach. The allocation of the
fair value of the net assets acquired is as follows:
Net Liabilities $ (835,774)
Core Technology 36,000,000
Goodwill....... 77,335,774
------------
$112,500,000
============
F-19
The following unaudited pro forma financial information reflects the
combined results of operations of the Company and Astarte as if Astarte had
been acquired on the first day of fiscal year 2000. The unaudited pro forma
basis financial information also assumes that the license of intellectual
property from AT&T had occurred on January 1, 2000. The summary includes the
impact of certain adjustments, such as goodwill and intangible asset
amortization and the number of shares outstanding. The unaudited pro forma
financial information is not necessarily indicative of what actually would have
occurred had the transactions occurred on January 1, 2000, nor are they
intended to be a projection of future results.
Year Ended
December 31,
2000
-------------
Revenue, net..................................... $ 13,842,318
Net loss......................................... (139,035,576)
Net loss per basic and diluted share............. $ (5.69)
14. Quarterly Financial Information (Unaudited)
The following is a summary of selected quarterly financial data for the
years ended December 31, 2000 and 2001:
2001 Quarters Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Revenue--net..................................... $ 10,845,748 $ 23,524,468 $ 26,213,178 $ 15,061,915
Gross profit..................................... 118,634 3,287,776 437,691 (15,545,660)
Operating loss................................... (52,489,537) (53,752,470) (50,654,776) (63,107,041)
Net loss......................................... (49,812,760) (51,497,917) (48,163,476) (61,514,855)
Net loss per basic and diluted share............. (3.20) (0.87) (0.47) (0.58)
2000 Quarters Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Revenue--net..................................... $ 3,123,184 $ 3,869,346 $ 80,664 $ 5,757,762
Gross profit..................................... 865,989 715,196 (1,562,900) (2,918,337)
Operating loss................................... (10,826,276) (16,269,972) (30,088,449) (60,179,910)
Net loss......................................... (10,103,543) (15,365,906) (28,611,884) (56,281,815)
Net loss per basic and diluted share............. (3.91) (2.16) (3.29) (4.35)
F-20
SCHEDULE II
TELLIUM, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 2000 and 2001
Additions
Balance at Charged to
Beginning of Costs and Write-offs Balance at
Period Expenses (Deductions) End of Period
------------ ---------- ------------ -------------
Allowance for Doubtful Accounts
For the year ended December 31, 1999............. -- 60,000 -- 60,000
For the year ended December 31, 2000............. 60,000 61,000 -- 121,000
For the year ended December 31, 2001............. 121,000 36,000 -- 157,000
Deferred Tax Valuation Allowance
For the year ended December 31, 1999............. 11,159,000 10,285,000 -- 21,444,000
For the year ended December 31, 2000............. 21,444,000 47,846,000 -- 69,290,000
For the year ended December 31, 2001............. 69,290,000 83,680,000 -- 152,970,000
II-1
EXHIBIT INDEX
The following documents are filed as exhibits to this report:
Exhibit Description
- ------- -----------
3.1* Amended and Restated Certificate of Incorporation of Tellium, Inc.
3.2* Amended and Restated Bylaws of Tellium, Inc.
4.1* Specimen common stock certificates
4.2* Amended and Restated Stockholders' Agreement dated as of September 19, 2000 by and among
Tellium, Inc. and certain stockholders of Tellium, Inc.
4.3* Supplemental Stockholders' Agreement dated as of August 29, 2000 by and among Tellium, Inc.
and certain former stockholders of Astarte Fiber Networks, Inc.
4.4* Form of Supplemental Stockholders Agreement dated as of September 18, 2000 by and among
Tellium, Inc. and Qwest Investment Company (fka U.S. Telesource, Inc.)
4.5* Form of Supplemental Stockholders Agreement dated as of September 18, 2000 by and among
Tellium, Inc. and the Holders listed therein
4.6* Form of Supplemental Stockholders' Agreement dated March 21, 2001 by and among Tellium, Inc.
and the parties listed therein
4.7* Supplemental Stockholders' Agreement dated April 10, 2001 by and between Tellium, Inc. and
Qwest Investment Company (fka U.S. Telesource, Inc.)
10.1* Amended and Restated Securities Purchase Agreement dated as of February 10, 1999, among
Tellium, Inc. and the purchasers named therein
10.2* Stock Purchase Agreement dated as of February 11, 1999 by and among Tellium, Inc., Cisco
Systems, Inc. and other investors, as amended pursuant to Amendment No. 1 dated May 5, 1999 to
the Stock Purchase Agreement
10.3* Stock Purchase Agreement dated as of December 2, 1999 by and among Tellium, Inc. and certain
investors, as amended pursuant to Amendment No. 1 dated January 14, 2000 to the Stock Purchase
Agreement
10.4+* Purchase Agreement dated as of September 21, 1999 between Tellium, Inc. and Extant, Inc.
10.5* Agreement and Plan of Merger dated as of August 29, 2000 by and among Tellium, Inc., Astarte
Acquisition Corporation, Astarte Fiber Networks, Inc., AFN LLC and Aron B. Katz
10.6* Stock Purchase Agreement dated September 1, 2000 by and between Tellium, Inc. and AT&T Corp.
10.7* Stock Purchase Agreement dated as of September 19, 2000 by and among Tellium, Inc. and certain
investors
10.8+* Restated and Amended Intellectual Property Agreement dated December 30, 1998 between Bell
Communications Research Inc. and Tellium, Inc.
10.9+* Warrant to Purchase Common Stock granted to Extant, Inc. dated September 21, 1999, and Side
Letter to Annex I to the Warrant dated December, 1999
10.10+* Amendment to Warrant to Purchase Common Stock dated as of September 21, 1999 between
Tellium, Inc. and Dynegy Global Communications, Inc. (as successor to Extant, Inc.), made as of
November 2, 2000
10.11+* Amendment to Purchase Agreement dated as of September 21, 1999 between Tellium, Inc. and
Extant, Inc., made as of November 6, 2000
10.12+* Contract Manufacturing Agreement dated as of August 1, 2000 between Tellium, Inc. and Solectron
Corporation
II-2
Exhibit Description
- ------- -----------
10.13+* Agreement dated as of August 7, 2000 between Tellium, Inc. and Cable & Wireless Global
Networks Limited
10.14* Patent License Agreement dated September 1, 2000 by and between Tellium, Inc. and AT&T Corp.
10.15+* "A" Warrants to Purchase Common Stock granted to Qwest Investment Company
(fka U.S. Telesource, Inc.), dated as of September 18, 2000
10.16* Business Loan Agreement dated June 1, 2000 by and among Tellium, Inc. and
Commerce Bank/Shore N.A.
10.17* Executive Employment Agreement dated as of December 31, 1999 between Tellium, Inc. and
Harry J. Carr
10.18* Restricted Stock Agreement (Time Vested Shares) dated as of April 4, 2000 by and between
Tellium, Inc. and Harry J. Carr
10.19* Restricted Stock Agreement (Performance Shares) dated as of April 4, 2000 by and between
Tellium, Inc. and Harry J. Carr, and Amendment Number 1 to the Restricted Stock Agreement dated
September 18, 2000
10.20* Form of Restricted Stock Agreement for Executives
10.21* Lease Agreement dated February 9, 1998 between Tellium, Inc. and G.B. Ltd., L.L.C. (as amended)
10.22* Lease Agreement dated August 3, 2000 between 185 Monmouth Parkway Associates, L.P. and
Tellium, Inc.
10.23* Amended and Restated 1997 Employee Stock Incentive Plan
10.24* 2001 Stock Incentive Plan
10.25+ Amended and Restated Procurement Agreement dated December 14, 2001 between Tellium, Inc.
and Qwest Communications Corporation (Incorporated by reference from Exhibit 10.1 of the
Company's Report on Form 8-K dated and filed with the Securities and Exchange Commission on
December 20, 2001)
10.26** Retirement and Separation Agreement and Release dated as of December 21, 2001 between Richard
W. Barcus and Tellium, Inc.
16.1** Letter re: change in certifying accountant
21.1** Subsidiaries of Tellium, Inc.
23.1** Consent of Deloitte & Touche LLP
- --------
* Incorporated by reference from the Registration Statement filed on Form S-1,
Registration No. 333-46362.
** Filed herewith.
+ Subject to a confidential treatment request.
II-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Oceanport, State of New Jersey, on April 1, 2002.
TELLIUM, INC.
/S/ HARRY J. CARR
By: -----------------------------
Harry J. Carr
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K for the fiscal year ended December 31,
2001 has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/S/ HARRY J. CARR Chief Executive Officer and April 1, 2002
- ----------------------------- Chairman of the Board of
Harry J. Carr Directors (Principal
Executive Officer)
/S/ WILLIAM PROETTA President and Chief Operating April 1, 2002
- ----------------------------- Officer
William Proetta
/S/ WILLIAM B. BUNTING Director April 1, 2002
- -----------------------------
William B. Bunting
/S/ MICHAEL M. CONNORS Director April 1, 2002
- -----------------------------
Michael M. Connors
/S/ JEFFREY A. FELDMAN Director April 1, 2002
- -----------------------------
Jeffrey A. Feldman
/S/ EDWARD F. GLASSMEYER Director April 1, 2002
- -----------------------------
Edward F. Glassmeyer
/S/ RICHARD C. SMITH, JR. Director April 1, 2002
- -----------------------------
Richard C. Smith, Jr.
/S/ WILLIAM A. ROPER, JR. Director April 1, 2002
- -----------------------------
William A. Roper, Jr.
/S/ MARC B. WEISBERG Director April 1, 2002
- -----------------------------
Marc B. Weisberg
/S/ MICHAEL J. LOSCH Chief Financial Officer April 1, 2002
- ----------------------------- (Principal Financial and
Michael J. Losch Accounting Officer)
II-4