Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
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)
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 [_]
As of June 30, 2002, there were 112,658,761 shares outstanding of the
registrant's common stock, par value $0.001.
================================================================================
TELLIUM, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Condensed Consolidated Financial Statements (Unaudited): ... 3
Condensed Consolidated Balance Sheets as of June 30,
2002 and December 31, 2001 ............................ 3
Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 2002 and June 30,
2001 and for the Six Months Ended June 30, 2002 and
June 30, 2001 .......................................... 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the Six Months Ended June
30, 2002 ............................................... 5
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2002 and June 30, 2001 ... 6
Notes to Condensed Consolidated Financial Statements ... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ............................................ 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 31
Item 2. Changes in Securities and Use of Proceeds .................. 31
Item 3. Defaults Upon Senior Securities ............................ 31
Item 4. Submission of Matters to a Vote of Security Holders ........ 31
Item 5. Other Information .......................................... 32
Item 6. Exhibits and Reports on Form 8-K ........................... 32
Signatures ................................................. 35
2
TELLIUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
2001 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................ $ 218,708,074 $ 206,135,276
Accounts receivable .................................................................. 23,923,631 4,136,382
Inventories .......................................................................... 52,398,123 20,499,412
Prepaid expenses and other current assets ............................................ 8,107,916 9,786,929
--------------- ---------------
Total current assets ................................................................ 303,137,744 240,557,999
PROPERTY AND EQUIPMENT--Net .............................................................. 65,085,402 56,731,802
INTANGIBLE ASSETS--Net ................................................................... 60,200,000 1,704,511
GOODWILL--Net ............................................................................ 58,433,967 --
DEFERRED WARRANT COST .................................................................... 65,704,572 29,548,717
OTHER ASSETS ............................................................................. 1,276,847 771,398
--------------- ---------------
TOTAL ASSETS ............................................................................. $ 533,838,532 $ 329,314,427
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ............................................................... $ 9,683,821 $ 6,783,027
Accrued expenses and other current liabilities ....................................... 39,777,417 37,694,278
Current portion of notes payable ..................................................... 601,847 256,376
Current portion of capital lease obligations ......................................... 95,612 80,447
Bank line of credit .................................................................. 8,000,000 8,000,000
--------------- ---------------
Total current liabilities ........................................................... 58,158,697 52,814,128
LONG-TERM PORTION OF NOTES PAYABLE ....................................................... 583,399 540,000
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS ........................................... 124,513 88,717
OTHER LONG-TERM LIABILITIES .............................................................. -- --
....................................................................................... 233,335 309,267
--------------- ---------------
Total liabilities ................................................................... 59,099,944 53,752,112
--------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 25,000,000 shares authorized as of
December 31, 2001 and June 30, 2002, 0 issued and outstanding as of
December 31, 2001 and June 30, 2002 ................................................. -- --
Common stock, $0.001 par value, 900,000,000 shares authorized,
114,495,282 and 115,108,762 issued as of December 31, 2001 and June 30, 2002, and
112,446,449 and 112,658,761 outstanding as of December 31, 2001 and June 30, 2002 ... 114,496 115,109
Additional paid-in capital ........................................................... 1,043,900,812 1,012,640,007
Notes receivable ..................................................................... (33,513,935) (30,522,415)
Accumulated deficit .................................................................. (367,137,978) (609,406,685)
Deferred employee compensation ....................................................... (144,495,721) (90,927,740)
Common stock in treasury, at cost, 2,048,833 and 2,450,001 shares as of
December 31, 2001 and June 30, 2002 ................................................. (4,129,086) (6,335,961)
--------------- ---------------
Total stockholders' equity .......................................................... 494,738,588 275,562,315
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................... $ 553,838,532 $ 329,314,427
=============== ===============
See notes to condensed consolidated financial statements.
3
TELLIUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
REVENUE ............................................... $ 30,414,155 $ 3,074,433 $ 46,049,556 $ 57,134,008
Non-cash charges related to equity issuances .......... 6,889,687 28,800,000 11,679,340 36,155,855
------------- -------------- ------------- --------------
REVENUE, net of non-cash charges related to equity
issuances ......................................... 23,524,468 (25,725,567) 34,370,216 20,978,153
COST OF REVENUE ....................................... 20,236,692 25,851,320 30,963,806 57,097,516
------------- -------------- ------------- --------------
Gross profit .......................................... 3,287,776 (51,576,887) 3,406,410 (36,119,363)
------------- -------------- ------------- --------------
OPERATING EXPENSES:
Research and development, excluding stock based
compensation ...................................... 15,232,412 13,801,443 31,879,775 27,766,983
Sales and marketing, excluding stock based
compensation ...................................... 8,465,425 4,547,845 16,137,214 11,703,365
General and administrative, excluding stock based
compensation ...................................... 6,443,804 8,243,973 12,258,880 15,862,809
Amortization of intangible assets and goodwill ........ 7,916,790 2,745,489 15,833,580 6,795,489
Stock-based compensation expense ...................... 18,981,815 11,025,516 33,538,968 23,012,355
Impairment of goodwill ................................ -- 58,433,967 -- 58,433,967
Restructuring and impairment of long-lived assets ..... -- 64,535,388 -- 64,535,388
------------- -------------- ------------- --------------
Total operating expenses .............................. 57,040,246 163,333,621 109,648,417 208,110,356
------------- -------------- ------------- --------------
OPERATING LOSS ........................................ (53,752,470) (214,910,508) (106,242,007) (244,229,719)
------------- -------------- ------------- --------------
OTHER INCOME (EXPENSE):
Other income (expense) - net .......................... 118,183 51,580 98,496 (4,089)
Interest income ....................................... 2,394,077 1,293,211 5,202,900 2,472,144
Interest expense ...................................... (257,707) (186,072) (370,066) (507,043)
------------- -------------- ------------- --------------
Total other income .................................... 2,254,553 1,158,719 4,931,330 1,961,012
------------- -------------- ------------- --------------
NET LOSS .............................................. $ (51,497,917) $ (213,751,789) $(101,310,677) $ (242,268,707)
============= ============== ============= ==============
BASIC AND DILUTED LOSS PER SHARE ...................... $ (0.87) $ (1.98) $ (2.68) $ (2.26)
============= ============== ============= ==============
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING ................................ 59,215,496 107,835,852 37,765,392 107,420,739
============= ============== ============= ==============
STOCK-BASED COMPENSATION EXPENSE
Cost of revenue ....................................... $ 1,588,065 $ 1,481,643 $ 2,953,093 $ 2,934,787
Research and development .............................. 10,578,954 7,531,280 20,067,455 15,050,899
Sales and marketing ................................... 5,541,456 2,343,096 8,069,082 5,277,934
General and administrative ............................ 2,861,405 1,151,140 5,402,431 2,683,522
Restructuring ......................................... -- 1,445,696 -- 1,445,696
----------- ------------ ----------- ------------
$ 20,569,880 $ 13,952,855 $ 36,492,061 $ 27,392,838
============= ============== ============= ==============
See notes to condensed consolidated financial statements.
4
TELLIUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Treasury Stock Additional
------------ -------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
JANUARY 1, 2002 ............................... 114,495,282 $ 114,496 2,048,833 $ (4,129,086) $1,043,900,812
Exercise of stock options and warrants ........ 613,480 613 -- -- 301,448
Forfeiture of unvested stock options .......... -- -- -- -- (26,586,480)
Warrant and option cost ....................... -- -- -- -- 524,227
Amortization of deferred compensation ......... -- -- -- -- --
Repurchase of warrants ........................ -- -- -- -- (5,500,000)
Repurchase of restricted stock ................ -- -- 401,168 (2,206,875) --
Net loss ...................................... -- -- -- -- --
----------- --------- --------- ------------- --------------
JUNE 30, 2002 ................................. 115,108,762 $ 115,109 2,450,001 $ (6,335,961) $1,012,640,007
=========== ========= ========= ============= ==============
Accumulated Deferred Notes Stockholders'
Deficit Compensation Receivable Equity
------- ------------ ---------- ------
JANUARY 1, 2002 ............................... $(367,137,978) $(144,495,721) $(33,513,935) $494,738,588
Exercise of stock options and warrants ........ -- -- -- 302,061
Forfeiture of unvested stock options .......... -- 26,566,282 -- (20,198)
Warrant and option cost ....................... -- -- -- 524,227
Amortization of deferred compensation ......... -- 27,001,699 -- 27,001,699
Repurchase of warrants ........................ -- -- -- (5,500,000)
Repurchase of restricted stock ................ -- -- 2,991,520 784,645
Net loss ...................................... (242,268,707) -- -- (242,268,707)
-------------- ------------- ------------ ------------
JUNE 30, 2002 $(609,406,685) $(90,927,740) $(30,522,415) $275,562,315
============= ============ ============ ============
See notes to condensed consolidated financial statements.
5
TELLIUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................................. $(101,310,677) $(242,268,707)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................................................... 21,486,379 17,992,039
Write down of impaired assets .......................................................... -- 157,983,967
Provision for doubtful accounts ........................................................ -- 199,135
Amortization of deferred compensation expense ......................................... 31,865,961 26,981,501
Amortization of deferred warrant cost .................................................. 11,679,340 7,355,855
Warrant and option cost related to third parties ....................................... 4,616,495 524,227
Changes in assets and liabilities:
Decrease in due from stockholder ....................................................... 26,437 784,645
Decrease in accounts receivable ........................................................ 4,551,343 19,471,973
Decrease (increase) in inventories ..................................................... (33,214,708) 15,098,711
Decrease (increase) in prepaid expenses and other current assets ....................... 5,517,603 (1,562,872)
Decrease in other assets ............................................................... 10,398 505,449
Decrease in accounts payable ........................................................... (18,920,014) (2,900,794)
Increase (decrease) in accrued expenses and other current liabilities .................. 23,440,963 (2,083,139)
Increase in other long-term liabilities ................................................ 74,533 75,932
----------- -------------
Net cash used in operating activities ............................................... (50,175,947) (1,842,078)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................................................ (47,245,331) (5,092,950)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and line of credit
borrowings ............................................................................. (302,311) (388,870)
Principal payments on capital lease obligations ........................................... (3,547,357) (50,961)
Repurchase of warrants .................................................................... -- (5,500,000)
Proceeds from line of credit borrowings ................................................... 4,000,000 --
Issuance of common stock .................................................................. 139,831,875 302,061
----------- -------------
Net cash provided by (used in) financing
activities ........................................................................ 139,982,207 (5,637,770)
----------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................................... 42,560,929 (12,572,798)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................ 188,175,444 218,708,074
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................................... $ 230,736,373 $ 206,135,276
============= =============
SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION
Cash paid for interest .................................................................... $ 370,066 $ 507,043
============= =============
See notes to condensed consolidated financial statements.
6
TELLIUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We design, develop and market high-speed, high-capacity, intelligent
optical switching solutions that enable network service providers to quickly and
cost-effectively deliver new high-speed services. Our product line consists of
several hardware products and related software tools.
The continued deteriorating conditions in the telecommunications industry
has hindered our ability to secure additional customers and has caused current
customers' purchases to decline. As a result, on June 24, 2002, we announced a
business restructuring that resulted in a workforce reduction of approximately
200 employees. We recorded a restructuring charge of approximately $12.8 million
related to the workforce reduction and the consolidation of facilities in the
June 2002 quarter. This restructure included a significant reduction in our
efforts to develop the Aurora Optical Switch, which may negatively impact our
ability to secure additional revenue from our customers.
We also completed an assessment of the current carrying value of certain
assets on our balance sheet, including goodwill, intangible assets, deferred
warrant changes and inventory. Our analysis resulted in a write off of
approximately $155.7 million related to these assets.
The accompanying, unaudited condensed consolidated financial statements
included herein for Tellium have been prepared by us pursuant to the rules and
regulations of the Securities and Exchange Commission. In our opinion, the
condensed consolidated financial statements included in this report reflect all
normal recurring adjustments which we consider necessary for the fair
presentation of the results of operations for the interim periods covered and of
our financial position at the date of the interim balance sheet. Certain
information and footnote disclosures normally included in the annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
we believe that the disclosures are adequate to understand the information
presented. The operating results for interim periods are not necessarily
indicative of the operating results to be expected for the entire year. These
statements should be read in conjunction with the financial statements and
related footnotes for the year ended December 31, 2001, included in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission on April
1, 2002.
2. GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." As indicated in our Form 10-K for the year ended
December 31, 2001, we implemented SFAS No. 142 as of January 1, 2002. SFAS No.
142 changed 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, ceased upon adoption of this statement.
Identifiable intangible assets 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 following table presents the impact of SFAS No. 142 on net loss and net
loss per share for the three months and six months ended June 30, 2002,
respectively, and the impact of SFAS No. 142 as if it had been in effect for the
three months and six months ended June 30, 2001, respectively.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2002 2001 2002
---- ---- ---- ----
Reported net loss .................................. $(51,497,917) $(213,751,789) $(101,310,677) $(242,268,707)
Add back: Goodwill amortization .................... 3,866,890 -- 7,733,780 --
------------ ------------- ------------- -------------
Adjusted net loss .................................. $(47,631,027) $(213,751,789) $ (93,576,897) $(242,268,707)
============ ============= ============= =============
Basic and diluted earnings per share:
Reported net loss ............................... $ (0.87) $ (1.98) $ (2.68) $ (2.26)
Goodwill amortization ........................... $ 0.07 $ -- $ 0.20 $ --
------------ ------------- ------------- -------------
Adjusted net loss ............................... $ (0.80) $ (1.98) $ (2.48) $ (2.26)
============ ============= ============= =============
7
We have completed the transitional testing of goodwill upon the January 1,
2002 adoption date of SFAS No. 142. The first step of this transitional test
indicated that no impairment existed as of the adoption date, as the fair value
of the reporting unit carrying the goodwill exceeded its carrying value.
During the three months ended June 30, 2002, we experienced a decline in
capital spending by our customers, reduced our expectations for future growth in
revenue and cash flows and our stock price continued to decline significantly.
Due to these significant changes, which indicated that goodwill and other assets
of the reporting unit might be impaired, we, with the assistance from an
independent valuation expert, performed an evaluation of goodwill and other
identifiable long-lived assets.
We compared the fair value of the reporting unit to the carrying value of
the reporting unit, including goodwill, in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets", and determined that the carrying value,
including goodwill, exceeded the fair value of our reporting unit. As a result
of this evaluation, we took a charge of approximately $58.4 million for the
impairment of goodwill during the three months ended June 30, 2002. The fair
value of the reporting unit was determined using a combination of a discounted
cash flows method and other accepted valuation methodologies.
As a result of the valuation, we recorded an impairment charge of
approximately $58.4 million during the three months ended June 30, 2002 in
accordance with SFAS No. 142. The change in the carrying amount of goodwill for
the six months ended June 30, 2002 is as follows:
2002
----
Balance as of January 1, 2002 .......................... $ 58,433,967
Impairment losses ...................................... (58,433,967)
------------
Balance as of June 30, 2002 ............................ $ --
------------
3. RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS
During the six months ended June 30, 2002, continued deteriorating
conditions in the telecommunications industry have contributed to our inability
to secure additional customers and caused purchases by current customers to
decline. On June 24, 2002, in response to these conditions, we announced a
business restructuring plan designed to decrease our operating expenses. We
recorded a restructuring charge of approximately $12.8 million associated with a
workforce reduction and the consolidation of excess facilities, resulting in
non-cancelable lease costs and write down of certain leasehold improvements.
As of June 30, 2002, approximately 200 employees have been notified of the
termination of their employment with us. Charges for the workforce reduction of
approximately $6.3 million consisted of primarily severance and extended
benefits. The remaining balance of approximately $4.5 million will be paid
during second half of 2002.
During the three months ended June 30, 2002, we recorded a charge of
approximately $6.5 million related to the consolidation of facilities and a net
charge of approximately $2.3 million related to the write down of leasehold
improvements. The remaining facilities balance of approximately $4.3 million as
of June 30, 2002 is related to the net lease expense of non-cancelable leases,
which will be paid over the respective lease terms through the year 2007. We do
not believe that the restructuring program will have a material impact on
revenues. We expect that the actions described above will result in an estimated
annual reduction in employee-related expense and cash flows of approximately
$15-20 million.
The following displays the activity and balances of the restructuring
reserve account for the three months ended June 30, 2002:
Workforce Facility Total
--------- -------- -----
Reduction Consolidation
---------- -------------
Reserve recorded during the three months ended June 30, 2002 ....... $6,335,388 $6,500,000 $12,835,388
Non-cash reduction ................................................. (1,445,696) (2,250,000) (3,695,696)
Cash reductions .................................................... (342,237) -- (342,237)
---------- ---------- -----------
Restructuring liability as of June 30, 2002 ........................ $4,547,455 $4,250,000 $ 8,797,455
========== ========== ===========
We performed an impairment review of our deferred warrant costs during the
three months ended June 30, 2002. We previously granted warrants to two
customers in conjunction with the execution of customer supply agreements. The
fair value of these warrants was capitalized on the measurement date as deferred
warrant costs, which were amortized as a pro-rata reduction of revenue as the
customers purchased products under the supply agreements. Based on the recent
sharp decline in customer spending and the situation in the telecommunications
industry in general, we believe that our customers with warrants will
8
purchase less equipment than originally forecasted. As a result, we recorded an
impairment charge to deferred warrant cost of approximately $28.8 million. The
charge was measured based upon the proportion of the forecasted purchases under
the supply agreement expected to not be fulfilled compared to the capitalized
cost. In the consolidated statement of operations, the impairment charge is
classified as a reduction to revenue under "Non-cash charges related to equity
issuances" in accordance with EITF Issue, No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products."
We also assessed the carrying value of intellectual property acquired from
AT&T Corp. on September 1, 2000 and from Astarte Fiber Networks, Inc. on October
10, 2000. Because the estimated undiscounted cash flows relating to these
identifiable long-lived assets was less than their carrying value, an impairment
charge of approximately $51.7 million was recorded based on discounted cash
flows in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The charge is included in "Restructuring and
impairment of long-lived assets" within operating expenses in the statement of
operations.
4. RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations and cost associated with the retirement of tangible long-lived
assets. We are required to implement SFAS No. 143 for fiscal years beginning
after June 15, 2002 and have not yet determined the impact that this statement
will have on our results of operations or financial position.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an amendment of that Statement, and SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting of Intangible Assets of Motor Carriers."
SFAS No. 145 amends SFAS No. 13, "Accounting for Leases" to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
SFAS No. 145 also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The provision of SFAS No. 145 related to
extinguishment of debt becomes effective for financial statements issued for
fiscal years beginning after May 15, 2002. We are currently evaluating the
impact that the adoption of this statement will have on its results of
operations and financial position.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146
replaces EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002.
5. 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. 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 our 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 three months ended June 30,
2001 and 2002 and the six months ended June 30, 2001 and 2002, potentially
dilutive shares of 8,870,860, 525,666, 6,677,539 and 1,004,431, respectively,
were excluded from the diluted weighted average shares outstanding calculation.
6. INVENTORIES
Inventories consist of the following:
December 31, 2001 June 30, 2002
----------------- -------------
Raw materials ..................................... $20,242,766 $ 5,247,774
Work-in-process ................................... 21,743,663 6,512,557
Finished goods .................................... 10,411,694 8,739,081
----------- -----------
$52,398,123 $20,499,412
----------- -----------
9
We have recorded a $16.8 million charge to cost of sales in the quarter ended
June 30, 2002. Consistent with the downturn in the markets served by us, we
evaluated our inventory levels in light of actual and forecasted revenue. The
inventory charge relates to reserves for excess and obsolete inventory that we
believe we are carrying as a result of the market conditions. We have a plan to
dispose of the obsolete inventory during the second half of 2002. We will
continue to monitor our excess reserves and to the extent that inventory that
has been reserved as excess is ultimately sold by us, such amounts will be
disclosed in the future.
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, 2001 June 30, 2002
----------------- -------------
Equipment ....................................... $46,576,810 $56,557,640
Furniture and fixtures .......................... 6,463,144 6,295,731
Acquired software ............................... 9,747,235 10,482,840
Leasehold improvements .......................... 15,716,203 13,436,711
Construction in progress ........................ 6,518,764 1,137,773
----------- -----------
85,022,156 87,856,695
Less accumulated depreciation and amortization .. 19,936,754 31,124,893
----------- -----------
Property, plant and equipment--Net .............. $65,085,402 $56,731,802
=========== ===========
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, 2001 June 30, 2002
----------------- -------------
Licenses ........................................ $45,000,000 $ 1,445,524
Core Technology ................................. 36,000,000 1,283,837
----------- -----------
81,000,000 2,729,361
Less accumulated amortization ................. 20,800,000 1,024,850
----------- -----------
$60,200,000 $ 1,704,511
=========== ===========
During the three months ended June 30, 2002, we wrote down net intangible
assets by approximately $51.7 million due to the impairment of certain
intellectual property. (See Note 3.)
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
December 31, 2001 June 30, 2002
----------------- -------------
Accrued professional fees ....................... $ 754,129 $ 834,179
Accrued compensation and related expenses ....... 12,762,549 10,877,559
Accrued taxes ................................... 1,175,895 650,158
Deferred revenue ................................ 14,549,053 4,239,857
Warranty reserve ................................ 8,466,615 10,294,785
Restructuring reserve ........................... - 8,797,455
Other ........................................... 2,069,176 2,000,285
----------- -----------
$39,777,417 $37,694,278
=========== ===========
10. SUBSEQUENT EVENTS
Stock Option Exchange Offer and Management Repurchase Program
On August 1, 2002, we commenced an offer to exchange outstanding
employee stock options having an exercise price of $2.14 or more per share in
return for a combination of share awards for shares of common stock and new
stock options to purchase shares of common stock to be granted by us (the
"Exchange Offer"). Our directors, executive officers and vice presidents were
not eligible to participate in the Exchange Offer. Subject to the terms and
conditions of the Exchange Offer, in exchange for eligible options, an option
holder who tenders eligible options that are accepted by us will receive a share
award for shares of common stock equal to one tenth (1/10) of the total number
of shares subject to the options tendered by the option holder, and for new
options to be granted for a number of shares of common stock equal to nine
tenths (9/10) of the total number
10
of shares subject to the options tendered by the option holder. Employees who
accept the Exchange Offer with respect to any of their eligible options are
required to exchange any option granted to them on or after February 1, 2002.
Upon completion of the Exchange Offer, we expect to issue share awards promptly
upon acceptance and cancellation of the eligible options and to grant new
options in March 2003, on a date that is at least six months and one day from
the expiration date of the offer. The share awards will be 100% vested upon
issuance. The new options will vest from the original grant date of the eligible
options in accordance with the original vesting schedule of the original option
grant. The new options will be granted with an exercise price equal to the fair
market value of our common stock on the date of the grant. We will record a
charge for the fair value of the common stock awarded, as the exercise price is
zero and the common stock is being issued with no restrictions. In addition, we
will record a charge to write-off any deferred compensation associated with the
options tendered by the option holders.
Subsequent to June 30, 2002, the board of directors decided to make changes
to our management incentive program, including changes relating to the loans
held by 12 employees, consisting of executive officers, vice presidents and
other employees. The notes had been issued as consideration for the issuance of
restricted stock. As part of these changes, these employees were permitted to
deliver shares of vested and unvested restricted stock to be applied against the
loans. We also amended the terms of these loans and agreed to pay a bonus to
those management members who participated in the program should a change in
control occur. After the adoption of the above program, the board of directors
became aware of issues that arose regarding the implementation of the program.
The board is currently reviewing these issues and their implications for the
company and its management. The resolution of these issues may have a material
adverse effect on the company. While the notes remain full recourse for legal
purposes and the executives remain indebted to us, accounting standards require
the notes to now be treated as non-recourse. For accounting purposes a charge
will be recorded in the third quarter for the difference between the principal
and interest related to the notes and the fair value of our common stock at the
modification date. In connection with the option exchange offer, assuming all
eligible options are accepted, and based on a closing share price of $0.52 as of
August 12, 2002, and also in connection with the management repurchase program,
we currently expect to record a non-cash compensation expense of up to
approximately $105 million in the third quarter of 2002, of which approximately
$75 million was recorded as deferred compensation expense prior to our initial
public offering.
Legal Proceedings
In late July 2002, Corning Incorporated filed a Demand for Arbitration
arising out of a dispute in connection with our October 2000 merger with Astarte
Fiber Networks, Inc. Corning alleges that Astarte, and Tellium as
successor-in-interest to Astarte, fraudulently induced Corning to enter into a
contract, breached that contract and breached warranties presented in that
contract. Corning seeks an award of $38 million, plus expenses and interest. We
intend to defend vigorously the claims made in any legal proceedings that may
result, and pursue any possible counter claims against Corning, Astarte, and
other parties associated with the claims. It is too early in the dispute process
to determine the impact, if any, that such dispute will have upon our business,
financial condition or results of operations.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis addresses the financial condition of
Tellium and its subsidiaries as of June 30, 2002 compared with December 31,
2001, and our results of operations for the three months and six months ended
June 30, 2002 compared with the same periods last year, respectively. You should
read this discussion and analysis along with our unaudited condensed
consolidated financial statements and the notes to those statements included
elsewhere in this report, and in conjunction with our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on April 1, 2002.
Certain statements and information included in this Form 10-Q are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements express our intentions,
strategies or predictions for the future. Actual results may differ from our
predictions. For more information regarding forward-looking statements, please
see "Cautionary Statement Regarding Forward-Looking Statements" below.
Overview
We design, develop and market high-speed, high-capacity, intelligent
optical switching solutions that enable network service providers to quickly and
cost-effectively deliver new high-speed services. Our product line consists of
several hardware products and related software tools.
We have purchase contracts with the following three customers: Cable &
Wireless Global Networks Limited, Dynegy Connect, L.P., an affiliate of Dynegy
Global Communications, and Qwest Communications Corporation. Under the terms of
its contract, Cable & Wireless made a commitment to purchase a minimum of $350
million of our products, including the Aurora Optical Switch, the StarNet
Wavelength Management System and the StarNet Operating System, by August 7,
2005. Our agreement with Cable & Wireless gives it the right to reduce its
minimum purchase commitment from $350 million to $200 million if we do not
maintain a technological edge so that there exists in the marketplace superior
technology that we have not matched. The agreement also permits Cable & Wireless
to terminate the agreement upon breach of a variety of our obligations under the
contract. Cable & Wireless has conducted laboratory testing of the Aurora
Optical Switch. As of June 30, 2002, Cable & Wireless has not yet made any
purchases under this agreement, and we do not anticipate any significant
purchases to be made in the near term.
Under the terms of our contract with Dynegy Connect, to the extent Dynegy
Connect elects to purchase core optical switches, it is required to purchase its
full requirements for them 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. 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, however we do not expect any significant purchases to be made
in the near term.
Under the terms of our contract with Qwest, Qwest has agreed to purchase
approximately $400 million of our products (including prior purchases) over the
term of the contract, subject to reaching agreement on price and technical
specifications and 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 remainder of the
commitment in a variety of circumstances. Qwest began conducting laboratory
testing of the Aurora Optical Switch in the fourth quarter of 2000. We commenced
commercial shipment under this contract during the first quarter of 2001,
however we do not expect any significant purchases to be made in the near term.
The continued deteriorating conditions in the telecommunications industry
has hindered our ability to secure additional customers and has caused current
customers' purchases to decline. As a result, on June 24, 2002, we announced a
business restructuring that resulted in a workforce reduction of approximately
200 employees. We recorded a restructuring charge of approximately $12.8 million
related to the workforce reduction and the consolidation of facilities in the
June 2002 quarter. This restructure included a significant reduction in our
efforts to develop the Aurora Optical Switch, which may negatively impact our
ability to secure additional revenue from our customers.
12
We also completed an assessment of the current carrying value of certain
assets on our balance sheet, including goodwill, intangible assets, deferred
warrant changes and inventory. Our analysis resulted in a write off of
approximately $155.7 million in non-cash charges related to these assets.
Since our inception, we have incurred significant losses and as of June 30,
2002, we had an accumulated deficit of approximately $609.4 million. Our revenue
has decreased dramatically in the second quarter of 2002, and we do not
anticipate a significant increase in revenue in the foreseeable future. In
addition, 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.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Revenue
For the three months ended June 30, 2002, we recognized revenue before
non-cash charges related to equity issuances of approximately $3.1 million,
which represents a decrease of $27.3 million from revenue before non-cash
charges related to equity issuances of approximately $30.4 million for the three
months ended June 30, 2001. The decrease is due to unfavorable economic
conditions resulting in significantly reduced capital expenditures of our
existing customers. Non-cash charges related to warrant issuances to customers
totaled approximately $28.8 million for the three months ended June 30, 2002,
compared to approximately $6.9 million for the same period in 2001. The increase
in non-cash charges is due to an impairment charge of approximately $28.8
million for deferred warrant cost recorded as a non-cash charge during the three
months ended June 30, 2002 as a result of our assessment that our customers with
warrants will purchase less equipment than originally forecasted. As a result of
the foregoing, revenue, net of non-cash charges related to equity issues,
decreased from approximately $23.5 million for the three months ended June 30,
2001 to approximately ($25.7) million for the three months ended June 30, 2002.
We expect to generate revenues from a limited number of customers for the
foreseeable future.
Cost of Revenue
For the three months ended June 30, 2002, our cost of revenue totaled
approximately $25.9 million, which represents an increase of $5.7 million over
cost of revenue of approximately $20.2 million for the three months ended June
30, 2001. The increase was due to charges for excess and obsolete inventory of
approximately $16.8 million for the three months ended June 30, 2002, which were
only partly offset by a decrease of material cost by approximately $10.4 million
and overhead cost by approximately $1.4 million as a result of the corresponding
decrease in revenue. Cost of revenue includes amortization of stock-based
compensation of approximately $1.5 million for the three months ended June 30,
2002 and approximately $1.6 million for the three months ended June 30, 2001.
Gross (loss) profit was approximately ($51.6) million and approximately $3.3
million for the three months ended June 30, 2002 and 2001, respectively. The
$54.9 million decrease in gross profit was the result of decreased revenues and
inventory charges taken in conjunction with a significant decline in capital
spending by our customers and a decline in forecasted revenues of existing
products during the second quarter of 2002. Our current ability to make reliable
forecasts for cost of revenue and gross margins for 2002 is limited.
Research and Development Expense
For the three months ended June 30, 2002, we incurred research and
development expense of approximately $13.8 million, which represents a decrease
of $1.4 million from research and development expense of approximately $15.2
million for the three months ended June 30, 2001. The decrease is attributed
primarily to prototype expense and research and development personnel expense,
which decreased in total by approximately $2.7 million and was partly offset by
an increase in consulting expense of approximately $1.4 million. In connection
with our announced restructuring, we expect research and development expense to
decrease in future periods.
Sales and Marketing Expense
For the three months ended June 30, 2002, we incurred sales and marketing
expense of approximately $4.5 million, which represents a decrease of $4.0
million from sales and marketing expense of approximately $8.5 million for the
three months ended June 30, 2001. The decrease resulted primarily from lower
sales and marketing personnel expense and reduced expenses for advertising and
promotion. In connection with our announced restructuring, we expect sales and
marketing expense to decrease in future periods.
13
General and Administrative Expense
For the three months ended June 30, 2002, we incurred general and
administrative expense of approximately $8.2 million, which represents an
increase of $1.8 million over general and administrative expense of
approximately $6.4 million for the three months ended June 30, 2001. The
increase was primarily the result of higher facility expenses, increased
professional fees and depreciation. In connection with our announced
restructuring, we expect general and administrative expense to decrease in
future periods.
Amortization of Intangible Assets and Goodwill
For the three months ended June 30, 2002, we incurred amortization expense
of approximately $5.2 million, which represents a decrease of $3.8 million from
amortization expense of approximately $7.9 million for the three months ended
June 30, 2001. These amounts include approximately $2.7 million and $4.1 million
of amortization of identifiable intangible assets relating to our acquisition of
Astarte Fiber Networks, Inc. and an intellectual property license from AT&T
Corp. in 2000, both of which are amortized over an estimated useful life of 5
years. Amortization of goodwill related solely to our acquisition of Astarte in
2000 totaled $0 for the three months ended June 30, 2002, compared to
approximately $3.8 million for the three months ended June 30, 2001. The
decrease in amortization expense occurred primarily because, effective January
1, 2002, we ceased recording additional amortization expense for goodwill
related to Astarte in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets."
Stock-Based Compensation Expense
For the three months ended June 30, 2002, we recorded stock-based
compensation expense of approximately $14.0 million, which represents a decrease
of $6.6 million from stock-based compensation expense of approximately $20.6
million for the three months ended June 30, 2001. The decrease occurred
primarily because stock-based compensation expense in the three months ended
June 30, 2001 included charges related to the issuance and accelerated vesting
of options, and there was no corresponding expense in the three months ended
June 30, 2002.
Impairment of Goodwill
During the three months ended June 30, 2002, we experienced a decline in
capital spending by our customers, reduced our expectations for future growth in
revenue and cash flows and our stock price continued to decline significantly.
Due to these significant changes, which indicated that goodwill and other assets
of the reporting unit might be impaired, we, with the assistance from an
independent valuation expert, performed an evaluation of goodwill and other
identifiable long-lived assets.
We compared the fair value of our reporting unit to the carrying value of
the reporting unit, including goodwill, in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets", and determined that the carrying value,
including goodwill, exceeded the fair value of our reporting unit. As a result
of this evaluation we took a charge of approximately $58.4 million for the
impairment of goodwill during the three months ended June 30, 2002, and there
was no corresponding expense in the three months ended June 30, 2001. For
further details of this charge, see Note 2 of the Notes to Condensed
Consolidated Financial Statements (Unaudited) above.
Restructuring and Impairment of Long-Lived Assets
Continued deteriorating conditions in the telecommunications industry have
contributed to our inability to secure additional customers and caused purchases
by current customers to decline. On June 24, 2002, in response to these
conditions, we announced a business restructuring plan designed to decrease our
operating expenses. We recorded a restructuring charge of approximately $12.8
million associated with a workforce reduction and the consolidation of excess
facilities, resulting in non-cancelable lease costs and write down of certain
leasehold improvements.
As of June 30, 2002, approximately 200 employees have been notified of
the termination of their employment with us. Charges for the workforce reduction
of approximately $6.3 million consisted of primarily severance and extended
benefits. The remaining balance of approximately $4.5 million will be paid
during second half of 2002.
During the three months ended June 30, 2002, we recorded a charge of
approximately $6.5 million related to the consolidation of facilities and a net
charge of approximately $2.3 million related to the write down of leasehold
improvements. The remaining facilities balance of approximately $4.3 million as
of June 30, 2002 is related to the net lease expense of non-cancelable leases,
which will be paid over the respective lease terms through the year 2007. We do
not believe that the restructuring program will have a material impact on
revenues. We expect that the actions described above will result in an estimated
annual reduction in employee-related expense and cash flows of approximately
$15-20 million.
14
We performed an impairment review of our deferred warrant costs during the
three months ended June 30, 2002. We previously granted warrants to two
customers in conjunction with the execution of customer supply agreements. The
fair value of these warrants was capitalized on the measurement date as deferred
warrant costs, which were amortized as a pro-rata reduction of revenue as the
customers purchased products under the supply agreements. Based on the recent
sharp decline in customer spending and the situation in the telecommunications
industry in general, we believe that our customers with warrants will purchase
less equipment than originally forecasted. As a result, we recorded an
impairment charge to deferred warrant cost of approximately $28.8 million. The
charge was measured based upon the proportion of the forecasted purchases under
the supply agreement expected to not be fulfilled compared to the capitalized
cost. In the consolidated statement of operations, the impairment charge is
classified as a reduction to revenue under "Non-cash charges related to equity
issuances" in accordance with EITF Issue, No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products."
We also assessed the carrying value of intellectual property acquired from
AT&T Corp. on September 1, 2000 and from Astarte Fiber Networks, Inc. on October
10, 2000. Because the estimated undiscounted cash flows relating to these
identifiable long-lived assets was less than their carrying value, an impairment
charge of approximately $51.7 million was recorded in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
charge is included in "Restructuring and impairment of long-lived assets" within
operating expenses in the statement of operations.
Interest Income, Net
For the three months ended June 30, 2002, we recorded interest income, net
of interest expense, of approximately $1.1 million, which represents a decrease
of $1.0 million from interest income, net of interest expense, of approximately
$2.1 million for the three months ended June 30, 2001. Net interest income
consists of interest earned on our cash and cash equivalent balances, offset by
interest expense related to outstanding borrowings. The decrease in our interest
income for this period is primarily attributable to lower interest rates for the
three months ended June 30, 2002 as compared to the same period in 2001.
Income Taxes
We recorded no income tax provision or benefit for the three months ended
June 30, 2002 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.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenue
For the six months ended June 30, 2002, we recognized revenue before
non-cash charges related to equity issuances of approximately $57.1 million,
which represents an increase of $11.1 million over revenue before non-cash
charges related to equity issuances of approximately $46.0 million for the six
months ended June 30, 2001. The increase is primarily due to increased sales to
our existing customers in the first three months of 2002. Non-cash charges
related to warrant issuances to customers totaled approximately $36.2 million
for the six months ended June 30, 2002, compared to approximately $11.7 million
for the same period in 2001. The increase in non-cash charges is primarily due
to an impairment charge of approximately $28.8 million for deferred warrant cost
recorded as a non-cash charge during the six months ended June 30, 2002 as a
result of our assessment that our customers with warrants will purchase less
equipment than originally forecasted. For the six months ended June 30, 2002, we
recognized revenue, net of non-cash charges related to equity issues, of
approximately $21.0 million, which represents a decrease of $13.4 million from
revenue, net of non-cash charges related to equity issues, of approximately
$34.4 million for the six months ended June 30, 2001. We expect to generate
revenues from a limited number of customers for the foreseeable future.
Cost of Revenue
For the six months ended June 30, 2002, our cost of revenue totaled
approximately $57.1 million, which represents an increase of $26.1 million over
cost of revenue of approximately $31.0 million for the six months ended June 30,
2001. The increase was primarily due to impairment charges for excess and
obsolete inventory of approximately $16.8 million, increased material cost of
approximately $6.6 million and increased personnel cost of approximately $2.3
related to the corresponding increase in revenue during the six months ended
June 30, 2002. Cost of revenue includes amortization of stock-based compensation
of approximately $2.9 million for the six months ended June 30, 2002 and
approximately $3.0 million for the six months ended June 30, 2001. Gross (loss)
profit was approximately ($36.1) million and approximately $3.4 million for the
six months ended June 30, 2002 and 2001, respectively. The $39.5 million
decrease in gross profit was primarily related to
15
impairment charges as a result of a significant decline in capital spending by
our customers and a decline in forecasted revenues of existing products during
the second quarter of 2002. Our current ability to make reliable forecasts for
cost of revenue and gross margins for 2002 is limited.
Research and Development Expense
For the six months ended June 30, 2002, we incurred research and
development expense of approximately $27.8 million, which represents a decrease
of $4.1 million from research and development expense of approximately $31.9
million for the six months ended June 30, 2001. The decrease is attributed
primarily to prototype expense and research and development personnel expense,
which decreased in total by approximately $4.4 million, and was partly offset by
an increase in depreciation expense. In connection with our announced
restructuring, we expect research and development expense to decrease in future
periods.
Sales and Marketing Expense
For the six months ended June 30, 2002, we incurred sales and marketing
expense of approximately $11.7 million, which represents a decrease of $4.4
million from sales and marketing expense of approximately $16.1 million for the
six months ended June 30, 2001. The decrease resulted primarily from lower sales
and marketing personnel expense and reduced expenses for advertising and
promotion. In connection with our announced restructuring, we expect sales and
marketing expense to decrease in future periods.
General and Administrative Expense
For the six months ended June 30, 2002, we incurred general and
administrative expense of approximately $15.9 million, which represents an
increase of $3.6 million over general and administrative expense of
approximately $12.3 million for the six months ended June 30, 2001. The increase
was primarily the result of higher facility expenses, increased professional
fees and depreciation. In connection with our announced restructuring, we expect
general and administrative expense to decrease in future periods.
Amortization of Intangible Assets and Goodwill
For the six months ended June 30, 2002, we incurred amortization expense of
approximately $6.8 million, which represents a decrease of $9.0 million from
amortization expense of approximately $15.8 million for the six months ended
June 30, 2001. These amounts include approximately $6.8 million and $8.2 million
of amortization of identifiable intangible assets relating to our acquisition of
Astarte and an intellectual property license from AT&T in 2000, both of which
are amortized over an estimated useful life of 5 years. Amortization of goodwill
related solely to our acquisition of Astarte in 2000 totaled $0 for the six
months ended June 30, 2002, compared to approximately $7.6 million for the six
months ended June 30, 2001. The decrease in amortization expense occurred
because, effective January 1, 2002, we ceased recording additional amortization
expense for goodwill related to Astarte in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets." We expect amortization expense for
intangible assets to be approximately $3.0 million for the year 2002, based on
the identifiable intangible assets we carried on our balance sheet at June 30,
2001.
Stock-Based Compensation Expense
For the six months ended June 30, 2002, we recorded stock-based
compensation expense of approximately $27.4 million, which represents a decrease
of $9.1 million from stock-based compensation expense of approximately $36.5
million for the six months ended June 30, 2001. The decrease occurred primarily
because stock-based compensation expense in the six months ended June 30, 2001
included charges related to the issuance and accelerated vesting of options, and
there was no corresponding expense in the six months ended June 30, 2002.
Interest Income, Net
For the six months ended June 30, 2002, we recorded interest income, net of
interest expense, of approximately $2.0 million, which represents a decrease of
$2.8 million from interest income, net of interest expense, of approximately
$4.8 million for the six months ended June 30, 2001. Net interest income
consists of interest earned on our cash and cash equivalent balances, offset by
interest expense related to outstanding borrowings. The decrease in our interest
income for this period is primarily attributable to lower interest rates for the
six months ended June 30, 2002 as compared to the same period in 2001.
Income Taxes
We recorded no income tax provision or benefit for the six months ended
June 30, 2002 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.
16
Liquidity and Capital Resources
We finance our operations primarily through available cash and cash flows
from operations. As of June 30, 2002, our cash and cash equivalents totaled
approximately $206.1 million and our working capital totaled approximately
$187.7 million.
Cash used in operating activities for the six months ended June 30, 2002
and 2001 was approximately $1.8 million and approximately $50.2 million,
respectively. The decrease in net cash used in operating activities during the
first six months of 2002 reflects primarily net losses of $242.3 million, which
were only partly offset by non-cash charges of approximately $211.0 million and
further offset by a decrease in receivables and a decrease of inventory. Net
cash used in operating activities for the same period in 2001 was primarily
attributable to net losses and an increase of inventory.
Cash used in investing activities for the six months ended June 30, 2002
and 2001 was approximately $5.1 million and approximately $47.2 million,
respectively. The decrease in net cash used for investing activities reflects
primarily the result of decreased capital requirements in the first six months
of 2002, whereas the same period in 2001 included purchases of property and
equipment related to the buildout of our new facilities.
Cash (used in) or provided by financing activities for the six months ended
June 30, 2002 and 2001 was approximately ($5.6) million and approximately $139.8
million, respectively. Cash used in financing activities during the six months
ended June 30, 2002 was primarily attributable to the repurchase of a warrant to
purchase approximately 4.2 million shares of our common stock from a customer
for the purchase price of $5.5 million, in order to reduce the number of
potentially dilutive shares outstanding. Cash provided by financing activities
during the six months ended June 30, 2001 primarily included net proceeds from
our initial public offering on May 17, 2001.
In November 1999, we entered into a lease line of credit with Comdisco,
Inc. 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, 2001 and June 30, 2002, we had not drawn any amount under this agreement.
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
3.45% and expires on June 30, 2003. On each of December 31, 2001 and June 30,
2002, approximately $8.0 million was outstanding under this line of credit.
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 included in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission on April 1, 2002.
We expect to use our available cash, our line of credit facilities and cash
anticipated to be available from future operations to fund operating losses and
for working capital and other general corporate purposes and believe that these
sources will be sufficient for the next 12 months. 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.
Our cash flows may be affected by our ability to manufacture and sell our
products. We currently have a limited number of customers that provide
substantially all of our revenues, and the loss of any of these customers would
decrease our cash flows. Changes in the timing and extent of the sale of our
products will also affect our cash flows. In addition, 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
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.
17
Recent Developments
Stock Option Exchange Offer and Management Repurchase Program
On August 1, 2002, we commenced an offer to exchange outstanding employee
stock options having an exercise price of $2.14 or more per share in return for
a combination of share awards for shares of common stock and new stock options
to purchase shares of common stock to be granted by us (the "Exchange Offer").
Our directors, executive officers and vice presidents were not eligible to
participate in the Exchange Offer. Subject to the terms and conditions of the
Exchange Offer, in exchange for eligible options, an option holder who tenders
eligible options that are accepted by us will receive a share award for shares
of common stock equal to one tenth (1/10) of the total number of shares subject
to the options tendered by the option holder, and for new options to be granted
for a number of shares of common stock equal to nine tenths (9/10) of the total
number of shares subject to the options tendered by the option holder. Employees
who accept the Exchange Offer with respect to any of their eligible options are
required to exchange any option granted to them on or after February 1, 2002.
Upon completion of the Exchange Offer, we expect to issue share awards promptly
upon acceptance and cancellation of the eligible options and to grant new
options in March 2003, on a date that is at least six months and one day from
the expiration date of the offer. The share awards will be 100% vested upon
issuance. The new options will vest from the original grant date of the eligible
options in accordance with the original vesting schedule of the original option
grant. The new options will be granted with an exercise price equal to the fair
market value of our common stock on the date of the grant.
On various dates between April and August 2000, 12 employees, consisting of
executive officers, vice presidents and other employees borrowed funds from us
to exercise stock options with an exercise price of approximately $2.14 per
share under the terms of individual promissory notes to us. The loans provide
that the interest rate shall float on a quarterly basis and shall equal the
Internal Revenue Service established short-term Applicable Federal Rate for a
quarterly compounding period effective for the first month in such quarterly
period, provided that the rate shall not be less than 2.5% per annum nor exceed
7.5% per annum. Upon exercise of these stock options, each employee received
shares of restricted stock, subject to vesting schedules and other restrictions
contained in a restricted stock agreement between us and each employee. The
employees pledged their shares of restricted stock to us as collateral for the
loans. As of July 25, 2002, the employees as a group beneficially owned
approximately 13,645,044 vested and unvested shares of restricted stock. On July
25, 2002, the aggregate outstanding balance due on all of the loans was
$32,966,369, consisting of principal plus accrued interest due by the following:
Name Loan Amount
---- -----------
Harry J. Carr $15,994,686
William J. Proetta 0
Michael J. Losch 2,165,093
Krishna Bala 2,902,869
Vice Presidents and Other Management Employees
as a Group 11,903,721
-----------
Total $32,966,369
In May 2002, the price of our stock dropped substantially below $2.14 per
share, leaving insufficient collateral to repay the loans, and thereby
jeopardizing the personal financial solvency of our executive officers, vice
presidents and other employees. Recognizing that these loans were diverting the
employees' attention from our business and that these employees needed a
positive incentive program that promoted retention, motivation and performance,
our board of directors decided to make changes to our management incentive
program, including changes relating to the loans.
As part of these changes, the employees will be permitted to deliver shares
of restricted stock (either vested or unvested) to be applied against the loans.
The reduction in the loans will be calculated as follows:
.. the fair market value of our common stock on June 19, 2002 (when our
board of directors acted on this portion of the management incentive
program) of $1.04 per share for all vested shares of restricted stock,
and
.. the price that each executive officer, vice president and other employee
originally paid for each unvested share of restricted stock, which is
generally $2.14 per share, plus accrued interest.
18
We also amended the terms of our loans. The amended loans were subordinated
to each employee's current and future mortgage, home equity loan or home
improvement loan, consumer credit, credit and charge cards and any other similar
forms of debt. The due date of each employee loan was extended so that the
principal and interest due under the loans are payable in five annual
installments of 10%, 15%, 20%, 25% and 30% beginning on the first anniversary of
the original loan due date.
In addition, as part of these changes, our board of directors approved a
bonus plan under which, upon a change in control, we will pay each employee who
has loans and participates in the repurchase program, a cash bonus consisting of
the following:
.. an amount sufficient to fully pay off the remaining balance outstanding on
the relevant employee's promissory note, and
.. an amount sufficient so that after payment by the relevant employee of all
federal, state and local income and excise taxes imposed on the bonus
amount, the employee retains an amount equal to the federal, state and
local income and excise taxes imposed upon the bonus amount.
In connection with these changes to the program, we received valuable
consideration and other benefits, including but not limited to, the execution of
non-competition agreements by each participating employee.
After the adoption of the above program, the board of directors became
aware of issues that arose regarding the implementation of the program. The
board is currently reviewing these issues and their implications for the company
and its management. The resolution of these issues may have a material adverse
effect on the company.
In connection with the stock option exchange offer, assuming all eligible
options are accepted and based on a closing share price of $0.52 as of August
12, 2002, and also in connection with the management repurchase program, we
expect to record a non-cash compensation expense of up to approximately $105
million in the third quarter of 2002, of which approximately $75 million was
recorded as deferred compensation expense prior to our initial public offering.
Legal Proceedings
In late July 2002, Corning Incorporated filed a Demand for Arbitration
arising out of a dispute in connection with our October 2000 merger with Astarte
Fiber Networks, Inc. Corning alleges that Astarte, and Tellium as
successor-in-interest to Astarte, fraudulently induced Corning to enter into a
contract, breached that contract and breached warranties presented in that
contract. Corning seeks an award of $38 million, plus expenses and interest. We
intend to defend vigorously the claims made in any legal proceedings that may
result, and pursue any possible counter claims against Corning, Astarte, and
other parties associated with the claims. It is too early in the dispute process
to determine the impact, if any, that such dispute will have upon our business,
financial condition or results of operations.
Recent Financial Accounting Pronouncements
In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations and cost associated with the retirement of tangible long-lived
assets. We are required to implement SFAS No. 143 for fiscal years beginning
after June 15, 2002 and have not yet determined the impact that this statement
will have on our results of operations or financial position.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an amendment of that Statement, and SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting of Intangible Assets of Motor Carriers."
SFAS No. 145 amends SFAS No. 13, "Accounting for Leases" to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
SFAS No. 145 also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their
19
applicability under changed conditions. The provision of SFAS No. 145 related to
extinguishment of debt becomes effective for financial statements issued for
fiscal years beginning after May 15, 2002. We are currently evaluating the
impact that the adoption of this statement will have on its results of
operations and financial position.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146
replaces EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information included in this Form 10-Q are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements express our intentions,
strategies or predictions for the future. Actual results may differ from our
predictions. We consider all statements regarding anticipated or future matters,
including without limitation the following, to be forward-looking statements:
.. our expected future revenue, liquidity, cash flows, expenses and level of
net losses;
.. our planned decreases in research and development, sales and marketing and
general and administrative expenses; 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 known and unknown risks and
uncertainties that may cause actual results to be materially different from the
results expressed or implied by the forward-looking statements. The
forward-looking statements in this Form 10-Q are only made as of the date of
this report, and we undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
Shareholders, potential investors and other readers are urged to consider
carefully the following factors, among others, in evaluating the forward-looking
statements:
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 $211.0 million for the
year ended December 31, 2001 and approximately $242.3 million for the six months
ended June 30, 2002. As of June 30, 2002, we had an accumulated deficit of
approximately $609.4 million. We have significant 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 of our business. In order to become profitable, we will need to
generate and sustain higher revenue. If we do not generate sufficient revenue 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.
20
We expect that substantially all of our revenues will be generated from a
limited number of customers. Historically, this has included Dynegy Connect and
Qwest. The termination or deterioration of our relationship with these
customers, or with Cable & Wireless will have a significant negative impact on
our revenue and cause us to continue to incur substantial operating losses.
For the year ended December 31, 2001 and the six months ended June 30,
2002, we have derived revenue from sales under our contract with Dynegy Connect
and Qwest. We anticipate that a majority of our revenues for the foreseeable
future will be derived from 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. As of June 30, 2002, Cable & Wireless has
not yet made any purchases under this agreement.
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 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
remainder of the commitment in a variety of circumstances.
In June 2002, we announced a business restructuring that included a
significant reduction in our efforts to develop the Aurora Optical Switch. This
may negatively impact our ability to secure additional revenue from our
customers.
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 and may
decrease.
We are currently very dependent on Dynegy Connect and Qwest. 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;
. we do not meet our customers' delivery requirements; or
. our carrier customers continue to cut their capital budgets, and
do not invest in next-generation optical networking products.
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.
21
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;
. 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.
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
22
of these options and awards. At June 30, 2002, we had recorded deferred
compensation expense of approximately $90.9 million, which will be amortized to
compensation expense through 2005.
A warrant held by affiliates of Dynegy Connect allows them to purchase
313,560 shares of our common stock at $3.05 per share. The warrant becomes
exercisable based on a schedule of milestones. If the milestones are not reached
by March 31, 2005, the remaining unexercised shares subject to the warrant will
become exercisable. In connection with the warrant, we record and will continue
to record deferred warrant expenses as a reduction of revenue when we realize
revenue from this contract. Under the terms of the contract with Dynegy Connect,
to the extent Dynegy Connect elects to purchase core optical switches, it is
required to purchase its full requirements for them from us until November 1,
2003. However, Dynegy Connect is not contractually obligated to purchase future
products or services from us and may discontinue doing so at any time. During
the three months ended June 30, 2002, we performed an evaluation of the carrying
value of deferred warrant cost. Based on the recent sharp decline in customer
spending and the situation in the telecommunications industry in general, we
believe that Dynegy will purchase less equipment than originally forecasted. As
a result, we recorded an impairment charge to deferred warrant cost related to
the proportion of the forecasted purchases expected to not be met under the
customer supply agreements.
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. During the three months ended June 30, 2002, we
performed an evaluation of the carrying value of deferred warrant cost. Based on
the recent sharp decline in customer spending and the situation in the
telecommunications industry in general, we believe that Qwest will purchase less
equipment than originally forecasted. As a result, we recorded an impairment
charge to deferred warrant cost related to the proportion of the forecasted
purchases expected to not be met under the customer supply agreements.
We have incurred 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
Astarte acquisition were initially approximately $113.3 million. The
identifiable intangible assets associated with the acquisition of the AT&T
license were initially approximately $45.0 million. Amortization of goodwill
ceased on January 1, 2002 upon adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets," and goodwill is now subject to periodic impairment reviews
in accordance with SFAS No. 142. During the second quarter of 2002, we
experienced a sharp decrease in spending for our products and services and at
the same time a significant decline of our stock price. Due to these
circumstances, which indicated that goodwill and other assets of the reporting
unit might be impaired, we, with the assistance from independent valuation
experts, performed an evaluation of goodwill and identifiable long-lived assets.
The evaluation resulted in impairment charges for goodwill and identifiable
intangible assets of approximately $58.4 million and approximately $51.7
million, respectively. As of June 30, 2002, the remaining balances recorded in
our balance sheet are $0 for goodwill and $1.7 million for identifiable
intangible assets.
In connection with the stock option exchange offer, assuming all eligible
options are accepted and based on a closing share price of $0.52 as of August
12, 2002, and also in connection with the management repurchase program, we
expect to record a non-cash compensation expense of up to approximately $105
million in the third quarter of 2002, of which approximately $75 million was
recorded as deferred compensation expense prior to our initial public offering.
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 is uncertain, including on the industry section in which we focus and
our customers and prospective customers. Additionally, the amount of debt being
held by our carrier customers, and the continued cuts to capital spending, put
our customers' and potential customers' businesses in jeopardy. Our operating
results and financial condition consequently could be materially and adversely
affected in ways we cannot foresee.
23
We face possible delisting from the Nasdaq National Market, which would result
in a limited public market for our common stock and make obtaining future equity
financing more difficult for us.
On August 7, 2002, we received notification from the Nasdaq Stock
Market, Inc. that our stock had traded below the $1.00 minimum per share price
required for continued listing on The Nasdaq National Market for more than 30
consecutive trading days. We have until November 5, 2002 to regain compliance by
maintaining a minimum closing bid price of $1.00 for 10 consecutive trading
days. Nasdaq may delist our shares from The Nasdaq National Market if we fail to
meet this requirement. There can be no assurances that we will satisfy the
standards to regain compliance. If we do not meet those standards, our common
stock may not be eligible for trading on The Nasdaq National Market.
The delisting of our common stock from The Nasdaq National Market may
have a material adverse effect on us by, among other things, reducing:
. the liquidity of our common stock;
. the market price of our common stock;
. the number of institutional and other investors that will consider
investing in our common stock;
. the number of market makers in our common stock;
. the availability of information concerning the trading prices and
volume of our common stock;
. the number of broker-dealers willing to execute trades in shares of our
common stock; and
. our ability to obtain equity financing for the continuation of our
operations.
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 37% 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 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.
24
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.
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.
25
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 unpredictable. 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 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 currently use our direct
sales force and plan to develop a distribution channel outside of the United
States, using both direct and indirect sales. Competition for these resources is
intense because there is a limited number of people available with the necessary
technical skills and understanding of the optical switching market. 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
may 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.
26
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 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 June 30, 2002, we had approximately $206.1 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.
27
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 consider investments in complementary businesses, products or
technologies. In the event of any future acquisitions, we could:
. issue stock that would dilute our current stockholders'
percentage ownership;
. incur debt that will give rise to interest charges and may impose
material restrictions on the manner in which we operate our
business;
. assume liabilities;
. incur amortization expenses related 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 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.
28
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.
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 non-competition,
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. These agreements may be
insufficient to prevent former employees from using our technology after the
termination of their employment with us. In addition, 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.
29
In late July 2002, Corning Incorporated filed a Demand for Arbitration
arising out of a dispute in connection with our October 2000 merger with Astarte
Fiber Networks, Inc. Corning alleges that Astarte, and Tellium as
successor-in-interest to Astarte, fraudulently induced Corning to enter into a
contract, breached that contract and breached warranties presented in that
contract. Corning seeks an award of $38 million, plus expenses and interest. An
adverse outcome in the Corning arbitration could render a portion of our
intellectual property less valuable, and also diminish our right to protect this
intellectual property. An adverse outcome in the Corning arbitration could
therefore have a material adverse impact on our business, financial condition or
results of operations.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In late July 2002, Corning Incorporated filed a Demand for Arbitration
arising out of a dispute in connection with our October 2000 merger with
Astarte Fiber Networks, Inc. Corning alleges that Astarte, and Tellium
as successor-in-interest to Astarte, fraudulently induced Corning to
enter into a contract, breached that contract and breached warranties
presented in that contract. Corning seeks an award of $38 million, plus
expenses and interest. We intend to defend vigorously the claims made in
any legal proceedings that may result, and pursue any possible counter
claims against Corning, Astarte, and other parties associated with the
claims. It is too early in the dispute process to determine the impact,
if any, that such dispute will have upon our business, financial
condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
(a) Changes in Securities.
None.
(b) Use of Proceeds.
On May 17, 2001 in connection with our initial public offering, a
Registration Statement on Form S-1 (No. 333-46362) was declared
effective by the Securities and Exchange Commission. The net
proceeds of our initial public offering were approximately $139.5
million. The proceeds of this offering were invested in
short-term, interest-bearing, investment-grade securities. We
expect to use the net proceeds from this offering primarily to
fund operating losses and for working capital and other general
corporate purposes to implement our business strategies. We may
also use a portion of the net proceeds from our initial public
offering to acquire or invest in businesses, technologies or
products that are complementary to our business.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
At its Annual Meeting of Stockholders on May 21, 2002, our
stockholders took the following actions:
1. Elected the following Class I directors to serve until the next
annual meeting of stockholders at which their respective class is
due for election or until their respective successors shall have
been duly elected and qualified, with votes as indicated opposite
each director's name:
------------------------------------------------------
For Withheld
------------------------------------------------------
William A. Roper, Jr. 88,379,611 1,130,602
------------------------------------------------------
Richard C. Smith, Jr. 88,380,028 1,130,185
------------------------------------------------------
The directors whose term of office as a director continued after
the meeting are: Harry J. Carr, William B. Bunting, Michael M.
Connors, Jeffrey A. Feldman, Edward F. Glassmeyer and Marc B.
Weisberg.
2. Approved an amendment to Tellium's Amended and Restated Special
2001 Stock Incentive Plan in order to permit non-employee
directors, executive officers and consultants to be eligible to
receive options and awards under the Plan. The vote was 68,864,515
for the proposal and 20,503,178 against with 142,520 abstentions.
31
3. Approved the 2002 Employee Stock Purchase Plan.
The vote was 64,416,306 for the proposal, 1,398,493
against with 77,285 abstentions and 23,618,129 broker
nonvotes.
4. Ratified the appointment of Deloitte & Touche LLP
as our independent auditors. The vote was 88,492,740 for
the proposal and 946,995 against with 70,478
abstentions.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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
32
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
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.
10.27*** Tellium 2002 Employee Stock Purchase Plan
10.28# Tellium, Inc. Amended and Restated Special 2001 Stock
Incentive Plan
10.29# Form of Non-Competition Agreement
33
10.30# Form of Non-Competition Agreement between Tellium, Inc. and
Harry J. Carr, dated as of June 19, 2002
10.31# Form of Amendment No.1 to Purchase Money Promissory Note
10.32# Assignment of Warrants dated as of June 26, 2002 between
Dynegy Connect, L.P. and Tellium, Inc.
10.33# Rider dated July 30, 2001 to the Business Loan Agreement
between Tellium, Inc. and Commerce Bank/Shore N.A. dated June
1, 2000
16.1** Letter re: change in certifying accountant
21.1** Subsidiaries of Tellium, Inc.
- --------------------
* Incorporated by reference from the Registration Statement filed on Form
S-1, Registration No. 333-46362.
** Incorporated by reference from the Annual Report filed on Form 10-K, for
the fiscal year ended December 31, 2001.
*** Incorporated by reference from the Registration Statement filed on Form
S-8, filed with the Securities and Exchange
Commission on May 21, 2002.
+ Subject to a confidential treatment request.
# Filed herewith.
(b) Reports on Form 8-K.
On May 1, 2002, we filed a report on Form 8-K
announcing our financial results for the quarter
ended March 31, 2002.
On June 26, 2002, we filed a report on Form 8-K
announcing a business restructuring plan executed as
of June 24, 2002.
On July 3, 2002, we filed a report on Form 8-K
announcing our preliminary financial results for the
quarter ended June 30, 2002.
On July 30, 2002, we filed a report on Form 8-K
announcing our financial results for the quarter
ended June 30, 2002.
34
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELLIUM, INC.
Dated: August 15, 2002 /s/ Harry J. Carr
--------------------------------------------
Harry J. Carr
Chairman of the Board and
Chief Executive Officer
Dated: August 15, 2002 /s/ Michael J. Losch
--------------------------------------------
Michael J. Losch
Chief Financial Officer
(Principal Financial and Accounting Officer)
35