AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(all tabular
amounts in thousands except share and per share data)
(1)
|
OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
|
Avici Systems Inc. and subsidiaries (Avici or the Company) was incorporated in the State of Delaware on November 12, 1996 and was organized to design and develop core routers for the carrier market.
In February 2007, Avici announced its decision to launch Soapstone Networks (Soapstone) (Note 8). Soapstone is expected to help network
providers of all types connect their physical transport infrastructure to the Next Generation Network (NGN) software infrastructure. The Soapstone products are currently in the research and development stage.
In April 2007, Avici announced its transition away from core router development and product sales to focus on Soapstone. Avici completed the final
shipments of its core router products in the fourth quarter of 2007. Avici will continue to service its products under existing contracts that are in place with its customers. Avici no longer actively develops or sells core router products, and we
are no longer resourced to manufacture our core router products. Accordingly, Avici does not anticipate product revenue from core router sales in 2008 and as a result expects its total gross revenue to decline significantly in 2008.
Avici is subject to a number of risks and challenges similar to other companies in a similar stage of development. These risks include, but are not
limited to, its need to successfully develop and market a commercially usable product, the ability to sell and market to new customers, acceptance of the Soapstone products by target customers, the development of the market for the Soapstone
products, the ability to obtain adequate financing to support growth and product development, and competition from substitute products and larger companies with greater financial, technical, management and marketing resources.
Avici recorded net income of approximately $62.3 and $8.3 million for the years ended December 31, 2007 and 2006, respectively, and a net loss of
approximately $24.7 million for the year ended December 31, 2005. At December 31, 2007, Avici had an accumulated deficit of approximately $383.5 million and has funded those losses primarily through the sale of redeemable convertible
preferred stock, the proceeds from the sale of its common stock and certain capital leases. Although Avici posted net income in its recent years, it will not be able to sustain its profitability in 2008 as a result of its decision to transition away
from core router development and product sales. Avicis future profitability is dependent on its successful development, marketing and sale of its Soapstone products. Avici expects to meet its future working capital, marketing and research and
development needs using its existing cash, cash equivalents and marketable securities until Avici returns to profitability. However, we could be required, or could elect to raise additional funds during that period and we may need to raise
additional capital in the future.
The accompanying consolidated financial statements reflect the application of certain significant
accounting policies as described in this note and elsewhere in these notes to consolidated financial statements.
Avici records revenue in
accordance with Statement of Position No. 97-2, Software Revenue Recognition, and all related interpretations. Avici recognizes revenue from product sales upon shipment or delivery to customers, including resellers, provided that a
purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collectibility is deemed probable. If uncertainties regarding customer
acceptance exist, Avici recognizes revenue
44
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
when those uncertainties are resolved. For arrangements that include the delivery of multiple elements, revenue is allocated to the various elements based on
vendor-specific objective evidence of fair value (VSOE). Avici uses the residual method when VSOE does not exist for one of the delivered elements in an arrangement. Revenue from support and maintenance contracts is recognized ratably
over the period of the related agreements. Revenue from installation and other services is recognized as the work is performed. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.
(b)
|
Cash and Cash Equivalents and Marketable Securities
|
Avici follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities
. Avici has classified its marketable securities as held-to-maturity and
recorded them at amortized cost, which approximates market value. Unrealized losses are primarily due to rising interest rates and are considered temporary in nature. Avici considers all highly liquid investments with original maturities of three
months or less at the date of acquisition to be cash equivalents. Cash and cash equivalents include money markets, certificates of deposit and commercial paper.
As of December 31, 2007, cash, cash equivalents and marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
Remaining
Maturities
|
|
Amortized
Cost
|
|
Fair
Market
Value
|
|
Unrealized
Gain
(Loss)
|
|
Commercial Paper
|
|
Within 1 year
|
|
$
|
2,457
|
|
$
|
2,462
|
|
$
|
5
|
|
Corporate Bonds
|
|
Within 1 year
|
|
|
7,628
|
|
|
7,629
|
|
|
1
|
|
U.S. Government Obligations
|
|
Within 1 year
|
|
|
1,000
|
|
|
1,001
|
|
|
1
|
|
U.S. Government Obligations
|
|
12 years
|
|
|
3,000
|
|
|
3,004
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
|
|
|
14,085
|
|
|
14,096
|
|
|
11
|
|
Cash and cash equivalents
|
|
|
|
|
88,903
|
|
|
88,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
|
|
$
|
102,988
|
|
$
|
102,999
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, cash, cash equivalents and marketable securities consisted of the following:
|
|
|
|
|
|
|
Securities
|
|
Remaining
Maturities
|
|
Amortized
Cost
|
|
Fair
Market
Value
|
|
Unrealized
Gain
(Loss)
|
|
Commercial Paper
|
|
Within 1 year
|
|
$
|
6,651
|
|
$
|
6,641
|
|
$
|
(10
|
)
|
Corporate Bonds
|
|
Within 1 year
|
|
|
2,004
|
|
|
2,002
|
|
|
(2
|
)
|
Corporate Bonds
|
|
12 years
|
|
|
3,507
|
|
|
3,495
|
|
|
(12
|
)
|
U.S. Government Obligations
|
|
Within 1 year
|
|
|
7,161
|
|
|
7,150
|
|
|
(11
|
)
|
U.S. Government Obligations
|
|
12 years
|
|
|
4,997
|
|
|
4,996
|
|
|
(1
|
)
|
Auction Rate Municipal Bonds
|
|
Above 10 years
|
|
|
4,600
|
|
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
|
|
|
28,920
|
|
|
28,884
|
|
|
(36
|
)
|
Cash and cash equivalents
|
|
|
|
|
39,679
|
|
|
39,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
|
|
$
|
68,599
|
|
$
|
68,563
|
|
$
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Inventories are stated at the lower of
cost (first-in, first-out) or market and consist of the following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Finished goods
|
|
$
|
|
|
$
|
5,094
|
Raw materials
|
|
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
5,438
|
|
|
|
|
|
|
|
Inventories consist of finished goods and raw materials. Finished goods inventory includes product
on hand or product at customer sites, as well as deferred costs associated with shipments for which revenue has been deferred. Raw materials include component parts and chips on hand. Historically, Avici regularly reviewed inventory quantities on
hand and inventory commitments with suppliers and recorded a provision for excess and obsolete inventory based primarily on the estimated forecast of product demand. Purchase commitments accrued at December 31, 2006 were $0.4 million.
Consistent with its transition away from the core router product sales, Avici did not carry any inventory at December 31, 2007.
(e)
|
Depreciation, Amortization and Impairment
|
Property
and equipment are stated at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. Avici
provides for depreciation and amortization on the straight-line basis and charges to operations amounts that allocate the cost of the assets over their estimated useful lives as follows:
|
|
|
Asset Classification
|
|
Estimated
Useful Life
|
Computer equipment
|
|
3 years
|
Laboratory and test equipment
|
|
1.5-3 years
|
Leasehold improvements
|
|
Shorter of lease term or useful life of asset
|
Furniture and fixtures
|
|
5 years
|
Accumulated amortization expense and amortization expense on equipment under capital leases is
included in accumulated depreciation and depreciation expense, respectively. Depreciation and amortization expense was $4.6 million, $6.3 million, and $6.7 million for the years ended December 31, 2007, 2006, and 2005, respectively.
46
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
(f)
|
Concentrations of Credit and Other Risks
|
SFAS
No. 105,
Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk
, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Avicis principal credit risk relates to its cash, cash equivalents, marketable securities and accounts receivable. Avici invests its excess cash, cash equivalents and marketable securities primarily in deposits with commercial
banks and high-quality corporate securities. One customer accounted for 100% of trade receivables at December 31, 2007 and at December 31, 2006. One customer accounted for 99%, 94% and 94% of gross revenue in 2007, 2006 and 2005,
respectively.
Avici has no off-balance sheet concentrations such as foreign exchange contracts, option contracts, or other foreign hedging
arrangements.
(g)
|
Fair Value of Financial Instruments
|
Avicis
financial instruments mainly consist of cash, cash equivalents and marketable securities. The carrying amounts of these instruments approximate their fair value based on their short-term maturity or quoted market prices.
(h)
|
Research and Development and Software-Development Costs
|
Research and development costs are expensed as incurred. Avici accounts for its software development costs in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed
.
Accordingly, the costs for the development of software and enhancements are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. Avici determines technological
feasibility has been established at the time at which a working model of the software has been completed. Because Avici believes its current process for developing software is essentially completed concurrently with the establishment of
technological feasibility, no costs have been capitalized to date.
(i)
|
Net Loss per Share and Pro Forma Net Loss per Share
|
Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential
common shares outstanding during the period. Dilutive potential common shares primarily consist of employee stock options, common stock warrants and restricted common stock. Dilutive potential common shares were 736,974 and 397,872 in 2007 and 2006
respectively. Basic and diluted net loss per share is the same for periods with net loss and all outstanding employee stock options, common stock warrants and unvested restricted stock have been excluded, as they are considered antidilutive. All
outstanding common stock warrants have been also been excluded for 2006 as they are considered antidilutive.
Options to purchase a total
of 2,847,293 shares and unvested restricted common stock of 239,500 shares have been excluded from the computation of diluted weighted average shares outstanding for the year ended December 31, 2005. Warrants to purchase 800,000 shares of
common stock have been excluded from the computation of diluted weighted average shares outstanding for the years ended December 31, 2006 and 2005.
47
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
Statement of Financial Accounting Standards No. 128, Earnings per Share, requires
that employee equity share options, nonvested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per common share. Diluted shares outstanding include the
dilutive effect of in-the-money options, which is calculated, based on the average share price for each fiscal period using the treasury stock method.
(j)
|
Comprehensive Income (Loss)
|
SFAS No. 130,
Reporting Comprehensive Income, requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances involving non-owner sources. During all periods presented, Avici did not have any items of comprehensive income (loss) other than its reported net income(loss).
(k)
|
Stock-Based Compensation
|
Avici records its
share-based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123R, (SFAS 123R) Share-Based Payment, which establishes accounting for equity instruments exchanged for
employee services. Under the provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees requisite service
period (generally the vesting period of the equity grant) under the accelerated attribution method. Prior to 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25,
(APB 25) Accounting for Stock Issued to Employees, and related interpretations. Avici also followed the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS
148, Accounting for Stock-Based CompensationTransition and Disclosure. Avici elected to adopt the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior
years presented have not been restated to reflect the fair value method of expensing share-based compensation.
Avici estimates the fair
value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of Avicis stock
over the options expected term, the risk-free interest rate over the options expected term, and Avicis expected annual dividend yield. Expected volatilities are based on historical volatilities of our common stock; the expected
life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve
in effect at the time of grant for periods corresponding with the expected life of the option. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Risk-free interest rate
|
|
|
4.52
|
%
|
|
|
4.86
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
Expected lives
|
|
|
4.20 years
|
|
|
|
3.64 years
|
|
Expected volatility
|
|
|
76
|
%
|
|
|
73
|
%
|
Expected forfeiture
|
|
|
23.22
|
%
|
|
|
19.15
|
%
|
Weighted average grant date fair value per share of options granted
|
|
$
|
4.08
|
|
|
$
|
3.53
|
|
48
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
The fair value of grants made under the employee stock purchase plan in 2007 was calculated using the
following assumptions: risk-free interest rate of 4.34%, expected lives of 0.5 years and expected volatility of 75.3%. The fair value of grants made under the employee stock purchase plan in 2006 was calculated using the following assumptions:
risk-free interest rate of 4.49%, expected lives of 0.5 years and expected volatility of 82.8%.
Avici did not recognize compensation
expense under APB 25 for employee stock options in 2005 since the exercise price of the Avicis employee stock option awards equaled the market price of the underlying stock on the dates of grant. The following table illustrates the effects on
net loss and net loss per share for the year ended December 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS 123 to share-based employee awards.
|
|
|
|
|
|
|
2005
|
|
Net loss, as reported
|
|
$
|
(24,654
|
)
|
Deduct: Stock-based employee compensation expense related to restricted stock included in reported net loss
|
|
|
281
|
|
Add: Stock-based employee compensation expense determined under fair value based method for all awards
|
|
|
(2,263
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(26,636
|
)
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
|
|
|
As reported
|
|
$
|
(1.91
|
)
|
Pro forma
|
|
|
(2.07
|
)
|
The fair value of each option grant in 2005 included in the above table was estimated on the grant
date using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
2005
|
|
Risk-free interest rate
|
|
|
3.50-4.43
|
%
|
Expected dividend yield
|
|
|
|
|
Expected lives
|
|
|
4.0 years
|
|
Expected volatility
|
|
|
80
|
%
|
Weighted average grant date fair value per share of options granted
|
|
$
|
2.82
|
|
(l)
|
Disclosures about Segments of an Enterprise
|
SFAS
No. 131,
Disclosures about Segments of an Enterprise and Related Information,
establishes standards for reporting information regarding operating segments and establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions
regarding resource allocation and assessing performance. In 2007, Avici announced its transition away from core router development and product sales to focus on its Soapstone products. Avici completed the final shipments of its core router products
in the fourth quarter of 2007 and is expected to continue to service its products. During this transition the chief operating decision maker, or decision making group commenced assessing performance and allocation of resources between its legacy
core router product and service and its Soapstone product development. Accordingly, commencing from 2007 Avici
49
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
operates in two operating segments core router and Soapstone. Since Soapstone is a new product Avici has not commenced recording any revenue; instead
it is currently focusing on software development and sales and marketing related to such development. Accordingly, the reported revenue and accounts receivable are attributed solely to the core router segment. Additionally in 2007, additions to
long-lived assets were approximately $1.3 million for the core router segment and approximately $1.4 million for the Soapstone segment. Avici considers all other assets to be jointly used, and accordingly does not separately identify or allocate
such assets to its operating segments. Pre-tax income from operations of $75.3 million was derived from the core router segment and pre-tax operating losses of $9.3 million were incurred in Soapstone in 2007. Avici does not allocate to the operating
segments its general and administrative expenses, which were $6.6 million in 2007.
For the year ended December 31, 2007, Avici
derived 100% of its gross revenue from North America. For the year ended December 31, 2006, the geographic distribution of gross revenue was as follows: North America 95%, Europe 5%. For the year ended December 31, 2005, the geographic
distribution of gross revenue was as follows: North America: 95%, Europe: 3%, Asia: 2%.
(m)
|
Principles of Consolidation
|
The consolidated
financial statements include the accounts of Avici Systems Inc. and all of its wholly owned subsidiaries after elimination of intercompany accounts and transactions.
(n)
|
Recent Accounting Pronouncements
|
In September
2006, the FASB issued FAS 157, Fair Value Measurements (SFAS 157). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and
establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with early adoption permitted. The Company will adopt this pronouncement beginning in fiscal year 2008. The adoption
of the provisions of SFAS 157 is not expected to have a material impact on the Companys financial position or results of operations.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 (SFAS 159). SFAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal
year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. The Company will adopt this pronouncement beginning in fiscal year 2008. The adoption of the provisions of
SFAS 159 is not expected to have a material impact on the Companys financial position or results of operations.
In December 2007,
the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141R) . SFAS 141R retains the fundamental requirements in FASB Statement 141 that the acquisition method of accounting (which Statement 141 called
the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest
in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in SFAS 141R. That replaces FASB Statement 141s cost-allocation process, which required the cost of an acquisition to be
allocated to the
50
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R will now require acquisition costs to be expensed as
incurred, restructuring costs associated with a business combination must generally be expensed prior to the acquisition date and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally
will affect income tax expense. SFAS 141R applies prospectively to business combinations for which the acquisition date is in fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The Company will adopt this
pronouncement beginning in fiscal year 2009. The adoption of the provisions of SFAS 141R is not expected to have a material impact on the Companys financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51, Consolidated Financial Statements (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income (loss) attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160
also establishes reporting requirements that identify and distinguish between the interest of the parent and the interest of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of
the provisions of SFAS 160 is not expected to have a material impact on the Companys financial position or results of operations.
On June 22, 2007, Avici
distributed a special cash dividend of $2.00 per outstanding share of common stock, or $28.3 million, to shareholders of record as of June 11, 2007. As required under its equity plans, Avici made antidilution adjustments to reflect the impact
of the special cash dividend to the total number of shares authorized under the plans, the number of shares subject to outstanding options, the number of shares available for future grant and the exercise price per share of outstanding options. Such
adjustments in connection with the payment of an extraordinary dividend are intended to equitably offset the decline in stock price following the payment of such a dividend, particularly given that optionholders are not entitled to receive the cash
distribution. Prior to the distribution and as approved by its shareholders at the Companys annual meeting, Avici modified its 2000 Non-Employee Director Stock Option Plan to clarify and broaden the antidilution provisions, which resulted in
Avici recording a charge of $0.1 million. All share and per share information with respect to options to purchase common stock have been retroactively restated to reflect the special dividend.
(a)
|
Share Repurchase Program
|
During the third quarter
of 2002, the Board of Directors authorized a share repurchase program, in effect for a one year period, to acquire up to 1.5 million shares of Avicis common stock in the open market at times and prices considered appropriate by Avici. The
share buyback program was initiated during the fourth quarter of 2002, and during the program Avici purchased 482,308 shares at an aggregate cost of approximately $2.1 million. The share repurchase program terminated during the third quarter of
2003.
(b)
|
Common Stock Warrants
|
In January 2004, in
connection with a three-year strategic OEM agreement with a channel partner, Avici issued a warrant to purchase 800,000 shares of Avici common stock at an exercise price of $6.03 per share (as
51
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
adjusted for the $2.00 special cash dividend paid on June 22, 2007 to common stockholders of record on June 11, 2007). The agreement provided the
channel partner with the ability, but not the obligation, to purchase equipment and services from Avici for its own use or for resale. The warrant is nonforfeitable and has a term of approximately seven years from the date of issuance and is
exercisable after seven years. The right to exercise the warrant may have been accelerated if the channel partner achieved certain performance milestones or may be accelerated upon a change in control at the discretion of Avici. The fair value of
the warrant at the grant date was calculated to be approximately $6.3 million using the Black-Scholes valuation model, and was being recorded as a reduction of revenue on a straight-line basis over three years. The unamortized balance was deemed
impaired and was fully written off in the first quarter of 2006.
(c)
|
Equity-Based Compensation Plans
|
Avici currently
has two stock incentive plans: the Amended and Restated 1997 Stock Incentive Plan (the 1997 Plan) and the Amended and Restated 2000 Stock Option and Incentive Plan (the 2000 Plan). A total of approximately 3.6 million
shares of common stock have been reserved for issuance under these plans. The 2000 Plan is the primary plan under which new awards are currently being issued. The maximum number of shares with respect to which awards may be granted to any employee
under the 2000 Plan shall not exceed 650,000 shares of common stock during any calendar year. In addition, any shares not yet issued under the 1997 Plan on or before the date of Avicis initial public offering or shares subject to options
outstanding on the date of Avicis initial public offering which are forfeited or terminated are available for issuance under the 2000 Plan.
The Plans provide for the grant of stock-based awards to Avicis employees, officers, directors, consultants and advisors. Under the Plans, Avici may grant options that are intended to qualify as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code, options not intended to qualify as incentive stock options, restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of Avici.
(d)
|
2000 Nonemployee Director Stock Option Plan
|
In May
2007, the Companys stockholders approved the Amended and Restated 2000 Nonemployee Director Stock Option Plan (the Director Plan). A total of 130,000 shares of common stock have been authorized for issuance under the Director Plan.
On January 1 of each year, commencing with January 1, 2008, the aggregate number of shares available for grant under the plan will automatically increase by the number of shares necessary to cause the total number of shares then available
for grant to be 130,000 shares.
The Director Plan is administered by the compensation committee. Under the Director Plan, each nonemployee
director who becomes a member of the Board of Directors will be automatically granted on the date first elected to the Board of Directors an option to purchase 11,375 shares of common stock, which will vest in four equal installments over four
years. In addition, provided that the director continues to serve as a member of the Board of Directors, each nonemployee director will be automatically granted on the date of each annual meeting of stockholders following his or her initial option
grant date an option to purchase 4,875 shares of common stock, 1,625 shares of which will vest immediately and 3,250 shares of which will vest in four equal installments over four years. Avici granted a total of 50,000 options to its nonemployee
directors at the time of Avicis initial public offering. Such options vested in four equal installments over four years.
As of
December 31, 2007, 115,375 shares were available for future grant under the Director Plan.
52
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
Option activity under all stock
option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
Outstanding, December 31, 2004
|
|
3,503,111
|
|
|
$
|
7.89
|
|
6.8
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1,179,490
|
|
|
|
3.56
|
|
|
Exercised
|
|
(52,155
|
)
|
|
|
2.70
|
|
|
ForfeitedCancelled
|
|
(928,966
|
)
|
|
|
7.35
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
3,701,480
|
|
|
$
|
6.65
|
|
7.3
|
|
|
|
|
|
|
|
|
|
Granted
|
|
834,600
|
|
|
|
5.00
|
|
|
Exercised
|
|
(920,617
|
)
|
|
|
4.14
|
|
|
ForfeitedCancelled
|
|
(1,137,098
|
)
|
|
|
7.73
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
2,478,365
|
|
|
$
|
6.68
|
|
7.4
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1,265,450
|
|
|
|
6.75
|
|
|
Exercised
|
|
(1,001,578
|
)
|
|
|
5.02
|
|
|
ForfeitedCancelled
|
|
(321,757
|
)
|
|
|
9.47
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
2,420,480
|
|
|
$
|
7.04
|
|
7.9
|
|
|
|
|
|
|
|
|
|
The following table summarizes information relating to outstanding and exercisable stock options
as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Exercisable
|
Exercise Price
|
|
Number of
Shares Outstanding at
December 31, 2007
|
|
Weighted
Average Remaining
Contractual
Life (in years)
|
|
Weighted Average
Exercise Price
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
$ 2.68-3.54
|
|
67,344
|
|
6.3
|
|
$ 3.06
|
|
46,920
|
|
$ 2.90
|
3.55-3.55
|
|
393,446
|
|
7.3
|
|
3.55
|
|
251,158
|
|
3.55
|
4.15-4.15
|
|
4,875
|
|
5.4
|
|
4.15
|
|
4,875
|
|
4.15
|
4.68-4.68
|
|
245,638
|
|
8.4
|
|
4.68
|
|
111,187
|
|
4.68
|
4.87-5.91
|
|
156,310
|
|
5.5
|
|
5.67
|
|
127,612
|
|
5.78
|
6.08-6.08
|
|
860,595
|
|
9.3
|
|
6.08
|
|
114,372
|
|
6.08
|
6.10-7.99
|
|
326,485
|
|
8.8
|
|
7.57
|
|
64,578
|
|
7.01
|
8.02-12.31
|
|
298,541
|
|
6.0
|
|
10.14
|
|
176,091
|
|
10.63
|
15.91-58.08
|
|
54,246
|
|
3.5
|
|
30.22
|
|
53,839
|
|
30.32
|
76.92-76.92
|
|
13,000
|
|
2.6
|
|
76.92
|
|
13,000
|
|
76.92
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.68-76.92
|
|
2,420,480
|
|
7.9
|
|
$ 7.04
|
|
963,632
|
|
$ 8.26
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of outstanding options calculated as the difference between the
market value of Avicis common stock as of December 31, 2007 and the exercise price was $4.9 million, of which $2.3 million were vested. The intrinsic value of options exercised calculated as the difference between the market value of the
shares on the exercise date and the exercise price of the option was $4.1 million, $1.9 million and $0.1 million in 2007, 2006 and 2005 respectively.
53
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
As of December 31, 2007, total unrecognized compensation cost was approximately $2.1 million
related to unvested stock-based compensation arrangements granted under the Companys stock plans and is expected to be recognized over a weighted-average period of less than one year.
(f)
|
Restricted Stock Grants
|
In 2005 and 2006, Avici
granted 172,000 and 92,500 shares, respectively, of performance-based restricted stock to certain key employees of the Company. The shares were to vest no later than five years from the grant date with a provision to accelerate the vesting upon the
achievement of certain pre-defined performance milestones. The value of the shares at the dates of grant was $0.8 million and $0.6 million for 2005 and 2006, respectively, and was charged to sales and marketing, general and administrative and
research and development expenses on a straight-line basis over the shorter of the expected performance period or the five year vesting period. The performance criteria for the 2005 and 2006 grants were met in 2007 and accordingly all unamortized
expenses associated with such grants were expensed. No new restricted stock grants were made in 2007. The total charges associated with all restricted stock grants were $0.3 million, $1.0 million and $0.3 million in 2007, 2006 and 2005,
respectively.
The following table summarizes Avicis nonvested restricted stock activity for the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
Number of
shares
|
|
|
Weighted
Average Grant
Date
Fair Value
|
Nonvested at December 31, 2006
|
|
179,500
|
|
|
$
|
5.62
|
Granted
|
|
|
|
|
|
|
Vested
|
|
(179,500
|
)
|
|
$
|
5.62
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(g)
|
2000 Employee Stock Purchase Plan
|
A total of
187,500 shares of common stock have been reserved for issuance under the 2000 Employee Stock Purchase Plan. The plan contains consecutive, overlapping, 24-month offering periods. Each offering period includes four consecutive six-month purchase
periods. Eligible employees may purchase common stock at a price equal to 85% of the lower of the fair market value of the common stock (i) at the beginning of the offering period or (ii) at the end of the purchase period, whichever is
lower, with the option price at the beginning of the first offering period equal to 85% of the initial public offering price. Participation is limited to 10% of the employees eligible compensation, not to exceed $25,000 per calendar year or
amounts allowed by the Internal Revenue Code. On January 1 of each year, commencing with January 1, 2001, the aggregate number of shares of common stock available for purchase under the 2000 Employee Stock Purchase Plan will automatically
increase by the number of shares necessary to cause the total number of shares then available for purchase to be 187,500 shares. During the years ended December 31, 2007, 2006 and 2005, Avici sold 23,625 shares, 31,700 shares and 46,396 shares,
respectively, to employees under the 2000 Employee Stock Purchase Plan.
54
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
(h)
|
Shareholder Rights Agreement
|
On December 5,
2001, the Board of Directors enacted a stockholder rights agreement and declared a dividend of one preferred share purchase right for each outstanding share of common stock outstanding at the close of business on December 17, 2001 to the
stockholders of record on that date. Each stockholder of record as of December 17, 2001 received a summary of the rights and any new stock certificates issued after the record date contain a legend describing the rights. Each preferred share
purchase right entitles the registered holder to purchase from Avici one two-hundred fiftieth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, at a price of $40.00 per one two-hundred fiftieth of a Preferred
Share, subject to adjustment, upon the occurrence of certain triggering events, including the purchase of 15% or more of Avicis outstanding common stock by a third party. Until a triggering event occurs, the common stockholders have no right
to purchase shares under the stockholder rights agreement. If the right to purchase the preferred stock is triggered, the common stockholders will have the ability to purchase sufficient stock to significantly dilute the 15% or greater holder.
(4)
|
RESTRUCTURING AND IMPAIRMENT CHARGES
|
In February
2006, Avici announced a plan to restructure its business and realign its cost structure to execute a focused strategy aimed at driving Avici toward profitability and positive cash flow. The restructuring plan included a workforce reduction and
employee retention plan, charges related to excess inventory and inventory related costs, asset impairment and other costs.
The Company
recorded total restructuring charges of approximately $11.0 million, of which $8.4 million was cash based. In 2006 Avici recorded $10.7 million of these charges and the remaining $0.3 million was recorded in the first quarter of 2007. In the future,
Avici does not expect to record any additional charges associated with this restructuring.
The restructuring and impairment charges
recorded and the reserve activities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge
in fiscal 2006
|
|
Non-cash
Charges
|
|
Fiscal 2006
Payments
|
|
Accrual
Balance at
December 31,
2006
|
|
First
quarter
2007
charge
|
|
First
quarter
2007
payments
|
|
Accrual
Balance at
March 31,
2007
|
Workforce restructuring related
|
|
$
|
5,371
|
|
$
|
|
|
$
|
3,883
|
|
$
|
1,488
|
|
$
|
100
|
|
$
|
1,588
|
|
$
|
|
Asset impairment
|
|
|
1,580
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other costs
|
|
|
666
|
|
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and impairment charges
|
|
|
7,617
|
|
|
1,580
|
|
|
4,549
|
|
|
1,488
|
|
|
100
|
|
|
1,588
|
|
|
|
Inventory and inventory related costs recorded in cost of revenueproduct
|
|
|
3,094
|
|
|
1,065
|
|
|
1,104
|
|
|
925
|
|
|
175
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,711
|
|
$
|
2,645
|
|
$
|
5,653
|
|
$
|
2,413
|
|
$
|
275
|
|
$
|
2,688
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avici accounts for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using
currently enacted tax rates. Deferred income tax expense or credits are based on changes in the asset or liability from period to period.
55
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
In 2007 and 2006, Avici provided for federal and state income taxes of approximately $1.2 million and
$0.2 million, respectively, after giving benefit to the utilization of net operating loss carryforwards. As of December 31, 2007, Avici had net operating loss carryforwards for federal and state income tax purposes of approximately $294.1
million and $154.9 million, respectively. As of December 31, 2006, Avici had net operating loss carryforwards for federal and state income tax purposes of approximately $349.9 million and $155.7 million, respectively. Approximately $21.9
million of Avicis net operating loss carryforwards relate to deductions associated with Avicis stock option plans, which will be benefited through stockholders equity if realized. The federal net operating loss carryforwards begin
to expire in 2012 and state net operating loss carryforwards began to expire in 2007. As of December 31, 2007 Avici also has gross federal and state research tax credit carryforwards of approximately $12.4 million and $8.0 million respectively,
which will begin to expire in 2012. The utilization of the net operating loss carryforwards may be subject to annual limitations as a result of changes in the ownership of the Company. In 2007 Avici paid $0.2 million in income taxes.
The approximate income tax effects of each type of temporary differences and carryforwards are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
109,969
|
|
|
$
|
129,577
|
|
Research credit carryforwards
|
|
|
17,621
|
|
|
|
17,592
|
|
Depreciation
|
|
|
1,751
|
|
|
|
3,302
|
|
Inventory
|
|
|
1,416
|
|
|
|
2,207
|
|
Stock Compensation
|
|
|
1,959
|
|
|
|
1,337
|
|
Other accruals
|
|
|
1,301
|
|
|
|
2,093
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
134,017
|
|
|
|
156,108
|
|
Valuation allowance
|
|
|
(134,017
|
)
|
|
|
(156,108
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between the statutory federal income tax rate and Avicis effective tax rate
follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
Benefit of net operating losses utilized
|
|
(33.7
|
)
|
|
(33.1
|
)
|
Other, net
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
%
|
|
1.9
|
%
|
|
|
|
|
|
|
|
While Avici has recorded pre-tax income in the each of the past two years, given the transition to
Soapstone, it is uncertain whether future profitability will occur; hence, Avici has provided a full valuation allowance against its deferred tax assets at December 31, 2007 and 2006. The reduction of the valuation allowance in 2007 and 2006 is
due to the utilization of net operating loss carryforwards.
56
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
Avici has conducted business overseas; as a result, one or more of its subsidiaries files income tax
returns in various jurisdictions outside of the U.S. Avici generally remains subject to examination of its various income tax returns in its significant jurisdictions outside the U.S. after the date the return was filed. There are presently no
examinations of returns filed in any of the jurisdictions and the Company has not been notified of any pending examinations.
In June 2006,
the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for a tax position
taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Avici adopted the provisions of FASB Interpretation
No. 48 (FIN 48) as of January 1, 2007 and the adoption of FIN 48 did not result in a significant change to the liability for unrecognized tax benefits. The total amount of unrecognized tax benefits at January 1, 2007 and
December 31, 2007 was less than $0.2 million. There were no increases or settlements of unrecognized tax benefits during 2007.
(6)
|
EMPLOYEE BENEFIT PLAN
|
Avici has a 401(k) Plan that
provides for eligible employees to make contributions on a tax-deferred basis. All employees on the first day of the month following their date of employment are eligible to participate in the 401(k) Plan. Contributions are limited to 15% of their
annual compensation, as defined, subject to certain IRS limitations. Avici may contribute to the Plan at its discretion. Employer contributions to the Plan were $0.2 million and $0.3 million at December 31, 2007 and December 31, 2006,
respectively.
(7)
|
COMMITMENTS AND CONTINGENCIES
|
Future minimum payments due under lease
agreements at December 31, 2007 are as follows:
|
|
|
|
|
|
Operating
Leases
|
2008
|
|
$
|
490
|
2009
|
|
|
157
|
|
|
|
|
Total payments
|
|
$
|
647
|
|
|
|
|
Rent expense from operating leases included in the accompanying consolidated statements of
operations was approximately $1.0 million, $1.2 million, and $1.3 million for the years ended December 31, 2007, 2006, and 2005, respectively.
(b)
|
Guarantees and Product Warranties
|
The Financial
Accounting Standards Board issued Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires certain
guarantees to be recorded at fair value as opposed to the current practice of recording a
57
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
liability only when a loss is probable and reasonably estimable and also requires a guarantor to make significant new guaranty disclosures, even when the
likelihood of making any payments under the guarantee is remote. The following is a summary of agreements that Avici has determined to be within the scope of FIN 45.
In the normal course of business, Avici may agree to indemnify other parties, including customers, lessors and parties to other transactions with Avici, with respect to certain matters. Avici has agreed to hold these
other parties harmless against losses arising from a breach of representations or covenants, or other claims made against certain parties. Historically, payments made by Avici, if any, under these agreements have not had a material impact on
Avicis operating results or financial position.
Avici established warranty reserves for costs expected to be incurred after its
final router product sale and delivery for deficiencies as required under specific product warranty provisions. The warranty reserves were determined based on the actual trend of historical charges incurred over the prior twelve-month period
excluding any significant or infrequent issues, which are specifically identified and reserved for. The warranty liability is established when it is probable that customers will make claims and when a reasonable estimate of costs can be made.
Warranty reserves are included in Accrued other in the accompanying consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Product warranty liability, beginning of year
|
|
$
|
284
|
|
|
$
|
191
|
|
Warranties issued during the period
|
|
|
549
|
|
|
|
773
|
|
Settlements made during the period
|
|
|
(534
|
)
|
|
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
Product warranty liability, end of year
|
|
$
|
299
|
|
|
$
|
284
|
|
|
|
|
|
|
|
|
|
|
In addition to claims in the normal
course of business, twelve purported securities class action lawsuits were filed against Avici and one or more of Avicis underwriters in Avicis initial public offering, and certain officers and directors of Avici. The lawsuits alleged
violations of the federal securities laws and were docketed in the U.S. District Court for the Southern District of New York (the Court) as: Felzen, et al. v. Avici Systems Inc., et al., C.A. No. 01-CV-3363; Lefkowitz, et al. v.
Avici Systems Inc., et al., C.A. No. 01-CV-3541; Lewis, et al. v. Avici Systems Inc., et al., C.A. No. 01-CV-3698; Mandel, et. al v. Avici Systems Inc., et al., C.A. No. 01-CV-3713; Minai, et al. v. Avici Systems Inc., et al., C.A.
No. 01-CV-3870; Steinberg, et al. v. Avici Systems Inc., et al., C.A. No. 01-CV-3983; Pelissier, et al. v. Avici Systems Inc., et al., C.A. No. 01-CV-4204; Esther, et al. v. Avici Systems Inc., et al., C.A. No. 01-CV-4352; Zhous,
et al. v. Avici Systems Inc. et al., C.A. No. 01-CV-4494; Mammen, et al. v. Avici Systems Inc., et. al., C.A. No. 01-CV-5722; Lin, et al. v. Avici Systems Inc., et al., C.A. No. 01-CV-5674; and Shives, et al. v. Banc of America
Securities, et al., C.A. No. 01-CV-4956. On April 19, 2002, a consolidated amended class action complaint (the Complaint), which superseded these twelve purported securities class action lawsuits, was filed in the Court. The
Complaint is captioned In re Avici Systems, Inc. Initial Public Offering Securities Litigation (21 MC 92, 01 Civ. 3363 (SAS)) and names as defendants Avici, certain of the underwriters of Avicis initial public offering, and certain
of Avicis officers and directors. The Complaint, which seeks unspecified damages, alleges violations of the federal securities laws, including among other things, that the underwriters of Avicis initial public offering (IPO)
improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of Avicis stock in the aftermarket as conditions of receiving shares in Avicis IPO. The Complaint further claims that
these supposed practices of the underwriters should have been disclosed in Avicis
58
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
IPO prospectus and registration statement. In addition to the Complaint against Avici, various other plaintiffs have filed other substantially similar class
action cases against approximately 300 other publicly traded companies and their IPO underwriters in New York City, which along with the case against Avici have all been transferred to a single federal district judge for purposes of case management.
Avici and its officers and directors believe that the claims against Avici lack merit, and have defended the litigation vigorously. In that regard, on July 15, 2002, Avici, together with the other issuers named as defendants in these
coordinated proceedings, filed a collective motion to dismiss the consolidated amended complaints against them on various legal grounds common to all or most of the issuer defendants.
On October 9, 2002, the Court dismissed without prejudice all claims against the individual current and former officers and directors who were named
as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the issuer defendants and separate motions to dismiss filed by the underwriter
defendants. In that ruling, the Court granted in part and denied in part those motions. As to the claims brought against Avici under the antifraud provisions of the securities laws, the Court dismissed all of these claims with prejudice, and refused
to allow the plaintiffs an opportunity to re-plead these claims against Avici. As to the claims brought under the registration provisions of the securities laws, which do not require that intent to defraud be pleaded, the Court denied the motion to
dismiss these claims as to Avici and as to substantially all of the other issuer defendants as well. The Court also denied the underwriter defendants motion to dismiss in all respects.
In June 2003, Avici elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been
approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Avici and against any of the other issuer defendants who elected to participate in the proposed settlement, together with the
current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on, among other things, a ruling by the District Court that the claims against Avici and against the
other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the
settlement unless an investor opted to be excluded from the settlement.
On December 5, 2006, the U.S. Court of Appeals for the Second
Circuit issued a decision that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Courts determination that
individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of this ruling. On April 6, 2007 the Court of Appeals
denied the plaintiffs petition for rehearing of the Courts December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet
the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. The plaintiffs have since moved for certification of different classes in the District Court, and that motion remains pending.
In light of the Court of Appeals December 5, 2006 decision regarding certification of the plaintiffs claims, the District
Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Avici. Because any possible future settlement with the plaintiffs, if such a settlement were ever to be agreed to,
would involve the certification of a class action for settlement purposes, the impact of the Court of Appeals class certification-related rulings on the possible future settlement of the claims against Avici cannot now be predicted.
59
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
On October 1, 2007, the plaintiffs submitted their briefing in support of their motions to
certify different classes in the six focus cases. The issuer defendants and the underwriter defendants filed separate oppositions to those motions on December 21, 2007. The motions to certify classes in the six focus cases remain pending. In
addition, on August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. On November 13, 2007, the issuer defendants moved to dismiss the claims against them in the amended complaints in the six focus cases. The
underwriter defendants have also moved to dismiss the claims against them in the amended complaints in the six focus cases. Those motions to dismiss remain pending.
With the termination of the proposed settlement, we intend to continue to defend the litigation vigorously. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as
to the ultimate outcome of this pending lawsuit. Avici believes that the underwriters may have an obligation to indemnify Avici for the legal fees and other costs of defending this suit and that Avicis directors and officers
liability insurance policies would also cover the defense and potential exposure in the suit. While we can make no promises or guarantees as to the outcome of these proceedings, Avici does not believe that a loss is probable or reasonably estimable
as of the balance sheet date.
In addition, Avici received letters dated July 13, 2007 and July 25, 2007 from a putative
shareholder, demanding that the Company investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Securities Exchange Act of 1934 by the underwriters of its IPO and certain unidentified directors,
officers and shareholders of the Company. Avici evaluated the demand and declined to prosecute the claim. On October 3, 2007, the putative shareholder commenced a civil lawsuit in the U.S. District Court for the Western District of Washington
against the lead underwriters of Avicis IPO, alleging violations of Section 16(b). The complaint alleges that the combined number of shares of Avicis common stock beneficially owned by the lead underwriters and certain unnamed
officers, directors, and principal shareholders exceeded ten percent of its outstanding common stock from the date of Avicis IPO on July 28, 2000, through at least July 27, 2001. It further alleges that those entities and individuals
were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriters any
short-swing profits obtained by them in violation of Section 16(b). Avici was named as a nominal defendant in the action, but has no liability for the asserted claims. No directors or officers of the Company are named as defendants
in this action. Avici has waived service and is in the process of considering what, if any, action to take in response to this litigation. Avici believes that the outcome of this litigation will not have a material adverse impact on its consolidated
financial position, results of operations or cash flows.
On February 28, 2008 Avici
announced that effective March 19, 2008 it will change its name to Soapstone Networks Inc. and trade in NASDAQ under the ticker symbol SOAP.
60
AVICI SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
2007
(all tabular amounts in thousands except share and per share data)
(9)
|
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2007
|
|
|
June 30,
2007
|
|
September 30,
2007
|
|
December 31,
2007
|
Gross revenueproduct
|
|
$
|
18,424
|
|
|
$
|
26,900
|
|
$
|
26,927
|
|
$
|
42,137
|
Gross revenueservice
|
|
|
2,088
|
|
|
|
2,738
|
|
|
2,349
|
|
|
2,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
20,512
|
|
|
$
|
29,638
|
|
$
|
29,276
|
|
$
|
44,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross marginproduct
|
|
$
|
13,103
|
|
|
$
|
18,906
|
|
$
|
20,809
|
|
$
|
34,108
|
Gross marginservice
|
|
|
1,631
|
|
|
|
2,373
|
|
|
2,001
|
|
|
2,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margintotal
|
|
$
|
14,734
|
|
|
$
|
21,279
|
|
$
|
22,810
|
|
$
|
36,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,001
|
|
|
$
|
12,067
|
|
$
|
15,004
|
|
$
|
29,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.42
|
|
|
$
|
0.82
|
|
$
|
0.97
|
|
$
|
1.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2006
|
|
|
June 30,
2006
|
|
September 30,
2006
|
|
December 31,
2006
|
Gross revenueproduct
|
|
$
|
20,279
|
|
|
$
|
23,574
|
|
$
|
18,526
|
|
$
|
13,992
|
Gross revenueservice
|
|
|
1,115
|
|
|
|
1,696
|
|
|
1,677
|
|
|
1,904
|
Common stock warrant discountproduct
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
20,867
|
|
|
$
|
25,270
|
|
$
|
20,203
|
|
$
|
15,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross marginproduct
|
|
$
|
11,511
|
|
|
$
|
17,201
|
|
$
|
10,736
|
|
$
|
10,068
|
Gross marginservice
|
|
|
609
|
|
|
|
1,250
|
|
|
1,227
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margintotal
|
|
$
|
12,120
|
|
|
$
|
18,451
|
|
$
|
11,963
|
|
$
|
11,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,322
|
)
|
|
$
|
7,896
|
|
$
|
2,723
|
|
$
|
2,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.41
|
)
|
|
$
|
0.58
|
|
$
|
0.20
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61