I think you got out at a good time. fyi - Some interesting info from TELM's S-8 registration, May 31, 2001. I realize that "risk factors" are worded for conservative disclosure, but the info contained reveal quite a bit about the TELM-EXTANT agreement that DYN assumed (DYN doesn't have to purchase $ 250 million of OCX equipment, and look at the charges TELM will have to claim in future 10Q filings for the options granted to DYN).
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 31, 2001
REGISTRATION NO. 333-______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-8
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------------------
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED IN THIS REOFFER PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE BEFORE YOU PURCHASE ANY SHARES OF OUR COMMON STOCK.
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 not recognized meaningful revenue and have incurred significant
losses to date. We expect to continue to incur losses in the future. We had net
losses of approximately $110.4 million for the year ended December 31, 2000 and
approximately $49.8 million for the three months ended March 31, 2001. As of
December 31, 2000 and March 31, 2001, we had an accumulated deficit of
approximately $156.1 million and $206.0 million, respectively. We have large
fixed expenses and expect to continue to incur significant manufacturing,
research and development, sales and marketing, administrative and other expenses
in connection with the ongoing development and expansion of our business. We
expect these operating expenses to increase significantly as we increase our
spending in order to develop and grow our business. In order to become
profitable, we will need to generate and sustain higher revenue. If we do not
generate sufficient revenues to achieve or sustain profitability, our stock
price will likely decline.
OUR LIMITED OPERATING HISTORY MAKES FORECASTING OUR FUTURE REVENUES AND OPERATING RESULTS DIFFICULT, WHICH MAY IMPAIR OUR ABILITY TO MANAGE OUR BUSINESS AND YOUR ABILITY TO ASSESS OUR PROSPECTS.
We began our business operations in May 1997 and shipped our first optical
switch in January 1999. We have limited meaningful historical financial and
operational data upon which we can base projected revenues and planned operating
expenses and upon which you may evaluate us and our prospects. As a young
company in the new and rapidly evolving optical switching industry, we face
risks relating to our ability to implement our business plan, including our
ability to continue to develop and upgrade our technology and our ability to
maintain and develop customer and supplier relationships. You should consider
our business and prospects in light of the heightened risks and unexpected
expenses and problems we may face as a company in an early stage of development
in our industry.
WE EXPECT THAT SUBSTANTIALLY ALL OF OUR REVENUES WILL BE GENERATED FROM A LIMITED NUMBER OF CUSTOMERS, INCLUDING CABLE & WIRELESS, DYNEGY CONNECT AND QWEST. THE TERMINATION OR DETERIORATION OF OUR RELATIONSHIP WITH THESE CUSTOMERS WILL HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR REVENUE AND CAUSE US TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES.
2
For the year ended December 31, 2000 and for the three months ended March
31, 2001, we have derived significant revenue from sales under our contract with
Extant, which was transferred to Dynegy Connect in September 2000. We anticipate
that substantially all of our revenues for the foreseeable future will be
derived from Cable & Wireless, Dynegy Connect and Qwest.
Dynegy is proceeding with Extant's planned network build-out. Dynegy may,
however, change its plans at any time and determine not to proceed with the
build-out on a timely basis or at all. If Dynegy Connect were to stop or delay
purchasing products or services from us, or reduce the amount of products or
services that it obtains from us, our revenues would be reduced.
In addition, although Dynegy Connect has agreed to purchase its full
requirements for optical switches from us until November 1, 2003, Dynegy Connect
is not contractually obligated to purchase future products or services from us
and may discontinue doing so at any time. Dynegy Connect is permitted to
terminate the agreement for, among other things, a breach of our material
obligations under the contract.
Under our agreement with Cable & Wireless, Cable & Wireless has made a
commitment to purchase a minimum of $350 million of our optical switches by
August 7, 2005. Our agreement with Cable & Wireless gives Cable & Wireless the
right to reduce its minimum purchase commitment from $350 million to $200
million if we do not maintain a technological edge so that there exists in the
marketplace superior technology that we have not matched. This agreement also
permits Cable & Wireless to terminate the agreement upon breach of a variety of
our obligations under the contract.
Under our agreement with Qwest, Qwest has made a commitment to purchase a
minimum of $300 million of our optical switches over the first three years of
the contract and, subject to extensions under a limited circumstance, an
additional $100 million over the following two years of the contract. This
agreement allows Qwest, through binding arbitration, to terminate the agreement
upon breach of a variety of our obligations under the contract.
If any of these customers elects to terminate its contract with us or if a
customer fails to purchase our products for any reason, we would lose
significant revenue and incur substantial operating losses, which would
seriously harm our ability to build a successful business.
IF WE DO NOT ATTRACT NEW CUSTOMERS, OUR REVENUE MAY NOT INCREASE.
We are currently very dependent on three customers. We must expand our
customer base in order to succeed. If we are not able to attract new customers
who are willing to make significant commitments to purchase our products and
services for any reason, including if there is a downturn in their businesses,
our business will not grow and our revenue will not increase. Our customer base
and revenue will not grow if:
o customers are unwilling or slow to utilize our products;
3
o we experience delays or difficulties in completing the development and
introduction of our planned products or product enhancements;
o our competitors introduce new products that are superior to our
products;
o our products do not perform as expected; or
o we do not meet our customers' delivery requirements.
In the past, we issued warrants to some customers. We may not be able to
attract new customers and expand our sales with our existing customers if we do
not provide warrants or other incentives.
IF OUR LINE OF OPTICAL SWITCHES OR THEIR FUTURE ENHANCEMENTS ARE NOT
SUCCESSFULLY DEVELOPED, THEY WILL NOT BE ACCEPTED BY OUR CUSTOMERS AND OUR
TARGET MARKET, AND OUR FUTURE REVENUE WILL NOT GROW.
We began to focus on the marketing and the selling of optical switches in
the second quarter of 1999. No service provider has fully deployed our optical
switches in a large, complex network. 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
4
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:
o specific network deployment plans of the customer;
o installation skills of the customer;
o size of the network deployment;
o complexity of the customer's network;
o degree of hardware and software changes required; and
o 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:
o competitive pressures;
o increased sales discounts; and
o 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.
5
WE WILL BE REQUIRED TO RECORD SIGNIFICANT NON-CASH CHARGES AS A RESULT OF
WARRANTS, OPTIONS AND OTHER EQUITY ISSUANCES. THESE NON-CASH CHARGES WILL
ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS AND INVESTORS MAY CONSIDER THIS
IMPACT MATERIAL, IN WHICH CASE THE PRICE OF OUR COMMON STOCK COULD DECLINE.
The warrant held by affiliates of Dynegy Connect allows them to purchase
5,226,000 shares of our common stock at $3.05 per share. When we granted the
warrant, the majority of shares subject to the warrant were scheduled to become
exercisable as Dynegy Connect met specified milestones during the term of our
contract. We recorded non-cash charges of approximately $1.7 million,
approximately $2.4 million and approximately $4.3 million related to the warrant
for the years ended December 31, 1999 and December 31, 2000 and for the three
months ended March 31, 2001, respectively. A non-cash charge of approximately
$1.1 million was recorded to sales and marketing expense to reflect the fair
market value of the shares vested subject to the warrant at the grant date. As
of November 2, 2000, we amended the warrant agreement to immediately vest all of
the remaining shares subject to the warrant. The revised agreement provides that
the warrant becomes exercisable based on the schedule of milestones previously
contained in the warrant. If the milestones are not reached by March 31, 2005,
the remaining unexercised shares subject to the warrant shall then become
exercisable. In connection with the execution of this amendment, we will incur a
non-cash charge of approximately $90.6 million. This charge will be recorded as
a reduction of revenue as we realize revenue from this contract. Charges of
approximately $584,000, approximately $2.4 million and approximately $4.3
million have been recorded as an offset to revenue for the years ended December
31, 1999 and December 31, 2000 and for the three months ended March 31, 2001,
respectively, to reflect the fair value of the shares subject to the warrant
earned by Dynegy Global Communications based upon purchases through that date.
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. Another warrant becomes exercisable as to
1,000,000 shares at the earlier of Qwest meeting specified milestones during the
term of our procurement contract or on September 18, 2005, which is five years
from the date of the warrant. The third warrant becomes exercisable as to the
remaining 375,000 shares at the earlier of Qwest meeting a milestone during the
term of our procurement contract or on April 10, 2007, which is six years from
the date of the warrant. The fair market value of the issued warrants,
approximately $39.0 million, will be recorded as a reduction of revenue related
to the Qwest procurement contract. We recorded non-cash charges of approximately
$328,000 and $531,000 as an offset to revenue for the year ended December 31,
2000 and for the three months ended March 31, 2001, respectively.
We will incur significant additional non-cash charges as a result of our
acquisition of Astarte and our acquisition of an intellectual property license
from AT&T. The goodwill and intangible assets associated with the Astarte
acquisition were approximately $113.3 million. The intangible
6
asset associated with the acquisition of the AT&T license is approximately
$45.0 million. The goodwill and intangible assets are being amortized over
five years.
In addition, we have recorded deferred compensation expense and have begun
to amortize non-cash charges to earnings as a result of options and other equity
awards granted to employees and non-employee directors at prices deemed to be
below fair market value on the dates of grant. Our future operating results will
reflect the continued amortization of those charges over the vesting period of
these options and awards. At March 31, 2001, we had recorded deferred
compensation expense of approximately $191.3 million, which will be amortized to
compensation expense between 2001 and 2005.
We have also issued certain performance-based options to employees and
consultants. If the performance criteria are met, we will record significant
non-cash charges that will negatively impact our operating results. At this
time, it is not possible to determine the amount of these charges as they will
be based in part on the fair market value of our common stock at the time the
performance criteria are met.
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.
******
RISKS RELATED TO OUR PRODUCT MANUFACTURING
13
IF AGERE SYSTEMS INC. STOPS SUPPLYING US WITH COMPONENTS, WE MAY EXPERIENCE
MANUFACTURING DELAYS, WHICH COULD HARM OUR CUSTOMER RELATIONSHIPS.
We currently contract with Agere Systems to supply us with optical
transceivers, a critical component of our optical switches. Lucent Technologies,
Inc., a major stockholder of Agere, is also one of our major competitors since
it develops and markets products similar to ours. If Agere determines not to
supply us with optical transceivers because of its relationship with Lucent, we
will have to rely on other sources and may experience delays in manufacturing
our products, which could damage our customer relationships.
*****
A SUBSTANTIAL NUMBER OF SHARES WILL BECOME AVAILABLE FOR SALE, AND IF THESE
SHARES ARE SOLD IN A SHORT PERIOD OF TIME, THE MARKET PRICE OF OUR COMMON STOCK
COULD DECLINE.
If our stockholders sell substantial amounts of our common stock, the
market price of our common stock could decrease. As of May 31, 2001, we have
outstanding 110,721,333 shares of common stock. Most of our stockholders are
subject to agreements with the underwriters or us that restrict their ability to
transfer their stock for periods ranging from 90 to 180 days from the date of
our initial public offering, with some exceptions. After all of these agreements
expire, an aggregate of 77,829,325 additional shares will be eligible for sale
in the public market. |
