| AVICI SYSTEMS INC ITEM 1A RISK FACTORS Our company, business and operations are subject to a number of risks and uncertainties |
| We discuss material risks and uncertainties below |
| To the extent any of these risks and uncertainties materialize, our business, results of operation and financial condition would suffer |
| You should carefully consider these risk factors in evaluating our company |
| We are reliant on our major customer AT&T and we expect that substantially all of our revenues will be generated from a limited number of networking service providers |
| Our revenues will not grow if our products are not selected for or do not successfully pass field trial tests, or are not increasingly deployed in customer networks |
| In 2004, Huawei and Nortel accounted for 27prca and 12prca, respectively, of gross revenue |
| We expect that in the foreseeable future substantially all of our revenues will continue to depend on sales of our products to a limited number of customers and we have adjusted our corporate strategy to focus our efforts on a target customer base, particularly AT&T, and core product functionalities |
| The loss of or reduction in business from any major customer could materially reduce our revenue and cash flow, and adversely affect our ability to achieve and maintain profitability |
| On November 18, 2005, AT&T completed its merger with SBC Communications |
| This development gives rise to new opportunities and risks as our major customer experiences changes associated with integrating two businesses |
| We will need to build on our existing relationships at AT&T, build new relationships, address competitive challenges and adapt our product development and customer service activities to meet the needs of the resulting entity |
| 11 ______________________________________________________________________ [35]Table of Contents In addition, we are dependent on factors affecting the telecommunications industry |
| The telecommunications industry has and may continue to experience consolidation, changing technical requirements and changing demand for services |
| Any such factors or other factors affecting the telecommunications industry or carrier customers could cause a downturn in the demand for our products |
| We currently depend on a limited number of products offered in the core routing market segment and our future revenues depend on enhancements to these products and their commercial success |
| Our future growth and revenue depend on the commercial success of our TSR, SSR and QSR products, which are the only products that we currently offer |
| We offer these products in the core routing market segment |
| We must continue to enhance the features and functionality of our products to meet customer requirements and competitive demands |
| In addition, the failure of these planned product enhancements to operate as expected could delay or prevent future sales of our products |
| If our target customers do not adopt, purchase and successfully deploy our products and our planned product enhancements, our revenues could decrease significantly |
| Our sales cycle to new and existing customers is lengthy, and we may expend considerable resources without resulting revenue |
| Our sales cycle typically involves a lengthy sales consultation process followed by laboratory testing in which our product is evaluated against competing products |
| If our product is selected for field trials after laboratory testing, our product is then tested in an operational environment |
| Generally, our customers do not contractually commit to purchase any products from us until we have successfully demonstrated specific performance criteria in these field trials |
| We cannot predict whether our products will successfully complete laboratory tests or field trials with particular customers or whether these customers will order and commercially deploy our products in meaningful volumes |
| The failure of current or prospective customers to purchase our products for any reason, including the failure to pass field trials, any determination not to install our products in their networks or any downturn in their business, would seriously harm our ability to build a successful business |
| Even if we are successful in promoting the adoption of our products, customers usually test, purchase and deploy competitive products for various segments of their networks |
| Accordingly, we will likely face additional competitive challenges in maintaining and expanding our position in established customer accounts |
| We have reduced our direct sales capability as a result of our recent restructuring and our indirect sales channels have had limited success, accordingly, we are likely to face difficulties in obtaining and retaining customers through direct and indirect sales channels |
| Our products have historically required a sophisticated and in depth sales effort targeted at key individuals within worldwide target end user customer organizations |
| We have achieved limited success through both our direct and indirect sales channels |
| In connection with the restructuring of our business, we have reduced our direct sales and marketing force |
| We currently do not plan to staff our direct sales force at 2005 levels or hire a significant number of additional sales personnel or, unless warranted by customer activity, engineering personnel |
| The competition for qualified individuals is intense, and our ability to hire the type and number of sales, engineering or customer service and support personnel that we may need in the future will remain subject to competitive pressures |
| To date, we have entered into agreements with a number of regional systems integrators and distribution partners, including Nortel Networks, on a worldwide basis, and Huawei Technologies in Greater China |
| The relationships with these systems integrators and distribution partners have not produced the results we anticipated when entering into these relationships |
| These systems integrators and distribution partners do not have any purchase commitments associated with our agreements with them and, generally, are not prohibited from selling products that compete with our products |
| We cannot be certain that such partners will devote adequate resources 12 ______________________________________________________________________ [36]Table of Contents to marketing or selling our product or generate significant revenue in order for us to achieve and maintain profitability |
| Gross margin on distribution sales are lower than those on direct sales |
| Accordingly, to the extent that a higher percentage of our revenue is derived from distribution sales, it is expected that our gross margin percentage will decline from current levels |
| There can be no assurance that incremental revenue from distribution channels will be sufficient to offset the decline in gross margin dollars |
| Our current strategy does not include the development of and investment in indirect sales channels outside of specific core customer opportunities |
| Our plan to restructure our business and realign our cost structure may not produce the expected performance improvements and cost savings within the projected timeline |
| We have announced a plan to restructure our business to focus our efforts on our core customers and core functionalities |
| The benefits of this restructuring are expected to be significant performance improvements and cost savings |
| However, there is no way to gauge the actual impact of the restructuring or the amount and timing of either the performance improvements or the cost savings |
| In addition, the restructuring will result in significant charges and a reduction in our staff and capabilities in key areas such as sales and marketing, product development and engineering and international operations |
| Because of this, the restructuring may not produce immediate results on our financial indicators and may cause the trading price of our common stock to decrease materially |
| Our failure to compete effectively, particularly against Cisco Systems, Juniper Networks, and other established participants with greater financial and other resources than ours, could limit our ability to increase our market share |
| The competition in the network infrastructure equipment market is intense |
| This market historically has been dominated by Cisco Systems, although we also compete with other companies such as Juniper Networks |
| Our prospective customers may be reluctant to replace or expand their current infrastructure solutions, which may be supplied by one or more of these more established competitors, with our products |
| Further, many of our competitors have greater selling and marketing, technical, manufacturing, financial and other resources, more customers, greater market recognition and more established relationships and alliances in the industry |
| As a result, these competitors may be able to develop, enhance and expand their product offerings more quickly, adapt more swiftly to new or emerging technologies and changes in customer demands, devote greater resources to the marketing and sale of their offerings, pursue acquisitions and other opportunities more readily and adopt more aggressive pricing policies |
| In addition, established or emerging network equipment vendors may also focus on our target market, thereby further intensifying competition |
| In order to compete effectively with these competitors, we must demonstrate that our products are superior in meeting the needs of carriers and provide high levels of reliability, scalability and interoperability in a cost-effective manner |
| In addition, we believe that understanding the infrastructure requirements of telecommunications carriers and other service providers, experience in working with these providers to develop new services for their customers and an ability to provide vendor-sponsored financing are important competitive factors in our market |
| We have limited experience in working with telecommunications carriers and other service providers |
| In addition, we do not currently anticipate an ability to provide vendor-sponsored financing and this may influence the purchasing decision of prospective customers, which may decide to purchase products from one of our competitors that offer such financing |
| If we are unable to compete successfully against our current and future competitors, we could experience order cancellations, lost customer opportunities and price and volume reductions |
| If this occurs, our revenues may decline, our gross margins could decrease and we could experience additional material losses |
| 13 ______________________________________________________________________ [37]Table of Contents Our failure to stabilize our revenues and manage our costs would prevent us from achieving and maintaining profitability |
| We have incurred significant losses in each quarterly and annual period since inception and expect to continue to incur significant losses in the future |
| As of December 31, 2005, we had an accumulated deficit of dlra425dtta7 million |
| We cannot be certain that our revenues will increase or that we will generate sufficient revenues to achieve profitability |
| We plan to continue product development focused on our core customers and core product functionality |
| These efforts will continue to require significant expenditures, a substantial portion of which we will make long before any significant revenue related to these expenditures may be realized |
| In addition, our operating expenses are based largely on anticipated revenue trends and a significant portion of our expenses, such as personnel and real estate facilities costs, is fixed |
| As a result, we will need to generate significant revenues and manage ongoing costs to achieve and maintain profitability |
| If we fail to achieve such revenue levels, our operating losses could continue or materially increase |
| We may never achieve profitability or generate positive cash flows from operations |
| If we do achieve profitability or positive cash flows from operations in any period, we may not be able to sustain or increase profitability or positive cash flows in the future |
| We rely on single or limited source suppliers for several key components |
| If we are unable to purchase these components on a timely basis or upon favorable terms, we will not be able to deliver our products to our customers within the timeframes required and we may experience order cancellations |
| We currently specify and purchase through our contract manufacturers several key components from single or limited sources |
| We have worked with LSI Logic for over five years to develop several of our key proprietary application specific integrated circuits, or ASICs, which are custom designed integrated circuits built to perform a specific function more rapidly than a general purpose microprocessor |
| These proprietary ASICs are very complex and LSI Logic is currently our sole source supplier for them |
| We do not have a long-term, fixed-price or minimum volume of supply agreement with LSI Logic |
| Our ASICs generally require a lengthy lead-time |
| If required, we would likely be unable to develop an alternate source to LSI Logic in a timely manner, which could hurt our ability to deliver our products to our customers |
| We also purchase other critical components, including optical components, field programmable gate arrays and other ASICs, from sole or limited sources, and at times some of these components are subject to allocation |
| In addition we established a strategic relationship with Intel to supply certain network processors for use in our Multiservice Connect family of line cards and have also established other relationships for component supply |
| We do not have a long-term, fixed price or minimum volume of supply agreement with such vendors |
| Although we believe that there are alternative sources for many of these components, in the event of a disruption in supply, we may not be able to develop an alternate source in a timely manner or at favorable prices |
| In addition, our supplier of ASICs or other critical components could discontinue the production of such components |
| LSI Logic has informed us that the supply of certain key ASICs will be discontinued |
| In such an event, we may have the opportunity to make an end-of-life purchase of excess inventory of such component, as we plan to do with these key ASICs |
| Changes in demand for our product in the future may render our inventory stocking purchase to be in excess or short of future requirements, and in the event we require additional supplies we may be unable to transition to an alternative vendor on a timely or cost effective basis and we would be subject to the risks described below |
| We typically specify and purchase through our contract manufacturers all of our components, including our ASICs, under purchase orders placed from time to time |
| We do not carry significant inventories of components and have no guaranteed supply arrangements with our vendors |
| If we are unable to purchase our critical components, or to provide for the production of our ASICs, at times and in volumes as our business requirements necessitate, we will not be able to manufacture and deliver our products to our customers in accordance with their volume and schedule requirements |
| If we are not able to satisfy the delivery requirements of our customers, they may reduce any future orders or eliminate our status as a vendor |
| Our reputation also would likely be 14 ______________________________________________________________________ [38]Table of Contents harmed and, given the limited number of customers in our target market, we may not be able to replace any lost business with new customers |
| In addition, even if we are able to obtain these critical components in sufficient volume and on schedules that permit us to satisfy our delivery requirements, we have little control over their cost |
| Accordingly, the lack of alternative sources for these components may force us to pay higher prices |
| If we are unable to obtain these components from our current suppliers or others at economical prices and favorable terms, our margins would be adversely impacted unless we could raise the prices of our products in a commensurate manner |
| The existing competitive conditions may not permit us to do so, in which case we may suffer increasing losses or reduced profits |
| We depend upon contract manufacturers and any disruption in these relationships may cause us to fail to meet the demands of our customers and damage our customer relationships |
| We do not have internal manufacturing capabilities |
| We rely on a small number of contract manufacturers to manufacture our products in accordance with our specifications and to fill orders on a timely basis |
| These contract manufacturers procure material on our behalf and provide comprehensive manufacturing services, including assembly, test and control |
| We may not be able to effectively manage our relationships with these contract manufacturers, they may not meet our future requirements for timely delivery and quality, and our business terms, such as pricing and credit terms, may change in a manner not favorable to us |
| If we experience changing demand for our products, the challenges we face in managing our relationships with these manufacturers will be increased |
| Each of our contract manufacturers also builds products for other companies, and we cannot be certain that they will always have sufficient quantities of inventory available to fill orders placed by our customers, or that they will allocate their internal resources to fill these orders on a timely basis |
| Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming and could result in a significant interruption in the supply of our product |
| If we are required or choose to change one or both of our contract manufacturers, we could experience a material loss in our revenue and significant damage to our customer relationships |
| If we fail to accurately predict our manufacturing requirements, we could incur additional costs or experience manufacturing delays |
| Our contract manufacturers are not obligated to supply products to us for any specific period, in any specific quantity or at any certain price, except as may be provided in a particular purchase order |
| We generally provide forecasts of our demand to these manufacturers up to 12 months prior to scheduled delivery of product to our customers |
| If we overestimate our requirements, we may purchase excess inventory, which would consume cash by increasing our costs and may require us to take additional charges for excess and obsolete inventory |
| If we underestimate our requirements, we may have an inadequate amount of inventory, which could result in delays in delivery to our customers and in recognition of revenue or in increased costs incurred to expedite product delivery |
| In addition, the lead times for materials and components we order vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time |
| We also may experience shortages of other components from time to time, which also could delay the manufacturing of our products and delay our recognition of revenue |
| In addition, we may be subject to regulatory requirements such as international environmental regulation, which could affect our ability to manufacture and deliver product on a timely and cost-effective basis |
| For example, the Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive of the European Parliament bans the use of certain materials in new electrical and electronic equipment |
| Any noncompliance with RoHS or other EU requirements would have an adverse effect on our ability to pursue European sales in the future, and could adversely affect our business and operating results |
| 15 ______________________________________________________________________ [39]Table of Contents The long and variable sales cycle for our products may cause revenues and operating results to vary unexpectedly from quarter to quarter, which could affect the market price of our common stock |
| A customer’s decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation, testing and product qualification process |
| Throughout the sales cycle, we spend considerable time and expense educating and providing information to prospective customers about the use and features of our products |
| Even after our customers make a decision to purchase, we believe that our customers will deploy our products slowly and deliberately |
| The timing of deployment can vary widely and depends on the technical features and functionality available in our products, the size of the network deployment, the complexity of the customer’s network environment and the degree of hardware and software configuration necessary |
| Customers with significant or complex networks usually expand their networks in large increments on a periodic basis |
| Accordingly, we expect to receive purchase orders on an irregular and unpredictable basis |
| Because of our limited operating history and the nature of our business, we cannot predict these sales and deployment cycles |
| These long sales cycles, as well as our expectation that customers will tend to sporadically place large orders with short lead times, may cause our revenues, cash flows and results of operations to vary significantly and unexpectedly from quarter to quarter and the trading price of our common stock could decrease materially |
| Our complex products may have errors or defects or may not interoperate within the networks of our customers, which could result in reduced demand for our products or costly litigation against us |
| Our products are complex and are designed to be deployed in large and complex networks with large volumes of traffic |
| Accordingly, our products can only be fully tested when completely deployed in these types of networks |
| Despite deployment and internal testing, our customers may discover errors or defects in the hardware or the software, or the product may not operate as expected even after it has been fully deployed |
| In addition, many of our customers will require that our products be designed to interface with their existing networks, each of which may have different specifications and utilize multiple protocol standards |
| Our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved |
| Our products must interoperate with many of the products within these networks as well as future products in order to meet the requirements of our customers |
| Because our products are critical to the networks of our customers, any significant interruption in their service as a result of defects in our product or the failure of our product to interoperate within our customers’ networks could result in lost profits or damage to these customers |
| These problems could cause us to incur significant service and warranty costs, divert engineering personnel from product development efforts and significantly impair our ability to maintain existing customer relations and attract new customers |
| Although our contracts with our customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages, a court might not enforce a limitation on our liability, which could expose us to additional financial loss |
| In addition, a product liability claim, whether successful or not, would likely be time consuming and expensive to resolve and would divert management time and attention |
| Further, if we are unable to fix the errors or other problems that may be identified in full deployment, we would likely experience loss of or delay in revenues and loss of market share and our business and prospects would suffer |
| We have been in business for a short period of time and your basis for evaluating us is limited |
| We were founded in November 1996, our TSR became commercially available during the fourth quarter of 1999, our SSR became commercially available during the fourth quarter of 2001, and our QSR became commercially available during the fourth quarter of 2002 |
| Accordingly, we have limited meaningful historical financial data upon which to base projected revenues and planned operating expenses and upon which investors may evaluate our prospects and us |
| In addition, our limited operating history means that we have less insight into how technological and market trends may affect our business |
| The revenue and income potential of our business 16 ______________________________________________________________________ [40]Table of Contents is unproven and the market that we are addressing is rapidly evolving and competition is intense |
| Our ability to sell our products depends on, among other things, the level of demand for intelligent high-speed routers, our ability to address competition, and our ability to meet the needs of our major customers |
| You should consider our business and prospects in light of the risks and difficulties frequently encountered by companies like ours in the early stages of development |
| The unpredictability of our quarterly results of operations may adversely affect the trading price of our common stock |
| Our quarterly operating results are likely to vary significantly in the future based on a number of factors related to our industry, the markets for our products and how we manage our business |
| We have little or no control over many of these factors and any of these factors could cause the price of our common stock to fluctuate significantly |
| In addition to the risks discussed elsewhere in this section, the following may also adversely affect the trading price of our common stock: • fluctuations in the demand for high-speed routers; • the timing and size of customer orders for our products or cancellations of orders; • the timing of product acceptance by customers; • the timing and level of research and development and prototype expenses; • the distribution channels through which we sell our products; • general economic conditions; and • conditions specific to the telecommunications industry, including uncertainty related to consolidation |
| We plan to selectively invest in research and development and customer support capabilities |
| Our operating expenses will largely be based on anticipated organizational growth and revenue trends and a high percentage of our expenses are, and will continue to be, fixed in the short term |
| As a result, if revenue for a particular quarter is below our expectations for any of the reasons set forth above, or for any other reason, we may not be able to proportionately reduce operating expenses for that quarter |
| Accordingly, this revenue shortfall would have a disproportionate effect on our expected operating results and could result in material operating losses for that quarter, which could result in significant variations in our operating results from quarter to quarter |
| Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance |
| You should not rely on our results or growth for any single quarter as an indication of our future performance |
| It is likely that in some future quarters, our operating results may be below the expectations of public market analysts and investors |
| In this event, the price of our common stock may decline |
| If we do not respond effectively and on a timely basis to rapid technological changes, our products could become obsolete and we would probably be unable to attract new customers |
| The market for high-speed core router products has been and is likely to continue to be characterized by rapid technological change, evolving industry standards, and frequent new product introductions |
| The introduction of new products by competitors, market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products obsolete |
| Accordingly, we may be required to make significant and ongoing investments in future periods in order to remain competitive |
| The development of new products or technologies is a complex and uncertain process that requires the accurate anticipation of technological and market trends |
| We may be unable to respond quickly or cost-effectively to these developments, and we may not be able to obtain the necessary funds to develop or acquire new technologies or products needed to compete |
| We also cannot assure you that any products we do develop will gain market acceptance |
| 17 ______________________________________________________________________ [41]Table of Contents In addition, in order to introduce products incorporating new technologies and new industry standards, we must be able to gain access to the latest technologies used by our customers, our suppliers and other network vendors |
| Any failure to gain access to the latest technologies could impair our ability to develop competitive products |
| Cisco’s leadership position in our market could create technical challenges to our ability to sell our products |
| In developing our products, we have made, and will continue to make, assumptions about the standards that may be adopted by our customers and competitors |
| If the standards adopted are different from those that we have chosen to support, market acceptance of our products would likely be significantly reduced and our business will be seriously harmed |
| Because Cisco maintains a leadership position in selling products that currently comprise the infrastructure of the Internet, Cisco may have the ability to establish de facto standards within the industry |
| Any actions by Cisco that diminish compliance by our products with industry or de facto standards or the ability of our products to interoperate with other Internet-related products would be damaging to our reputation and our ability to generate revenue |
| Customer requirements are likely to evolve, and we will not retain customers or attract new customers if we do not anticipate and meet specific customer requirements through our strategy to focus on core functionalities |
| Our future success will also depend upon our ability to develop and manage key customer relationships in order to introduce a variety of new products and product enhancements that address the increasingly sophisticated needs of our target base of customers |
| Our current and prospective customers may require product features and capabilities that our products do not have |
| We must effectively anticipate and adapt on a timely basis to customer requirements and offer products that meet those demands in a timely manner |
| Our strategy is to focus on core product functionalities which we believe will be common to our target base of core customers |
| Our failure to develop products that satisfy customer requirements would seriously harm our ability to achieve market acceptance for our products |
| In addition, we may experience design, manufacturing, marketing and other difficulties that could delay or prevent our development or introduction of new products and enhancements |
| Material delays in introducing new products may cause customers to forego purchases of our products and purchase those of our competitors, which could seriously harm our business |
| The introduction of new or enhanced products also requires that we manage the transition from older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand |
| Our inability to effectively manage this transition would cause us to lose current and prospective customers |
| Our ability to develop, market and support products depends on retaining our management team and attracting and retaining highly qualified individuals in our industry |
| Our future success depends on the continued services of our management team, which has significant experience with the data communications, telecommunications and Internet infrastructure markets, as well as relationships with many of the communications service providers and business partners that we currently or may in the future rely on in implementing our business plan |
| The loss of the services of our management team or any key executive could have a significant detrimental effect on our ability to execute our business strategy |
| Our future success also depends on our continuing ability to selectively identify, hire as needed, train, assimilate and retain highly qualified engineering, managerial, support and other personnel |
| The demand and competition for qualified personnel is high, and we have from time to time experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications |
| In particular, we have experienced difficulty in hiring qualified engineering personnel |
| The loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future or 18 ______________________________________________________________________ [42]Table of Contents delays in hiring required personnel, particularly engineers, could delay product development and negatively impact our ability to sell our products |
| We face risks associated with international sales and operations that could impair our ability to grow our revenues abroad |
| Our international sales have been conducted through a direct sales force, sales agents, systems integrators, and distributors in Europe, Asia, and Latin America |
| In January 2004, we established a strategic relationship with Nortel Networks to market, sell and support our products on a worldwide basis |
| In 2003, we also established a strategic relationship with Huawei Technologies to resell our products in Greater China, which expired in 2005, and also have established regional partners in Europe, Japan, Asia, and Latin America |
| These efforts to date have not achieved the results we anticipated and we do not anticipate the continuation of a comparable level of investment in support of future international sales channels |
| In addition, international activities involve additional risks that we do not have to address in the domestic market, such as difficulties in managing foreign operations, different regulatory requirements and different technology standards |
| We expect that international sales will be generally denominated in United States dollars |
| As a result, increases in the value of the United States dollar relative to foreign currencies would cause our products to become less competitive in international markets and could result in limited, if any, sales and profitability |
| To the extent that we denominate sales in foreign currencies or incur significant operating expenses denominated in local currencies, we will be exposed to increased risks of currency exchange rate fluctuations |
| We may experience difficulty in identifying, acquiring and integrating acquisition candidates |
| We may supplement our internal growth by acquiring complementary businesses, technologies or product lines |
| We may not be able to identify and acquire suitable candidates on reasonable terms |
| We compete for acquisition candidates with other companies that have substantially greater financial, management and other resources than we do |
| If we do complete an acquisition, then we may face numerous business risks |
| These risks include difficulties in assimilating the acquired operations, technologies, personnel and products, difficulties in managing geographically dispersed and international operations; difficulties in assimilating diverse financial reporting and management information systems; the diversion of management’s attention from other business concerns; the potential disruption of our business; and the potential loss of key employees, customers, distributors or suppliers |
| We may finance acquisitions by issuing shares of our common stock, which could dilute our existing stockholders |
| We may also use cash or incur additional debt to pay for these acquisitions |
| In addition, we may be required to expend substantial funds to develop acquired technologies |
| We may also be required to amortize significant intangible assets in connection with future acquisitions, which could adversely affect our operating results |
| Our intellectual property protection may be inadequate to protect our proprietary rights, and we may be subject to infringement claims that could subject us to significant liability and divert the time and attention of our management |
| We regard our products and technology as proprietary |
| We attempt to protect them through a combination of patent protection, copyrights, trademarks, trade secret laws, contractual restrictions on disclosure and other methods |
| These methods may not be sufficient to protect our proprietary rights |
| We presently have 15 patents granted in the United States and over 50 United States and foreign patent applications pending |
| We cannot be certain that patents will be granted based on these or any other applications, or that, even if issued, the patents will adequately protect our technology |
| We also generally enter into confidentiality agreements with our employees, consultants and customers, and generally control access to and distribution of our documentation and other proprietary information |
| Despite these precautions, it may be possible for a third party to copy or otherwise misappropriate and use our products or technology without authorization, particularly in foreign countries where the laws may not protect our proprietary rights to the same extent as do the laws of the United States, or to develop similar technology independently |
| We may need to resort to litigation in the future to enforce our 19 ______________________________________________________________________ [43]Table of Contents intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others |
| This litigation could result in substantial costs and diversion of resources and could harm our business |
| We also license technologies from third parties, some of which we license without indemnification from the licensor for infringement of third party intellectual property rights |
| We are continuing to develop and acquire additional intellectual property |
| Although we have not been involved in any litigation relating to our intellectual property, including intellectual property that we license from third parties, we expect that participants in our markets will be increasingly subject to infringement claims |
| Third parties may try to claim our products infringe their intellectual property |
| Any claim, whether meritorious or not, could be time consuming, result in costly litigation and/or require us to enter into royalty or licensing agreements |
| Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed |
| In addition, any royalty or licensing agreements might not be available on terms acceptable to us or at all, in which case we would have to cease selling, incorporating or using the products that incorporate the challenged intellectual property and expend substantial amounts of resources to redesign our products |
| If we are forced to enter into unacceptable royalty or licensing agreements or to redesign our products, our business and prospects would suffer |
| We are uncertain of our ability to obtain additional financing for our future capital needs |
| We expect our current cash, cash equivalents and marketable securities will meet our normal working capital and capital expenditure needs for at least the next twelve months |
| We may need to raise additional funding at that time or earlier if we decide to undertake more rapid expansion, including acquisitions of complementary products or technologies, or if we increase our research and development or other efforts in order to respond to competitive pressures |
| We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all |
| We may obtain additional financing by issuing shares of our common stock, which could dilute our existing stockholders |
| If we cannot raise needed funds on acceptable terms, or at all, we may not be able to develop or enhance our products or respond appropriately to competitive pressures, which would seriously harm our business |
| The market price of our common stock may be materially adversely affected by market volatility |
| The price at which our common stock trades is highly volatile and fluctuates substantially |
| Given the limited volume of our product sales and our limited number of customers, the announcement of any significant customer developments, awards or losses or of any significant partnerships or acquisitions by us or our competitors could have a material adverse effect on our stock price |
| In addition, the stock market in general has, and technology companies in particular have, from time to time experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance or prospects of such companies |
| In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities |
| Those companies, like us, that are involved in rapidly changing technology markets are particularly subject to this risk |
| Securities class action lawsuits have been filed against us in the United States District Court for the Southern District of New York |
| The consolidated amended complaint generally alleges that our offering documents failed to disclose certain underwriting fees and commissions and underwriter tie-ins and other arrangements with certain customers of the underwriters that impacted the price of our common stock in the after-market |
| The plaintiffs are seeking unspecified damages |
| We believe that the claims in this case against us lack merit, and we have defended the litigation vigorously |
| We can provide no assurance as to the outcome of this securities litigation |
| Any conclusion of this litigation in a manner adverse to us could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| In addition, the cost to us of defending the litigation, even if resolved in our favor, could be substantial |
| Such litigation could also substantially divert the attention of our management and our resources in general |
| Uncertainties resulting from the initiation and continuation of this litigation could harm our 20 ______________________________________________________________________ [44]Table of Contents ability to compete in the marketplace |
| Because the price of our common stock has been, and may continue to be, volatile, we can provide no assurance that additional securities litigation will not be filed against us in the future |
| The market price of our common stock might decline due to future non-cash charges to earnings |
| In December 2004, the Financial Accounting Standards Board issued SFAS Nodtta 123R, “Share Based Payment |
| ” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values |
| Avici will adopt this statement in the first quarter of 2006 |
| The adoption of this statement is expected to have a material impact on its future earnings |
| It may not be possible to calculate the future impact with respect to stock-based grants as the amount of these charges to earnings fluctuates with the price of our common stock and other factors |
| It is possible that some investors might consider this impact on operating results to be material, which could result in a decline in the price of our common stock |
| In addition, since 2000 we amortized against revenue, non-cash charges relating to the issuance of common stock warrants to a customer |
| In January 2004, in connection with a three-year strategic OEM agreement with Nortel Networks we issued a warrant to purchase shares of Avici common stock |
| The fair value of the warrant was calculated to be approximately dlra6dtta3 million using the Black-Scholes valuation model, and is being recorded as a reduction of revenue on a systematic basis over the economic life of the OEM agreement, which is expected to be three years |
| Our estimates and judgments related to critical accounting policies could be inaccurate |
| We consider accounting policies related to revenue recognition, cost of revenue – service, inventory valuation, warranty liabilities and long lived assets to be critical in fully understanding and evaluating our financial results |
| Management makes certain significant accounting judgments and estimates related to these policies |
| Our business, operating results and financial condition could be materially and adversely impacted in future periods if our accounting judgments and estimates related to these critical accounting policies prove to be inadequate |
| Any failure to maintain effective internal information systems or to implement effective internal controls over financial reporting could adversely impact our business |
| We must continue to maintain our internal information systems in order to manage our business operations |
| We must also maintain internal controls over financial reporting in accordance with The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) |
| Our disclosure controls and procedures and internal controls over financial reporting may not prevent all errors and intentional misrepresentations |
| Any system of internal control can only provide reasonable assurance that all control objectives are met |
| Some of the potential risks involved could include but are not limited to management judgments, simple errors or mistakes, willful misconduct regarding controls or misinterpretation |
| There is no guarantee that existing controls will prevent or detect all material issues or that existing controls will be effective in future conditions, which could materially and adversely impact our financial results |
| Under Sarbanes-Oxley, we are required to evaluate and determine the effectiveness of our internal controls over financial reporting |
| Compliance with this legislation will require management’s attention and resources and will cause us to continue to incur significant expense |
| Management’s assessment of our internal controls over financial reporting may identify weaknesses that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors |
| Should we determine that we have material weaknesses in our internal controls over financial reporting, our results of operations or financial condition may be materially adversely affected or the price of our common stock may decline |
| Our charter documents, Shareholder Rights Plan, and Delaware law could inhibit a takeover that some stockholders may consider favorable |
| There are provisions of Delaware law and our charter, by-laws, and Shareholder Rights Plan that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to some of our stockholders by providing them the opportunity to sell their shares at a premium over the market price |
| If a change of control or change in management is delayed or prevented, the market price of our common stock could be affected |