<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000
REGISTRATION NO. 333-95509
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
ARROWPOINT COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3576 04-3364184
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
ARROWPOINT COMMUNICATIONS, INC.
50 NAGOG PARK
ACTON, MASSACHUSETTS 01720
(978) 206-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHIN-CHENG WU
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
50 NAGOG PARK
ACTON, MASSACHUSETTS 01720
(978) 206-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PATRICK J. RONDEAU, ESQ. KEITH F. HIGGINS, ESQ.
HALE AND DORR LLP ROPES & GRAY
60 STATE STREET 1 INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
TELEPHONE: (617) 526-6000 TELEPHONE: (617) 951-7000
TELECOPY: (617) 526-5000 TELECOPY: (617) 951-7050
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this form is post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement of
the same offering. [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registrations statement
of the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value...... 5,750,000 $32.00 $184,000,000 $48,576
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 750,000 shares of common stock which may be purchased to cover
overallotments, if any.
(2) Estimated solely for purposes of calculating registration fee pursuant to
Rule 457(a).
(3) A registration fee of $22,770 was paid with the initial filing of this
registration statement and an additional registration fee of $3,036 was paid
with Amendment No. 1. Accordingly an additional registration fee of $22,770
is being paid herewith.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED MARCH 28, 2000.
5,000,000 Shares
[ARROWPOINT COMMUNICATIONS LOGO]
Common Stock
------------------------
This is an initial public offering of shares of ArrowPoint Communications,
Inc. All of the shares of common stock are being sold by ArrowPoint.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $30.00 and $32.00. ArrowPoint has applied for quotation of
the common stock on the Nasdaq National Market under the symbol "ARPT".
See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the common stock.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................. $ $
Underwriting discount..................................... $ $
Proceeds, before expenses, to ArrowPoint.................. $ $
</TABLE>
To the extent that the underwriters sell more than 5,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
750,000 shares from ArrowPoint at the initial public offering price less the
underwriting discount.
------------------------
The underwriters expect to deliver the shares in New York, New York on
, 2000.
GOLDMAN, SACHS & CO.
DEUTSCHE BANC ALEX. BROWN
J.P. MORGAN & CO.
------------------------
Prospectus dated , 2000.
<PAGE> 3
[ARTWORK]
[Description of inside front cover graphic: graphic depicts ArrowPoint's two web
switches along with the captions "The CS-100 Content Smart Web Switch is a
compact solution for small to medium sized Web sites" and "The CS-800 Content
Smart Web Switch is a carrier-class modular solution for high traffic Web sites:
Graphic contains our name and logo at the bottom right corner of the page. The
phrase 'for high traffic sites' is on the right side of the web switches.]
[Description of gatefold graphics: This is a detailed graphic outlining
ArrowPoint's Web Network Architecture. Under the caption "Service Provider
Infrastructure" is a graphic of seven destinations from the cloud shape with the
word Internet in the middle of the page. Five destinations are routed through
ArrowPoint's Web Network Architecture and two destinations are not. The
destination circles are connected by color-coded lines representing user
requests. The color lines are described in a legend in the bottom left corner.
Yellow dashed lines are captioned "Request routed based on user info," red
dashed and solid lines are captioned "Request routed based on URL" and blue
dashed lines are captioned "Request routed based on best site, server, content
and application availability." Two circles at the top of the page are routed
through a circle entitled ArrowPoint Web Network Architecture in the center
above the Internet cloud. The Web Network Architecture circle depicts two of
ArrowPoint's CS-800 web switches. Beneath the switches are the following three
questions: "Who is Requesting User Info?" "What is Requested? URL" "Where are
the best Resources?" At the top left corner, one destination circle is captioned
"stocks.com hosted Web site" with icons of four groups of servers collectively
captioned "Boston Data Center" and individually captioned "Real-time Stock
Quotes," "401(k) Account Browsing," "Traffic Overflow Servers" and "Platinum
Account Services." Beneath the circle is the caption "E-Commerce ArrowPoint
enables businesses to offer high-speed services such as prioritizing important
customers and transactions, delivering personalized content, and processing
electronic shopping with increased reliability and security." In the top right
corner, is another circle, captioned "portal.com hosted Web Site," with icons of
two groups of servers collectively captioned "Boston Data Center" and
individually captioned "Chat Room" and "Streaming Media Service." Above this
circle is the caption "Web Content Providers ArrowPoint enables Web content
providers to offer reliable, high-speed delivery of multimedia and other
sophisticated content to customers, and to reduce Web infrastructure costs by
using servers efficiently."
There are two more circles at the bottom of the page directly connected to the
Internet Cloud. Red and blue lines lead to these two circles. The circle to the
left is captioned "stocks.com customers" and contains three icons of personal
computers captioned "Platinum Account Customer," "Stock Broker" and "401(k)
Browser." The circle to the right is captioned "portal.com customers" and
contains three icons of personal computers captioned "Boston User Wants Music
Download," "Boston Chat Room Member" and "London User Wants Music Download."
In the bottom right corner, are the following two captions:
1. "Web & Application Hosters ArrowPoint enables hosting providers to offer
new, managed services for e-commerce, content delivery and security. 'Flash
crowd' insurance supports sudden traffic surges that can disrupt hosting
customers' Web businesses."
2. "Internet Service Providers ArrowPoint enables ISPs to improve speed for
broadband users, prioritize delivery of important information to subscribers,
and realize significant savings on Internet bandwidth and cache servers."
Above these captions, and connected on the left by a red line to the cloud shape
captioned "Internet" is a web switch icon captioned "CS-100" and "Dallas Data
Center." This icon is also connected by a red line to an icon of a server to the
right.
Above the "CS-100" caption is an icon captioned "CS-800" and "London Data
Center" which is connected on the left by red and blue lines to the circle
entitled Web Network Architecture. This London data center is also connected to
both the lower right circle entitled portal.com customers and the Internet
cloud. This London Data Center is connected on the right to two icons of servers
captioned "Chat Room" and "Streaming Media Service."]
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of some important information about ArrowPoint
and this offering. It may not contain all of the information that is important
to you. You should read this summary together with the more detailed information
and our financial statements and the notes to those statements appearing
elsewhere in this prospectus.
ARROWPOINT
We provide intelligent Web switches that enable our customers to deploy a
global Web network architecture to optimize e-commerce transactions and the
delivery of Web content. Our products, which are specifically designed for the
Web, are intended to enhance the performance, scalability, availability,
reliability and security of our customers' Web sites. Using patented technology,
our switches intelligently route requests for Web content or transactions to the
network server that is best able to handle the request at that moment based on
information about:
- - the requesting party;
- - the content or transaction requested; and
- - the structure and changing conditions of the customer's Web network.
In recent years there has been dramatic growth in both the number of people
using the Internet and the amount of e-commerce taking place over the Web. To
attract and retain Internet users, companies are continually increasing the
amount and the sophistication of the information and services offered on their
Web sites. This has resulted in significantly more complex Web sites, typically
consisting of a variety of different types of servers connected by traditional
networking devices such as switches and routers. While the increasing importance
of the Internet to the businesses of many companies makes it critical for those
companies to effectively manage their Web site traffic and provide visitors with
a positive experience, the increasing complexity of their Web networks is making
it more difficult to do so. We believe many companies are seeking to develop a
Web network architecture that improves the ability to conduct e-commerce on
their Web sites, intelligently directs Web traffic and enables these companies
to offer new and enhanced Web services.
Our intelligent Web switches enable our customers to deploy a Web network
architecture that:
- - facilitates e-commerce transactions;
- - enables companies to give preferred or differing treatment to specific users
or specific types of content requests;
- - directs Web requests to the network server best able to handle those requests
based on information about the requesting party, the Web content or
transaction requested and the customer's Web network;
- - identifies hot content, such as a breaking news story, and automatically
triggers the copying of that content to dynamically add capacity to handle the
requests for that content;
- - intelligently redirects requests for content or applications unavailable due
to a Web site failure to another Web site or server which has the requested
information;
- - protects against attempts by computer hackers to disable servers or keep
servers busy performing useless tasks without significantly impairing
performance;
- - addresses a range of customer needs, from those of smaller Web sites to the
high-performance demands of large, complex Web hosting operations; and
- - tracks detailed statistics about the performance of the network, servers,
applications and content.
Our objective is to be the leading provider of intelligent Web switches
that enable the deployment of a global Web network architecture to optimize
e-commerce transactions and the delivery of Web content. To achieve this
3
<PAGE> 5
objective, we are pursuing the following strategies:
- - targeting leading Web hosting and application service providers and e-commerce
companies;
- - aggressively expanding our direct sales force and increasing the size and
productivity of our indirect sales channels;
- - maintaining our technological leadership;
- - pursuing strategic alliances with key customers, Web hosting and application
service providers; and
- - continuing to deliver superior service and support to our customers.
Our customers include Web hosting and application service providers,
e-commerce companies, Internet service providers and other enterprises deploying
applications on the Web. Our Web switches enable our customers to solve many
e-commerce problems and to offer new and enhanced Web services. As of December
31, 1999, over 100 companies have deployed our switches in their Web networks.
Our customers include EMC, Exodus Communications, Global Crossing, NaviSite and
Road Runner.
ArrowPoint Communications, Inc. was incorporated in Delaware in April 1997.
Our principal executive offices are located at 50 Nagog Park, Acton,
Massachusetts 01720. Our telephone number is (978) 206-3000. Our World Wide Web
site is located at www.arrowpoint.com. The information on our Web site should
not be considered part of this prospectus.
THE OFFERING
Shares offered by
ArrowPoint.................... 5,000,000 shares
Shares outstanding after the
offering.................... 34,218,364 shares
Proposed Nasdaq National
Market symbol................. "ARPT"
Use of proceeds............... For general corporate purposes, including
funding expansion of product development and
sales and marketing activities and working
capital. See "Use of Proceeds".
The number of shares of common stock to be outstanding after the offering
is based on the number of shares outstanding on February 29, 2000. This number
does not include 5,790,998 shares of common stock issuable upon the exercise of
stock options outstanding on February 29, 2000 with a weighted average exercise
price of $5.40 per share. This number also does not include an aggregate of
10,694,334 additional shares reserved for future issuance under ArrowPoint's
stock option and purchase plans as of February 29, 2000.
Except as otherwise specified in this prospectus, all information in this
prospectus:
- gives effect to the automatic conversion of all outstanding shares of our
preferred stock into 21,003,996 shares of our common stock, or two shares
of common stock for each outstanding share of preferred stock, which will
occur upon the closing of this offering;
- gives effect to the two-for-one split of our common stock in February
2000; and
- assumes that the underwriters do not exercise the over-allotment option
that we have granted to them to purchase additional shares in the
offering. See "Underwriting".
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read this summary information with the discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes to those statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED
(APRIL 14, 1997) TO DECEMBER 31,
DECEMBER 31, -------------------
1997 1998 1999
------------------- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ -- $201 $12,377
Cost of revenue..................................... -- 150 5,110
------- ------- --------
Gross profit........................................ -- 51 7,267
Total operating expenses............................ 2,996 9,900 20,390
------- ------- --------
Net loss............................................ (2,856) (9,447) (12,606)
Net loss per share:
Basic and diluted................................. $(11.36) $(6.26) $(3.99)
======= ======= ========
Pro forma basic and diluted....................... $(0.57)
========
Shares used in computing net loss per share:
Basic and diluted................................. 251 1,509 3,157
Pro forma basic and diluted....................... 22,277
</TABLE>
The following table presents a summary of our balance sheet as of December
31, 1999:
- on an actual basis,
- on a pro forma basis to reflect the sale in January 2000 of 657,263
shares of Series E preferred stock at $21.14 per share, a charge to
accumulated deficit of $6.6 million related to the fair value of the
beneficial conversion feature of the Series E preferred stock, and the
conversion of all outstanding shares of our preferred stock into
21,003,996 shares of our common stock, and
- on a pro forma basis as adjusted to reflect our sale of 5,000,000 shares
of common stock in this offering at an assumed initial public offering
price of $31.00 per share, after deducting the estimated underwriting
discount and offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $10,731 $24,586 $167,811
Working capital.......................................... 10,350 24,206 167,431
Total assets............................................. 23,206 37,061 180,286
Long-term liabilities.................................... -- -- --
Redeemable preferred stock............................... 34,534 -- --
Total stockholders' equity (deficit)..................... (19,858) 28,531 171,756
</TABLE>
5
<PAGE> 7
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information in this prospectus
before deciding to invest in shares of our common stock.
RISKS RELATING TO OUR BUSINESS AND
FINANCIAL PERFORMANCE
OUR LIMITED OPERATING HISTORY MAY MAKE IT DIFFICULT TO VALUE AND EVALUATE OUR
BUSINESS AND OUR FUTURE PROSPECTS
We commenced operations in April 1997 and commercially released our first
product in the fourth quarter of 1998. Your evaluation of the risks and
uncertainties of our business will be difficult because of our limited operating
history. 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 and market are unproven. You must
consider our business and prospects in light of the risks and difficulties
typically encountered by companies in their early stages of development,
particularly those in new and rapidly evolving markets such as the Internet
infrastructure industry.
WE HAVE INCURRED SUBSTANTIAL LOSSES TO DATE AND MAY NOT BE ABLE TO ACHIEVE OR
MAINTAIN PROFITABILITY, WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO DECLINE
Since we began operations, we have incurred losses in every fiscal period.
We incurred a net loss of $4.7 million in the fourth quarter of 1999 and our
accumulated deficit through December 31, 1999 was $25.0 million. We cannot be
certain if or when we will become profitable. Our failure to become profitable
within the timeframe expected by investors may adversely affect the market price
of our common stock. We expect to continue to increase our expenses in an effort
to develop our business and, as a result, we will need to generate significant
revenue to achieve profitability. Even if we do achieve profitability, we cannot
assure you that we can sustain or increase profitability on a quarterly or
annual basis in the future.
OUR OPERATING RESULTS ARE DIFFICULT TO FORECAST AND MAY FLUCTUATE FROM QUARTER
TO QUARTER, WHICH MAY HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON
STOCK
Our operating results are difficult to forecast and may fluctuate from
quarter to quarter. As a result of our limited operating history, we do not have
historical financial data for a significant number of periods upon which to
forecast quarterly financial performance. If our quarterly revenue or operating
results fall below the expectations of investors or securities analysts, the
price of our common stock could fall substantially.
Among the factors that could cause our quarterly operating results to
fluctuate are:
- - We depend on a relatively small number of customers for a large percentage of
our revenue in any particular quarter. As a result, a delay in a particular
quarter in receiving orders from one or a small number of customers may have a
significant negative impact on our operating results for that quarter.
- - Our sales cycle makes it difficult to predict accurately when we will complete
sales and when we will recognize revenue.
- - We have historically derived a significant portion of our revenue from sales
that occur near the end of a fiscal quarter. As a result, a delay in
anticipated sales is more likely to result in a deferral of the associated
revenue beyond the end of a particular quarter, which would have a significant
impact on our operating results for that quarter.
Most of our operating expenses do not vary directly with revenue and are
difficult to adjust in the short term. As a result, if revenue for a particular
quarter is below our expectations, we could not proportionately reduce operating
expenses for that quarter,
6
<PAGE> 8
and therefore this revenue shortfall would have a disproportionate effect on our
expected operating results for that quarter.
THERE IS INTENSE COMPETITION IN THE MARKET FOR INTERNET INFRASTRUCTURE SOLUTIONS
AND IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUE COULD DECLINE AND WE COULD
EXPERIENCE ADDITIONAL LOSSES
The market for Internet infrastructure solutions is new, rapidly evolving
and very competitive. We expect competition in this market to increase as a
result of factors such as:
- - the entrance of new competitors;
- - innovations that improve competitive products or that enable products or
services that are not currently competitive with our solutions to compete with
us;
- - acquisitions of competitive products or technologies, particularly by a large
company with an established market presence and distribution capabilities; and
- - strategic alliances, in which competitors succeed in bundling their products
with other software products, hardware products or services.
This competition could, among other things:
- - divert sales from us;
- - force us to charge lower prices; and
- - adversely affect our strategic relationships with manufacturers, resellers and
others.
If any of these risks occurred, our revenues could decline, our gross margins
could decrease, our expenses could increase and we could experience additional
losses.
Our principal competitors include large networking equipment companies such
as Cisco Systems, as well as companies such as Alteon WebSystems, F5 Networks
and Foundry Networks. Some of our competitors have longer operating histories,
greater name recognition and greater financial, technical, sales, marketing,
support and other resources than we do.
OUR COMPANY IS GROWING RAPIDLY AND WE MAY BE UNABLE TO MANAGE OUR GROWTH
EFFECTIVELY, WHICH COULD RESULT IN LOST SALES OR DISRUPTIONS TO OUR BUSINESS
Our failure to effectively manage our recent and anticipated growth could
have a material adverse effect on the quality of our products, our ability to
retain key personnel and financial performance. From January 1, 1999 to January
31, 2000, the number of our employees increased from 60 to over 200 and we
established a sales presence in over 10 U.S. cities and 14 countries. In
addition, the proceeds of this offering will be used in part to further expand
our operations and increase the number of our employees. This growth has
strained, and may further strain, our management, operational systems and other
resources. To manage our growth effectively, we must be able to enhance our
financial and accounting systems and controls, integrate new personnel and
manage expanded operations. There can be no assurance we will be able to do so.
WE PURCHASE SEVERAL OF OUR KEY COMPONENTS FROM SINGLE SOURCES, AND WE COULD LOSE
REVENUE AND MARKET SHARE IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF THOSE
COMPONENTS
Several key components of our products are currently available from single
vendors. If we are unable to obtain sufficient quantities of these components,
we would be unable to manufacture and ship our products on a timely basis. This
could result in lost or delayed revenue, damage to our reputation and increased
manufacturing costs.
Examples of the components which we purchase from single sources are:
- - critical network processors for both the CS-100 and the CS-800 from MMC
Networks;
- - the power supply device for the CS-100 from Cherokee International; and
- - the power supply device for the CS-800 from Tectrol.
We do not have guaranteed supply agreements with any of the vendors of
these
7
<PAGE> 9
products. Moreover, even if supply is available, our inability to accurately
forecast the demand for our products may result in an inadequate supply of these
components. Our products are designed based on the MMC network processor, and if
we are unable to obtain a sufficient supply of these network processors from
MMC, we would be forced to significantly modify the design of our products to
use different network processors. If we are unable to obtain a sufficient supply
of power supplies from our current vendors, we would be forced either to develop
alternative sources of supply or to modify the design of our products to use
more readily available components. Redesigning our products, particularly a
redesign involving new network processors, or identifying new sources of supply
may take a long time and may involve significant additional expenses. Moreover,
our vendors may increase their prices for these components. Accordingly, the
lack of alternative sources for these components may force us to pay higher
prices for these components, which would cause our gross margins to decrease and
could cause us to incur additional losses.
WE DEPEND UPON A SINGLE CONTRACT MANUFACTURER TO MANUFACTURE ALL OF OUR PRODUCTS
AND IF THAT MANUFACTURER IS UNABLE OR UNWILLING TO MANUFACTURE A SUFFICIENT
NUMBER OF OUR PRODUCTS, WE MAY NOT BE ABLE TO TIMELY FILL CUSTOMER ORDERS
We currently subcontract the manufacturing and testing of our products to
Plexus, an independent manufacturer. Our reliance on a single manufacturer
exposes us to a number of risks, including reduced control over manufacturing
capacity, product completion and delivery times, product quality and
manufacturing costs. If, as we anticipate, we experience increased demand for
our products, the challenges we face in managing our relationship with Plexus
will be increased. If Plexus is unable or unwilling to manufacture a sufficient
quantity of products for us, on the time schedules and with the quality that we
demand, we may be forced to engage additional or replacement manufacturers,
which could result in additional expenses and delays in product shipments.
IF WE ARE NOT ABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO SUCCEED,
WE WILL NOT BE ABLE TO GROW OUR BUSINESS AS WE ANTICIPATE
The growth of our business and revenue depends in large part upon our
ability to attract and retain sufficient numbers of highly skilled employees,
particularly qualified sales and engineering personnel. We plan to increase our
employee count from 148 at December 31, 1999 to between 350 and 400 by December
31, 2000. We may not be successful in hiring and retaining the skilled personnel
that we need. Qualified personnel are in great demand throughout the computer
networking industry.
IF INTERNET INFRASTRUCTURE SOLUTIONS DO NOT ACHIEVE WIDESPREAD COMMERCIAL
ACCEPTANCE, WE WILL NOT BE ABLE TO SELL OUR PRODUCTS AND OUR ABILITY TO INCREASE
REVENUE WOULD BE HARMED
Widespread commercial acceptance of our products is critical to our future
success. The market for Internet infrastructure solutions is relatively new and
rapidly evolving. Rather than utilizing Internet infrastructure solutions, many
Web data center administrators manage Internet traffic by adding servers and
interconnecting a variety of single-function traffic management tools. Our
ability to increase revenue in the future depends on the extent to which our
potential customers recognize the value of our solutions.
The acceptance of our products may be hindered by:
- - the failure of prospective customers to recognize the value of Internet
infrastructure solutions;
- - the reluctance of our prospective customers to replace or expand their current
networking solutions, which may be supplied by more established vendors, with
our products; and
- - the emergence of new technologies or industry standards that could cause our
products to be less competitive or obsolete.
In addition, because the market for Internet infrastructure solutions is in
an early
8
<PAGE> 10
stage of development, we cannot assess the size of the market accurately, and we
have limited insight into trends that may emerge and affect our business. For
example, we may have difficulty in predicting customer needs, developing
products that could address those needs and establishing a distribution strategy
for those products. We may also have difficulties in predicting the competitive
environment that will develop.
BECAUSE WORLDWIDE DEMAND FOR MEMORY CHIPS HAS INCREASED, ADEQUATE QUANTITIES OF
THIS KEY COMPONENT MAY NOT BE AVAILABLE TO SATISFY OUR NEEDS, WHICH COULD
INCREASE THE COST AND DELAY DELIVERY OF OUR PRODUCTS
During the last year, the demand for memory chips, a key component in our
products, has increased worldwide. Although we purchase our memory chips from
several suppliers, if these suppliers are unable to provide adequate quantities
of memory chips to satisfy our needs, product shipments may be delayed, we could
experience a loss of or delay in revenue and our competitive position would be
harmed. In addition, if, as a result of increased demand, our suppliers raise
the price of memory chips, the cost of manufacturing our products would increase
and the sales of our products could decrease.
IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS AND FEATURES ON A TIMELY BASIS OR IF
OUR NEW PRODUCTS ARE UNSUCCESSFUL, OUR SALES AND COMPETITIVE POSITION WILL
SUFFER
The market for Internet infrastructure solutions is characterized by
rapidly changing technologies, frequent new product introductions and evolving
customer requirements and industry standards. The rapid growth in the use of the
Web and intense competition in our industry exacerbate these market
characteristics. In order to remain competitive in our markets, we will need to
introduce on a timely basis new products that offer significantly improved
performance and features, at lower prices, and we may not be successful in doing
so. Some prior versions of our products were released behind schedule, and this
may happen again in the future. Delays in introducing new products and features,
or the introduction of new products which do not meet the evolving demands of
our customers, could damage our corporate reputation and cause a loss of or
delay in revenue. In addition, some of the benefits offered by our products are
based on their ability to route Web requests based on information about, among
other things, the person making the request. To the extent that privacy concerns
or technological developments limit the amount of information available about
the person making the Web request, the benefits of our products would be
diminished.
BECAUSE WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF
CUSTOMERS, ANY LOSS OF OR DELAY IN RECEIVING REVENUE FROM THOSE CUSTOMERS COULD
SIGNIFICANTLY DAMAGE OUR FINANCIAL PERFORMANCE
We have historically derived a significant portion of our revenue from a
relatively small number of customers. If any of these customers stop or delay
purchasing products or services from us, our financial performance would be
negatively impacted. NaviSite accounted for 14% of our revenue in 1999. None of
our reseller or end-user customers are contractually obligated to purchase
future products or services from us, and they may discontinue doing so at any
time. In addition, although our largest customers will probably vary from period
to period, we anticipate that a small number of customers will continue to
represent a large percentage of our revenue in any given fiscal period.
Accordingly, the failure to obtain a significant order from a customer within
the fiscal period expected by us could have a significant adverse effect on our
financial performance for that fiscal period.
OUR SUCCESS DEPENDS ON THE CONTINUED SERVICES OF OUR TOP EXECUTIVES AND OTHER
KEY PERSONNEL
Our future success depends to a significant degree on the skills and
efforts of Chin-Cheng Wu, our founder, Chairman of the Board and Chief Executive
Officer, and Louis J. Volpe, our President and Chief Operating Officer. The loss
of the services of Mr. Wu or Mr. Volpe could have a material adverse effect on
our financial performance and ability to compete. In addition, Mr. Wu
9
<PAGE> 11
and Mr. Volpe have been working together only since November 1999, and their
effectiveness in working together cannot be fully assessed at this time. We also
depend on the ability of our other executive officers and members of senior
management to work effectively as a team. The loss of one or more of our
executive officers or senior management members could also have a material
adverse effect on our financial performance and ability to compete.
OUR INTERNATIONAL BUSINESS EXPOSES US TO SPECIAL RISKS WE DO NOT FACE IN OUR
U.S. BUSINESS
In 1999, we derived 47% of our revenue from sales outside the U.S., and we
expect to derive a comparable percentage in 2000. Our significant international
business exposes us to a number of risks that we do not have to address in our
U.S. operations. These risks include:
- - longer accounts receivable collection cycles;
- - challenges and costs inherent in managing geographically dispersed operations;
- - protectionist laws and business practices that favor local competitors;
- - economic or political instability in some international markets;
- - difficulties in finding and managing local resellers;
- - diverse and changing governmental laws and regulations; and
- - foreign currency exchange rate fluctuations.
If we are unsuccessful in addressing these risks, our international business
will not achieve the revenue or profits we expect.
IF OUR PRODUCTS DO NOT COMPLY WITH INDUSTRY STANDARDS OR WORK EFFECTIVELY WITH
OUR CUSTOMERS' NETWORKS, WE MAY LOSE SALES AND INCUR ADDITIONAL EXPENSES
Our success depends in part on both the adoption of industry standards for
technologies in the Internet infrastructure solutions market and our products'
compliance with those industry standards. The absence of industry standards for
a particular technology may prevent widespread adoption of products based on
that technology. In addition, because many technological developments occur
prior to the adoption of related industry standards, we may develop products
that do not comply with industry standards that are eventually adopted, which
would hinder our ability to sell those products. Moreover, because of Cisco
Systems' leadership position in selling products that comprise the
infrastructure of the Internet, Cisco may have the ability to establish de facto
standards within the industry. Actions by Cisco, for competitive or other
reasons, that diminish our products' compliance with industry or de facto
standards or their ability to interoperate with other Internet-related products
would be damaging to our ability to generate revenue and our reputation.
Our products must work effectively with our customers' existing networks,
which typically include products from a variety of different vendors and utilize
multiple protocol standards. The complexity of these networks makes it difficult
for us to ensure that our products will function properly within these networks
and also makes it difficult for us to identify the source of any problems which
occur in the operation of our products. If our products fail to work properly
within our customers' networks, we may:
- - lose sales;
- - incur additional expenses in our efforts to identify and remedy the problems;
and
- - suffer damage to our corporate reputation.
FACTORS ADVERSELY AFFECTING THE USE OF THE INTERNET COULD REDUCE THE DEMAND FOR
OUR PRODUCTS
Our products are designed to enable our customers to provide faster and
more reliable connections to users accessing their Web sites. Any factors that
adversely affect Internet usage could result in less demand for
10
<PAGE> 12
our products. Among the factors that could disrupt Internet usage are:
- - security concerns;
- - user dissatisfaction due to network problems or service disruptions that
prevent users from accessing an Internet server; and
- - delays in, or disputes concerning, the development and adoption of
industry-wide Internet standards and protocols.
IF OUR PRODUCTS CONTAIN DEFECTS OR FAIL TO PERFORM PROPERLY, WE COULD LOSE
REVENUE AND INCUR DAMAGE TO OUR REPUTATION AND LIABILITY TO OUR CUSTOMERS
Our products may contain undetected errors, or bugs, which result in
product failures or poor product performance. Our products may be particularly
susceptible to bugs or performance degradation because of the emerging nature of
Web-based technologies and the stress that may be placed on our products by the
full deployment of our products on a customer's Web site. Product performance
problems could result in:
- - loss of or delay in revenue;
- - failure of our products to achieve market acceptance;
- - incurrence of significant expenses to remedy problems;
- - diversion of development resources;
- - liability claims by our customers; and
- - negative publicity and injury to our reputation.
RISKS RELATED TO LEGAL UNCERTAINTIES
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS
COULD HINDER OR BLOCK OUR ABILITY TO SELL OUR PRODUCTS, SUBJECT US TO
SIGNIFICANT MONETARY LIABILITY AND DIVERT THE TIME AND ATTENTION OF OUR
MANAGEMENT
If any of our products violate third party proprietary rights, we may be
required to reengineer our products or seek to obtain licenses from third
parties to continue offering our products without substantial reengineering. Any
efforts to reengineer our products or obtain licenses from third parties may not
be successful, in which case we may be forced to stop selling the infringing
product or remove the infringing functionality or feature. We may also become
subject to damage awards as a result of infringing the proprietary rights of
others, which could cause us to incur additional losses and have an adverse
impact on our financial position. We do not conduct comprehensive patent
searches to determine whether the technologies used in our products infringe
patents held by others. In addition, product development is inherently uncertain
in a rapidly evolving technological environment in which there may be numerous
patent applications pending, many of which are confidential when filed, with
regard to similar technologies.
OUR COMPETITIVE POSITION WOULD BE ADVERSELY AFFECTED IF WE WERE UNABLE TO
PROTECT OUR PROPRIETARY TECHNOLOGY
Our success and competitiveness are dependent to a significant degree on
the protection of our proprietary technology. We rely primarily on a combination
of patents, copyrights, trade secret laws and restrictions on disclosure to
protect our proprietary technology. Despite these precautions, others may be
able to copy or reverse engineer aspects of our products, to obtain and use
information that we regard as proprietary or to independently develop similar
technology. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright and trade secret protection may not be available in
those jurisdictions. Litigation may be necessary in the future to enforce or
defend our proprietary technology or to determine the validity and scope of the
proprietary rights of others. This litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of management and
technical resources.
11
<PAGE> 13
WE ARE INVOLVED IN LITIGATION WITH ARROW ELECTRONICS OVER OUR USE OF THE NAME
ARROWPOINT, AND AN ADVERSE OUTCOME IN THIS LITIGATION COULD CAUSE US TO CHANGE
OUR NAME, INCUR SIGNIFICANT COSTS AND DAMAGE OUR COMPETITIVE POSITION
We were sued by Arrow Electronics in July 1999 over our use of the
trademark ArrowPoint and the Internet domain name arrowpoint.com. Arrow
Electronics is seeking an injunction precluding us from using the name
ArrowPoint and requiring us to relinquish the domain name arrowpoint.com. This
lawsuit is still in the early stages of discovery, and we are not yet able to
assess our potential liability. If we fail to prevail in this litigation, we may
be forced to change our corporate name and our domain name, which could damage
our sales and marketing efforts and our competitive position. In addition,
regardless of its outcome, this litigation may force us to incur significant
expenses in defending the lawsuit and may divert the attention and efforts of
our management team from normal business operations.
OUR FAILURE TO COMPLY WITH DOMESTIC AND FOREIGN REGULATIONS COULD LIMIT OUR
ABILITY TO SELL OUR PRODUCTS
Our products must comply with a number of regulations and standards adopted
by the U.S. Federal Communications Commission and by Underwriters Laboratories.
Internationally, our products may be required to comply with regulations
established by telecommunications and other government authorities in each
country in which we sell our products. Moreover, the encryption technology
contained in our products is subject to U.S. export controls, which limit our
ability to distribute some versions of our products outside of the United States
and Canada. If we do not comply with the governmental regulations applicable to
our products, we may be prevented from selling our products in some
jurisdictions and we may incur fines or other penalties.
RISKS ASSOCIATED WITH THIS OFFERING OF OUR COMMON STOCK
THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MAY BE LOWER THAN THE PRICE
YOU PAY AND MAY BE EXTREMELY VOLATILE
The price of our common stock that will prevail in the market after this
offering may be lower than the price you pay. After this offering, an active
trading market in our stock might not develop or continue. If you purchase
shares of our common stock in this offering, you will pay a price that we
negotiated with the representatives of the underwriters, and not a price that
was established in a competitive market.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Web-related companies, have been extremely volatile, and
have experienced fluctuations that have often been unrelated or disproportionate
to operating performance. These broad market fluctuations could adversely affect
the market price of our common stock. Securities class action litigation is
often instituted against companies following significant drops in the market
price of their common stock. If litigation of this nature were instituted
against us, it could result in substantial costs, a diversion of our
management's attention and liability for damages.
THE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK WILL LIMIT YOUR
ABILITY TO INFLUENCE CORPORATE ACTIONS
Immediately following this offering, our executive officers, directors and
their affiliates will together own approximately 53.0% of our outstanding common
stock. As a result, those stockholders, if they act together, will be able to
determine the outcome of the vote on any matter requiring stockholder approval,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying,
preventing or deterring a change in control of ArrowPoint, could deprive our
stockholders of an opportunity to receive a premium for their common stock as
12
<PAGE> 14
part of a sale of ArrowPoint and might affect the market price of our common
stock.
SOME PROVISIONS OF OUR CHARTER AND BY-LAWS MAY DELAY OR PREVENT TRANSACTIONS
THAT MANY STOCKHOLDERS MAY FAVOR
Some provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger or acquisition that our stockholders may
consider favorable, including transactions in which stockholders might otherwise
receive a premium for their shares. These provisions include:
- - authorization of the issuance of "blank check" preferred stock without the
need for action by stockholders;
- - provision for a classified board of directors with staggered three-year terms;
- - elimination of the ability of stockholders to call special meetings of
stockholders or act by written consent; and
- - advance notice requirements for proposing matters that can be acted on by
stockholders at stockholder meetings.
Some provisions of Delaware law may also discourage, delay or prevent
someone from acquiring us or merging with us. See "Description of Capital
Stock -- Delaware Anti-Takeover Law and Certain Charter and By-Law Provisions"
for more detailed information on these provisions.
FUTURE SALES OF OUR COMMON STOCK BY EXISTING STOCKHOLDERS COULD DEPRESS THE
MARKET PRICE OF OUR COMMON STOCK
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their common stock for the first
time. Sales of a substantial number of shares of common stock in the public
market, or the threat that substantial sales might occur, could cause the market
price of the common stock to decrease significantly. These factors could also
make it difficult for us to raise additional capital by selling stock. See
"Shares Eligible for Future Sale" for further details regarding the number of
shares eligible for sale in the public market after this offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business", and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance, and are identified by terminology such as "may",
"will", "should", "expects", "scheduled", "plans", "intends", "anticipates",
"believes", "estimates", "potential", or "continue" or the negative of these
terms or other comparable terminology. These statements are only predictions and
involve known and unknown risks and uncertainties. Actual events or results may
differ materially from those indicated by such forward-looking statements. In
evaluating those statements, you should consider the inherent risks and
uncertainties involved, including the risks outlined under "Risk Factors".
Although we believe that the expectations reflected in those
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for the updating of any of those
forward-looking statements after the date of this prospectus.
This prospectus also contains several projections of market development by
industry analysts, such as projected growth in the use of the Web and projected
increases in e-commerce revenue. Those projections involve a number of
assumptions and limitations. We cannot assure you that those projections will be
attained.
13
<PAGE> 15
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the 5,000,000 shares of
common stock in this offering will be approximately $143.2 million at an assumed
initial public offering price of $31.00 per share, after deducting the estimated
underwriting discount and offering expenses. If the underwriters' over-allotment
option is exercised in full, we estimate our net proceeds will be approximately
$164.8 million.
The principal purposes of this offering are to create a public market for
our common stock, increase our visibility in the market place, provide liquidity
to existing stockholders and obtain additional working capital. We intend to use
the net proceeds of this offering for general corporate purposes, including the
funding of our operations, the expansion of our sales and marketing and product
development activities and for working capital. We may also use a portion of the
net proceeds to acquire or invest in complementary businesses or products, or to
obtain the right to use complementary technologies. We have no specific
understandings, commitments or agreements relating to an acquisition or
investment. We believe that a portion of the net proceeds from this offering
will be necessary to fund our operations in fiscal 2000. However, we have not
specifically allocated the anticipated proceeds of this offering to any of the
uses described above and we have no specific plans or projections for the net
proceeds. Our uses of the net proceeds will vary significantly depending upon a
number of factors, including the amount of revenue we generate, the success and
timing of our hiring efforts and other initiatives we may undertake in response
to competitive and market conditions. Accordingly, our management will retain
broad discretion concerning the use of the net proceeds. A public market for our
common stock will facilitate future access to public equity markets and enhance
our ability to use our common stock as a means of attracting and retaining key
employees and as consideration for acquisitions.
Pending these uses, we will invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends in the foreseeable future. Covenants in
our credit facility prohibit the payment of cash dividends so long as there are
loans or letters of credit outstanding and until the termination of commitments
and the payment of all of our obligations under the credit facility. We
currently intend to retain future earnings, if any, to fund the expansion and
growth of our business.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- - on an actual basis;
- - on a pro forma basis to reflect the sale in January 2000 of 657,263 shares of
Series E preferred stock at $21.14 per share, a charge to accumulated deficit
of $6.6 million related to the fair value of the beneficial conversion feature
of the Series E preferred stock, and the conversion of all outstanding shares
of our preferred stock into 21,003,996 shares of our common stock; and
- - on a pro forma basis, as adjusted to reflect our sale of 5,000,000 shares of
common stock in this offering at an assumed initial public offering price of
$31.00 per share, after deducting the estimated underwriting discount and
offering expenses.
The outstanding share information does not include 3,805,070 shares of
common stock issuable upon the exercise of stock options outstanding on December
31, 1999 with a weighted average exercise price of $1.92 per share.
You should read this information in conjunction with our financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------ --------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Redeemable convertible preferred stock, $.01 par
value; 12,500,000 shares authorized, 9,844,735
issued and outstanding, actual; none issued or
outstanding, pro forma or pro forma as adjusted..... $ 34,534 $ -- $ --
Stockholders' equity (deficit):
Common stock, $.001 par value; 25,000,000 shares
authorized, 8,351,330 shares issued, actual;
200,000,000 shares authorized, 29,355,326 shares
issued, pro forma; 200,000,000 shares authorized,
34,355,326 shares issued, pro forma as
adjusted......................................... 8 29 34
Additional paid-in capital............................ 20,483 75,424 218,644
Treasury stock........................................ (36) (36) (36)
Deferred compensation................................. (15,300) (15,300) (15,300)
Accumulated deficit................................... (25,013) (31,586) (31,586)
-------- -------- --------
Total stockholders' equity (deficit)............. (19,858) 28,531 171,756
-------- -------- --------
Total capitalization........................ $ 14,676 $ 28,531 $171,756
======== ======== ========
</TABLE>
15
<PAGE> 17
DILUTION
Our pro forma net tangible book value at December 31, 1999 was $28.5
million, or $0.98 per share of common stock. Pro forma net tangible book value
per share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of our common stock outstanding after giving
effect to the sale in January 2000 of 657,263 shares of Series E preferred stock
at $21.14 per share and the conversion of all outstanding shares of our
preferred stock into an aggregate of 21,003,996 shares of common stock. After
giving effect to our sale of 5,000,000 shares of common stock in this offering
at an assumed initial public offering price of $31.00 per share, and after
deducting the estimated underwriting discount and offering expenses, our pro
forma net tangible book value as of December 31, 1999 would have been $171.8
million, or $5.03 per share. This represents an immediate increase in pro forma
net tangible book value of $4.05 per share to existing stockholders and an
immediate dilution of $25.97 per share to investors purchasing common stock in
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $31.00
Pro forma net tangible book value per share at December
31, 1999............................................... $0.98
Increase per share attributable to new investors.......... 4.05
-----
Pro forma net tangible book value per share after this
offering.................................................. 5.03
------
Dilution per share to new investors......................... $25.97
======
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option,
our pro forma net tangible book value as of December 31, 1999 would have been
approximately $193.4 million, or $5.54 per share, representing an immediate
increase in pro forma net tangible book value of $4.56 per share to existing
stockholders and an immediate dilution of $25.46 per share to new investors.
The following table summarizes, as of December 31, 1999, the total number
of shares of common stock purchased, the consideration paid to us and the
average price per share paid by existing stockholders and by new investors
purchasing common stock in this offering at an assumed initial public offering
price of $31.00 per share, before deducting the estimated underwriting discount
and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 29,130,992 85.4% $ 51,240,621 24.8% $ 1.76
New investors................ 5,000,000 14.6 155,000,000 75.2 31.00
---------- ----- ------------ -----
Totals.................. 34,130,992 100.0% $206,240,621 100.0%
========== ===== ============ =====
</TABLE>
The tables above assume no exercise of stock options outstanding on
December 31, 1999. As of December 31, 1999, there were 3,805,070 shares of
common stock issuable upon the exercise of outstanding stock options with a
weighted average exercise price of $1.92 per share. To the extent that these
options are exercised, there will be further dilution to new investors. The
outstanding share information includes 1,314,526 shares of common stock issuable
upon the conversion of 657,263 shares of Series E preferred stock that were
issued in January 2000 at a price of $21.14 per share of Series E preferred
stock, or $10.57 per share of underlying common stock.
16
<PAGE> 18
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", appearing elsewhere in this prospectus. The statement of operations
data for the period from inception (April 14, 1997) to December 31, 1997 and for
the years ended December 31, 1998 and 1999 and the balance sheet data as of
December 31, 1997, 1998 and 1999 are derived from our audited financial
statements. The historical results of operations are not necessarily indicative
of the operating results to be expected in the future.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
INCEPTION DECEMBER 31,
(APRIL 14, 1997) TO -------------------
DECEMBER 31, 1997 1998 1999
------------------- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $ -- $ 201 $ 12,377
Cost of revenue.................................... -- 150 5,110
------- ------- --------
Gross profit.................................. -- 51 7,267
Operating expenses:
Sales and marketing.............................. 137 3,074 9,919
Research and development......................... 2,494 5,902 6,438
General and administrative....................... 365 924 1,690
Stock-based compensation......................... -- -- 2,343
------- ------- --------
Total operating expenses...................... $ 2,996 $ 9,900 $ 20,390
Operating loss..................................... (2,996) (9,849) (13,123)
Interest income, net............................... 140 402 517
------- ------- --------
Net loss........................................... $(2,856) $(9,447) $(12,606)
======= ======= ========
Net loss per share:
Basic and diluted................................ $(11.36) $ (6.26) $ (3.99)
======= ======= ========
Pro forma basic and diluted...................... $ (0.57)
========
Shares used in computing net loss per share:
Basic and diluted................................ 251 1,509 3,157
Pro forma basic and diluted...................... 22,277
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,682 $ 4,339 $ 10,731
Working capital........................................... 2,220 4,810 10,350
Total assets.............................................. 3,438 7,663 23,206
Long-term liabilities..................................... -- 470 --
Redeemable preferred stock................................ 5,750 18,189 34,534
Total stockholders' deficit............................... (2,847) (12,162) (19,858)
</TABLE>
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
OVERVIEW
From our inception on April 14, 1997 through September 1998, we were a
development stage enterprise and had no product revenue. Our operating
activities during this period related primarily to developing our initial
product, recruiting personnel, building our corporate infrastructure and raising
capital.
In October 1998, we released our CS-100 Web switch and in January 1999 we
released the CS-800, our high-performance switching chassis. We derive our
revenue from both the sale of these two products and the sale of technical
support contracts. Our customers consist of end users, distributors, resellers
and original equipment manufacturers, known as OEMs.
We recognize revenue from product sales to end users, resellers and OEMs
upon product shipment, provided that there are no uncertainties regarding
acceptance, there is persuasive evidence of an arrangement, the sales price is
fixed or determinable and collection of the related receivable is probable. If
uncertainties exist, we recognize revenue when those uncertainties are resolved.
Our distributors have limited rights of return and therefore we recognize
revenue on product sales to distributors when the rights of return lapse,
provided that the other criteria listed above are met. If uncertainties exist,
we recognize revenue when those uncertainties are resolved.
In arrangements that contain products and services, we allocate revenue to
each product or service based on its respective fair value. We recognize service
revenue as the services are performed or ratably over the terms of the service
contracts. Amounts collected or billed prior to satisfying the above revenue
recognition criteria are reflected as deferred revenue. See Note 1 of the notes
to our financial statements for a more detailed description of our revenue
recognition policy.
Revenue derived from customers located outside of the United States was 16%
of our revenue in 1998 and 47% of our revenue in 1999. We expanded our
international activities significantly in 1999 in Europe, Latin America and the
Asia/Pacific market, and plan to continue to do so in 2000.
We have incurred significant net losses since our inception and we had an
accumulated deficit of $25.0 million as of December 31, 1999. We have not
achieved profitability on a quarterly or annual basis, and we cannot be certain
if or when we will become profitable. We expect to increase our sales and
marketing, research and development and general and administrative expenses and,
as a result, we will need to generate significant revenue to achieve
profitability. Although we have achieved rapid growth in revenue in recent
periods, we may not be able to sustain these growth rates in the future.
We recorded deferred compensation of approximately $17.6 million in 1999.
We expect to record additional deferred compensation of approximately $8.8
million in the quarter ending March 31, 2000. These amounts represent the
difference between the exercise or purchase price of stock options granted or
stock sold to our employees and the deemed fair value of our stock at the time
of grant or sale. We are amortizing these amounts over the vesting period of the
options and stock awards, which is generally five years. We recorded
compensation expense of $2.3 million for the year ended December 31, 1999. We
also expect to record compensation expense relating to these stock awards of
approximately $11.1 million in 2000, $6.3 million in 2001, $3.8 million in 2002,
$2.1 million in 2003, $704,000 in 2004 and $6,000 in 2005. It is possible that
the amount of our total deferred compensation,
18
<PAGE> 20
and therefore the amount of expense we incur each year, may increase as a result
of factors such as the grant of additional stock awards with a purchase price
below the deemed fair market value of our common stock.
We also expect to record a charge to accumulated deficit of approximately
$6.6 million in the quarter ending March 31, 2000. This amount represents the
fair value of the beneficial conversion feature of the Series E convertible
preferred stock. This amount will be accounted for like a dividend to preferred
stockholders and, as a result, will increase the Company's net loss available to
common stockholders and the related net loss per share.
In light of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. This is particularly true of companies
such as ours that operate in new and rapidly evolving markets.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUE
We derive revenue from the sale of our CS-100 and CS-800 products and
related technical support contracts. We first shipped our CS-100 product in the
fourth quarter of 1998. Revenue increased by $12.2 million from $201,000 in 1998
to $12.4 million in 1999. This increase was due to growth in sales of the CS-100
since its commercial introduction in the fourth quarter of 1998 and the CS-800
since its commercial introduction in the first quarter of 1999 as well as
further development of our sales channels. Approximately 92.0% of the increase
in revenue was attributable to revenue from new customers. Substantially all of
the revenue increase was comprised of product revenue, as service revenue
represented only approximately 1.0% of total revenue in 1999. Sales of the
CS-100 represented 42.0% of revenue and sales of the CS-800 represented 57.0% of
revenue in 1999.
COST OF REVENUE
Cost of revenue consists of material, assembly, test and overhead costs
incurred to produce our products. Cost of revenue increased by $5.0 million from
$150,000 in 1998 to $5.1 million in 1999 as a result of the increased volume of
sales. Gross margin increased from 25% to 59% due to higher production volumes
that resulted in cost efficiencies for both material and overhead costs.
SALES AND MARKETING
Sales and marketing expenses consist primarily of compensation, travel,
advertising, public relations, trade show and marketing literature expenses. Our
sales and marketing expenses increased from $3.1 million in 1998 to $9.9 million
in 1999. This increase was due primarily to investing in our sales and marketing
infrastructure, both domestically and internationally. These investments
included an increase in our sales, marketing and customer support personnel from
18 at December 31, 1998 to 73 at December 31, 1999 resulting in an increase in
compensation expenses of $4.2 million, an increase in travel expenses of
$839,000, and an increase in other sales and marketing activities resulting in
increased expenses of $1.8 million. Sales and marketing expenses were 80% of
revenue in 1999. We expect sales and marketing expenses to increase on an
absolute dollar basis in future periods.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of compensation,
depreciation and prototyping material expenses. Our research and development
expenses increased from $5.9 million in 1998 to $6.4 million in 1999. This
increase was due primarily to an increase in our software engineers and other
technical staff from 30 at December 31, 1998 to 50 at December 31, 1999
resulting in an increase in compensation expenses of $1.4 million and an
increase in depreciation expense of $303,000, partially
19
<PAGE> 21
offset by a reduction in spending for prototype materials of $1.1 million from
1998 to 1999. Research and development expenses were 52% of revenue in 1999. We
believe continued investment in research and development is essential to
attaining our strategic objectives, and as a result, we expect research and
development expenses to increase on an absolute dollar basis in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
general and administrative personnel, depreciation and professional fees. Our
general and administrative expenses increased from $924,000 in 1998 to $1.7
million in 1999. This increase was due primarily to an increase in general and
administrative personnel from 6 at December 31, 1998 to 16 at December 31, 1999
resulting in increased compensation expenses of $325,000, increased depreciation
expense of $143,000 and increased professional and other expenses of $298,000.
General and administrative costs were 14% of revenue in 1999. We expect general
and administrative expenses to increase on an absolute dollar basis in future
periods.
INTEREST INCOME, NET
Net interest income was $517,000 in 1999 compared to net interest income of
$402,000 in 1998. This increase was due primarily to increased cash and cash
equivalents balances as a result of our Series D preferred stock financing in
February 1999.
PERIOD FROM INCEPTION (APRIL 14, 1997) TO DECEMBER 31, 1997 AND THE YEAR ENDED
DECEMBER 31, 1998
REVENUE
We derived $201,000 of revenue in 1998 from the initial sales of our CS-100
product in the fourth quarter of 1998. We recorded no revenue for the period
from inception (April 14, 1997) to December 31, 1997.
COST OF REVENUE
We recorded no cost of revenue for the period from inception to December
31, 1997. Cost of revenue was $150,000 in 1998 reflecting costs of the initial
sales of our CS-100 product. Gross margin of 25% reflects the start-up costs of
manufacturing and lower production levels during this period.
SALES AND MARKETING
Our sales and marketing expenses increased from $137,000 for the period
from inception to December 31, 1997, to $3.1 million in 1998. This increase was
due primarily to investing in our sales and marketing infrastructure. These
investments included an increase in our sales, marketing and customer support
personnel with an increase in compensation and recruiting expenses of $1.4
million, an increase in travel expenses of $284,000, and increased other sales
and marketing activities, including advertising, trade shows and other
promotional expenses, resulting in increased expenses of $1.2 million.
RESEARCH AND DEVELOPMENT
Our research and development expenses increased from $2.5 million for the
period from inception to December 31, 1997, to $5.9 million in 1998. This
increase was due primarily to an increase in our personnel resulting in an
increase in compensation expenses of $1.4 million, an increase in prototyping
materials expenses of $1.0 million and an increase in other related expenses of
$1.0 million.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses increased from $366,000 for the
period of inception to December 31, 1997 to $924,000 in 1998. This increase was
due primarily to an increase in general and administrative personnel resulting
in an increase in compensation expenses of $331,000 and an increase in
professional and other expenses of $227,000.
INTEREST INCOME, NET
Net interest income was $140,000 in the period from inception to December
31, 1997 compared to net interest income of $402,000 in 1998. This increase was
due primarily to increased cash and cash equivalents received from the sale of
our Series B preferred stock in February 1998.
20
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations
for the eight quarters ended December 31, 1999 in dollars. You should read the
following table in conjunction with our financial statements and related notes
in this prospectus. We have prepared this unaudited information on the same
basis as our audited financial statements. These results include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our operating results for the quarters
presented. You should not draw any conclusions about our future results from the
results of operations for any quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue..................... $ -- $ -- $ -- $ 201 $ 737 $ 1,929 $ 3,686 $ 6,025
Cost of revenue............. -- -- -- 150 501 839 1,365 2,405
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................ -- -- -- 51 236 1,090 2,321 3,620
Operating expenses:
Sales and marketing....... 255 842 919 1,058 1,298 1,837 2,536 4,248
Research and
development............. 1,276 1,526 1,398 1,702 1,342 1,452 1,682 1,962
General and
administrative.......... 157 247 258 262 350 305 405 630
Stock-based
compensation............ -- -- -- -- 104 292 328 1,619
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 1,688 2,615 2,575 3,022 3,094 3,886 4,951 8,459
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations........ (1,688) (2,615) (2,575) (2,971) (2,858) (2,796) (2,630) (4,839)
Interest income, net........ 102 131 100 69 100 167 147 103
------- ------- ------- ------- ------- ------- ------- -------
Net loss.................... $(1,586) $(2,484) $(2,475) $(2,902) $(2,758) $(2,629) $(2,483) $(4,736)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our quarterly operating results have fluctuated significantly and we expect
that future operating results will be subject to similar fluctuations for a
variety of factors, many of which are substantially outside our control. See
"Risk Factors -- Our operating results are difficult to forecast and may
fluctuate from quarter to quarter, which may have a negative impact on the
market price of our common stock".
LIQUIDITY AND CAPITAL RESOURCES
From our inception through December 1999, we financed our operations and
capital expenditures primarily through the sale of approximately $34.5 million
in equity securities and borrowings of $1.1 million. In January 2000, we sold
approximately $13.9 million of preferred stock.
We have a $2 million equipment line of credit and a $5 million accounts
receivable line of credit with Fleet National Bank with interest rates of
approximately 9% as of December 31, 1999. At December 31, 1999, there was $1.1
million outstanding under the equipment line of credit and no borrowings under
the accounts receivable line of credit. We are required to comply with financial
and restrictive covenants related to, among other things, minimum liquidity,
maximum leverage, profitability and net worth. As of December 31, 1999, we were
out of compliance with one of these covenants. The bank waived our
non-compliance with this covenant for the year ended December 31, 1999. The
waiver does not apply to periods after December 31, 1999. We are currently
renegotiating the financial covenants under these lines of credit. Accordingly,
amounts outstanding under the lines of credit have been classified as short-
term.
Cash used in our operating activities was $2.4 million for 1997, $10.0
million for 1998 and $9.4 million for 1999. These net cash outflows resulted
primarily from operating losses because:
- in 1997 our operating expenses of $3.0 million exceeded our revenue of
zero;
21
<PAGE> 23
- in 1998 our operating expenses of $9.9 million exceeded our revenue of
$200,000; and
- in 1999 our operating expenses of $20.4 million, which included
incremental spending increases of $6.8 million on sales and marketing,
$535,000 on research and development and $766,000 on general and
administrative, exceeded our revenue of $12.4 million.
The net cash outflow in 1999 also resulted from accounts receivable and
inventory increasing by $4.7 million and $1.4 million, respectively, from 1998
to 1999. Accounts receivable at December 31, 1999 were approximately 79.0% of
revenue for the quarter ended December 31, 1999 due primarily to the large
portion of sales occurring during the second half of the quarter and the level
of international sales, which generally have longer standard payment terms than
domestic sales. The increases in accounts receivable and inventory were
partially offset by increases in accounts payable of $2.7 million, accrued
liabilities of $1.3 million and deferred revenue of $2.5 million, from 1998 to
1999.
Cash used in investing activities was $608,000 for 1997, $1.5 million for
1998 and $3.6 million for 1999, substantially all of which was used for the
purchase of property and equipment, primarily computers and test equipment for
our development and manufacturing activities and leasehold improvements. We
expect capital expenditures to continue to increase through the year 2000, due
to the costs of expansion and expenditures for computers and test equipment.
As of December 31, 1999, we had obligations outstanding under various
operating leases. In August 1999 we agreed to lease approximately 45,000 square
feet in a facility located in Acton, Massachusetts for a term of five years. The
annual cost of this lease is approximately $817,000, subject to annual
adjustments. Although we have no other material commitments, we anticipate a
substantial increase in our lease commitments consistent with anticipated growth
in our operations, infrastructure and personnel. In the future we may also
require a larger inventory of products in order to provide better availability
to customers and achieve purchasing efficiencies. We expect that the net
proceeds from this offering, our existing cash balances and amounts available
under our credit facilities will be sufficient to meet our currently anticipated
working capital and capital expenditure needs for at least the next 18 months.
NET OPERATING LOSSES AND
TAX CREDIT CARRYFORWARDS
As of December 31, 1999, we had approximately $20.6 million of net
operating loss carryforwards and $1.1 million of tax credit carryforwards
available to offset future taxable income. These carryforwards expire at various
dates through 2019, to the extent that they are not utilized. Utilization of
these carryforwards may be subject to annual limitations due to ownership change
provisions. A 100% valuation allowance has been recorded against the related
deferred tax assets due to uncertainties surrounding the realization of these
assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 of Financial Accounting Standards, "Accounting for Derivative Instruments
and Hedging Activities". This statement requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is, the type of hedge transaction. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133".
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. We do not currently use derivative instruments.
Therefore we do not expect the adoption of this statement to have any
significant effect on our results of operations or financial position.
22
<PAGE> 24
MARKET RISK
We do not currently use derivative financial instruments. We generally
place our marketable security investments in high credit quality instruments,
primarily U.S. Government obligations with contractual maturities of less than
one year. We do not expect to have any material loss from our marketable
security investments and therefore believe that our potential interest rate
exposure is not material.
YEAR 2000 COMPLIANCE
BACKGROUND OF YEAR 2000 ISSUES
Many currently installed computer and communications systems and software
products are unable to distinguish 21st century dates from 20th century dates.
This situation could result in system failures or miscalculations causing
business disruptions. As a result, many companies' software and computer and
communications systems may need to be upgraded or replaced to become Year 2000
compliant.
OUR PRODUCT TESTING AND LICENSING
We have tested all of our current products for Year 2000 compliance. We
derived our testing method from our review and analysis of the Year 2000 testing
practices of other software vendors, relevant industry Year 2000 compliance
standards and the specific functionality and operating environments of our
products. The tests were run on all supported platforms for each current release
of our product and included testing for date calculations and internal storage
of date information with test numbers starting in 1999 and going beyond the Year
2000. Based on these tests, we believe our products to be Year 2000 compliant
with respect to date calculations and internal storage of date information. To
date, we have not encountered any material Year 2000 problems with our products.
CUSTOMER CLAIMS
We may be subject to customer claims to the extent our products fail to
operate properly as a result of the Year 2000 problem. Liability may result to
the extent our products are not able to store, display, calculate, compute and
otherwise process date-related data. We could also be subject to claims based on
the failure of our products to work with software or hardware from other
vendors. To date, we have not received any customer claims alleging that our
products are not Year 2000 compliant in any material respect.
OUR EXTERNAL VENDORS
We have verified Year 2000 compliance by some of the external vendors that
supply us with material software and information systems and communicated with
our significant suppliers to determine their Year 2000 readiness. As part of our
assessment, we have evaluated the level of validation we require of third
parties to ensure their Year 2000 readiness. To date, we have not encountered
any material Year 2000 problems with software and information systems provided
to us by third parties.
OUR INTERNAL SYSTEMS
We have reviewed our internal management information and other systems to
identify any products, services or systems that may not be Year 2000 compliant
and to take corrective action when required. To date, we have not encountered
any material Year 2000 problems with our computer systems or any other equipment
that might be subject to such problems.
COSTS OF ADDRESSING YEAR 2000 COMPLIANCE
To date, we have incurred aggregate expenses of approximately $50,000 in
connection with our Year 2000 remediation program. We do not believe that we
will be required to expend any additional material amounts in the future in
connection with addressing Year 2000 non-compliance issues. However, any Year
2000 compliance problems experienced by us or our customers could require us to
incur expenses to correct problems with our products and could decrease demand
for our products which could seriously harm our business and results of
operations.
23
<PAGE> 25
BUSINESS
OVERVIEW
We provide intelligent Web switches that enable our customers to deploy a
global Web network architecture to optimize e-commerce transactions and the
delivery of Web content. Our products, which are specifically designed for the
Web, are intended to enhance the performance, scalability, availability,
reliability and security of our customers' Web sites. Using patented technology,
our switches intelligently route requests for Web content or transactions to the
network server that is best able to handle the request at that moment based on
information about:
- - the requesting party;
- - the content or transaction requested; and
- - the structure and changing conditions of the customer's Web network.
Our customers include Web hosting and application service providers,
e-commerce companies, Internet service providers and other enterprises deploying
applications on the Web. Our Web switches enable our customers to solve many
e-commerce problems and to offer new and enhanced Web services. As of December
31, 1999, over 100 companies have deployed our switches in their Web networks.
Our customers include EMC, Exodus Communications, Global Crossing, NaviSite and
Road Runner.
INDUSTRY BACKGROUND
EVOLUTION OF THE WEB AND E-COMMERCE
The emergence of the Web has enabled the delivery of information and rich
media content and the sale of products and services to a worldwide audience.
According to International Data Corporation, or IDC, an information technology
industry analyst, the number of e-commerce users with access to the Web will
grow from an estimated 142 million at the end of 1998 to 502 million by the end
of 2003. To attract and retain these users, companies are continually increasing
the amount and the sophistication of the information and services offered on
their Web sites. Most leading Web sites offer one or more of the following:
- - personalized information, such as individual stock portfolios or custom home
pages;
- - rich media content, such as audio and video; and
- - e-commerce transactions, such as electronic ordering, order status and bill
payment.
Accompanying the growth of the Web has been a dramatic increase in the
amount of e-commerce taking place over the Web. According to a report by IDC,
e-commerce revenue is expected to increase from $50 billion in 1998 to over $1.3
trillion in 2003. To be successful, companies conducting e-commerce must
effectively manage their Web site traffic and provide visitors with a positive
experience.
In response to the rapid growth in the number and complexity of Web sites
and e-commerce and the significance of the Internet to the business strategies
of many companies, a Web hosting industry has developed. According to IDC, the
Web hosting market will expand from $823 million during 1998 to $18.9 billion by
2003. Web hosting companies manage a company's Web servers at data centers with
high-speed Internet connectivity and provide the hosted company with the
benefits of high-bandwidth access to its Web site without having to build its
own network. Web hosting companies are increasingly offering services in
addition to Web connectivity, including content development, Web site
management, disaster recovery and various service guarantees. In addition, many
Web hosting companies are either providing on-line software applications
directly to their customers or providing Web hosting services to other
application service providers, which in turn provide on-line software
applications to other companies. The increasing complexity and scalability
requirements of business-critical Web sites and the emergence of Web hosting
companies are creating new opportunities to provide infrastructure products and
24
<PAGE> 26
services for complex Web networks and applications.
TODAY'S WEB SITE INFRASTRUCTURE
Web sites today typically consist of multiple types of servers, providing
the following functions:
- - Web servers provide the primary interface for visitors to the Web site;
- - application servers provide a platform for application-specific processing
such as personalized services or on-line shopping;
- - secure servers are used for encrypted operations such as credit card
processing or viewing account information;
- - database servers provide centralized information repositories; and
- - cache servers store copies of frequently accessed files to improve response to
requests for those files.
These servers are connected by traditional networking devices such as switches
and routers. As Web traffic volume increases, the performance of any individual
server can degrade. By copying applications and data to multiple servers of the
same type, a company can provide increased capacity and performance for its Web
site as a whole. Load balancing devices, typically PC-based servers, are then
used to distribute the traffic among these multiple servers.
Traditional load balancing devices operate by intercepting data packets
addressed to a Web site and translating the destination address of the packets
to the address of the server. If a particular server is unavailable, the load
balancing device stops using its address as a destination and routes the packet
to another server. Due to the limited performance of PC platforms, these load
balancing devices can themselves become overloaded, reducing the performance and
response time of the Web site. In addition, because these devices base their
decisions on packet address information, they cannot determine the identity of
the user or what content the user is trying to access. This is because the
information that uniquely identifies users and content is located much deeper
inside the packets. Although manufacturers of traditional switching equipment
have attempted to address some of the performance issues of PC-based load
balancing products by introducing load-balancing capabilities to their switches,
these switches were not designed for this task and typically suffer from serious
performance limitations of their own. In addition, like PC-based load balancers,
these devices are "content blind" -- that is, they are unaware of the user's
identity or the specific content being requested.
These existing solutions do not adequately address the problems confronting
complex Web sites today because they are unable to do all of the following:
- - provide e-commerce transaction integrity by ensuring server continuity to
avoid problems such as lost electronic shopping carts;
- - provide special treatment to certain content requests based upon information
such as the identity of the requester or the type of content requested;
- - maximize the efficiency of Web servers, application servers, databases, caches
and firewalls by routing requests to the best server to handle that type of
request;
- - detect and handle flash crowds -- that is, a sudden surge of requests for a
piece of Web content such as a breaking news story -- by identifying hot
content and creating additional ways to access this hot content;
- - route traffic around failed servers, applications or content;
- - block denial-of-service attacks by computer hackers, which are attempts to
disable servers or keep the servers busy performing useless tasks so that
other users of the site are denied service;
- - improve the scalability, performance and reliability of high-end Web sites;
and
- - provide systems administrators with data about content and application
performance.
The rapid growth in the use of the Web and in e-commerce, coupled with the
increase in Web site complexity, has put tremendous pressure on companies to
develop new Web
25
<PAGE> 27
network architectures that can efficiently and effectively address the problems
described above.
ARROWPOINT SOLUTION
Our intelligent Web switches are used by companies such as Web hosting and
application service providers, e-commerce companies and Internet service
providers to deploy a Web network architecture that optimizes e-commerce
transactions and the delivery of Web content. Using our technology, our
customers can significantly improve the experience of visitors to their Web
sites. Our customers typically deploy our Web switches in their Web networks in
a configuration similar to the following:
ArrowPoint Solutions graphic
The graphic is titled "ArrowPoint Solutions." Beneath this title is a cloud
shaped area labeled "Internet." A line leads from the cloud shape to the icon of
a router below, labeled "Router." Beneath the router and connected to it by a
line is a web switch icon labeled "ArrowPoint Web Switch." Four lines lead from
beneath the web switch icon to four icons of web servers which are collectively
labeled "Web Servers."
Our intelligent Web switches enable our customers to deploy a Web network
architecture that offers the following benefits:
E-COMMERCE TRANSACTION ASSURANCE
E-commerce transactions depend on the ability of the server and the
application to maintain information about the purchaser's transaction until the
transaction is completed. For example, a purchaser may initiate several requests
while browsing through a Web site and adding items to an electronic shopping
cart. The items in the shopping cart must be maintained on the server until
checkout. To accomplish this, it is critical to ensure that a purchaser's
requests are always directed to the same server until the transaction is
complete. Our intelligent Web switches, unlike traditional switches, are able to
use information located deep within the purchaser's Web request to continually
direct the purchaser to the correct server, preventing problems such as lost
electronic shopping carts.
SPECIALIZED TREATMENT BASED ON CONTENT, APPLICATION OR USER
Our Web switches can direct traffic to specific servers or groups of
servers based on a range of different information about the requesting party or
the Web content or transaction requested. This feature enables companies to give
preferred or differing treatment to specific users, such as preferred customers.
In addition, this feature enables companies to distinguish among Web requests
based on the nature of the request, such as giving requests for
revenue-generating transactions priority over requests for information.
OPTIMIZED CONTENT DELIVERY
Poor Web site performance can disrupt Web transactions and cause user
dissatisfaction, resulting in lost revenue for e-commerce companies and other
businesses dependent on their Web sites. Using information about the requesting
party, the Web content or transaction requested and the customer's Web network,
our intelligent Web switches can direct requests for Web content or transactions
to the network server -- which may be part of a globally dispersed network --
best able to handle that request at that moment. This enables our customers to
pro-
26
<PAGE> 28
vide dynamic Web content from Web servers, static content from caches, and
streaming audio and video from optimized streaming servers. These capabilities
optimize Web performance and content delivery and enhance the experience of
visitors to the Web site.
FLASH CROWD INSURANCE
The popularity of a particular piece of Web content changes from moment to
moment. At a news service Web site, for example, a breaking news story can cause
a sudden surge of requests for that story that overwhelms the site's Web
servers. It is often difficult to predict which content will be popular and to
provide additional servers in anticipation of flash crowds. Our Web switches can
identify hot content and automatically trigger the copying of that content to
servers or caches to dynamically add capacity to handle flash crowds. This
enables our customers to cost-efficiently maximize the number of Web requests
they can satisfy.
IMPROVED AVAILABILITY OF APPLICATIONS AND CONTENT
Even when a Web site is available, a particular server or application at
that site may still fail. Our Web switches can recognize this and intelligently
redirect requests for unavailable content or applications to another Web site or
server which has the requested information.
ENHANCED SITE SECURITY
While firewalls can effectively perform many security functions for a
customer's network, they are less well-suited to the protection of Web sites, as
most companies want to encourage rather than restrict access to their Web sites.
Firewalls generally do not provide effective protection against denial-of-
service attacks -- which are attempts by computer hackers to disable servers or
keep servers busy performing useless tasks -- without significantly impairing
the performance of the Web site. Our switches are able to differentiate between
legitimate Web requests and denial-of-service attacks. In addition, our switches
can be used to improve the performance of traditional firewalls through load
balancing.
SUPERIOR SCALABILITY, PERFORMANCE AND RELIABILITY
Our Web switches are designed to address the needs of our customers, which
range from smaller Web sites to large, complex Web hosting operations. In
addition, our different product offerings and flexible software architecture
enable customers to easily deploy additional ArrowPoint switches as their Web
networks expand, without having to replace their existing ArrowPoint switches.
Our switches were designed for the strict reliability standards of
telecommunications networks, and an individual CS-800 Web switch can handle
approximately three billion Web requests in a 24-hour period. In addition, our
products include features and components to enhance the reliability of our
customers' Web sites and the availability of their content.
PERFORMANCE MONITORING AND CAPACITY PLANNING
Our products track detailed statistics about the performance of our
customers' networks, servers, applications and content, which can be used to
operate their Web sites more efficiently and plan more effectively for growth.
This information can be accessed from any standard network management system.
ARROWPOINT STRATEGY
Our objective is to be the leading provider of intelligent Web switches
that enable the deployment of a global Web network architecture to optimize
e-commerce transactions and the delivery of Web content. To achieve this
objective, we are pursuing the following strategies:
TARGET LEADING WEB HOSTING AND APPLICATION SERVICE PROVIDERS AND E-COMMERCE
COMPANIES
We will continue to focus on providing our Web products and services
directly to leading Web hosting and application service providers and e-commerce
companies, as well as to Web hosting and application service providers for
integration into their product and service offerings. We believe that our
solutions are particularly well-suited for com-
27
<PAGE> 29
panies in these rapidly expanding target markets and position us well for future
penetration of these markets. Focusing on these selected industries has also
allowed us to develop considerable expertise that we can apply to improve our
product and service offerings for companies in these industries.
AGGRESSIVELY EXPAND DIRECT AND INDIRECT SALES CHANNELS
We will continue to aggressively expand our sales channels on a world-wide
basis by seeking to significantly expand our direct sales force and to increase
the productivity and size of our reseller network. Since the beginning of the
third quarter of 1999, we have established a sales presence in ten locations in
the United States and locations in Argentina, Australia, Belgium, Brazil,
France, Hong Kong, Japan, Mexico, South Korea and the United Arab Emirates. We
plan to continue to increase the size of our existing sales teams as well as
establish sales teams in new locations around the world. In addition, we are
continuing to develop strategies designed to increase the productivity of our
direct sales force and reseller network, including bolstering our marketing
efforts and sales training and providing additional consulting services to our
end-users and reseller network.
MAINTAIN TECHNOLOGICAL LEADERSHIP
We believe we offer the most advanced Web switching solution for optimizing
e-commerce transactions and Web content delivery. By working closely with our
customers, we are able to quickly define and assess our customers' changing
business needs and utilize that information in our product development efforts.
We plan to continue to devote substantial resources to improving the performance
and features of our products and to ensure that our products continue to support
emerging technologies and industry standards. We also plan to introduce new
products and software releases with additional features to address different
market segments. We believe that these product development efforts will allow us
to continue to offer advanced product performance to our customers at a range of
price points.
DEVELOP STRATEGIC ALLIANCES
We will continue to pursue strategic alliances, including product
development relationships, with key customers, Web hosting and application
service providers and other companies that offer complementary products or
technologies. We plan to pursue this strategy both by leveraging our existing
marketing and other relationships with vendors and by continuing to develop new
relationships. We believe that these strategic alliances will enable us to
enhance both the attractiveness of our product offerings and our marketing reach
and penetration by providing us with access to many of our strategic partners'
development resources and marketing channels.
DELIVER SUPERIOR SERVICE AND SUPPORT
As our intelligent Web switches are an integral part of our customers' Web
businesses, we will continue to seek to increase customer satisfaction and
strengthen customer loyalty through our quality service offerings. We believe
that delivering superior customer service and support is essential to winning
business. We offer comprehensive customer service and support, including
consulting and training, software upgrades and around-the-clock on-line support
and telephone support. We intend to continue improving our customer support
services and devoting significant resources to providing installation, training,
support and consulting services to our customers to help them fully utilize the
benefits of our solution.
PRODUCTS AND TECHNOLOGY
We believe we offer the most advanced Web switching solution for optimizing
e-commerce transactions and the delivery of Web content. The principal
components of our technology consist of:
- - a patented technique for intelligently routing Web requests, which we call
content switching;
- - a powerful and scalable software operating system; and
- - a high-performance switching architecture that enables us to rapidly benefit
from new
28
<PAGE> 30
and better-performing commercially available microprocessors.
CONTENT SWITCHING TECHNOLOGY
We have developed a patented technique for routing a Web content request to
the server within a network of distributed servers that is best able to handle
that request. We call this technique content switching. Our switches
intelligently route requests based on an analysis of user and content
identification information found in the request and information about the
performance and availability of eligible servers.
Unlike traditional switching technology, which makes routing and policy
decisions based on Internet protocol, or IP, addresses, our content switching
also makes use of detailed information available only through the Hypertext
Transfer Protocol, or HTTP, the data transfer protocol of the World Wide Web. In
particular, our switches use the following information found through HTTP as
part of the content switching process:
- - Uniform Resource Locator, or URL -- This information uniquely identifies the
specific file requested from the server or the specific operation to be
performed.
- - Host header -- This information uniquely identifies the requested host.
- - Cookie -- "Cookies" have a variety of uses, but are generally used by Web
applications to maintain information about users. A cookie is a small file of
information about a user's transaction that a Web server places on a user's
computer; the user returns the cookie in subsequent Web requests to the same
site, which our switches can use to direct the user to the correct server.
This allows the site to maintain information about a user's transactions that
spans multiple HTTP requests.
The policies our Web switches can apply based on this information are very
flexible, allowing our customers to customize their Web sites and to optimize
them for peak performance.
SOFTWARE
We have invested significant resources in the development of our software,
which runs on both our CS-100 and our CS-800 switches. Our software enables many
of the important customer benefits offered by our Web switches. Because so much
of our technology is embedded in our software platform, we can easily add
functionality and features to our products through software upgrades, which
enables our customers to benefit from our technological developments without
having to replace their existing ArrowPoint switches.
Among the many technologies and features contained in our operating system
software are the following:
- - Our Web switches facilitate e-commerce transactions by maintaining information
across multiple HTTP requests to a Web site. This is done by "sticking" the
user to the same server until the transaction is complete. This "stickyness"
can be accomplished by matching on the IP address, URL, cookie or the secure
socket layer session ID.
- - Our Web switches allow customers to deploy distributed networks of servers
and/or caches, leveraging those servers as a shared resource that can be used
to accelerate the delivery of content around the world.
- - Our Web switches can be configured to restrict access to a Web site based on
IP address, URL, host header or cookie. In addition, our operating system
filters out common denial-of-service attacks and notifies Web site operators
about security violations so they can take corrective action.
- - Our customers can configure our switches to load balance among local servers
using a number of industry-standard algorithms, as well as an advanced
algorithm developed by us. These load balancing algorithms can be invoked
based on IP address, Internet domain name, URL or any combination of these
identifications. This allows our customers to adopt extremely flexible
policies, which they can use to
29
<PAGE> 31
partition content by type, directory or individual file name.
- - Our software enables our switches to intelligently route content requests to
the optimal site and server for that request based on what content is being
requested, who is requesting it and where the requestor is located. Our global
load balancing methods take into account information the switches have learned
about content location, availability and proximity to the requesting user. Our
switches use a proprietary protocol to maintain and communicate information
about a variety of relevant data, including the performance of not only the
local servers attached to them but all other servers and switches in the
network. This enables distributed calculation of best site and server
information.
- - Our switches can automatically replicate content when it is added or changed
on a server or, alternatively, when the access frequency for a particular
piece of content exceeds a user-defined threshold.
CONTENT SWITCHING ARCHITECTURE
We have developed a distributed processing architecture for content
switching that leverages multiple specialized processors in a way that optimizes
the system for specific tasks. Arriving Web content requests are analyzed by an
array of general-purpose microprocessors, which then determine where to send the
content request based on what content is being requested and who is requesting
it. Once a request is analyzed and the best server is selected, the content is
delivered by special-purpose network processors, which are optimized for packet
forwarding. This content switching architecture allows us to offer products that
combine a high degree of content intelligence with high-performance and
cost-effectiveness. In addition, our architecture is highly scalable, enabling
us to add new features for higher performance without modifying the underlying
architecture.
PRODUCTS
We offer two Web switches today: the CS-100 and the CS-800.
The CS-100 is designed for smaller Web sites with 16 or fewer servers. It
is comprised of 12 or 16 100-megabit Ethernet interfaces interconnected by a
five gigabit per second switching fabric. The CS-100 is priced from $17,000 to
$25,000 depending on configuration and software options.
The CS-800 is a high-performance switching chassis designed for large Web
sites and Web hosting operations. Each CS-800 can support up to 64 100-megabit
Ethernet interfaces or 32 gigabit Ethernet interfaces interconnected by a 20
gigabit per second switching fabric. It features redundant power supplies,
switching fabrics and control logic. All systems modules, power supplies and
fans are field replaceable. The CS-800 was designed for the high performance,
reliability, availability and redundancy requirements of service providers and
telecommunications companies. The CS-800 is priced from $35,000 to $220,000
depending on configuration and software options.
Both Web switches support our full range of content switching capabilities.
Both of our Web switches are based on our content switching architecture and
combine the necessary performance and intelligence to enable efficient, reliable
and secure delivery of Web content. Customers can install our products without
having to modify the hardware, software or content of their Web site.
SERVICES AND SUPPORT
We believe that quality technical support is a critical factor in a
customer's decision to purchase a Web switching solution. Accordingly, we devote
significant resources to ensure that we deliver high-quality support to our
customers.
Our technical support includes:
- - telephone support, which is available either 24 hours a day, seven days a
week, or during business hours, depending upon the support option chosen by
our customers;
- - online support, including answers to frequently asked questions, technical
tips and manuals;
- - software upgrades; and
- - hardware repair.
30
<PAGE> 32
We generally charge our customers an annual technical support fee ranging
from 12% to 18% of the purchase price for the products being supported. We
believe that our technical support work with our customers not only helps ensure
a customer's success with our products, but also allows our personnel to gain
industry-specific knowledge that can be leveraged in future customer accounts
and utilized in our product development efforts.
We also offer installation, training and consulting services to assist
customers in optimizing the benefits of our products. We assist with the
implementation of our products and provide training on their functionality and
features. In addition, we offer network design, configuration and optimization
advice and services to our customers.
SALES AND MARKETING
We sell our products through a direct sales force, distributors, a network
of resellers, including application service providers, and OEMs. We believe that
a direct sales force is critical for addressing our largest customers and
potential customers, helping to create demand in the marketplace and generating
an understanding of customer needs for use in product development efforts. We
use our indirect channel to address accounts with which those resellers have
strategic relationships, smaller accounts and geographic areas that are more
efficiently addressed indirectly than directly.
We are making a significant investment in our direct sales force. We expect
direct sales to account for a majority of our revenue in 2000. Our direct sales
force is comprised of a series of sales teams, consisting of a sales executive
and a systems engineer. We have sales personnel in a number of major
metropolitan areas, including Atlanta, Boston, Chicago, Dallas, Denver, Houston,
Los Angeles, Minneapolis, New York, Philadelphia, San Jose, Seattle and
Washington, D.C. Our international sales personnel are located in Argentina,
Australia, Belgium, Brazil, Canada, France, Germany, Hong Kong, Israel, Japan,
Mexico, the Netherlands, Singapore, South Korea, the United Arab Emirates and
the United Kingdom. Our systems engineers support our sales efforts by working
with potential customers to help them analyze the structure and needs of their
particular network and how best to configure and implement our Web switching
solutions into their network.
We also sell our products through the following indirect channels:
- - distributors, such as ACAL Nederland, NetOne Systems and Westcon;
- - traditional resellers, such as Case Technology, Cube Computer, Sumitronics and
Telemation Netzwerke;
- - Web hosting and application service providers, such as Exodus Communications,
GlobalCenter and NaviSite; and
- - OEMs, such as Alcatel.
Our marketing organization utilizes a variety of programs to build brand
awareness, convey our value proposition and technology leadership position and
create demand for our products. Our marketing programs include:
- - seminars and trade shows;
- - market research and analysis;
- - product and strategy updates with industry analysts;
- - public relations activities and speaking engagements;
- - media advertisements;
- - direct mail programs;
- - brochures, data sheets and white papers;
- - Web site marketing; and
- - telemarketing programs.
CUSTOMERS
Our customers include Web hosting and application service providers,
Internet service providers, e-commerce companies, Web portals and other
enterprises deploying applications on the Web. In 1999, the following end users
purchased at least $100,000 of our
31
<PAGE> 33
products and services from us or through one of our resellers or OEMs:
<TABLE>
<S> <C>
Adonis Lyonais de Cable
Asnet Matav
Avantel NaviSite
EMC Nettaxi.com
Exodus Road Runner
Communications Siemens
GlobalCenter Spinway.com
Green Information Telefonica
and Communication Interactiva
Iaxis T-Online
Infosel Unitel
Liberte Surf World Online
</TABLE>
NaviSite accounted for 14% of our revenue in 1999. Sales to customers
outside of the United States accounted for approximately 47% of our revenue in
1999.
The following are examples of how customers in different Web markets have
implemented our products and services.
NAVISITE. NaviSite is an application service provider and Web hosting
provider for large e-commerce and content delivery companies. NaviSite was
looking for a strategic advantage in the high-end Web hosting and application
services market. Our intelligent Web switches have enabled NaviSite to offer
fee-based services to customers, including e-transaction assurance, site
security, and dynamic load balancing. NaviSite has deployed CS-100 and CS-800
Web switches to deliver these services faster and more reliably than it was
previously able. For example, NaviSite has used our Web switches to provide
real-time streaming video content, including the broadcast of New England
Patriot football games, for ThingWorld.com. The stability and support of our Web
switches helped NaviSite create a scalable and reliable Web infrastructure that
meets the demands of next-generation e-commerce and Web site services.
TOYSMART.COM. Toysmart.com is an on-line provider of toys, children's
products, learning tools and resources for parents, caregivers and educators.
Like many e-commerce sites, toysmart.com confronts the significant e-commerce
problem of managing a deluge of holiday shoppers to its site. In 1999,
toysmart.com installed two ArrowPoint intelligent CS-800 Web switches to manage
its site traffic so that holiday shoppers would experience smooth browsing and
strong connections during their on-line shopping. Toysmart.com used our Web
switches to perform load balancing, service selection and user selection. Our
Web switches allowed toysmart.com to examine their customers' cookies and to
make decisions based on content. Depending on the results, the CS-800 would
decide which caching or SSL server was most appropriate for a particular
customer. Toysmart.com reported that our Web switches allowed toysmart.com to
double the performance and capacity of its Web site without adding servers or
other hardware.
ROAD RUNNER. Road Runner is a high-speed, on-line service provider. Road
Runner has subscribers for its cable broadband online service in many locations
throughout the United States. It is a joint venture among Time Warner, MediaOne
Group, Microsoft, Compaq, and Advance/Newhouse. Road Runner installed our CS-100
Web switches at 21 data centers nationwide to deliver broadband Web content to
hundreds of thousands of users simultaneously. Our Web switches work in
combination with caches to enable Road Runner to deliver faster and more
efficient service to its customers. Our Web switches have helped boost the
performance of the Road Runner network and have reduced the need for Road Runner
to purchase additional bandwidth. According to Road Runner, it chose ArrowPoint
because we offered the only solution for directing Web traffic based on the
content requested. With the assistance of our Web switching technology, Road
Runner can offer its subscribers fast, reliable and advanced broadband online
experiences.
NETTAXI.COM. Nettaxi.com is a developer of commerce-enabled and content
rich Web communities that allow its members to build their own distinctive
"homes" on the Internet. These personalized "homes" may include news,
entertainment, sports, financial and travel information as well as e-mail,
personal home pages and chat rooms. Like many large-scale, on-line communities
and portals, Nettaxi.com faced the problem of managing
32
<PAGE> 34
high traffic volumes and content load balancing. Nettaxi.com deployed our
intelligent CS-100 Web switches to better manage its large on-line community of
home pages, e-mail, domain hosting and e-commerce Web sites. Nettaxi.com
reported that our Web switches significantly improved the performance and
reliability of its Web site. Nettaxi.com uses our Web switches in place of a
traditional load balancing solution. Our Web switches read URL addresses,
allowing Nettaxi.com to separate requests for content, e-commerce services and
on-line community content by type across the three server farms. Segmenting its
content enables Nettaxi.com to scale its site intelligently, adding servers only
where needed, as well as to deliver larger volumes of content to users faster
and more reliably than was possible with traditional solutions. Intelligently
managing its Web traffic flows with our Web switches has helped keep
Nettaxi.com's growing community of users returning to the site.
EXODUS COMMUNICATIONS. Exodus Communications is a provider of complex
Internet hosting services. Exodus desired to improve the overall performance and
speed of its ReadyCache content distribution service. The ReadyCache service
improves response times over the Internet by storing frequently accessed Web
content closer to the user. In addition, Exodus was looking for a URL-based load
balancing product that would bring more intelligence and scalability to its
service offerings. Exodus also required a Web switching solution that was
compatible with its encryption technology. During 1999, Exodus installed 18 of
our CS-100 Web switches in its data centers. The ability of our CS-100 Web
switches to perform intelligent cache bypass and provide Exodus with effective
load balancing capabilities enhanced the performance and scalability of the
ReadyCache content distribution service.
MANUFACTURING
While we design our products and develop our software in-house, we
subcontract the manufacturing of our products to Plexus, an independent
manufacturer. Plexus assembles our products, tests them, stores and delivers
them, and provides some field service to our customers. Our reliance on a single
manufacturer exposes us to a number of risks, as described under "Risk
Factors -- Because we depend upon a single contract manufacturer to manufacture
all of our products, we are exposed to significant risks over which we have
little control".
In addition to managing our relationship with Plexus, our internal
manufacturing group is responsible for the following functions which support the
manufacturing activities of Plexus:
- - vendor selection and management;
- - purchasing;
- - materials management and forecasting; and
- - quality assurance.
Several key components of our products are currently available from only
single vendors. The key components of our products that we purchase from single
sources are:
- - critical network processors for both the CS-100 and the CS-800 from MMC
Networks;
- - the power supply device for the CS-100 from Cherokee International; and
- - the power supply device for the CS-800 from Tectrol.
For a discussion of the risks associated with this, see "Risk Factors -- We
purchase several of our key components from single sources, and we could lose
revenue and market share if we are unable to obtain a sufficient supply of those
components".
COMPETITION
We compete primarily on the basis of:
- - the features and functionality of our products, including their ability to
analyze the content of Web requests;
- - the scalability of our solutions;
- - the ease of installing, configuring and managing our products;
- - the services we offer in support of our products; and
33
<PAGE> 35
- - the ratio of performance to price for our products.
We believe that we currently compete effectively against our competitors
with respect to each of the competitive factors listed above. However, we cannot
assure you that we will be able to maintain our competitive position in the
future.
The market for Internet infrastructure solutions is new, rapidly evolving
and very competitive. We expect competition in this market will increase in the
future. Our principal competitors include large networking equipment companies
such as Cisco Systems, as well as companies such as Alteon WebSystems, F5
Networks and Foundry Networks. Some of our competitors have longer operating
histories, greater name recognition and greater financial, technical, sales,
marketing, support and other resources than we do.
PROPRIETARY RIGHTS
Our success and competitiveness depend significantly on the protection of
our proprietary technology. We rely primarily on a combination of patents,
copyrights, trade secret laws and restrictions on disclosure to protect our
proprietary technology. In December 1999 we were awarded a U.S. patent covering
a variety of claims relating to our content switching technology, including a
method for analyzing content to select the most appropriate server to handle a
particular request by a user. This patent expires in August 2017. Despite these
protections, others may be able to copy or reverse engineer aspects of our
products, to obtain and use information that we regard as proprietary or to
independently develop similar technology. In addition, our patent has been
issued only in the United States and the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States.
Litigation may be necessary in the future to enforce or defend our
proprietary technology or to determine the validity and scope of the proprietary
rights of others. This litigation, whether successful or unsuccessful, could
result in substantial costs and diversion of management and technical resources.
We attempt to avoid infringing intellectual property and proprietary rights
of third parties in our product development efforts. However, we do not conduct
patent searches to determine whether the technology used in our products
infringes patents held by third parties. In addition, product development is
inherently uncertain in a rapidly evolving technological environment in which
there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. If our products
violate third-party proprietary rights, we could be liable for substantial
damages. In addition, we may be required to reengineer our products or seek to
obtain licenses to continue offering those products, and there can be no
assurance that those efforts would be successful.
We incorporate into our products some technology developed by third
parties, including the operating system for our Web switches and some routing
technology. We have purchased licenses to these technologies, which generally
have an indefinite term or renew automatically, and in some cases have obtained
rights to the source code for the licensed software. We believe that alternative
sources for these technologies are available.
We have received trademark registrations in several foreign jurisdictions
for the mark "ArrowPoint", and we have applications pending in the U.S. and
several foreign jurisdictions for the trademarks "Content Smart", "Content Smart
Switching", "Flowminder" and "Flowwall Security".
EMPLOYEES
As of December 31, 1999, we had 148 employees, including 73 in sales,
marketing and support, 50 in product development, nine in manufacturing and 16
in finance and administration. None of our employees is subject to a collective
bargaining agreement. We believe that our relations with our employees are good.
FACILITIES
Our headquarters are located in approximately 45,000 square feet of space
in an
34
<PAGE> 36
office building in Acton, Massachusetts, under a lease that expires in November
2004. We also lease sales offices in 12 locations around the world. We believe
that our existing facilities are adequate to meet our current needs and that
suitable additional or substitute space will be available on commercially
reasonable terms when needed.
LEGAL PROCEEDINGS
We were named a defendant in a civil suit filed in the United States
District Court for the Southern District of New York by Arrow Electronics, Inc.
on July 19, 1999. In the lawsuit, Arrow Electronics asserts trademark
infringement and associated state law claims. In particular, Arrow Electronics
alleges that customers are likely to be confused between Arrow Electronics and
ArrowPoint, and by use of the Internet domain name arrowpoint.com. Arrow
Electronics is seeking an injunction precluding us from using the name and mark
ArrowPoint and requiring us to relinquish registration of the domain name
arrowpoint.com. We have filed an answer denying all material allegations
asserted in the complaint. The case is presently in the early stages of
discovery. We intend to vigorously defend this lawsuit, including our right to
use the ArrowPoint trademark and the arrowpoint.com domain name.
We are not currently a party to any other legal proceedings.
35
<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists our executive officers and directors and their
ages as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Chin-Cheng Wu........................ 49 Chairman of the Board and Chief Executive Officer
Louis J. Volpe....................... 50 President, Chief Operating Officer and Director
Cynthia M. Deysher................... 41 Vice President, Operations, Chief Financial Officer
and Treasurer
Christopher P. Lynch................. 36 Vice President, Worldwide Sales and Support
Peter M. Piscia...................... 39 Vice President, Engineering
Edward T. Anderson(1)(2)............. 50 Director
James A. Dolce, Jr.(1)............... 37 Director
Paul J. Ferri(1)(2).................. 61 Director
</TABLE>
- ---------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
CHIN-CHENG WU founded ArrowPoint, has served as our Chief Executive Officer
since our inception in April 1997 and has served as Chairman of the Board since
November 1999. Mr. Wu also served as President from our inception until November
1999. From March 1996 to March 1997, Mr. Wu was the Vice President of Remote
Access Engineering at Cascade Communications, a networking company. Mr. Wu
co-founded Arris Communications, a networking company, and served as Vice
President of Engineering from June 1995 to March 1996. From January 1991 to June
1995, Mr. Wu was Vice President of Engineering at Xyplex Inc., a computer
networking company.
LOUIS J. VOLPE joined us as President, Chief Operating Officer and a
director in November 1999. Mr. Volpe was Senior Vice President, Worldwide Sales
and Marketing and a director of GeoTel Communications, a provider of software
solutions for call center applications, from May 1996 to June 1999. From
February 1995 to April 1996, Mr. Volpe served as GeoTel's Vice President of
Marketing.
CYNTHIA M. DEYSHER joined us as Vice President of Operations and Chief
Financial Officer in December 1997. From January 1994 to March 1997, Ms. Deysher
served as Senior Vice President, Finance and Administration and as Chief
Financial Officer at Shiva Corporation, a designer and manufacturer of hardware
and software products.
CHRISTOPHER P. LYNCH joined us as Vice President, Worldwide Sales and
Support in February 1998. From December 1997 to February 1998, Mr. Lynch served
as Vice President, North American Sales of Lucent Technologies, a communications
systems company. Mr. Lynch served as Vice President, North American Sales of
Prominet Corporation from May 1997 until Prominet's acquisition by Lucent in
January 1998. From October 1992 to May 1997, Mr. Lynch was a sales executive at
Bay Networks, Inc., an Internetworking solutions company, and its predecessor
company, Wellfleet Communications.
PETER M. PISCIA joined us as Director of Engineering in August 1997 and was
promoted to Vice President, Engineering in November 1998. From May 1996 to June
1997, Mr. Piscia served as Director of Engineering Operations at Cascade
Communications. From June 1995 to May 1996, Mr. Piscia was Director of
Engineering Operations at Xyplex, Inc.
EDWARD T. ANDERSON has served as a director since April 1997. Mr. Anderson
has been General Partner of North Bridge Venture Management Company, a venture
capital firm, since March 1994.
36
<PAGE> 38
JAMES A. DOLCE, JR. has served as a director since January 2000. Mr. Dolce
has served as Vice President and General Manager of Unisphere Solutions, Inc., a
computer networking company and a division of Siemens, since April 1999. Mr.
Dolce founded Redstone Communications in September 1997 and served as its Chief
Executive Officer and President until April 1999. From May 1996 to July 1997,
Mr. Dolce was Vice President and General Manager of Cascade Communications'
Remote Access Business Unit. Mr. Dolce co-founded Arris Networks and served as
its Vice President, Sales and Marketing from October 1995 until Arris Networks'
acquisition by Cascade in May 1996.
PAUL J. FERRI has served as a director since April 1997. Mr. Ferri has been
General Partner of Matrix Partners, a venture capital firm, since 1982. Mr.
Ferri also serves as a director of Sycamore Networks, Inc., Ezenia!, Inc. and
Applix, Inc.
The terms of office of the members of our board of directors are divided
into three classes. Messrs. Wu and Anderson serve as Class I Directors (whose
terms expire in 2001), Messrs. Volpe and Ferri serve as Class II Directors
(whose terms expire in 2002) and Mr. Dolce serves as a Class III Director (whose
term expires in 2003). At each annual meeting of stockholders, the successors to
directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election.
Additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the total number of directors. The
classification of our board of directors may have the effect of delaying or
preventing changes in control or management of ArrowPoint. See "Description of
Capital Stock -- Charter Documents".
Each executive officer is appointed by, and serves at the discretion of,
our board of directors. There are no family relationships among any of our
directors or officers.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our compensation committee consists of Mr. Anderson and Mr. Ferri. It
establishes the salaries and incentive compensation of our executive officers
and administers our stock option plans.
Our audit committee consists of Mr. Anderson, Mr. Dolce and Mr. Ferri. It
reviews the results and scope of audits and other services provided by our
independent public accountants and reviews our system of internal accounting and
financial controls. Our audit committee also reviews such other matters with
respect to our accounting, auditing and financial reporting practices and
procedures as it may find appropriate or may be brought to its attention.
DIRECTOR COMPENSATION
Non-employee directors are reimbursed for their reasonable out-of-pocket
expenses incurred in attending meetings of our board of directors. No director
receives compensation for services rendered as a director. Non-employee
directors will be eligible for participation in our 2000 Non-Employee Director
Stock Option Plan. See "Management -- Stock Plans".
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table presents information concerning
compensation paid or accrued for the year ended December 31, 1999 for each of
our executive officers during that year.
37
<PAGE> 39
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------
AWARDS
-------------------------
ANNUAL COMPENSATION RESTRICTED STOCK
------------------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER AWARDS(1) OPTIONS
- --------------------------- -------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Chin-Cheng Wu................. $160,000 $64,000 -- -- 340,000
Chairman of the Board and
Chief Executive Officer
Louis J. Volpe................ 14,564 9,333 -- $31,625,000 --
President and Chief
Operating Officer(2)
Cynthia M. Deysher............ 135,000 32,400 -- -- 60,000
Vice President, Operations
and Chief Financial Officer
Christopher P. Lynch.......... 120,000 -- $144,134(3) -- 90,000
Vice President, Worldwide
Sales and Support
Peter M. Piscia............... 130,000 31,110 -- -- 80,000
Vice President, Engineering
</TABLE>
- ---------------
(1) Amounts shown represent the value of the restricted stock award, based on
the midpoint of the estimated public offering price range less the purchase
price paid. The number of shares of restricted stock beneficially held by
each of the executive officers as of December 31, 1999 and their value as of
December 31, 1999, based on the midpoint of the estimated public offering
price range, were as follows: Mr. Wu: 2,000,000 shares, $61,999,000; Mr.
Volpe: 1,100,000 shares, $31,625,000; Ms. Deysher: 300,000 shares,
$9,292,500; Mr. Lynch: 400,000 shares, $12,300,000; and Mr. Piscia: 140,000
shares, $4,339,300. The holders of those shares of restricted stock will be
entitled to receive any dividends paid by ArrowPoint on its common stock.
(2) Mr. Volpe joined ArrowPoint in November 1999 and thus received compensation
for only part of the fiscal year.
(3) Consists of sales commissions.
38
<PAGE> 40
OPTION GRANTS
The following table presents information concerning grants of stock options
to each of our executive officers during the year ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED
NUMBER OF ANNUAL RATES OF
SHARES PERCENT OF TOTAL EXERCISE STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED OR BASE FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES PRICE EXPIRATION --------------------------
NAME GRANTED IN FISCAL YEAR PER SHARE(1) DATE 5% 10%
- ---- ---------- ---------------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Chin-Cheng Wu........... 140,000 4.7% $1.25 6/10/09 $6,894,403 $11,081,842
200,000 6.7 3.50 11/19/09 9,399,147
15,381,203
Louis J. Volpe.......... -- -- -- -- -- --
Cynthia M. Deysher...... 60,000 2.0 1.25 6/10/09 2,954,744 4,749,361
Christopher P. Lynch.... 90,000 3.0 1.25 6/10/09 4,432,116 7,124,041
Peter M. Piscia......... 80,000 2.7 1.25 6/10/09 3,939,659 6,332,481
</TABLE>
- ---------------
(1) In general, options become exercisable over a five-year period and terminate
three months following termination of the executive officers' employment or
ten years after the date of grant, whichever occurs earlier. 50% of the
unvested shares become exercisable upon an acquisition of ArrowPoint.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) in
the assumed initial public offering price of our common stock of $31.00 over
the term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect our
estimate of future stock price growth. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise of the option or the sale of the underlying
shares. The actual gains, if any, on the exercises of stock options will
depend on the future performance of our common stock, the optionholders'
continued employment through the option period, and the date on which the
options are exercised.
39
<PAGE> 41
YEAR-END OPTION VALUES
The following table presents information concerning the unexercised options
held by each of our executive officers on December 31, 1999. None of our
executive officers exercised any stock options during the year ended December
31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR ENDED OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR END
---------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
- ---- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Chin-Cheng Wu....................... -- 340,000 -- $9,665,000
Louis J. Volpe...................... -- -- -- --
Cynthia M. Deysher.................. -- 60,000 -- 1,785,000
Christopher P. Lynch................ -- 90,000 -- 2,677,500
Peter M. Piscia..................... 22,732 157,268 $696,279 4,746,121
</TABLE>
- ---------------
(1) There was no public trading market for our common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of $31.00 per share, less the
applicable exercise price.
STOCK PLANS
1997 STOCK INCENTIVE PLAN
General. Our 1997 Stock Incentive Plan (the "Incentive Plan") provides for
the grant of incentive stock options, nonstatutory stock options, restricted
stock awards and other awards. The Incentive Plan authorizes the issuance of a
maximum of 19,000,000 shares of common stock. As of February 29, 2000, 3,214,668
shares had been issued and are outstanding under the Incentive Plan and
5,790,998 shares were subject to outstanding options under the Incentive Plan.
The Incentive Plan is administered by our board of directors and the
compensation committee.
Eligibility to Receive Awards. Employees, officers, directors, consultants
and advisors of ArrowPoint and our subsidiaries are eligible to be granted
awards under the Incentive Plan. Under present law, however, incentive stock
options qualifying under Section 422 of the Internal Revenue Code may only be
granted to employees.
Incentive Stock Options and Nonstatutory Stock Options. Stock options
entitle the holder to purchase a specified number of shares of common stock at a
specified option price, subject to the other terms and conditions contained in
the option grant. The board establishes the exercise price on the date of grant.
Under present law, however, incentive stock options and options intended to
qualify as performance-based compensation under Section 162(m) of the Internal
Revenue Code may not be granted at an exercise price less than the fair market
value of the common stock on the date of grant (or less than 110% of the fair
market value in the case of incentive stock options granted to optionees holding
more than 10% of the voting power of ArrowPoint). Options may not be granted for
a term in excess of ten years. Our board of directors or our compensation
committee determines:
- - the recipients of stock options,
- - the number of shares subject to each option granted,
- - the exercise price of the option,
- - the vesting schedule of the option (generally over five years),
- - the duration of the option (generally ten years, subject to earlier
termination in the event of the termination of the optionee's employment), and
40
<PAGE> 42
- - the manner of payment of the exercise price of the option.
Restricted Stock Awards. Restricted stock awards entitle recipients to
acquire shares of common stock, subject to our right to repurchase all or part
of such shares from the recipient in the event of the termination of the
recipient's employment prior to the end of the vesting period for such award or
if other conditions specified in the award are not satisfied. Our board of
directors or the compensation committee determines:
- - the recipients of restricted stock,
- - the number of shares subject to each restricted stock award granted,
- - the purchase price of the restricted stock award,
- - the vesting schedule of the restricted stock award (generally over five
years), and
- - the manner of payment of the purchase price for the restricted stock award.
Acquisition of ArrowPoint. Most outstanding stock options and restricted
stock awards under the Incentive Plan provide that 50% of the unvested portion
of such option or award becomes vested upon an acquisition of ArrowPoint.
2000 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Our 2000 Non-Employee Director Stock Option Plan (the "Director Plan")
authorizes the grant of options to purchase up to 300,000 shares of common stock
to our non-employee directors. No options have been granted to date under the
Director Plan.
Under the Director Plan, each non-employee director will be granted a stock
option to purchase 20,000 shares of common stock on the date of this prospectus,
and each future non-employee director will be granted a stock option to purchase
20,000 shares of common stock on the date he or she is first elected to our
board of directors. In addition, each non-employee director will be granted a
stock option to purchase 10,000 shares of common stock on January 31 of each
year, beginning January 31, 2001. The exercise price for all options granted
under the Director Plan will be equal to the fair market value of the common
stock on the date of grant. Each option granted will become exercisable in full
on the first anniversary of the date of grant, provided that the optionee
remains a director, and will become exercisable as to 50% of the shares covered
by the option upon a change in control of ArrowPoint. Each option will expire on
the earlier of ten years from the date of grant or on the first anniversary of
the date on which the optionee ceases to be a director.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan (the "Purchase Plan") provides for
the issuance of up to 400,000 shares of our common stock to participating
employees. On May 1 of each year, commencing with May 1, 2001, the aggregate
number of shares available for purchase during the life of the Purchase Plan
will be automatically increased by the number of shares necessary to increase
the number of shares then available under the Purchase Plan to 400,000.
All of our employees, including directors who are employees, and all
employees of any participating subsidiaries:
- - whose customary employment is more than 20 hours per week for more than five
months in a calendar year;
- - who are employed by us for at least 15 days prior to enrolling in an offering;
and
- - who are employed on the first day of a designated payroll deduction offering
period are eligible to participate in an offering under the Purchase Plan.
Employees who would immediately after the grant own five percent or more of
the total combined voting power or value of our stock or any subsidiary are not
eligible to participate.
The Purchase Plan will be implemented through a series of six-month
offering periods. The first offering period will commence on May 1, 2000. To
participate in an offering under the Purchase Plan, an employee must authorize
us to deduct from one to ten
41
<PAGE> 43
percent of his or her base pay during the offering period. At the end of each
offering period, the accumulated payroll deductions of each participating
employee will be used to purchase shares of our common stock at the purchase
price for that offering period. The purchase price of the shares in each
offering period will be 85% of the closing price per share of the common stock
on either the first or last day of the offering period, whichever is lower.
401(k) PLAN
We maintain a 401(k) plan qualified under Section 401(k) of the Internal
Revenue Code. Under the 401(k) plan, a participant may contribute a maximum of
15% of his or her pre-tax salary, commissions and bonuses through payroll
deductions, up to the statutorily prescribed annual limit ($10,000 in calendar
year 1999). The percentage elected by more highly compensated participants may
be required to be lower. In addition, at the discretion of our board of
directors, we may make discretionary profit-sharing contributions into the
401(k) plan for all eligible employees. During the years ended December 31, 1998
and 1999, we made no profit-sharing contributions to the 401(k) plan.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
None of our executive officers has served as a director or member of the
compensation committee of any other entity whose executive officers served as a
director or member of our compensation committee.
LIMITATION OF LIABILITY AND
INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of his or her fiduciary duties as a
director, except for liability
- - for any breach of his or her duty of loyalty to the corporation or its
stockholders;
- - for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- - for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law; or
- - for any transaction from which he or she derived an improper personal benefit.
Our certificate of incorporation provides that we will indemnify our
directors and officers to the fullest extent permitted by law. Our certificate
of incorporation permits us to advance expenses incurred by an indemnified
director or officer in connection with the defense of any action or proceeding
arising out of such director's or officer's status or a director or officer upon
an undertaking by such director or officer to repay such advances if it is
ultimately determined that the director or officer is not entitled to such
indemnification.
We have also purchased directors and officers liability insurance.
TRANSACTIONS WITH AFFILIATES
We have engaged in the following transactions, with our directors,
executive officers, and stockholders who beneficially own more than 5% of our
outstanding common stock.
On April 17, 1997, we sold an aggregate of 5,600,000 shares of our Series A
preferred stock to ten purchasers at a purchase price of $1.00 per share. North
Bridge Venture Partners II, L.P., which currently owns more than 5% of our
outstanding common stock and has a representative on our board of directors,
purchased 2,100,000 of those shares. Various funds affiliated with Matrix
Partners, which currently owns more than 5% of our outstanding common stock and
has a representative on our board of directors,
42
<PAGE> 44
purchased 2,875,000 of those shares. Chin-Cheng Wu, our Chairman and Chief
Executive Officer, purchased 280,000 of those shares. James A. Dolce, Jr., a
director, purchased 25,000 of those shares. On December 30, 1997, we sold 25,000
shares of Series A preferred stock to Cynthia M. Deysher, our Vice President,
Operations and Chief Financial Officer, at a purchase price of $1.00 per share.
On February 5, 1998, we sold an aggregate of 2,213,828 shares of our Series
B preferred stock to 16 purchasers at a purchase price of $4.63 per share.
Various funds affiliated with Accel Partners, which currently owns more than 5%
of our outstanding common stock, purchased 1,079,914 of those shares. North
Bridge Venture Partners II, L.P. purchased 453,564 of those shares. Various
funds affiliated with Matrix Partners purchased 626,350 of those shares. Mr. Wu
purchased 10,800 of those shares. Ms. Deysher and members of her family
purchased 10,800 of those shares.
On September 30, 1998, we sold an aggregate of 278,464 shares of our Series
C preferred stock to seven purchasers at a purchase price of $7.86 per share.
Various funds affiliated with Accel Partners purchased 24,100 of those shares.
On February 16, 1999, we sold an aggregate of 1,502,443 shares of our
Series D preferred stock to 20 purchasers at a purchase price of $10.20 per
share. North Bridge Venture Partners II, L.P. purchased 98,039 of those shares.
Various funds affiliated with Matrix Partners purchased 147,058 of those shares.
Various funds affiliated with Accel Partners purchased 49,019 of those shares.
On November 24, 1999, we sold 100,000 shares of our Series D preferred stock to
Louis J. Volpe, our President, Chief Operating Officer and a director, at a
purchase price of $10.20 per share.
Between January 14, 2000, and January 26, 2000, we sold an aggregate of
657,263 shares of our Series E preferred stock to 42 purchasers at a purchase
price of $21.14 per share. Various funds affiliated with North Bridge Venture
Partners purchased 140,992 of those shares. Various funds affiliated with Matrix
Partners purchased 193,995 of those shares. Various funds affiliated with Accel
Partners purchased 61,309 of those shares. Mr. Dolce purchased 9,460 of those
shares.
On April 15, 1997, we sold 2,000,000 shares of restricted common stock to
Mr. Wu for $.0005 per share. On October 10, 1997, we sold 140,000 shares of
restricted common stock to Peter M. Piscia, Vice President, Engineering, for
$.005 per share. On December 31, 1997, we sold 300,000 shares of restricted
common stock to Ms. Deysher for $.025 per share. On March 12, 1998 we sold
400,000 shares of restricted common stock to Christopher P. Lynch, Vice
President, Worldwide Sales and Support, for $.25 per share. On November 29,
1999, we sold 1,100,000 shares of restricted common stock to Mr. Volpe for $2.25
per share.
We believe that all transactions set forth above were made on terms no less
favorable to us than we would have obtained from unaffiliated third parties.
We have adopted a policy providing that all future transactions between
ArrowPoint and our officers, directors and affiliates must be approved by a
majority of the disinterested members of our board of directors and must either
be for a valid business purpose or be on terms no less favorable to ArrowPoint
than could be obtained from unaffiliated third parties.
43
<PAGE> 45
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of January 31, 2000, and as adjusted to reflect
the sale of the shares of common stock in this offering, by:
- - each person known by us to be the beneficial owner of more than 5% of our
common stock;
- - each of our executive officers listed in the Summary Compensation table;
- - each of our directors; and
- - all of our executive officers and directors as a group.
To our knowledge, each person has sole voting and investment power over the
shares shown as beneficially owned except to the extent authority is shared by
spouses under applicable law and except as described in the footnotes to the
table. The number of shares of common stock owned by each person listed includes
shares of common stock underlying options held by that person that are
exercisable within 60 days after January 31, 2000. The number of outstanding
shares of common stock used in calculating the percentage ownership for each
person listed includes the shares of common stock underlying options held by
that person that are exercisable within 60 days after January 31, 2000, but
excludes shares of common stock underlying options held by any other person.
Percentage ownership calculations are based on 29,201,964 shares of common stock
outstanding as of January 31, 2000, and the additional 5,000,000 shares of
common stock to be sold in this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
North Bridge Venture Partners(1)...................... 5,585,190 19.13% 16.33%
Matrix Partners(2).................................... 7,684,806 26.32 22.47
Accel Partners(3)..................................... 2,428,684 8.32 7.10
Chin-Cheng Wu(4)...................................... 2,581,600 8.84 7.55
Louis J. Volpe........................................ 1,300,000 4.45 3.80
Cynthia M. Deysher(5)................................. 371,600 1.27 1.09
Christopher P. Lynch(6)............................... 400,000 1.37 1.17
Peter M. Piscia(7).................................... 167,733 * *
Paul J. Ferri(2)...................................... 7,684,806 26.32 22.47
Edward T. Anderson(1)................................. 5,585,190 19.13 16.33
James A. Dolce, Jr.(8)................................ 68,920 * *
All executive officers and directors as a group (eight
persons)............................................ 18,159,849 62.13 53.05
</TABLE>
- ---------------
* Less than 1%.
(1) Composed of 5,303,206 shares held by North Bridge Venture Partners II,
L.P., 191,156 shares held by North Bridge Venture Partners IV-A, L.P. and
90,828 shares held by North Bridge Venture Partners IV-B, L.P. Messrs.
Edward Anderson, Richard D'Amore, William Geary and Jeffrey McCarthy, by
virtue of their management position in the North Bridge entities, each have
voting and dispositive power with respect to the shares owed by North
Bridge Venture Partners II, L.P. Messrs. Edward Anderson, Richard D'Amore,
William Geary, Jeffrey McCarthy and Angelo Santinelli, by virtue of their
management position in the North Bridge entities, each have voting and
dispositive power with respect to the shares owned by North Bridge Venture
Partners IV-A, L.P. and North Bridge Venture Partners IV-B, L.P. The
address of North Bridge Venture Partners, L.P. is 950 Winter Street, Suite
4600, Waltham, MA 02451.
44
<PAGE> 46
(2) Composed of 6,931,976 shares held by Matrix Partners IV, L.P., 364,840
shares held by Matrix IV Entrepreneurs Fund, L.P., 333,672 shares held by
Matrix Partners VI, L.P. and 54,318 shares held by Weston & Co., as nominee
for certain persons. Mr. Ferri, by virtue of his management position in the
Matrix entities, has sole voting and dispositive power with respect to the
Matrix entities' shares. Mr. Ferri disclaims beneficial ownership of these
shares. Robert J. Hawke has sole voting and dispositive power with respect
to the shares held by Weston & Co. The address of Matrix Partners is Bay
Colony Corporate Center, 1000 Winter Street, Suite 4500, Waltham, MA 02451.
(3) Composed of (i) 1,906,518 shares held by Accel V L.P., as to which Arthur
C. Patterson, ACP Family Partnership L.P. (whose sole general partner is
Arthur C. Patterson), James R. Swartz, James W. Breyer, The Breyer 1995
Trust dated 10/4/95, Eugene D. Hill, Swartz Family Limited Partnership L.P.
(whose sole general partner is James R. Swartz), Luke B. Evnin, J. Peter
Wagner and G. Carter Sednaoui share voting and dispositive power; (ii)
252,582 shares held by Accel Internet/Strategic Technology Fund L.P., as to
which Arthur C. Patterson, ACP Family Partnership L.P. (whose sole general
partner is Arthur C. Patterson), James R. Swartz, James W. Breyer, Eugene
D. Hill, Swartz Family Limited Partnership L.P. (whose sole general partner
is James R. Swartz), Luke B. Evnin, J. Peter Wagner and G. Carter Sednaoui
share voting and dispositive power; (iii) 99,576 shares held by Accel
Keiretsu V L.P., as to which Arthur C. Patterson, James R. Swartz, James W.
Breyer, Eugene D. Hill, Luke B. Evnin, J. Peter Wagner and G. Carter
Sednaoui share voting and dispositive power; (iv) 116,578 shares held by
Accel Investors '97 L.P., as to which Arthur C. Patterson, James R. Swartz,
James W. Breyer, Eugene D. Hill, Luke B. Evnin, J. Peter Wagner and G.
Carter Sednaoui share voting and dispositive power; and (v) 53,430 shares
held by Ellmore C. Patterson Partners, as to which Arthur C. Patterson has
sole voting and dispositive power. The address of Accel Partners is 428
University Avenue, Palo Alto, California 94301.
(4) Includes 1,000,000 shares held by the Chin-Cheng Wu 1996 Irrevocable
Children's Trust dated December 9, 1996. The address of Chin-Cheng Wu is
c/o ArrowPoint Communications, Inc., 50 Nagog Park, Acton, Massachusetts
01720.
(5) Includes 16,000 shares held for the benefit of Ms. Deysher's minor children
under the Massachusetts Uniform Transfer to Minors Act.
(6) Includes 8,000 shares held for the benefit of Mr. Lynch's minor children
under the Massachusetts Uniform Transfer to Minors Act.
(7) Includes 27,733 shares issuable upon the exercise of options exercisable
within 60 days after January 25, 2000.
(8) Composed of 50,000 shares held by the Alexer Family Limited Partnership and
18,920 held by Mr. Dolce. Mr. Dolce is a general partner of the Alexer
Family Limited Partnership.
45
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will
consist of 200,000,000 shares of common stock, $.001 par value per share, and
5,000,000 shares of preferred stock, $.01 par value per share. As of February
29, 2000, there were outstanding
- - 8,214,368 shares of common stock held by 79 stockholders of record,
- - 10,501,998 shares of convertible preferred stock (convertible into 21,003,996
shares of common stock) held by 71 stockholders of record, and
- - options to purchase an aggregate of 5,790,998 shares of common stock.
The following summary of our capital stock and our certificate of
incorporation and bylaws is qualified by reference to the provisions of
applicable law and to our certificate of incorporation and bylaws included as
exhibits to the registration statement of which this prospectus is a part. See
"Where You Can Find More Information".
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends declared by our board of directors, subject to any
preferential dividend rights of outstanding preferred stock. In addition, our
credit facility restricts the payment of cash dividends without the bank's
consent. See "Dividend Policy". Upon the liquidation, dissolution or winding up
of ArrowPoint, the holders of common stock are entitled to receive ratably our
net assets available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of
common stock have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of common stock are subject to
the rights of the holders of shares of any series of preferred stock which we
may designate and issue in the future.
PREFERRED STOCK
Under the terms of our certificate of incorporation, our board of directors
is authorized to designate and issue shares of preferred stock in one or more
series without stockholder approval. Our board has discretion to determine the
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of the preferred stock. However, these effects
might include:
- - restricting dividends on the common stock;
- - diluting the voting power of the common stock;
- - impairing the liquidation rights of the common stock; and
- - delaying or preventing a change in control of our company.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could make it more difficult for a third party to
acquire, or could discourage a third party from attempting to acquire, a
majority of our outstanding voting stock. We have no present plans to issue any
shares of preferred stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. In general, the statute prohibits
46
<PAGE> 48
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved by our board of directors and/or stockholders
of the corporation in a prescribed manner. A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock.
Our certification of incorporation and bylaws provide for the division of
our board of directors into three classes as nearly equal in size as possible
with staggered three-year terms. Any vacancy on our board of directors,
including a vacancy resulting from an enlargement of our board of directors, may
only be filled by vote of a majority of the directors then in office. The
classification of our board of directors and the limitation on filling of
vacancies could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, control of ArrowPoint.
Our bylaws also provide that any action required or permitted to be taken
by our stockholders at an annual meeting or special meeting of stockholders may
only be taken if it is properly brought before such meeting and may not be taken
by written action in lieu of a meeting. Our bylaws further provide that special
meetings of the stockholders may only be called by the Chairman of the Board,
the President or our board of directors. In order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
certain requirements regarding advance notice and provide certain information to
us. These provisions could have the effect of delaying until the next
stockholders meeting stockholder actions which are favored by the holders of a
majority of our outstanding voting securities. These provisions could also
discourage a third party from making a tender offer for our common stock,
because even if it acquired a majority of our outstanding voting securities, it
would be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders' meeting and not by
written consent.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
47
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of contractual and legal restrictions on resale described
below, sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
SALES OF RESTRICTED SHARES AND
LOCK-UP AGREEMENTS
After this offering, we will have outstanding 34,218,364 shares of common
stock, based upon shares outstanding as of February 29, 2000, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options after February 29, 2000. All of the shares sold in this
offering will be freely tradable without restriction under the Securities Act,
except for any shares purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act. The remaining 29,218,364 shares of common
stock held by existing stockholders are "restricted" shares as that term is
defined in Rule 144 under the Securities Act. We issued and sold the restricted
shares in private transactions in reliance upon exemptions from registration
under the Securities Act. Restricted shares may be sold in the public market
only if they are registered under the Securities Act or if they qualify for an
exemption from registration, such as Rule 144 or 701 under the Securities Act,
which are summarized below.
Except for sales of common stock to the underwriters in accordance with the
terms of the underwriting agreement, ArrowPoint, our executive officers and
directors and most of our stockholders and optionholders, who in the aggregate
hold 29,210,998 shares of our common stock, have agreed with the underwriters
not to dispose of or hedge any of their shares of common stock or securities
convertible into or exchangeable for shares of common stock (excluding shares
purchased in open market transactions or pursuant to our directed share program,
which are not subject to the lock-up) during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except that (i) two days after ArrowPoint publicly releases its
operating results for the quarter ended June 30, 2000, 15% of the total number
of shares of common stock locked-up pursuant to lock-up agreements shall be
released from the lock-up provisions on a pro rata basis for each stockholder
subject to such lock-up agreements, and (ii) 30 days after ArrowPoint releases
its operating results for the quarter ended June 30, 2000, another 25% of the
total number of shares of common stock locked-up pursuant to lock-up agreements
shall be released from the lock-up provisions on a pro rata basis for each
stockholder subject to such lock-up agreements. In addition, shares of common
stock can be released with the prior written consent of Goldman, Sachs & Co. See
"Underwriting".
Taking into account the lock-up agreements, the number of additional shares
that will be available for sale in the public market under the provisions of
Rules 144, 144(k) and 701 will be as follows:
<TABLE>
<CAPTION>
NUMBER OF
DATE OF AVAILABILITY FOR SALE ADDITIONAL SHARES
- ----------------------------- -----------------
<S> <C>
On the date of this prospectus.............................. 5,000,000
90 days after the date of this prospectus................... 5,000
Two days after ArrowPoint releases its operating results for
the quarter ended June 30, 2000........................... 4,154,825
30 days after ArrowPoint releases its operating results for
the quarter ended June 30, 2000........................... 6,813,084
180 days after the date of this prospectus.................. 13,703,537
</TABLE>
48
<PAGE> 50
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell, within any three-month
period, up to that number of restricted shares as is equal to the greater of one
percent of the number of shares of common stock then outstanding (which will
equal approximately 342,183 shares immediately after this offering) or the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to manner of sale
provisions, notice requirements and the availability of current public
information about ArrowPoint. Rule 144 also provides that our affiliates who are
selling shares of common stock that are not restricted shares must nonetheless
comply with the same restrictions applicable to restricted shares with the
exception of the holding period requirement.
Under Rule 144(k), beginning on the date of this prospectus, a person who
is not deemed to have been an affiliate of ArrowPoint at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell those shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
Rule 701 may be relied upon with respect to the resale of shares of common
stock originally purchased from us by employees or consultants prior to the date
of this prospectus. Shares issued in reliance on Rule 701 are restricted shares
and, subject to the lock-up agreements described above, may be sold beginning 90
days after the date of this prospectus by persons other than affiliates, subject
only to the manner of sale provisions of Rule 144, and may be sold by affiliates
under Rule 144 without compliance with its one-year holding period requirement.
FUTURE REGISTRATIONS OF SHARES
Following this offering, we intend to file registration statements under
the Securities Act covering the shares of common stock issuable upon the
exercise of stock options or reserved for issuance under our stock plans. The
shares registered under these registration statements will, subject to Rule 144
provisions applicable to affiliates, be available for sale in the open market,
except to the extent that the shares are subject to our vesting restrictions or
the lock-up agreements described above. See "Management -- Stock Plans".
In addition, following this offering, the holders of 20,703,996 shares of
common stock will have the right, subject to certain exceptions and conditions,
to require us to register their shares of common stock under the Securities Act,
and they will have the right to participate in future registrations of
securities by us. We are not required to effect more than two demand
registrations on Form S-1 or more than three demand registrations on Form S-3 on
behalf of these holders. We are generally required to bear all of the expenses
of all registrations. Registration of any of the shares of common stock would
result in these shares becoming freely tradable without restriction under the
Securities Act upon effectiveness of the registration statement.
49
<PAGE> 51
UNDERWRITING
ArrowPoint and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Deutsche Bank
Securities Inc. and J.P. Morgan Securities Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Deutsche Bank Securities Inc. ..............................
J.P. Morgan Securities Inc. ................................
--------
Total............................................. 5,000,000
========
</TABLE>
------------------------
If the underwriters sell more shares than the total number presented in the
table above, the underwriters have an option to buy up to an additional 750,000
shares from ArrowPoint to cover such sales. They may exercise that option for 30
days. If any shares are purchased upon exercise of that option, the underwriters
will severally purchase shares in approximately the same proportion as presented
in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by ArrowPoint. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase 750,000 additional shares.
<TABLE>
<CAPTION>
Paid by ArrowPoint
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price presented on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
ArrowPoint and its directors, officers and stockholders who own
approximately 28,210,998 shares of common stock have agreed with the
underwriters not to dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock (excluding shares
purchased in open market transactions or pursuant to our directed share program,
which are not subject to the lock-up) during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except that (i) two days after ArrowPoint publicly releases its
operating results for the quarter ended June 30, 2000, 15% of the total number
of shares of common stock subject to these lock-up agreements shall be released
from the lock-up provisions on a pro rata basis, and (ii) 30 days after
ArrowPoint releases its operating results for the quarter ended June 30, 2000,
another 25% of the total number of shares of common stock subject to these
lock-up agreements shall be released from the lock-up provisions on a pro rata
basis. In addition, shares of common stock can be released with the prior
written consent of Goldman, Sachs & Co. See "Shares Eligible for Future Sale"
for a discussion of transfer restrictions that apply to the common stock.
At the request of ArrowPoint, the underwriters have reserved up to 650,000
shares of common stock for sale, at the initial public offering price, to
directors, officers, employees, stockholders and friends of ArrowPoint through a
directed share program. There can be no
50
<PAGE> 52
assurance that any of the reserved shares will be so purchased. The number of
shares of common stock available for sale to the general public in the public
offering will be reduced by the number of reserved shares sold. Any reserved
shares not so purchased will be offered to the general public on the same basis
as the other shares offered hereby.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among ArrowPoint and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be ArrowPoint's historical performance, estimates of the
business potential and earnings prospects of ArrowPoint, an assessment of
ArrowPoint's management and the consideration of the above factors in relation
to market valuation of companies in related businesses.
ArrowPoint has applied to list the common stock on the Nasdaq National
Market under the symbol "ARPT".
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters of this offering. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the representatives to underwriters that may make Internet distributions on the
same basis as other allocations. Any underwriters making such Internet
distributions will follow the procedures for online distributions previously
cleared with the Securities and Exchange Commission.
ArrowPoint estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $925,000.
ArrowPoint has agreed to indemnify the underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
In January 2000, ArrowPoint sold shares of its Series E preferred stock in
a private placement. In this private placement, a managing director of Goldman,
Sachs & Co. purchased 4,730 shares of Series E preferred stock, which are
convertible into an aggregate of 9,460 shares of common stock, for approximately
$100,000, or $21.14 per share of Series E preferred stock. These shares will be
subject to restrictions on transfer for the period required by the National
Association of Securities Dealers. This individual purchased these shares on the
same terms as the other investors in the private placement.
51
<PAGE> 53
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for ArrowPoint by Hale and Dorr LLP, Boston, Massachusetts. Legal matters
in connection with this offering will be passed upon for the underwriters by
Ropes & Gray, Boston, Massachusetts. H&D Investments 97, a fund affiliated with
Hale and Dorr LLP, owns 4,901 shares of Series D preferred stock of ArrowPoint.
EXPERTS
The audited consolidated financial statements as of December 31, 1998 and
1999 and for the period from inception (April 14, 1997) to December 31, 1997 and
for the years ended December 31, 1998 and 1999, included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement. For further information with respect to our
company and our common stock, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of the contract or document filed as an
exhibit to the registration statement, and each such statement is qualified in
all respects by reference to such exhibit. Copies of the registration statement
may be examined without charge at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission at Suite
1400, 500 West Madison Street, Chicago, Illinois 60661 and World Trade Center,
Thirteenth Floor, New York, New York 10048. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, or by calling the Commission at 1-800-SEC-0330, at prescribed rates.
The Commission also maintains a web site at http://www.sec.gov that contains
reports, proxy, registration and information statements and other information
regarding registrants, such as us, that make electronic filings with the
Commission.
We intend to furnish to our stockholders annual reports containing
financial statements audited by an independent public accounting firm.
52
<PAGE> 54
ARROWPOINT COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and Pro Forma December 31, 1999 (Unaudited)............... F-3
Consolidated Statements of Operations for the period from
inception (April 14, 1997) to December 31, 1997 and for
the years ended December 31, 1998 and 1999................ F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock And Stockholders' Equity (Deficit) for the period
from inception (April 14, 1997) to December 31, 1997, for
the years ended December 31, 1998 and 1999 and Pro Forma
December 31, 1999 (Unaudited)............................. F-5
Consolidated Statements of Cash Flows for the period from
inception (April 14, 1997) to December 31, 1997, and for
the years ended December 31, 1998 and 1999................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
ArrowPoint Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ArrowPoint
Communications, Inc. (a Delaware corporation) and subsidiary as of December 31,
1998 and 1999, and the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders' equity (deficit) and cash flows
for the period from inception (April 14, 1997) to December 31, 1997, and for the
years ended December 31, 1998 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ArrowPoint Communications, Inc.
and subsidiary as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the period from inception (April 14, 1997)
to December 31, 1997, and for the years ended December 31, 1998 and 1999, in
conformity with generally accepted accounting principles.
Boston, Massachusetts Arthur Andersen LLP
January 26, 2000, except with respect to
the matters discussed in
Notes 7(a) and 7(d)(ii), as to which
the date is February 29,
2000.
F-2
<PAGE> 56
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
---------------------------- 1999
1998 1999 NOTE 1(b)
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 4,339,436 $ 10,730,584 $ 24,586,000
Accounts receivable, net of allowance for doubtful
accounts of $0 and $250,000 at December 31, 1998 and
1999, respectively...................................... 14,685 4,744,902 4,744,902
Inventory................................................. 1,511,154 2,864,072 2,864,072
Prepaid expenses.......................................... 112,134 541,442 541,442
------------ ------------ ------------
Total current assets................................ 5,977,409 18,881,000 32,736,416
------------ ------------ ------------
Property and Equipment, at cost:
Equipment and software.................................... 2,093,932 4,735,760 4,735,760
Furniture and fixtures.................................... 100,122 339,239 339,239
Leasehold improvements.................................... 44,679 761,478 761,478
------------ ------------ ------------
2,238,733 5,836,477 5,836,477
Less -- Accumulated depreciation and amortization......... 569,063 1,702,251 1,702,251
------------ ------------ ------------
1,669,670 4,134,226 4,134,226
Other Assets................................................ 16,014 190,676 190,676
------------ ------------ ------------
Total assets........................................ $ 7,663,093 $ 23,205,902 $ 37,061,318
============ ============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Loans payable............................................. $ 206,614 $ 1,146,864 $ 1,146,864
Accounts payable.......................................... 661,340 3,322,676 3,322,676
Accrued expenses.......................................... 299,088 1,590,507 1,590,507
Deferred revenue.......................................... -- 2,470,525 2,470,525
------------ ------------ ------------
Total current liabilities........................... 1,167,042 8,530,572 8,530,572
------------ ------------ ------------
Loans Payable, net of current portion....................... 469,576 -- --
------------ ------------ ------------
Commitments and Contingencies (Note 6)
Redeemable Convertible Preferred Stock, $ .01 par value;
12,500,000 shares authorized, 8,242,292 shares and
9,844,735 shares issued and outstanding at December 31,
1998 and 1999, respectively; none authorized, issued and
outstanding, pro forma.................................. 18,188,751 34,533,670 --
Stockholders Equity (Deficit):
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding, pro forma...... -- -- --
Common stock, $.001 par value; 25,000,000 shares
authorized, 7,048,700 shares and 8,351,330 shares issued
at December 31, 1998 and 1999, respectively; 200,000,000
shares authorized, 29,355,326 shares issued, pro
forma................................................... 7,049 8,351 29,355
Additional paid-in capital................................ 227,040 20,483,269 75,423,981
Treasury stock, at cost (190,000 shares and 224,334 shares
at December 31, 1998 and 1999, respectively)............ (27,900) (36,484) (36,484)
Deferred compensation..................................... -- (15,299,920) (15,299,920)
Accumulated deficit....................................... (12,368,465) (25,013,556) (31,586,186)
------------ ------------ ------------
Total stockholders' equity (deficit)................ (12,162,276) (19,858,340) 28,530,746
------------ ------------ ------------
$ 7,663,093 $ 23,205,902 $ 37,061,318
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 57
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 14,
1997) TO YEARS ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1997 1998 1999
------------ ---- ----
<S> <C> <C> <C>
Revenue........................................ $ -- $ 200,683 $ 12,377,037
Cost of Revenue(1)............................. -- 149,811 5,110,077
----------- ----------- ------------
Gross margin......................... -- 50,872 7,266,960
Operating Expenses:
Sales and marketing(1)....................... 137,088 3,073,920 9,918,476
Research and development(1).................. 2,493,686 5,902,657 6,438,004
General and administrative(1)................ 365,665 923,767 1,690,319
Stock-based compensation..................... -- -- 2,342,804
----------- ----------- ------------
Total operating expenses............. 2,996,439 9,900,344 20,389,603
----------- ----------- ------------
Operating loss....................... (2,996,439) (9,849,472) (13,122,643)
Interest Income................................ 142,311 416,784 584,043
Interest Expense............................... (1,969) (14,292) (67,366)
----------- ----------- ------------
Net loss............................. $(2,856,097) $(9,446,980) $(12,605,966)
=========== =========== ============
Net Loss Per Share:
Basic and diluted............................ $ (11.36) $ (6.26) $ (3.99)
=========== =========== ============
Pro forma basic and diluted.................. $ (0.57)
============
Shares Used In Computing Net Loss Per Share:
Basic and diluted............................ 251,482 1,508,506 3,157,412
Pro forma basic and diluted.................. 22,277,486
- ---------------
(1) Excludes non-cash, stock-based compensation
as follows:
Cost of revenue......................... $ -- $ -- $ 200,568
=========== =========== ============
Sales and marketing..................... $ -- $ -- $ 741,090
=========== =========== ============
Research and development................ $ -- $ -- $ 344,657
=========== =========== ============
General and administrative.............. $ -- $ -- $ 1,056,489
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 58
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE CONVERTIBLE PREFERRED
PREFERRED STOCK STOCK COMMON STOCK
------------------------- ----------------------- ----------------------
CARRYING CARRYING $.001
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE
------ -------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Inception (April 14, 1997).................... -- $ -- -- $ -- -- $ --
Sale of common stock......................... -- -- -- -- 6,257,700 6,258
Sale of Series A redeemable convertible
preferred stock, net of issuance costs of
$23,800.................................... 5,750,000 5,750,000 -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ------------ -------- ------------ ---------- -------
Balance, December 31, 1997.................... 5,750,000 5,750,000 -- -- 6,257,700 6,258
---------- ------------ -------- ------------ ---------- -------
Sale of common stock......................... -- -- -- -- 791,000 791
Sale of Series B redeemable convertible
preferred stock, net of issuance costs of
$23,811.................................... 2,213,828 10,250,024 -- -- -- --
Sale of Series C redeemable convertible
preferred stock, net of issuance costs of
$17,777.................................... 278,464 2,188,727 -- -- -- --
Purchase of treasury stock................... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ------------ -------- ------------ ---------- -------
Balance, December 31, 1998.................... 8,242,292 18,188,751 -- -- 7,048,700 7,049
---------- ------------ -------- ------------ ---------- -------
Sale of common stock......................... -- -- -- -- 1,302,630 1,302
Sale of Series D redeemable convertible
preferred stock, net of issuance costs of
$39,125.................................... 1,602,443 16,344,919 -- -- -- --
Purchase of treasury stock................... -- -- -- -- -- --
Deferred compensation related to stock
options and capital stock.................. -- -- -- -- -- --
Amortization of deferred compensation........ -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ------------ -------- ------------ ---------- -------
Balance, December 31, 1999.................... 9,844,735 34,533,670 -- -- 8,351,330 8,351
---------- ------------ -------- ------------ ---------- -------
Sale of Series E convertible preferred stock,
net of issuance costs of $39,124
(unaudited)................................ -- -- 657,263 13,855,416 -- --
Conversion of convertible preferred stock
into common stock (unaudited).............. (9,844,735) (34,533,670) (657,263) (13,855,416) 21,003,996 21,004
---------- ------------ -------- ------------ ---------- -------
Pro Forma Balance, December 31, 1999
(unaudited).................................. -- $ -- -- $ -- 29,355,326 $29,355
========== ============ ======== ============ ========== =======
<CAPTION>
TOTAL
ADDITIONAL TREASURY STOCK STOCKHOLDERS'
PAID-IN ------------------ DEFERRED ACCUMULATED EQUITY
CAPITAL SHARES COST COMPENSATION DEFICIT (DEFICIT)
---------- ------ ---- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Inception (April 14, 1997).................... $ -- -- $ -- $ -- $ -- $ --
Sale of common stock......................... 26,331 -- -- -- -- 32,589
Sale of Series A redeemable convertible
preferred stock, net of issuance costs of
$23,800.................................... -- -- -- -- (23,800) (23,800)
Net loss..................................... -- -- -- -- (2,856,097) (2,856,097)
----------- ------- -------- ------------ ------------ ------------
Balance, December 31, 1997.................... 26,331 -- -- (2,879,897) (2,847,308)
----------- ------- -------- ------------ ------------ ------------
Sale of common stock......................... 200,709 -- -- -- -- 201,500
Sale of Series B redeemable convertible
preferred stock, net of issuance costs of
$23,811.................................... -- -- -- -- (23,811) (23,811)
Sale of Series C redeemable convertible
preferred stock, net of issuance costs of
$17,777.................................... -- -- -- -- (17,777) (17,777)
Purchase of treasury stock................... -- 190,000 (27,900) -- -- (27,900)
Net loss..................................... -- -- -- -- (9,446,980) (9,446,980)
----------- ------- -------- ------------ ------------ ------------
Balance, December 31, 1998.................... 227,040 190,000 (27,900) (12,368,465) (12,162,276)
----------- ------- -------- ------------ ------------ ------------
Sale of common stock......................... 2,613,505 -- -- -- -- 2,614,807
Sale of Series D redeemable convertible
preferred stock, net of issuance costs of
$39,125.................................... -- -- -- -- (39,125) (39,125)
Purchase of treasury stock................... -- 34,334 (8,584) -- -- (8,584)
Deferred compensation related to stock
options and capital stock.................. 17,642,724 -- -- (17,642,724) -- --
Amortization of deferred compensation........ -- -- -- 2,342,804 -- 2,342,804
Net loss..................................... -- -- -- (12,605,966) (12,605,966)
----------- ------- -------- ------------ ------------ ------------
Balance, December 31, 1999.................... 20,483,269 224,334 (36,484) (15,299,920) (25,013,556) (19,858,340)
----------- ------- -------- ------------ ------------ ------------
Sale of Series E convertible preferred stock,
net of issuance costs of $39,124
(unaudited)................................ 6,572,630 -- -- -- (6,572,630) 13,855,416
Conversion of convertible preferred stock
into common stock (unaudited).............. 48,368,082 -- -- -- -- 34,533,670
----------- ------- -------- ------------ ------------ ------------
Pro Forma Balance, December 31, 1999
(unaudited).................................. $75,423,981 224,334 $(36,484) $(15,299,920) $(31,586,186) $ 28,530,746
=========== ======= ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
F-5
<PAGE> 59
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 14, 1997) YEARS ENDED DECEMBER 31,
TO DECEMBER 31, ------------------------
1997 1998 1999
---------------- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................... $(2,856,097) $(9,446,980) $(12,605,966)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 73,284 495,779 1,133,188
Amortization of deferred compensation.... -- -- 2,342,804
Changes in operating assets and
liabilities:
Accounts receivable.................... -- (14,685) (4,730,217)
Inventories............................ -- (1,511,154) (1,352,918)
Prepaid expenses....................... (73,827) (38,307) (429,308)
Other assets........................... (10,331) (5,683) (174,662)
Accounts payable....................... 297,330 364,010 2,661,336
Accrued expenses....................... 123,267 175,821 1,291,419
Deferred revenue....................... -- -- 2,470,525
----------- ----------- ------------
Net cash used in operating
activities........................ (2,446,374) (9,981,199) (9,393,799)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchases of property and equipment......... (608,487) (1,493,550) (3,597,744)
----------- ----------- ------------
Cash Flows from Financing Activities:
Net proceeds from sale of Series A
redeemable convertible preferred stock... 5,726,200 -- --
Net proceeds from sale of Series B
redeemable convertible preferred stock... -- 10,226,213 --
Net proceeds from sale of Series C
redeemable convertible preferred stock... -- 2,170,950 --
Net proceeds from sale of Series D
redeemable convertible preferred stock... -- -- 16,305,794
Proceeds from sale of common stock.......... 32,589 201,500 2,614,807
Purchase of treasury stock.................. -- (27,900) (8,584)
Proceeds from loans payable................. -- 676,190 688,530
Payments on loans payable................... -- (114,756) (217,856)
Payments on capital lease obligations....... (21,940) -- --
----------- ----------- ------------
Net cash provided by financing
activities........................ 5,736,849 13,132,197 19,382,691
----------- ----------- ------------
Net Increase in Cash and Cash Equivalents..... 2,681,988 1,657,448 6,391,148
----------- ----------- ------------
Cash and Cash Equivalents, beginning of
period...................................... -- 2,681,988 4,339,436
----------- ----------- ------------
Cash and Cash Equivalents, end of period...... $ 2,681,988 $ 4,339,436 $ 10,730,584
=========== =========== ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for interest...... $ 1,968 $ 14,292 $ 57,484
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 60
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ArrowPoint Communications, Inc. (the Company or ArrowPoint) was
incorporated as a Delaware corporation on April 14, 1997 and provides
intelligent Web switches that enable customers to deploy a global Web network
architecture to optimize e-commerce transactions and the delivery of Web
content. The Company's products, which are specifically designed for the Web,
are intended to enhance the performance, scalability, availability, reliability
and security of customers' Web sites.
The Company incurred net losses of $2,856,097, $9,446,980, and $12,605,966
for the period from inception (April 14, 1997) to December 31, 1997 and for the
years ended December 31, 1998 and 1999, respectively. At December 31, 1999, the
Company had an accumulated deficit of $25,013,556. During 1998, ArrowPoint
commenced commercial shipment of its products and emerged from the development
stage. Although no longer in the development stage, ArrowPoint continues to be
subject to the risks and challenges similar to other companies in a similar
stage of development. These risks include, but are not limited to, dependence on
key individuals, dependence on a single contract manufacturer and key suppliers
of integral components, successful development and marketing of products, the
ability to obtain adequate financing to support growth and competition from
substitute products and larger companies with greater financial, technical,
management and marketing resources.
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.
(a) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma consolidated balance sheet as of December 31, 1999,
reflects the automatic conversion of all outstanding shares of Series A, B, C
and D redeemable convertible preferred stock into 19,689,470 shares of common
stock which will occur upon the closing of the Company's proposed initial public
offering. The unaudited pro forma consolidated balance sheet as of December 31,
1999, also reflects the sale of 657,263 shares of Series E convertible preferred
stock in January 2000, the automatic conversion of those shares into 1,314,526
shares of the Company's common stock upon the closing of the Company's proposed
initial public offering and a charge to accumulated deficit of $6,572,630
related to the fair value of the beneficial conversion feature of the Series E
convertible preferred stock.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-7
<PAGE> 61
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) REVENUE RECOGNITION
The Company recognizes revenue from product sales to end users, resellers
and OEMs upon product shipment, provided that there are no uncertainties
regarding acceptance, there is persuasive evidence of an arrangement, the sales
price is fixed or determinable and collection of the related receivable is
probable. If uncertainties exist, the Company recognizes revenue when those
uncertainties are resolved. The Company's distributors have certain limited
rights of return and therefore, the Company recognizes revenue on product sales
to distributors when the rights of return lapse, provided that there are no
uncertainties regarding acceptance, there is persuasive evidence of an
arrangement, the sales price is fixed or determinable and collection of the
related receivable is probable. If uncertainties exist, the Company recognizes
revenue when those uncertainties are resolved. In multiple element arrangements
that contain product and service elements, the Company uses the residual method
when fair value does not exist for one of the delivered elements in the
arrangement. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized. The Company has established
vendor specific objective evidence of fair value for support services.
Accordingly, product revenue is recognized under the residual method in
arrangements in which the product is sold with support services. Service revenue
is recognized as the services are performed or ratably over the terms of the
service contracts. Amounts collected or billed prior to satisfying the above
revenue recognition criteria are reflected as deferred revenue.
Warranty costs are estimated and recorded by the Company at the time of
product revenue recognition.
(e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less at the time of purchase to be cash
equivalents.
(f) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Statement of Financial Accounting Standards (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. The Company
has no significant off-balance-sheet concentrations such as foreign exchange
contracts, option contracts or other foreign hedging arrangements. The Company
maintains the majority of its cash and cash equivalent balances with one
financial institution. One customer represented approximately 11% of total
accounts receivable at December 31, 1999. In 1998, three customers accounted for
57%, 22% and 16% of revenue, respectively. In 1999, one customer accounted for
14% of revenue.
(g) SINGLE SOURCE SUPPLIERS AND SINGLE CONTRACT MANUFACTURER
Several key components of the Company's products are currently available
from single vendors. If the Company is unable to obtain sufficient quantities of
these components, it would be unable to manufacture and ship its products on a
timely basis. This could result in lost or delayed revenue, damage to the
Company's reputation and increased manufacturing costs.
The Company currently subcontracts the manufacturing and testing of its
products to an independent manufacturer. The Company's reliance on a single
manufacturer exposes it to a number of risks, including reduced control over
manufacturing capacity, product completion and
F-8
<PAGE> 62
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
delivery times, product quality, and manufacturing costs. If the Company
experiences increased demand for its products, the challenges it faces in
managing its relationship with the independent manufacturer will be increased.
If the independent manufacturer is unable or unwilling to manufacture a
sufficient quantity of products on the time schedules and with the quality that
the Company demands, the Company may be forced to engage additional or
replacement manufacturers, which could result in additional expenses and delays
in product shipments.
(h) INVENTORIES
Inventories are stated at the lower of cost or market, determined on a FIFO
(first-in, first-out) basis and consist of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Raw materials..................................... $1,050,649 $ 170,822
Work-in-process................................... 234,435 256,094
Finished goods.................................... 226,070 2,437,156
---------- ----------
$1,511,154 $2,864,072
========== ==========
</TABLE>
(i) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation on a straight-line basis to allocate
the cost of the assets over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -----------
<S> <C>
Equipment and software...................................... 2-3 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... Life of lease
</TABLE>
(j) RESEARCH AND DEVELOPMENT COSTS
The costs of the development of hardware products and enhancements to
existing hardware products are expensed as incurred. The Company 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 new software that are included in
the hardware products and substantial enhancements to such existing software are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized. The Company determines
technological feasibility has been established at the time at which a working
model of the software has been completed. Because the Company believes its
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility, no costs have been
capitalized to date.
(k) NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earnings Per Share for all periods presented. In accordance with SFAS
No. 128, basic and diluted net loss per common share was determined by dividing
net loss available for common stockholders by the weighted average common shares
outstanding during the period, less shares subject to repurchase. Basic and
diluted net loss per share are the same because all outstanding
F-9
<PAGE> 63
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock options have been excluded as they are considered antidilutive
since the Company has incurred a net loss for all periods presented. Options to
purchase a total of 966,000 and 3,805,070 common shares have been excluded from
the computations of diluted weighted average shares outstanding for the years
ended December 31, 1998 and 1999, respectively. Shares of common stock issuable
upon the conversion of outstanding shares of convertible preferred stock have
also been excluded for all periods presented.
In accordance with the SEC Staff Accounting Bulletin No. 98, Earnings Per
Share in an Initial Public Offering, the Company has determined that there were
no nominal issuances of the Company's common stock prior to the Company's
proposed initial public offering.
The Company's historical capital structure is not indicative of its capital
structure after the proposed initial public offering due to the automatic
conversion of all shares of preferred stock into common stock concurrent with
the closing of the Company's proposed initial public offering. Accordingly, pro
forma net loss per share is presented for the year ended December 31, 1999
assuming the conversion of all outstanding shares of preferred stock into common
stock upon the closing of the Company's initial public offering using the
if-converted method from the respective dates of issuance.
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of pro forma basic and diluted
net loss per share:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Weighted average common shares outstanding.................. 3,157,412
Add: Weighted average common shares issued upon the
conversion of preferred stock............................. 19,120,074
----------
Pro forma basic and diluted weighted average common shares
outstanding............................................... 22,277,486
==========
</TABLE>
(l) COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. The Company does not have
any components of comprehensive income (loss) other than its reported net loss.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash, accounts receivable,
accounts payable and notes payable. The estimated fair value of these
instruments approximates their carrying value.
(2) ACCOUNTS RECEIVABLE
Accounts receivable, which result primarily from product sales, are
presented net of an allowance for doubtful accounts. The activity in the
Company's allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF CHARGED TO END OF
PERIOD EXPENSE WRITE-OFFS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999........ $-- $260,000 $10,000 $250,000
== ======== ======= ========
</TABLE>
F-10
<PAGE> 64
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Payroll and payroll-related........................ $166,066 $ 860,196
Other.............................................. 133,022 730,311
-------- ----------
$299,088 $1,590,507
======== ==========
</TABLE>
(4) INCOME TAXES
The Company accounts for federal and state income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax
assets and liabilities are recognized based on temporary differences between the
financial statement and tax bases of assets and liabilities using currently
enacted tax rates.
No provision for federal or state income taxes has been recorded, as the
Company has incurred net operating losses for all periods presented. As of
December 31, 1999, the Company had net operating loss and tax credit
carryforwards of approximately $20,594,000 and $1,097,000, respectively,
available to reduce future federal and state income taxes, if any. If not
utilized, these carryforwards will expire at various dates through 2019. If
substantial changes in the Company's ownership were to occur, as defined by
Section 382 of the Internal Revenue Code, there could be annual limitations on
the amount of carryforwards that can be utilized in future periods.
The approximate income tax effects of each type of temporary differences
and carryforwards are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
---- ----
<S> <C> <C>
Net operating loss carryforwards.............. $ 4,804,000 $ 8,293,000
Research credits carryforwards................ 575,000 1,097,000
Temporary differences......................... 492,000 1,666,000
----------- ------------
Gross deferred tax assets..................... 5,871,000 11,056,000
Valuation allowance........................... (5,871,000) (11,056,000)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
The Company has recorded a 100% valuation allowance against its gross
deferred tax assets as of December 31, 1998 and 1999 because the future
realizability of such assets is uncertain.
(5) LOANS PAYABLE
As of December 31,1999, the Company has an equipment line-of-credit
agreement (the Equipment Line) and an accounts receivable line-of-credit
agreement (the Accounts Receivable Line) with a bank.
F-11
<PAGE> 65
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(a) EQUIPMENT LINE
This agreement provides for three separate loan commitments consisting of
(i) a Tranche A commitment of up to $2 million, (ii) a Tranche B commitment of
up to $2 million less the amount outstanding on Tranche A and (iii) a Tranche C
commitment of up to $2 million less the amounts outstanding under Tranche A and
B. Advances totaling $676,190 were outstanding under Tranche A at December 31,
1998 and converted to a term loan payable in 36 equal installments commencing on
February 1, 1999. Amounts outstanding under this term loan at December 31, 1999
were $469,577. Advances totaling $80,947 under Tranche B converted to a term
loan payable in 36 equal installments commencing on July 1, 1999. Amounts
outstanding under this term loan at December 31, 1999 were $69,704. Advances
totaling $607,583 were outstanding under Tranche C at December 31, 1999 and will
convert to a term loan payable in 36 equal installments commencing on October 1,
2000.
Amounts due under the Equipment Line are collateralized by the assets
purchased under the Equipment Line. All outstanding amounts bear interest at the
prime rate (8.50% at December 31, 1999) plus 0.5%.
(b) ACCOUNTS RECEIVABLE LINE
Borrowings under the Accounts Receivable Line are limited to the lesser of
$5 million or an amount based on eligible trade accounts receivable. The
maturity date of this agreement is June 30, 2000. All outstanding amounts under
the Accounts Receivable Line bear interest at the prime rate (8.50% at December
31, 1999). At December 31, 1999, there were no amounts outstanding under the
Accounts Receivable Line. In addition, the Company is required to comply with
certain financial and restrictive covenants.
Pursuant to the line of credit agreements, the Company is required to
comply with financial and restrictive covenants related to, among other things,
minimum liquidity, maximum leverage, profitability and net worth. As of December
31, 1999, the Company was out of compliance with one of these covenants. The
bank waived the Company's non-compliance with this covenant for the year ended
December 31, 1999. The waiver does not apply to periods after December 31, 1999.
The Company is currently renegotiating the financial covenants under these line
of credit agreements. Accordingly, amounts outstanding under the lines of credit
have been classified as short-term.
(6) COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
The Company leases certain equipment and conducts its operations in leased
facilities and is obligated to pay monthly rent through October 31, 2004. Rental
expense charged to operations in the period from inception (April 14, 1997) to
December 31, 1997 and the years ended December 31, 1998 and 1999 was
approximately $57,000, $175,000 and $525,000, respectively.
F-12
<PAGE> 66
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, the approximate minimum future rental payments under
these operating lease agreements are as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
2000............................................ $ 943,000
2001............................................ 852,000
2002............................................ 853,000
2003............................................ 854,000
2004............................................ 709,000
Thereafter...................................... --
----------
$4,211,000
==========
</TABLE>
(b) LITIGATION
The Company was named a defendant in a civil suit filed in the United
States District Court for the Southern District of New York by Arrow
Electronics, Inc. on July 19, 1999. In the lawsuit, Arrow Electronics asserts
trademark infringement and associated state law claims. In particular, Arrow
Electronics alleges that customers are likely to be confused between Arrow
Electronics and ArrowPoint, and by use of the Internet domain name
arrowpoint.com. Arrow Electronics is seeking an injunction precluding the
Company from using the name ArrowPoint and requiring the Company to relinquish
registration of the domain name arrowpoint.com. The Company has filed an answer
denying all material allegations asserted in the complaint. The case is
presently in the early stages of discovery. The Company intends to vigorously
defend this lawsuit, including its right to use the ArrowPoint trademark and the
arrowpoint.com domain name. Arrow Electronics is not seeking the recovery of
monetary damages from the Company. Although the Company is unable to estimate
the costs associated with changing its corporate name, the Company believes that
an adverse outcome in this suit would not have a material impact on its
financial condition or results of operations.
The Company is not currently a party to any other legal proceedings.
(7) STOCKHOLDERS' EQUITY (DEFICIT)
(a) BOARD OF DIRECTORS' AND STOCKHOLDERS' ACTIONS
The Company's Board of Directors and stockholders approved the following on
January 25, 2000 and February 18, 2000, respectively:
- amendment to the certificate of incorporation increasing the number of
authorized shares of common stock, $.001 par value per share, from
25,000,000 shares to 200,000,000 shares and authorizing 5,000,000 shares
of preferred stock, $.01 par value per share;
- an increase in the number of shares issuable under the Company's 1997
Stock Incentive Plan from 11,000,000 shares to 19,000,000 shares;
- the adoption of the 2000 Non-Employee Director Stock Option Plan under
which an aggregate of 300,000 shares of common stock may be issued; and
F-13
<PAGE> 67
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- the adoption of the 2000 Employee Stock Purchase Plan under which an
aggregate of 400,000 shares of common stock, subject to automatic
increase as described in the Plan, may be issued.
On January 25, 2000, the Company's Board of Directors approved a
two-for-one split of the outstanding common stock, to be effected in the form of
a 100% dividend of common stock payable on February 29, 2000 to stockholders of
record at the close of business on February 18, 2000. All share and per share
amounts for all periods presented have been retroactively adjusted to reflect
the two-for-one stock split.
The Company's Board of Directors and stockholders also approved on January
25, 2000 and February 18, 2000, respectively, an amended and restated
certificate of incorporation that would be effective following the closing of
the Company's proposed initial public offering that would:
- eliminate all references to the Series Convertible Preferred Stock; and
- establish the authorized capitalization of the Company at 200,000,000
shares of common stock, $.001 par value per share and 5,000,000 shares of
undesignated preferred stock, $.01 par value per share.
(b) PREFERRED STOCK
At December 31, 1999, the Company had 12,500,000 authorized shares of
preferred stock, of which 5,750,000 shares had been designated as Series A
redeemable convertible preferred stock (Series A Preferred Stock), 2,213,828
shares had been designated as Series B redeemable convertible preferred stock
(Series B Preferred Stock), 278,464 shares had been designated as Series C
redeemable convertible preferred stock (Series C Preferred Stock) and 1,602,443
shares had been designated as Series D redeemable convertible preferred stock
(Series D Preferred Stock).
During 1997, the Company sold 5,750,000 shares of Series A Preferred Stock
at $1.00 per share for net proceeds of $5,726,200. On February 5, 1998, the
Company sold 2,213,828 shares of Series B Preferred Stock at $4.63 per share for
net proceeds of $10,226,213. On September 30, 1998, the Company sold 278,464
shares of Series C Preferred Stock at $7.86 per share for net proceeds of
$2,170,950. On February 17, 1999, the Company sold 1,502,443 shares of Series D
Preferred Stock at $10.20 per share and on November 29, 1999, the Company sold
an additional 100,000 shares of Series D Preferred Stock to an employee at
$10.20 per share, for net proceeds of $16,305,794. In connection with the
November 29, 1999 sale, the Company recorded compensation expense of
approximately $460,000. This amount represents the difference between the deemed
fair value of the Series D Preferred Stock and $10.20.
In January 2000, the Company sold 657,263 shares of Series E convertible
preferred stock (Series E Preferred Stock) at $21.14 per share for net proceeds
of $13,855,416. (See Note 10.)
F-14
<PAGE> 68
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Redeemable convertible preferred stock outstanding consists of the
following:
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
-------------------------- 1999
1998 1999 (NOTE 1(B))
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Series A, $.01 par value -- 5,750,000 shares
issued and outstanding at December 31, 1998 and
1999 (at liquidation value) (pro forma -- no
shares authorized, issued or outstanding)...... $ 5,750,000 $ 5,750,000 $--
Series B, $.01 par value -- 2,213,828 shares
issued and outstanding at December 31, 1998 and
1999 (at liquidation value) (pro forma -- no
shares authorized, issued or outstanding)...... 10,250,024 10,250,024 --
Series C, $.01 par value -- 278,464 shares issued
and outstanding at December 31, 1998 and 1999
(at liquidation value) (pro forma -- no shares
authorized, issued or outstanding)............. 2,188,727 2,188,727 --
Series D, $.01 par value -- 1,602,443 shares
issued and outstanding at December 31, 1999 (at
liquidation value) (pro forma -- no shares
authorized, issued or outstanding)............. -- 16,344,919 --
----------- ----------- --
$18,188,751 $34,533,670 $--
=========== =========== ==
</TABLE>
The rights, preferences and privileges of the Series A, Series B, Series C
and Series D Preferred Stock are listed below.
(I) DIVIDENDS
The Company shall not declare or pay any dividends on shares of common
stock unless the holders of the Series A, Series B, Series C and Series D
Preferred Stock then outstanding receive an amount equal to the dividends
declared or paid on common stock. As of December 31, 1999, no dividends have
been declared or paid.
(II) CONVERSION
Each share of Series A, Series B, Series C and Series D Preferred Stock is
convertible at the option of the holder into two shares of common stock,
adjusted for certain dilutive events. In addition, all shares of the Series A,
Series B, Series C and Series D Preferred Stock shall be automatically converted
into shares of common stock upon the closing of an initial public offering at a
per share price of at least $8.25, resulting in net proceeds to the Company of
at least $10,000,000.
(III) MANDATORY REDEMPTION
The Company will be required to redeem, subject to certain conditions, on
February 16, 2004, February 16, 2005 and February 16, 2006, each a Mandatory
Redemption Date, the percentage of Series A, Series B, Series C and Series D
Preferred Stock, as listed in the following table, at a rate of $1.00 per share
in the case of the Series A Preferred Stock, $4.63
F-15
<PAGE> 69
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
per share in the case of the Series B Preferred Stock, $7.86 per share in the
case of Series C Preferred Stock and $10.20 per share in the case of Series D
Preferred Stock.
<TABLE>
<CAPTION>
PORTION OF SHARES OF
MANDATORY PREFERRED STOCK TO BE
REDEMPTION DATE REDEEMED
- --------------- ---------------------
<S> <C>
February 16, 2004.............................. 33.3%
February 16, 2005.............................. 50.0
February 16, 2006.............................. All shares then held
</TABLE>
(IV) VOTING RIGHTS
The Series A, Series B, Series C and Series D preferred stockholders are
entitled to vote on all matters with the common stockholders as if they were one
class of stock. The Series A, Series B, Series C and Series D preferred
stockholders are entitled to the number of votes equal to the number of shares
of common stock into which each share of those series of preferred stock are
then convertible.
(V) LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the holders of the Series A, Series B, Series C
and Series D Preferred Stock then outstanding will be entitled to be paid an
amount equal to $1.00 per share, $4.63 per share, $7.86 per share and $10.20 per
share, respectively, plus any dividends declared but unpaid on such shares prior
to any payment to common stockholders. In addition, the Series A and B preferred
stockholders will participate with the common stockholders on an if-converted
basis in any other proceeds available.
(c) COMMON STOCK
As of December 31, 1999, the Company has 25,000,000 authorized shares of
common stock, of which a total of 8,126,996 shares have been issued and are
outstanding. As previously discussed, the Company's Board of Directors has
approved, subject to stockholder approval, an increase in the number of
authorized shares of common stock from 25,000,000 shares to 200,000,000 shares.
The Company has reserved a total of 11,000,000 shares of common stock for
issuance under the 1997 Stock Incentive Plan, of which 3,127,296 shares have
been issued and are outstanding as of December 31, 1999. In addition, the
Company has reserved a total of 11,500,000 shares of common stock for the
conversion of the Series A Preferred Stock, 4,427,656 shares of common stock for
the conversion of the Series B Preferred Stock, 556,928 shares of common stock
for the conversion of the Series C Preferred Stock and 3,204,886 shares of
common stock for the conversion of the Series D Preferred Stock.
In 1997, the Company sold 4,999,700 shares of common stock to various
employees at prices which represented the fair market value of the common stock.
These shares of common stock are subject to repurchase agreements which provide
for the vesting of these shares generally over five years. In the event that an
employee is terminated, the Company has the right to repurchase any unvested
shares at the original issue price. As of December 31, 1999, 2,103,718 shares of
common stock were subject to repurchase under these agreements.
F-16
<PAGE> 70
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) 1997 STOCK INCENTIVE PLAN
In April 1997, the Company's Board of Directors approved the 1997 Stock
Incentive Plan (the Plan), which provides for the granting of incentive stock
options (ISOs), nonqualified stock options and the sale of common stock to
employees, officers, directors, advisors and consultants of the Company.
(i) COMMON STOCK
Under the Plan, the Board of Directors may authorize the sale of common
stock to employees, officers, directors, advisors and consultants of the
Company. The purchase price for the common stock shall be determined by the
Board of Directors. In addition, for each grant, the Board of Directors will
determine the terms under which the Company may repurchase such shares.
During 1997 and 1998, the Company sold 1,258,000 and 791,000 shares of
common stock, respectively, to various employees. These shares of common stock
were sold at fair market value and are subject to repurchase agreements which
provide for the vesting of these shares generally over five years. In 1999, the
Company sold 1,211,600 shares of common stock to various employees, subject to
repurchase agreements which provide for the vesting of these shares generally
over five years. In connection with the 1999 sales of common stock, the Company
recorded deferred compensation of approximately $5.7 million which represents
the aggregate difference between the deemed fair value and the selling price of
the common stock (See (iii) Accounting for Stock-Based Compensation). During
1998 and 1999, the Company repurchased 224,334 shares of common stock from
terminated employees. As of December 31, 1999, 2,400,944 shares of common stock
sold to employees under the Plan are subject to repurchase.
(ii) STOCK OPTIONS
Under the Plan, the Board of Directors may grant ISOs and nonqualified
stock options to employees, officers, directors, advisors and consultants of the
Company. ISOs may be granted only to employees. The exercise price of each
option shall be determined by the Board of Directors, but it shall not be less
than the estimated fair market value on the date of grant. Nonqualified stock
options may be granted to employees, officers, directors, advisors or
consultants of the Company. The exercise price of each nonqualified stock option
shall be determined by the Board of Directors, but it shall not be less than the
par value of the common stock on the date of grant. All stock options granted
under the Plan expire within 10 years from the date of grant.
F-17
<PAGE> 71
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES EXERCISE PRICE PRICE
--------- -------------- --------
<S> <C> <C> <C>
Outstanding, December 31, 1997...... -- $ -- $ --
Granted........................ 966,000 0.05 - 0.40 0.29
--------- ----------- -----
Outstanding, December 31, 1998...... 966,000 0.05 - 0.40 0.29
Granted........................ 3,021,200 0.50 - 5.00 2.34
Exercised...................... (91,030) 0.05 - 0.40 0.18
Canceled....................... (91,100) 0.25 - 0.40 0.34
--------- ----------- -----
Outstanding, December 31, 1999...... 3,805,070 $0.05 - 5.00 $1.92
--------- ----------- -----
Exercisable, December 31, 1999...... 256,234 $0.05 - 0.40 $0.27
========= =========== =====
</TABLE>
The following table summarizes information relating to currently
outstanding and exercisable stock options as of December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES LIFE (YEARS) PRICE OF SHARES PRICE
- ------------------------ --------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.05 - 0.40............ 783,870 8.58 $0.30 256,234 $ 0.27
0.50 - 1.25............ 1,246,000 9.31 1.05 -- --
1.75 - 2.25............ 931,000 9.74 2.20 -- --
3.50........... 332,200 9.91 3.50 -- --
5.00........... 512,000 9.99 5.00 -- --
--------- ---- ----- ------- ------
3,805,070 9.41 $1.92 256,234 $ 0.27
========= ==== ===== ======= ======
</TABLE>
During the period from January 1, 2000 to February 29, 2000, the Company
granted options to purchase 2,121,300 shares of common stock at an average
exercise price of $11.43 and options to purchase 87,372 shares of common stock
were exercised at an average exercise price of $0.34. Subsequent to February 29,
2000 the Company granted options to purchase 1,338,100 shares of common stock at
an average exercise price of $25.36.
(iii) ACCOUNTING FOR STOCK-BASED COMPENSATION
In 1999, the Company recorded deferred compensation of approximately $17.6
million. This amount represents the aggregate difference between the deemed fair
value of the Company's stock and the exercise price of stock options granted and
the selling price of stock sold. The Company expects to record additional
deferred compensation of approximately $8.8 million in the quarter ending March
31, 2000. All stock options granted and stock sold prior to 1999 were at fair
market value and therefore, did not result in deferred compensation. The
deferred compensation will be recognized as an expense over the vesting period
of the stock and stock options. During the year ended December 31, 1999, the
Company recorded approximately $2.3 million of compensation expense. The Company
expects to recognize compensation expense of
F-18
<PAGE> 72
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $11.1 million, $6.3 million, $3.8 million, $2.1 million, $704,000
and $6,000 during the years ended December 31, 2000, 2001, 2002, 2003, 2004 and
2005, respectively.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which requires the measurement of
the fair value of employee stock options or warrants to be included in the
statement of income or disclosed in the notes to the financial statements. The
Company has determined that it will account for stock-based compensation for
employees and directors under Accounting Principles Board (APB) Opinion No. 25
and elect the disclosure-only alternative under SFAS No. 123, which requires
disclosure of the pro forma effects on earnings as if the fair-value-based
method of accounting under SFAS No. 123 had been adopted, as well as certain
other information. The Company has computed the pro forma disclosures required
under SFAS No. 123 for options granted in 1998 and 1999 using the Black-Scholes
option pricing model prescribed by SFAS No. 123. The assumptions used for grants
during the years ended December 31, 1998 and 1999 include the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Risk-free interest rates.................................... 4% 5% - 6%
Expected dividend yield..................................... -- --
Volatility factor........................................... 100% 100%
Expected lives.............................................. 4 years 4 years
Weighted average fair value of options granted.............. $0.21 $4.70
</TABLE>
If compensation cost had been determined for stock options granted to
employees based on the fair value of the awards at the date of grant in
accordance with the provisions of SFAS No. 123, the Company's net loss and net
loss per share for the years ended December 31, 1998 and 1999 would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net loss --
As reported......................................... $(9,446,980) $(12,605,996)
Pro forma........................................... (9,478,798) (13,066,630)
Basic and diluted net loss per share --
As reported......................................... $ (6.26) $ (3.99)
Pro forma........................................... (6.28) (4.14)
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because
ArrowPoint's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
(8) EMPLOYEE BENEFIT PLAN
In July 1997, the Company adopted a 401(k) retirement plan (the 401(k)
Plan) for eligible employees, as defined. Each participant may elect to
contribute up to 15% of his or her compensation for the plan year, subject to
certain IRS limitations. Company matching
F-19
<PAGE> 73
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contributions are made to the 401(k) Plan at the discretion of the Board of
Directors. There have been no discretionary contributions made by the Company to
the 401(k) Plan to date.
(9) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas. To date, the Company has viewed its operations and manages its business
as principally one segment. As a result, the financial information disclosed
herein represents all of the material financial information related to the
Company's principal operating segment.
The following table represents the percentage of revenue derived from
individual countries:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1998 1999
---- ----
<S> <C> <C>
United States............................................... 84% 53%
Japan....................................................... 16 2
Germany..................................................... -- 10
Other....................................................... -- 35
--- ---
100% 100%
--- ---
</TABLE>
(10) SUBSEQUENT EVENT
In January 2000, the Company amended its certificate of incorporation to
authorize 699,837 shares of Series E convertible preferred stock (Series E
preferred stock). Also, in January 2000, the Company sold 657,263 shares of
Series E preferred stock for $21.14 per share resulting in net proceeds to the
Company of approximately $13.9 million. In connection with the sale of Series E
preferred stock, the Company will record a charge to accumulated deficit of
approximately $6.6 million in the quarter ending March 31, 2000. This amount
represents the fair value of the beneficial conversion feature of the Series E
preferred stock. This amount will be accounted for like a dividend to preferred
stockholders and, as a result, will increase the Company's net loss available to
common stockholders and the related net loss per share.
F-20
<PAGE> 74
- -------------------------------------------------------
- -------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Special Note Regarding Forward-
Looking Statements.................. 13
Use Of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 24
Management............................ 36
Transactions with Affiliates.......... 42
Principal Stockholders................ 44
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 48
Underwriting.......................... 50
Legal Matters......................... 52
Experts............................... 52
Where You Can Find More Information... 52
Index to Financial Statements......... F-1
</TABLE>
------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
5,000,000 Shares
ARROWPOINT
COMMUNICATIONS, INC.
Common Stock
------------------
[ARROWPOINT COMMUNICATIONS LOGO]
------------------
GOLDMAN, SACHS & CO.
DEUTSCHE BANC ALEX. BROWN
J.P. MORGAN & CO.
Representatives of the Underwriters
- -------------------------------------------------------
- -------------------------------------------------------
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the common stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 47,058
NASD filing fee............................................. 10,275
Nasdaq National Market listing fee.......................... 90,000
Printing and engraving expenses............................. 120,000
Legal fees and expenses..................................... 325,000
Accounting fees and expenses................................ 275,000
Transfer agent and registrar fees and expenses.............. 9,500
Miscellaneous............................................... 48,167
--------
Total............................................. $925,000
========
</TABLE>
- ---------------
ArrowPoint will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and ArrowPoint's Certificate of
Incorporation provide for indemnification of ArrowPoint's directors and officers
for liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of ArrowPoint and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
The Underwriting Agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of ArrowPoint against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").
In addition, ArrowPoint has purchased a directors and officers liability
insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement,
ArrowPoint has sold the following securities that were not registered under the
Securities Act:
On April 15, 1997, ArrowPoint issued and sold 2,600,000 shares of its
common stock to two employees for an aggregate purchase price of $1,300. These
sales were made pursuant to Section 4(2) of the Securities Act.
On April 17, 1997, ArrowPoint issued and sold an aggregate of 5,600,000
shares of its Series A preferred stock to 10 purchasers for an aggregate
purchase price of $5,600,000. These sales were made pursuant to Section 4(2) of
the Securities Act.
On August 8, 1997, ArrowPoint issued and sold an aggregate of 20,000 shares
of its Series A preferred stock to one purchaser for an aggregate purchase price
of $20,000. This sale was made pursuant to Section 4(2) of the Securities Act.
On August 10, 1997, ArrowPoint issued and sold an aggregate of 15,000
shares of its Series A preferred stock to one purchaser for an aggregate
purchase price of $15,000. This sale was made pursuant to Section 4(2) of the
Securities Act.
II-1
<PAGE> 76
On August 11, 1997, ArrowPoint issued and sold an aggregate of 35,000
shares of its Series A preferred stock to one purchaser for an aggregate
purchase price of $35,000. This sale was made pursuant to Section 4(2) of the
Securities Act.
On August 19, 1997, ArrowPoint issued and sold an aggregate of 35,000
shares of its Series A preferred stock to one purchaser for an aggregate
purchase price of $35,000. This sale was made pursuant to Section 4(2) of the
Securities Act.
On December 30, 1997, ArrowPoint issued and sold an aggregate of 25,000
shares of its Series A preferred stock to one purchaser for an aggregate
purchase price of $25,000. This sale was made pursuant to Section 4(2) of the
Securities Act.
On December 31, 1997, ArrowPoint issued and sold an aggregate of 20,000
shares of it Series A preferred stock to one purchaser for an aggregate purchase
price of $20,000. This sale was made pursuant to Section 4(2) of the Securities
Act.
On February 5, 1998, ArrowPoint issued and sold an aggregate of 2,213,828
shares of its Series B preferred stock to 16 purchasers for an aggregate
purchase price of $10,250,023.64. These sales were made pursuant to Section 4(2)
of the Securities Act.
On September 30, 1998, ArrowPoint issued and sold an aggregate of 278,464
shares of its Series C preferred stock to 7 purchasers for an aggregate purchase
price of $2,188,727.04. These sales were made pursuant to Section 4(2) of the
Securities Act.
On February 16, 1999, ArrowPoint issued and sold an aggregate of 1,502,443
shares of its Series D preferred stock to 20 purchasers for an aggregate
purchase price of $15,324,918.60. These sales were made pursuant to Section 4(2)
of the Securities Act.
On November 24, 1999, ArrowPoint issued and sold an aggregate of 100,000
shares of its Series D preferred stock to one purchaser for an aggregate
purchase price of $1,020,000. This sale was made pursuant to Section 4(2) of the
Securities Act.
Between January 14, 2000 and January 26, 2000, ArrowPoint issued and sold
an aggregate of 657,263 shares of its Series E preferred stock to 42 purchasers,
including 15 venture capital investors, 22 purchasers who are employed by
ArrowPoint customers, two purchasers who are employed by a prospective
ArrowPoint customer, one director of ArrowPoint, one customer of ArrowPoint and
one managing director of an investment bank, for an aggregate purchase price of
$13,894,539.82. These sales were made pursuant to Section 4(2) of the Securities
Act.
Between April 15, 1997 and March 21, 2000, ArrowPoint has issued and sold a
total of 8,518,938 shares of its common stock to 85 persons for a purchase
prices ranging from $.0005 to $3.50 per share. All of these sales were made
pursuant to Rule 701 promulgated under the Securities Act.
No underwriters were involved in any of the foregoing sales of securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- ------------------------------------------------------------
<C> <S>
1.01* Form of Underwriting Agreement.
3.01* Certificate of Incorporation of ArrowPoint, as amended to
date.
3.02* Form of Certificate of Amendment to Certificate of
Incorporation of ArrowPoint (to be filed prior to closing of
this public offering).
</TABLE>
II-2
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- ------------------------------------------------------------
<C> <S>
3.03* Form of Amended and Restated Certificate of Incorporation of
ArrowPoint (to be filed following the closing of this public
offering).
3.04* Amended and Restated By-Laws of ArrowPoint.
4.01 Specimen Certificate for shares of Common Stock.
5.01* Legal Opinion of Hale and Dorr LLP.
10.01* 1997 Stock Incentive Plan.
10.02* 2000 Non-Employee Director Stock Option Plan.
10.03* Stock Restriction Agreement dated April 15, 1997 between
ArrowPoint and Chin-Cheng Wu.
10.04* Stock Restriction Agreement dated November 29, 1999 between
ArrowPoint and Louis J. Volpe.
10.05* Stock Restriction Agreement dated December 31, 1997 between
ArrowPoint and Cynthia M. Deysher.
10.06* Stock Restriction Agreement dated March 9, 1998 between
ArrowPoint and Christopher P. Lynch.
10.07* Stock Restriction Agreement dated October 10, 1997 between
ArrowPoint and Peter M. Piscia.
10.08* Form of Non-competition and Confidentiality Agreement
between ArrowPoint and each executive officer.
10.09* Investor Rights Agreement dated January 14, 2000 among
ArrowPoint and the investors named therein.
10.10+* Comprehensive Professional Services Agreement dated August
25, 1999 between ArrowPoint and Plexus Corp.
10.11* Sourcepro Software Source Code Escrow Agreement Source File
Number 7541 dated July 30, 1997 among Source File LLC, MMC
Networks, Inc. and ArrowPoint.
10.12* Office Lease dated August 31, 1999 by and between Nagog Park
Investors, L.L.C. and ArrowPoint.
10.13* Credit Agreement dated as of August 5, 1998 between
ArrowPoint and Fleet National Bank, as amended.
10.14* Series B Preferred Stock Purchase Agreement dated February
5, 1998 among ArrowPoint and the purchasers named therein.
10.15* Series C Preferred Stock Purchase Agreement dated September
30, 1998 among ArrowPoint and the purchasers named therein.
10.16* Series D Preferred Stock Purchase Agreement dated February
16, 1999 among ArrowPoint and the purchasers named therein.
10.17* Series D Preferred Stock Purchase Agreement dated November
24, 1999 between ArrowPoint and Louis J. Volpe.
10.18* Series E Preferred Stock Purchase Agreement dated January
25, 2000 among ArrowPoint and the purchasers named therein.
21.01* Subsidiaries.
23.01* Consent of Hale and Dorr LLP (included in Exhibit 5.01).
23.02 Consent of Arthur Andersen LLP.
</TABLE>
II-3
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- ------------------------------------------------------------
<C> <S>
23.03* Consent of International Data Corporation.
24.01* Power of Attorney.
27.01* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the Commission.
(b) Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser, (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in Acton, Massachusetts on March 28,
2000.
ARROWPOINT COMMUNICATIONS, INC.
By: /s/ CYNTHIA M. DEYSHER
------------------------------------
Cynthia M. Deysher
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman and Chief Executive Officer
(principal executive officer)
* March 28, 2000
- ---------------------------------------
Chin-Cheng Wu
Chief Financial Officer (principal
financial and accounting officer)
/s/ CYNTHIA M. DEYSHER March 28, 2000
- ---------------------------------------
Cynthia M. Deysher
Director
* March 28, 2000
- ---------------------------------------
Edward T. Anderson
Director
* March 28, 2000
- ---------------------------------------
James A. Dolce, Jr.
Director
* March 28, 2000
- ---------------------------------------
Paul J. Ferri
Director
* March 28, 2000
- ---------------------------------------
Louis J. Volpe
*By: /s/ CYNTHIA M. DEYSHER
---------------------------------
Cynthia M. Deysher
Attorney-in-fact
</TABLE>
II-5
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- ------------------------------------------------------------
<C> <S>
1.01* Form of Underwriting Agreement.
3.01* Certificate of Incorporation of ArrowPoint, as amended to
date.
3.02* Form of Certificate of Amendment to Certificate of
Incorporation of ArrowPoint (to be filed prior to closing of
this public offering).
3.03* Form of Amended and Restated Certificate of Incorporation of
ArrowPoint (to be filed following the closing of this public
offering).
3.04* Amended and Restated By-Laws of ArrowPoint.
4.01 Specimen Certificate for shares of Common Stock.
5.01* Legal Opinion of Hale and Dorr LLP.
10.01* 1997 Stock Incentive Plan.
10.02* 2000 Non-Employee Director Stock Option Plan.
10.03* Stock Restriction Agreement dated April 15, 1997 between
ArrowPoint and Chin-Cheng Wu.
10.04* Stock Restriction Agreement dated November 29, 1999 between
ArrowPoint and Louis J. Volpe.
10.05* Stock Restriction Agreement dated December 31, 1997 between
ArrowPoint and Cynthia M. Deysher.
10.06* Stock Restriction Agreement dated March 9, 1998 between
ArrowPoint and Christopher P. Lynch.
10.07* Stock Restriction Agreement dated October 10, 1997 between
ArrowPoint and Peter M. Piscia.
10.08* Form of Non-competition and Confidentiality Agreement
between ArrowPoint and each executive officer.
10.09* Investor Rights Agreement dated January 14, 2000 among
ArrowPoint and the investors named therein.
10.10+* Comprehensive Professional Services Agreement dated August
25, 1999 between the ArrowPoint and Plexus Corp.
10.11* Sourcepro Software Source Code Escrow Agreement Source File
Number 7541 dated July 30, 1997 among Source File LLC, MMC
Networks, Inc. and ArrowPoint.
10.12* Office Lease dated August 31, 1999 by and between Nagog Park
Investors, L.L.C. and ArrowPoint.
10.13* Credit Agreement dated as of August 5, 1998 between
ArrowPoint and Fleet National Bank, as amended.
10.14* Series B Preferred Stock Purchase Agreement dated February
5, 1998 among ArrowPoint and the purchasers named therein.
10.15* Series C Preferred Stock Purchase Agreement dated September
30, 1998 among ArrowPoint and the purchasers named therein.
10.16* Series D Preferred Stock Purchase Agreement dated February
16, 1999 among ArrowPoint and the purchasers named therein.
10.17* Series D Preferred Stock Purchase Agreement dated November
24, 1999 between ArrowPoint and Louis J. Volpe.
10.18* Series E Preferred Stock Purchase Agreement dated January
25, 2000 among ArrowPoint and the purchasers named therein.
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- ------------------------------------------------------------
<C> <S>
21.01* Subsidiaries.
23.01* Consent of Hale and Dorr LLP (included in Exhibit 5.01).
23.02 Consent of Arthur Andersen LLP.
23.03* Consent of International Data Corporation.
24.01* Power of Attorney
27.01* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the Commission.
<PAGE> 1
Exhibit 4.01
[ARROW POINT COMMUNICATIONS LOGO]
COMMON STOCK PAR VALUE $.001
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
See reverse for
certain definitions
CUSIP 042810 10 1
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
ArrowPoint Communications, Inc. transferable in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
and the shares represented hereby are subject to all the terms, conditions and
limitations of the Certificate of Incorporation and By-laws and all Amendments
and Restatements thereto and Supplements thereof. This Certificate is not valid
until countersigned by the Transfer Agent and registered by the Registrar.
Witness the corporate seal of the Corporation and the signatures of its duly
authorized officers.
Dated:
/s/ Louis J. Volpe
PRESIDENT AND
CHIEF OPERATING OFFICER
[SEAL GRAPHIC]
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY /s/ Cynthia M. Deysher
TRANSFER AGENT VICE PRESIDENT OF OPERATIONS
AND REGISTRAR AND CHIEF FINANCIAL OFFICER
BY
AUTHORIZED SIGNATURE
<PAGE> 2
ArrowPoint Communications, Inc.
The Corporation is authorized to issue more than one class of stock. The
corporation will furnish without charge to each stockholder who so requests the
power, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-............Custodian............
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act...............
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list
For value recieved, ________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------------
- ---------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares
- --------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporationn with
full power of substitution in the premises.
Dated:
---------------------------
(Signature)
----------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATSOEVER.
Signature(s) Guaranteed:
- ----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBER-
SHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 27, 2000
