<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 2000.
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ELASTIC NETWORKS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 58-2418576
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
6120 WINDWARD PARKWAY
SUITE 100
ALPHARETTA, GEORGIA 30005
(678) 297-3100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
GUY D. GILL
ELASTIC NETWORKS INC.
6120 WINDWARD PARKWAY, SUITE 100
ALPHARETTA, GEORGIA 30005
(678) 297-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
W. TINLEY ANDERSON, III, ESQ. MARK L. HANSON, ESQ.
SCOTT M. HOBBY, ESQ. JONES, DAY, REAVIS & POGUE
HUNTON & WILLIAMS 3500 SUNTRUST PLAZA
BANK OF AMERICA PLAZA, SUITE 4100 303 PEACHTREE STREET, NE
600 PEACHTREE STREET, NE ATLANTA, GEORGIA 30308
ATLANTA, GEORGIA 30308 (404) 521-3939
(404) 888-4000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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, as amended (the "Securities Act"), 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, please 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 a 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
for 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 number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) AMOUNT OF REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value....................... $75,000,000 $19,800
</TABLE>
(1) Includes shares which the underwriters may purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
--------------------------
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 29, 2000
PROSPECTUS
Shares
[LOGO]
Common Stock
This is the initial public offering of common stock by Elastic
Networks Inc. We are selling shares of our common stock and one of
our stockholders is selling shares of our common stock. We estimate that
the initial public offering price will be between $ and $ per
share. We will not receive any of the proceeds from the sale of common stock by
the selling stockholder.
------------------------
Prior to this offering, there has been no public market for our common
stock. We have applied to list our common stock on the Nasdaq National Market
under the symbol ELAS.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Elastic Networks, before offering expenses...... $ $
Proceeds to the selling stockholder, before offering
expenses.................................................. $ $
</TABLE>
Elastic Networks and the selling stockholder have granted the underwriters
an option for a period of 30 days to purchase up to additional shares of
common stock at the offering price, less the underwriting discount.
------------------------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CHASE H&Q ROBERTSON STEPHENS
UBS WARBURG LLC
, 2000
<PAGE>
Center top: title "ELASTIC'S CURRENT IP END-TO-END SOLUTIONS DIAGRAM"
PRODUCT DIAGRAM in Business Section
1. Top left images of an ELMo DSLAM, its associated filter shelf and YesWare
Server with lines connecting both to a picture of a telephone switch and a
picture of Internet services to a line that represents a third party router. On
the top right are the words "In-Home" and the picture of our Elite modem with
lines connecting it to a computer and a telephone. Below that are the words
"In-Office" and pictures of our Ethernet port with lines connecting them to a
telephone and a lap top computer. A dashed line is drawn from these figures to
our ELMo filter.
2. Bottom left: the words "In-Building" and images of the ELMo DSLAM, its
associated filter shelf and our YesWare server with a line connected to a PBX
and a picture of the Internet to a line that represents a third party router in
a typical multi-tenant building location. A dashed line connects this to a
picture of a standard telephone and our eSled, which is connected by a line to a
lap top computer. The eSled is attached to a phone and shown as an image on the
lower right side. EDGAR HERE
Elastic Networks, Elastic, EtherLoop, the Elastic logo, ELMo, Elite, Spectrum
Manager, YesWare, Storm System, BitStorm, MicroBurst, eSled, StormPort and
StormTracker are our trademarks. This prospectus also includes trademarks,
service marks and trade names of other companies. This prospectus refers to
market research reports prepared by various organizations, which typically do
not disclose their underlying limitations or assumptions. You should not rely on
these market reports as being necessarily indicative of future developments.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Cautionary Note Regarding Forward-Looking Statements........ 16
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Historical Financial Information................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 28
Management.................................................. 40
Related Party Transactions.................................. 46
Principal and Selling Stockholders.......................... 49
Description of Capital Stock................................ 51
Shares Eligible for Future Sale............................. 53
Underwriting................................................ 54
Legal Matters............................................... 57
Experts..................................................... 57
Additional Information...................................... 57
Index to Financial Statements............................... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION ABOUT ELASTIC NETWORKS AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING, AS WELL AS OUR FINANCIAL STATEMENTS AND THE RELATED NOTES, APPEARING
ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, YOU SHOULD READ
THE ENTIRE PROSPECTUS, ESPECIALLY THE RISKS DESCRIBED UNDER "RISK FACTORS,"
BEFORE YOU DECIDE TO INVEST IN OUR COMMON STOCK.
ELASTIC NETWORKS INC.
We design, develop and market high-speed digital subscriber line, or DSL,
communications products. Our products enable service providers to deliver
broadband access solutions that are easy to deploy and cost-effectively utilize
the existing copper telephone wire infrastructure. We design our products based
on our patented EtherLoop technology to overcome many of the limitations of
conventional DSL technologies. EtherLoop combines the benefits of Ethernet and
conventional DSL technologies into a next generation DSL technology. Our
products consist of Internet Protocol DSL access multiplexers, or IP DSLAMs, DSL
customer premises equipment, or CPE, and complementary software. In addition to
providing broadband access, our products dynamically allocate bandwidth,
intelligently monitor and adjust for line interference, simplify connectivity
and provide enhanced policy management tools. Our products can be implemented as
a complete solution or on a modular basis.
Our solution is highly scalable and may be deployed in a service provider's
facility or on any premises where multiple end users are located, such as
hotels, multi-tenant business complexes, apartment buildings, condominiums and
university campuses. Our products can be scaled to enhance functionality by
adding such features as additional lines and increased bandwidth. Our products
enable service providers to rapidly deploy DSL services to meet their
subscribers' growing demand for broadband access and new value-added services.
We sell our products through a direct sales force and selected distributors
to telecommunications and in-building service providers. Our products have been
deployed by domestic and international service providers, including Darwin
Networks, Inc., Everest Broadband Networks, Inc., Sprint Corporation, Terra
Networks, S.A., OverNet Inc., Prism Communications, Inc. and UniversalCom, Inc.
We have distribution arrangements with Nortel Networks Inc., Westcon Group Inc.
and Williams Communications Group Inc. that allow us to expand our market
presence. We also have strategic business partnerships with Texas Instruments
Incorporated, Sanmina Corporation and GTE Communications Corporation, among
others, to assist us with technology development, manufacturing and professional
services. All of these arrangements enable us to benefit from the infrastructure
and capabilities of established industry leaders, helping us improve our
products, lower our costs and increase our speed to market.
We were originally formed in January 1997 as the Elastic Networks group of
Nortel Networks Inc. and began doing business as a separate company in
May 1999. Our relationship with Nortel is among our most important.
MARKET OPPORTUNITY
As the Internet has become an increasingly important communications medium,
businesses and residential users have embraced it for more sophisticated uses.
The Internet is now used for mission critical applications such as e-commerce,
virtual private networking and telecommuting, and for interactive applications
such as online customer service, distance learning and online entertainment. As
users seek access to more content, and as applications become more complex and
require more bandwidth, the ability to connect to the Internet at high-speeds is
increasingly becoming important for end users. DSL technology has the capability
of delivering broadband access to end users over existing copper telephone
wires, an infrastructure that connects to over 850 million homes and businesses
worldwide. To date, deployment and maintenance of conventional DSL technologies
have been complex, expensive and subject
3
<PAGE>
to quality of service issues. We believe that widespread deployment of DSL
services requires technology that is easy to deploy, does not interfere with,
and is not subject to interference from, other services, and provides the speed
and performance that is required by service providers and their customers.
OUR SOLUTION AND STRATEGY
Our products utilize our patented EtherLoop technology to provide
high-speed, cost-effective broadband access solutions. EtherLoop combines the
best attributes of DSL with those of Ethernet to deliver a next generation
access technology that overcomes many of the performance, cost and quality of
service limitations of conventional DSL technologies. Our access solutions offer
the following benefits:
- DYNAMIC BANDWIDTH ALLOCATION. Our EtherLoop technology currently enables
dynamically allocated bi-directional bandwidth of up to 4 megabits per
second, or Mbps, based on end user demands, providing the functionality to
deliver an array of value-added business services and applications on a
common platform.
- AVOIDANCE OF CROSS TALK AND OTHER INTERFERENCE. Our EtherLoop technology
constantly monitors interference on each line over which EtherLoop signals
are transmitted and can dynamically adjust transmission frequencies to
avoid potential interference. This includes cross talk interference either
by or with other services in the same bundle of telephone wires, or binder
group. This enables service providers to deploy more broadband lines in
the same binder group without equipment modifications.
- EASE OF DEPLOYMENT AND USE. Our products can be deployed without the need
for costly plant re-engineering and rewiring, or labor intensive service
calls, or truck rolls, and are designed for plug and play connectivity.
- HIGHLY SCALABLE. Our products are designed in a modular format, which
enables the quick adjustment of features, such as line capacity and
bandwidth, without the cost of replacing the entire DSLAM or CPE.
- GREATER DISTANCE. Our products utilize data packet transmission technology
to provide reliable service coverage beyond the typical range of
conventional DSL technologies, enabling service providers to maximize
their technology investment to deliver access to more of their subscriber
base.
We intend to maintain and build upon our position as a leader in next
generation DSL access technology. Key elements of our strategy include:
- Continue to capitalize on the advantages of our EtherLoop technology;
- Expand our penetration within the broadband access market;
- Increase our direct and indirect sales channels, and expand
internationally;
- Leverage our existing business partnerships, and develop new ones, to
continue to improve our products, reduce costs and increase speed to
market; and
- Facilitate further market adoption through the licensing of our
technology.
CORPORATE INFORMATION
We were incorporated as a Delaware corporation in September 1998 and began
doing business as a separate company in May 1999. Our principal executive office
is located at 6120 Windward Parkway, Suite 100, Alpharetta, Georgia 30005. Our
telephone number is (678) 297-3100 and our Web address is WWW.ELASTIC.COM.
Information contained on our Web site does not constitute part of this
prospectus, and you should rely only on the information contained in this
prospectus in deciding whether to invest in our common stock.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Elastic Networks................... shares
Common stock offered by the selling stockholder............ shares
Common stock to be outstanding after this offering......... shares
Use of proceeds by Elastic Networks........................ To fund the expansion of our business,
our operating deficits and other working
capital needs, as well as general
corporate purposes and to repay short
term debt we expect to incur before the
closing of this offering.
Proposed Nasdaq National Market symbol..................... ELAS
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of March 31, 2000, and excludes:
- 4,960,854 shares of common stock issuable upon exercise of outstanding
options and warrants; and
- 762,020 shares reserved for future grants under our 1999 stock incentive
plan.
------------------------
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS:
- REFLECTS THE CONVERSION OF ALL THE OUTSTANDING SHARES OF OUR SERIES A AND
B PREFERRED STOCK INTO 9,084,913 SHARES OF OUR COMMON STOCK, WHICH WILL
AUTOMATICALLY OCCUR ON THE CLOSING OF THIS OFFERING;
- REFLECTS THE AMENDMENT AND RESTATEMENT OF OUR CERTIFICATE OF INCORPORATION
AND BYLAWS, WHICH WILL OCCUR IMMEDIATELY BEFORE THE CLOSING OF THIS
OFFERING; AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table is a summary of the financial data for our business. You
should read this information together with the financial statements and the
related notes appearing at the end of this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For an explanation of the determination of the number of shares
used to compute historical and pro forma basic and diluted net loss per share,
see note 2 of the notes to our financial statements. The pro forma balance sheet
data summarized below gives effect to the conversion of all outstanding shares
of our preferred stock into 9,084,913 shares of our common stock, which will
automatically occur on the closing of this offering and the payment of
$2.0 million in notes receivable from a non-affiliate investor, which occurred
in June 2000, as if the conversion and repayment occurred on March 31, 2000. The
pro forma as adjusted balance sheet data summarized below also reflects the sale
of the common stock offered by us at the estimated initial public offering price
of $ per share, after deducting underwriting discounts and estimated
offering expenses payable by us, and our receipt and application of the net
proceeds from this offering.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................... $ -- $ 233 $ 8,215 $ 344 $ 6,189
Gross profit (loss).......................... -- (1,913) (6,075) (459) 133
Operating expenses........................... 4,503 13,317 14,870 2,927 5,856
Operating loss............................... (4,503) (15,230) (20,945) (3,386) (5,723)
Net loss..................................... $(4,503) $(15,230) $(20,855) $(3,386) $(5,679)
======= ======== ======== ======= =======
Net loss attributable to common
stockholders............................... $(4,503) $(15,230) $(21,188) $(3,386) $(5,812)
======= ======== ======== ======= =======
Basic and diluted net loss per common
share...................................... $ (0.28) $ (0.93) $ (1.29) $ (0.21) $ (0.36)
======= ======== ======== ======= =======
Weighted average shares used in computing
basic and diluted net loss per common
share...................................... 16,367 16,367 16,367 16,367 16,367
======= ======== ======== ======= =======
Pro forma basic and diluted net loss per
common share (unaudited)................... $ (1.05) $ (0.24)
======== =======
Weighted average shares used in computing
unaudited pro forma basic and diluted net
loss per common share amounts
(unaudited)................................ 20,244 24,166
======== =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 16,265 $18,259 $ --
Working capital............................................. 13,466 15,460
Total assets................................................ 27,546 29,540 --
Capital lease obligations--long term........................ 84 84
Redeemable convertible participating preferred stock........ 29,001 --
Total stockholders' equity (deficit)........................ (14,821) 16,174
</TABLE>
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND ALL OF THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE MAKING A DECISION TO INVEST IN OUR COMMON
STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED. IN THAT CASE, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE
FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US MAY ALSO HARM
OUR BUSINESS.
RISKS RELATED TO OUR BUSINESS
WE HAVE A SHORT OPERATING HISTORY, WHICH MAY MAKE IT DIFFICULT TO ACCURATELY
FORECAST OUR FUTURE REVENUES AND OTHER OPERATING RESULTS.
We only began selling our products in mid 1999. As a result, we have only a
limited operating history upon which you may evaluate our business and
prospects. Our limited operating history may make it difficult or impossible for
analysts or investors to accurately forecast our future revenues and other
operating results. Furthermore, if we do not meet or exceed the forecasts and
expectations of analysts and investors regarding our future revenues and other
operating results, the price of our common stock could decline substantially.
WE HAVE INCURRED NET LOSSES SINCE WE WERE FORMED AND EXPECT TO INCUR FUTURE
LOSSES.
Through March 31, 2000, we incurred net losses totaling approximately
$46.3 million. As of March 31, 2000 we had an accumulated deficit of
$18.1 million. We expect to continue to incur substantial expenditures for sales
and marketing, product development and other purposes, which may be fixed in the
short term. As a result, we expect to continue to incur losses in 2000, as well
as in future years. Our ability to increase revenues, and achieve and maintain
profitability in the future, will primarily depend on our ability to increase
sales of our products, reduce production and other costs and successfully
introduce new and enhanced versions of our existing products into the
marketplace. We cannot assure you that we will be able to increase our revenues
at a rate that equals or exceeds expenditures. Our failure to do so would result
in our incurring additional losses.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE, WHICH MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. Therefore, you should not rely on our historical
operating results as an indicator of future performance. Some of the factors
that could cause our results of operations to fluctuate include:
- variations in market acceptance of our products and in the timing and size
of customer orders and shipments;
- changes in the mix of our product offerings and sales channels;
- competitive market conditions, such as pricing policies, timing and
acceptance of new and enhanced product introductions by us, our customers
or our competitors, including introductions of alternative technologies;
- changes in our operating expenses, including the costs of our products'
components;
- our ability to meet and maintain production volumes and ship products in a
timely manner; and
- other general economic factors, as well as those specific to the
telecommunications industry.
Fluctuations caused by these or other factors could harm our business,
financial condition, results of operations and the price of our common stock.
7
<PAGE>
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS AND THE LOSS OF ANY ONE OF THEM COULD
SIGNIFICANTLY HARM OUR BUSINESS.
We derive a substantial portion of our revenues, and expect to continue to
derive a substantial portion of our revenues in the near future, from sales to a
limited number of customers. For the year ended December 31, 1999, aggregate
sales to Darwin and Nortel accounted for about 81% of our total revenues. Sales
to Darwin accounted for 41% of our revenues and sales to Nortel, which included
indirect sales to Westcon, accounted for 40% of our revenues during that period.
In the first quarter of 2000, we entered into a distribution arrangement with
Westcon under which Westcon agreed to purchase our products directly from us
instead of through our distributors. Sales to Darwin, Nortel and Westcon during
the first three months of 2000 accounted for about 83% of our total revenues.
Sales to Darwin accounted for 54% of our revenues, sales to Nortel accounted for
15% of our revenues and sales to Westcon for 14% of our revenues during that
period.
Unless and until we diversify and expand our customer base, our success will
depend significantly upon the timing and size of future purchase orders, if any,
from our largest customers, the product requirements of these customers, the
financial and operational success of these customers, and, in particular, the
successful deployment of services using our products. The loss of any one or
more of these customers, significant changes in their product requirements,
delays of significant orders or the occurrence of any sales fluctuations of our
or our customers' products could harm our business, financial condition, results
of operations and the price of our common stock.
A MAJORITY OF OUR BUSINESS IS GENERATED BY DEMAND FROM NEW AND EMERGING SERVICE
PROVIDERS, WHOSE INABILITY TO OBTAIN CAPITAL COULD CAUSE THEM TO REDUCE OR
DISCONTINUE THE PURCHASE OF OUR PRODUCTS AT ANY TIME.
The companies that currently deploy our products, or that may do so in the
future, are new and emerging and have largely unproven business models. These
companies require substantial capital for the development, construction and
expansion of their businesses. Financing may not be available to these companies
on favorable terms, if at all. To the extent that these companies are unable to
obtain the financing they need, our ability to make future sales to these
customers directly or through our distributors could be harmed. In addition, to
the extent we choose to provide financing to these customers, we will be subject
to additional financial risk which could reduce our profitability.
WE ONLY OFFER A LIMITED NUMBER OF PRODUCTS AND, THEREFORE, OUR BUSINESS DEPENDS
ON THE SUCCESS OF EACH.
We currently derive substantially all of our revenues from sales of a
limited number of high-speed access products. We do not expect our line of
products to expand significantly in the near future. The failure of any of our
product offerings to achieve and maintain a meaningful level of market
penetration and customer satisfaction would harm our ability to generate
revenues.
Numerous factors could affect the ability of our product offerings to
achieve and maintain market penetration and customer satisfaction. We only began
selling our products in mid 1999, and cannot yet predict whether they will gain
widespread market acceptance. Even if our customers do purchase our products in
meaningful quantities, due to the variety and complexity of the environments in
which these customers operate, our products may not operate as expected. This
could result in delays in installation and increased expenses. In addition, the
success of competing products and technologies, pricing pressures, manufacturing
difficulties and other factors could harm our ability to generate revenues, as
well as harm our business, financial condition, results of operations and the
price of our common stock.
OUR SUCCESS DEPENDS UPON WIDESPREAD MARKET ACCEPTANCE OF DSL TECHNOLOGY.
Because our products are based on the use of copper telephone wires, and
because there are physical limits to the speed and distance over which data can
be transmitted over these types of wires, our
8
<PAGE>
products may not be a viable solution for customers requiring service at
performance levels beyond the limits of copper telephone wires. Our competitors
currently offer products based on directly competing technologies, including
ISDN, T-1, fiber optics and cable and wireless solutions. Additionally, in the
future our competitors may develop transmission media and technologies other
than DSL that provide faster access, higher reliability or are more cost
effective for some of our existing and potential customers. If any of these
technologies are adopted or implemented in our market, demand for our products
that are based on copper telephone wires could decline and our business,
financial condition, results of operations, and the price of our common stock
could be harmed.
WE DEPEND ON DISTRIBUTORS AND RESELLERS FOR SALES, AND IF ANY OF THEM DO NOT
PERFORM AS EXPECTED, WE COULD EXPERIENCE A LOSS OF SALES.
Our success depends, in part, upon distribution and reseller arrangements,
including our current arrangements with Nortel, Westcon and Williams
Communications. These arrangements are relatively new, and we cannot accurately
predict whether significant recurring revenues will be generated from these
arrangements. Our sales and distribution partners may not market, sell or
distribute our products, or perform any of their other obligations, as we
expect, in which case we may not desire to maintain these arrangements, or be
able to develop successful replacements. In the event that any of these
arrangements are terminated, or are otherwise unsuccessful, sales of our
products could be harmed.
OUR DEPENDENCE ON SINGLE SOURCE SUPPLIERS EXPOSES US TO SUPPLY INTERRUPTION
RISKS WHICH COULD HARM OUR SALES AND INCREASE OUR COSTS.
Although we generally use standard parts and components for our products,
our products contain several key components that are purchased from single
source suppliers: line driver chips from Texas Instruments, power supplies from
Aztec America Inc. and system processor chips from Motorola Inc. We do not have
written agreements with our single source suppliers. The manufacture of some of
these single source components is extremely complex, and our reliance on the
suppliers of these components exposes us to potential production difficulties
and quality variations due to increased third-party demand or supplier related
issues. If these suppliers are unable to meet component requirements, we would
be forced to seek alternative production sources, which could negatively impact
our costs and the timely delivery of our products. Alternate suppliers may not
meet our quality standards or quantity requirements. Our inability to obtain
sufficient quantities of these components, or components that meet our quality
standards, may result in delays or reductions in product shipments, which could
harm our reputation, business, financial condition, results of operations and
the price of our common stock.
OUR DEPENDENCE ON OUR CONTRACT MANUFACTURER COULD RESULT IN PRODUCT DELIVERY
DELAYS.
We currently use a contract manufacturer, Sanmina, to build some of our
printed circuit boards, chassis and subassemblies and, in most cases, to
complete final assembly and testing of our products. Our reliance on Sanmina
involves a number of risks, including the absence of adequate capacity, the
unavailability of, or interruptions in, access to certain process technologies,
and reduced control over delivery schedules, manufacturing yields, quality and
costs. It is possible that Sanmina's manufacturing capabilities may not be
available to us when needed, or that it may not be in a position to satisfy our
production requirements at acceptable prices and on a timely basis, if at all.
If Sanmina is unable or unwilling to continue manufacturing our components in
required volumes, or to our quality specifications, or if we develop new
technologies requiring components which Sanmina is incapable of manufacturing,
we will have to identify acceptable alternative manufacturers. Alternative
manufacturers, however, may not be available. Any significant interruption in
the supply of products could result in our inability to adequately meet our
customers' demands, which in turn could harm our reputation, business, financial
condition, results of operations and the price of our common stock.
9
<PAGE>
WE DEPEND ON INTERNATIONAL SALES FOR A SIGNIFICANT PORTION OF OUR REVENUES.
Revenues from customers outside of the United States accounted for about 12%
of our total revenues for the year ended December 31, 1999, and 16% of our total
revenues for the three months ended March 31, 2000. As a part of our strategy,
we intend to expand our sales in international markets. There are a number of
risks associated with our international sales, including:
- longer receivables collection periods;
- increased political and economic instability;
- difficulties and costs of staffing and managing foreign operations;
- difficulties in enforcing our rights and agreements through non-U.S. legal
systems;
- unexpected changes in regulatory requirements;
- changes in import or export licensing requirements;
- reduced protection for intellectual property rights in some countries; and
- currency fluctuations which could cause our products, the prices of which
are denominated in U.S. dollars, to become relatively more expensive for
non-U.S. customers and reduce demand for our products.
We also utilize product development and other resources in order to meet
regulatory and technical requirements of countries into which we sell our
products. We depend on sales of our products in these markets in order to offset
the costs associated with developing products for those markets. If we are
unable to generate sufficient international sales to offset these expenses, our
business could suffer.
We expect sales to customers outside of the United States to continue to
account for a significant portion of our revenues. We can give no assurance that
non-U.S. markets for our products will continue to develop or will develop at
the rate we expect. Any failure of these markets to develop, or our failure to
increase sales to customers outside of the United States, could harm our
business, financial condition, results of operations and the price of our common
stock.
NORTEL NETWORKS CORPORATION AND ITS WHOLLY OWNED U.S. SUBSIDIARY, NORTEL
NETWORKS INC., HAVE SIGNIFICANT INFLUENCE ON OUR AFFAIRS DUE TO OUR VARIOUS
COMMERCIAL, OWNERSHIP, MANAGEMENT AND INTELLECTUAL PROPERTY RELATIONSHIPS WITH
THEM.
We were formed by means of a contribution agreement among Nortel
Networks Inc., Nortel Networks Corporation and us. Under this agreement, we
issued Nortel Networks Inc. 15,384,614 shares of our common stock. Nortel has
the right to designate two members of our board of directors, but this right
terminates on the closing of this offering. Messrs. Manley and Reid, appointed
by Nortel to our board of directors, are executives of Nortel. Although Nortel
is selling some of its shares of our common stock in this offering, after the
offering closes, it will still own %, or shares, of our outstanding
common stock. Because of this level of ownership, and because of their board
representation, after the offering Nortel will continue to have the ability to
exercise significant control over our affairs. There also may be conflicts of
interest between us and Nortel with respect to acquisitions, financings and
other corporate opportunities. Nortel's ability to exercise significant control
could have the effect of delaying or preventing a change in control of Elastic
Networks and other strategic and operational initiatives, which could harm our
business and the price of our common stock.
As part of our formation, we also entered into an intellectual property
transfer and license agreement with Nortel Networks Corporation, and a patent
transfer and license agreement with Nortel Networks Inc. Under these agreements,
Nortel licensed or transferred to us the rights to patents, patent applications,
trademarks, software and other technical information that we use in our
business. In return, we granted Nortel a license, with a limited right to grant
sublicenses, to the transferred patented technology, the licensed technologies,
the transferred software and to the other technical information. This license
granted
10
<PAGE>
back to Nortel also includes a license to any improvements that we may acquire
or make to the transferred patented technology, the licensed technologies, the
transferred software and the other technical information. Although this license
is subject to Nortel's obligation not to compete with us with respect to
EtherLoop-based products through May 12, 2002, all of our rights to these
technologies are subject to various cross-licenses that Nortel granted to other
companies prior to May 12, 1999. Therefore, we cannot assure you that our rights
to these technologies will allow us to prevent Nortel, these companies or other
licensees from using these technologies. There will be no contractual
restrictions on Nortel's ability to engage in competitive activities with
respect to EtherLoop-based products once Nortel's obligation not to compete
expires. Furthermore, we currently compete with some other technologies Nortel
owns for which we do not have licenses.
We also have other agreements and relationships with Nortel. We have entered
into a distribution arrangement with Nortel under which they have agreed to
market and distribute our products. We cannot predict whether Nortel will
continue to market and distribute our products or perform its other obligations
under these agreements. Additionally, since we became a separate company, Nortel
has provided us with insurance, access to software systems and other services
under a transition services agreement that terminates on November 12, 2000. Our
insurance benefits under this agreement automatically terminate on the closing
of this offering. We may not be able to obtain similar insurance at favorable
rates or access to similar software systems on commercially reasonable terms.
Finally, Nortel has, from time to time, guaranteed the financing of purchases of
our equipment by some of our customers who purchase through our distribution
arrangement with Nortel. Should Nortel fail to do this in the future, we may not
be able to make sales we otherwise might have made.
Because of the number and nature of the various relationships that we have
with Nortel, an interruption or dissolution of any one of these relationships
could significantly harm our business, financial condition, results of
operations and the price of our common stock.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY, OR IF OTHERS USE OUR
INTELLECTUAL PROPERTY WITHOUT OUR PERMISSION, OUR COMPETITIVE POSITION MAY
SUFFER.
Our ability to compete and be successful is based, in part, on our
intellectual property. We rely on a combination of copyright, trademark, patent
and trade secret laws and contractual restrictions to establish and protect our
technology and other intellectual property. We require employees and consultants
and, when possible, suppliers, manufacturers and distributors, to sign
confidentiality agreements. However, we cannot assure you that our steps will be
sufficient to prevent misappropriation of our technology and other intellectual
property, or that our competitors will not independently develop technologies or
other intellectual properties that are substantially equivalent or superior to
ours. In addition, the laws of many countries do not protect intellectual
property to the same extent as the laws of the United States. If our
intellectual property rights are not protected, our business may suffer. If we
have to bring a lawsuit against another entity that infringes or misappropriates
any of our intellectual property, we would likely have to divert significant
resources, both financial and human, in prosecuting the lawsuit.
We own U.S. patent number 5,912,895, titled "Information Network Access
Apparatus and Methods for Communicating Information Packets via Telephone
Lines." This patent issued on June 15, 1999 and expires on May 1, 2016. However,
our ownership of this patent is subject to various cross-licenses that Nortel,
as the original owner, granted to other companies. Therefore, we cannot assure
you that our ownership of this patent will allow us to prevent these companies
and their licensees from using this technology. In addition, we have granted
Nortel a license to this technology and all improvements that we may acquire or
make to this technology. Nortel, however, has agreed not to compete with us by
using this technology prior to May 12, 2002. We cannot assure you that after
May 12, 2002, Nortel will not decide to develop products that use this
technology to compete with our products.
We also have exclusive licenses from Nortel to two patent pending
technologies, as well as non-exclusive licenses to two other patent pending
technologies, to two patented technologies and to one
11
<PAGE>
technology for which no patent is pending. The two exclusive licenses are
subject to the same cross-licenses to which our patent is subject. Therefore, we
cannot assure you that our exclusive licenses will allow us to prevent these
companies or their licensees from using this technology. The exclusivity
provisions of the exclusive licenses expire on May 12, 2004, after which time
our licenses become non-exclusive. After that date, we will be unable to prevent
Nortel from licensing these two technologies to other parties that may use those
technologies to compete with us. We cannot assure you that patents will issue
for any of the patent pending technologies or that, if they issue, they will be
sufficiently broad to protect the technology for our business purposes.
Also, from time to time, we may desire or be required to obtain or renew
licenses from other parties in order to further develop and market commercially
viable products and for other business purposes. There can be no assurance that
the necessary licenses will be available upon acceptable terms, if at all. Our
failure to obtain these licenses, or to protect and prevent the misappropriation
of our intellectual property, could harm our business, financial condition,
results of operations and the price of our common stock.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT WOULD BE
COSTLY TO DEFEND AND COULD HARM OUR BUSINESS AND ABILITY TO COMPETE.
We are also subject to the risk of adverse claims and litigation alleging
that our products, technologies and other intellectual property, as well as
those of our licensors, infringe the intellectual property rights of others. Any
of these claims could require us to pay damages or settlement amounts and could
require us to develop non-infringing intellectual property or acquire licenses
to the intellectual property that is the subject of asserted infringement
claims. This litigation could result in product delays or increased costs,
either of which could harm our business. In addition, the cost of defending any
litigation and resulting distraction of our management resources could harm our
business, financial condition, results of operations and the price of our common
stock.
WE MAY ACQUIRE COMPANIES, TECHNOLOGIES OR PRODUCTS, AND THE FAILURE TO INTEGRATE
ANY FUTURE ACQUISITIONS COULD HARM OUR BUSINESS.
We may make acquisitions of complementary companies, products or
technologies. Although we are not currently exploring any specific acquisition
opportunities, any future acquisitions would be accompanied by the risks
commonly encountered in acquisitions. These risks include the difficulties in
integrating the operations, technology and personnel of acquired companies.
Furthermore, future acquisitions, if any, may result in substantial dilution to
our stockholders, and lower earnings arising from the amortization of acquired
intangible assets. We cannot assure you that we will be able to successfully
address any of these risks, and our failure to do so could harm our business,
financial condition, results of operations and the price of our common stock.
IF WE LOSE KEY PERSONNEL, OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL
AS NECESSARY, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS.
We depend on the continued contributions of our principal sales,
engineering, professional services and management personnel, many of whom would
be difficult to replace. The loss of the services of any key personnel,
particularly senior management or engineers, could harm our business, financial
condition, results of operations and the price of our common stock. Furthermore,
the market for qualified personnel, especially engineers, is very competitive,
and if we fail to attract the personnel necessary for our business, our
operations could similarly suffer.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS WILL SUFFER.
We have rapidly and significantly expanded our operations since 1998. We
believe that further significant expansion will be required to address potential
growth in our client base and market
12
<PAGE>
opportunities in order for us to be successful. During 1999, we increased the
number of employees from 58 to 95, and as of May 31, 2000, we had further
increased that number to 147. We expect that this expansion will continue to
place a significant strain on our managerial, operational and financial
resources. To manage the expected growth of our operations and personnel, we
will be required to:
- improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
- install new management information systems; and
- train, motivate and manage our sales and marketing, engineering, technical
and customer support employees.
If we are not able to manage our growth and its related costs effectively,
it may be difficult to support our future operations.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR
STOCKHOLDERS, AND IF WE ARE UNABLE TO SECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE
TO US, WE MAY BE UNABLE TO EXECUTE OUR BUSINESS PLAN.
If the proceeds of this offering, our existing cash balances and cash flow
from operations are not sufficient to meet our liquidity needs, we will need to
raise additional funds. If additional funds are raised through the issuance of
equity securities, the percentage ownership of pre-existing stockholders will be
reduced. If additional funds are raised through the issuance of debt or
preferred equity securities, these securities would have rights, preferences and
privileges senior to those of the common stock. Furthermore, the terms of any
debt could impose restrictions on our operations. If adequate funds are not
available on acceptable terms, or are not available at all, we may not be able
to take advantage of market opportunities, develop new products or otherwise
respond to competitive pressures. This inability would harm our business,
financial condition, results of operations and the price of our common stock.
DUE TO A HIGH LEVEL OF STOCK OWNERSHIP, MANAGEMENT AND SOME OF OUR STOCKHOLDERS
CAN EXERCISE SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER APPROVAL.
Upon the completion of this offering, our executive officers, directors and
5% or greater stockholders, and their affiliates, will own an aggregate of
approximately % of our outstanding common stock on a fully-diluted basis.
These stockholders will own approximately % if the underwriters'
over-allotment option is exercised in full. Nortel Networks Inc. alone will own
approximately % in that case. These stockholders, if acting together, would
be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or
other business combinations. This concentration of ownership may have the effect
of delaying, deterring or preventing a change in control of Elastic Networks,
which could prevent our stockholders from receiving a premium for their common
stock as part of any merger or other business combination.
OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL.
Immediately prior to the closing of this offering, our certificate of
incorporation and bylaws will be amended to provide for a classified board of
directors, to eliminate cumulative voting in the election of directors and to
restrict our stockholders from acting without a meeting. These provisions may
make some corporate actions more difficult and might delay or prevent a change
in control. Further, our board of directors will have the ability to issue up to
25 million shares of preferred stock with certain rights, preferences,
privileges and restrictions, including voting rights, that could be senior to
those of our common stock. New preferred stock might also be used to make
acquiring control of us more difficult. We have no current plans to issue shares
of preferred stock. We will also indemnify officers and directors against losses
incurred in legal proceedings to the broadest extent permitted by Delaware law.
13
<PAGE>
RISKS RELATED TO OUR MARKET
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND CHANGES IN INDUSTRY
STANDARDS, AND WE MUST BE ABLE TO INTRODUCE NEW, AND ENHANCE EXISTING, PRODUCTS
IN ORDER TO EFFECTIVELY COMPETE.
The market for high-speed access products is characterized by rapid
technological developments, frequent enhancements to existing products, new
product introductions, changes in end user requirements and evolving industry
standards. Any technological advancements, whether in DSL or otherwise, or
product introductions that provide faster access, greater reliability, increased
cost-effectiveness or other advantages over technologies that utilize existing
copper telephone wires, could render our product line obsolete. We cannot assure
you that we will be able to respond quickly and effectively to any of these
changes or challenges. Moreover, in order to respond quickly and effectively to
all of these changes and challenges, we must continually make investments in the
development of new technologies and the further advancement of our current
technologies. However, the nature and quantity of these investments cannot be
definitively predicted, and we may not have sufficient resources to make these
investments.
Even if we are able to make the necessary investments, the development of
new or enhanced products or technologies is a complex and uncertain process
requiring the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent our development, introduction or marketing of new or enhanced
products or technologies. The introduction of new or enhanced products or
technologies also requires that we manage the transition from older products or
technologies in order to minimize disruption in customer ordering patterns and
ensure that adequate supplies of new products can be delivered to meet
anticipated customer demand. We may not be able to successfully develop or
introduce, or manage the transition to, these new products. Furthermore, despite
testing by us and our contract manufacturer, any of these new or enhanced
products or technologies may contain undetected or unresolved errors when they
are first introduced or as new versions are released.
To the extent that we are unable to effectively address these technological
changes and challenges, our business, financial condition, results of operations
and the price of our common stock could be harmed.
OUR MARKET IS HIGHLY COMPETITIVE AND OUR PRODUCTS, TECHNOLOGY AND BUSINESS MAY
NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER PRODUCTS OR TECHNOLOGIES.
The market for high-speed access products is highly competitive, and we
expect that it will become increasingly competitive in the future. In addition
to facing competition from providers of DSL based products, our products
currently compete with products using other technologies, including ISDN, T-1,
fiber optics and cable and wireless solutions. Our most direct competitors
include Alcatel, Cisco Systems, Inc., Copper Mountain Networks, Inc., Lucent
Technologies, Inc., Nokia Corporation, Nortel and Tut Systems, Inc. In addition,
due to the rapidly evolving nature of the market in which we compete, additional
competitors with significant market presence and financial resources, including
other large telecommunications equipment manufacturers, as well as smaller
companies, may enter our markets and further intensify competition. These and
our other competitors may foresee the course of market developments more
accurately than we do. In addition, many of our current and potential
competitors have significantly greater sales and marketing, technical,
manufacturing, financial and other resources than we do. The products and
technologies offered by these competitors may provide faster access and higher
reliability than ours, and prove more cost-effective for some end users.
Commercial acceptance of any one of these competing solutions could decrease the
demand for our products, result in our loss of market share, reduce average
selling prices and the profit margin associated with our products, and
consequently harm our business, financial condition, results of operations and
the price of our common stock.
14
<PAGE>
OUR COMPANY, OUR PRODUCTS AND OUR CUSTOMERS ARE SUBJECT TO GOVERNMENT
REGULATIONS, AND CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS THAT
NEGATIVELY IMPACT US, OUR PRODUCTS OR OUR CUSTOMERS COULD HARM OUR BUSINESS.
The Federal Communications Commission, or FCC, regulates the
telecommunications industry, including our company, our products and our
customers. The adoption of new FCC regulations affecting the broadband access
industry, our customers or our products may harm our business. For example, FCC
policies that affect the availability of data and Internet services may impede
our customers' penetration into certain markets or affect the prices they
charge. In turn, this may reduce their orders for our products. In addition,
international regulatory bodies are beginning to adopt regulations and standards
for the communications industry. These regulations and standards may require us
to make engineering or functional changes to our products, or changes to our
marketing and selling practices. Delays caused by changes in our products or
practices undertaken to comply with state, national and international regulatory
requirements, may result in order cancellations or postponements of product
purchases by our customers, which would harm our business, financial condition,
results of operations and the price of our common stock.
RISKS RELATED TO THIS OFFERING
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND WE CANNOT ASSURE YOU
THAT HOW WE INVEST THESE PROCEEDS WILL YIELD A FAVORABLE RETURN.
We intend to use the net proceeds from this offering to fund the expansion
of our business, our operating deficits and other working capital needs and for
general corporate purposes, as well as to repay short term debt we expect to
incur before the closing of this offering. Thus, our management will have broad
discretion over how these proceeds are used and could spend most of these
proceeds in ways with which the stockholders may not agree. We cannot assure you
that the unapplied proceeds will be invested to yield a favorable return.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT
OR ABOVE YOUR PURCHASE PRICE.
Before this offering, there was no public market for our stock. An active
public market for our stock may not develop or be sustained after this offering.
In recent years, the stock market in general, and the stock prices of
technology companies in particular, have been extremely volatile. The following
factors could cause the market price of our stock to fluctuate significantly
from the price paid by investors in this offering:
- announcements by us or our competitors of significant contracts, new
products or technological innovations, acquisitions, strategic
relationships, joint ventures or capital commitments;
- changes in financial estimates by securities analysts;
- changes in market valuations of telecommunications companies; and
- fluctuations in stock market prices and volumes.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our stock after this offering could reduce the
market price of our common stock. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional shares of
stock in the future at a time and price that we deem appropriate.
15
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements that are not historical facts, but
rather are based on our current expectations, estimates and projections about
our industry and our management's beliefs and assumptions. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and other factors,
some of which are beyond our control, that are difficult to predict and could
cause actual results to differ materially from those expressed or forecasted in
the forward-looking statements. These risks and uncertainties are described in
"Risk Factors" and elsewhere in this prospectus. We caution you not to place
undue reliance on these forward-looking statements which reflect our
management's view only as of the date of this prospectus. We are under no
obligation to update these statements or publicly release the result of any
revisions to them to reflect events or circumstances after the date of this
prospectus or to reflect the occurrence of unanticipated events.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of our common
stock in this offering of approximately $ million, or approximately
$ million if the underwriters' exercise their over-allotment option.
This estimate is after deducting estimated underwriting discounts and
commissions and other fees and expenses payable by us of approximately $
. We will not receive any portion of the proceeds from the sale of shares
of stock by the selling stockholder.
We intend to use the net proceeds from this offering to fund the expansion
of our business, our operating deficits and other working capital needs and for
general corporate purposes. We will also use a portion of the proceeds to repay
short term debt we expect to incur before this offering closes. As part of our
ongoing corporate development activities, we expect we will consider acquisition
opportunities, and may use a portion of the net proceeds to acquire
complementary businesses, products or technologies.
We currently intend to use substantially all of the net proceeds for the
categories mentioned above. However, the precise allocation of funds among these
uses will depend on future technological, regulatory and other developments
which may affect our business or our industry. Until we use the net proceeds for
any particular purpose, we will invest them in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate doing so in the foreseeable future. It is the current
policy of our board of directors to retain earnings to finance the expansion of
our operations. The board of directors will determine future declaration and
payment of dividends, if any, in light of the then-current conditions, including
our earnings, operations, capital requirements, financial condition,
restrictions in financing agreements and other relevant factors.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding shares of preferred stock into 9,084,913 shares of common
stock upon the closing of this offering and the payment of $2.0 million in
notes receivable from a non-affiliate investor, which occurred in June
2000; and
- on a pro forma as adjusted basis to reflect the sale of the common stock
offered by this prospectus at an estimated initial public offering price
of $ per share and the receipt of the net proceeds therefrom, after
deducting the estimated expenses, underwriting discounts and commissions
payable by us as if the sale of common stock and receipt of proceeds
occured on March 31, 2000.
This table contains unaudited information and should be read in conjunction
with our financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations--long term..................... $ 84 $ 84 $ 84
Redeemable, convertible, participating preferred stock,
$0.01 par value, 7,799,386 shares authorized, 7,799,386
shares issued and outstanding, actual; no shares issued
and outstanding, pro forma; no shares issued and
outstanding, pro forma as adjusted..................... 29,001 -- --
Stockholders' equity (deficit):
Common stock, $0.01 par value: 35,000,000 shares
authorized, 15,385,946 shares issued and outstanding,
actual; 24,470,859 shares issued and outstanding, pro
forma; shares issued and outstanding, pro
forma as adjusted.................................... 154 245
Additional paid-in capital............................... 3,137 34,041
Accumulated deficit...................................... (18,112) (18,112) (18,112)
-------- -------- --------
Total stockholders' equity (deficit)................. (14,821) 16,174
-------- -------- --------
Total capitalization................................. $ 14,264 $ 16,258 $
======== ======== ========
</TABLE>
This table excludes:
- 4,948,415 shares of common stock subject to options outstanding as of
March 31, 2000 under our stock incentive plan with a weighted average
exercise price of $2.12 per share, and 762,020 shares of common stock
available for future grant under the plan; and
- 12,439 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $2.76 per share.
From April 1, 2000 through June 16, 2000, we granted options under our 1999
stock incentive plan to purchase 378,150 shares of common stock, all with an
exercise price of $4.53 per share.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$16.2 million, or $0.66 per share of common stock. Pro forma net tangible book
value represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding, assuming conversion
of all outstanding shares of preferred stock into 9,084,913 common stock, and
the payment of the $2.0 million in notes receivable from a non-affiliate
investor. Without taking into account any other changes in the net tangible book
value after March 31, 2000, other than to give effect to our sale of the shares
of common stock offered by this prospectus at an estimated initial public
offering price of $ per share, and our receipt of the estimated net proceeds
from the sale, our as adjusted pro forma net tangible book value as of
March 31, 2000 would have been approximately $ million or $ per share. This
represents an immediate increase in pro forma net tangible book value of $
per share to existing stockholders and an immediate dilution of $ per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Estimated initial public offering price per share........... $
-----
Pro forma net tangible book value per share as of
March 31, 2000............................................ $0.66
Increase per share attributable to this offering..........
-----
Pro forma net tangible book value per share after this
offering................................................
-----
Dilution per share to new investors......................... $
=====
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
March 31, 2000, the differences between existing stockholders and the new
investors with respect to the number of shares of common stock purchased from
Elastic Networks, the total consideration paid and the average price per share
paid, before deducting the underwriting discounts and commissions and estimated
offering expenses payable by Elastic Networks.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 24,470,859 $33,506,479 $1.37
New investors.....................
---------- -------- ----------- --------
Total........................... 100.0% $ 100.0%
========== ======== =========== ========
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding as of March 31, 2000. As of March 31, 2000, there were
options outstanding to purchase a total of 4,948,415 shares of common stock all
with a weighted average exercise price of $2.12 per share and warrants
outstanding to purchase a total of 12,439 shares of common stock with an
exercise price of $2.76 per share. To the extent that any of these options or
warrants are exercised, there will be further dilution to new investors.
18
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
Our selected historical financial information as of December 31, 1998 and
1999, and for each of the years in the three-year period ended December 31,
1999, have been derived from our financial statements, included elsewhere in
this prospectus, which have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is also included elsewhere in this prospectus.
The selected financial information as of March 31, 2000 and for each of the
three month periods ended March 31, 1999 and 2000 has been derived from our
unaudited financial statements included elsewhere in this prospectus. For an
explanation of the determination of the number of shares used to compute basic
and diluted net loss per share, see note 2 of the notes to our financial
statements. In the opinion of management, these unaudited statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and results of
operations for these periods.
You should read the following selected historical financial and operating
data in conjunction with the discussion in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and our financial statements
and the related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................................ $ -- $ 233 $ 8,215 $ 344 $ 6,189
Cost of revenues.......................................... -- 2,146 14,290 803 6,056
------- -------- -------- ------- -------
Gross profit (loss)..................................... -- (1,913) (6,075) (459) 133
Operating expenses:
Sales and marketing..................................... 644 3,431 5,169 909 2,486
Research and development................................ 3,335 8,191 7,425 1,643 2,080
General and administrative.............................. 524 1,695 2,276 375 1,290
------- -------- -------- ------- -------
Total operating expenses.............................. 4,503 13,317 14,870 2,927 5,856
------- -------- -------- ------- -------
Operating loss...................................... (4,503) (15,230) (20,945) (3,386) (5,723)
Other income (expense), net............................... -- -- 90 -- 44
------- -------- -------- ------- -------
Net loss................................................ (4,503) (15,230) (20,855) (3,386) (5,679)
Accretion of series A preferred stock..................... -- -- (333) -- (133)
------- -------- -------- ------- -------
Net loss attributable to common stockholders.............. $(4,503) $(15,230) $(21,188) $(3,386) $(5,812)
======= ======== ======== ======= =======
Basic and diluted net loss per common share............... $ (0.28) $ (0.93) $ (1.29) $ (0.21) $ (0.36)
======= ======== ======== ======= =======
Weighted average shares used in computing basic and
diluted net loss per common share....................... 16,367 16,367 16,367 16,367 16,367
======= ======== ======== ======= =======
Pro forma basic and diluted net loss per common share
(unaudited)............................................. $ (1.05) $ (0.24)
======== =======
Weighted average shares used in computing unaudited pro
forma basic and diluted net loss per share amounts
(unaudited)............................................. 20,244 24,166
======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ -- $ 5,613 $ 16,265
Working capital (deficit)................................... (2,955) (1,256) 13,466
Total assets................................................ 1,735 9,869 27,546
Capital lease obligations--long-term........................ -- 100 84
Redeemable convertible participating preferred stock........ -- 7,965 29,001
Total stockholders' equity (deficit)........................ (3,521) (9,009) (14,821)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
THE RELATED NOTES.
OVERVIEW
We design, develop, and market high-speed DSL communications products. Our
products enable service providers to deliver broadband access solutions that are
easy to deploy and cost-effectively utilize the existing copper telephone wire
infrastructure.
On January 1, 1997, Nortel Networks Corporation and its subsidiary Nortel
Networks Inc., together referred to as Nortel, established the Elastic Networks
group to pursue the development of EtherLoop technology and products. On
September 22, 1998, Nortel incorporated a wholly-owned subsidiary, Elastic
Networks Inc. On May 12, 1999, Nortel transferred the assets of the Elastic
Networks group to us in exchange for 15,384,614 shares of Elastic Networks'
common stock. Also, on May 12, 1999, we sold 3,876,923 shares of our series A
preferred stock for $12.6 million, comprised of $10.6 million in cash and
$2.0 million in notes receivable that have since been paid. We maintain a
relationship with Nortel, including as a distribution and technology partner.
Additionally, we currently pay Nortel a 2.5% royalty on sales of EtherLoop-based
products. Our obligation to pay this royalty will cease on the closing of this
offering.
Since we were formed in January 1997 as a division of Nortel through mid
1999, our operating activities related primarily to developing our EtherLoop
technology and complementary software, building and testing prototype products,
building our technical support infrastructure, commencing the staffing of our
sales and marketing organization and establishing relationships with our
customers. Since mid 1999, we commenced shipment of our commercial products and
continued making investments to grow our business. As of March 31, 2000, we had
an accumulated deficit of $18.1 million.
Our revenues have been generated principally from the sales of our first
generation DSLAMs, which are known as ELMo DSLAMs, our Elite family of CPEs,
and, to a lesser extent, our complementary software. We began limited shipment
of our first release DSLAM, the ELMo 8, in the second quarter of 1999. We began
shipping the ELMo 120, in the third quarter of 1999. Our recently announced
Storm System family of products, which we expect to begin shipping in the fourth
quarter of 2000, evolves our ELMo product line. The Storm System product family
includes IP DSLAMs, DSL CPE, and complementary software. We expect to continue
to invest in product enhancements and new product development in order to
increase bandwidth and functionality and decrease cost. Additionally, we plan to
pursue both an OEM licensing strategy for our CPE products and a technology
licensing strategy for our software and patented EtherLoop technology. These
licensing strategies are primarily intended to accelerate our market penetration
and to increase our gross margin.
We recognize revenues from product sales upon shipment if collection of the
resulting receivable is probable, product pricing is fixed and determinable and
product returns are reasonably estimated. Revenues on products shipped on a
trial basis are recognized when products are accepted by the customer. Estimated
sales returns are based on historical experience by product and are recorded at
the time the product revenues are recognized. We currently have licensing
revenues and anticipate we will recognize increased licensing revenues in the
future. Technology licensing revenues are recognized ratably over the term of
the related agreement.
For the fiscal year ended December 31, 1999, sales to Darwin and Nortel
accounted for 81% of our revenues as follows: sales to Darwin accounted for 41%
of our revenues and sales to Nortel, which included indirect sales to Westcon
accounted for 40% of our revenues. In the first quarter of 2000, we entered into
a separate distribution arrangement with Westcon under which Westcon agreed to
purchase
20
<PAGE>
our products directly from us instead of through our distributors. For the three
months ended March 31, 2000, sales to Darwin, Nortel and Westcon accounted for
83% of our revenues as follows: sales to Darwin accounted for 54% of revenues,
sales to Nortel accounted for 15% of our revenues, and sales to Westcon
accounted for 14% of our revenues. We expect to continue to be dependent upon a
relatively small number of customers, although the specific customers may vary
from period to period. Also, the sales to our customers may be impacted by the
potential seasonal nature of their capital expenditures. Additionally, we expect
a portion of our future revenues to be derived from customers outside of North
America. In order to continue growing our revenues and attain profitability, we
must continue to invest in our international operations. To date, our
international sales have been denominated in U.S. dollars and, accordingly, we
have not been exposed to fluctuations in non-U.S. currency exchange rates. In
the future a portion of our international sales may be denominated in currencies
other than U.S. dollars, which would expose us to gains and losses upon exchange
rate fluctuations. In the first quarter of 2000, 16% of our revenues were
generated from international sales.
Our gross margin is affected by many factors including competitive pricing
pressures, fluctuations in manufacturing volumes, costs of components and
sub-assemblies, and the mix of products or system configurations sold.
Additionally, our gross margin may fluctuate due to changes in our mix of
distribution channels. Our negative gross margin in 1999 was due primarily to
our sales of the first generation ELMo 8 DSLAM. To date, gross margin on sales
of our DSLAMs have been higher than the gross margin on sales of our DSL CPE.
Our gross margin was positive in the first three months of 2000, and we expect
our gross margin to increase in the future as we lower the cost of our existing
products, commence the sale of our Storm System family of products, and increase
our licensing revenues.
We currently outsource our manufacturing and supply chain management
operations to Sanmina. Sanmina conducts manufacturing engineering, quality
assurance, program management and product repairs. For this reason, a
significant portion of our cost of revenues consists of payments to Sanmina. If
we cease our relationship with Sanmina, we may be responsible for purchasing
some of their raw material inventory used to manufacture our products.
Research and development expenses primarily consist of salaries and related
personnel expenses, contractor and consultant fees, and prototype expenses
related to the design, development, testing and enhancement of our products. We
expense all research and development expenses as incurred. We believe that
continued investment in research and development is critical to attaining our
strategic sales and cost-reduction objectives and, as a result, we expect these
expenses to increase in absolute dollars in the future, but to decline as a
percentage of revenues.
We sell our products through a direct sales force and selected distributors
to domestic and international telecommunications and in-building service
providers. Sales and marketing expenses consist of employee salaries,
commissions, travel and related expenses for personnel engaged in marketing,
sales and sales support functions. These expenses also include trade show and
promotional expenses. We expect these expenses to continue to increase in the
future as we address additional domestic and international markets. Sales and
marketing expenses as a percentage of revenues declined in each of the last two
quarters ended March 31, 2000 due to substantial increases in our quarterly
revenues, and we expect them to continue to decline as a percentage of revenues.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, human resources and administrative
personnel, facilities expenses, information systems and other general corporate
expenses. We expect general and administrative expenses to increase in absolute
dollars as we add personnel and incur additional costs related to the growth of
our business and operations as a public company, but decline as a percentage of
revenues.
21
<PAGE>
RESULTS OF OPERATIONS
The table below shows operating data, as a percentage of revenues, for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------- -------------------
1998 1999 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues..................................... 100% 100% 100% 100%
Cost of revenues................................... 921 174 233 98
-------- -------- -------- --------
Gross profit (loss)............................ (821) (74) (133) 2
Operating expenses:
Sales and marketing.............................. 1,473 63 264 40
Research and development......................... 3,515 90 478 34
General and administrative....................... 727 28 109 21
-------- -------- -------- --------
Total operating expenses....................... 5,715 181 851 95
-------- -------- -------- --------
Operating loss............................... (6,536) (255) (984) (93)
Other income (expense), net........................ -- 1 -- 1
-------- -------- -------- --------
Net loss..................................... (6,536)% (254)% (984)% (92)%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
TOTAL REVENUES. Revenues increased from $344,000 for the three months ended
March 31, 1999 to $6.2 million for the three months ended March 31, 2000. This
increase was primarily due to the successful transition from development of our
products to commencement of commercial operations and a significant increase in
the sales of our ELMo 120 DSLAM, which we introduced in the third quarter of
1999. For the quarters ended March 31, 1999, and March 31, 2000, we generated
revenues from international sales of $43,000 and $991,000.
GROSS PROFIT (LOSS). Gross profit (loss) improved from a loss of $459,000
for the three months ended March 31, 1999 to a profit of $133,000 for the three
months ended March 31, 2000. The improvement in gross profit (loss), in absolute
dollars and as a percentage of revenues, was primarily the result of sales of
our ELMo 120 DSLAM and declines in component costs.
SALES AND MARKETING. Sales and marketing expenses increased from $909,000
for the three months ended March 31, 1999 to $2.5 million for the three months
ended March 31, 2000. This increase was primarily a result of increases in
staffing for marketing, account management, customer support and direct sales,
as well as increases in sales commissions. This increase in sales and marketing
expenses was also the result of our increased investment in international
operations. Sales and marketing expenses as a percentage of revenues
significantly decreased as a result of the increase in our revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$1.6 million in the three months ended March 31, 1999 to $2.1 million in the
three months ended March 31, 2000. This increase in our research and development
expenses was primarily a result of additional hardware and software development
personnel. Research and development expenses as a percentage of revenues
significantly decreased as a result of the increase in our revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $375,000 for the three months ended March 31, 1999 to $1.3 million for the
three months ended March 31, 2000. This increase was a result of an increase in
personnel related costs, and increased expenditures on legal, accounting,
information systems and consulting fees. The increase in our general and
administrative expenses was required to support the growth in our operations,
commercial activities and customer base.
22
<PAGE>
General and administrative expenses as a percentage of revenues decreased as a
result of the increase in our revenues.
OTHER INCOME (EXPENSE), NET. Other income (expense), net improved from $0
for the three months ended March 31, 1999 to $44,000 for the three months ended
March 31, 2000, resulting primarily from an increase in interest income
partially offset by royalty payments to Nortel. Our royalty obligations to
Nortel will terminate on the closing of this offering.
YEARS ENDED DECEMBER 31, 1998 AND 1999
TOTAL REVENUES. Revenues increased from approximately $233,000 in the year
ended December 31, 1998 to $8.2 million in the year ended December 31, 1999.
This increase was primarily due to the successful transition from development of
our products to commencement of commercial operations and a significant increase
in the sales of our ELMo 8 and ELMo 120 DSLAMs that we introduced in mid 1999.
We generated revenues from international sales of $0 for the year ended
December 31, 1998 and $948,000 for the year ended December 31, 1999.
GROSS PROFIT (LOSS). Gross profit (loss) declined from a loss of
$1.9 million in the year ended December 31, 1998 to a loss of $6.1 million in
the year ended December 31, 1999. The increase in gross loss was primarily the
result of our selling products at prices that were less than our cost during
each year, together with increases in sales of our products. Additionally,
significant amounts of manufacturing support costs were incurred in the fourth
quarter of 1999 while the products were undergoing continued redesign aimed at
cost reduction. The majority of these costs were non-recurring in nature, and
were incurred as we moved from manufacturing prototype products to manufacturing
and selling commercial products.
SALES AND MARKETING. Sales and marketing expenses increased from
$3.4 million in the year ended December 31, 1998 to $5.2 million in the year
ended December 31, 1999. This increase was primarily a result of increases in
staffing for marketing, account management, customer support and direct sales,
as well as increases in sales commissions. The majority of the increase in sales
and marketing expenses occurred in the fourth quarter of 1999 in support of the
ELMo 120 launch, and in support of the expansion of our international business.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased from
$8.2 million in the year ended December 31, 1998 to $7.4 million in the year
ended December 31, 1999. This decrease in our research and development expenses
was primarily a result of a reduction in contract development costs and the
replacement of contractors with full time employees. We expect to increase
expenditures in research and development programs in future periods for the
purposes of reducing the costs of our products and enhancing current and
developing new products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.7 million in the year ended December 31, 1998 to $2.3 million in the
year ended December 31, 1999. This increase was primarily a result of an
increase in personnel-related costs and increased expenditures on legal,
accounting, information systems and consulting fees. The increase in our general
and administrative staffing was required to support the growth in our
operations, commercial activities and customer base.
OTHER INCOME (EXPENSE), NET. Other income (expense), net improved from $0
in the year ended December 31, 1998 to $90,000 in the year ended December 31,
1999 resulting primarily from an increase in interest income partially offset by
an increase of royalties paid to Nortel. Our royalty obligations to Nortel
terminate on the closing of this offering.
YEARS ENDED DECEMBER 31, 1997 AND 1998
TOTAL REVENUES. Revenues increased from $0 in the year ended December 31,
1997 to $233,000 in the year ended December 31, 1998. This increase was due
primarily to licensing revenues related to our
23
<PAGE>
EtherLoop technology and limited sales of our initial products. During 1997 and
1998 we continued to develop our EtherLoop technology and DSL access products,
but none of these products was commercially released during these periods.
GROSS PROFIT (LOSS). Gross profit (loss) decreased from $0 in the year
ended December 31, 1997 to a loss of $1.9 million in the year ended
December 31, 1998. The decrease in gross profit (loss) was primarily the result
of significant amounts of manufacturing costs we incurred in support of our DSL
access products.
SALES AND MARKETING. Sales and marketing expenses increased from $644,000
in the year ended December 31, 1997 to $3.4 million in the year ended
December 31, 1998. This significant increase was primarily a result of increases
in staffing for marketing, account management, customer support and direct
sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$3.3 million in the year ended December 31, 1997 to $8.2 million in the year
ended December 31, 1998. This significant increase in our research and
development expenses was primarily a result of additional hardware and software
development personnel, including contractor expenses, related to the ongoing
commercial development of our products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $524,000 in the year ended December 31, 1997 to $1.7 million in the year
ended December 31, 1998. This increase was primarily a result of an increase in
personnel-related costs and increased expenditures on legal, accounting,
information systems and consulting fees. The increase in our general and
administrative staffing was required to support the growth in our operations,
commercial activities and customer base.
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly operating results, in
dollars and as a percentage of revenues, for the five quarters ended March 31,
2000. We believe this information reflects all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair presentation
of this information in accordance with generally accepted accounting principles.
The results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues................................ $ 344 $ 2,256 $ 1,164 $ 4,451 $ 6,189
Cost of revenues.............................. 803 3,202 1,844 8,441 6,056
------- ------- ------- ------- -------
Gross profit (loss)....................... (459) (946) (680) (3,990) 133
Operating expenses:
Sales and marketing......................... 909 983 1,234 2,043 2,486
Research and development.................... 1,643 1,770 1,726 2,286 2,080
General and administrative.................. 375 516 642 743 1,290
------- ------- ------- ------- -------
Total operating expenses.................. 2,927 3,269 3,602 5,072 5,856
------- ------- ------- ------- -------
Operating loss.......................... (3,386) (4,215) (4,282) (9,062) (5,723)
Other income (expense), net................... -- 19 99 (28) 44
------- ------- ------- ------- -------
Net loss.................................. $(3,386) $(4,196) $(4,183) $(9,090) $(5,679)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues................................ 100% 100% 100% 100% 100%
Cost of revenues.............................. 233 142 158 190 98
---- ---- ---- ---- ----
Gross profit (loss)......................... (133) (42) (58) (90) 2
Operating expenses:
Sales and marketing......................... 264 44 106 46 40
Research and development.................... 478 78 148 51 34
General and administrative.................. 109 23 55 17 21
---- ---- ---- ---- ----
Total operating expenses.................. 851 145 309 114 95
---- ---- ---- ---- ----
Operating loss.......................... (984) (187) (367) (204) (93)
Other income (expense), net................... -- 1 8 -- 1
---- ---- ---- ---- ----
Net loss.................................. (984)% (186)% (359)% (204)% (92)%
==== ==== ==== ==== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to May 1999, we operated as a division of Nortel and all operating
deficits and capital expenditures were funded by Nortel. Since we became a
separate company on May 12, 1999, we have financed our operations and capital
expenditures through the sale of equity securities and leases for capital
equipment. On May 12, 1999, we sold shares of our series A preferred stock for
$12.6 million comprised of $10.6 million in cash and $2.0 million in notes. The
notes were paid in June 2000. On February 14, 2000, we sold shares of our
series B preferred stock for $20.9 million, which resulted in a significant
increase in our working capital during the three months ended March 31, 2000.
25
<PAGE>
At March 31, 2000, we had cash and cash equivalents and short term
investments of $16.3 million. We are currently in discussions with several
potential lenders, including some of our stockholders, for a working capital
bridge loan which we expect to close prior to this offering. We anticipate that
this loan will be on terms that are generally at market and will be repaid with
a poriton of the proceeds from this offering.
Cash used in operating activities was $11.9 million for the period ended
December 31, 1998 and $16.4 million for the period ended December 31, 1999. The
increase in cash used for operating activities for the year ended December 31,
1999 compared to the year ended December 31, 1998 was primarily due to increases
in net losses, accounts receivable and inventories as a result of the
introduction of and growth in demand for our products. This increase was
partially offset by increases in accounts payable and other accruals. Cash used
in operating activities for the period ended December 31, 1997 was $3.0 million
due to net losses of $4.5 million, partially offset by an increase of
liabilities of $1.5 million.
Cash used in investing activities was $1.3 million for the period ended
December 31, 1998 and $2.4 million for the period ended December 31, 1999. The
increase in cash used for investing activities for the year ended December 31,
1999 compared to the prior year was primarily due to the net purchase of
$1.8 million in short term investments, partially offset by a reduction in
capital expenditures. Investing activities for the period ended December 31,
1997 consisted of expenditures for plant and equipment of $28,000.
Cash provided by financing activities was $13.2 million for the period ended
December 31, 1998 and $22.7 million for the period ended December 31, 1999. For
the year ended December 31, 1998, cash was provided by Nortel to fund our
operations during periods of operating losses and capital expenditures. The
increase in cash provided by financing activities for the year ended
December 31, 1999 compared to the year ended December 31, 1998 was primarily due
to the issuance of our series A preferred stock for $10.6 million in cash and
$11.9 million of cash provided by Nortel prior to May 12, 1999 in support of our
operating losses and asset purchases. Financing activities for the period ended
December 31, 1997 consisted of funding by Nortel of $3.0 million.
Our future capital requirements will depend upon many factors, including
sales of our products, the timing of research and product development efforts
and the expansion of our marketing efforts. We expect to continue to expend
amounts on property and equipment related to the expansion of facility
infrastructure, computer equipment and for research and development laboratory
and test equipment to support on-going research and development operations. We
have no material commitments other than obligations under our operating and
capital leases. In future periods, we anticipate increases in working capital on
a period-to-period basis primarily as a result of planned increased product
revenues.
We believe that our cash and cash equivalent balances, short-term
investments and our expected proceeds from this offering will be sufficient to
satisfy our cash requirements for at least the next 12 months. We intend to
invest our cash in excess of current operating requirements in short-term,
interest-bearing, investment-grade securities.
Inflation has had no material impact on our operations to date.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our investments are exposed to changes in interest rates primarily on our
investments in certain held-to-maturity securities. Under our current policies,
we do not use interest rate derivative instruments to manage exposure to
interest rate changes. A hypothetical 100 basis point adverse move in interest
rates along the entire interest rate yield curve would not materially effect the
fair value of interest sensitive financial instruments we held as at March 31,
2000.
26
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board, or FASB, issued
FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION (AN INTERPRETATION OF THE ACCOUNTING PRINCIPLES BOARD OPINION
NO. 25). Among other issues, this interpretation clarifies:
- the definition of employee for purposes of applying Opinion 25;
- the criteria for determining whether a plan qualifies as a noncompensatory
plan;
- the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business
combination.
This interpretation is effective July 1, 2000, but certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
impact on our financial statements is not expected to be material.
In June 1998, the FASB issued Statements of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities," or SFAS No. 133,
as amended by Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133," which established accounting and reporting
standards of derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. We are in the process of evaluating the effects of
these new statements.
27
<PAGE>
BUSINESS
OVERVIEW
We design, develop and market high-speed DSL communications products that
enable service providers to deliver cost-effective and easy-to-deploy access
solutions to their customers using the existing copper telephone wire
infrastructure. We design our products based on our patented EtherLoop
technology to overcome many of the limitations of conventional DSL technologies
and to address many quality of service requirements. The performance and cost
advantages of our EtherLoop technology allow service providers to maximize their
infrastructure investment to meet their customers' growing demand for broadband
access and new value-added services.
MARKET OPPORTUNITY
GROWING DEMAND FOR BROADBAND ACCESS
The Internet is dramatically changing how businesses and individuals
communicate and share information. International Data Corporation, or IDC,
projects that the number of worldwide Internet users will grow from about
240 million in 1999 to over 600 million by 2003. As Internet usage is becoming
more prevalent, it is also becoming more sophisticated. Businesses and
individuals are using the Internet for more advanced, mission critical
activities such as e-commerce, customer support, virtual private networking,
telecommuting and distance learning. The Internet is also quickly evolving into
a highly interactive medium for communications, entertainment and other
applications. For example, customer service representatives can communicate with
customers using real-time video collaboration rather than traditional text
messaging and students from around the world can participate in classroom
discussions without the need to be in the same location. However, we believe the
true benefits of the interactive Internet will not be realized without
technology improvements in the portion of the telephone network between the end
user's premises and the service provider's central office, known as the last
mile or the local loop.
The growing demand for broadband access over the last mile presents an
attractive new market opportunity for service providers. The Telecommunications
Act of 1996 has facilitated this market opportunity by enabling open access to
the existing copper wire local loop, which was originally built by the incumbent
local exchange carriers, or ILECs. The Telecommunications Act opened the market
for new communications service providers, such as competitive local exchange
carriers, or CLECs, to compete with the ILECs. According to the Association for
Local Telecommunications Services, the number of CLECs grew from about 50 in
1996 to over 375 by the end of 1999. These CLECs are investing on average over
$1 billion per month, in the aggregate, on their networks. As competition
increases from CLECs and other emerging service providers, such as Internet
service providers, or ISPs, we believe that service providers will begin
offering a broader range of voice, data and other value-added offerings in order
to effectively differentiate their services. We believe that the proliferation
of new services will create a greater need for bandwidth throughput over the
last mile.
With improvements in access technologies and the emergence of new
competitive service providers, broadband access that was previously available
only to large businesses is now offered to a much wider group of business and
residential end users. Service providers can cost-effectively deliver high-speed
access to concentrated groups of end users by deploying access solutions
directly on a customer's premises or within in-building environments, such as
hotels, multi-tenant business complexes, apartment buildings, condominiums and
university campuses. With lower cost technologies that are competitive with
cable modems, service providers can also deploy access solutions to residential
users and businesses directly from the service provider's facilities.
While the market opportunity to deliver broadband access is significant,
current penetration rates for high-speed access outside of the larger business
market has remained low. In the United States, according to IDC statistics, of
the small businesses with Internet access in 1999, more than 90% still used
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conventional dial-up connections rather than dedicated high-speed connections.
Data communication speeds over the last mile have traditionally been limited
because the existing telecommunications equipment was originally built to
support analog voice rather than bandwidth intensive data. There are a number of
existing high-speed digital access technologies that are intended to address the
connectivity limitations over the last mile, including ISDN, T-1, fiber optics
and wireless and cable solutions. However, these technologies have their own
limitations, such as high cost, complex deployment and security and performance
issues. DSL technology was developed to overcome some of these issues by taking
advantage of the existing copper wire infrastructure while providing a
cost-effective connectivity solution over the last mile.
DSL TECHNOLOGY OVERVIEW
DSL technology has the capability to enable broadband data transmission at
speeds up to one hundred times faster than those of traditional analog
technology, using the same copper telephone wires. A DSL solution typically
consists of a DSLAM and the end user's DSL modem or other CPE. The DSLAM is
located in a service provider's facility or on the premises where multiple end
users are located. The DSLAM transmits data to and from multiple CPE, and
provides a constant, common link to the Internet backbone or other networks.
Conventional DSL access technologies have several key advantages that
include:
- HIGH-SPEED ACCESS. DSL technology provides high-speed, fixed upstream and
downstream broadband access at speeds ranging from 150 kilobits per
second, or Kbps, up to millions of bits per second.
- SECURE, DEDICATED BANDWIDTH. Unlike shared services such as cable, DSL
technology provides a dedicated point-to-point connection, increasing line
security and maintaining high levels of performance even as new users are
added to the network.
- WIDESPREAD COVERAGE. The worldwide installed base of copper telephone
lines exceeds 850 million, providing the capability to deploy DSL services
to a significant base of potential end users.
LIMITATIONS OF CONVENTIONAL DSL TECHNOLOGIES
Despite the advantages of conventional DSL technologies, such as
asymmetrical DSL, or ADSL, symmetrical DSL, or SDSL, and G.Lite, these
technologies have significant limitations, such as:
- INEFFICIENT BANDWIDTH UTILIZATION. Conventional DSL technologies have
fixed upstream and downstream bandwidth, and they cannot dynamically
allocate bandwidth depending on usage needs. As a result, they do not
efficiently utilize available bandwidth to manage the throughput to
support bandwidth intensive, interactive Internet applications. For
example, ADSL provides up to 6 Mbps downstream to the user but only 640
Kbps upstream to the network. As a result, if users want to send a large
file, digital photo or movie to someone, they can only use the 640 Kbps
while the 6 Mbps is wasted.
- CROSS TALK INTERFERENCE. A user's DSL connection can be adversely affected
by line interference when multiple services are delivered within the same
binder group. Sending high-speed data requires substantial signal levels
and power, which, when delivered through the copper wire, can lead to
signal leaks and create interference with the other signals in the binder
group. This problem is known as cross talk interference. Since
conventional DSL technologies operate with a continuously powered fixed
frequency transmission signal, they do not have the flexibility to monitor
other line signals and adjust the frequency of the signal to avoid
interference. While cross talk interference has not been a widely
publicized problem to date because of the low penetration of high-speed
services within individual binder groups, we believe it will become a
significant problem as high-speed services are more widely deployed.
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- COMPLEX, COSTLY DEPLOYMENT AND OPERATION. The installation of conventional
DSL technologies is often a time consuming, manual process. Service
providers must generally test and adjust the copper telephone lines during
installation in order to overcome transmission obstacles caused by bridge
taps and wire gauge changes in the copper telephone lines. This process
requires costly, labor intensive service calls, or truck rolls. This
complexity increases installation time and the likelihood of human error.
Also, the majority of DSLAMs deployed today are asynchronous transfer
mode, or ATM, based, requiring a conversion of the communications signal
between ATM and Internet Protocol, or IP, the native Internet
communications protocol. This conversion adds complexity and cost.
- LIMITED SCALABILITY. Each type of conventional DSL technology addresses
different needs such as distance, speed or voice. However, they are not
compatible with each other. For instance, an ADSL DSLAM cannot operate
with SDSL CPE. This incompatibility prevents the service provider from
delivering, and the end user from experiencing, the full range of benefits
that DSL technologies promise. Also, traditional DSLAM products were
designed to work from a telephone company's central office and cannot be
used for customers that are served by a digital loop carrier, or DLC. In
addition, conventional DSL's cross talk interference problem limits the
number of end users that can be serviced in a binder group.
- DISTANCE LIMITATIONS. DSL is limited by the end user's distance from the
DSLAM. The signal strength sent across the copper line dissipates the
farther it travels between the DSLAM and CPE, currently limiting reliable
DSL deployment to distances of about 18,000 feet.
While conventional DSL technologies do provide multiple benefits, we believe
that the majority of service providers have been unable to cost-effectively
provide widespread DSL services to their customers because of its limitations.
Today, many service providers are engaged in the costly, time-consuming process
of re-engineering their infrastructures in an attempt to overcome these
limitations. Service providers need a more robust DSL technology that is easy to
deploy, does not interfere with, and is not subject to interference from, other
services and provides the speed and performance that is required by their
customers.
THE ELASTIC NETWORKS SOLUTION
We provide broadband access solutions designed to meet the interactive
demands of business and residential users. Our patented EtherLoop technology
overcomes many of the limitations of conventional DSL technologies and addresses
many quality of service requirements. Our solution provides complete IP
end-to-end connectivity and incorporates IP DSLAMs, DSL CPE and complementary
software. Our solution is highly scalable and may be deployed in a service
provider's facility or on any premises where multiple end users are located.
Our solution offers the following benefits:
- DYNAMIC BANDWIDTH ALLOCATION. Our products enable service providers to
deliver an array of services and applications, including Internet access,
virtual private networking, videoconferencing, video on demand and
IP-based voice services, on a common platform. Our access products and
EtherLoop technology currently allow our clients to deliver bi-directional
bandwidth of up to 4 Mbps, and dynamically allocate both downstream and
upstream bandwidth based on user demands. This capability enables service
providers to maximize bandwidth utilization and provide additional revenue
generating services.
- AVOIDANCE OF CROSS TALK AND OTHER INTERFERENCE. Our EtherLoop technology
constantly monitors interference on each line over which EtherLoop signals
are transmitted. It can dynamically adjust transmission frequencies in
order to avoid potential noise and cross talk interference caused by other
high-speed data services. EtherLoop also adjusts its transmission
frequency to avoid
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interfering with other signals in the binder group. These advantages
enable service providers to deploy more broadband lines in a binder group
and provide a higher quality service.
- EASE OF DEPLOYMENT AND USE. Our products allow service providers to
cost-effectively utilize the existing copper wire infrastructure to
quickly deploy high-speed access to their subscribers. Unlike most other
access products, our technology can be deployed without the need for
costly local loop re-engineering and rewiring, or time consuming service
truck rolls. Our CPE products allow for quick and easy end user
installation, reducing the need for professional installation services.
Further, our YesWare software enables end users to easily and quickly
access the Internet without having to install special software or modify
computer settings.
- HIGHLY SCALABLE. Our access products are designed in a modular format,
which enables the quick adjustment of features without the cost of having
to replace the entire DSLAM or CPE. Service providers can easily and
quickly increase bandwidth and increase or change the number of lines
served to address functionality and cost requirements. Because
EtherLoop-based products are designed to be deployed at digital loop
carrier, or DLC, locations, service providers deploying our products have
access to more subscribers.
- GREATER DISTANCE. Our products also provide reliable service coverage
beyond the typical range of conventional DSL technologies. With this
extended reach, service providers are able to maximize their technology
investment to deliver high-speed access to more of their subscriber base.
Additionally, unlike conventional DSL technologies, EtherLoop is designed
so that its signals are capable of being repeated to extend service over
greater distances.
STRATEGY
We intend to maintain and build upon our position as a leader in next
generation DSL access technology. Key elements of our strategy include:
- CONTINUE OUR TECHNOLOGY LEADERSHIP. We will continue to devote
substantial resources to further develop our EtherLoop technology to
enhance the functionality, bandwidth and scalability of our access
solutions. Our recently announced Storm System products are designed to
enhance scalability by increasing bi-directional access speeds to 6 Mbps
and above and by significantly increasing line density. Additionally, we
will continue enhancing our software solutions to provide tools that
increase the value-added functionality of our products, including
bandwidth management, provisioning and quality of service offerings. As
our EtherLoop technology continues to advance, we believe that we will be
able to effectively service a greater percentage of the significant market
for high-speed access.
- EXPAND PENETRATION INTO THE BROADBAND ACCESS MARKET. We plan to expand
our distribution channels to meet the growing demand for business and
residential broadband access. While we initially focused our sales efforts
on the hospitality industry, we have since expanded these sales efforts to
reach other market opportunities. Our products are now deployed in diverse
in-building environments, including multi-tenant business complexes,
apartment buildings, condominiums and college dormitories, as well as in
central office facilities. Our new Storm System products will also allow
us to expand product deployment to the large number of subscribers served
by DLCs.
- INCREASE DIRECT AND INDIRECT SALES CHANNELS AND EXPAND
INTERNATIONALLY. We intend to utilize our direct and indirect sales
channels to increase market penetration of our access products. We will
continue to increase our sales presence in the growing domestic and Asian
markets. We also plan to expand our sales efforts into other emerging
international markets such as Europe and Latin America. To complement our
direct channels, we intend to strengthen our relationships with resellers
and other distributors, such as Nortel, Westcon and Williams
Communications. We support our sales efforts with marketing campaigns, and
we will continue to actively promote the advantages of EtherLoop
technology to build greater awareness of our products.
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- LEVERAGE STRATEGIC BUSINESS PARTNERSHIPS. We have formed strategic
relationships with a variety of business partners for technology,
manufacturing and professional services. These relationships enable us to
leverage the infrastructure and capabilities of established industry
leaders, helping us to improve our products, lower our costs and increase
our speed to market. We have established relationships with Nortel, Texas
Instruments, Sanmina, GTE Communications and Teledex Corporation, among
others. We intend to continue to develop these, and seek additional,
strategic relationships.
- DEVELOP LICENSING STRATEGY. We plan to license our EtherLoop technology
to third parties to facilitate integration of our technology into new
product developments. Additionally, we intend to license our YesWare
software as a stand-alone application to in-building operators to allow
them to increase their control over their telecommunications access
billing and management functions. Furthermore, we plan to pursue a
strategy of entering into relationships with original equipment
manufacturers, or OEMs, to expand the market penetration of our CPE
products. By licensing our technology and entering into OEM relationships,
we can increase market adoption of our technology, help promote new
applications for our access solutions and improve our margins.
CORE TECHNOLOGY
Our patented EtherLoop technology combines the benefits of Ethernet and
conventional DSL into a next generation DSL technology. EtherLoop technology
combines Ethernet's burst data packet delivery techniques with DSL's advanced
signal modulation to provide a robust access solution with many attractive
benefits, including dynamic bandwidth allocation, reduced interference, IP
connectivity, ease of deployment and greater transmission distance.
ETHERLOOP PROVIDES DYNAMIC BANDWIDTH ALLOCATION. EtherLoop constantly
monitors both upstream and downstream data signal bandwidth requirements and
dynamically allocates all available bandwidth for maximum utilization. For
instance, if the downstream signal needs only 10% of the available bandwidth,
but the upstream signal needs 90%, EtherLoop will allocate the necessary
bandwidth to the upstream signal. As bandwidth requirements change, EtherLoop
reallocates the available bandwidth, providing enhanced service performance over
other fixed bandwidth solutions.
ETHERLOOP REDUCES CROSS TALK AND OTHER INTERFERENCE. EtherLoop technology
reduces cross talk interference problems by transmitting data in discrete signal
packets, or burst mode, instead of a constant signal stream. As a result,
EtherLoop can actively monitor and adjust its transmission frequency to avoid
interference and conflicts with other signals in the binder group, all without
sacrificing speed or data quality. This dynamic frequency adjustment can also
increase throughput and data quality because it greatly reduces the need for
retransmission of signals degraded by line interference and transmission
conflicts. This functionality also allows service providers the flexibility to
deploy our solution in the same binder group with other voice and high-speed
data services without compromising signal quality.
ETHERLOOP PROVIDES IP CONNECTIVITY. EtherLoop provides IP connectivity,
eliminating the need for conversion of data between ATM and IP. This efficient
form of data communications reduces costs and complexity, and improves
throughput and service quality.
ETHERLOOP-BASED PRODUCTS ARE EASY TO INSTALL AND REDUCE THE NEED FOR SERVICE
CALLS. Similar to conventional DSL, our equipment must be installed in a
telephone company's facilities, or in a central location on the customer's
premises in the case of in-building applications, to permit the end users'
signals to be transmitted to the Internet or other networks. However, unlike
many conventional DSL technologies, EtherLoop reduces the complexity and expense
of the installation process and increases deployment speed. Our solution
generally does not require loop re-engineering as EtherLoop can operate on
copper phone lines regardless of bridge taps or wire gauge changes. Without the
need to recondition or rewire the lines, our EtherLoop technology significantly
reduces the requirement for installation truck rolls.
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ETHERLOOP ENABLES HIGH-SPEED DATA TRANSMISSION OVER LONGER
DISTANCES. Communications speed and bandwidth decrease as the distance between
the end user and the DSLAM increases. EtherLoop addresses this limitation by
utilizing burst mode technology and advanced signal modulation to provide
high-speed communications beyond the reach of conventional DSL technologies.
EtherLoop continually monitors and determines the characteristics of each line
to provide the best frequency and bandwidth available. In addition, we are
currently developing repeater technology to incorporate into our DSL solution
that will be able to leverage the efficiencies of data packet delivery to extend
the signal out to longer distances while maintaining bandwidth throughput.
PRODUCTS
We provide an end-to-end solution of IP DSLAMs, DSL CPE and complementary
software, either as a complete solution or on a modular basis. Our products are
designed to comply with Level 3 of the Networking Equipment Building Standards,
or NEBS, and can be deployed in multiple operating environments. The following
diagram highlights where our products reside in the typical network:
[GRAPHIC]
Center top: title "ELASTIC'S CURRENT IP END-TO-END SOLUTIONS DIAGRAM"
PRODUCT DIAGRAM in Business Section
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1. Top left images of an ELMo DSLAM, its associated filter shelf and YesWare
Server with lines connecting both to a picture of a telephone switch and a
picture of Internet services to a line that represents a third party router. On
the top right are the words "In-Home" and the picture of our Elite modem with
lines connecting it to a computer and a telephone. Below that are the words
"In-Office" and pictures of our Ethernet port with lines connecting them to a
telephone and a lap top computer. A dashed line is drawn from these figures to
our ELMo filter.
2. Bottom left: the words "In-Building" and images of the ELMo DSLAM, its
associated filter shelf and our YesWare server with a line connected to a PBX
and a picture of the Internet to a line that represents a third party router in
a typical multi-tenant building location. A dashed line connects this to a
picture of a standard telephone and our eSled, which is connected by a line to a
lap top computer. The eSled is attached to a phone and shown as an image on the
lower right side.
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Service providers use our products to deliver EtherLoop next-generation DSL
services to their end users. These products are installed in telecommunications
service provider facilities or on any premises where multiple users are located
such as multi-tenant buildings and hotels. In addition to the features inherent
in our core EtherLoop technology, including IP connectivity, dynamic bandwidth
allocation, reduced interference, ease of deployment and greater transmission
distances, our products offer many additional features, some of which are
discussed below.
CURRENT PRODUCTS
ELMO 8 IP DSLAM. The ELMo 8 IP DSLAM offers the following features:
- An eight line shelf capacity;
- Up to eight modem cards with 4 Mbps of dedicated bandwidth;
- A filter card for directing voice traffic to the public switched telephone
network;
- A port card for distributing high speed data traffic to an external wide
area network, or WAN, device;
- NEBS Level 3 and 10 Base-T Ethernet compliance; and
- A 48 volt power card.
ELMO 120 IP DSLAM. The ELMo 120 IP DSLAM offers the following features:
- A 120 line shelf capacity;
- Up to ten modem cards, each supporting up to twelve lines sharing 4 Mbps
of bandwidth;
- An optional filter shelf supporting up to 120 lines that direct voice
traffic to the public switched telephone network;
- A port card for distributing high speed data traffic to an external WAN
device;
- NEBS Level 3 and 10/100 Base-T Ethernet compliance; and
- A 48 volt power card.
ELITE MODEM. The Elite is the EtherLoop modem connecting end user voice and
data CPE to the network. It offers the following features:
- Up to 4 Mbps of bandwidth that is dynamically allocated upstream and
downstream depending on usage requirements;
- A standard Ethernet 10 Base-T connector and RJ-11 phone jack;
- Easy to install--plugs into a standard RJ-11 wall jack;
- Always connected to the network--no need to dial-up;
- Supports both single user and small work group applications; and
- Powered by 110/120 VAC.
We also offer an auxiliary connection device, an Ethernet port, to connect
the end user's device to the Elite modem where there is limited desktop space.
ESLED. This product attaches to the bottom of Teledex manufactured hotel
telephones and provides the same connectivity as our standard Elite modem
without occupying additional desktop space.
YESWARE. Our current YesWare software suite provides port authorization,
billing and provisioning and administrative functions to network managers of
EtherLoop-based high-speed access services. With YesWare operations,
administration, maintenance and provisioning software, network managers can
assign
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modems to individual users, monitor performance, remotely download new firmware
to modems, and troubleshoot network issues. In addition, for hospitality
customers, YesWare visitor-based networking software enables customer plug and
play connectivity with no laptop reconfiguration, direct or credit card billing
for hotel guests, interface to hotel property management systems and other
revenue generating features.
RECENTLY ANNOUNCED PRODUCTS
In June 2000, we announced our Storm System family of products, which we
expect to begin shipping in the fourth quarter of 2000. The Storm System family
evolves our ELMo product line in the following ways:
- Storm System IP DSLAMs are designed on a single shelf chassis, based on
the ELMo 120 architecture;
- Additional modem cards enable our IP DSLAMs to support greater bandwidth
for end users and greater access line density for service providers;
- The introduction of IP policy management that allows service providers to
intelligently manage bandwidth, access and service characteristics in
order to provide new multi-media services; and
- The introduction of a WAN switch that provides high-bandwidth connectivity
between the DSLAM and the network.
The Storm System family consists of the following products designed to
enable the complete delivery and management of IP services:
- BITSTORM IP DSLAMS. This product will deliver bi-directional dynamically
allocated bandwidth up to 6 Mbps and beyond over a single copper line.
Added capability can be provided by the optional layer 3 switch and the
subscriber management gateway. The layer 3 switch eliminates traditional
routers, sets priorities for network traffic and manages bandwidth. The
subscriber management gateway feature enables service providers to manage
bandwidth allocation, monitor network activity, provide online security
functions and perform other subscriber management services.
- STORMPORT CPE. The StormPort family of CPE devices will connect end user
voice and data equipment to the DSLAM, which is connected to the network,
and enable plug and play connectivity.
- STORMTRACKER. StormTracker software will provide operations,
administration, maintenance and provisioning tools to enable easy
management of Storm System components. StormTracker will also include
Spectrum Manager, an optional feature that allows service providers to
control EtherLoop's line interference monitoring-and-avoidance technology.
The Spectrum Manager feature will also permit the graphical display of
line transmission characteristics.
- MICROBURST. This IP remote access multiplexer is designed for deployment
in outside plant applications such as DLCs and multi-tenant business
complexes.
RESEARCH AND DEVELOPMENT
We continually review and evaluate technological changes affecting the
telecommunications market and invest in research and development to address
those changes. We are committed to an ongoing program of new product development
that combines internal development efforts and licensing arrangements for new
products and technologies from other sources.
We have focused our recent research and development expenditures on four
areas: Application Specific Integrated Circuit, or ASIC, chip development for
increased bandwidth of our EtherLoop technology of up to 10 Mbps and above,
advanced IP switching techniques, high-speed access connectivity devices and
enhanced communications software.
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Research and development expenses were $3.3 million in 1997, $8.2 million in
1998 and $7.4 million in 1999. We intend to increase our investment in research
and development in the future.
PROFESSIONAL SERVICES
Our professional services department supports our customers in the timely
deployment of our products at customer sites. The department outsources many
professional services to independent service organizations, including GTE
Communications and Tstaff, Inc. The department also provides our customers with
technical assistance on a twenty-four hours a day, seven days a week basis, as
needed.
CUSTOMERS
We target our sales efforts to various categories of service providers
operating in the market for high-speed access, both in the United States and
internationally. To date, customer installations have ranged from in-building
applications, including hotels, multi-tenant business complexes, apartment
buildings and college dormitories, as well as in service providers' central
office locations used to reach both business and residential users. The
following is a list of service providers who purchase our products directly from
us or through our distributors and resellers, Nortel, Westcon and Williams
Communications:
<TABLE>
<CAPTION>
UNITED STATES BASED SERVICE PROVIDERS INTERNATIONAL BASED SERVICE PROVIDERS
--------------------------------------------- ---------------------------------------------
<S> <C>
BellSouth Corporation Beijing Keval On-Line Technology, Ltd.
Darwin Networks, Inc. Coventus Inc.
Everest Broadband Networks, Inc. New T & T Hong Kong Limited
Grand River Mutual Telephone Corporation OverNet Inc.
On Command Corp. Terra Networks, S.A.
Oregon Trail Internet, Inc.
Prism Communications, Inc.
Sprint Corporation
UniversalCom, Inc.
U.S. Online, Inc. member ISPs
</TABLE>
In 1999, sales to Darwin and Nortel represented approximately 81% of our
revenues. Sales to Darwin accounted for 41% of our revenues and sales to Nortel,
which included indirect sales to Westcon, accounted for 40% of our revenues
during that period. In the first quarter of 2000, we entered into a distribution
arrangement with Westcon under which Westcon agreed to purchase our products
directly from us instead of through our distributors. In the first quarter of
2000, sales to Darwin, Nortel and Westcon accounted for 83% of our revenues,
with sales to Darwin accounting for 54% of our revenues, sales to Nortel
accounting for 15% of our revenues and sales to Westcon accounting for 14% of
our revenues.
SALES AND MARKETING
We sell and market our products on a worldwide basis through both direct and
indirect channels. In the first quarter of 2000, our revenues from international
sales were 16% of total revenues, and revenues from domestic sales were 84% of
total revenues. Direct sales accounted for 66% of our revenues and indirect
sales accounted for 34% of our revenues in the first quarter of 2000.
DIRECT SALES. Our direct sales efforts are managed through directors and
managers who are responsible for specific customer accounts. Relationships we
establish at various levels in our customers' organizations are key to our sales
efforts. The sales management team for each customer maintains contact with key
customer representatives who have planning and policy responsibility within
their organizations. At the same time, our sales engineers work with customers
to sell our products at key levels through the customer's organization. We
currently have sales offices in Atlanta, Georgia and Hong Kong.
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INDIRECT SALES. Our sales team works closely with our distribution partners
to identify customer prospects and fulfill market demand. These relationships
allow us to effectively sell to smaller service providers.
MARKETING. We structure our marketing efforts along product lines and
distribution channels. We employ product marketing specialists who perform the
following functions:
- communications and promotions;
- market research and competitive analysis, including pricing and
positioning;
- development of specific marketing strategies for each product line;
- coordination with our direct and indirect sales forces to develop key
account and market strategies;
- definition of product and service functions and features; and
- sales support.
Our marketing efforts are further augmented by our participation in the
Network Reliability and Interoperability Council V, an FCC implemented
commission that concentrates on spectral compatibility issues.
MANUFACTURING
Our manufacturing operations consist primarily of supporting prototype
development, materials planning and procurement, final assembly, testing and
quality control. We use independent suppliers to provide certain printed circuit
boards, chassis and subassemblies for our products. We outsource substantially
all of our final manufacturing and testing to Sanmina.
Although we generally use standard parts and components for our products,
our products contain several key components that are purchased from single
source suppliers: line driver chips from Texas Instruments, power supplies from
Aztec America Inc. and system processor chips from Motorola Inc. We do not have
written agreements with our single source suppliers. We generally purchase
components on a purchase order basis, as opposed to entering into long-term
procurement agreements. To date, we have generally been able to obtain adequate
supplies in a timely manner from vendors or, when necessary, to meet production
needs from alternative vendors. We believe that, in most cases, alternative
parts and components suppliers can be identified if current vendors fail to
fulfill our requirements.
COMPETITION
We operate in the highly competitive telecommunications access industry. We
believe that competition may increase substantially with the introduction of new
technologies, deployment of new broadband communications networks and potential
changes in the regulatory environment which may create new opportunities for
established and emerging companies. Our current and prospective competitors
include many large companies that have substantially greater market presence,
financial, technical, marketing and other resources than we have. We compete
directly or indirectly with various providers of DSL technology, including
Alcatel, Cisco, Copper Mountain, Lucent, Nokia, Nortel and Tut Systems.
In addition, DSL technology competes with alternative technologies, such as
ISDN, T-1, fiber optics, cable and wireless solutions.
The rapid technological developments within the telecommunications industry
have resulted in frequent changes in our group of competitors. The principal
competitive factors in our market include:
- system reliability and performance;
- key product features, such as bandwidth and distance;
- ease of installation and use;
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- standards compliance;
- technical support and customer service; and
- price.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, trademark, patent and trade secret
laws and contractual restrictions to establish and protect our technology and
proprietary rights. We require employees and consultants and, when possible,
suppliers and distributors, to sign confidentiality agreements. However, we
cannot assure you that our steps will be sufficient to prevent misappropriation
of our technology and proprietary rights and information, or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to ours. In addition, the laws of many foreign countries
do not protect our intellectual property to the same extent as the laws of the
United States. From time to time, we may desire or be required to renew or
obtain licenses from other parties in order to further develop and market
commercially viable products. There can be no assurance that any necessary
licenses will be available upon acceptable terms.
PATENTS AND PATENT LICENSES. We own U.S. patent number 5,912,895, titled
"Information Network Access Apparatus and Methods for Communicating Information
Packets via Telephone Lines," which generally covers the communication of
Ethernet data frames between master and slave modems using burst mode, half
duplex transmission and providing a collision avoidance technique over a
telephone line. This patent issued on June 15, 1999 and expires on May 1, 2016.
Australia has also granted us a patent on this technology and we have applied
for patents in Canada, Japan and the European Community. Although we have
granted Nortel a license to practice the patented technology, Nortel has agreed
not to compete with us by practicing this patent prior to May 12, 2002. We have
also granted Nortel a license to all improvements to this patented technology
that we may make or acquire. Nortel does not have the right to sublicense this
technology except in limited circumstances such as when Nortel resells our
products containing the technology.
We also have exclusive licenses from Nortel to two patent pending
technologies and non-exclusive licenses to two patent pending technologies, to
two other patented technologies and to one technology for which no patent is
pending, all of which we use in our business. The exclusive licenses are subject
to cross-licenses granted by Nortel that existed at the time Nortel granted us
the licenses. In addition, we have granted Nortel a license, with a limited
right to grant sublicenses, to the technologies covered by all of these licenses
and to any improvements to these technologies that we may acquire or make. The
exclusivity provisions of the exclusive licenses granted to us by Nortel expire
after May 12, 2004, after which time our licenses become non-exclusive. These
licenses expire on the dates the patents expire, unless the patents earlier
terminate, or upon termination of the license arrangements. The license
arrangements may be terminated by either party upon a material breach, or by
Nortel if we become insolvent or bankrupt.
We pay Nortel royalties for our use of the licensed technologies; however,
our royalty obligations will end on the closing of this offering. For a detailed
discussion of our royalty obligations, please refer to "Related Party
Transactions."
TRADEMARKS. We have a United States trademark registration on the mark ELMo
and a Canadian trademark registration on the mark EtherLoop. We also have
pending United States and foreign trademark applications for our other marks. We
also claim common law protection for other marks we use in our business.
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EMPLOYEES
As of May 31, 2000, we employed approximately 147 full time employees,
including 49 in sales and marketing, 8 in manufacturing, 46 in research and
development, 14 in finance and administration and 30 in professional services.
None of our employees is represented by a labor union, we have no collective
bargaining agreement and we believe our relations with our employees are good.
FACILITIES
We lease a 14,000 square foot facility in Alpharetta, Georgia, which serves
as our principal engineering and product development facility. The current lease
for this facility expires in May 2003. We also lease another 14,000 square foot
facility in Alpharetta, Georgia for executive offices and for administrative,
sales and marketing purposes. The lease for this facility expires in
August 2002, with an option to renew for a nine month term ending May 2003. We
lease an additional 25,000 square foot facility in Alpharetta, Georgia, which is
used primarily for our professional services team and for warehouse space. The
lease for this facility expires in November 2003.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, the positions held by them and their
ages as of June 1, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- -------- -----------
<S> <C> <C>
Guy D. Gill.................................. 47 President, Chief Executive Officer and Director
Michael VanPatten............................ 47 Senior Vice President, Business Development
Kevin D. Elop................................ 34 Chief Financial Officer, Secretary and Treasurer
Robert T. Gallagher.......................... 38 Vice President, Engineering
Thomas J. Gallo.............................. 42 Vice President, Worldwide Sales
Phillip L. Griffith.......................... 49 Vice President, Marketing
Larry R. Hurtado............................. 38 Vice President, Global Operations
Gary Palmer.................................. 55 Vice President, Professional Services
Tom Manley (2)............................... 42 Director
Gerald A. Poch (2)........................... 52 Director
Richard Reid (1)............................. 53 Director
</TABLE>
------------------------
(1) Member of compensation committee.
(2) Member of audit committee.
GUY D. GILL, one of our co-founders, has served as our president and as a
director since September 1998. He became our chief executive officer in May
1999. From January 1999 until May 1999, Mr. Gill served as president of the
Elastic Networks group of Nortel Networks Inc., a global telecommunications
services company. From January 1998 through January 1999, Mr. Gill was president
and chief executive officer of Arris Interactive, L.L.C., a cable telephony
joint venture between Nortel and ANTEC Corporation. From December 1995 to
January 1998, Mr. Gill served as vice president and general manager of Nortel's
access networks division. From January 1994 through December 1995, he was vice
president, customer network solutions, of Nortel Networks Inc. Mr. Gill has 23
years of telecommunications experience with Nortel Networks in positions in
general management, sales, marketing and finance. He has served on the board of
directors of Arris Interactive and NetSpeed, Inc.
MICHAEL VANPATTEN has served as our senior vice president, business
development since January 2000. From October 1997 through January 2000 he was
senior vice president of ViaGate Technologies, Inc., which designs, develops and
distributes multimedia access products to telecommunication services companies.
From January 1997 to September 1997 he was vice president of marketing for DAGAZ
Technologies, Inc., which designs, develops and distributes multimedia access
products to telecommunication services companies. From 1994 to 1996,
Mr. VanPatten served as vice president of marketing and engineering for
Microdyne Corporation, a computer networking company.
KEVIN D. ELOP has served as our chief financial officer since June 2000 and
as treasurer and corporate secretary since May 1999. From June 1998 through
May 1999, he served as the director of finance and administration for the
Elastic Networks group of Nortel. From January 1990 through June 1998, Mr. Elop
served in various capacities at Nortel including as senior manager for corporate
consolidations, senior manager for external reporting and accounting research,
manager of finance systems and manager of enterprise networks finance.
ROBERT T. GALLAGHER has served as our vice president, engineering since
January 2000. Prior to that, he worked at ADC Telecommunications, Inc., a
telecommunications business, from August 1994, where he served as manager of
development engineering from August 1994 to August 1995, director of design
engineering from August 1995 through September 1997 and vice president of design
engineering from September 1997 through January 2000.
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<PAGE>
THOMAS J. GALLO has served as our vice president, worldwide sales since
June 1999. From July 1998 through June 1999, he served as North American
business director for business partners of Bay Networks, Inc., a networking
products manufacturer. From July 1997 through June 1998, Mr. Gallo served as
director, small/medium business VAR sales of Bay Networks, and from March 1996
through June 1997 he served as director, Internet CPE sales for Bay Networks.
From June 1995 to March 1996, he was vice president, sales for Performance
Technology, Inc., a local area network to Internet connectivity hardware and
software solutions company.
PHILLIP L. GRIFFITH has served as our vice president, marketing since
May 1999. Prior to that, Mr. Griffith served in various positions at Nortel.
From June 1998 through May 1999, he served as vice president, sales and
marketing for Nortel's Elastic Networks group. From June 1997 through
June 1998, he served as Nortel's regional vice president, wireless networks.
From June 1995 through June 1997, Mr. Griffith served as Nortel's vice president
of sales, wireless networks for the southeast United States.
LARRY R. HURTADO, one of our co-founders, has served as our vice president,
global operations since March 2000. From January 2000 to March 2000 he served as
our vice president, technology and operations and from May 1999 through
January 2000, he served as our vice president, engineering, technology and
operations. From October 1998 through May 1999, Mr. Hurtado served as vice
president, business line management for the Elastic Networks group of Nortel.
From September 1997 through October 1998 he served as the director, business
line management of the Elastic Networks group. From September 1996 through
September 1997, Mr. Hurtado founded and served as a principal of the Lighthouse
Group, a technology consulting company, and from July 1995 through
September 1996, he served as vice president and general manager of Medaphis
Corporation, a medical technology provider.
GARY PALMER has served as our vice president, professional services since
December 1999. From June 1995 through December 1999 he served as vice president
operations, AT&T global account of Nortel. Prior to June 1995, Mr. Palmer served
in various other capacities at Nortel including as vice president, North
American installation, vice president of customer service, BellSouth account,
vice president of customer service, BellAtlantic account and vice president of
customer service, Teligent account.
TOM MANLEY has served as a director since May 1999. Mr. Manley has served as
vice president finance of Nortel's service provider and carrier group since
October 1999. Prior to that, Mr. Manley served as vice president finance of
Nortel's carrier packet solutions group since September 1997. From September
1995 to September 1997 he served as a vice president and general manager of
Nortel's advanced public access systems division.
GERALD A. POCH has served as a director since May 1999. Mr. Poch has served
as managing director of Pequot Capital Management, Inc., a venture capital fund
management company, since January 2000. From August 1998 through January 2000,
he was a principal of Pequot Capital Management. From August 1996 to June 1998
he was the chairman, president and chief executive officer of GE Capital
Information Technology Solutions Inc., a technology solutions provider. Prior to
that, he served as co-chairman and co-president of AmeriData
Technologies, Inc., a value added reseller and systems integrator of hardware
and software systems. Mr. Poch is co-chairman of MessageMedia, Inc. and a
director of FutureLink Corp. and BriteSmile, Inc.
RICHARD REID has served as a director since May 1999. Mr. Reid has a
30 year career with Nortel. Currently, Mr. Reid is president of Nortel's
emerging service provider market segment. Before that, Mr. Reid was president of
Nortel's global carrier solutions--CLECs/IXCs business unit. Mr. Reid has also
served as Nortel's vice president and general manager, DMS-100, vice president
and managing director, private switching for Europe, Middle East and Africa, and
managing director and vice president in the United Kingdom.
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<PAGE>
Prior to completion of this offering, we intend to elect three additional
members to our board of directors. These individuals will be independent
directors in accordance with the rules and regulations of the Nasdaq National
Market.
There are no family relationships among any of the directors or executive
officers of Elastic Networks.
SPECIAL TECHNOLOGY CONSULTANT
JOHN B. (JACK) TERRY invented EtherLoop technology while serving as an
assistant vice president of Nortel. Mr. Terry was a co-founder of Nortel's
Elastic Networks group, serving as its chief technical officer from its creation
in January 1997 until his retirement from Nortel in December 1998. We have
retained him since February 1999 as our special technology consultant for the
further development of our technology and products. He holds numerous patents in
a variety of fields and has chaired and presented papers at many key conferences
during the past 30 years. Mr. Terry is a Fellow of the IEEE, recipient of the
IEEE 1995 Engineering Leadership Award, a Senior Member of the SCTE and a member
of Sigma Xi.
BOARD OF DIRECTORS
Immediately prior to the completion of this offering, our second amended and
restated certificate of incorporation will provide for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the closing
of this offering, of the members of the board of directors will be elected to
terms expiring at the first annual meeting of stockholders to be held after the
closing of this offering, will be elected to terms expiring at the second annual
meeting of stockholders to be held after the closing of this offering, and will
be elected to terms expiring at the third annual meeting of stockholders to be
held after the closing of this offering. Thereafter, each class of directors
will be elected for three-year terms. Messrs. and have
been designated class I directors, whose terms will expire at the annual meeting
of stockholders to be held in 2001. Messrs. and have been
designated class II directors, whose terms will expire at the annual meeting of
stockholders to be held in 2002. Messrs. and have been
designated class III directors, whose terms will expire at the annual meeting of
stockholders to be held in 2003.
BOARD COMMITTEES
Our board of directors has two committees: an audit committee and a
compensation committee. The audit committee consists of Messrs. Manley and Poch,
and our compensation committee consists of Messrs. Reid and . The
audit committee reviews the results and scope of our annual audit and meets with
our independent auditors to review our internal accounting procedures and
financial management practices. The compensation committee makes recommendations
concerning salaries, stock options, incentives and other forms of compensation
for our directors, officers and other employees, subject to ratification by our
full board of directors.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash or equity compensation for
services on our board of directors or any board committee, but directors may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings.
EXECUTIVE COMPENSATION
The following table provides information concerning compensation awarded to,
earned by or accrued for services rendered to us in all capacities during the
year ended December 31, 1999 by (i) our chief
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<PAGE>
executive officer and (ii) our two other most highly compensated executive
officers whose salary and bonus totaled at least $100,000 for the fiscal year.
Together, they are referred to as the Named Executive Officers.
Cash payments for services prior to May 12, 1999, were made by Nortel. All
bonus amounts were paid by Nortel and related to the period before May 12, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION ---------------------
------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#)
--------------------------- -------- -------- ---------------------
<S> <C> <C> <C>
Guy D. Gill......................................... $247,206 $46,070 1,319,192
President, Chief Executive
Officer and Director
Phillip L. Griffith................................. 185,147 37,446 271,838
Vice President, Marketing
Larry R. Hurtado.................................... 164,529 28,297 400,257
Vice President, Global Operations
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table describes options granted in 1999 to the Named Executive
Officers. These options were granted with an exercise price equal to the fair
market value of our common stock on the date of grant as determined by our board
of directors. Options for Messrs. Gill, Griffith and Hurtado are incentive stock
options except for 1,042,647 of Mr. Gill's options, 172,930 of Mr. Hurtado's
options and 70,733 of Mr. Griffith's options which are non-qualified and vest
over four years. Ten percent of the stock options vested on the grant date, 15%
vest on the first anniversary of the grant date and the balance vest monthly
over the three-year period commencing on May 13, 2000. The options have a
ten-year term.
The 5% and 10% assumed annual rates of compound stock price appreciation are
prescribed by the rules and regulations of the Securities and Exchange
Commission and do not represent our estimate or projection of the future trading
prices of our common stock. There can be no assurance that the actual stock
price appreciation over the ten-year option term will be the assumed 5% or 10%
levels or any other defined level. Actual gains, if any, on stock option
exercises are dependent on numerous factors, including our future performance,
overall market conditions and the option holder's continued employment with us
throughout the entire vesting period and option term, none of which are
reflected in this table.
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<PAGE>
The potential realizable value is calculated by multiplying the fair market
value per share of the common stock on the date of grant as determined by the
board of directors, which is equal to the exercise price per share, by the
stated annual appreciation rate compounded annually for the option term,
subtracting the exercise price per share from the product, and multiplying the
remainder by the number of shares underlying the option granted.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE THE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Guy D. Gill....................... 1,284,192 30.7% $2.07 05/13/09 $1,671,776 $4,236,610
Phillip L. Griffith............... 256,838 6.1 2.07 05/13/09 334,355 847,321
15,000 0.4 2.07 12/15/09 19,527 49,486
Larry R. Hurtado.................. 385,257 9.2 2.07 05/13/09 501,532 1,270,981
15,000 0.4 2.07 12/15/09 19,527 49,486
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES
The following table provides information about stock options held at
December 31, 1999 by the Named Executive Officers. None of these options has
been exercised.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Guy D. Gill.................................... 128,419 1,155,773 $ -- $ --
Phillip L. Griffith............................ 25,684 246,154 -- --
Larry R. Hurtado............................... 38,525 361,732 -- --
</TABLE>
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
EMPLOYMENT AGREEMENTS AND INCENTIVE AND NONSTATUTORY STOCK OPTION AGREEMENTS
ENTERED INTO WITH OUR NAMED EXECUTIVE OFFICERS
On May 12, 1999, we entered into four-year employment agreements with Guy
Gill, Phillip Griffith and Larry Hurtado. Under the agreements, Mr. Gill is
entitled to receive a base salary of $260,000 per year, Mr. Griffith is entitled
to receive $180,300 per year, and Mr. Hurtado is entitled to receive $150,500
per year. In addition, Mr. Gill is entitled to reimbursement for up to $10,000
of expenses incurred in connection with personal financial, estate planning and
tax assistance services and automobile operating expenses, and both
Mr. Griffith and Mr. Hurtado are entitled to reimbursement of up to $5,000 per
year for similar expenses. Mr. Gill is also entitled to reimbursement for
country club membership expenses.
On May 13, 1999, we granted Mr. Gill incentive stock options to purchase
241,545 shares of our common stock and non-qualified stock options to purchase
1,042,647 shares of our common stock, Mr. Griffith incentive stock options to
purchase 197,361 shares and non-qualified stock options to purchase 59,477
shares, and Mr. Hurtado incentive stock options to purchase 223,583 shares and
non-qualified stock options to purchase 161,674 shares, each at an exercise
price of $2.07 per share. Ten percent of the stock options vested on the grant
date, 15% vest on the first anniversary of the grant date and the balance vest
monthly over the three-year period commencing on May 13, 2000. If we are
acquired by another company and the options are not assumed by the acquiring
company, then the options shall fully vest and be exercisable for 45 days after
this date.
If we terminate Mr. Gill's employment other than for cause, or if Mr. Gill
terminates his employment for good reason, we must pay Mr. Gill a lump severance
payment calculated over a severance period equal
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<PAGE>
to the shorter of 18 months or the time remaining in the term of the agreement,
but not less than 12 months. If we terminate Mr. Griffith's or Mr. Hurtado's
employment other than for cause, or if either terminates his employment for good
reason, we must pay him a lump sum severance payment calculated over a severance
period equal to 12 months. The payment will equal the sum of the base salary the
terminated employee would have received during the severance period, plus an
amount to pay for health and other insurance benefits during the severance
period, plus a bonus amount based on the terminated employee's meeting 100% of
all performance requirements.
Effective May 12, 2000, we increased Mr. Gill's annual salary to $275,000,
Mr. Griffith's to $190,000 and Mr. Hurtado's to $185,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Reid and one other non-employee director who resigned from our board of
directors in June 2000 served during the year ended December 31, 1999 as members
of the compensation committee of our board of directors. No executive officer of
Elastic Networks has served as a director or member of the compensation
committee, or other committee serving an equivalent function, of any other
entity, any of whose executive officers served as a director of or member of the
compensation committee of our board of directors.
1999 STOCK INCENTIVE PLAN
Our 1999 Stock Incentive Plan provides for the grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
to our employees and nonstatutory stock options and stock based awards to our
employees, directors, consultants and advisors. A total of 5,711,766 shares of
common stock have been reserved for issuance under the plan. As of March 31,
2000, options to purchase an aggregate of 4,948,415 shares were outstanding,
1,331 shares of common stock had been purchased through exercises of stock
options and 762,020 shares were available for future grant.
The plan is administered by the board of directors, or a committee appointed
by the board of directors, which determines the terms of options granted,
including the exercise price and the number of shares subject to each option.
The board of directors also determines the vesting schedule. The maximum number
of shares with respect to which options may be granted per participant is
2,000,000 shares per calendar year. The term of options granted under the plan
is ten years. The exercise price of incentive stock options must be at least
equal to the fair market value of our common stock on the date of grant. The
aggregate fair market value of the shares of common stock with respect to which
incentive stock options are exercisable for the first time by an optionee during
any calendar year (under all of our and our affiliate's plans) may not exceed
$100,000, or the portion of those options which exceed this limit shall be
treated as nonstatutory stock options.
Under the plan, shares subject to stock awards that have expired or
otherwise terminated without having been exercised in full again become
available for grant.
Except as the board of directors may otherwise provide, options are not
transferable by the optionee, and each option is exercisable during the lifetime
of the optionee only by the optionee. Options must be exercised within 60 days
after the end of optionee's status as an employee, director or consultant of
Elastic Networks, or within twelve months after his or her termination by
disability or death, to the extent that the option is vested on the date of
termination, but in no event later than the expiration of the option's term.
The plan provides that in the event we merge with or into another
corporation, or we sell all or substantially all of our assets, each outstanding
option shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted, the
options will become immediately exercisable and vested in full. The options
shall then be exercisable for at least 45 days. The board of directors may amend
or modify the plan at any time, except that without the consent of the
stockholders, no amendment or modification shall adversely affect rights and
obligations with respect to outstanding options. Unless sooner terminated by the
board of directors, the plan will terminate in May 2009.
45
<PAGE>
RELATED PARTY TRANSACTIONS
INITIAL FORMATION
On May 12, 1999, Elastic Networks Inc. began doing business as a separate
company as a result of a contribution agreement among Nortel Networks Inc.,
Nortel Networks Corporation and us. Nortel Networks Inc. is a wholly-owned
subsidiary of Nortel Networks Corporation. Under this agreement, we issued
Nortel Networks Inc. 15,384,614 shares of our common stock and assumed all of
Nortel's obligations related to the Elastic Network's group, including those
described below.
Because we were a division of Nortel and all of our officers were employees
of Nortel prior to the execution of the contribution agreement, the value of the
shares issued to Nortel in exchange for the assets of the Elastic Networks group
was not arrived at by an arm's-length negotiation between Nortel and us. Rather,
as part of the transfer of assets, Nortel determined that the value of shares to
be paid for its Elastic Networks business would be the net book value of the
assets being transferred, which we believe was the fair market value of the
Elastic Networks business at the time of transfer.
Under the contribution agreement, both Nortel Networks Corporation and
Nortel Networks Inc. agreed not to compete with us during the period commencing
on May 12, 1999 and ending on May 12, 2002, with respect to the design,
research, development, manufacture and/or sale of products or devices that
communicate or involve communicating by EtherLoop technology. Messrs. Manley and
Reid, members of our board of directors, are officers of Nortel Networks Inc.
INTELLECTUAL PROPERTY TRANSFER AND LICENSE AGREEMENT. This agreement was
also entered into in connection with our formation. Under this agreement, Nortel
Networks Corporation licensed us the rights to patents, patent applications,
trademarks, software and other technical information that we use in our
business. See "Business-Intellectual Property" for a discussion of the scope and
nature of Nortel Networks Corporation's licenses to Elastic. In return, we
granted Nortel a royalty-free, non-exclusive, perpetual, worldwide license, with
a limited right to grant sublicenses, to the transferred patented technology,
the licensed technologies, the transferred software and the other technical
information to us. The license granted back to Nortel also includes a license to
any improvements that we may acquire or make to the transferred patented
technology, the licensed technology, the transferred software and to the other
technical information. The license granted back is subject to Nortel's
obligation not to compete with us.
Under this agreement, we pay Nortel Networks Corporation three separate
royalties. First, we pay a two and one half percent royalty on the amounts we
receive, after the deduction of some trade losses, transportation charges, taxes
and other duties, from either (i) our sale or sublicense to third parties of
some of our products or (ii) our provision to third parties of engineering,
installation, maintenance, repair and other services relating to these products.
Second, we pay a two and one half percent royalty on the amounts we receive,
after the deduction of some trade losses, transportation charges, taxes and
other duties, from either (i) our sale or license to distributors of certain of
our products or (ii) the provision by a distributor to an end user of
engineering, installation, maintenance, repair and other services relating to
such products. Finally, we pay Nortel Networks Corporation a royalty of five
percent of the amounts we receive, after the deduction of some trade losses,
transportation charges, taxes and other duties, from either our sale and license
to a sublicensee of the right (i) to make, use, copy, modify and sell certain of
our products or (ii) to provide engineering, installation, maintenance, repair
and other services relating to those products.
PATENT TRANSFER AND LICENSE AGREEMENT. This agreement was also entered into
in connection with our formation. Under this agreement, Nortel Networks Inc.
assigned us all of its rights to U.S. patent number 5,912,895 titled
"Information Network Apparatus and Methods Communicating Information Packets via
Telephone Lines," both within and outside the United States. In exchange, we
granted Nortel, subject to its obligations not to compete with us, an
irrevocable, nonexclusive, worldwide license to the patented
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<PAGE>
technology and any improvements to the patented technology we may acquire or
make. Our license back to Nortel includes a limited right to grant sublicenses.
DISTRIBUTION AGREEMENT. Effective September 1, 1998, we entered into a
distribution agreement with Nortel for Nortel to purchase EtherLoop products
from us for distribution to customers. The agreement terminates on December 31,
2001, but it is renewable by us for an additional three year period. Also, we
pay a commission on some sales generated under the agreement; however, we have
incurred no payment obligations to date. Nortel has, from time to time,
guaranteed the financing of purchases of our equipment by some of our customers
who purchase through our distribution arrangement with Nortel. In 1999, Nortel
guaranteed about $3.4 million in purchases. For the first quarter of 2000,
Nortel guaranteed $3.5 million in purchases.
LEASE OBLIGATIONS. The property we occupy at 6120 Windward Parkway,
Alpharetta, Georgia, is subleased from Nortel on the same terms as the original
lease to Nortel. As a sub-lessor, Nortel is responsible for payments on the
lease if we do not pay. We paid $260,000 under this lease in 1999 and expect to
pay a minimum of $268,000 annually until this lease expires. Also, Nortel
guaranteed our lease of office equipment and fixtures currently used in another
office located in Alpharetta, Georgia. Nortel's guaranty was for $158,000 of the
total lease amount and Nortel has not been called to make a payment under the
guaranty.
TRANSITION SERVICES. Since May 12, 1999, we have been provided
administrative services from Nortel in connection with our development as a
stand alone company. In 1999, we accrued $29,000 for the costs of these
services. This agreement is scheduled to terminate on November 12, 2000. In
addition, during 1999, we accrued $120,000 for the cost to reimburse Nortel for
Nortel employees who provided services to us.
SERIES A PREFERRED STOCK FINANCING. On May 12, 1999 we sold 3,876,923
shares of series A preferred stock at a purchase price of $3.25 per share. Upon
the closing of this offering, the series A preferred stock will automatically
convert into 5,162,450 shares of common stock. The following beneficial owners
of more than 5% of our common stock (assuming the conversion of all shares of
preferred stock into common stock) acquired beneficial ownership of series A
preferred stock pursuant to the series A redeemable convertible participating
preferred stock purchase agreement.
<TABLE>
<CAPTION>
NUMBER OF
COMMON STOCK
NAME NUMBER OF SHARES EQUIVALENTS PURCHASE PRICE
---- ---------------- -------------- --------------
<S> <C> <C> <C>
Pequot Private Equity Fund, L.P........... 2,075,660 2,763,916 $6,745,895
Pequot Venture Partners, L.P.............. 923,076 1,229,154 2,999,997
Pequot Offshore Private Equity Fund,
Inc..................................... 262,802 349,943 854,106
</TABLE>
Mr. Poch, a member of our board of directors, is the managing director of Pequot
Capital Management, Inc., an affiliate of the Pequot entities that own our
stock, and may have an indirect material interest in the transactions between us
and the Pequot entities.
INVESTMENT IN EVEREST BROADBAND NETWORKS, INC.
In the fourth quarter of 1999, we purchased 300,000 shares of series A
preferred stock of Everest Broadband Networks, Inc. for an aggregate price of
$102,000. The Pequot entities, combined, own more than 10% of the voting power
of Everest and more than 5% of our common stock. At the time of the investment,
Pequot's board of directors' designees, Mr. Poch and one other non-employee
director who resigned from the board of directors in June 2000 to become chief
executive officer of Everest, were involved in the decision to invest in
Everest.
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<PAGE>
SERIES B PREFERRED STOCK FINANCING
In February 2000, we sold 3,922,463 shares of series B preferred stock at a
purchase price of $5.329 per share. Upon the closing of this offering, the
series B preferred stock will automatically convert into common stock. The
following beneficial owners of more than 5% of our common stock, assuming the
conversion of all shares of preferred stock into common stock, acquired
beneficial ownership of series B preferred stock pursuant to the series B
redeemable convertible participating preferred stock purchase agreement. These
shares convert on a one-for-one basis into common stock on the closing of this
offering.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PURCHASE PRICE
---- ---------------- --------------
<S> <C> <C>
Manufacturers Life Insurance Company (U.S.A.) ............ 1,407,394 $7,500,003
Pequot Private Equity Fund, L.P. ......................... 541,331 2,884,752
Pequot Offshore Private Equity Fund, Inc. ................ 68,539 365,244
</TABLE>
Mr. Poch, a member of our board of directors, is the managing director of Pequot
Capital Management, an affiliate of the Pequot entities that own our stock, and
may be deemed to have an indirect material interest in the transactions between
us and the Pequot entities.
All of the securities referenced above were sold at prices equal to the fair
market value of the securities, as determined by our board of directors, on the
date of issuance.
REGISTRATION RIGHTS
Nortel Networks Inc. and the holders of our series A and series B preferred
stock, which will automatically convert into common stock upon the closing of
this offering, have both incidental, or piggyback, and demand registration
rights to cause us to register their shares of common stock in a public offering
after this offering closes. These registration rights are described in detail in
"Description of Capital Stock--Registration Rights."
48
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table contains information concerning:
- those persons whom we know own beneficially more than 5% of our
outstanding common stock, including the selling stockholder;
- our directors;
- the Named Executive Officers; and
- all of our directors and executive officers as a group.
Unless otherwise indicated in the footnotes below, this information is
provided as of May 31, 2000. The number of shares owned by a person includes
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of May 31, 2000. The table assumes the
conversion of all the outstanding shares of our series A and B preferred stock
into 9,084,913 shares of common stock and that the underwriters do not exercise
their over-allotment option. If the underwriters' over-allotment option is
exercised in full, shares of common stock will be outstanding after the
completion of this offering.
The shares issuable under options exercisable within 60 days of May 31, 2000
are treated as if outstanding for computing the percentage ownership of the
person holding these options but are not treated as if outstanding for the
purposes of computing the percentage ownership of any other person.
Except as noted, the business address of the named beneficial owner is c/o
Elastic Networks Inc., 6120 Windward Parkway, Suite 100, Alpharetta, Georgia
30005. Except as noted, each beneficial owner has sole voting and investment
power over the shares shown.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING SHARES OFFERING
---------------------------- BEING ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ------------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Guy D. Gill.......................... 374,556(1) 1.5% -- 374,556
Phillip L. Griffith.................. 74,912(2) * -- 74,912
Larry R. Hurtado..................... 112,367(3) * -- 112,367
Tom Manley........................... 15,384,615(4) 62.8
Gerald A. Poch....................... 4,952,883(5) 20.2 -- 4,952,883
Richard Reid......................... 15,384,615(6) 62.8
Nortel Networks Inc.................. 15,384,615(7) 62.8
Pequot entities...................... 4,952,883(8) 20.2 -- 4,952,883
Manufacturers Life Insurance Company
(9)................................ 1,407,394 5.8 -- 1,407,394
All directors and executive officers
as a group (11 persons)............ 21,052,711 83.5
</TABLE>
------------------------------
* Represents beneficial ownership of less than 1% of our outstanding capital
stock.
(1) Consists of 374,556 shares subject to options that are exercisable within
60 days of May 31, 2000.
(2) Consists of 74,912 shares subject to options that are exercisable within
60 days of May 31, 2000.
(3) Consists of 112,367 shares subject to options that are exercisable within
60 days of May 31, 2000.
(4) Mr. Manley is the vice president, finance of Nortel's service provider and
carrier division and may be deemed to beneficially own the 15,384,615 shares
held by Nortel Networks Inc. Mr. Manley disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest.
49
<PAGE>
(5) Mr. Poch is managing director of Pequot Capital Management, Inc. and may be
deemed to beneficially own the 4,952,883 shares held by the Pequot entities.
Mr. Poch disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest.
(6) Mr. Reid is president of Nortel's global carrier solutions division, and may
be deemed to beneficially own the 15,384,615 shares held by Nortel
Networks Inc. Mr. Reid disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest.
(7) Nortel Networks Inc.'s business address is 2350 Lakeside Blvd., Mail Stop
07/J01/A30, Richardson, Texas 75082.
(8) Represents 3,305,247 shares held by Pequot Private Equity Fund, L.P.,
418,482 shares held by Pequot Offshore Private Equity Fund, Inc., and
1,229,154 shares held by Pequot Venture Partners, L.P. The Pequot entities'
address is c/o Pequot Capital Management, Inc., 500 Nyala Farm Road,
Westport, Connecticut 06880.
(9) Manufacturers Life Insurance Company's business address is c/o Stephen
Brackett, MF Private Capital, Inc., 45 Milk Street, Ste. 600, Boston,
Massachusetts 02109.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of (i) 100 million shares of common stock, $0.01 par value per share, and
(ii) 25 million shares of preferred stock, $0.01 par value per share. As of
March 31, 2000, 24,470,859 shares of common stock were outstanding, assuming
conversion of all outstanding preferred stock into common stock, and we had 24
stockholders of record. The following summary is qualified in its entirety by
reference to our second amended and restated certificate of incorporation and
amended and restated bylaws, which will take effect immediately prior to the
closing of this offering and are filed as exhibits to the registration statement
of which this prospectus is a part.
COMMON STOCK
Under the Delaware General Corporation Law, referred to as the DGCL, and our
second amended and restated certificate of incorporation, holders of common
stock are entitled to one vote per share on all matters submitted to a vote of
the stockholders, including the election of directors. The common stock carries
no preemptive rights and is not convertible, redeemable or assessable. The
holders of common stock are entitled to dividends in amounts and at times as may
be declared by the board of directors out of funds legally available therefor.
Upon our liquidation, dissolution or winding up, the holders of our common stock
are entitled to ratably receive our net assets available after payment or
provision for payment of all debts and other liabilities and subject to prior
rights of holders of our preferred stock then outstanding, if any. All shares of
common stock outstanding immediately following this offering will be fully paid
and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, our second amended and restated
certificate of incorporation will authorize our board of directors to issue up
to 25 million shares of blank check preferred stock. The board of directors will
also have the right to fix or alter the designations, preferences, rights and
any qualifications, limitations, or restrictions of any preferred stock issues,
including dividend rights and rates, conversion rights, voting rights, terms of
redemption, including sinking fund provisions, liquidation preferences and the
number of shares constituting any series or designations of that series.
REGISTRATION RIGHTS
Under the terms of our investor rights agreement with Nortel Networks Inc.
and the holders of our series A and B preferred stock, which will be
automatically converted to common stock upon the closing of this offering,
Nortel Networks, series A preferred stockholders and series B preferred
stockholders holding an aggregate of 24,469,528 shares of capital stock, are
entitled to registration rights under the Securities Act. Following the closing
of this offering, Nortel or holders of at least 20% of the shares entitled to
registration rights may require us, on up to two occasions, to register their
shares of common stock for public resale. We initially will be obligated to
register this stock only if the aggregate public offering price would be at
least $5,000,000 and only after six months have passed since our last public
offering. Further, holders of registrable securities may require that we
register their shares for public resale on Form S-3 if the value of the
securities to be registered would be at least $2,000,000. In the event our board
of directors determines it advisable to do so, as limited by the terms of the
investor rights agreement, we may defer any registration for up to 90 days.
If, after the closing of this is offering, we elect to register any of our
shares of common stock for purposes of effecting any additional public
offerings, the holders of the registrable securities described above would be
entitled to include their shares of common stock in that registration. We may
reduce the number of shares requesting registration in view of adverse market
conditions. Although these registration rights do not apply to this offering, we
are registering for sale shares owned by Nortel. See
51
<PAGE>
"Principal and Selling Stockholders." All registration rights will terminate
five years following the closing of this offering.
WARRANTS
As of May 31, 2000 there were outstanding warrants to purchase 12,439 shares
of our common stock at an exercise price of $2.76 per share.
BUSINESS COMBINATION PROVISIONS
We will be subject to the "business combination" statute of the DGCL. This
statute prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years from the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner,
such as the approval of a majority of disinterested members of the board. The
term "business combination" includes mergers and stock and asset sales. An
"interested stockholder" is a person who, together with his affiliates and
associates, owns, or within the prior three years owned, 15% or more of the
corporation's voting stock. The effect of this statute could, among other
things, make it more difficult for a third party to gain control of us,
discourage bids for our common stock at a premium or otherwise harm the market
price of our common stock.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY; INDEMNIFICATION
Our second amended and restated certificate of incorporation and amended and
restated bylaws will include provisions that limit the personal liability of our
officers and directors for monetary damages for breach of their fiduciary duty,
except for liability that cannot be eliminated under the DGCL. Our second
amended and restated certificate of incorporation will provide that, to the
fullest extent provided by the DGCL, our directors will not be personally liable
for monetary damages for breach of their fiduciary duty as directors. The DGCL
does not permit a provision in a corporation's certificate of incorporation that
would eliminate such liability (i) for any breach of a duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for any
unlawful payment of a dividend or unlawful stock repurchase or redemption as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate this
duty. These provisions will have no effect on the availability of equitable
remedies such as an injunction or rescission based on a director's breach of his
or her duty of care. The provisions described above apply to an officer of a
corporation only if he or she is a director of that corporation and is acting in
his or her capacity as director, and do not apply to the officers of the
corporation who are not directors.
Our second amended and restated certificate of incorporation and amended and
restated bylaws will provide that, to the fullest extent permitted by the DGCL,
we may indemnify our directors and officers. In addition, we anticipate that
each director will enter into an indemnification agreement pursuant to which we
will agree to indemnify such director to the fullest extent permitted by the
DGCL. At present, there is no pending litigation or proceeding involving any of
our directors or officers in which indemnification is required or permitted, and
we are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is our transfer agent and registrar.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect market prices prevailing
from time to time. Furthermore, sales of substantial amounts of common stock in
the public market after various resale restrictions lapse could adversely affect
the prevailing market price and our ability to raise equity capital in the
future.
After this offering, shares of our common stock will be outstanding,
assuming that the underwriters do not exercise the over-allotment option. Of
these shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by affiliates as that term is defined in
Rule 144 under the Securities Act. The remaining shares of common stock
held by existing stockholders are restricted securities within the meaning of
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which are
summarized below.
The following table indicates approximately when the shares of our
common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED
SHARES FOR SALE IN THE
PUBLIC MARKET
-------------------------
<S> <C>
At effective date........................................
90 days after the effective date.........................
180 days after the effective date........................
</TABLE>
Most of the restricted shares that will become available for sale in the
public market starting 90 days and also 180 days after the effective date will
be subject to volume and other resale restrictions under Rule 144 because the
holders are our affiliates.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year, including any affiliate of ours, is entitled
to sell, within any three-month period, a number of shares that is not more than
the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 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 before a notice of the sale
on Form 144 is filed.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner other than an affiliate, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us under a stock option plan or
other written agreement can resell those shares 90 days after the effective date
of this offering in reliance on Rule 144, without having to comply with some of
the restrictions, including the holding period, contained in Rule 144.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, through their representatives,
Chase Securities Inc., FleetBoston Robertson Stephens Inc. and UBS Warburg LLC,
have severally agreed to purchase from us the respective number of shares of
common stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ----------
<S> <C>
Chase Securities Inc........................................
FleetBoston Robertson Stephens Inc..........................
UBS Warburg LLC.............................................
---------
Total...................................................
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from us and the selling stockholder, our counsel, counsel
to the selling stockholder and the independent auditors. The underwriters are
obligated to purchase all shares of common stock offered by us (other than those
shares covered by the over-allotment option described below) if they purchase
any shares.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us and the selling stockholder.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares.
<TABLE>
<CAPTION>
PAID BY THE SELLING
PAID BY ELASTIC NETWORKS STOCKHOLDER
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total.................
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $ .
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per share to some other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters.
We and the selling stockholder have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to additional shares of common stock at the initial public offering price,
less the underwriting discount set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage as the number of shares of common stock to be purchased by it shown
in the above table bears to the total number of shares of common stock offered
by this prospectus. If the underwriters exercise the option, we and the selling
stockholder will be obligated, pursuant to the option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments, if any, made in connection
with the sale of shares of common stock offered by this prospectus.
54
<PAGE>
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling stockholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act and
to contribute to payments the underwriters may be required to make in respect of
these liabilities.
Some of our stockholders, who will own in the aggregate shares of common
stock after the offering, have agreed not to, without the prior written consent
of Chase Securities Inc. or its successors, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of common stock or any securities convertible
into or exchangeable or exercisable for shares of common stock for a period of
180 days from the date of this prospectus, subject to some exceptions. We have
agreed that we will not, without the prior written consent of Chase
Securities Inc. or its successors, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of common stock or any securities convertible into or exchangeable
or exercisable for shares of common stock for a period of 180 days following the
date of this prospectus, except that we may issue shares upon the exercise of
options granted prior to the date hereof and may grant additional options under
our stock option plans. Without the prior written consent of Chase
Securities Inc. or its successors, none of these additional options shall be
exercisable during the 180 day period.
At our request, the underwriters have reserved up to shares of common
stock offered by this prospectus for sale at the initial public offering price
to our directors, officers, employees, business associates and related persons.
The number of shares of common stock available for sale to the general public
will be reduced by the number of reserved shares these persons purchase. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered by this
prospectus. Persons who otherwise have signed lock-up agreements and who
purchase reserved shares will not, without the prior written consent of Chase
Securities Inc. or its successors, be able to sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of common stock or any securities convertible
into or exchangeable or exercisable for shares of common stock for a period of
180 days from the date of this prospectus.
Before this offering, there has been no public market for our common stock.
The initial public offering price for the common stock will be determined by
negotiation among us, the selling stockholder and the representatives of the
underwriters. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, our
revenues and operating results, market valuations of other companies engaged in
activities similar to ours, estimates of our business potential and our
prospects, and the present state of our business operations, our management and
other factors deemed relevant.
The shares of common stock have been applied for quotation on the Nasdaq
National Market under the symbol ELAS.
Persons participating in this offering may over-allot or effect transactions
which stabilize, maintain or otherwise affect the market price of the common
stock at levels above those which might otherwise prevail in the open market,
including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering
55
<PAGE>
transactions. Such transactions may be effected on the Nasdaq National Market,
in the over-the-counter market or otherwise. This stabilizing, if commenced, may
be discontinued at any time.
In connection with this offering, certain underwriters, and selling group
members, if any, who are qualified market makers on the Nasdaq National Market,
may engage in passive market making transactions in the common stock on the
Nasdaq national market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security. If all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986 and
the Public Offers of Securities Regulations 1995 with respect to anything done
by any person in relation to the common stock in, from or otherwise involving
the United Kingdom must be complied with.
Each underwriter has agreed that it has;
- complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
shares of common stock in, from or otherwise involving the United Kingdom;
- only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the offer or sale
of the shares of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, as amended, or is a person to
whom such document may otherwise lawfully be issued or passed on; and
- not offered or sold and prior to the date six months after the date of
issue of the shares of common stock will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 or otherwise
in compliance with all applicable provisions of such regulations.
56
<PAGE>
LEGAL MATTERS
Hunton & Williams, Atlanta, Georgia, will pass upon the validity of the
shares of common stock offered hereby. Certain legal matters in connection with
the offering will be passed upon for the underwriters by Jones, Day, Reavis &
Pogue, Atlanta, Georgia.
EXPERTS
The financial statements as of December 31, 1998 and 1999, and for each of
the three years in the period ended December 31, 1999, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 under the Securities Act
with the SEC, with respect to the common stock offered hereby. As permitted by
the rules and regulations of the SEC, this prospectus, which is a part of the
registration statement, omits certain information, exhibits, schedules and
undertakings set forth in the registration statement. For further information
pertaining to us and the common stock we are offering by this prospectus, please
refer to the registration statement and its exhibits and schedules. Statements
contained in this prospectus as to the contents or provisions of any contract or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. A copy of the registration statement may be
inspected without charge at the public reference facilities of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048. You may obtain copies of all or any part of the registration
statement from any of these offices upon the payment of the fees prescribed by
the SEC. You may obtain information on the operations of the public reference
room by calling the SEC at 1-800-SEC-0330. In addition, registration statements
and certain other filings made with the SEC through its Electronic Data
Gathering, Analysis, and Retrieval, or EDGAR, system are publicly available
through the Commission's web site at http://www.sec.gov.
57
<PAGE>
ELASTIC NETWORKS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Elastic Networks Inc.:
We have audited the accompanying balance sheets of Elastic Networks Inc.
(the "Company") as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 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 auditing standards generally
accepted in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
June 16, 2000
F-2
<PAGE>
ELASTIC NETWORKS INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 2000
DECEMBER 31, DECEMBER 31, MARCH 31, PRO FORMA
1998 1999 2000 STOCKHOLDERS' EQUITY
------------- ------------- ----------- --------------------
(UNAUDITED) (UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ -- $ 3,863 $ 15,746
Short-term investments.......................... 1,750 519
Accounts receivable, net of allowance for
doubtful accounts of $0, $250, and $250....... 40 361 4,120
Accounts receivable from Nortel................. 1,209 893
Inventories..................................... 528 759 4,021
Other........................................... 473 449
-------- -------- --------
Total current assets........................ 568 8,415 25,748
Property and equipment, net....................... 1,167 1,352 1,696
Other............................................. 102 102
-------- -------- --------
Total assets................................ $ 1,735 $ 9,869 $ 27,546
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................ $ 1,468 $ 6,869 $ 9,414
Payable to Nortel............................... 149 149
Royalties payable--Nortel....................... 129 54
Accrued liabilities............................. 1,405 1,888 2,041
Deferred software license revenue, current...... 650 591 571
Capital lease obligation, current............... 45 53
-------- -------- --------
Total current liabilities................... 3,523 9,671 12,282
Capital lease obligation--long term............... 100 84
Deferred software license revenue, net of current
portion......................................... 1,733 1,142 1,000
Commitments and contingencies
Redeemable convertible participating preferred
stock--Series A, $0.01 par value, 3,876,923
shares authorized and outstanding, at cost
(redemption value--$12,600) less note receivable
of $1,828....................................... 7,965 8,098 $ --
Redeemable convertible participating preferred
stock--Series B, $0.01 par value, 3,922,463
shares authorized and outstanding, at cost
(redemption value--$20,903)..................... 20,903
Stockholders' equity (deficit):
Common stock, par value $0.01; 35,000,000 shares
authorized; 1 share issued and outstanding at
December 31, 1998; 15,385,946 shares issued
and outstanding as of December 31, 1999 and
March 31, 2000 (unaudited) and 24,470,859
shares issued and outstanding pro forma at
March 31, 2000................................ 154 154 245
Additional paid-in capital...................... 3,270 3,137 34,041
Accumulated deficit............................. (3,521) (12,433) (18,112) (18,112)
-------- -------- -------- --------
Total stockholders' equity (deficit)........ (3,521) (9,009) (14,821) $ 16,174
-------- -------- -------- ========
Total liabilities and stockholders' equity
(deficit)................................. $ 1,735 $ 9,869 $ 27,546
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
F-3
<PAGE>
ELASTIC NETWORKS INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ---------------------
1997 1998 1999 1999 2000
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues......................... $ -- $ 36 $ 4,298 $ -- $ 5,073
Product revenues from Nortel............. 80 3,267 182 953
License revenue.......................... 117 650 162 163
------- -------- -------- ------- -------
Total revenues..................... -- 233 8,215 344 6,189
Cost of revenues
Cost of product revenues................. 740 8,118 5,098
Cost of product revenues--Nortel......... 1,406 6,172 803 958
------- -------- -------- ------- -------
Total cost of revenues............. -- 2,146 14,290 803 6,056
Gross profit (loss)........................ -- (1,913) (6,075) (459) 133
Operating expenses:
Sales and marketing expense.............. 644 3,431 5,169 909 2,486
Research and development expense......... 3,335 8,191 7,425 1,643 2,080
General and administrative expense....... 524 1,695 2,276 375 1,290
------- -------- -------- ------- -------
Total operating expenses........... 4,503 13,317 14,870 2,927 5,856
------- -------- -------- ------- -------
Operating loss................... (4,503) (15,230) (20,945) (3,386) (5,723)
Other income (expense), net................ 90 44
------- -------- -------- ------- -------
Net loss........................... (4,503) (15,230) (20,855) (3,386) (5,679)
Accretion of Series A preferred stock...... (333) (133)
------- -------- -------- ------- -------
Net loss attributable to common
stockholders........................... $(4,503) $(15,230) $(21,188) $(3,386) $(5,812)
======= ======== ======== ======= =======
Basic and diluted net loss per common
share.................................... $ (0.28) $ (0.93) $ (1.29) $ (0.21) $ (0.36)
======= ======== ======== ======= =======
Weighted average shares used in computing
basic and diluted net loss per common
share.................................... 16,367 16,367 16,367 16,367 16,367
======= ======== ======== ======= =======
Pro forma basic and diluted net loss per
common share (unaudited)................. $ (1.05) $ (0.24)
======== =======
Weighted average shares used in computing
unaudited pro forma basic and diluted net
loss per share amounts (unaudited)....... 20,244 24,166
======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-4
<PAGE>
ELASTIC NETWORKS INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL PAID-IN ACCUMULATED TOTAL STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME (DEFICIT) EQUITY (DEFICIT)
---------- -------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1997...................... -- $ -- $ -- $ -- $ --
Net loss.................... (4,503) (4,503)
Change in shareholder's net
investment................ 3,045 3,045
---------- ---- ------ -------- --------
BALANCE AT DECEMBER 31,
1997...................... -- -- -- (1,458) (1,458)
Net loss.................... (15,230) (15,230)
Subscription for zero par
value common stock by
Nortel.................... 1 --
Change in shareholder's net
investment................ 13,167 13,167
---------- ---- ------ -------- --------
BALANCE AT DECEMBER 31,
1998...................... 1 -- -- (3,521) (3,521)
Net loss.................... (20,855) (20,855)
Issuance of common stock to
Nortel.................... 15,384,614 154 154
Additional paid in capital
from Series A preferred
shares issuance (less note
receivable of $166)....... 2,974 2,974
Change in shareholder's net
investment................ 11,943 11,943
Employee stock options
exercised................. 1,331 -- 4 4
Stock options for 615,385
shares.................... 573 573
Issuance of 32,105 stock
options for consulting
services.................. 39 39
Issuance of 12,439 stock
warrants for consulting
services.................. 13 13
Accretion to redemption
value on Series A
preferred stock........... (333) (333)
---------- ---- ------ -------- --------
BALANCE AT DECEMBER 31,
1999...................... 15,385,946 154 3,270 (12,433) (9,009)
Net loss (unaudited)........ (5,679) (5,679)
Accretion to redemption
value on Series A
preferred stock
(unaudited)............... (133) (133)
---------- ---- ------ -------- --------
BALANCE AT MARCH 31, 2000
(UNAUDITED)............... 15,385,946 $154 $3,137 $(18,112) $(14,821)
========== ==== ====== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-5
<PAGE>
ELASTIC NETWORKS INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(4,503) $(15,230) $(20,855) $(3,386) $ (5,679)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 6 114 353 68 119
Issuance of common stock options and warrants........ 52
Issuance of common stock options..................... 114 43
Changes in assets and liabilities:
Decrease (increase) in accounts receivables........ (40) (321) (1,310) (3,759)
Decrease (increase) in accounts receivable from
Nortel........................................... (1,209) 316
Decrease (increase) in inventories................. (528) (231) (2,401) (3,262)
Decrease (increase) in other....................... (13) (20)
Increase (decrease) in accounts payable............ 1,100 368 5,401 (98) 2,545
Increase (decrease) in payable to Nortel........... 149
Increase (decrease) in royalties payable--Nortel... 129 (75)
Increase (decrease) in accrued liabilities......... 380 1,025 483 (530) 153
Increase (decrease) in deferred software license
revenues......................................... 2,383 (650) (162) (162)
Increase (decrease) in capital lease obligations... 158 (8)
------- -------- -------- ------- --------
Net cash provided by (used in) operating
activities................................... (3,017) (11,908) (16,440) (7,819) (9,789)
------- -------- -------- ------- --------
Cash flows from investing activities:
Expenditures for plant and equipment................. (28) (1,259) (538) (46) (462)
Other................................................ (102)
Sales of short-term investments...................... 81,626 25,607
Purchases of short-term investments.................. (83,376) (24,376)
------- -------- -------- ------- --------
Net cash provided by (used in) investing
activities................................... (28) (1,259) (2,390) (46) 769
------- -------- -------- ------- --------
Cash flows from financing activities:
Cash proceeds from issuance of common and preferred
stock.............................................. 10,760 20,903
Proceeds from issuance of common stock upon exercise
of options......................................... 4
Transfers from shareholder........................... 3,045 13,167 11,943 7,865
Payments of capital lease obligations................ (14)
------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities................................... 3,045 13,167 22,693 7,865 20,903
------- -------- -------- ------- --------
Cash and cash equivalents at beginning of period..... -- -- -- -- 3,863
Net increase in cash and cash equivalents............ -- -- 3,863 -- 11,883
------- -------- -------- ------- --------
Cash and cash equivalents at end of period..... $ -- $ -- $ 3,863 $ -- $ 15,746
======= ======== ======== ======= ========
Supplemental schedule of investing and financing
activities:
Cash paid during the period for interest............. $ -- $ -- $ 2 $ -- $ 2
======= ======== ======== ======= ========
Capital lease additions.............................. $ 158
========
Redeemable convertible participating preferred stock
issued for notes receivable........................ $ 1,994
========
Issuance of stock options and warrants for consulting
services........................................... $ 52
========
Issuance of stock options for shares................. $ 573
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-6
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On January 1, 1997, Nortel Networks Corporation, and its subsidiary Nortel
Networks Inc., (collectively "Nortel") established the Elastic Networks group
(the "Division") to develop technology and products to provide high speed access
over copper wire infrastructure.
Nortel created a separate company, Elastic Networks Inc. (the "Company")
that was incorporated on September 22, 1998 and operated as a wholly owned
subsidiary of Nortel. At the close of business on May 12, 1999, Nortel
transferred to the Company certain of the assets and liabilities, intellectual
property rights, licenses and contracts of the Division of Nortel (the
"Separation"). In exchange Nortel received 15,384,614 shares of the Company's
common stock. At the close of business on May 12, 1999, the Company sold
3,876,923 shares of its Series A preferred stock in a private placement for
proceeds totaling $12,600,000 (the "Series A Private Placement").
BASIS OF PRESENTATION
These consolidated financial statements have been prepared for the purpose
of presenting the balance sheets of the Company as of December 31, 1998 and
1999, and the related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999, and for
the three months ended March 31, 1999 and 2000 (unaudited). Prior to May 12,
1999, the historical results of operations represent the operations of the
Division transferred to the Company from Nortel in the Separation. These
historical results of the Division present the financial position of the
Division as a separate reporting entity independent of Nortel and its
subsidiaries, as if the Division was a separate entity prior to May 12, 1999.
The 1997, 1998 and 1999 financial statements have been prepared using the
historical basis of the assets and liabilities and the historical results of
operations related to the Company's business. Changes in stockholders' net
investment in 1997, 1998, and 1999 represent Nortel's contribution of its net
investment after giving effect to the net loss of the Division and net cash
transfers to or from the Division. The stockholders' net investment was not
transferred to the Company as part of the Separation.
The financial statements, presented here for comparative purposes, include
certain Nortel corporate costs that were allocated to the Division using
procedures deemed appropriate for the nature of the expenses involved. The
procedures utilized various allocation bases such as invested net assets, number
of employees and related payroll costs, and direct effort expended. Management
believes that the allocations reflected in the financial statements are
reasonable, but they were not necessarily indicative of the costs that would
have been incurred had the Division functioned as a separate company. After the
Separation, Nortel continued to provide certain corporate services to the
Company. Fees charged for such services are based on Nortel's internal
usage-based fee structures where applicable or Nortel's direct cost of services,
including total compensation and out-of-pocket expenses.
CASH BALANCES
Prior to May 12, 1999, the Company, as a division of Nortel, participated in
the Nortel cash management system and, accordingly, did not maintain cash
balances.
F-7
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of and for the three months ended March 31, 1999
and 2000 are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals necessary for a fair
presentation of its financial position, operating results and cash flows. The
results of operations for the three months ended March 31, 2000 are not
necessarily indicative of results to be expected for the full calendar year 2000
or for any future period.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY (DEFICIT)
If the offering contemplated by this prospectus is consummated, all of the
redeemable convertible participating preferred stock outstanding as of the
closing date will automatically be converted into an aggregate of 7,799,386
shares of common stock based on the shares of preferred stock outstanding at
March 31, 2000, and the Series A preferred stockholders will receive in the
aggregate an additional 1,285,527 shares of common stock (see Note 9). Unaudited
pro forma stockholders' equity (deficit) at March 31, 2000, as adjusted for the
conversion of the preferred stock, the issuance of the additional common shares
and the collection of the $1,993,848 in notes receivable from a non-affiliate
investor is disclosed on the balance sheet.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash, money market funds and other
highly liquid investments with an original maturity from date of purchase of
three months or less. The carrying value of these instruments approximates fair
value. The Company generally invests its excess cash in various investment-
grade commercial paper, money market accounts and debt instruments of the U.S.
Treasury, government agencies and corporations with strong credit ratings. Such
investments are made in accordance with the Company's investment policy, which
establishes guidelines relative to diversification and maturities designed to
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates. The Company
has not experienced any losses on its cash
F-8
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and cash equivalents. Cash, cash equivalents and short-term investments
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash equivalents:
Corporate and other non-government debt
securities.................................... $-- $ 483 $ 828
Money market funds.............................. 3,380 14,918
------ ------ -------
-- 3,863 15,746
Short-term investments:
Corporate and other non-government debt
securities.................................... 1,750 519
------ ------ -------
$-- $5,613 $16,265
====== ====== =======
</TABLE>
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Marketable debt securities are classified as available-for-sale, and are
carried at their fair value, with the unrealized gains and losses, when
material, reported net-of-tax as a component of other comprehensive income. As
of December 31, 1999 and March 31, 2000, there were no unrealized gains and
losses. Realized gains and losses and declines in value judged to be
other-than-temporary are included in interest income. The cost of securities
sold is based on specific identification.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to market and
credit risk consist principally of cash and cash equivalents, short-term
investments, notes receivable and accounts receivable. The estimated fair value
of these instruments as of December 31, 1998 and 1999 and March 31, 2000
(unaudited), approximated the carrying amount. The Company has investment
policies that limit the amount of credit exposure to any one issuer and restrict
placement of these investments to issuers evaluated as credit worthy. The
Company maintains its cash and cash equivalents, and short-term investments,
with high quality financial institutions and investment managers. The Company
performs periodic reviews of the credit standing of its investments and the
financial institutions managing those investments.
The Company performs ongoing credit evaluations of its customers, and
generally does not require collateral from its customers to support accounts
receivable. Requests to extend significant credit to customers are reviewed and
approved by senior management. The Company maintains an allowance for potential
losses due to credit risk, but has not experienced significant write-offs.
Management believes that
F-9
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the reserves for losses are adequate. The following table summarizes the changes
in the allowance for doubtful accounts (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of
period.............................................. $-- $-- $ --
Additional provision.................................. 250
------ ------ ----
Allowance for doubtful accounts, end of period........ $-- $-- $250
====== ====== ====
</TABLE>
The Company had significant accounts receivable balances due from certain
customers as a percentage of total accounts receivable as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
CUSTOMER 1998 1999 2000
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Company A........................................ 50.0%
Company B........................................ 40.0 2.3% 0.2%
Company C........................................ 77.0 17.8
Company D........................................ 55.5
Company E........................................ 15.0
</TABLE>
The following individual customers accounted for 10% or more of total
revenues (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------- -----------------------------------------
CUSTOMER 1998 1999 1999 2000
-------- ------------------- ------------------- ------------------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Company C............ $ 80 34.3% $3,267 39.8% $182 52.7% $ 953 15.4%
Company D............ 3,394 41.3 3,354 54.2
Company E............ 838 13.5
Company F............ 117 50.2 650 7.9 162 47.1 163 2.6
</TABLE>
Currently, the Company relies on a contract manufacturer and some single
source suppliers of materials for certain product components. As a result,
should the Company's current manufacturer or suppliers not produce or deliver
inventory for the Company to sell on a timely basis, operating results could be
adversely impacted.
INVENTORY
Inventory is stated at the lower of standard cost (which approximates
first-in, first-out cost) or market.
F-10
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets. The
expected useful lives of the furniture and fixtures, computer and telecom
equipment and software are three to five years, as are the terms of the facility
lease for leasehold improvements. Maintenance and repairs are charged to
operations as incurred. Expenditures, which substantially increase an asset's
useful life, are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss based on fair value of
the asset is recognized when the sum of the expected future undiscounted net
cash flows is less than the carrying amount of the asset. The Company has
identified no such impairment losses.
WARRANTY RESERVES
The Company provides limited warranties on certain of its products for
periods of up to one year. The Company recognizes warranty reserves when
products are shipped based upon an estimate of total warranty costs, and such
reserves are included in current liabilities.
REVENUE RECOGNITION
Revenues are recognized when earned in accordance with applicable accounting
standards, including American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 97-2, SOFTWARE REVENUE RECOGNITION,
as amended. The Company generally recognizes revenues from product sales upon
shipment depending on contract terms and conditions if collectibility is
reasonably assured, product pricing is fixed and determinable and product
returns are reasonably estimated. No revenues are recognized on products shipped
on a trial basis until products are fully accepted by the customer. Estimated
sales returns, based on historical experience by product, are recorded at the
time the product revenues are recognized. Technology license revenues are
recognized ratably over the term of the related agreement.
Installation and training revenues are recognized as the services are
completed. Consulting services are typically performed under separate service
agreements and are usually performed on a time and material basis. Such services
primarily consist of implementation services related to the installation and
deployment of the Company's products and do not include significant
customization or development of the underlying software code.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred for hardware research and development are expensed as
incurred. Costs for the development of new software and substantial enhancements
to existing software are expensed as incurred until technological feasibility
has been established, at which time any additional development costs would be
capitalized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, COMPUTER
F-11
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. The Company believes its
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility; accordingly, no costs have
been capitalized to date.
STOCK BASED COMPENSATION
The Company accounts for employee stock plans under the intrinsic value
method prescribed by Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
INCOME TAXES
The Company uses the asset and liability method to account for income taxes.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts of
existing assets and liabilities for accounting purposes, and their respective
tax bases. Deferred income tax assets and liabilities are measured using
statutory tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred income tax assets and liabilities of a change in statutory tax rates
is recognized in net income in the year of change. A valuation allowance is
recorded for those deferred income tax assets whose recoverability is not
reasonably possible.
NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are presented in conformity with
SFAS No. 128, EARNINGS PER SHARE, for all periods presented. Basic and diluted
net loss per common share are computed by dividing the net loss for the period
by the 15,384,615 common shares issued to Nortel; the 1,285,527 additional
shares assumed issued to the Series A preferred stockholders; and the 13,770
shares issued upon conversion of the outstanding stock options and issuable
under the terms of a warrant, for all periods presented. Weighted average shares
subject to repurchase of 317,377 have been deducted from such amounts. Unaudited
proforma basic and diluted net loss per common share are computed as described
above and also gives effect, under Securities and Exchange Commission guidance,
to the conversion of the Series A and Series B redeemable convertible
participating preferred stock.
F-12
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net income per share has been calculated as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss attributable to common stockholders.... $(4,503) $(15,230) $(21,188) $(3,386) $(5,812)
======= ======== ======== ======= =======
Basic and diluted
Weighted average shares of common stock
outstanding................................. 16,684 16,684 16,684 16,684 16,684
Less: Weighted average shares subject to
repurchase.................................. (317) (317) (317) (317) (317)
------- -------- -------- ------- -------
Weighted average shares used in computing basic
and diluted net loss per share................ 16,367 16,367 16,367 16,367 16,367
======= ======== ======== ======= =======
Basic and diluted net loss per common share..... $ (0.28) $ (0.93) $ (1.29) $ (0.21) $ (0.36)
======= ======== ======== ======= =======
</TABLE>
Dilutive securities include options, contingent stock related to Series A
redeemable convertible participating preferred stock, and Series A and B
redeemable convertible participating preferred stock. Potentially dilutive
securities totaling 11,738,588 for the year ended December 31, 1999, and
16,201,498 (unaudited) for the three month period ended March 31, 2000, were
excluded from historical basic and diluted earnings per share because of their
anti-dilutive effect.
RECENT PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION (AN INTERPRETATION OF THE ACCOUNTING PRINCIPLES BOARD OPINION
NO. 25) (the "Interpretation"). Among other issues, this Interpretation
clarifies (a) the definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. This Interpretation is
effective July 1, 2000, but certain conclusions in the Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. The impact on the Company's financial
statements is not expected to be material.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which established accounting and reporting
standards for derivative instruments and hedging activities. It requires an
entity to measure all derivatives at fair value and to recognize them in the
balance sheet as an asset or liability, depending on the entity's rights or
obligations under the applicable derivative contract. In June 1999, the FASB
issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which
defers the effective date of SFAS No. 133 until fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 2000,
F-13
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the FASB issued SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
CERTAIN HEDGING ACTIVITIES, which amends the accounting and reporting standards
of SFAS No. 133 for certain derivative instruments and certain hedging
activities. The Company is in the process of evaluating the effects of these new
statements.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................. $390 $146 $ 129
Finished goods................................. 138 613 3,892
---- ---- ------
Total...................................... $528 $759 $4,021
==== ==== ======
</TABLE>
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements........................... $ 57 $ 57 $ 57
Furniture and fixtures........................... 254 254 254
Computers........................................ 258 788 899
Other............................................ 86
Test equipment................................... 718 726 992
------ ------ ------
1,287 1,825 2,288
Less accumulated depreciation.................... (120) (473) (592)
------ ------ ------
Total property and equipment, net............ $1,167 $1,352 $1,696
====== ====== ======
</TABLE>
Depreciation and amortization expense on property and equipment was $5,668,
$113,871 and $352,852 for the years ended December 31, 1997, 1998, and 1999,
respectively and $68,400 and $119,357 for the three month periods ending
March 31, 1999 and 2000 (unaudited), respectively.
5. CAPITAL LEASES
The Company is obligated for equipment under various capital leases that
expire at various dates through 2002. The related equipment secures these
leases. At December 31, 1998 and 1999, and March 31, 2000 (unaudited), the gross
amount of the equipment acquired under capital leases was $0, $157,879, and
$157,879, respectively, and the related accumulated amortization was $0, $12,402
and
F-14
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
5. CAPITAL LEASES (CONTINUED)
$21,515, respectively. Amortization of assets held under capital leases is
included with depreciation and amortization expense in the accompanying
financial statements.
Future minimum capital lease payments as of December 31, 1999 are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 62
2001........................................................ 62
2002........................................................ 44
----
Total minimum lease payments................................ 168
Less amount representing interest........................... 23
----
Present value of net minimum capital lease payments..... 145
Less current installments of obligations under capital
leases................................................ 45
----
Obligations under capital leases, net of current
installments.......................................... $100
====
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued expenses................................. $ 888 $ 151 $ 234
Accrued employee benefits........................ 126 263
Warranty--hardware............................... 357 420
Incentive bonus accrual.......................... 290
Accrued payroll.................................. 227 222 460
Known product defects............................ 972 664
Other............................................ 60
------ ------ ------
$1,405 $1,888 $2,041
====== ====== ======
</TABLE>
7. COMMITMENTS
The Company leases administrative and sales offices and certain property and
equipment under noncancellable operating leases expiring through 2004. The
Company subleases some of its administrative and sales office space from Nortel.
The leases contain renewal options and are subject to cost increases. Total rent
expense under such leases for the years ended December 31, 1997, 1998 and 1999
were $0, $111,100 and $343,033, respectively, and for the three month periods
ended March 31, 1999 and 2000 (unaudited) were $85,758 and $141,948,
respectively.
F-15
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
7. COMMITMENTS (CONTINUED)
At December 31, 1999, the future minimum lease payments under operating
leases were as follows (in thousands):
<TABLE>
<CAPTION>
RELATED PARTY OTHER
LEASE LEASES TOTAL
------------- -------- --------
<S> <C> <C> <C>
2000........................................... $ 268 $ 488 $ 756
2001........................................... 276 558 834
2002........................................... 284 478 762
2003........................................... 218 283 501
2004........................................... 52 52
------ ------ ------
Total future minimum lease payments........ $1,046 $1,859 $2,905
====== ====== ======
</TABLE>
8. INCOME TAXES
Prior to May 12, 1999, the Company, as a division of Nortel, did not file
separate income tax returns. If the Company had filed separate tax returns, on a
pro forma basis, due to the Company's historical losses, the Company would not
have recorded any tax benefit provisions in its statements of operations since
the future use of such losses is uncertain. In addition, all net deferred assets
and liabilities, principally net operating losses, would be fully reserved by a
valuation allowance. Since the Separation, significant components of the
Company's recorded net deferred tax assets and liability as of December 31, 1999
and March 31, 2000 (unaudited) are shown below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Deferred software license revenue................ $ 658 $ 596
Net operating loss carryforwards................. 4,150 6,713
Inventory........................................ 727 536
Accrued liabilities.............................. 289 336
Other............................................ 389 164
------- -------
Total deferred tax assets........................ 6,213 8,345
Valuation allowance................................ (6,110) (8,242)
------- -------
Net deferred tax assets.......................... 103 103
Deferred tax liability:
Property and equipment........................... (103) (103)
------- -------
Total.......................................... $ -- $ --
======= =======
</TABLE>
A valuation allowance equal to 100% of the net deferred tax assets has been
established because of the uncertainty of realization of the deferred tax assets
due to the Company's lack of earnings history. The valuation allowance increased
$6,110,415 and $2,131,857 (unaudited) for the period from May 12, 1999 to
December 31, 1999, and the three months ended March 31, 2000 (unaudited),
respectively. The Company
F-16
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
8. INCOME TAXES (CONTINUED)
had federal income tax net operating loss carryforwards at December 31, 1999 of
$10,932,242. The federal income tax loss carryforwards will begin to expire
2020, unless previously utilized.
9. REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK
PREFERRED STOCK
The Company is authorized to issue up to, and has issued, 7,799,386 shares
of preferred stock in one or more series. Each such series of preferred stock
has such rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights and liquidation preferences, as set
forth in the Company's certificate of incorporation.
SERIES A REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK
On May 12, 1999, the Company issued 3,876,923 shares of its Series A
redeemable convertible participating preferred stock for net cash proceeds of
$10,606,153 plus notes receivable of $1,993,848. The value of the Series A
redeemable convertible participating preferred stock reflected in the Company's
balance sheet is net of $1,828,000 in notes receivable as consideration for such
shares. As discussed below, the additional paid-in capital is net of the
remaining $166,000 in notes receivable.
DIVIDENDS
The Company shall not declare or pay any cash dividends or other
distributions on shares of common stock until the holders of the Series A
preferred stock then outstanding shall have first received, or simultaneously
receive, a cash dividend on each outstanding share of Series A preferred stock
in an amount at least equal to dividends declared, paid, or set aside for common
stock.
CONVERSION AND RIGHTS
Each share of Series A preferred stock may be voluntarily converted into
common stock at the option of the stockholder. The Series A preferred stock
automatically converts to common stock upon the closing of the public offering
of shares of the Company's common stock at a price not less than $6.50 per share
and proceeds to the Company of not less than $30,000,000. The Series A preferred
stock has the same voting rights as the common stock. Generally, the Company
cannot issue stock with preferences greater than the current preferred stock or
issue a preferred or common stock dividend without the consent of the holders of
two-thirds of the outstanding shares of the Series A preferred stock.
Upon a public offering (or immediately prior to any voluntary or involuntary
liquidation, dissolution or winding up of the Company, or the closing or
consummation of any merger or consolidation of the Company into or with another
corporation) the Series A preferred stockholders will receive in the aggregate
an additional 1,285,527 shares of common stock. The Company has considered that
the 1,285,527 common shares were in substance issued at May 12, 1999 because a
portion of the proceeds from the Series A private placement were for these
additional shares, and because of the absolute certainty that the Series A
preferred stockholders will receive these shares. Accordingly, the Series A
preferred stock has been valued at $2.44 per share, the assumed fair market
value, and the $3,140,000 difference between the $3.25 price paid for the
preferred shares and the $2.44 per share assumed fair market value, less notes
F-17
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
9. REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK (CONTINUED)
receivable of $166,000, as consideration for the 1,285,527 common shares, has
been credited to additional paid-in capital.
If the Company has not consummated a public offering as of December 31,
2000, and for the year ending December 31, 2000, revenues do not equal or exceed
$40,000,000, Series A preferred stockholders shall be entitled to receive in the
aggregate an additional 3,453,697 shares of common stock over and above the
1,285,527 common shares.
The Company has considered the additional 3,453,697 shares of common stock
to be a beneficial conversion feature of the Series A preferred stock. The value
of such shares will be recorded if and when the above revenue and public
offering contingencies are resolved.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, or the closing or consummation of any merger or
consolidation of the Company into or with another corporation, the holders of
Series A preferred stock are entitled to receive out of the assets of the
Company available for distribution to its stockholders, an amount equal to at
least their initial investment plus any declared but unpaid dividends, including
all cumulative dividends.
REDEMPTION
On May 12, 2004 and on each of the first and second anniversaries thereof,
the Company may redeem, at the request of each holder of shares of Series A
preferred stock then outstanding up to one-third of the originally issued shares
per year. The redemption price shall be at a price equal to the initial
investment of $12,600,000, plus any dividends declared but unpaid thereon,
subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting these shares. The
Company is accreting the $3,140,000 difference between cost and redemption value
over the period from issuance to the redemption periods.
SERIES B REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK
On February 14, 2000, the Company issued 3,922,463 shares of Series B
redeemable convertible participating preferred stock for net cash proceeds of
$20,902,805.
DIVIDENDS
The Company shall not declare or pay any cash dividends or other
distributions on shares of common stock until the holders of the Series B
preferred stock then outstanding shall have first received, or simultaneously
receive, a cash dividend on each outstanding share of Series B preferred stock
in an amount at least equal to dividends declared, paid, or set aside for common
stock.
CONVERSION AND RIGHTS
Each share of Series B preferred stock may be converted into common stock on
a one-to-one basis at the option of the stockholder. The Series B preferred
stock automatically converts to common stock upon
F-18
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
9. REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK (CONTINUED)
the closing of the public offering of shares of the Company's common stock at a
price not less than $8.00 per share and net proceeds to the Company of not less
than $30,000,000. The Series B preferred stock has the same voting rights as the
common stock. Generally, the Company cannot issue stock with preferences greater
than the current preferred stock or issue a preferred or common stock dividend
without the consent of the holders of two-thirds of the outstanding shares of
Series B preferred stock.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, or the closing or consummation of any merger or
consolidation of the Company into or with another corporation, the holders of
Series B preferred stock are entitled to receive out of the assets of the
Company available for distribution to its stockholders, an amount equal to at
least $5.329 per share plus any declared but unpaid dividends, including all
cumulative dividends.
REDEMPTION
On May 12, 2004 and on each of the first and second anniversaries thereof,
the Company will redeem, at the request of each holder of shares of Series B
preferred stock then outstanding up to one-third of the originally issued shares
per year. The redemption price shall be at a price equal to the initial
investment of $20,902,805 plus any dividends declared but unpaid thereon,
subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting these shares.
10. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue 35,000,000 shares of Common Stock $0.01
par value. The holders of common stock are entitled to one vote per share and
are entitled to dividends when and if declared by the Board of Directors of the
Company.
On May 12, 1999, the Company issued 15,384,614 common shares. During 1999,
two employees exercised options to purchase a total of 1,331 shares. As of
December 31, 1999 and March 31, 2000 (unaudited), there were 15,385,946 shares
of common stock outstanding.
F-19
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At March 31, 2000, common shares reserved for future issuance consisted of
the following (unaudited):
<TABLE>
<S> <C>
Conversion of convertible preferred stock................... 7,799,386
Shares deemed issued upon sale of Series A preferred
stock..................................................... 1,285,527
Stock warrants.............................................. 12,439
Shares reserved for future option exercises................. 5,710,435
Shares reserved for potential issuance under provisions of
Series A convertible preferred stock agreement............ 3,453,697
----------
Total................................................. 18,261,484
==========
</TABLE>
LIQUIDATION
Upon the dissolution or liquidation of the Company, whether voluntary or
involuntary, holders of common stock will be entitled to receive all assets of
the Company available for distribution to its stockholders, subject to any
preferential and participation rights of any then outstanding preferred stock.
WARRANTS
In November 1999, the Company entered into an agreement with a corporate
partner in consideration of the consulting services which the partner has
rendered to the Company in the past and which the partner will continue to
render to the Company in the future. In addition, the Company issued a warrant
to such corporate partner to purchase 12,439 shares of the common stock at a
price of $2.76 per share. One third of the warrant shares vested on the November
1999 effective date of the agreement; one third of the warrant shares vest in
November 2000; and the remaining one third of the warrant shares vest in
November 2001. The warrant is exercisable for five years following the date of
issuance. The estimated fair value of the vested warrant shares at the time of
issuance was immaterial. Additional expense will be recorded in subsequent
periods based on additional vesting and the related fair value of the underlying
stock.
11. STOCK OPTIONS
On May 12, 1999, the Company introduced the Elastic Networks 1999 Stock
Incentive Plan (the "Plan"), under which options to purchase common shares of
the Company may be granted to employees, officers, and directors of, and
consultants and advisors to, the Company. Options granted may be either
incentive stock options or non-statutory stock options and are exercisable
within the times determined by the Board of Directors as specified in each
option agreement. Options vest over a period of time as
F-20
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
11. STOCK OPTIONS (CONTINUED)
determined by the Board of Directors, generally four years. The Company is
authorized to issue 5,711,766 shares under the Plan. A summary of the activity
under the Plan is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Balance at December 31, 1998
Granted.............................................. 4,640,877 $2.07
Exercised............................................ (1,331) 2.07
Cancelled............................................ (231,578) 2.07
---------
Balance at December 31, 1999........................... 4,407,968 2.07
Granted (unaudited).................................. 730,103 2.40
Cancelled (unaudited)................................ (189,656) 2.07
---------
Balance at March 31, 2000.............................. 4,948,415 2.12
=========
</TABLE>
As of December 31, 1999 there were 358,650 options exercisable at an
exercise price of $2.07. As of March 31, 2000 (unaudited), there were 364,086
options exercisable at an exercise price of $2.07.
The following table summarizes all employee options outstanding and
exercisable by price and range as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.07 3,946,920 9.5 $2.07 326,566 $2.07
</TABLE>
The following table summarizes all employee options outstanding and
exercisable by price as of March 31, 2000 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.07 4,389,467 9.3 $2.07 331,982 $2.07
4.53 97,900 9.9 4.53 -- 4.53
</TABLE>
From April 1, 2000 through June 16, 2000, the Company granted options to
purchase 378,150 shares of common stock, exercisable at $4.53 per share.
F-21
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
11. STOCK OPTIONS (CONTINUED)
STOCK BASED COMPENSATION
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans
because the exercise price of each option equals or exceeds the fair value of
the underlying stock as of the grant date for each stock option. Had
compensation costs for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for awards under the Plan,
consistent with the methodology prescribed under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company's results would have been as follows for
the year ended December 31, 1999 (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Net loss.................................................... $(21,516)
Net loss attributable to common stockholders................ (21,849)
Net loss per common share--basic and diluted................ (1.31)
</TABLE>
The weighted average fair value of all options granted during fiscal 1999
was estimated as of the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Expected option life, in years.............................. 5
Risk-free interest rate..................................... 6.3%
Volatility.................................................. 62.0%
Dividend yield.............................................. 0.0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the vesting period. The estimated fair value of
employee stock options granted during 1999 was $1.22 per share.
NONEMPLOYEE STOCK OPTIONS
During 1999, the Company issued options to purchase 461,048 shares under the
Plan in exchange for services received or to be received. The options have an
exercise price of $2.07 and a fair value of $1.22 per option on the grant date.
The weighted average fair value was determined using the Black-Scholes Valuation
Model with the following assumptions: no dividend yield; volatility of 62%;
risk-free interest rate of 6.3%; and an expected life of 5 years. The majority
of these options will be fully vested by December 31, 2001. In conjunction with
the issuance of these options, the Company recognized expense of $39,020 in 1999
based on the fair value of the options, which have fully or partially vested.
Additional expense will be recorded in subsequent periods based on additional
vesting and the related fair value of the underlying stock.
F-22
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
12. SOFTWARE LICENSE AGREEMENT
In September 1998, Nortel and a non-affiliate investor (the "Licensee")
signed a Cooperative Development and License Agreement. The agreement was
subsequently assigned by Nortel to the Company. Under the terms of the
agreement, the Licensee agreed to pay $4,500,000 for a license of certain of the
Company's technology and for development of some additional agreed-upon
technology. The payment terms provided for $1,000,000 to be paid within 30 days
of the signing of the agreement and for additional payments to be made within
30 days of the completion by the Company of certain technology. The Company
received $1,000,000 in October 1998 and $1,500,000 in December 1998 from the
Licensee as payments under this agreement. Such amounts have been reflected as
deferred software license revenue on the Company's December 31, 1998 balance
sheet and will be amortized on a straight-line basis over the remaining term of
the agreement.
In May 1999, the agreement was amended to provide for the termination of the
original agreement in the event that the Company and the Licensee could not
agree to the final terms and completion dates of the additional technology to be
developed under the term of the original agreement.
As described in Note 9, in May 1999 the Company issued 615,385 shares of
Series A redeemable convertible participating preferred stock to the Licensee
for cash of $6,154 plus notes of $1,993,848. Repayment of the notes is required
if the certain technology is completed or upon a liquidation or qualified
initial public by the Company. If the technology is not completed, the Licensee
has the option of paying the notes in full and keeping the shares or canceling
the notes and returning the shares.
Since the Company has given the Licensee the right to either pay for the
shares by paying off the notes or returning the shares and having the notes
cancelled, the Company in substance has granted the Licensee an option. The
Licensee has the right, but not the obligation, to purchase the 615,385 shares
at a predetermined price. The Company has accounted for the option under SFAS
No. 123, and calculated a value of the option using a Black-Scholes option
pricing model using the following assumptions: no dividend yield; risk-free
interest rate of 6.3%; expected life of 1.6 years; and volatility of 62%. The
resulting value of the option of $573,918 was deferred as part of the cost of
the overall Cooperative Development and License Agreement and will be amortized
over the remaining period of the technology license agreement.
The Cooperative Development and License Agreement was amended, effective
April 5, 2000, to provide for the granting of a license by the Company to the
Licensee for certain technology that was developed under the terms of the
agreement. Accordingly, the Licensee has agreed to pay the notes and on
June 16, 2000, the Company received cash of $1,993,848 in full payment of the
notes.
13. SEGMENT INFORMATION
The Company operates in one reportable business segment, to develop
technology and products to provide high speed access over copper wire
infrastructure.
GEOGRAPHIC INFORMATION
The Company's headquarters and its operations are located in the United
States. The Company's research and development activities are conducted in the
United States. The Company conducts its sales, marketing and customer service
activities throughout the world. Geographic long-lived assets information is
F-23
<PAGE>
ELASTIC NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
13. SEGMENT INFORMATION (CONTINUED)
based on the physical location of the assets at the end of each period.
Geographic revenue information is based on the location of the end customer.
Identifiable long-lived assets (principally property and equipment) by
geographic areas (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-lived assets--United States......................... $1,167 $1,352 $1,696
</TABLE>
Revenues by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED MARCH
31, 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
United States................................ $ -- $233 $7,267 $301 $5,198
Canada....................................... 126 8 300
Asia......................................... 799 31 691
Other........................................ 23 4
------ ---- ------ ---- ------
Total revenues........................... $ -- $233 $8,215 $344 $6,189
====== ==== ====== ==== ======
</TABLE>
14. ROYALTY OBLIGATIONS
On May 12, 1999, the Company obtained ownership rights in certain
intellectual property belonging to Nortel. Nortel gave the Company several
exclusive and non-exclusive, worldwide licenses under the Intellectual Property
Transfer and License Agreement (the "Agreement") for the purpose of designing,
developing, using, manufacturing, and distributing licensed technical
information, patents, products, technology, trademarks, software and third party
software. Such license also includes the right to have licensed products and
software made by another manufacturer for the use, lease or sale by the Company.
The patent license granted to the Company also includes the right to grant
sublicenses to third parties within the scope of the license granted.
The provisions of the Agreement also provide for the Company to pay to
Nortel: (a) a royalty of 2.5% of net end user revenues for the term of the
Agreement; (b) a royalty of 2.5% of net distributor revenues for the term of the
Agreement; (c) 5.0% of net sublicensing revenues for the term of the Agreement.
The royalty payments are due 30 days after each quarter-end. The royalty and
reporting obligations set out in the Agreement shall be payable by the Company
until such time as securities of the Company are first offered for sale and sold
to the public in a public offering or on a sale of the Company at a value
greater than or equal to $30,000,000; after such time, provided the Company has
paid all outstanding royalties owing and is not in default under any of the
terms of the Agreement, the licenses granted to the Company shall be considered
to be fully paid-up and royalty free. For 1999, royalties owed were $129,216.
F-24
<PAGE>
PHOTOGRAPHC AND CAPTIONS
Center top title: ELASTIC'S CURRENT PRODUCTS
1.Top left: color photograph of our DSLAM and its associated filter shelf
with the following description across the right side: "The Elastic
ELMo 120 is a DSL access multiplexer that uses EtherLoop DSL technology to
provide broadband access over existing voice telephone lines for up to 120
end users. The ELMo 120 uses Ethernet 10/100 Base-T and Internet Protocol
technology to connect users to the Internet."
2.Middle left: color photograph of the YesWare Server with the following
description across on the right side: "The Elastic YesWare Server provides
SNMP, OAM&P and port management software, as well as optional
visitor-based networking software for easy high-speed Internet access by
temporary users without reconfiguring their computers and service provider
billing interfaces."
3.Bottom left: color photograph of the Elite modem and optional extender
with the following description across on the right side: "The Elite modem
provides broadband access over an existing voice telephone line using
EtherLoop DSL technology when connected to an ELMo 120. The StormPort is
customer premises equipment that has connectors for a telephone handset,
the phone line and an Ethernet connector for a computer. The optional
extender provides additional reach with a smaller footprint."
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shares
[LOGO]
Common Stock
--------------
PROSPECTUS
-----------------
CHASE H&Q ROBERTSON STEPHENS
UBS WARBURG LLC
------------
, 2000
-----------------
You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
as of the date of this document.
Until , 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealer's obligation to deliver a prospectus when acting as an
underwriter and with respect to their unsold allotments or subscriptions.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses, other than underwriting discounts
and commissions, to be paid by us in connection with the issuance and
distribution of the common stock being registered:
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
Securities and Exchange Commission registration fee......... $19,800
NASD filing fee............................................. 8,000
Nasdaq National Market listing fee..........................
Blue Sky fees and expenses..................................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer Agent and Registrar fee............................
Miscellaneous...............................................
Total....................................................... $
-------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of the State of Delaware,
as amended, we have the power to indemnify directors and officers under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
his or her being a director or officer if it is determined that he acted in
accordance with the applicable standard of conduct set forth in such statutory
provision.
Our amended and restated bylaws generally will permit indemnification of
directors and officers to the fullest extent authorized by the General
Corporation Law of the State of Delaware.
Our directors and officers are presently covered under Nortel's directors'
and officers' liability insurance policies. We intend to purchase our own
directors' and officers' liability insurance prior to this offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our inception in May 1999, we have issued and sold unregistered
securities in the transactions described below. See Notes 9 and 10 to Notes to
Financial Statements.
1. On September 22, 1998, we issued 1 share of our common stock to Nortel
Networks Inc. in connection with our incorporation.
2. On May 12, 1999, we issued 15,384,614 shares of our common stock to Nortel
Networks Inc. in connection with our formation and in exchange for
contributed assets.
3. On May 12, 1999 we sold 3,876,923 shares of our series A redeemable
convertible participating preferred stock to four stockholders at a price of
$3.25 per share for an aggregate price of $12.6 million.
4. On February 14, 2000 we sold 3,922,463 shares of our series B redeemable
convertible participating preferred stock to 18 stockholders at a price of
$5.329 per share for an aggregate price of $20.9 million.
II-1
<PAGE>
5. On November 18, 1999, we granted to a vendor a warrant to purchase 12,439
shares of our common stock at an exercise price of $2.76 per share.
6. Since we were formed we have granted options to purchase an aggregate of
5,299,874 shares of our common stock at per share prices equal to the fair
market value of a share of our common stock on the date of grant.
All issuances of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 or Section 3(b) of the Securities Act of 1933 or Rule 701 thereunder. The
Company believes that all of the securities were acquired by the investors for
investment and with no view toward the resale or distribution thereof. In each
instance, the investor was either an employee of the Company or a sophisticated
investor, the offers and sales were made without any public solicitation and the
stock certificates bear restrictive legends. No underwriter was involved in the
transactions and no commissions were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement *
3.1 Form of Second Amended and Restated Certificate of
Incorporation *
3.2 Form of Amended and Restated Bylaws *
4.1 Specimen stock certificate *
5.1 Opinion of Hunton & Williams *
10.1 Contribution Agreement among the Company, Nortel Networks
Corporation and Nortel Networks Inc., dated May 12, 1999
10.2 Patent Transfer and License Agreement between the Company
and Nortel Networks Inc., dated May 12, 1999
10.3 Intellectual Property Transfer and License Agreement between
the Company and Nortel Networks Corporation, dated May 12,
1999
10.4 Reseller Agreement between the Company and Darwin
Networks, Inc., dated June 17, 1999
10.5 Distribution Agreement between the Company and Northern
Telecom, Inc., dated September 1, 1998
10.6 Agreement for Electronic Manufacturing Services between the
Company and Sanmina Corporation, dated February 19, 1999
10.7 1999 Stock Incentive Plan
10.8a Investor Rights Agreement between the Company and certain
holders of the Company's equity securities, dated May 12,
1999
10.8b Amendment to Investor Rights Agreement between the Company
and certain holders of the Company's equity securities,
dated February 14, 2000
10.9 Lease Agreement between the Company and Ted and Mary
Flipowicz, dated February 18, 2000
10.10 Lease Agreement between the Company and Backman, L.C. and
Northern Telecom Inc., dated April 16, 1998
10.11 Commercial Space Lease Agreement between the Company and J&N
Realty Company, Inc., dated August 6, 1999
10.12 Employment Agreement between the Company and Guy D. Gill,
dated May 12, 1999
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.13 Employment Agreement between the Company and Phillip L.
Griffith, dated May 12, 1999
10.14 Employment Agreement between the Company and Larry R.
Hurtado, dated May 12, 1999
23.1 Consent of Deloitte & Touche LLP, independent accountants
23.2 Consent of Hunton & Williams (set forth in Exhibit 5.1)
27 Financial Data Schedule
</TABLE>
------------------------
* To be filed by Amendment
(B) FINANCIAL STATEMENT SCHEDULES:
The required Financial Statement Schedules have been omitted because they
are either not required, not applicable or the required information is included
in the financial statements and notes thereto.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide the Underwriter at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each Purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers and controlling persons of the
Company, pursuant to the foregoing provisions, or otherwise, the Company 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 Company of expenses
incurred or paid by a director, officer or controlling person of the Company 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 Company 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 Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of a 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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on the 29th day of June, 2000.
<TABLE>
<S> <C> <C>
ELASTIC NETWORKS INC.
By: /s/ GUY D. GILL
-----------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Each person whose individual signature appears below hereby authorizes and
appoints Guy D. Gill and Kevin D. Elop, and each of them, with full power of
substitution and resubstitution and full power to act without the other, as his
true and lawful attorney-in-fact and agent to act in his name, place and stead
and to execute in the name and on behalf of each person, individually and in
each capacity stated below, and to file, any and all amendments to this
Registration Statement, including any and all post-effective amendments and any
registration statement relating to the same offering as this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing, ratifying and confirming all that said attorneys-in-fact and agents or
any of them or their substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GUY D. GILL President, Chief Executive
------------------------------------------- Officer and Director (principal
Guy D. Gill executive officer) June 29, 2000
Chief Financial Officer,
/s/ KEVIN D. ELOP Secretary and Treasurer
------------------------------------------- (principal financial and
Kevin D. Elop accounting officer) June 29, 2000
/s/ TOM MANLEY
-------------------------------------------
Tom Manley Director June 28, 2000
/s/ GERALD A. POCH
-------------------------------------------
Gerald A. Poch Director June 27, 2000
/s/ RICHARD REID
-------------------------------------------
Richard Reid Director June 28, 2000
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement *
3.1 Form of Second Amended and Restated Certificate of
Incorporation *
3.2 Form of Amended and Restated Bylaws *
4.1 Specimen stock certificate *
5.1 Opinion of Hunton & Williams *
10.1 Contribution Agreement among the Company, Nortel Networks
Corporation and Nortel Networks Inc., dated May 12, 1999
10.2 Patent Transfer and License Agreement between the Company
and Nortel Networks Inc., dated May 12, 1999
10.3 Intellectual Property Transfer and License Agreement between
the Company and Nortel Networks Corporation, dated May 12,
1999
10.4 Reseller Agreement between the Company and Darwin
Networks, Inc., dated June 17, 1999
10.5 Distribution Agreement between the Company and Northern
Telecom, Inc., dated September 1, 1998
10.6 Agreement for Electronic Manufacturing Services between the
Company and Sanmina Corporation, dated February 19, 1999
10.7 1999 Stock Incentive Plan
10.8a Investor Rights Agreement between the Company and certain
holders of the Company's equity securities, dated May 12,
1999
10.8b Amendment to Investor Rights Agreement between the Company
and certain holders of the Company's equity securities,
dated February 14, 2000
10.9 Lease Agreement between the Company and Ted and Mary
Flipowicz, dated February 18, 2000
10.10 Lease Agreement between the Company and Backman, L.C. and
Northern Telecom Inc., dated April 16, 1998
10.11 Commercial Space Lease Agreement between the Company and J&N
Realty Company, Inc., dated August 6, 1999
10.12 Employment Agreement between the Company and Guy D. Gill,
dated May 12, 1999
10.13 Employment Agreement between the Company and Phillip L.
Griffith, dated May 12, 1999
10.14 Employment Agreement between the Company and Larry R.
Hurtado, dated May 12, 1999
23.1 Consent of Deloitte & Touche LLP, independent accountants
23.2 Consent of Hunton & Williams (set forth in Exhibit 5.1)
27 Financial Data Schedule
</TABLE>
------------------------
* To be filed by Amendment
