<PAGE>
As filed with the Securities and Exchange Commission on December 20, 1999.
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
ALTEON WEBSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
---------------
Delaware 3679 77-0429769
(State or other (Primary Standard (I.R.S Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
---------------
50 Great Oaks Boulevard
San Jose, California 95119
(408) 360-5500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Dominic P. Orr
President, Chief Executive Officer and Chairman of the Board of Directors
Alteon WebSystems, Inc.
50 Great Oaks Boulevard
San Jose, California 95119
(408) 360-5500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Eric C. Jensen, Esq. Laird H. Simons III, Esq.
Matthew W. Sonsini, Esq. Kathy Tallman Schuda, Esq.
Cooley Godward LLP Thomas J. Hall, Esq.
Five Palo Alto Square Fenwick & West LLP
3000 El Camino Real Two Palo Alto Square
Palo Alto, CA 94306 Palo Alto, CA 94306
(650) 843-5000 (650) 494-0600
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is 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,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................. 5,750,000 $91.00 $523,250,000 $138,138
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 750,000 shares of Common Stock issuable upon exercise of the
underwriters' over-allotment option, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee based on the average high and low trading price for the
Common Stock on December 17, 1999, pursuant to Rule 457(c) under the
Securities Act.
---------------
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 that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the 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 we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion dated December 20, 1999
PROSPECTUS
5,000,000 Shares
[LOGO OF ALTEON WEBSYSTEMS]
Common Stock
- --------------------------------------------------------------------------------
We are offering 1,250,000 shares of common stock and the selling stockholders
are offering 3,750,000 shares.
We will not receive any of the proceeds from the sale of shares being sold by
the selling stockholders. Our common stock is quoted on the Nasdaq National
Market under the symbol "ATON." On December 17, 1999, the last reported sale
price of our common stock on the Nasdaq National Market was $87.625 per share.
Investing in our shares involves risks. "Risk Factors" begin on page 7.
<TABLE>
<CAPTION>
Per
Share Total
----- --------
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discount........................................... $ $
Proceeds to Alteon WebSystems................................... $ $
Proceeds to Selling Stockholders................................ $ $
</TABLE>
We and the selling stockholders have granted the underwriters a 30 day option
to purchase up to 750,000 additional shares of common stock solely to cover
over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 2000.
- --------------------------------------------------------------------------------
Lehman Brothers Robertson Stephens
Thomas Weisel Partners LLC Dain Rauscher Wessels
, 2000
<PAGE>
[Description of Inside Front Cover Graphic: Graphic depicts a toy race car.
Graphic is captioned "Speed doesn't kill slow kills." The graphic contains our
name and logo in the lower right hand corner with the phrase "Web speed for e-
business." The graphic also lists Alteon customers.]
[Description of gatefold graphics: Graphic depicts three interlocking gears
entitled "Access," "Worldwide Web" and "Enterprise," respectively, with boxes
on the top of each gear representing our products and different users of our
products. Caption emerging from one of the boxes representing our products
states "Alteon Web Switches Offer high availability and increased performance
by balancing Web traffic load across Web servers and other Web data center
components including security servers, specialized storage servers and
routers." Caption in upper left-hand corner states "Enhancing Web Performance
for E-Business/Shifting Gears to Web working." The graphic contains our name
and logo in the lower right hand corner with the phrase "Web Speed for
e-Business." The graphic also has the following captions:
"WEB HOSTERS
We help Web hosters serve more customers, simplify operations, reduce
expenses and offer new services by improving infrastructure availability,
balancing the load across Web servers and controlling traffic flow.
E-COMMERCE COMPANIES
We help e-commerce companies improve customers' Web experience by enhancing
the performance and improving the availability of Web servers and security
servers.
ISPs
We help Internet Service Providers improve performance and reduce
telecommunications costs by automatically redirecting Web requests to
specialized storage servers or to lower cost network connections.
PORTALS
We help portals increase page views, improve availability and enhance user
Web experience by distributing Web traffic across local and geographically
dispersed server groups.
CONTENT PUBLISHERS
We help content publishers improve content availability by balancing Web
traffic load across both local and geographically dispersed server groups.
ENTERPRISES
We help enterprises keep pace with Web traffic growth and increase the speed
of their Web data center infrastructure by balancing the load to security
servers and Web servers."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 7
Use of Proceeds...................... 19
Dividend Policy...................... 19
Price Range of Common Stock.......... 19
Capitalization....................... 20
Dilution............................. 21
Selected Consolidated Financial
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business............................. 32
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management............................................................ 51
Related Party Transactions............................................ 61
Principal and Selling Stockholders.................................... 63
Description of Capital Stock.......................................... 65
Shares Eligible for Future Sale....................................... 67
Underwriting.......................................................... 69
Legal Matters......................................................... 71
Experts............................................................... 71
Where You Can Find More Information................................... 71
Index to Consolidated Financial Statements............................ F-1
</TABLE>
----------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and elsewhere in
this prospectus are "forward-looking statements." These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations and intentions and other statements contained in the
prospectus that are not historical facts. When used in this prospectus, the
words "anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "seeks," "should" or "will" or the negative of
these terms or similar expressions are generally intended to identify forward-
looking statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk Factors."
We have filed for federal trademark registration for Alteon and the Alteon
logo. Other trademarks and trade names appearing in this prospectus are the
property of their holders.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes appearing
elsewhere in this prospectus. Unless otherwise indicated, information in this
prospectus assumes that the underwriters do not exercise their over-allotment
option.
We are a leading provider of next generation Internet infrastructure
solutions that are designed to enable e-businesses to meet the demands
resulting from the rapid growth of the Internet. Our Web data center products,
which include switches, server adapters and software, are optimized to meet the
specific challenges of managing Web traffic and provide the high performance
and availability of leading networking infrastructure solutions. We refer to
this combination of capabilities as Web-working. Our solutions are designed to
increase the performance, availability, scalability, manageability and control
of Web servers and Web data center infrastructure. Our solutions are built on a
technology core that consists of our Web operating system, or Web OS, a suite
of Internet traffic management software, a distributed processing architecture
and our family of custom semiconductors, which we refer to as WebICs. Our
customers consist of e-commerce companies, Web portals, content publishers, Web
hosting companies, Internet service providers, server vendors and enterprises,
including the following customers which have purchased at least $100,000 of our
products: Concentric Network Corp., DLJdirect, Inc., IBM Corporation, Inktomi
Corporation, Intermedia Communications Inc., Sandpiper Networks, Inc. and UUNET
Technologies, Inc. We have experienced operating losses in each quarterly and
annual period since inception. We incurred a net loss of $12.1 million for the
quarter ended September 30, 1999 and had an accumulated deficit of $43.5
million at September 30, 1999.
According to International Data Corporation, an industry research firm, the
number of users of the Internet will increase from 142 million in 1998 to 502
million by the end of 2003. With the emergence of faster access technologies
such as digital subscriber line, cable modem and wireless, the speed and
flexibility with which users are accessing the Internet are also increasing.
Because of the increasing capabilities and accessibility of the Internet,
companies are building their business models around the Internet and developing
Internet-based mission-critical business applications. These e-businesses rely
on the Web to communicate with customers, access and share business
information, engage in marketing activities and conduct e-commerce
transactions. However, existing Internet traffic management solutions,
consisting of traditional switches and routers as well as single function,
software-based traffic management devices, generally lack the combination of
speed and intelligence required to manage Web traffic efficiently.
All of our products are designed to enhance the performance of Web data
centers for e-businesses. Our products include the ACEdirector and Alteon 180
Series of Web switches, Web OS and our ACEnic server adapters, as well as our
Alteon 700 Series of Web switches, which are in customer testing which is
expected to continue until at least March 2000. The key benefits of our
products include:
. High-Speed, Web Intelligent Switching. Our Web switches and Web OS
combine high performance Fast Ethernet and Gigabit Ethernet connectivity
and Web session switching capabilities with a broad set of Web traffic
control functions. Our current Web switches are designed to offer Web
session management at a rate of approximately 74,000 sessions per second
on a Fast Ethernet port, which we believe is the maximum possible session
switching rate, or "wire speed," for Fast Ethernet. Web session
management rate means the speed at which a traffic management device can
process new incoming TCP connections.
. Rapid and Efficient Scalability. Web OS, our distributed architecture and
WebICs allow the capacity of our Web switches to be increased rapidly and
efficiently simply by adding more ports.
. System-Level High Availability. Our Web switches monitor the status and
performance of each server, server farm and server location and redirect
traffic to alternate servers and Web data centers in the
4
<PAGE>
event of a system failure or server overload. The Web switches themselves
can be set up in a redundant design to provide resilience in the event of
a switch failure.
. Increased Flexibility. Our Web switches are designed to select and direct
Internet traffic flexibly and transparently, enabling e-businesses to
increase infrastructure efficiency.
. Enhanced Control. Our Alteon 700 Series of Web switches is designed to
allow Web data center administrators to allocate and prioritize bandwidth
to control resource usage.
. Cost Effectiveness. Our Web data center infrastructure solutions
integrate multiple traffic management functions in a single Web switch,
which is intended to allow e-businesses to reduce capital, management and
training costs.
Our objective is to be the leading supplier of Web-working infrastructure
solutions. The key elements of our strategy are to:
. Extend our early market leadership in the Web-working market;
. Leverage our Web-working technology leadership;
. Build our relationships with key companies in the Internet marketplace;
. Increase our penetration of leading e-businesses;
. Expand our supplier relationships with leading server manufacturers; and
. Enhance our customer service and support.
Our principal executive offices are located at 50 Great Oaks Boulevard, San
Jose, California 95119. Our telephone number is (408) 360-5500. We were
incorporated in Delaware on March 18, 1996. Our Web site address is
www.alteonwebsystems.com. Information contained on our Web site does not
constitute part of this prospectus.
The Offering
<TABLE>
<C> <S>
Common stock offered by Alteon WebSystems.......... 1,250,000 shares
Common Stock offered by the Selling Stockholders... 3,750,000 shares
Common stock to be outstanding after the offering.. 40,375,087 shares
Use of proceeds.................................... For general corporate
purposes. See "Use of
Proceeds." We will not
receive any proceeds from
the shares sold by selling
stockholders
Nasdaq National Market symbol...................... "ATON"
</TABLE>
The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of November 30, 1999, and
excludes:
. 6,410,516 shares underlying options outstanding as of November 30, 1999
at a weighted average exercise price of $11.81 per share;
. 3,127,914 shares available for future grants under our option plan; and
. 1,500,000 shares available for issuance under our employee stock
purchase plan.
5
<PAGE>
Summary Consolidated Financial Data
The following tables summarize our consolidated financial data. The as
adjusted column of the consolidated balance sheet data reflects the sale of
1,250,000 shares of our common stock at an assumed public offering price of $
per share, after deducting the estimated underwriting discount and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
Quarter Ended
March 18, 1996 Year Ended June 30, September 30,
(Inception) to --------------------------------------- -----------------
June 30, 1996 1997 1998 1999 1998 1999
------------------------------- -------------- -------- ------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Net sales............... $ -- $ 178 $ 13,572 $ 26,254 $ 5,127 $ 12,750
Cost of sales........... -- 637 7,893 13,385 2,549 5,447
------------ ------------- -------------- -------- ------- --------
Gross profit (loss)..... -- (459) 5,679 12,869 2,578 7,303
Operating expenses:
Sales and marketing... 19 1,921 6,485 13,061 2,516 6,820
Research and
development.......... 176 4,782 8,816 10,004 2,165 3,989
General and
administrative....... 98 744 1,505 2,538 492 1,283
Stock compensation to
consultants.......... -- -- -- -- -- 7,638
------------ ------------- -------------- -------- ------- --------
Total operating
expenses........... 293 7,447 16,806 25,603 5,173 19,730
------------ ------------- -------------- -------- ------- --------
Loss from operations.... (293) (7,906) (11,127) (12,734) (2,595) (12,427)
Interest income (ex-
pense), net............ 20 122 322 264 65 331
------------ ------------- -------------- -------- ------- --------
Loss before income tax-
es..................... (273) (7,784) (10,805) (12,470) (2,530) (12,096)
Income taxes............ 1 1 1 73 -- 40
------------ ------------- -------------- -------- ------- --------
Net loss................ $ (274) $ (7,785) $ (10,806) $(12,543) $(2,530) $(12,136)
============ ============= ============== ======== ======= ========
Basic and diluted loss
per common share....... $ (0.48) $ (5.15) $ (2.18) $ (1.65) $ (0.39) $ (1.20)
============ ============= ============== ======== ======= ========
Basic and diluted common
shares used in
computation............ 569 1,511 4,951 7,610 6,540 10,095
============ ============= ============== ======== ======= ========
As adjusted basic and
diluted loss per common
share.................. $ (1.07)
========
Shares used in as
adjusted basic and
diluted loss per common
share.................. 11,345
========
</TABLE>
<TABLE>
<CAPTION>
September 30,
1999
-----------------
As
Actual Adjusted
-------- --------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and equivalents.......................................... $107,103
Working capital............................................... 100,121
Total assets.................................................. 122,355
Long-term obligations, less current portion................... 1,570 1,570
Stockholders' equity.......................................... 153,220
Total stockholders' equity.................................... 103,360
</TABLE>
6
<PAGE>
RISK FACTORS
An investment in our common stock is risky. You should carefully consider the
following risks, as well as the other information contained in this prospectus.
If any of the following risks actually occurs, our business could be harmed. In
that case, the trading price of our common stock could decline, and you might
lose all or part of your investment. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties not
presently known to us, or that we currently see as immaterial, may also harm
our business.
Because our limited operating history makes it difficult to evaluate our
business, our future financial performance may disappoint securities analysts
or investors and result in a decline in our common stock price.
We were founded on March 18, 1996 and have a limited operating history, which
makes an evaluation of our current business and prospects difficult. Due to our
limited operating history, it will be difficult to accurately predict our
future revenue or results of operations. This may result in one or more future
quarters where our financial results may fall below expectations of analysts
and investors. As a result, the price of our common stock may decline. In
addition, because of our limited operating history, we have a limited insight
into trends that may emerge in our market and affect our business. The revenue
and income potential of our business and market are unproven. You must consider
our business and prospects in light of the risks and difficulties typically
encountered by companies in their early stages of development, particularly
those in new and rapidly evolving markets such as the Internet traffic
management industry.
Our quarterly operating results are not indicative of future performance and
are difficult to forecast, and our stock price may fall if our quarterly
performance does not meet analysts' or investors' expectations.
Our quarterly operating results have varied significantly in the past and are
likely to vary significantly in the future, which makes it difficult for us to
predict our future operating results. We believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as an indicator of our future performance. In particular,
historically, a significant portion of our sales has occurred near the end of a
quarter. For example, for the year ended June 30, 1999, our fiscal 1999, in
some cases up to one-half of our sales occurred in the last month of the
quarter. Accordingly, delays in anticipated sales past the end of a particular
quarter may harm our results of operations for that quarter. Furthermore, we
base our decisions regarding our operating expenses on anticipated revenue
trends, and our expense levels are relatively fixed. Consequently, if revenue
levels fall below our expectations, we may suffer unexpected losses because
only a small portion of our expenses vary with our net sales.
In one or more future quarters, our operating results will likely be below
the expectations of public market analysts and investors. If this occurs, the
price of our common stock will probably decline.
We expect to incur significant future operating expenses and losses and may
never achieve profitability, which may cause our stock price to decline.
We have experienced net losses in each quarterly and annual period since
inception. We incurred a net loss of $12.1 million for the quarter ended
September 30, 1999, and at September 30, 1999 had an accumulated deficit of
$43.5 million. Although our net sales have grown in recent quarters, we may not
be able to achieve future revenue growth or achieve or sustain profitability.
We intend to increase our operating expenses substantially, particularly
expenses related to expanding our sales and marketing activities, developing
new distribution channels and increasing levels of research and development. If
we fail to achieve and sustain significant increases in our quarterly net
sales, we may not be able to increase our investment in these areas. In
addition, with increased expenses, we will need to generate significant
additional revenue to achieve profitability. We cannot predict when we will be
profitable, if at all. If we continue to incur net losses and never attain
profitability, our stock price is likely to decline.
7
<PAGE>
Because we do not have any experience commercially manufacturing products
incorporating our next generation of WebICs and Web OS, we may not be
successful in launching our Alteon 700 Series of Web switches in a timely
manner.
We expect to derive a significant portion of our future net sales from sales
of products containing our next generation of WebICs. To date, we have produced
only a few of our Alteon 700 Series of Web switches for customer testing
purposes and do not have any experience in manufacturing them in commercial
quantities. Because of the complexity of the WebICs and the supporting Web OS
software, there is a risk that we will experience unanticipated problems with
the manufacturing, volume shipment or performance of these products.
Since July 1999, the first product using this generation of WebICs, our
Alteon 700 Series of Web switches, has been in customer testing and we expect
to begin customer shipments of these switches in March 2000. The WebIC in this
product is complicated, and its development has been delayed on two prior
occasions, which resulted in our postponing customer testing of this product by
approximately six months. We have not completed internal testing of this WebIC.
If we discover significant defects, commercial release of our next-generation
Web switch could be delayed significantly, particularly if the WebIC must be
re-designed and re-manufactured by LSI Logic Corporation, our WebIC
manufacturer. Our next generation of Web switches also requires the successful
development of a new version of Web OS. Development of this software is also
complex and could be subject to delay.
If we fail to launch commercially our Alteon 700 Series of Web switches in a
timely manner:
. revenues from our existing products could be inadequate to cover our
expenses, including the cost of selling, marketing, developing and
manufacturing new products;
. our brand and reputation will be damaged;
. our competitors' products could achieve market acceptance; and
. we would lose market share.
If our Alteon 700 Series of Web switches or other new products or product
enhancements fail to achieve customer acceptance, or if we fail to manage
product transitions successfully, our business reputation and financial
performance would suffer.
Our industry is characterized by very rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. Our existing products will be rendered less
competitive or obsolete if we fail to introduce new products or product
enhancements that anticipate the features and functionality that customers
demand or to ensure that they interoperate with current and emerging networking
technologies. Our Alteon 700 Series of Web switches is still under development
and has not been commercially released to customers, and we cannot assure you
that it will achieve customer acceptance. The success of our Alteon 700 Series
of Web switches and other new product introductions will depend on:
. the ability of our products to meet customer needs and expectations
regarding features, performance and robustness;
. our ability to accurately anticipate industry trends and changes in
technology standards; and
. timely completion and introduction of new product designs and features.
In addition, the introduction of new or enhanced products also requires that
we manage the transition from older products to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products can be
delivered to meet customer demand. In particular, our Alteon 700 Series of Web
switches has been in customer testing since July 1999 and we expect to begin
customer shipments of these switches in March 2000. Our failure to
commercialize and manage the transition to this new product series successfully
would harm our business.
Because the Internet infrastructure consists primarily of products manufactured
by Cisco Systems, Inc., Cisco has the ability to alter the fundamental
technology underlying computer networking, which could render our products less
competitive or obsolete.
Our products are developed based on the current Internet infrastructure,
consisting primarily of routers, switches and a network of hardware and
software. Cisco is the leader in developing and marketing equipment
8
<PAGE>
and software that form the backbone of this infrastructure. Cisco has a
dominant market share and an extensive, loyal and entrenched customer base. If
Cisco introduced or made an announcement regarding a new technology or product
that had the potential to alter the manner in which computing devices
communicated with each other over the Internet infrastructure, our products
might be rendered less competitive or obsolete.
In addition, Cisco offers a variety of Internet appliances and software that
manage Internet traffic volume. We believe that Cisco is providing to certain
customers pricing incentives to purchase a complete series of Cisco products.
This policy could cause us to lose sales which could harm our business.
Recently Cisco announced plans to integrate some of these products into their
LAN switches. This integrated product offering will compete directly with our
products. Cisco has a longer operating history and significantly greater
financial, technical, marketing and other resources than we do. Cisco also has
broad strategic relationships with server vendors, OEMs, resellers and other
software and hardware providers. As a result of these factors, Cisco may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements than we can.
If our products do not interoperate with our customers' networks, installations
will be delayed or cancelled and a substantial portion of our products could be
returned.
Our products are designed to interface with our customers' existing networks,
each of which has different specifications and utilizes multiple protocol
standards. Many of our customers' networks contain multiple generations of
products that have been added over time as these networks have grown and
evolved. Our products must interoperate with all of the products within these
networks. If our products fail to interoperate with the existing software or
hardware components used in our customers' networks, we would have to modify
our products to overcome the defects which would delay installations of our
products, cause orders for our products to be cancelled or result in product
returns. This could result in negative publicity and could harm our business
reputation.
Problems arising from use of our products in conjunction with other vendors'
products could disrupt our business and cause significant customer relations
problems.
Service providers typically use our products in conjunction with products
from other vendors. As a result, when problems occur, it may be difficult to
identify the source of the problem. These problems may cause us to incur
significant, unanticipated expenses, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relations problems.
If our products contain defects, we may be subject to significant liability
claims from our customers or their customers and could incur significant
unexpected expenses and lost sales.
Because our products are designed to provide critical communications services
to emerging Web applications such as e-commerce, we may be subject to
significant liability claims if our products contain undetected or unresolved
errors. Our agreements with customers typically contain provisions intended to
limit our exposure to liability claims. However, these limitations may not
preclude all potential claims resulting from a defect in one of our products.
Although we maintain product liability insurance of up to $5.0 million covering
damages arising from implementation and use of our products, our insurance may
not cover every claim brought against us. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages.
As a result, any liability claims, whether or not successful, could harm our
reputation and our business.
Future consolidation in the networking industry may improve our competitors'
position, which could reduce our revenues, potential profits and overall market
share.
The networking industry is characterized by continued consolidation. We may
not be able to compete successfully in an increasingly consolidated industry.
Consolidation in our industry may result in a smaller number of competitors
with greater resources and broader product lines, which could force us to
reduce the prices of our products or result in a loss of market share.
Additionally, because we depend on strategic
9
<PAGE>
relationships with third parties in our industry, any consolidation involving
these parties could reduce the demand for our products or otherwise harm our
business.
Because our markets are highly competitive, customers may choose to purchase
our competitors' products, which would result in reduced revenues or loss of
market share, any of which could damage the long-term or short-term prospects
of our business.
We compete in a new, rapidly evolving and highly competitive sector of the
networking industry. We expect competition to intensify in the future.
Increased competition would likely reduce our prices, which would reduce our
gross margins. Increased competition also would likely cause us to lose market
share. Our principal competitors include:
. Large telecommunications and networking equipment companies. We face
competition from large telecommunications and networking equipment
companies such as Cisco and Nortel Networks Corporation. These companies
have greater financial resources, longer operating histories, broader
customer relationships, greater brand recognition and a broader set of
products than we do. Cisco and other large telecommunications companies
have announced plans to incorporate an Internet traffic management
component into existing switches. If Cisco or other companies form
alliances with or acquire companies offering competing Web traffic
management products, even if those products do not have capabilities
comparable to our products, they would be significant competitors and
their activities could cause us to reduce our prices.
. Other vendors of Internet traffic management products and services. A
number of other private and public companies offer products designed to
provide Internet traffic management solutions. Some of these companies
offer products focused on a particular function, such as bandwidth
management or load balancing. With respect to a particular function,
these products may be superior to ours. Some of these companies have
longer operating histories, more resources and broader customer
relationships than we do.
Our competitors may respond more quickly to emerging technologies than we do.
In the past, we have lost customers to competitors because we were not able to
respond to their requests for additional features in a timely fashion. We may
not be able to maintain or improve our competitive position against current or
potential competitors, especially those with greater resources.
Because of our lengthy sales cycle, it is difficult to predict future revenue
and we may not be able to compensate for unanticipated revenue shortfalls.
We cannot predict the timing of our revenues accurately because of the length
of our sales cycles. As a result, if sales forecasted from specific customers
are not realized, we may be unable to compensate for the revenue shortfall and
our operating results would be harmed. The sales cycle for our products has
ranged from two to three months for sales to smaller customers to one year or
more for sales to large, established enterprises. Customers frequently begin by
evaluating our products on a limited basis before deciding to purchase them.
Generally, they consider a wide range of issues before committing to purchase
our products, including product benefits, ability to interoperate with
networking equipment and product reliability. Our competitors offer a wide
variety of hardware or software products that purport to serve the needs
addressed by our products. As a result, we must educate potential customers on
the benefits of our products. While potential customers are evaluating our
products and before they place an order with us, we may incur substantial sales
and marketing expenses and expend significant management effort. Consequently,
if orders for our products do not occur as anticipated, our operating results
could be harmed.
If Internet traffic management solutions do not achieve widespread commercial
acceptance, we will not be able to sell our products and our ability to
increase revenues would be harmed.
Widespread commercial acceptance of our products is critical to our future
success. The market for Internet traffic management solutions is relatively new
and rapidly evolving. Rather than utilizing
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<PAGE>
comprehensive Internet traffic management solutions, most Web data center
administrators manage Internet traffic by adding servers and interconnecting a
variety of single function traffic management tools. Our ability to increase
revenues in the future depends on the extent to which our potential customers
recognize the value of our integrated Internet traffic management solutions.
The acceptance of our products may be hindered by:
. the failure of prospective customers to recognize the value of Internet
traffic management solutions;
. the reluctance of our prospective customers to replace or expand their
current networking solutions, which may be supplied by more established
vendors, with our products; and
. the emergence of new technologies or industry standards that could cause
our products to be less competitive or obsolete.
In addition, because the market for Internet traffic management solutions is
in an early stage of development, we cannot assess the size of the market
accurately, and we have limited insight into trends that may emerge and affect
our business. For example, we may have difficulty in predicting customer needs,
developing products that could address those needs, and establishing a
distribution strategy for these products. We may also have difficulties in
predicting the competitive environment that will develop.
Because we purchase several of our key components from single source suppliers,
we could lose sales if these suppliers fail to meet our requirements.
We purchase several key product components from single source vendors for
which alternative sources are either not currently available or difficult to
develop. The inability to obtain sufficient quantities of these components may
result in delays or reductions in product shipments that would harm our
business. We presently purchase two key components, WebICs and power supplies,
from vendors for which there are currently no alternative suppliers. In
addition, we expect that a significant portion of our products in the next year
will incorporate a key networking component which is available only from a
single source. The sole manufacturer of our WebICs is LSI. The process used to
manufacture our WebICs is proprietary to LSI. If LSI terminated our
relationship, we would be required to redesign our WebICs to make them
compatible with the manufacturing process of a new supplier and to develop or
license additional technology. We estimate that this process could take as long
as 12 months and cost $4.0 million or more. Furthermore, we would lose
significant revenue opportunities while working to achieve volume production
with a new vendor. We do not have supply contracts with LSI or other sole
source vendors. In the event of a reduction or interruption of supply of any
such components, a period of 12 months or longer could pass before we would
begin receiving adequate supplies from alternative suppliers, if at all, and
our business would be harmed. It is possible that our sources may not be
available for us or be in a position to satisfy our production requirements at
acceptable prices and on a timely basis, if at all.
In addition, the manufacture of some of these single source components,
particularly WebICs, is complex and time consuming, and our reliance on the
suppliers of these components exposes us to potential production difficulties
and quality variations, including, in the case of WebICs, yield issues, which
could increase prices and delay delivery of our products. Any significant
interruption in the supply or degradation in the quality of any component could
harm our business.
Because the worldwide demand for one of our key components has increased,
adequate quantities of this component may not be available to satisfy our needs
which could increase the price and delay delivery of our products.
During the last year, the worldwide demand for memory chips, a key component
in our products, has increased worldwide. Although we purchase our memory chips
from several suppliers, if these suppliers are unable to provide adequate
quantities of memory chips to satisfy our needs, product shipments may be
delayed and our business would be harmed. In addition, if, as a result of
increased demand, our suppliers raise the price of memory chips, the cost of
manufacturing our products would increase and the sales of our products could
decrease.
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<PAGE>
Because we depend on a single independent manufacturer to make our products, we
are susceptible to interruptions in our product flow which could limit our
revenue and adversely affect our competitive position and reputation.
We currently outsource substantially all of the manufacturing and testing of
our hardware platforms to a single independent manufacturer, Celestica Thailand
Ltd., a subsidiary of Celestica Inc. Our reliance on a single independent
manufacturer involves a number of risks, including possible limitations on
manufacturing capacity and reduced control over delivery schedules,
manufacturing yields and costs. As our relationship with Celestica develops,
manufacturing yields or product performance could be adversely affected due to
difficulties associated with adapting our technology and product design to
Celestica's manufacturing process. In addition, we do not have a supply
contract with Celestica. As a result, Celestica is not obligated to supply
products to us for any specific period, in any specific quantity or at any
specific price, except as may be provided in a particular purchase order. If
Celestica is unable or unwilling to continue manufacturing our components in
required volumes, we will have to identify acceptable alternative
manufacturers, which could take six months or more. Any significant
interruption in the manufacturing of our products would also result in product
shortages or delivery delays, which could harm our customer relationships and
our business and reputation. Moreover, because substantially all of our final
assembly is performed in one of Celestica's facilities, located in Chanburi,
Thailand, any fire or other disaster at this facility would harm our business.
We derive a substantial portion of our revenues from a small number of
customers, and our revenues may decline significantly if any major customer
cancels or delays a purchase of our products.
A relatively small number of our OEM and reseller customers has accounted for
a significant portion of our net sales. In the first quarter of fiscal 2000, no
individual customer accounted for 10% or more of net sales. In fiscal 1999,
sales to 3Com accounted for 14% of net sales, sales to IBM accounted for 10% of
net sales and sales to Hewlett-Packard accounted for 10% of net sales. In
fiscal 1998, sales to Sun Microsystems accounted for 42% of net sales, sales to
Fuji Xerox accounted for 14% of net sales and sales to 3Com accounted for 10%
of net sales. If any of our large customers stop or delay purchases, our
revenue and profitability may be adversely affected. For example, over the last
three fiscal years, sales to Sun Microsystems have decreased significantly from
49% of net sales in fiscal 1997, to 42% of net sales in fiscal 1998, and to 6%
of net sales in fiscal 1999. We expect that revenues from a relatively small
number of our OEM and reseller customers will continue to account for a
significant portion of our net sales. Accordingly, unless and until we
diversify and expand our customer base, our future success will depend upon the
timing and size of future purchase orders, if any, from our largest customers
and, in particular:
. the success of these customers in marketing solutions, including our
products;
. the product requirements of these customers; and
. the financial and operational success of these customers.
Some of our customers are significantly larger than we are and have
sufficient bargaining power to demand lower prices and better terms. The loss
of any one of our major customers or the delay of significant orders from these
customers, could reduce or delay our recognition of revenues, harm our
reputation in the industry, and reduce our ability to predict cash flow
accurately.
We have experienced rapid growth that has placed a strain on our resources, and
our failure to manage our growth could disrupt our operations and prevent us
from generating increased revenue.
We have experienced rapid growth and expansion since our inception. From June
30, 1998 to November 30, 1999, we increased the number of our employees from
85 to 218. This growth has placed, and will continue to place, a significant
strain on our management and information systems and operational and financial
resources. To manage our growth effectively, we must continue to improve our
operational, financial and management controls. Although we believe that our
management and information systems are adequate for the next 12 months,
depending on the volume of our sales, we may have to replace or enhance our
management and information systems sooner than anticipated. We expect that the
cost of implementing these new systems
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<PAGE>
would be approximately $2.0 million. If we have to implement modifications
sooner than we expected, we will incur substantial additional expense earlier
than anticipated. If we fail to scale our management systems to accomodate our
growth, our operating results would be adversely impacted and our business
would be harmed.
If we do not substantially expand our sales channels, our ability to increase
market acceptance of our products and generate revenue would be compromised.
We sell our products in the United States directly, through resellers and
OEMs and we sell our products internationally primarily through resellers. Our
distribution strategy focuses principally on:
. developing and expanding our direct sales organization; and
. expanding our indirect distribution channels by establishing
relationships with vendors of complementary technology, OEMs and
resellers.
We expect to significantly increase the number of direct sales personnel in
the next six months in order to support and develop leads for our indirect
distribution channels and increase the direct sale of our products. This
expansion will significantly increase personnel costs and related expenditures.
Sales personnel will not be productive immediately, and costs of this expansion
may exceed the revenues generated by the sales personnel. To achieve broader
distribution of our products, we expect to increase our reliance on indirect
sales channels both internationally and in North America. If we fail to develop
and maintain relationships with significant OEMs and resellers, or if these
OEMs and resellers are not successful in their sales efforts, sales of our
products may decrease or fail to increase as expected.
Currently, we have only a few agreements with OEMs and resellers, most of
which are not exclusive. Generally, these relationships may be terminated with
little or no notice. Many of these OEMs and resellers sell or may develop
competitive products, or have or may have pre-existing relationships with our
current or potential competitors, which may reduce their efforts to sell our
products. Also, these OEMs and resellers may directly compete with each other
with respect to sales of our products in a particular market or region. We
cannot assure you that our existing OEM and reseller customers will market our
products effectively or continue to devote the resources necessary to provide
us with effective sales, marketing and technical support. Also, we may not be
able to retain our OEM or reseller customers. Any inability to effectively
establish our indirect sales channels would compromise our ability to increase
market acceptance of our products and limit our ability to generate revenue.
Because we rely on indirect channels to sell our products, we are unable to
predict the demand for our products accurately which contributes to the
uncertainty of our operating results.
We expect to have difficulties predicting the demand for our products because
we rely on indirect sales channels. For example, one aspect of our sales
strategy is to develop relationships with OEMs and resellers that sell our
products under either our label or their own label. However, the level and
timing of orders placed by OEMs and resellers varies due to many factors,
including their attempts to balance their inventories, changes in their
manufacturing strategies and variation in demand for their products. Our
inability to forecast the level of orders from these indirect sales channels
may make it difficult to schedule production, manage the manufacturing of our
products or forecast our revenues. The orders that we anticipate from our
current or future OEM and reseller customers may not materialize or delivery
schedules may be deferred as a result of changes in their business needs. This
fluctuation in orders and general sales cycle variability contributes to the
uncertainty of our operating results.
If we are unable to develop and maintain strategic relationships with third
parties, our distribution strategy would be compromised.
We depend upon our strategic alliances to expand our distribution channels
and marketing efforts. We have developed relationships with server vendors as
well as other key participants in the Internet marketplace.
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We believe that these relationships will provide us with valuable insights into
industry trends and technologies and help us supply more complete solutions to
joint customers. However, the amount and timing of resources that our strategic
partners devote to our business is not within our control. Our strategic
partners may not perform as expected. Many of our strategic relationships are
relatively new, and we cannot be certain that any revenue will be derived from
these arrangements. In addition, our arrangements with strategic partners
typically do not restrict them from working with competitors. If any of these
relationships are terminated, we may not be able to maintain or develop
alternative strategic relationships or to replace strategic partners.
International sales of our products account for a significant portion of our
net sales, which exposes us to risks inherent in international operations.
Our ability to grow will depend in part on the expansion of international
operations and sales, which are likely to continue to be a significant portion
of our net sales. Sales to customers outside of the United States accounted for
approximately 29% of our net sales in fiscal 1998, 25% of our net sales in
fiscal 1999 and 37% of our net sales in the first quarter of fiscal 2000.
Conducting business internationally involves many risks, including:
. longer accounts receivable collection cycles;
. difficulties in managing operations in different locations;
. difficulties associated with enforcing agreements through foreign legal
systems;
. seasonal reductions in business activities in some parts of the world,
such as during the summer months in Europe;
. import or export licensing requirements;
. potentially adverse tax consequences, including higher tax rates
generally in Europe;
. unexpected changes in foreign regulatory requirements, especially those
relating to telecommunications and the Internet;
. volatility in the political and economic conditions of foreign countries,
particularly China, Taiwan, Japan, Malaysia and North and South Korea;
and
. fluctuations in foreign currency exchange rates.
China, Taiwan, Japan and South Korea are substantial markets for our
products. Consequently, any political instability in these countries, such as
hostilities between North and South Korea, could significantly reduce demand
for our products from some of our major customers. Currently, most of our
international sales are denominated in U.S. dollars. As a result, an increase
in the value of the U.S. dollar relative to foreign currencies could make our
products less competitive in international markets. In addition, we have
elected to invoice some of our Japanese customers in yen. We plan to engage in
currency hedging activities, but we cannot guarantee that these activities will
shield us from fluctuations in exchange rates between the U.S. dollar and the
Japanese yen.
The average selling prices of our products may decrease, which may reduce our
gross profit.
We anticipate that the average selling prices of our products will decrease
in the future in response to competitive pricing pressures, increased sales
discounts, new product introductions by us or our competitors and other
factors. Therefore, in order to maintain our gross profit, we must develop and
introduce new products and product enhancements on a timely basis and
continually reduce our product costs. Any failure to do so would cause our net
sales and gross profit to decline, which would harm our operating results and
cause the price of our common stock to decline. In addition, we may experience
substantial period-to-period fluctuations in future operating results due to
any decrease in our average selling prices.
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 or sell
our products.
Our success depends to a significant degree upon the continued contributions
of our key management, product development, sales and marketing and finance
personnel, many of whom would be difficult to replace.
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In particular, we rely on our President, Chief Executive Officer and Chairman,
Dominic P. Orr. If we were to lose the services of Mr. Orr, our business and
results of operations would be harmed. None of our officers or key employees is
bound by an employment agreement for any specific term and we do not maintain
key person life insurance on any of our key personnel.
If we fail to attract, train and retain qualified marketing, sales and customer
support personnel our ability to increase sales of our products would be
compromised.
Our products require a complex marketing and sales effort targeted at several
levels within a prospective customer's organization. Although we have recently
expanded our sales force, unless we continue to expand our sales force, we will
not be able to increase revenues. In addition, in order to support and develop
leads for our indirect distribution channels and increase the direct sale of
our products, we expect to significantly increase the number of sales personnel
in the next six months. Competition for qualified sales personnel is intense,
and we might not be able to hire the kind and number of sales personnel we are
targeting. Our inability to retain and hire qualified sales personnel may harm
our results of operations and our ability to increase market share. On the
other hand, if we are successful in hiring our target number of sales
personnel, we will be faced with significantly increased personnel costs and
related expenditures. Sales personnel will not be productive immediately, and
the revenues generated by the sales personnel may not exceed the costs of our
planned expansion.
We have a small customer support organization and will need to increase our
staff to support new customers and the expanding needs of existing customers.
The installation of Internet traffic management solutions, the integration of
these solutions into existing networks and the ongoing support can be complex.
Accordingly, we need highly-trained customer support personnel. Hiring customer
support personnel is very competitive in our industry due to the limited number
of people available with the necessary technical skills and understanding of
our products. Our inability to attract, train or retain highly qualified
customer support personnel would harm our business and results of operations.
Our failure to comply with regulations and evolving industry standards could
delay our introduction of new products.
The market for our products is characterized by the need to meet
communications regulations and standards, some of which are evolving as new
technologies are deployed. To meet the requirements of our customers, our
products may be required to comply with various regulations including standards
established by Underwriters Laboratories and Bell Communications Research.
Failure of our products to comply or delays in compliance with the various
existing and evolving industry regulations and standards could delay the
introduction of our products. Moreover, enactment by federal, state or foreign
governments of new laws or regulations, changes in the interpretation of
existing laws or regulations, or a reversal of the trend toward deregulation in
the telecommunications industry could have a harmful effect on our customers,
and therefore on our business.
Our inability to protect our intellectual property rights from third-party
challenges may significantly impair our competitive position.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
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Our products and marketing efforts may infringe on the intellectual property
rights of third parties, which may result in lawsuits and prevent us from
selling our products.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Our business
activities may infringe upon the proprietary rights of others, and other
parties may assert infringement claims against us. In August 1999, we received
a letter from Resonate, Inc. alleging that some of our products infringe one if
its patents. If this claim, or any similar claims we may receive in the future
cannot be resolved through a license or similar arrangement, we could become a
party to litigation. In the past, we have been involved in trademark litigation
over the use of the name and mark Alteon. Intellectual property claims and any
resulting lawsuits, if successful, could subject us to significant liability
for damages and invalidation of our proprietary rights. These kinds of disputes
are subject to inherent uncertainties. In addition, these claims, regardless of
whether they result in litigation and regardless of the outcome of the
litigation, would be time-consuming and expensive to resolve and divert
management time and attention. Any intellectual property dispute may cause us
to do one or more of the following:
. stop selling, incorporating or using our products that use the challenged
intellectual property;
. attempt to obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which license may
not be available on reasonable terms or at all; or
. redesign those products that use the relevant technology.
If we are forced to take any of these actions, our business may be harmed.
Although we carry general liability insurance, our insurance may not cover
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed.
If we or our significant suppliers, service providers or the sole manufacturer
of our products fails to be Year 2000 compliant, our business may be severely
disrupted and our revenues may decline.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. Products containing this capability
are generally considered to be "Year 2000 compliant." As a result, computer
systems and/or software products used by many companies may need to be upgraded
to be Year 2000 compliant. We may be exposed to a loss of revenues and our
operating expenses could increase if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include our products, products purchased from or manufactured by third
parties, and our internal management information systems. Although, we have
expended resources to review our products and our internal management
information systems to remedy those systems that are not Year 2000 compliant,
there can be no assurance that the modifications we made were successful. If
our systems are not Year 2000 compliant, our business could be harmed.
In addition, although all of our significant suppliers, our significant
service providers and our sole manufacturer have indicated that they are or
expect to be Year 2000 compliant by December 31, 1999, we cannot be certain
that the representations of these third parties are accurate or that they will
achieve Year 2000 compliance in a timely manner. If we determine that the
progress of these third parties toward Year 2000 compliance is insufficient, we
intend to change to other suppliers or service providers or an alternate
manufacturer that have demonstrated Year 2000 readiness. If any of our
significant suppliers, our significant service providers or our sole
manufacturer do not achieve Year 2000 compliance successfully and in a timely
manner and we are unable to replace them with alternate sources, our business
would be harmed.
Conversely, concerns regarding Year 2000 compliance could cause a significant
number of companies, including our current customers, to reevaluate their
current needs and, as a result, consider deferring the purchase of our
products. Although we have not experienced the effects of this type of trend to
date, if customers defer purchases of our products, it could harm our business.
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If additional funds are not available as needed, we may not be able to take
advantage of market opportunities or otherwise grow our business.
We expect that the net proceeds from this offering, our initial public
offering, cash from operations and borrowings available under our credit
facility will be sufficient to meet our working capital and capital expenditure
needs for at least the next 12 months. After that, we may need to raise
additional funds, and additional financing may not be available on favorable
terms, if at all. Further, if we issue additional equity securities,
stockholders may experience dilution, and the new equity securities may have
rights, preferences or privileges senior to those of our common stock. If we
cannot raise funds on acceptable terms, we may not be able to develop new
products or enhance our existing products, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements.
Our existing stockholders will be able to exercise significant control over all
matters requiring stockholder approval.
On completion of this offering, our executive officers, directors and 5%
stockholders, and other affiliates, will beneficially own, in the aggregate,
approximately % of our outstanding common stock. As a result, these
stockholders, acting together, would be able to exercise significant control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions, which may have
the effect of delaying or preventing a third party from acquiring control over
us.
The book value of the shares you purchase will be substantially less than the
price you pay for the shares, and if a liquidation were to occur you might
receive significantly less than your full purchase price for the shares.
The offering price will be substantially higher than the book value per share
of our common stock. Investors purchasing common stock in this offering will,
therefore, incur immediate dilution of $ in net tangible book value per share
of common stock. Investors will incur additional dilution upon the exercise of
outstanding stock options. As a result of this dilution, common stockholders
purchasing stock in this offering may receive significantly less than the full
purchase price that they paid for the shares purchased in this offering in the
event of a liquidation.
If we engage in future acquisitions, we may fail to assimilate the acquired
operations, which could disrupt our ongoing business and generate negative
publicity.
We may acquire businesses that would complement our current product
offerings, augment our market coverage, enhance our technical capabilities, or
otherwise offer growth opportunities. While we have no current agreements with
respect to any acquisitions, we may acquire businesses, products or
technologies in the future. We may not be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could harm our business.
We are at risk of securities class action litigation due to our expected stock
price volatility.
The market price for our common stock will vary in response to a number of
factors, some of which are beyond our control. In the past, securities class
action litigation has often been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Regardless of its outcome, securities litigation
may result in substantial costs and divert management's attention and
resources, which could harm our business and results of operations.
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Provisions in our corporate charter and bylaws may discourage take-over
attempts and thus depress the market price of our stock.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would benefit our stockholders.
These provisions:
. establish a classified board of directors so that not all members of the
board may be elected at one time;
. authorize the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. substantially limit cumulative voting in the election of directors, which
would otherwise allow less than a majority of stockholders to elect
director candidates;
. limit who may call a special meeting of stockholders;
. prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establish advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and the
terms of our stock option plans may discourage, delay or prevent a third party
from acquiring us.
The substantial number of shares that will be eligible for sale in the near
future may cause the market price for our common stock to drop significantly,
even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public
market following this offering could depress the market price for our common
stock. The number of shares of common stock available for sale in the public
market is limited by restrictions under federal securities law and under
agreements that our stockholders have entered into with the underwriters and
with us. All of the shares sold in this offering will be, and the 4,600,000
shares sold by us in our initial public offering are, unless held by
affiliates, freely tradeable. In connection with our initial public offering on
September 23, 1999, holders of the remaining shares signed agreements that
restrict them from selling, pledging or otherwise disposing of their shares
until February 21, 2000 without the prior written consent of Lehman Brothers
Inc. In addition, shares held by the selling stockholders are subject to
agreements that restrict them from selling, pledging or otherwise disposing of
their shares for a period of 90 days after the date of this prospectus without
the prior written consent of Lehman Brothers Inc. However, Lehman Brothers Inc.
may, in its sole discretion, release all or any portion of the common stock
from the restrictions of these agreements at any time. The following table
indicates approximately when the 39,125,087 shares of our common stock that
were outstanding as of November 30, 1999 will be eligible for sale into the
public market:
<TABLE>
<CAPTION>
Eligibility of Shares for
Sale in Public Market
-------------------------
<S> <C>
Prior to February 21, 2000.................... 9,600,000
Following February 21, 2000 and prior to 90
days after the date of this prospectus.......
90 days after date of this prospectus.........
At various times after 90 days after date of
this prospectus..............................
</TABLE>
In addition, we filed a registration statement on Form S-8 with the
Securities and Exchange Commission covering 11,038,695 shares reserved for
issuance under our 1999 Equity Incentive Plan and our 1999 Employee Stock
Purchase Plan. Of the 6,410,516 shares issuable upon exercise of options to
purchase our common stock outstanding as of November 30, 1999, approximately
1,116,321 shares will be vested and eligible for sale following February 21,
2000.
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USE OF PROCEEDS
We will not receive any proceeds from the shares sold by the selling
stockholders in this offering.
We estimate that we will receive net proceeds from the sale of the 1,250,000
shares of common stock offered by us in this offering of $ or $ if the
underwriters exercise their over-allotment option in full, based on an assumed
public offering price of $ per share and after deducting the estimated
underwriting discount and estimated offering expenses. We will use the net
proceeds for general corporate purposes, including expansion of sales and
marketing capabilities, product development and potential acquisitions. Pending
these uses, we intend to invest the proceeds in short-term, investment-grade,
interest-bearing investments.
The principal purposes of this offering are to increase our capitalization
and financial flexibility. As of the date of this prospectus we cannot specify
with certainty all of the particular uses for the net proceeds we will have
upon completion of the offering. Accordingly, our management will have broad
discretion in the application of net proceeds.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently anticipate that we will retain all available funds for use in our
business and do not anticipate paying any cash dividends in the foreseeable
future. In addition, our loan and security agreement with Silicon Valley Bank
prohibits us from paying dividends.
PRICE RANGE OF COMMON STOCK
Our common stock has traded on the Nasdaq National Market under the symbol
"ATON" since September 24, 1999. The following table sets forth, for the
periods indicated, the high and low bid quotations for the common stock as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Common Stock
Price
--------------
High Low
------- ------
<S> <C> <C>
Fiscal Year Ending June 30, 2000
First Quarter (ending September 30, 1999)...................... 122 1/2 44 1/2
Second Quarter (through December 17, 1999)..................... 138 64
</TABLE>
On December 17, 1999, the last reported sale price on the Nasdaq National
Market for our common stock was $87.625 per share. As of November 30, 1999,
there were approximately 393 stockholders of record of our common stock.
19
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of September 30,
1999 and on an as adjusted basis to reflect our receipt of the net proceeds
from our sale of 1,250,000 shares of common stock in this offering at an
assumed public offering price of $ per share, after deducting the estimated
underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
As of September 30, 1999
----------------------------
Actual As Adjusted
------------ --------------
(in thousands)
<S> <C> <C>
Long-term obligations, less current portion....... $ 1,570 $ 1,570
------------ ------------
Stockholders' equity:
Preferred stock, $0.001 par value; 15,000,000
shares authorized; no shares issued and
outstanding, actual or as adjusted............. -- --
Common stock, $0.001 par value; 300,000,000
shares authorized; 39,124,197 shares issued and
outstanding, actual; 40,374,197 shares issued
and outstanding, as adjusted................... 153,220 --
Notes receivable from stockholders.............. (6,133) (6,133)
Deferred compensation........................... (183) (183)
Accumulated deficit............................. (43,544) (43,544)
------------ ------------
Total stockholders' equity.................... 103,360
------------ ------------
Total capitalization........................ $ 104,930 $
============ ============
</TABLE>
The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of November 30, 1999 and excludes:
. 6,410,516 shares underlying options outstanding as of November 30, 1999
at a weighted average exercise price of $11.81 per share;
. 3,127,914 shares available for future grants under our option plan; and
. 1,500,000 shares available for issuance under our employee stock purchase
plan.
See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto included in this prospectus.
20
<PAGE>
DILUTION
The net tangible book value of the common stock as of September 30, 1999 was
$103,360,000 or $2.64 per share. After giving effect to the sale of the common
stock pursuant to this offering at an assumed public offering price of $
per share, assuming that the underwriters' over-allotment option is not
exercised and after deducting the estimated underwriting discount and estimated
offering expenses, the net tangible book value at September 30, 1999, would
have been $ , or $ per share.
Net tangible book value per share before the offering has been determined by
dividing net tangible book value (total tangible assets less total liabilities)
by the number of shares of common stock outstanding at September 30, 1999. The
offering will result in an increase in net tangible book value per share of
$ to existing stockholders and dilution in net tangible book value per
share of $ to new investors who purchase shares in the offering. Dilution
is determined by subtracting net tangible book value per share after the
offering from the assumed public offering price of $ per share. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price................................. $
Net tangible book value per share at September 30, 1999...... $2.64
Increase attributable to sale of common stock in this
offering....................................................
-----
Net tangible book value per share after this offering.........
------
Dilution of net tangible book value per share to persons who
purchase shares in this offering............................. $
======
</TABLE>
If the underwriters' over-allotment option were exercised in full, the net
tangible book value per share after the offering would be $ per share, the
increase in net tangible book value per share to existing stockholders would be
$ per share and the dilution in net tangible book value to new investors would
be $ per share.
The above table does not assume the exercise of stock options outstanding at
November 30, 1999. At November 30, 1999, there were 6,410,516 shares of common
stock issuable upon the exercise of outstanding stock options at a weighted
average price of $11.81 per share.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents historical consolidated financial data of Alteon. You
should read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements. The
selected data in this section is not intended to replace the consolidated
financial statements.
We derived the consolidated statement of operations data for the years ended
June 30, 1997, 1998 and 1999 and the consolidated balance sheet data as of June
30, 1998 and 1999 from the audited consolidated financial statements included
in this prospectus. Deloitte & Touche LLP, our independent auditors, audited
these consolidated financial statements. We derived the consolidated statement
of operations data for the period from March 18, 1996 (inception) to June 30,
1996 and the consolidated balance sheet data as of June 30, 1996 and 1997 from
audited consolidated financial statements that are not included in the
prospectus. We derived the consolidated statements of operations data for the
quarters ended September 30, 1998 and 1999 and the consolidated condensed
balance sheet data as of September 30, 1999 from the unaudited condensed
consolidated financial statements included in this prospectus. In the opinion
of management, the unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our results of operations for these
periods and financial condition at that date. The historical results presented
below are not necessarily indicative of future results. See notes to the
consolidated financial statements for an explanation of the method used to
determine the number of shares used in computing basic and diluted loss per
common share.
The as adjusted column of the consolidated balance sheet data reflects the
sale of 1,250,000 shares of our common stock at an assumed public offering
price of $ per share, after deducting the estimated underwriting discount and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Quarter Ended
March 18, 1996 Year Ended June 30, September 30,
(Inception) to --------------------------- -----------------
June 30, 1996 1997 1998 1999 1998 1999
-------------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
Consolidated Statements of Operations
Data:
Net sales............................... $ -- $ 178 $ 13,572 $ 26,254 $ 5,127 $ 12,750
Cost of sales........................... -- 637 7,893 13,385 2,549 5,447
------ ------- -------- -------- ------- --------
Gross profit (loss)..................... -- (459) 5,679 12,869 2,578 7,303
Operating expenses:
Sales and marketing................... 19 1,921 6,485 13,061 2,516 6,820
Research and development.............. 176 4,782 8,816 10,004 2,165 3,989
General and administrative............ 98 744 1,505 2,538 492 1,283
Stock compensation to consultants..... -- -- -- -- -- 7,638
------ ------- -------- -------- ------- --------
Total operating expenses............ 293 7,447 16,806 25,603 5,173 19,730
------ ------- -------- -------- ------- --------
Loss from operations.................... (293) (7,906) (11,127) (12,734) (2,595) (12,427)
Interest income (expense), net.......... 20 122 322 264 65 331
------ ------- -------- -------- ------- --------
Loss before income taxes................ (273) (7,784) (10,805) (12,470) (2,530) (12,096)
Income taxes............................ 1 1 1 73 -- 40
------ ------- -------- -------- ------- --------
Net loss................................ $ (274) $(7,785) $(10,806) $(12,543) $(2,530) $(12,136)
====== ======= ======== ======== ======= ========
Basic and diluted loss per common
share.................................. $(0.48) $ (5.15) $ (2.18) $ (1.65) $ (0.39) $ (1.20)
====== ======= ======== ======== ======= ========
Basic and diluted common shares used in
computation............................ 569 1,511 4,951 7,610 6,540 10,095
====== ======= ======== ======== ======= ========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
September 30,
As of June 30, 1999
----------------------------- -----------------
As
1996 1997 1998 1999 Actual Adjusted
------ ------- ------ ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and equivalents.......... $3,830 $14,242 $9,047 $29,766 $107,103
Working capital............... 3,592 12,892 9,843 25,488 100,121
Total assets.................. 3,996 16,443 19,542 40,621 122,355
Long-term obligations, less
current portion.............. -- 700 1,371 1,919 1,570 1,570
Stockholders' equity:
Convertible preferred
stock...................... 3,993 21,721 29,862 58,294 --
Common stock................ 38 345 1,079 3,224
Total stockholders' equity.... 3,757 13,782 11,228 27,449 103,360
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
the related notes included elsewhere in this prospectus. Our actual results
could differ significantly from those discussed in these forward-looking
statements as a result of certain factors, including those described under
"Risk Factors" and elsewhere in this prospectus.
Overview
We provide next generation Internet infrastructure solutions that are
designed to increase the performance, availability, scalability, manageability
and control of Web servers and Web data centers. Our products include switches,
server adapters and software that combine intelligent Web session management
with the high performance and availability of leading networking infrastructure
solutions. We refer to this combination of capabilities as Web-working.
We provide our solutions to e-commerce companies, Web portals, content
publishers, Web hosting companies, Internet service providers and enterprises.
Our Web switches integrate high-performance Web-working services, including
local and global server load balancing, cache, firewall and router load
balancing, bandwidth management and server security, with greater performance
and cost-effectiveness than using a combination of traditional switches and
traffic management appliances. From our inception on March 18, 1996 through
April 1997, we were primarily engaged in research and development and a
substantial portion of our operating expenses during this period was related to
these activities. In July 1997, we commercially released our line of ACEswitch
Gigabit Ethernet Switches and ACEnic Gigabit Ethernet server adapters. In
February 1998, we commercially released our Alteon 180 Series of Web switches
and our Web OS Internet traffic management software. In July 1999, we began
customer testing of our Alteon 700 Series of Web switches and we expect to
begin customer shipments of these switches in March 2000. Our Alteon 700 Series
represents our most advanced offering of Web switches. We have incurred
significant net losses since inception and, as of September 30, 1999, had an
accumulated deficit of $43.5 million.
We derive revenues primarily from direct product sales and sales to original
equipment manufacturers, or OEMs, and resellers. Revenues are generally
recognized upon product shipment unless significant Alteon obligations remain.
Revenues are recorded net of sales returns, and allowances are calculated based
on actual historical and expected results.
We market our products through our direct sales force, OEMs and resellers. We
sell our products both directly and through OEMs in the United States, and we
sell our products internationally primarily through resellers. A majority of
our sales to date have been to customers located in the United States. In the
fiscal year ended June 30, 1999, our fiscal 1999, sales in the United States
accounted for approximately 75% of net sales, and in the first quarter of
fiscal 2000, sales in the United States accounted for approximately 63% of net
sales. We expect sales in the United States to continue to account for the
majority of our revenues.
A small number of our OEM and reseller customers account for a significant
portion of our revenues. In fiscal 1999, sales to 3Com accounted for 14% of net
sales, sales to IBM accounted for 10% of net sales and sales to Hewlett-Packard
accounted for 10% of net sales. In the fiscal year ended June 30, 1998, our
fiscal 1998, sales to Sun Microsystems accounted for 42% of net sales, sales to
Fuji Xerox accounted for 14% of net sales and sales to 3Com accounted for 10%
of net sales. In the first quarter of fiscal 2000, no individual customer
accounted for 10% or more of net sales. We expect that sales to a small number
of customers will continue to account for a significant portion of our
revenues.
We have a limited operating history, which makes it difficult to predict
future operating results. We believe our success requires expanding our
customer base and successfully introducing next generation
24
<PAGE>
products, including the Alteon 700 Series of Web switches. We intend to
continue to invest significantly in sales, marketing and research and
development and expect to incur operating losses for the foreseeable future.
Our operating expenses are relatively fixed and are based on anticipated
revenue trends, and therefore a delay in revenues from product sales could
cause significant variation in operating results and result in unforeseen
losses. Competition in our market is intense and may result in price reductions
and loss of market share. For example, in fiscal 1999 in some cases up to one-
half of our sales occurred in the last month of the quarter. Accordingly, a
delay in an anticipated sale past the end of a quarter may harm our results of
operations for that quarter. Our operating results will be affected by many
factors, including the following:
. changes in the mix of products we sell;
. the timing of the development and release of our Alteon 700 Series of Web
switches, as well as other product enhancements or new products, and our
ability to manage product transitions;
. deferrals of customer orders in anticipation of product enhancements or
new products;
. announcement or market acceptance of product enhancements or new products
offered by our competitors;
. the length and variability of our sales cycle;
. the mix of channels through which we sell our products;
. the timing and amount of orders from our OEM and reseller customers;
. deferrals of customer orders by our potential customers as companies
attempt to stabilize their computer systems in order to reduce the risk
of computer system problems associated with the occurrence of the Year
2000; and
. general economic conditions and economic conditions specific to the
Internet traffic management industry.
As a result, we believe that period-to-period comparisons of our results of
operations are not meaningful and should not be relied upon as an indicator of
our future performance. Our operating results will likely be below the
expectations of public market analysts and investors in some future quarter or
quarters. If this occurs, the price of our common stock is likely to decline.
Results of Operations
Quarters Ended September 30, 1998 and 1999
Net Sales. Net sales grew to $12.7 million in the quarter ended September 30,
1999, the first quarter of our fiscal 2000, from $5.1 million in the
corresponding quarter of fiscal 1999. Sales of our second generation ACEnic
products in this period represented $4.9 million, an increase of $1.5 million
from the same period last year. Sales of our ACEdirector product line
represented $3.1 million in the first quarter of fiscal 2000, an increase of
$2.4 million from the corresponding quarter of fiscal 1999. Sales of our Alteon
180 Series of Web switches represented $4.4 million in the first quarter of
fiscal 2000, an increase of $3.8 million from the corresponding quarter of
fiscal 1999.
Cost of Sales. Cost of sales consists primarily of costs related to product
components, contract manufacturing and testing, warranty service and quality
assurance for products, as well as costs of associated personnel. Cost of sales
increased to $5.4 million in the first quarter of fiscal 2000 from $2.5 million
in the first quarter of fiscal 1999. This increase was due primarily to an
increase in component and manufacturing costs and warranty reserves associated
with increased product sales. Gross profit as a percentage of net sales, or
gross margin, increased to 57% in the first quarter fiscal 2000 from 50% in the
corresponding quarter of fiscal 1999. This increase in gross margin was due
primarily to a change in our product mix to include more Web switches, which
generally have higher average gross margins than our server adapters. The
increase was partially offset by higher inventory reserves.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, including sales commissions, and product marketing and
promotion costs. Sales and marketing expenses increased to $6.8 million in the
first quarter of fiscal 2000 from $2.5 million in the first quarter of fiscal
1999. Of the
25
<PAGE>
$4.3 million increase, $2.2 million was due to increased personnel costs,
including commissions, associated with establishing a significant domestic
sales force and supporting increased marketing efforts, $0.7 million was due to
increased product marketing costs related primarily to our Web switches, $0.7
million was due to consulting and other services fees and $0.4 million was due
to travel related expenses. We expect that sales and marketing expense will
increase as we add additional personnel to support domestic and international
sales efforts.
Research and Development. Research and development expenses consist primarily
of salaries and related costs of employees engaged in research, design and
development activities. We have not capitalized any software development costs.
These costs are expensed as incurred because we believe our current development
process is completed at essentially the same time as we establish technological
feasibility. Research and development expenses increased to $4.0 million in the
first quarter of fiscal 2000 from $2.2 million in the corresponding quarter of
fiscal 1999. Of the $1.8 million increase, $0.7 million was due to increased
personnel costs associated with the design and development of products based on
our next generation of WebICs, including our Alteon 700 Series of Web switches,
and $0.6 million was due to non-recurring engineering and prototype assembly
expenses related to the design and development of these products. We expect
that research and development expenses will increase as we continue to develop
new products and product enhancements.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for our administrative and financial groups, as
well as legal, accounting and other professional fees. General and
administrative expenses increased to $1.3 million in the first quarter of
fiscal 2000 from $0.5 million in the first quarter of fiscal 1999. This
increase was due to increased personnel costs and professional fees required to
support our growth. We expect that general and administrative expenses will
increase as we establish the infrastructure to support growing operations and
due to the reporting requirements imposed on a public company.
Stock Compensation to Consultants. Since inception, Alteon granted stock
options to consultants to provide services over the vesting periods of the
options. The Company incurred a noncash, nonrecurring charge of $7.6 million in
the first quarter of fiscal 2000 in connection with changes to the vesting
periods. At September 30, 1999, all of these options were vested.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest income from cash and equivalent balances offset by interest expense
associated with debt obligations. Interest income (expense), net increased to
$331,000 in the first quarter of fiscal 2000 from $65,000 in the corresponding
quarter of fiscal 1999. This increase was due primarily to higher interest
income associated with higher average cash and equivalent balances.
Income Taxes. The $40,000 provision for income taxes represents foreign
income taxes and state franchise taxes. We have not provided for or paid
federal income taxes due to our net losses.
Years Ended June 30, 1998 and 1999
Net Sales. Net sales grew to $26.3 million in fiscal 1999 from $13.6 million
in fiscal 1998. All of our $26.3 million in net sales in fiscal 1999 were due
to sales of our Web data center products. Sales of our second generation ACEnic
products in this period represented $10.7 million, an increase of $9.5 million
from fiscal 1998. Sales of our ACEdirector product line represented $6.5
million in fiscal 1999, an increase of $6.2 million from fiscal 1998. Sales of
our Alteon 180 Series of Web switches represented $5.1 million in fiscal 1999,
an increase of $3.5 million from fiscal 1998. Sales of our first generation
ACEnic product represented $3.6 million in fiscal 1999, a decrease of $600,000
from fiscal 1998.
Cost of Sales. Cost of sales increased to $13.4 million in fiscal 1999 from
$7.9 million in fiscal 1998. This increase was due primarily to an increase in
component and manufacturing costs and warranty reserves associated with
increased product sales. Gross profit as a percentage of net sales, or gross
margin, increased to
26
<PAGE>
49% in fiscal 1999 from 42% in fiscal 1998. This increase in gross margin was
due primarily to a change in our product mix to include more Web switches,
which generally have higher average gross margins. Decreased manufacturing and
testing costs due to an increasing shift toward offshore contract manufacturing
and testing functions also contributed to this increase in gross margin. The
increase was partially offset by higher inventory reserves. In the fourth
quarter of fiscal 1999, we increased the inventory reserves by $796,000. Of
this increase, $286,000 was due to a cancellation of an order for customized
products, and $510,000 was the result of increased estimates of excess and
obsolete inventory.
Sales and Marketing. Sales and marketing expenses increased to $13.1 million
in fiscal 1999 from $6.5 million in fiscal 1998. Of the $6.6 million increase,
$2.9 million was due to increased personnel costs, including commissions,
associated with establishing a significant domestic sales force and supporting
increased marketing efforts, $1.9 million was due to increased product
marketing costs related primarily to our Web switches, $1.2 million was due to
consulting fees, facility costs and other services fees and $614,000 was due to
travel related expenses. We expect that sales and marketing expenses will
increase as we add personnel to support domestic and international sales
efforts.
Research and Development. Research and development expenses increased to
$10.0 million in fiscal 1999 from $8.8 million in fiscal 1998. Of the $1.2
million increase, $857,000 was due to increased personnel associated with the
design and development of products based on our next generation of WebICs,
including our Alteon 700 Series of Web switches and $375,000 was due to the
depreciation of equipment related to the design and development of these
products. We expect that research and development expenses will increase as we
continue to develop new products and product enhancements.
General and Administrative. General and administrative expenses increased to
$2.5 million in fiscal 1999 from $1.5 million in fiscal 1998. This increase was
due to increased personnel costs and professional fees required to support our
growth. We expect that general and administrative expenses will increase as we
establish the infrastructure to support growing operations and due to the
reporting requirements imposed on a public company.
Interest Income (Expense), Net. Interest income (expense), net decreased to
$264,000 in fiscal 1999 from $322,000 in fiscal 1998. This decrease was due
primarily to higher interest expense associated with an equipment loan that we
established in March 1998.
Income Taxes
We have not provided for or paid federal income taxes due to our net losses.
The $73,000 provision for income taxes represents foreign income taxes and
state maximum franchise taxes. As of June 30, 1999, we had available net
operating loss carryforwards for federal and state income tax purposes of
approximately $20.5 and $2.1 million. These net operating loss carryforwards
will expire at various dates through 2019 if they are not used. Utilization of
the net operating loss carryforwards may be subject to annual limitations due
to ownership change provisions. Annual limitations may result in the expiration
of the net operating losses before they can be utilized. We have recorded a
full valuation allowance against our deferred tax asset due to uncertainties
surrounding the realization of this asset.
Years Ended June 30, 1997 and 1998
Net Sales. We did not commercially release any products until July 1997. As a
result, net sales of $178,000 for the year ended June 30, 1997, our fiscal
1997, were due to sales of a limited number of products for customer testing
purposes. In July 1997 we commercially released our first server adapter
product and in February 1998 we commercially released our first Web switch
product and the first version of our Web OS software. As a result, net sales of
$13.6 million in fiscal 1998 were due to commercial sales of these Web data
center products. Sales of our first ACEswitch product represented $5.8 million,
sales of our first generation ACEnic product represented $4.2 million, sales of
our Alteon 180 Series of Web switches, introduced in
27
<PAGE>
February 1998, represented $1.6 million, and sales of our second generation
ACEnic product represented $1.2 million.
Cost of Sales. Cost of sales increased to $7.9 million in fiscal 1998 from
$637,000 in fiscal 1997. This increase was due primarily to component and
manufacturing costs associated with commercial product sales. Gross margin was
42% in fiscal 1998 and was negative in fiscal 1997. This improvement in gross
margin was due primarily to commencement of large scale manufacturing and
offshore contract production resulting in reduced product costs.
Sales and Marketing. Sales and marketing expenses increased to $6.5 million
in fiscal 1998 from $1.9 million in fiscal 1997. Of the $4.6 million increase,
$2.4 million was due to increased personnel costs, including commissions,
associated with establishing a sales force, $1.0 million was due to commencing
marketing efforts, $900,000 was due to travel and facility expenses associated
with the increase in sales and marketing personnel and $200,000 was due to
consulting fees required to define our marketing strategy.
Research and Development. Research and development expenses increased to
$8.8 million in fiscal 1998 from $4.8 million in fiscal 1997. Of the $4.0
million increase, $1.9 million was due to increased personnel costs associated
with the design and development of our Web switch products and continued
development of our server adapter products, $1.4 million was due to consulting
fees, facility costs and other services fees associated with the increased
personnel and $700,000 was due to the depreciation of equipment and prototype
expenses associated with the design and development of our Web switch products
and continued development of our server adapter products.
General and Administrative. General and administrative expenses increased to
$1.5 million in fiscal 1998 from $744,000 in fiscal 1997. Of this increase,
$506,000 was due to increased personnel costs and professional fees required to
support our growth and to commence commercial production of products and
$150,000 was due to additional reserves for bad debt expense.
Interest Income (Expense), Net. Interest income (expense), net increased to
$322,000 in fiscal 1998 from $122,000 in fiscal 1997. This increase was due
primarily to higher balances of cash and equivalents.
28
<PAGE>
Quarterly Results of Operations
The following table depicts statement of operations data for the most recent
eight quarters. You should read the following table in conjunction with the
consolidated financial statements and related notes in this prospectus. In our
opinion, this unaudited information has been prepared on the same basis as our
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the unaudited
quarterly results. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------
Dec 31, Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30, Sept 30,
1997 1998 1998 1998 1998 1999 1999 1999
------- ------- -------- -------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 4,193 $ 3,915 $ 3,797 $ 5,127 $ 6,559 $ 6,702 $ 7,866 $ 12,750
Cost of sales........... 2,108 2,491 2,092 2,549 3,675 3,157 4,004 5,447
------- ------- ------- ------- ------- ------- ------- --------
Gross profit ........... 2,085 1,424 1,705 2,578 2,884 3,545 3,862 7,303
Gross margin............ 49.7% 36.4% 44.9% 50.3% 44.0% 52.9% 49.1% 57.3%
Operating expenses:
Sales and marketing.... 1,298 1,945 2,167 2,516 3,072 3,346 4,127 6,820
Research and
development........... 2,100 2,776 2,400 2,165 2,641 2,280 2,918 3,989
General and
administrative........ 350 362 532 492 631 690 725 1,283
Stock compensation to
consultants........... -- -- -- -- -- -- -- 7,638
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 3,748 5,083 5,099 5,173 6,344 6,316 7,770 19,730
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations.... (1,663) (3,659) (3,394) (2,595) (3,460) (2,771) (3,908) (12,427)
Interest income
(expense), net......... 124 63 (19) 65 91 33 75 331
Income taxes............ -- -- 1 -- -- -- 73 40
------- ------- ------- ------- ------- ------- ------- --------
Net loss................ $(1,539) $(3,596) $(3,414) $(2,530) $(3,369) $(2,738) $(3,906) $(12,136)
======= ======= ======= ======= ======= ======= ======= ========
Basic and diluted loss
per common share....... $ (0.38) $ (0.65) $ (0.59) $ (0.39) $ (0.46) $ (0.35) $ (0.45) $ (1.20)
======= ======= ======= ======= ======= ======= ======= ========
Basic and diluted shares
used in computation.... 3,998 5,540 5,790 6,540 7,312 7,892 8,697 10,095
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
Our quarterly operating results have fluctuated significantly, and we expect
that future operating results will be subject to similar fluctuations for a
variety of reasons, many of which are substantially outside our control.
Liquidity and Capital Resources
Since inception in March 1996, we have financed our operations and capital
requirements primarily from the sale of $79.6 million of common stock in our
initial public offering in September 1999, the sale of $56.8 million of
preferred stock and net borrowings of $3.2 million under an equipment loan. Net
cash used in operating activities was $0.8 million in the first quarter of
fiscal 2000, $5.6 million in fiscal 1999, $13.3 million in fiscal 1998 and $6.6
million in fiscal 1997. Cash used in operating activities consisted primarily
of cash utilized to fund operating losses, partially offset in fiscal 1997,
fiscal 1998 and the first quarter of fiscal 2000 by changes in working capital.
Receivable days outstanding decreased to 35 days at September 30, 1999 from 44
days at June 30, 1999 as sales were spread more evenly throughout the current
quarter compared to the prior quarter.
During fiscal 1999, we acquired $2.9 million in property and equipment,
primarily computer hardware and software, leasehold improvements and office
furniture and equipment and, during the first quarter of fiscal 2000, we
acquired $1.5 million of property and equipment. We expect capital expenditures
during the remainder of fiscal 2000 to be approximately $4.0 million.
As of September 30, 1999, we had cash and equivalents of $107.1 million. We
have a revolving bank line of credit totaling $12.0 million, which expires in
December 2000. As of September 30, 1999, there were no borrowings outstanding
under this line. We also have a borrowing arrangement for up to $4.0 million
for the
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purchase of equipment, payable in monthly installments, through June 2002. At
September 30, 1999, we had approximately $2.9 million outstanding on this
equipment loan, which bears interest at the rate of prime plus 0.75%. At
September 30, 1999, this rate was 9%. At September 30, 1999, we had
approximately $1.1 million of noncancellable purchase commitments, primarily
associated with inventory purchases.
In future periods, we anticipate significant increases in working capital on
a period-to-period basis primarily as a result of planned increased product
sales and higher relative levels of inventory. We also anticipate that we will
continue to invest significant amounts in property and equipment related to
expansion of our facilities and to support increased sales and marketing as
well as ongoing research and development activities. We believe that our
current balances of cash and equivalents, and amounts available under our
credit facilities, will satisfy our expected operating losses and working
capital and capital expenditure requirements for at least the next 12 months.
However, we cannot assure you that our predictions with respect to our
operating expenses and capital expenditure requirements are accurate.
Therefore, we may require additional funds to support our working capital and
operating expenses or for other purposes sooner than expected. We may seek to
raise additional funds through public or private offerings or debt financings.
We cannot assure you that financings will be available, or if available, will
be on reasonable terms, nor can we assure you that these financings will not be
dilutive to our stockholders.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
our fiscal year ending June 30, 2001. We believe that this statement will not
have a significant impact on our financial results.
We adopted Statement of Position, or SOP, No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 in
the first quarter of fiscal 2000. Our adoption of this statement had no
material impact on our results of operations or financial position.
Year 2000 Compliance
Background of Year 2000 issues. Many currently installed computer and
communications systems and software products are unable to distinguish dates
following December 31, 1999 from dates prior to such date. This situation could
result in system failures or miscalculations causing business disruptions. As a
result, many companies' software and computer and communications systems may
need to be upgraded or replaced to become Year 2000 compliant as specified
below.
We have defined Year 2000 compliant as the ability to:
. Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. Function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. Respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner;
. Store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century; and
. Recognize year 2000 as a leap year.
Our product testing and licensing. We have tested all of our current products
for Year 2000 compliance. We derived our testing method from our review and
analysis of the Year 2000 testing practices of software vendors, relevant
industry Year 2000 compliance standards and the specific functionality and
operating environments of our products. The tests are run on all supported
platforms for each release of our products and
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include testing for date calculations and internal storage of date information
with test numbers starting in 1999 and going beyond the Year 2000. Based on
these tests, we believe our products to be Year 2000 compliant.
Customer claims. We may be subject to customer claims to the extent our
products are not Year 2000 compliant. Liability may result to the extent our
products are not able to store, display, calculate, compute and otherwise
process date-related data. We could also be subject to claims based on the
failure of our products to work with software or hardware from other vendors.
Our external vendors. We have identified and contacted our significant
suppliers, significant service providers and sole manufacturer to determine the
extent to which our interface systems are vulnerable to those third parties'
failures to remediate their own Year 2000 issues. All of our significant
suppliers, significant service providers and our sole manufacturer have
indicated that they are or are expecting to achieve Year 2000 compliance by
December 31, 1999. We are continuing to monitor the progress of third parties
that are critical to our business. We cannot be certain that the
representations of these third parties are accurate or that they will reach
Year 2000 compliance in a timely manner. In the event that any of our
significant suppliers, significant service providers or our sole manufacturer
do not achieve Year 2000 compliance in a timely manner, and we are unable to
replace them with alternate sources, our business would be harmed.
Our internal business software. During fiscal 1999, we upgraded our internal
business software to a version that the software vendor has indicated is Year
2000 compliant. This upgrade has been fully implemented. As a result, we
believe that our internal financial systems are Year 2000 compliant. However,
if due to unforeseen circumstances, the upgrade fails to store, display,
calculate, compute and otherwise process date-related data, the Year 2000 could
have a material impact on our operations.
Our internal non-financial software and equipment. We have taken an inventory
of all of our non-financial software and equipment that may be affected by the
Year 2000 and have identified the non-financial software and equipment that is
critical to our operations. We believe that our non-financial software and
equipment will be Year 2000 compliant by the end of 1999. If we are unable to
achieve Year 2000 compliance for our major non-financial systems and equipment,
the Year 2000 could have a material impact on our operations.
Costs of addressing Year 2000 compliance. Based on our evaluation, we have
not in the past, and do not believe that in the future, we will incur
significant expenses or be required to invest heavily in additional computer
system improvements to be Year 2000 compliant. We do not believe the cost of
addressing the Year 2000 non-compliance issues identified to date will exceed
$250,000. However, significant uncertainty exists concerning the potential
costs and effects associated with Year 2000 compliance. Any Year 2000
compliance problem experienced by us or our customers could decrease demand for
our products, which could harm our business.
Contingency planning. We have a contingency plan and will continue to monitor
our internal communication and management systems.
Recent legislation. Legislation was recently passed by Congress that purports
to limit liability for failure to be Year 2000 compliant. We cannot assure you
that this legislation will limit our liability.
Year 2000 issues affecting our business, if not adequately addressed by us,
our significant suppliers, our significant service providers and our sole
manufacturer could have a number of "worst case" consequences. These include:
. our inability to ship our products due to the failure of our sole
suppliers, our significant service providers and our sole manufacturer to
achieve Year 2000 compliance;
. claims from our customers asserting liability, including liability for
breach of warranties related to the failure of our products and services
to function properly; and
. our inability to manage our own business.
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BUSINESS
Overview
We are a leading provider of next generation Internet infrastructure
solutions that are designed to enable e-businesses to meet the demands
resulting from the rapid growth of the Internet. Our Web data center products,
which include switches, server adapters and software, are optimized to meet the
specific challenges of managing Web application traffic and provide the high
performance of leading networking infrastructure solutions. We refer to this
combination of capabilities as Web-working. Our solutions are designed to
increase the performance, scalability, manageability, availability and control
of Web servers and Web data center infrastructure. We provide our Web-working
solutions to e-commerce companies, Web portals, content publishers, Web hosting
companies, Internet service providers, server vendors and enterprises.
Industry Background
The Internet, a vast network of interconnected public and private data
networks, has emerged as an important communications and commerce medium for
consumers and enterprises. International Data Corporation, or IDC, an industry
research firm, estimates that the number of users of the Internet will increase
from 142 million in 1998 to 502 million by the end of 2003. With the emergence
of faster access technologies such as digital subscriber line, cable modem and
wireless, the speed and flexibility with which users are accessing the Internet
are also increasing. Furthermore, the advent of the World Wide Web has
facilitated the transmission of new, more complex content types, such as
graphics, audio and video, significantly expanding the capabilities of the
Internet. As a result, a growing number of companies are building business
models around the Internet and developing mission-critical business
applications. These "e-businesses" include:
. e-commerce companies, which sell goods or services over the Web;
. Web portals, which are frequently used starting points for Web browsing;
. content publishers, which are Web sites providing information to
consumers or business users;
. Web hosting companies, which house and manage Web sites for other
companies;
. Internet service providers, or ISPs, which largely operate the Internet
access and transport networks; and
. enterprises, such as corporations and universities.
E-businesses rely on the Web to communicate with customers and suppliers,
access and share business information, engage in marketing activities, provide
Web-based services and conduct e-commerce transactions. IDC projects that
worldwide e-commerce revenue will grow from $50.3 billion in 1998 to $1.3
trillion in 2003.
Increasing Demands on Web Servers
The growing use of the Internet as a medium for commerce and mission-critical
business applications is placing a significant processing burden on the
computer servers, called Web servers, that function as the main repositories of
e-business applications and information. As businesses increasingly depend on
the Web to conduct operations, Web server availability and performance are
becoming increasingly important for generating revenue and communicating with
customers and vendors. For example, delayed Web server response times may
encourage frustrated customers to pursue business with an on-line competitor or
drive them away indefinitely, particularly if the customer has a time-sensitive
request. A survey by Jupiter Communications, an industry research firm, showed
that 32% of users who have trouble accessing a Web site stop using it or find
an alternative. In almost all cases, the availability and performance of Web
servers and the quality of a customer's Web site experience directly impact
revenue generation capacity for an e-business.
At the same time, the amount of Web application traffic that servers are
required to process is increasing as a result of the growth in the number of e-
businesses. Web application traffic involves the exchange of multiple packets
of related data associated with a single transaction, often from multiple
servers. We refer to these exchanges as "Web sessions." Examples of Web
sessions include a user filling a "shopping cart" at an e-commerce site or a
business verifying the status of an order from a vendor. The effective
management of Web session traffic is extremely complex and can consume a
substantial portion of a Web server's processing power.
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In response to the rapid growth and complexity of Internet traffic and the
increasingly mission-critical nature of Web applications, e-businesses are
buying Web servers at an increasing rate. IDC estimates that corporate spending
on Internet servers will increase from $1.6 billion in 1998 to $5.9 billion in
2002. In addition, to facilitate the increase or "scaling" of Web server
capacity, e-businesses are dividing applications among multiple function-
specific servers to identify and isolate server bottlenecks more easily and add
additional server resources without disrupting the entire application. E-
businesses are also building redundant groups of Web servers, called server
farms, in multiple locations in an attempt to minimize downtime. The need to
quickly and cost-effectively scale applications across multiple servers and
server farms without affecting users has created significant operational and
economic challenges for e-businesses. Furthermore, the growing number of Web
servers, along with the additional infrastructure equipment required to
interconnect these servers, has increased the complexity of Web data centers
and is presenting significant management challenges. The inability of an e-
business to manage Web data centers effectively can result in lost revenues and
disappointed customers.
Limitations of Existing Infrastructure Equipment
The rapid growth in Web session traffic and the increase in the complexity of
Web data centers are creating a need for advanced Internet traffic management
solutions. Traditional networking equipment, consisting of devices known as
switches and routers, generally lacks the capability to manage Web session
traffic. The routers and switches that largely comprise the Internet
communications infrastructure today process traffic at the Internet Protocol,
or IP, layer of the Open System Interconnect, or OSI, reference model, a model
used to characterize communications between computers. The IP layer is also
known as Layer 3. In Layer 3 communications, data is processed in individual,
discrete packets. Each data packet on its own does not carry information about
the status of a Web session or information regarding the specific type of
content requested from a Web server by a user. To direct traffic on the basis
of Web session information, a device must be able to combine related packets
and process information contained at Layers 4 and above in the OSI reference
model, which we refer to as the Web session layers. To permit the management of
Web session traffic and to improve the manageability and scalability of Web
server farms, e-businesses are implementing new Internet traffic management
appliances that are capable of operating at Web session layers. These Internet
traffic management appliances include:
. Local server load balancers, which group a number of Web servers at the
same location into a large virtual server, monitor the status and usage,
or "load," on the actual servers and direct user requests to the best
performing and most available server;
. Global server load balancers, which enable geographic distribution of Web
servers and content to speed the access to information by determining the
geographical location of a requesting user and directing the user's
request to the best performing, most available and closest server farm
that contains the requested information;
. Bandwidth managers, which improve the performance, reliability and
effective capacity of a Web server farm by classifying, prioritizing and
controlling server traffic based on application type, user identity,
destination Web site, content type and other characteristics; and
. Non-server load balancers, which provide load balancing for "in-line
devices," or devices that are located directly in the traffic path
between users and Web servers. Examples of in-line devices commonly used
in a Web data center include firewalls and transparent caches. Firewalls
filter and pre-process traffic entering and exiting a network to enforce
security. Transparent caches store copies of previously requested
information from remote Web servers, transparently intercept user
requests to the Internet and fulfill the requests with locally-stored
information to reduce wide area network usage and to accelerate user
response time.
While these existing Internet traffic management appliances are capable of
performing Web session management functions, they are typically built on PC-
based platforms and commercial operating systems that generally lack the
combination of performance capabilities, high availability and scalability
required to support
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mission-critical Web data centers. These Internet traffic management appliances
rely principally upon a centralized processor, such as a PowerPC or an Intel
Pentium, to perform Web session management functions. As Web traffic increases
in volume and complexity, the performance of centralized processor-based
appliances generally declines. Most existing appliances are single-function
devices that do not integrate multiple functions, such as local and global load
balancing, into a single device. If multiple Web traffic management functions
are to be implemented, this lack of integration adds to the complexity and
management challenges of Web data centers.
Current Web Data Center Infrastructure
[Description of Graphic: Graphic depicts components of the current Web data
center infrastructure. It depicts the Internet in the lower right hand corner.
Connected to the Internet are Web data center infrastructure components,
including multiple Web servers which are connected to Layer 2/3 Web data center
switches, load balancers, bandwidth managers and firewalls as components. A
stop sign is depicted on the right hand side of each type of component.]
New Requirements of the Web Data Center
As e-businesses attempt to scale their Web server infrastructure to
accommodate the growth in Web session traffic, improving the reliability and
performance of Web data centers is driving a new set of requirements for
Internet infrastructure solutions. These solutions should offer:
High Speed Packet and Web Session Switching. Because Web data centers
increasingly have a multi-tiered, application-specific server structure,
infrastructure equipment must support traffic not only between Web servers and
end users but also among servers within the Web data center and between Web
data centers. In addition, the increasing amount of Internet traffic and, in
particular, the increasing amount of bandwidth-intensive audio and video
traffic are driving the need for high-speed connectivity within the Web data
center. Increasingly, Web data center infrastructure solutions must be capable
of supporting multiple Fast Ethernet, or 100 megabits per second, and Gigabit
Ethernet, or 1,000 megabits per second, connections. Ethernet is the
predominant data transmission technology for local area and wide area networks.
Next generation Web data center infrastructure solutions must be able to manage
data packets and Web sessions at these high data transmission speeds.
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Scalability and Manageability. Next generation Web data center infrastructure
solutions should be scalable and upgradable within the rapidly growing Web data
center environment with minimal downtime and administrative complexity. Given
the rapid growth in Internet applications and the emergence of new content
types, next generation Web data center infrastructure solutions must meet
today's performance requirements while providing an architecture that can be
managed easily and expanded cost-effectively as a business grows.
High Availability. To support the increasing mission-criticality of e-
business applications, next generation Web data center infrastructure solutions
must be designed to ensure high system uptime for the Web data center. This
includes redundancy and automatic recovery, known as "failover," in the event
of an outage at the application, content, server, server link, switch or
network level. Furthermore, these solutions should ensure Web data center
availability upon the failure of an in-line device, such as a firewall or
cache.
Bandwidth and Traffic Control. E-businesses increasingly want to apportion
and manage bandwidth based on a range of criteria, including Web site,
application type, content type, time sensitivity and user identity. The ability
to control the allocation and usage of bandwidth and to optimize the usage of
network and system resources through traffic redirection helps to ensure that
critical applications and key users are assigned the proper resources.
Cost Effectiveness. Next generation Web data center infrastructure solutions
should reduce operating costs by simplifying the provisioning and management of
Web data center services. These solutions should also provide Web data center
administrators with the ability to relocate, remove and add servers and other
infrastructure equipment without service disruption. In addition, e-businesses
increasingly seek to capture statistics and accounting data to protect and
generate revenue by offering preferential services and verifying service
levels.
To date, networking infrastructure equipment has primarily addressed speed
and performance requirements. On the other hand, although existing PC-based Web
traffic management appliances have the intelligence to manage Web sessions,
they often lack the performance, scalability and reliability required for
mission-critical Web data centers. Accordingly, to meet the requirements of
their Web data centers, e-businesses increasingly need solutions that integrate
the intelligence of Web session management capabilities with the speed and
resiliency of leading networking equipment.
The Alteon WebSystems Solution
We provide next generation Internet infrastructure solutions that are
designed to increase the performance, scalability, manageability, availability
and control of Web servers and Web data centers. Our Web data center products
include Gigabit Ethernet switches, server adapters and software that combine
intelligent Web session management with the high performance of leading
networking infrastructure solutions. We refer to this combination of
capabilities as Web-working.
We provide our Web-working solutions to e-commerce companies, Web portals,
content publishers, Web hosting companies, Internet service providers and
enterprises. Our Web data center switches, which we call Web switches,
integrate multiple high-performance Web-working services with greater
performance and cost-effectiveness than using a combination of traditional
switches and stand alone or single function Internet traffic management
appliances. Greater integration can improve our customers' responsiveness to
Web users by reducing delay, removing multiple points of potential system
failure and simplifying management of the Web data center. It also can reduce
the overall capital costs associated with building, maintaining and growing a
Web data center. Our server adapters provide Gigabit Ethernet connectivity to
servers and can increase their access speed while off-loading server processing
tasks. Our switch and adapter architectures are scalable to accommodate a
customer's growth. We believe that these features are crucial to e-businesses
operating Web data centers today and will become increasingly important in the
future.
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Our Web-working solutions are based on our core software and hardware
technologies:
Web OS. All of our Web switches can support our Web OS, a suite of Web
traffic control software for e-businesses. Web OS allows Web data center
administrators to deploy Web OS features in any combination and to enable new
features as new requirements arise. Web OS is designed to offer the following
features:
. Local server load balancing;
. Global server load balancing;
. Policy-based traffic redirection, which enables cache, firewall and
router load balancing;
. High availability configurations;
. Server security; and
. Bandwidth management.
Distributed Processing Architecture Using WebICs. Our Web switches implement
a distributed processing architecture that is optimized for processing-
intensive Web session management. We have developed application specific
integrated circuits, or ASICs, which have been designed specifically to address
the requirements of the Web data center. Our ASICs, which we call WebICs, are
deployed in our Web switches in a distributed architecture with a WebIC at each
port or port group, providing dedicated processing capacity. Our current Web
switches can support a session switching rate of approximately 74,000 sessions
per second on a Fast Ethernet port, which we believe is the maximum session
rate possible, or "wire speed," for Fast Ethernet. Our WebICs are also
programmable, providing the flexibility to integrate new Web traffic management
capabilities through software upgrades.
Next Generation Web Data Center Infrastructure
[Description of Graphic: Graphic depicts components of a new generation of Web
data center networks. It depicts the Internet in the lower right hand corner.
Connected to the Internet are Web data center infrastructure components,
including multiple Web servers which are connected to Alteon Layer 2-7 Web data
center switches, firewalls and routers as components.]
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The key benefits of our solutions are:
High-Speed, Web Intelligent Switching. Our Web OS and Web switches combine
Fast Ethernet and Gigabit Ethernet connectivity with both Layer 3 data packet
forwarding and high-performance Web session switching to provide a broad set of
Web traffic control capabilities. By intergrating multiple Web traffic
management functions into a single platform, our solutions are designed to
reduce the delay created by multiple, single-function appliances located in the
data path. Our Alteon 700 Series of Web switches, like our existing families of
Web switches, offers robust Web session switching capabilities based on Web OS.
In addition, the Alteon 700 Series of Web switches is designed to offer wire
speed Web session management across all Fast Ethernet and Gigabit Ethernet
ports.
Rapid and Efficient Scalability. Our Web OS software is designed to let e-
businesses scale their Web data center infrastructure as their businesses
expand. With Web OS, e-businesses can add Web traffic management functions on
an as-needed basis through a software upgrade. In addition, our Web switches
are scalable in performance, port density and feature support. Our distributed
architecture, which includes a WebIC on every port or port group, is designed
to allow the capacity of our Web switches to be increased rapidly and cost-
effectively simply by adding more ports.
System-Level High Availability. Local and global server load balancing
capabilities enable our Web switches to monitor the status and performance of
each server, server farm and server site and to redirect traffic to alternate
servers and Web data centers in the event of a system failure or server
overload. All of our Web switches feature automatic failover to redundant
switches upon failure. Unlike two port Internet traffic management appliances,
our switches also support multiple input and output connections, referred to as
"full-meshed topology," with redundant network links.
Increased Flexibility and Control. Our Web switches give Web data center
administrators the ability to select and direct traffic flexibly and
transparently through a designated network path or to a specific device or
device group based on a defined set of policies, regardless of the original
traffic destination. This feature, known as policy-based traffic redirection,
helps Web data center administrators optimize network and server resources. In
addition, bandwidth management features on our Alteon 700 Series of Web
switches are designed to allow Web data center administrators to allocate and
prioritize bandwidth to control resource usage.
Cost Effectiveness. We believe that our Web data center solutions provide
significant cost savings for our customers. Our solutions integrate multiple
functions in a single Web switch, reducing capital, management and training
costs. In addition, because our Web OS software can be implemented
incrementally, Web data center administrators can typically deploy additional
services without costly hardware upgrades. Our Web data center infrastructure
solutions increase Web server efficiency by offloading processing tasks from
servers, thereby allowing them to support more users and applications.
The Alteon WebSystems Strategy
Our objective is to be the leading supplier of Web-working infrastructure
solutions. The key elements of our strategy are:
Extend Early Market Leadership in the Web-working Market. We pioneered Web-
working by shipping the first Web switch in February 1998. Our focus on
providing infrastructure solutions optimized for managing traffic in the Web
data center has enabled us to build a strong position in the Web-working
market. Unlike the Layer 3 switching and routing market, which is dominated by
a few large companies, we believe the market for solutions optimized for
managing traffic at the Web session layers is in its infancy. We believe our
infrastructure solutions are among the most comprehensive Web traffic
management solutions available today that address the increasingly stringent
performance, scalability and reliability requirements of mission-critical Web
data centers. We began customer testing of our newest family of Web switches,
the Alteon 700 Series, in July 1999 and expect to begin customer shipments of
these switches in March 2000. The Alteon 700 Series is
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designed to extend our performance leadership. Based on product simulations, we
believe it will have the ability to process up to 12,000,000 sessions per
second per switch, which we believe would be the highest session switching rate
in the industry. We believe this capacity, combined with port density of up to
128 Fast Ethernet or 32 Gigabit Ethernet ports, will allow us to provide our
customers with a cost-effective and easily-managable upgrade path as they grow
their Web data centers.
Leverage our Web-working Technology Leadership. Acuitive, Inc., an industry
research company, has described our Web switches as demonstrating industry
leading performance. We offer customers a rich set of value-added Web traffic
control functions based on our ability to manage traffic at the Web session
layers in parallel on every port. By integrating these functions on a single
platform, we believe that our solutions offer higher performance and are more
scalable and cost-effective than existing Web traffic management appliances
that use standard processors and commercial operating systems. We intend to
leverage Web OS and our distributed WebIC architecture to integrate many new
traffic control features in our products. We believe that our ability to
provide enhanced features using a common platform offers a significant
competitive advantage. As an example of our technical leadership, we developed
a specification for extending the standard Ethernet frame size to improve the
performance of high-speed systems. This technology, known as Jumbo Frames, is
supported by Compaq, IBM, Microsoft Corporation, Silicon Graphics, Inc. and
other server suppliers. We co-authored a proposal for this capability with
UUNET, Juniper Networks Inc. and Packet Engines/Alcatel and submitted it in
June 1999 to the Internet Engineering Task Force with the objective of making
it an industry standard.
Build Relationships with Key Companies in the Internet Marketplace. We intend
to complement our direct sales force with a broader set of Internet-focused
resellers, system integrators and Web service outsourcing leaders. In June
1999, we entered into an agreement with Lucent under which Lucent has the
ability to include Alteon Web switches in its carrier network offerings from
the InterNetworking System unit. Under this agreement, Lucent can resell our
Web switches as part of the "Integrated IP Solutions for Service Providers"
program. Our open platform technology program, or Web-Enabled Business
Solutions, known as W.E.B.S., was formed to facilitate cooperation among
suppliers of products for Web data centers, which is an important component of
our distribution and technology integration strategy. Current members of
W.E.B.S. include Internet infrastructure providers such as CacheFlow, Inc.,
Check Point Software Technologies Ltd., Hewlett-Packard Company, Inktomi
Corporation, Network Appliance, Inc., Novell Inc. and Sandpiper Networks Inc.
We believe that these relationships provide an important competitive advantage
by helping us to anticipate industry trends and supply compatible solutions to
joint customers. For example, Intermedia Communications Inc. became a customer
as a result of our relationship with Inktomi, their cache vendor.
Increase Penetration of Leading E-businesses. We are focusing our near-term
sales and marketing initiatives on leading e-commerce companies, Web portals,
content publishers, Web hosting companies, Internet service providers and
enterprises. Similar to the way universities led the adoption of router
backbones, we believe that these early adopters of Internet technologies will
lead the way to widespread adoption of Web-working infrastructure solutions.
Expand our Supplier Relationships with Leading Server Manufacturers. We
believe our ACEnic Gigabit Ethernet server adapter products have helped us
establish close relationships with a majority of the leading server vendors.
These OEM customers provide us with valuable insights into Web server and Web
data center application trends and technologies. Because our Web switches and
server vendors' hardware and software offerings target a common environment,
the Web data center, we should mutually benefit from increased cooperation in
marketing, distribution, service and joint technology development. We plan to
broaden our distribution and service relationships with leading server vendors
to include not only our ACEnic server adapters but also our Web switch and Web
OS products.
Enhance Customer Service and Support. We believe that our ability to provide
high-quality customer service and support is a key factor in attracting and
retaining customers. Prior to the installation of our Internet traffic
management solutions, our systems engineering team works with customers to
analyze and understand
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their specific network needs. Our worldwide technical support team provides
remote support through a full time, or "24x7," help desk and assists our
customers with online queries and software upgrades. In addition, we provide
consulting services to our customers. We intend to enhance our existing sales
and customer service efforts by expanding our system engineering and customer
support service organizations on a worldwide basis. Given the increasingly
mission-critical nature of our customers' Web data centers, we believe our
ability to provide differentiated service and support is a competitive
advantage.
Technologies
All of our Web switches are built on a technology core that consists of our
Web OS traffic management software, our distributed processing architecture and
our family of WebICs. This technology core forms the basis of our advanced Web
switch and Gigabit Ethernet server adapter products, which are designed to
optimize Web data center performance, availability, scalability and
managability.
Web OS Software
Our Web switches run Web OS, a suite of Web traffic management software.
These features are designed to offload processing from Web servers, scale Web
servers and applications, and increase the availability, managability and
control of Web data center infrastructures. In addition to offering a variety
of Web traffic management features, Web OS allows our Web switches to
communicate with, and be dynamically controlled by, external servers and
network management devices. This enables customers with unique traffic
management requirements to customize Web OS operations to meet their specific
needs. Web OS is easily expandable, allowing customers to purchase and enable
additional Web traffic management features as they become available through the
use of a simple software key.
Distributed Processing Architecture
Our distributed processing architecture is the key to our scalable, high-
performance and cost-effective solutions for Web data center traffic
management. The distributed processing architecture used in our Web switch
products is specifically designed for processing-intensive Web traffic
management. With two reduced instruction set computing, or RISC, processors
located on every port or port group on the switch, the processing tasks for
each Web session are distributed across the four RISC processors at the input
and output ports for parallel operations. This not only increases Web session
throughput, but also reduces delay as the processing queues are shortened with
parallel processing. Our Web switches can support wire speed session switching
rates on a Fast Ethernet port which we believe is among the highest session
rates in the market. Based on testing conducted by the Tolly Group, we believe
that distributed processing also enables our Web switches' performance to
increase linearly with additional ports. As a result, administrators can scale
their Web data centers by adding servers and router connections without eroding
the performance of our Web switch. Because of the significant processing
capacity provided by our distributed architecture, future Web traffic
management features can be added with minimal performance impact.
Proprietary WebICs
Each port on our ACEdirector and ACEswitch 180 Series Web switches has a
dedicated WebIC that consists of a hardware-assisted forwarding engine and two
RISC processors. Two additional centralized RISC processors provide support for
switch-wide management functions. On each port, the WebIC forwarding engine
handles hardware-assisted packet forwarding, and the two RISC processors handle
Web traffic management functions, such as load balancing and traffic
redirection, in addition to traditional Layer 3 packet forwarding. Background
processing tasks, including Simple Network Management Protocol, or SNMP,
routing updates, server monitoring and global server site performance updates,
are provided separately by the two centralized management RISC processors. In
our current generation of Web switches, up to ten WebICs are interconnected,
which permits up to 20 RISC processors to be cost-effectively implemented in a
single Web switch. We believe that this could enable our current generation of
Web switches to process up to 296,000 sessions per second. We believe that the
performance and scalability enabled by the integration of RISC processors into
our WebICs significantly differentiates our Web traffic management products.
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Our Alteon 700 Series, which is currently being tested by our customers, is
designed to improve on our current generation of Web switches by integrating a
new one million gate WebIC. This new WebIC also has two RISC processors that
exclusively support service-specific features. The WebIC implements traditional
Ethernet and Layer 3 packet switching, as well as processing-intensive Web
session layer functions, directly in hardware rather than handling them in
software within the RISC processors. For example, in implementing server load
balancing, only Web session setup, which consists of selecting the best server
based on the user-configured load balancing algorithm, is performed by the RISC
processors. Once the server is identified, all packets in the same Web session
are switched to the selected server using hardware only, bypassing the RISC
processors. This means that the two RISC processors have significant excess
capacity, permitting the addition of new capabilities in the future. This new
WebIC is also capable of extracting information embedded in the data portion of
packets, a capability known as Web content parsing, which allows processing-
intensive features such as the following to be implemented with minimal
performance impact:
. URL-based load balancing, which is the ability to redirect Web sessions
to servers based on the uniform resource locator, otherwise known as a
URL, or Web address;
. SSL session-identifier load balancing, which is the ability to load
balance SSL sessions to specific Web servers based on the session
identifiers embedded in the secure sockets layer, or SSL, a popular
protocol. SSL is used for e-commerce data encryption; and
. cookie load balancing, which is the ability to direct Web sessions to
servers based on a unique Web user identifier, referred to as a cookie.
Cookies are widely used by portals and e-commerce sites to offer
differentiated personal services.
As e-commerce applications embed more and more user-specific information in a
Web session, we believe that high-speed Web content parsing will become
increasingly important. Our new WebIC also implements traffic-prioritization
support in hardware, while granular bandwidth management tasks such as usage
metering and bandwidth control are implemented in the two RISC processors. In
the high-end model of our Alteon 700 Series, the Alteon 714, up to 34 of our
new WebICs will be interconnected. This is designed to enable data throughput
rates of up to 12,000,000 Web sessions per second.
Our current-generation WebIC is also used across our ACEnic Gigabit Ethernet
server adapter line. The two embedded RISC processors are used to implement
many intelligent server offload functions. Our WebIC allows our ACEnic to be
highly effective in reducing host central processing unit, or CPU, utilization.
This frees up Web server processing cycles for applications. This capability
has resulted in this product being chosen by many high-end server vendors,
including IBM, Compaq, Hewlett-Packard, Silicon Graphics, Network Appliance and
EMC Corporation, as part of their networking solutions.
Products
Web OS Software
Web OS offers a rich set of features that can be implemented as needed,
providing Web data center administrators control of Web data center traffic
without sacrificing performance. Web OS includes local and global server load
balancing, policy-based traffic redirection, high availability configurations,
bandwidth management and server security services as well as a full complement
of Web switch management capabilities. Web OS was introduced in February 1998
and is implemented on our ACEdirector 2 and 3 and Alteon 180 Series and the new
Alteon 700 Series of Web switches.
Local Server Load Balancing. This feature allows network administrators to
transparently distribute Web session traffic across a group of physical servers
at the same location, thereby creating one large virtual server. This allows
Web data center administrators to scale Web application performance by simply
aggregating more servers, with no changes required to the application or to the
user's configuration. By continuously monitoring server, application and
content status and server load, this function ensures that traffic is sent to
the best-performing servers. For each Web session request received, a Web
switch running Web OS identifies the
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desired application and the target server group based on information in the
headers of the session request and, if appropriate, the URL, SSL session
identifiers or cookie embedded in the session request. Web OS identifies the
best server within the target server group to handle each Web session using one
of its load balancing algorithms. Web OS can also interface with external
programs running on a server or a management device to dynamically change its
server selection method.
Global Server Load Balancing. Web OS global server load balancing allows
content and servers to be distributed to locations around the world and directs
user requests to the best locations based on Web server and Web data center
performance, proximity to the client and Web server response time. If a Web
data center has suddenly failed or is overloaded, requests are redirected to
the next best location to help ensure application availability. Each Web switch
participating in global server load balancing monitors the status, response
time and performance of all the other load balancing locations and exchanges
its measurements with the Web switches in those locations. With a complete and
global view of each location's status and performance, the Web switch running
Web OS directs requests to locations near each requesting user in proportion to
their available capacity. As a result, the best performing locations receive
more connection requests than other locations, in proportion to their ability
to handle additional requests. This is designed to optimize response times and
provide consistent user performance.
Policy-based Traffic Redirection. This feature allows Web data center
administrators to use powerful filtering capabilities available in Web OS to
intercept traffic based on a variety of Web session attributes and redirect the
traffic to a designated Web server or server farm. Filters can be configured
based on source and destination IP address or Web session addresses. When
traffic is redirected to a server farm, a Web switch running our Web OS
software automatically performs load balancing across the server farm. The
following are examples of policy-based traffic redirection:
. Web Cache Redirection. This feature enables the use of transparent Web
caches without placing them in the data path. A Web switch running Web OS
can be configured to redirect outgoing Web traffic to a cache or cache
farm. By analyzing Web requests based on the embedded URL, Web OS further
improves cache server efficiency by only redirecting to the cache
requests for cachable objects from cachable sites. When a Web switch is
instructed to redirect traffic to a cache farm, the switch employs an
algorithm to load balance Web requests across the individual caches while
maximizing cache hits. Cache servers are continually monitored and
requests are forwarded either to a backup cache or directly to the
Internet upon a cache failure or overload.
. Firewall and Router Load Balancing. Web data center administrators can
also use redirection filters to extend the scalability and availability
benefits of server load balancing to in-line packet processing devices,
such as firewalls and routers, thereby increasing overall Web data center
throughput. For instance, application redirection enables a firewall or
router in standby mode to become fully active and available to process
its share of traffic with no software or hardware change. This feature
not only increases Web data center performance but also increases a
customer's return on invested capital, because these devices would
otherwise be inactive until failures occur in the primary firewall or
router.
High Availability. We have designed all Web OS services to enable ongoing
service in the event of any Web data center infrastructure failure involving a
firewall, cache, server, application, content or even an entire server farm or
network failure. In addition, redundant Web switches running Web OS can be
deployed in an "active-active" configuration with multiple "peer" switches
sharing Web session processing load. Upon detection of a peer switch failure, a
healthy switch automatically assumes the failed switch's load to prevent
service outage. Additionally, Web switches support full-meshed topologies,
eliminating system-wide single points of failure that can occur with
standalone, two-port Internet traffic management devices.
Bandwidth Management and Class of Service (CoS). These capabilities provide
bandwidth control for traffic entering and leaving Web servers. Because our Web
switches are designed to connect directly to servers, they are positioned to
meter server input and output and to control bandwidth usage. This feature
allows e-businesses to record a variety of traffic statistics for accounting,
service level agreement reporting and capacity planning.
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Server Security. This feature automatically protects Web servers against
unwanted intrusion by discarding illegitimate sessions. This function also
supports access control filtering and generic network address translation to
allow implementation of private Internet addresses.
Web Switches
ACEdirector Series. Our ACEdirector product line represents our first series
of stackable, fixed configuration Web switches. Based on our WebIC technology
and distributed processing architecture, the ACEdirector Series supports
Ethernet and Layer 3 switching and most Web OS Internet traffic control
features. The ACEdirector Series includes the ACEdirector 2 and ACEdirector 3
products. The ACEdirector 3 supports more memory than the ACEdirector 2,
enabling expanded network configurations. Both products offer eight Fast
Ethernet ports, with the ACEdirector 3 supporting one additional Gigabit
Ethernet port. We began shipping our ACEdirector product line in April 1998.
Cache Director. Our Cache Director is a Web traffic management appliance
designed to provide single-function, policy-based traffic redirection, at an
entry-level price. The Cache Director incorporates the same WebIC technology as
our ACEdirector Series and is based on the same distributed processing
architecture as all of our Web switches. We have shipped this product since
December 1998.
Alteon 180 Series. Like our ACEdirector series, our Alteon 180 Series is
stackable, with fixed-configuration Web switches. The Alteon 180 Series
consists of the Alteon 180, which supports Ethernet and Layer 3 switching, and
the Alteon 180Plus, which is additionally configured with Web OS functions to
enable advanced Web traffic management features. The Alteon 180 Series supports
nine Gigabit Ethernet ports, eight of which provide a Fast Ethernet option and
automatically select the appropriate speed based on the connection. We have
shipped Alteon 180 Series products since February 1998.
Alteon 700 Series. Our Alteon 700 Series represents our most advanced
offering of Web switches and was developed using our next-generation WebIC
technology. In July 1999, we began customer testing of our Alteon 700 Series
and we expect to begin customer shipments of these switches in March 2000. Like
our existing families of Web switches, the Alteon 700 Series offers robust Web
session switching capabilities using our suite of Web OS software products. In
addition, with the advanced processing capabilities of our new generation
WebIC, the Alteon 700 Series of Web switches enables high performance Web
session management for a large number of switch ports, an important capability
for rapidly growing e-business Web data center implementations. The Alteon 700
Series is comprised of the Alteon 708 and the Alteon 714. The Alteon 708 can
support up to 64 Fast Ethernet or 16 Gigabit Ethernet ports in flexible
combinations while the Alteon 714 can support up to 128 Fast Ethernet or 32
Gigabit Ethernet ports. Both the Alteon 708 and the Alteon 714 are housed in
modular switch chassises, providing multiple slots for mixed connectivity. The
Alteon 700 Series is designed to offer wire speed packet and session switching
throughput in all Fast and Gigabit Ethernet ports. All removable components are
interchangeable between the 708 and 714 products, enhancing our customers'
flexibility and ability to leverage their existing infrastructure investment.
The Alteon 708 offers physical redundancy, including power supplies and
management modules, while the Alteon 714 also offers redundant core
semiconductor interconnections. Both switches can support all Web OS functions.
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The following table summarizes the features and performance capabilities of
our Web switches:
<TABLE>
<CAPTION>
Alteon 180
ACEdirector 2/3 Cache Director Plus Alteon 708 Alteon 714
------------------- ------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Maximum Configurations.. 8 Fast Ethernet; 8 Fast Ethernet 8 selectable Up to 64 Fast Up to 128 Fast
ACEdirector 3 10/100/1000 Ethernet or 16 Ethernet or 32
also supports 1 Ethernet plus 1 Gigabit Ethernet Gigabit Ethernet
Gigabit Ethernet Gigabit Ethernet
port port
Web Session Switching .. Yes Yes Yes Yes Yes
Sessions per Second per
Port (approximate)...... 74,000 74,000 74,000 74,000 74,000
(Fast Ethernet) (Fast Ethernet)
740,000 740,000
(Gigabit Ethernet) (Gigabit Ethernet)
Sessions per Second per
Switch (approximate).... 296,000 296,000 296,000 6,000,000 12,000,000
Modularity.............. Stackable Stackable Stackable Modular Modular
Fixed configuration Fixed configuration Fixed configuration 4 input/output 8 input/output
slots for mixed slots for mixed
connectivity connectivity
Physical Redundancy..... None None None Physical Physical
redundancy, redundancy,
including power including power
supplies and supplies,
management management
modules modules and
redundant core
semiconductor
interconnectivity
Fabric Capacity......... 8 Gbps 8 Gbps 8 Gbps 90 Gbps 180 Gbps
Per Port List Price
Range of Fully-
Configured System Fast Ethernet: Fast Ethernet: Fast and Gigabit Fast Ethernet: Fast Ethernet:
(U.S.).................. $1,375 $687 Ethernet: $387-$583 $350-$545
Gigabit Ethernet: $1,667-$2,444 Gigabit Ethernet: Gigabit Ethernet:
$2,000 $2,149-$2,930 $2,042-$2,824
</TABLE>
The session per second per port performance for the Alteon 708 and Alteon 714
are design objectives that have been verified through design simulation.
The session per second per switch performance is based on internal testing
and extrapolation of port performance data.
ACEnic Gigabit Ethernet Server Adapters
We shipped the industry's first Gigabit Ethernet server adapter, the Alteon
ACEnic, in July 1997. In 1998, according to IDC, Alteon was the market share
leader with ACEnics garnering 47% of the Gigabit Ethernet adapter market.
The key design principle of the ACEnic is to offload processing from the
server CPU onto the ACEnic server adapter to free up server central processing
unit, or CPU, capacity for application processing. Our ACEnic features a WebIC
with two built-in RISC processors that enables it to offload network processing
from the server, provide downloadable updates and support value-added feature
enhancements.
We believe our ACEnic server adapters are among the best performing in the
industry. Industry-leading server performance results have been publicized by a
number of companies using our ACEnic server adapters. For example, Microsoft
has stated that it has demonstrated 920 Mbps throughput on a single-CPU Pentium
II Xeon server (400MHz), and IBM has announced 989 Mbps throughput for an
RS/6000 platform using our ACEnic server adapter.
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The ACEnic is currently available for Peripheral Component Interconnect, or
PCI bus, and Sun bus, or Sbus, with software drivers available for leading
operating systems such as Microsoft NT 4.0 and Windows 2000, Sun Solaris and
Solaris x86, Linux and FreeBSD. A number of our OEMs have written drivers for
many other operating environments, including:
. AIX, OS/400 and OS/390 from IBM;
. Tru64, NT (Alpha) and OpenVMS from Compaq;
. IRIX from SGI; and
. Mac OS from Apple Computer, Inc.
We believe that the breadth of operating systems that we support and the
software drivers written by our server and other OEM partners will continue to
be a strong asset as Gigabit Ethernet is increasingly deployed in volume during
the next few years.
Our ACEnic server adapters, as well as all of our Web switches, support
Ethernet frame sizes above the standard 1,500 bytes, known as Jumbo Frames.
Jumbo Frames is an optional performance extension to Ethernet that we propose
to Gigabit Ethernet solution providers. Using larger frame sizes during large
block transfers minimizes consumption of server processing capacity. In
publicly-conducted performance tests, Jumbo Frames has been shown to
significantly increase server throughput. Importantly, among the top 33
SPECweb96 Web server performance results published in April 1999, 10 of them
were achieved by Web servers connected with Alteon ACEnics and Alteon 180
switches running Jumbo Frames. SPECweb96 is an industry software benchmark
designed to measure a system's ability to act as a World Wide Web server for
static pages. For this reason, almost all of our ACEnic OEM partners have
implemented Jumbo Frame support in their drivers. We believe that the
widespread endorsement of Jumbo Frames among high-speed adapter suppliers will
be a significant advantage for our Web switches in server farm networks.
Customers
Our customers consist of e-commerce companies, Web portals, content
publishers, Web hosting companies, Internet service providers, server vendors
and enterprises. The following companies have purchased at least $100,000 of
our products:
3Com Corporation France Telecom (France)
Agence France-Presse (France) Fujitsu Limited (Japan)
Airtel Movil S.A. (Spain) Gigamedia (Taiwan)
Auspex Systems, Inc. Globix Corporation
BellSouth.net, Inc. GTE Internetworking Incorporated
Cable & Wireless Hong Kong Helsinki Telecom (Finland)
Telecom Ltd. Hewlett-Packard Company
Cable & Wireless Plc (UK) Hutchinson Telecommunications (Hong Kong)
China Telecom (Hong Kong) Ltd. Limited
Christopher Newport University IBeam, Inc.
Compaq Computer Corporation IBM Corporation
Concentric Network Corp. Inktomi Corporation
Dacom Corporation (Korea) Intermedia Communications Inc.
Daewoo Securities Co., Ltd. Korea Telecom Corp.
(Korea) Lyonnaise Cable (France)
Datek Online Brokerage Services Microsoft Corporation
LLC M-Web Co. (South Africa)
Diamond Cable/NTL Incorporated N2H2, Inc.
(UK) NEC Corporation
Digex, Incorporated Network Appliance, Inc.
DLJdirect, Inc. Nowcom Corp., Ltd. (Korea)
Dun & Bradstreet Corp. Northern Telecom Netgear
EMC Corporation NTT Data Corporation (Japan)
Exodus Communications, Inc. Samsung Security (Korea)
Fleet Numerical Meteorology and Sandpiper Networks, Inc.
Oceanography Center
Flycast Communications
Corporation
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Sharp Corporation Uni2 (Spain)
Siemens Nixdorf UUNET Technologies, Inc.
Sonera (Finland) VivaNET Pty Ltd. (Australia)
Sun Microsystems, Inc. Visitalk.com
Telefonica S.A. (Spain) Woolwich Plc (UK)
We sell our Gigabit Ethernet server adapters primarily to original equipment
manufacturers, or OEMs. The following OEMs have purchased more than $100,000 of
our server adapters:
3Com Corporation Hewlett-Packard Company
Auspex Systems, Inc IBM Corporation
Compaq Computer Corporation NEC Corporation
EMC Corporation Network Appliance, Inc.
In fiscal 1999, sales to 3Com accounted for 14% of net sales, sales to IBM
accounted for 10% of net sales and sales to Hewlett-Packard accounted for 10%
of net sales. In the first quarter of fiscal 2000, no individual customer
accounted for 10% or more of our net sales. We expect that revenues from a
relatively small number of customers will continue to account for a significant
portion of revenues. Unless and until we diversify and expand our customer
base, our future success will significantly depend upon the timing and size of
future purchase orders from our largest customers.
Sales to customers outside of the United States accounted for approximately
15% of net sales in fiscal 1997, 29% in fiscal 1998, 25% in fiscal 1999 and 37%
in the first quarter of fiscal year 2000.
The following examples illustrate how some of our customers have successfully
used our products to enhance service offerings.
Dacom Corporation. Dacom is the second leading telecommunications carrier and
the leading Internet service provider in Korea. The company was named by Data
Communications Magazine as the best business Internet service provider in Asia
Pacific and is currently the most profitable ISP in Korea. According to Dacom,
a key reason for the company's success as an e-business is their aggressive
application of advanced technologies in their Internet infrastructure to
improve customer service and control costs. Dacom began deploying Alteon's Web
switches in May 1998 to enable transparent caching on their Trans-Pacific link.
To enable caching without requiring their customers to modify their browsers to
send traffic to the cache, we installed an Alteon 180Plus next to the transit
router. This Web switch transparently intercepts non-domestic outbound traffic
and redirects it to the cache. As a result, Dacom has reduced bandwidth cost by
30% per month and, more importantly, improved their customers' response time.
Dacom has purchased over 40 Alteon Web switches and is deploying them in all of
their caching locations. Dacom also uses our Web switches to load balance all
of their servers, including file transfer, mail, news and domain name service
servers, for high availability and server capacity scaling. Dacom has also
installed our Web switches to offload access list processing from their
expensive backbone routers. Dacom recommends Alteon Web switches to their co-
location customers for load balancing and traffic redirection.
Sandpiper Networks, Inc. Sandpiper Networks provides an outsourced service,
helping Web publishers distribute their content reliably around the globe over
Sandpiper's content delivery network. To implement this service in a manner
that can scale and is completely reliable, Sandpiper has developed and
integrated a hardware and software solution called Footprint. In a FootPrint
Content Distributor location, an Alteon WebSystems ACEdirector connects to
Sandpiper customer Web cache servers that store their customers' content. The
ACEdirector is used for automatic failover. The ACEdirector evenly distributes
incoming requests between the two Web cache servers. It periodically executes a
comprehensive check of the Web cache server hardware and software to determine
if the Content Distributors are performing properly. If there is a failure, or
significant degradation in server performance, the AceDirector will direct all
traffic to the best-performing server. The ACEdirector is also capable of
evenly distributing incoming requests among the servers in the farm. Sandpiper
has deployed over 50 Alteon ACEdirectors for their service. As OPTECH members,
Sandpiper and Alteon also engage in joint product development activities that
are intended to enable Sandpiper to enhance their product offerings.
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Concentric Network Corp. Concentric Network Corp. is a leading Internet
service provider that provides value-added IP network and Web hosting services
for large and small businesses. Concentric operates an extensive backbone
network that interconnects more than 20 SuperPOPs in the United States that
provide nationwide coverage for dial, digital subscriber line and T1/T3
connectivity. In addition, Concentric operates four Web hosting data centers
around the United States. Concentric has many hundreds of co-located or managed
servers. In an effort to provide its customers with high availability, fault
tolerance and scalability for their server-based applications, Concentric
introduced new local and distributed server environment services. Concentric
sought to offer these services through a uniform switching architecture, with a
low cost of deployment per customer and the ability to support a redundant
failover configuration. To meet these challenges, Concentric has already
deployed 16 Alteon Web switches in redundant configurations in the majority of
its data centers. Our Web switches provide Gigabit Ethernet connectivity for
their data center routers and the Ethernet switches used to connect servers.
Our Web switches are also used to load balance traffic between multiple
customer Web servers and to provide rapid failover services in the event of a
port, link, switch or server failure. The ACEdirectors also provide Concentric
with automatic and transparent redirection of any IP traffic type based on
specific traffic engineering needs. Using our Web switches, Concentric
successfully launched its Local Server Environment services with 99.97% service
level guarantees and a low cost of deployment. Concentric also uses our Web
servers to load balance servers supporting its consumer dial service.
While the customers mentioned above have successfully used our products to
enhance their service offerings, of those customers that have implemented our
products, not all of these customers have implemented our products as
extensively and successfully.
Marketing, Sales and Customer Support
We sell our products through our direct sales force, OEMs and resellers. In
the United States we sell our products both directly and through OEMs, and
internationally we sell our products primarily through resellers. We are
actively establishing new sales channels and increasing our direct sales force,
both domestically and internationally. Our direct sales teams typically consist
of a sales representative covering specific geographic regions and a systems
engineer. Our systems engineers provide technical support and implementation
expertise during the evaluation process. We expect to nearly double the number
of direct sales personnel in the next six months in order to support and
develop leads for our indirect distribution channels and increase the direct
sale of our products. This expansion will significantly increase personnel
costs and related expenditures. Sales personnel will not be productive
immediately and we can not assure you that costs of this expansion will not
exceed the revenues generated by the sales personnel.
To achieve broader and more geographically dispersed distribution of our
products, we expect to increase our reliance on OEMs and resellers. For
example, in June 1999, we signed an agreement with Lucent under which Lucent
has the non-exclusive right to integrate and resell Alteon Web switches with
their solution offerings in their "Integrated IP Solutions for Service
Providers" program. Lucent is not obligated to resell our products under this
agreement. We cannot assure you that our existing OEM and reseller customers
will market our products effectively or continue to devote the resources
necessary to provide us with effective sales, marketing and technical support.
Furthermore, current OEM customers have developed, or may be developing,
competitive products, or may have pre-existing relationships with our current
or potential competitors which may reduce their efforts in selling our
products. We may also be unable to retain current or future OEM customers.
Generally, OEM relationships can be terminated with little or no notice. If our
relationship with any current or future OEM customers is terminated by either
party, we may not be successful in replacing the customer on a timely basis, or
at all, with another suitable OEM.
We sell our Web switches and our Web OS primarily through our direct sales
force to e-businesses, including e-commerce companies, Web portals, content
publishers, Web hosting companies, Internet service providers, server vendors
and enterprises. We sell our server adapters primarily to OEMs. We believe that
our customers evaluate our products primarily on the basis of performance,
features, manageability and speed of delivery.
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We believe that alliances with vendors of complementary technologies are
important in our rapidly-evolving market. As a result, we have established our
W.E.B.S. program, which has three components: product
interoperation/integration, joint marketing and joint sales. Through this
program, we attempt to offer our customers more complete, integrated Web data
center solutions. W.E.B.S. members include Internet infrastructure providers
such as CacheFlow, Check Point Software Technologies, Hewlett-Packard, Inktomi,
Network Appliance, Novell, and Sandpiper Networks. Alliances such as W.E.B.S.
and our relationship with Lucent help us to expand our sales effort, penetrate
new accounts, and ensure interoperability with industry leading products and
compliance with industry standards.
Once our products are sold to end users, our system engineering team
continues to work to address the evolving needs of their networks. We assist
our OEMs and resellers in providing support for products they sell. The sales
price for all of our products includes a one-year full warranty, and an
additional five-year service plan can be purchased separately. Our technical
support team provides worldwide support through a help desk and assists our
customers with online service updates and software upgrades. We also provide
on-site support for critical problem resolution. In addition, we provide a full
range of training and consulting services to our customers, including
comprehensive network management and performance and capacity analysis to
assist in predicting future network requirements. We believe that we have
leading customer service and support capabilities and we plan to continue to
invest in this area in the future.
Research and Development
To be successful, we must continue to enhance and build on our WebIC and Web
OS technologies and to develop competitive new products. We have assembled a
team of highly experienced hardware, software and test engineers and system
architects. Our engineering team possesses expertise in the areas of high
performance server connectivity, high performance, highly-integrated ASIC and
system design and internetworking.
We take an aggressive, team-oriented approach to product development, with
hardware and software engineers working together with product marketing
personnel to combine high performance with rapid time-to-market, which we
believe are critical to maintaining a leadership position in the Web-working
market. Our product development efforts focus on:
. defining product features;
. developing product specifications and architecture;
. implementing design;
. performing extensive design verification and testing; and
. initiating field testing.
As of November 30, 1999, we employed 62 full-time employees in research and
development. During fiscal 1997, we spent $4.8 million on research and
development. During fiscal 1998, we spent $8.8 million on research and
development. In fiscal 1999, we spent $10.0 million on research and
development.
Our industry is characterized by very rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. Our existing products will be rendered less
competitive or obsolete if we fail to introduce new products or product
enhancements that anticipate the features and functionality that customers
demand or insure that our products interoperate with current and emerging
networking technologies. In the past, we have lost customers to competitors
because we were not able to respond to their requests for additional features
in a timely fashion.
Manufacturing
Our manufacturing operations consist primarily of prototype development and
quality control. We outsource substantially all of the manufacturing and
testing of our hardware platforms to a contract manufacturer, Celestica, on a
turn-key basis. We purchase our custom components from third party suppliers
and deliver those components to Celestica on a consignment basis for assembly
in our hardware platforms. We
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<PAGE>
design and direct Celestica's manufacturing processes with the goal of ensuring
compliance with our quality standards and cost improvement initiatives. Our
reliance on a single independent manufacturer involves a number of risks,
including the absence of adequate manufacturing capacity and reduced control
over delivery schedules, manufacturing yields and costs. As our relationship
with Celestica develops, manufacturing yields or product performance could be
adversely affected due to difficulties associated with adapting our technology
and product design to Celestica's process technology and design rules. In
addition, Celestica is not obligated to supply products to us for any specific
period, in any specific quantity or at a specific price, except as may be
provided in a particular purchase order. If Celestica is unable or unwilling to
continue manufacturing our components in required volumes, we will have to
identify acceptable alternative manufacturers, which could take in excess of
six months.
We purchase several key product components that are contained in our products
from only one source and alternative sources for these components are either
not currently available or are difficult to develop. The inability to obtain
sufficient quantities of these components may result in delays or reductions in
product shipments, which would harm our business. For example, the only
manufacturer for our WebICs is LSI. The process used to manufacture our WebICs
is proprietary to LSI. We do not have a supply agreement with LSI. If LSI
terminated our relationship, we would be required to redesign our WebICs to
make them compatible with the manufacturing process of a new supplier. We
estimate that this process could take as long as 12 months and cost $4.0
million or more.
In order to maintain our competitive edge, we plan to focus our manufacturing
efforts on:
. new product introduction;
. building prototypes of new products;
. ensuring that products are designed for low cost;
. ensuring that product design and manufacturing processes yield high
quality;
. process design;
. constant yield improvement;
. failure analysis of field and factory failures;
. constant cost reduction;
. ensuring a very high level of customer satisfaction; and
. aggressively managing overhead and component costs to an absolute
minimum.
Competition
We compete in the highly competitive, next generation Internet infrastructure
market. We expect competition to intensify in the future. We believe our
ability to compete successfully in this market will be driven primarily by the
reliability, performance and distinctive features of our products and by the
quality of our customer service. We compete with large telecommunications and
networking companies including Cisco and Nortel. We expect that, over time,
Cisco, Nortel and other large telecommunications companies with significant
resources, technical expertise, market experience, customer relationships and
broad product lines, will introduce new products which are designed to compete
more effectively in this market. For example, Cisco has announced plans to
incorporate an Internet traffic management component into their existing LAN
switches. These product offerings compete directly with our products. In
addition, if Cisco or other large telecommunications companies form alliances
with, or acquire companies offering competing Web traffic management products,
even if those products do not have capabilities comparable to our products,
they would be significant competitors and their activities could cause us to
reduce our prices. In addition, a number of other private and public companies
offer products designed to address the same problems which our products
address. Some of these companies offer products focused on a particular
function, such as bandwidth management or load balancing. With respect to a
particular function, these products may be superior to ours.
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<PAGE>
In order to compete successfully in this emerging market, we need to:
. continuously improve our time-to-market with new features and
capabilities, thus reducing the risk of one traffic management function
being made obsolete or less competitive and maintaining a significant
barrier to entry;
. commercialize product features that take advantage of the Web session
layers hardware switching and switching-assist capabilities in our next
generation WebIC; and
. build relationships with networking equipment providers that lack
Internet traffic management solutions.
Intellectual Property
Our success is dependent upon our ability to develop and protect our
proprietary technology and intellectual proprietary rights. We rely primarily
on a combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws to accomplish these goals.
We have seven U.S. patent applications pending. It is possible that the
patents that we have applied for, if issued, or our potential future patents
may be successfully challenged or that no patents will be issued from our
patent applications. It is also possible that we may not develop proprietary
products or technologies that are patentable, that any patent issued to us may
not provide us with any competitive advantages, or that the patents of others
will harm our ability to do business.
We seek to avoid disclosure of our trade secrets, including but not limited
to, requiring employees, customers and others with access to our proprietary
information to execute confidentiality agreements with us and restricting
access to our source code. We also seek to protect our software, documentation
and other written materials under trade secret and copyright laws. Despite our
efforts to protect our proprietary rights, existing laws and our contractual
arrangements provide only limited protection. Unauthorized parties may attempt
to copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. Expensive litigation may
be necessary in the future to enforce our intellectual property rights. Our
failure to enforce and protect our intellectual property rights could harm our
business.
We incorporate technology that is licensed from several third parties into
our products. These licenses are either perpetual or are for technologies for
which alternative sources are generally available. In addition, our WebICs are
manufactured using technology owned by LSI. If we lost access to this LSI
technology, we would be required to re-design our products and develop or
license additional technology.
We expect that we will be subject to infringement claims as the number of
products and competitors in our markets grows and the functionality of products
overlaps. In the past, we were involved in trademark litigation over the use of
the name and mark Alteon. In addition, in August 1999 we received a letter from
Resonate, Inc. alleging that some of our products infringe one of its patents.
We do not believe that any of our current products infringe Resonate's patent.
Accordingly, we intend to contest this claim vigorously. However, if this
claim, or any similar claims we may receive in the future, cannot be resolved
through a license or similar arrangement, we could become a party to
litigation. The results of any litigation matter are inherently uncertain. In
the event of an adverse result in any litigation with third parties that could
arise in the future, we could be required to pay substantial damages, including
treble damages if we are held to have willfully infringed, to cease the
manufacture, use and sale of infringing products, to expend significant
resources to develop non-infringing technology, or to obtain licenses to the
infringing technology. In addition, lawsuits, regardless of their success,
would likely be time-consuming and expensive to resolve and would divert
management time and attention. Any intellectual property dispute also could
damage our business by causing us to do one or more of the following:
. stop selling, incorporating or using our products that use the challenged
intellectual property;
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<PAGE>
. attempt to obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which license may
not be available on reasonable terms, or at all; or
. redesign those products that use the relevant technology.
Employees
As of November 30, 1999, we employed 218 employees. Of the total number of
full-time employees, 62 were in research and development, 114 were in sales and
marketing and business development and 42 were in operations and
administration. Our employees do not have any collective bargaining agreement,
and we have never experienced a work stoppage. We believe our employee
relations are good.
Facilities
Our corporate headquarters are located in San Jose, California, under a lease
that expires in 2003, but which may be renewed for an additional five years. We
occupy approximately 48,000 square feet in this facility and sublease
approximately 30,000 square feet under a sublease that expires in 2002. We also
lease space in Japan and Hong Kong for our sales personnel. We believe that we
will need to obtain additional space in the near future and that this
additional space can be obtained on commercially reasonable terms.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding our executive officers
and directors as of December 20, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Dominic P. Orr.......... 48 Chief Executive Officer, President and Chairman
Joe T. Booker........... 58 Chief Operating Officer, Vice President of Operations and Director
Selina Y. Lo............ 40 Vice President of Marketing and Product Management
James G. Burke.......... 56 Chief Financial Officer and Secretary
Barton M. Burstein...... 47 Vice President of Business Development
Anthony Narducci........ 54 Vice President of Worldwide Sales
Shirish S. Sathaye...... 38 Vice President of Engineering
Tench Coxe.............. 41 Director
Adam Grosser............ 38 Director
Andrew W. Verhalen...... 43 Director
</TABLE>
Dominic P. Orr has served as our Chairman of the Board since August 1999 and
as our Chief Executive Officer and President and as a member of our board of
directors since November 1996. From April 1994 to October 1996, Mr. Orr served
as Senior Vice President at Bay Networks, a computer-networking company. From
December 1982 to March 1994, Mr. Orr held various positions at Hewlett Packard
Company, a computer and office equipment company, including Director of
Marketing and Product Operations in Asia Pacific for its computer systems
organization. Mr. Orr holds a B.S. in Physics from the City University of New
York, an M.S. in Theoretical Physics and a Ph.D. in Neurophysiology from the
California Institute of Technology.
Joe T. Booker has served as our Chief Operating Officer since December 1999
and as our Vice President of Operations since February 1997 and as a member of
our board of directors since September 1997. From February 1997 to December
1999, Mr. Booker served as our Vice President of Operations. From August 1994
to February 1997, Mr. Booker served as Vice President and General Manager of
the Commercial Business Unit at Centillion Networks, Inc., a networking
company.
Selina Y. Lo has served as our Vice President of Marketing and Product
Management since September 1996. In 1993, Ms. Lo co-founded Centillion
Networks, Inc., a networking company that was acquired by Bay Networks, Inc. in
May 1995, and served as Vice President of Product Management and Marketing from
May 1995 to July 1996. Prior to Centillion, Ms. Lo served in a variety of
product marketing, engineering and sales positions with Network Equipment
Technologies, Inc., a networking company and Hewlett Packard Company, a
computer and office equipment company. Ms. Lo holds a B.A. in Computer Science
from the University of California at Berkeley.
James G. Burke has served as our Chief Financial Officer and Secretary since
October 1998. From April 1997 to October 1998, Mr. Burke worked as an
independent consultant. From October 1992 to April 1997, Mr. Burke served as
Vice President of Finance and Administration, Chief Financial Officer and
Secretary of C-Cube Microsystems, Inc., a semiconductor company. Mr. Burke
holds a B.S.E.E. and B.N.S. from the University of Wisconsin and an M.B.A. from
Harvard University Graduate School of Business Administration.
Barton M. Burstein has served as our Vice President of Business Development
since August 1998 and has worked at Alteon since January 1997. From January
1995 to January 1997, Mr. Burstein worked at Bay Networks in a variety of
positions, including Director of Advanced Technology Sales/ICON. From 1985 to
1994, Mr. Burstein worked at UB Networks, Inc., a networking company, in a
variety of positions, including Director of Latin America and Asia Sales. Mr.
Burstein holds a B.A. from Antioch College and a Masters in Computer Science
from the University of Michigan.
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<PAGE>
Anthony Narducci has served as our Vice President of Worldwide Sales since
November 1998. From October 1997 to October 1998, Mr. Narducci served as Vice
President of Sales for Shomiti Systems, Inc. a networking company. From 1994 to
1997, Mr. Narducci served as Vice President, North American Business Unit at
Network Equipment Technologies, Inc., a networking company. Mr. Narducci holds
a B.S. in Management from Lehigh University.
Shirish S. Sathaye has served as our Vice President of Engineering since May
1997. From June 1994 to May 1997, Mr. Sathaye worked at FORE Systems, Inc., a
networking company, in a variety of positions, including Product Group
Director. From June 1986 to May 1994, Mr. Sathaye worked at Digital Equipment
Corporation, a computer company, in a variety of positions, including Principal
Engineer. He has published several technical papers, and has numerous patents
issued and pending on high-speed network design and performance analysis. Mr.
Sathaye holds a Ph.D. in Computer Engineering from Carnegie Mellon University.
Tench Coxe has served as a member of our board of directors since May 1996.
Mr. Coxe has served as a managing director of the general partner of Sutter
Hill Ventures, a venture capital investment firm in Palo Alto, California,
since 1989. From 1984 to 1987, Mr. Coxe served as a Director of Marketing and
in other management positions with Digital Communications Associates, a
telecommunications company. Mr. Coxe currently serves on the board of directors
of Clarus Corporation, Copper Mountain Networks, Inc., Edify Corporation and
NVidia Corporation. He holds a B.A. in Economics from Dartmouth College and an
M.B.A. from Harvard University Graduate School of Business Administration.
Adam Grosser has served as a member of our board of directors since June
1999. Since February 1997, Mr. Grosser has held various positions with At Home
Corporation, including Senior Vice President. Prior to that time, Mr. Grosser
was the President and Chief Executive Officer of Catapult Entertainment, Inc.,
a provider of networking services for personal computers and console video
games that he co-founded in April 1994 and sold in November 1996. Catapult
filed a voluntary petition for bankruptcy under Chapter 11 of the U.S.
bankruptcy code in October 1996. This filing was made in connection with the
acquisition of Catapult by Mpath Interactive, Inc., which occurred following
conclusion of this bankruptcy filing in November 1996. From August 1993 to
April 1994, Mr. Grosser was the Senior Vice President of New Media at Sony
Pictures. From August 1990 to August 1992, he was the General Manager of the
New Media Group at Lucas Arts Entertainment. Mr. Grosser holds B.A., M.S. and
M.B.A. degrees from Stanford University.
Andrew W. Verhalen has served as a member of our board of directors since May
1996. Mr. Verhalen has been the general partner of the general partner of
Matrix Partners, a venture capital investment firm, since April 1992. Prior to
joining Matrix, Mr. Verhalen held senior management positions at 3Com
Corporation and Intel Corporation. Mr. Verhalen currently serves on the board
of directors of Copper Mountain Networks, Inc., Phone.com, Inc. and WatchGuard
Technologies, Inc. He also serves on the boards of several private technology
companies. Mr. Verhalen holds B.S.E.E., M.Eng. and M.B.A. degrees from Cornell
University.
Our executive officers are appointed by the board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers. No director has
a contractual right to serve as a member of our board of directors.
Board Committees
. Audit Committee. Our audit committee, consisting of Mr. Coxe, Mr.
Verhalen and Mr. Grosser, reviews our internal accounting procedures and
consults with and reviews the services provided by our independent
auditors.
. Compensation Committee. Our compensation committee, consisting of Mr.
Coxe, Mr. Verhalen and Mr. Grosser, reviews and recommends to the board
of directors the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and
benefits of our employees.
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<PAGE>
Our class I directors are Mr. Booker and Mr. Verhalen; our class II directors
are Mr. Orr and Mr. Coxe; and our class III director is Mr. Grosser. At each
annual meeting of stockholders after the initial classification, the successors
to directors whose terms will then expire will be elected to serve from the
time of election and qualification until the third annual meeting following
election. Any additional directorships resulting from an increase in the number
of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Alteon.
Compensation of Directors
We do not provide cash compensation to members of our board of directors for
their services as members of the board or for attendance at committee meetings.
Members of the board are reimbursed for some expenses in connection with
attendance at board and committee meetings. In June 1999, our non-employee
directors, Mr. Coxe, Mr. Verhalen and Mr. Grosser, each received options to
purchase an aggregate of 41,250 shares of common stock at an exercise price per
share of $5.67. The exercise price was equal to the fair market value of the
common stock on the date of grant as determined by the board of directors.
These options were fully vested on the date of grant. In August 1999, our non-
employee directors each received options to purchase an aggregate of 123,750
shares of common stock at an exercise price per share of $14.00. The exercise
price was equal to the fair market value of the common stock on the date of
grant as determined by the board of directors. These options vest in a series
of equal monthly installments beginning August 2000 and extending through the
next three years of service.
Compensation Committee Interlocks and Insider Participation
The compensation committee is currently comprised of Mr. Coxe and Mr.
Verhalen. Neither Mr. Coxe nor Mr. Verhalen has at any time been an officer or
employee of Alteon. No interlocking relationship exists between our board of
directors or compensation committee and the board of directors or compensation
committee of any other company, nor has any interlocking relationship existed
in the past.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during the fiscal year ended June 30, 1999 to our Chief Executive
Officer and each of our four other most highly compensated executive officers
who earned more than $100,000 during that fiscal year. All option grants were
made under our 1999 Equity Incentive Plan.
Summary Annual Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------- ---------------------
Securities Underlying
Name and Principal Position Salary ($) Bonus ($) Options
- --------------------------- ---------- --------- ---------------------
<S> <C> <C> <C>
Dominic P. Orr...................... $175,000 -- 375,000
Chief Executive Officer, President
and Chairman
Barton M. Burstein.................. $160,000 $40,000 37,500
Vice President of Business
Development
Joe T. Booker....................... $175,000 -- --
Chief Operating Officer, Vice
President of Operations
and Director
Shirish S. Sathaye.................. $160,000 -- --
Vice President of Engineering
Selina Y. Lo........................ $155,000 -- 187,500
Vice President of Marketing and
Product Management
</TABLE>
53
<PAGE>
Election of Directors
We have authorized five directors. Under the terms of our certificate of
incorporation, our board of directors is divided into three classes as follows:
. class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2000; lass II directors, whose term will
expire at the annual meeting of stockholders to be
. class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2001; and
. class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2002.
The following table sets forth summary information regarding the option
grants made to our Chief Executive Officer and each of our four other most
highly compensated executive officers during the fiscal year ended June 30,
1999, our fiscal 1999. The exercise price per share was equal to the fair
market value of our common stock on the date of grant as determined by the
board of directors. Percentage of total options as set forth below was
calculated based on options to purchase an aggregate of 3,909,300 shares of
common stock granted under the 1999 Equity Incentive Plan in fiscal 1999. The
potential realizable value as set forth below was calculated based on the ten-
year term of the option and assumed rates of stock appreciation of 5% and 10%,
compounded annually from the date the options were granted to their expiration
date based on the fair market value of the common stock on the date of grant.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percent of Annual Rates of
Number of Total Stock Price
Securities Options Appreciation
Underlying Granted to for Option Term
Options Employees Exercise Price Expiration ---------------------
Name Granted In Fiscal Year (per share) Date 5% 10%
- ---- ---------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dominic P. Orr.......... 375,000 9.6% $5.67 6/30/09 $1,336,409 $3,386,723
Barton M. Burstein...... 37,500 1.0% $4.00 6/01/09 $ 94,334 $ 239,061
Joe T. Booker........... -- -- -- -- -- --
Shirish S. Sathaye...... -- -- -- -- -- --
Selina Y. Lo............ 187,500 4.8% $5.67 6/30/09 $ 668,204 $1,693,361
</TABLE>
The options listed in the table above vest in a series of equal monthly
installments beginning from the vesting start date and extending through the
next four years of service. See "Benefit Plans" for a description of the
material terms of these options.
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<PAGE>
The following table sets forth for our Chief Executive Officer and each of
our four most highly compensated executive officers information regarding
shares acquired upon exercise of options in our fiscal 1999 and the number and
value of options held as of June 30, 1999, the last day of fiscal 1999. Options
granted to purchase shares of our common stock under our 1999 Equity Incentive
Plan are generally immediately exercisable by the optionee but are subject to a
right of repurchase pursuant to the vesting schedule of each specific grant. In
the event that a purchaser ceases to provide service to Alteon and its
affiliates, we have the right to repurchase any of that person's unvested
shares of common stock at the original option exercise price. In addition, upon
a change of control of Alteon, we have the same right to repurchase any
unvested shares of common stock. Amounts shown in the value realized column
were calculated based on the difference between the option exercise price and
the fair market value of the common stock on the date of exercise, without
taking into account any taxes that may be payable in connection with the
transaction, multiplied by the number of shares of common stock underlying the
option. Exercise prices ranged from $0.05 to $5.67. Amounts shown in the value
of unexercised in-the-money options at June 30, 1999 column are based on a
price of $19.00, the initial public offering price of our common stock without
taking into account any taxes that may be payable in connection with the
transaction, multiplied by the number of shares underlying the option, less the
aggregate exercise price payable for these shares.
Aggregate Option Exercises in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options In-the-Money Options at
at June 30, 1999 June 30, 1999
Shares Acquired Value ----------------------- -------------------------
Name On Exercise Realized Vested Unvested Exercisable Unexercisable
- ---- --------------- -------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dominic P. Orr.......... -- -- -- 375,000 $5,000,000 --
Barton M. Burstein...... -- -- -- 37,500 $ 562,500 --
Joe T. Booker........... -- -- 31,250 43,750 $1,400,000 --
Shirish S. Sathaye...... 300,000(1) $750,000 9,375 290,625 $5,600,000 --
Selina Y. Lo............ -- -- -- 187,500 $2,500,000 --
</TABLE>
- --------
(1) As of June 30, 1999, approximately 12,500 shares held by Mr. Sathaye were
unvested and subject to repurchase by us.
Benefit Plans
1999 Equity Incentive Plan
Our board adopted, and our stockholders approved, the 1996 Stock Option Plan
in April 1996. The board subsequently amended, and the stockholders approved
the amendments to, the stock option plan in 1996, 1997 and 1998. The board
amended and restated the stock option plan as the 1999 Equity Incentive Plan in
June 1999.
Share Reserve. We have reserved 18,810,000 shares for issuance under the
incentive plan. The share reserve automatically will increase on June 30 every
year, starting in 2000, by a number equal to 5% of the outstanding shares on a
fully diluted basis. However, no more than an aggregate of 18,810,000 shares
will be available for incentive stock options. If stock awards granted under
the incentive plan expire or otherwise terminate without being exercised, the
shares not acquired pursuant to these stock awards again become available for
issuance under the incentive plan. If we repurchase unvested shares issued
under stock awards, the repurchased shares become available for reissuance
under the incentive plan.
Administration. The board has delegated the administration of the incentive
plan to a committee. The board has the authority to construe, interpret and
amend the incentive plan as well as to determine:
. the grant recipients;
. the grant dates;
. the number of shares subject to the award;
. the exercisability of the award;
. the exercise price;
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<PAGE>
. the type of consideration; and
. the other terms of the award.
Eligibility. The board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code of 1986, as amended, to our employees,
including officers of Alteon or its affiliates. The board may grant
nonstatutory stock options, stock bonuses, restricted stock purchase awards,
and stock appreciation rights to employees, directors and consultants of Alteon
or its affiliates.
. A stock option is a contractual right to purchase a specified number of
our shares at a specified price (exercise price) for a specified period
of time.
. An incentive stock option is a stock option that has met the
requirements of Section 422 of the Internal Revenue Code. Such an
option is free from regular tax at both the date of grant and the
date of exercise. If two holding period tests are met (two years
between grant date and sale date and one year between exercise date
and sale date), the profit on the option is long-term capital gain
income. If the holding periods are not met, there has been a
disqualifying disposition, and the difference between the exercise
price and the fair market value of the shares on the exercise date
will be taxed at ordinary income rates. The difference between the
fair market value on date of exercise and the exercise price is an
item of alternative minimum tax unless there is a disqualifying
disposition in the year of exercise.
. A nonstatutory stock option is a stock option not meeting the
Internal Revenue Code criteria for qualifying incentive stock options
and, therefore, triggering a tax upon exercise. This type of option
requires payment of state and federal income tax and, if applicable,
FICA/FUTA on the difference between the exercise price and the fair
market value on the exercise date.
. A restricted stock purchase award is a right to purchase shares at a
price either at or near the fair market value of the shares. A stock
bonus, on the other hand, is a grant of shares at no cost to the
recipient in consideration for past services rendered. However, we may
reacquire the shares under either type of award at the original purchase
price (which is zero in the case of a stock bonus) if the recipient's
service with us or an affiliate of ours is terminated before the shares
vest.
. A stock appreciation right generally is a right that allows a recipient
to elect to receive cash or stock of a value equal to the appreciation of
optioned rights. The incentive plan authorizes three types of stock
appreciation rights:
. A tandem stock appreciation right is granted along with a stock
option and is subject to the same terms and conditions applicable to
the option. It requires the holder to elect between exercising the
option (and receiving our shares) or surrendering, in whole or in
part, the option and receiving instead cash or stock equal to the
appreciation of the shares that are surrendered.
. A concurrent stock appreciation right also is granted with a stock
option and is subject to the same terms and conditions applicable to
the option. However, it is exercised automatically at the same time
that the recipient exercises the option. Without surrendering any of
the shares subject to the option, the recipient receives cash or
stock equal to the appreciation of the shares exercised.
. On the other hand, an independent stock appreciation right is not
granted with a stock option, although it generally is subject to the
same terms and conditions applicable to nonstatutory stock options.
On exercising the independent stock appreciation right, the recipient
receives cash or stock equal to the appreciation of the share
equivalents that the recipient is exercising.
Limits on Option Grants. There are limits on the number of shares that can be
subject to an option under the incentive plan. First, Section 162(m) of the
Internal Revenue Code, among other things, denies a deduction to publicly held
corporations for certain compensation paid to specific employees in a taxable
year to the extent that the compensation exceeds $1,000,000. When we become
subject to Section 162(m), the board may not grant options and stock
appreciation rights under the incentive plan to an employee covering an
aggregate of more than 2,250,000 shares in any calendar year.
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<PAGE>
Second, the aggregate fair market value, determined at the grant date, of
shares subject to incentive stock options that are exercisable for the first
time during a calendar year (under the incentive plan and all other stock plans
of Alteon and its affiliates) may not exceed $100,000.
Option Terms. The board may grant incentive stock options with a per share
exercise price of 100% or more of the fair market value of a share of our
common stock on the grant date. It may grant nonstatutory stock options with a
per share exercise price as low as 85% of the fair market value of a share on
the grant date.
An incentive stock option granted to a person who owns (or is deemed to own)
stock possessing more than 10% of our or our affiliates' total combined voting
power must have an exercise price of at least 110% of the fair market value of
our common stock on the grant date and an option term of five years or less.
The maximum option term is 10 years. The board may provide for exercise
periods of any length in individual option grants, subject to certain
restrictions. However, generally an option terminates three months after the
optionholder's service with us or our affiliates terminates. If such
termination is due to the optionholder's disability, the exercise period
generally is extended to 12 months. If such termination is due to the
optionholder's death or if the optionholder dies within three months after his
or her service terminates, the exercise period generally is extended to 18
months following death.
Nonstatutory stock options may be transferable, but incentive stock option
are not transferable. However, the optionholder may designate a beneficiary to
exercise the option following the optionholder's death. Otherwise, option
exercise rights will pass by the optionholder's will or by the laws of descent
and distribution.
Terms of Other Awards. The board determines the purchase price of other stock
awards, but it may not be less than 85% of the fair market value of our common
stock on the grant date. The board may award stock bonuses in consideration of
past services without a purchase payment. Shares sold or awarded under the
incentive plan may, but need not, be restricted and subject to repurchase by us
in accordance with a vesting schedule that the board determines. The board,
however, may accelerate the vesting of this restricted stock.
Other Provisions. Transactions in which we do not receive consideration, such
as a merger, consolidation, reorganization, stock dividend or stock split, may
change the class and number of shares subject to the incentive plan and to
outstanding awards. In that event, the board will appropriately adjust the
incentive plan as to the class and the maximum number of shares subject to the
incentive plan, the cap on shares available for incentive stock options and the
Section 162(m) limit. It also will adjust outstanding awards as to the class,
number of shares subject to these awards and price per share.
Upon specified changes in control of Alteon as provided under the incentive
plan, the surviving entity may assume or replace all outstanding awards under
the incentive plan, but generally the vesting and exercisability of outstanding
awards to employees will accelerate as to 25% of the unvested shares whether or
not the surviving entity assumes or replaces outstanding awards. Awards that
are not assumed or replaced will terminate upon the change in control.
Awards Granted. As of November 30, 1999, we had issued 10,187,477 shares upon
the exercise of options under the incentive plan, 915,907 of which had been
repurchased and 3,383,027 of which were subject to repurchase; options to
purchase 6,410,516 shares at a weighted average exercise price of $11.81 per
share were outstanding; and 3,127,914 shares remained available for future
grant. As of November 30, 1999, the board had not granted any stock bonuses,
restricted stock or stock appreciation rights under the incentive plan.
Plan Termination. The incentive plan will terminate in 2009 unless the board
terminates it sooner.
1999 Employee Stock Purchase Plan
In June 1999, we adopted the 1999 Employee Stock Purchase Plan. The purchase
plan is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code.
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Share Reserve. We have reserved 1,500,000 shares of our common stock for
issuance pursuant to purchase rights granted to employees of Alteon or its
designated affiliates. The share reserve will increase automatically every year
for ten years, starting on June 30, 2000, by the greater of:
. that number of shares equal to 1% of our outstanding shares on a fully
diluted basis; or
. that number of shares that have been issued under the purchase plan
during the prior 12-month period.
The automatic share reserve increase over the ten year period may not exceed
24,000,000 shares.
Offerings. The purchase plan provides a means by which employees may purchase
our common stock through payroll deductions. We implement this purchase plan by
offerings of purchase rights to eligible employees. Generally, all full-time
employees who have been employed for at least five days before an offering
begins may participate in the purchase plan. However, no employee may
participate in the purchase plan if immediately after we grant the employee a
purchase right, the employee has voting power over, or value of, 5% or more of
either our or our affiliates, outstanding capital stock. Under the purchase
plan, we may specify offerings of up to 27 months. The first offering began on
September 23, 1999, which was the effective date of this initial public
offering.
Purchase Price. Unless otherwise determined by our board, common stock is
purchased for accounts of participating employees at a price per share equal to
the lower of:
. 85% of the fair market value of a share of our common stock on the first
day of the offering; or
. 85% of the fair market value of a share on the date of purchase.
The board may provide that employees who become eligible to participate after
the offering begins nevertheless may enroll in the offering. These employees,
however, will purchase our stock at the lower of:
. 85% of the fair market value of a share on the day they were granted a
right to purchase shares; or
. 85% of the fair market value of a share on the date of purchase.
Other Provisions. Employees may authorize payroll deductions of up to 15% of
their specified compensation for the purchase of stock under the purchase plan.
Employees may end their participation in the purchase plan at any time up to 10
days before a purchase period ends. Participation ends automatically on
termination of employment with us and our affiliates.
We may grant eligible employees purchase rights under this plan only if the
purchase rights together with any other purchase rights granted under other
employee stock purchase plans established by us or an affiliate of ours, if
any, do not permit the employee's rights to purchase our stock to accrue at a
rate that exceeds $25,000 of fair market value of our stock for each calendar
year in which the purchase rights are outstanding.
In case of specified changes of control of Alteon, the board may provide that
the successor corporation will assume or replace outstanding purchase rights.
Alternatively, the board may shorten the offering and provide that shares will
be purchased for participants immediately before the change in control.
Shares Issued. As of the date of this prospectus, no shares of common stock
had been purchased under the purchase plan.
Plan Termination. The board may terminate the purchase plan following any
offering. The purchase plan automatically will terminate when the share reserve
is exhausted.
401(k) Plan
We maintain a retirement and deferred savings plan, the 401(k) Plan, for our
U.S. employees. The 401(k) Plan is intended to qualify as a tax-qualified plan
under Section 401(a) of the Internal Revenue Code. The 401(k) Plan provides
that each participant may contribute up to the maximum percentage allowable of
his or her pre-tax compensation (up to a statutory limit, which is $10,500 in
calendar year 2000). Under the 401(k) Plan, each employee is fully vested in
his or her deferred salary contributions. Employee contributions are held and
invested by the 401(k) Plan's trustee. The 401(k) Plan also permits us to make
matching and discretionary contributions, subject to established limits. We
have not made any matching contributions to the 401(k) Plan to date.
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<PAGE>
Limitations of Liability; Indemnification of Directors and Officers
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation further provides that we must indemnify our
directors and may indemnify our other officers and employees and agents to the
fullest extent permitted by Delaware law.
In addition, our amended and restated bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
. we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by law,
our amended and restated certificate of incorporation, our bylaws or
agreements;
. we are required to advance expenses to our directors and executive
officers as incurred in connection with a legal proceedings against them
for which they may be indemnified; and
. the rights conferred in the bylaws are not exclusive.
We have entered into indemnification agreements with each of our directors
and executive officers. These agreements, among other things, require us to
indemnify each director and officer to the fullest extent permitted by
Delaware law, including indemnification for expenses such as attorneys' fees,
judgments, fines and settlement amounts incurred by the director or officer in
any action or proceeding, including any action by or in the right of Alteon,
arising out of the person's services as a director or officer of Alteon, any
subsidiary of ours or any other company or enterprise to which the person
provides services at our request. At present, we are not aware of any pending
or threatened litigation or proceeding involving any of our directors,
officers, employees or agents in which indemnification would be required or
permitted. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
We intend to enter into an underwriting agreement in connection with this
offering which provides for cross-indemnification among us and the
underwriters for indemnification by the underwriters of our directors,
officers, employees and controlling persons and for indemnification by the
selling stockholders of the underwriters for some liabilities, including
liabilities arising under the Securities Act.
Employment Agreements
At the time of commencement of employment, our employees generally sign
offer letters specifying basic terms and conditions of employment. In general,
our employees are not subject to written employment agreements. On October 11,
1996, we entered into an employment offer letter with Dominic P. Orr, our
President and Chief Executive Officer which set his initial annual
compensation at $175,000. In addition, we granted Mr. Orr an option to
purchase 1,761,702 shares of common stock at an exercise price of $0.05 per
share. This option vested 25% on the first anniversary of the date of hire
with the remainder vesting monthly over the following three years. Pursuant to
his employment offer letter, in the event Mr. Orr's employment is terminated
without cause, he will receive severance compensation equal to twelve months
salary and his shares will continue to vest over the twelve-month period.
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<PAGE>
Change of Control Arrangements
Upon specified changes in control of Alteon as provided under the 1999 Equity
Incentive Plan, the surviving entity may assume or replace all outstanding
stock awards under this plan. Generally the vesting and exercisability of 25%
of the outstanding unvested shares subject to stock awards held by participants
will accelerate prior to the change in control, and the options will terminate
upon the change in control if they are not assumed or replaced.
We have entered into employment offer letters with each of the following
executive officers: Mr. Orr, our Chief Executive Officer, and the following
three of our four most highly compensated executive officers, Ms. Lo, Mr.
Booker, and Mr. Sathaye. These letters provide for the acceleration of
specified percentages of the outstanding unvested portions of the options held
by such individuals in the event we are acquired or sold. Specifically, if we
are acquired or sold, 80% of the unvested portion of Mr. Orr's options and 50%
of the unvested portion of the options of the other executive officers
described above vest immediately. If these executive officers accept full time
employment with the acquiring company, the remaining unvested portion of their
options continues to vest. If the acquiring company terminates the employment,
materially reduces the duties or compensation of any of these executive
officers without cause, or requires them to relocate, the remaining unvested
portions of their options immediately vest in full. In addition, upon Mr.
Booker's death or disability, 50% of his unvested shares will vest immediately.
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RELATED PARTY TRANSACTIONS
Certain stock option grants to our executive officers and directors are
described in this prospectus under the caption "Management--Compensation of
Directors," "--Executive Compensation," "--Employment Agreements" and "--Change
of Control Arrangements."
The following executive officers, directors and entities affiliated with our
directors purchased securities in the amounts and as of the dates set forth
below. The number of shares and price per share of the preferred stock in the
table below are based on the number of shares of common stock into which the
preferred stock was converted.
<TABLE>
<CAPTION>
Shares of Preferred Stock
------------------------------------
Common
Purchaser Stock Series A Series B Series C Series D
- --------- --------------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers(1)
Dominic P. Orr........... 2,136,702 -- -- -- --
Barton M. Burstein....... 300,000 -- -- -- --
Joe T. Booker............ 630,000 -- -- -- --
Shirish S. Sathaye....... 300,000 -- -- -- --
Selina Y. Lo............. 1,031,250 -- -- -- --
James G. Burke........... 480,000 -- -- -- --
Anthony Narducci......... 180,000 -- -- -- --
Tench Coxe............... -- 133,638 15,171 8,689 17,928
Adam Grosser............. 41,250 -- -- -- 36,352
Entities Affiliated with
Directors(1)
Matrix Partners(2)....... -- 3,896,103 450,000 253,349 352,942
Sutter Hill Ventures(3).. -- 3,896,103 450,000 253,349 352,942
Price Per Share.......... $0.05 to $14.00 $0.51 $3.33 $4.67 $5.67
Date(s) of Purchase...... 4/97-11/99 5/96 5/97 6/98 6/99
</TABLE>
- --------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Mr. Verhalen, one of our directors, is a general partner of the general
partner of Matrix Partners.
(3) Includes shares held by Tench Coxe. Mr. Coxe, one of our directors, is
managing director of the general partner of Sutter Hill Ventures.
We have entered into an Investor Rights Agreement with each of the purchasers
of preferred stock set forth above, pursuant to which these and other
stockholders will have registration rights with respect to the shares of common
stock issued to them upon conversion of their preferred stock following our
initial offering.
We have entered into indemnification agreements with our directors and our
executive officers for the indemnification of and advancement of expenses to
these persons to the fullest extent permitted by law. We also intend to enter
into indemnification agreements with our future directors and officers. See
"Limitation of Liability; Indemnification of Directors and Officers."
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<PAGE>
We have provided loans to Mr. Orr, our Chief Executive Officer, and the other
executive officers set forth below in connection with the exercise of their
options prior to vesting. These loans were provided pursuant to promissory
notes that are full-recourse and secured by the shares purchased with the note.
The notes bear interest at a rate of 6.5% per annum and are due three years
from the date of the note or upon termination of employment. The following
table sets forth certain information regarding these notes:
<TABLE>
<CAPTION>
Name Amount of Note Date of Note
---- -------------- ------------
<S> <C> <C>
Dominic P. Orr................................ $1,062,500 7/99
55,404 4/97
62,500 5/98
Barton M. Burstein............................ 6,400 4/97
25,000 7/97
12,500 1/98
145,200 9/99
Shirish S. Sathaye............................ 100,000 5/99
Selina Y. Lo.................................. 531,250 7/99
30,260 4/97
25,000 1/98
James G. Burke................................ 392,000 5/99
388,570 11/98
Anthony Narducci.............................. 285,017 11/98
</TABLE>
We believe that all of the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our outstanding common stock as of November 30, 1999 for:
. each person or group who beneficially owns more than 5% of the common
stock;
. our chief executive officer;
. each of our four other most highly compensated executive officers whose
compensation exceeded $100,000 during our fiscal year ended June 30,
1999;
. each of our directors;
. all of our directors and executive officers as a group; and
. each selling stockholder.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses sole voting and investment power with
respect to all shares of common stock held by them. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of
November 30, 1999 and not subject to repurchase as of such date are deemed
outstanding for computing the percentage of the person holding these options,
but are not deemed outstanding for computing the percentage of any other
person. Applicable percentage ownership in the following table is based on
39,125,087 shares of common stock outstanding as of November 30, 1999, and
40,375,087 shares of common stock outstanding immediately following the
completion of this offering. Unless otherwise indicated, the address of each of
the named individuals is c/o Alteon WebSystems, Inc., 50 Great Oaks Boulevard,
San Jose, California 95119.
<TABLE>
<CAPTION>
Amount and Nature of Shares of Common Stock Beneficially Owned as of November 30, 1999
-------------------------------------------------------------------------------------------------
Shares Issuable
Shares subject Pursuant to Beneficial Ownership Beneficial Ownership
to a Right of Options Prior to the Offering Number of After the Offering
Repurchase as of Exercisable ------------------------ Shares ------------------------
November 30, within 60 days of Number Being Number
Name 1999(1) November 30, 1999 of Shares(2) Percent Offered of Shares Percent
- ---- ---------------- ----------------- ------------- -------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Five Percent Stockholders:
Entities affiliated with
Matrix Partners(3)........ -- -- 4,952,394 12.7% %
Directors and Officers:
Dominic P. Orr............. 642,006(4) 187,500 762,213 4.0
Barton M. Burstein......... 116,251 40,000 182,549 *
Joe T. Booker.............. 196,875 155,000 431,125 2.0
Shirish S. Sathaye......... -- 300,000 300,000 1.5
Selina Y. Lo............... 337,657 93,750 669,968 2.8
Tench Coxe(5).............. -- 165,000 1,867,945 5.2
Adam Grosser............... -- 123,750 77,602 *
Andrew W. Verhalen(6)...... -- 165,000 4,952,394 13.0
All executive officers and
directors as a group
(10 people)(7)............ 1,748,096 1,510,000 9,440,889 32.3
Other Selling Stockholders:
</TABLE>
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<PAGE>
- --------
* Less than 1%
(1) The unvested portion of the shares of common stock is subject to a right of
repurchase, at the original option exercise price, in the event the holder
ceases to provide service to Alteon and its affiliates or upon a change of
control of Alteon. The option exercise prices range from $0.05 to $14.00.
See "Management--Executive Compensation" for more detail on our right to
repurchase.
(2) Excludes shares of common stock subject to a right of repurchase as of July
31, 1999.
(3) Includes 4,704,775 shares held by Matrix Partners IV, L.P. and 247,619
shares held by Matrix IV Entrepreneurs Fund, L.P. Matrix Partners is
located at 2500 Sand Hill Road, Suite 113, Menlo Park, CA 94025.
(4) Excludes 42,000 shares of common stock held in trust for Alvin C. Orr and
42,000 shares held in a trust for Adria C. Orr. Mr. Orr is not the trustee
of either of these trusts.
(5) Includes 1,351,542 shares held by Sutter Hill Ventures, 516,403 shares held
by parties related to Sutter Hill Ventures, 170,252 shares held by Mr. Coxe
and 8,689 shares held by Wells Fargo Bank, Trustee SHV M/P/T FBO Tench
Coxe. Mr. Coxe is a managing director of the general partner of Sutter Hill
Ventures. Mr. Coxe disclaims beneficial ownership of the shares held by
Sutter Hill Ventures except to the extent of his proportionate partnership
interest in these shares.
(6) Includes 4,704,775 shares held by Matrix Partners IV, L.P. and 247,619
shares held by Matrix IV Entrepreneurs Fund, L.P. Mr. Verhalen is a general
partner of the general partner of Matrix Partners IV, L.P. and Matrix IV
Entrepreneurs Fund, L.P. Mr. Verhalen disclaims beneficial ownership of
these shares except to the extent of his proportionate partnership interest
in these shares.
(7) Includes shares described in the notes above, as applicable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 300 million shares of common stock,
$0.001 par value, and five million shares of preferred stock, $0.001 par value.
Common Stock
As of November 30, 1999, there were 39,125,087 shares of common stock
outstanding that were held of record by approximately 393 stockholders. Upon
the closing of this offering, there will be 40,375,087 shares of common stock
outstanding (assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options) after giving effect to the sale of the
shares of common stock offered by this prospectus.
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of our stockholders. Subject to preferences that may be
applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to receive ratably any
dividends out of assets legally available therefor as our board of directors
may from time to time determine. Upon liquidation, dissolution or winding up of
Alteon, holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
Pursuant to our amended and restated certificate of incorporation, our board
of directors has the authority, without further action by the stockholders, to
issue up to five million shares of preferred stock in one or more series. The
board will be able to fix the rights, preferences, privileges and restrictions
of the preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and
the number of shares constituting any series or the designation of this series.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock, and the likelihood that holders of preferred stock
will receive dividend payments and payments upon liquidation may have the
effect of delaying, deferring or preventing a change in control of Alteon,
which could depress the market price of our common stock. We have no present
plan to issue any shares of preferred stock.
Registration Rights of Stockholders
Holders of 21,456,469 shares of common stock or their transferees are
entitled to rights to register these shares under the Securities Act of 1933.
If we propose to register any of our securities under the Securities Act,
either for our own account or for the account of other securityholders, the
holders of these shares will be entitled to notice of the registration and will
be entitled to include, at our expense, their shares of common stock. In
addition, the holders of these shares may require us, at our expense and on not
more than two occasions at any time beginning in March 2000, to file a
registration statement under the Securities Act with respect to their shares of
common stock, and we will be required to use our best efforts to effect the
registration. Further, the holders may require us at our expense to register
their shares on Form S-3 when this form becomes available. These rights
terminate when a holder is able to sell all its shares pursuant to Rule 144
under the Securities Act in any 90 day period or, if earlier, on September 23,
2004.
Anti-Takeover Provisions of Delaware and Charter Provisions
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any
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<PAGE>
interested stockholder for a period of three years following the date that the
stockholder became an interested stockholder unless:
. prior to this date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and by employee stock plans in which
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. on or subsequent to this date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our amended and restated certificate of incorporation requires that any
action required or permitted to be taken by our stockholders must be effected
at a duly called annual or special meeting of stockholders and may not be
effected by a consent in writing. Additionally, our certificate of
incorporation
. substantially limits the use of cumulative voting in the election of
directors;
. provides that the authorized number of directors may be changed only by
resolution of the board of directors; and
. authorizes our board of directors to issue blank check preferred stock to
increase the amount of outstanding shares.
Our amended and restated bylaws provide that candidates for director may be
nominated only by the board of directors or by a stockholder who gives written
notice to us no later than 60 days prior nor earlier than 90 days prior to the
first anniversary of the last annual meeting of stockholders. The authorized
number of directors is fixed in accordance with our certificate of
incorporation. The board currently consists of five members divided into three
different classes. As a result, only one class of directors will be elected at
each annual meeting of stockholders of Alteon, with the other classes
continuing for the remainder of their respective terms. The board may appoint
new directors to fill vacancies or newly created directorships. Our bylaws also
limit who may call a special meeting of stockholders.
Delaware law and these charter provisions may have the effect of deterring
hostile takeovers or delaying changes in control of our management, which could
depress the market price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Securities
Transfer & Trust, Inc.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the effective date of our initial public offering on September 23,
1999, there was no public market for our common stock. Future sales of
substantial amounts of our common stock in the public market could adversely
affect prevailing market prices.
Upon completion of this offering, we will have outstanding an aggregate of
40,375,087 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after November 30,
1999. Of these shares, the 5,000,000 shares sold by us and the selling
stockholders in this offering, together with 4,600,000 shares sold in our
initial public offering on September 23, 1999 will be freely tradable without
restriction or further registration under the Securities Act, unless these
shares are purchased by affiliates. The remaining 30,775,087 shares of common
stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration described below under Rules 144,
144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:
. shares will be eligible for sale following February 21, 2000 and
prior to 90 days after the date of this prospectus;
. shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, beginning 90 days after the date of
this prospectus; and
. shares will be eligible for sale upon the exercise of vested
options 90 days after the date of this prospectus.
Lock-Up Agreements. All of the selling stockholders have agreed not to
transfer or dispose of, directly or indirectly, any shares of our common stock
for a period of 90 days after the date of this prospectus. In addition, all of
our officers, directors, stockholders and option holders have agreed not to
transfer or dispose of, directly or indirectly, any shares of our common stock
or any securities convertible into or exercisable or exchangeable for shares of
our common stock, between September 23, 1999, the effective date of our initial
public offering, and February 21, 2000. Transfers or dispositions can be made
sooner only with the prior written consent of Lehman Brothers Inc.
Rule 144. In general, under Rule 144 as currently in effect, a person or
persons whose shares are aggregated, who has beneficially owned restricted
securities for at least one year, including the holding period of any prior
owner except an affiliate, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 441,242 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
Alteon.
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 preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
shares will qualify as "144(k) shares" within 90 days after the date of this
prospectus.
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<PAGE>
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in connection with a compensatory
stock purchase plan or option plan or other written agreement is eligible to
resell their shares, subject only to the manner of sale provisions of Rule 144,
and by affiliates under Rule 144 without compliance with its holding period
requirements.
Registration Rights. The holders of 21,456,469 shares of our common stock, or
their transferees, are entitled to rights with respect to the registration of
their shares under the Securities Act. Registration of their shares under the
Securities Act would result in these shares becoming freely tradable without
restriction under the Securities Act, except for shares purchased by
affiliates, immediately upon the effectiveness of such registration.
Stock Options. We have filed a registration statement under the Securities
Act covering shares of common stock reserved for issuance under our 1999 Equity
Incentive Plan and 1999 Employee Stock Purchase Plan. Shares registered under
the registration statement are available for sale in the open market, subject
to Rule 144 volume limitations applicable to affiliates and the contractual
restrictions described above.
68
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., FleetBoston Robertson Stephens
Inc., Thomas Weisel Partners LLC, Dain Rauscher Wessels and Fidelity Capital
Markets, a division of National Financial Services Corporation, are acting as
representatives, has agreed to purchase from us and the selling stockholders
the number of shares of common stock shown opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers Inc. ..............................................
FleetBoston Robertson Stephens Inc.................................
Thomas Weisel Partners LLC.........................................
Dain Rauscher Wessels..............................................
Fidelity Capital Markets
a division of National Financial Services Corporation.............
---------
Total............................................................ 5,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. It also provides that, if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock that the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirement
that:
. the representations and warranties made by us to the underwriters are
true;
. there is no material change in the financial markets; and
. we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
shown on the cover page of this prospectus. The representatives have also
advised us that the underwriters propose to offer the shares of common stock to
dealers, who may include the underwriters, at the public offering price less a
selling 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
brokers and dealers. After completion of the offering, the underwriters may
change the offering price and other selling terms.
We and the selling stockholders have granted the underwriters an option to
purchase on a pro rata basis up to 750,000 additional shares of common stock,
exercisable solely to cover over-allotments, if any, at the public offering
price less the underwriting discount shown on the cover page of this
prospectus. The underwriters may exercise this option at any time until 30 days
after the date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated in the
table above and we will be obligated, under the over-allotment option, to sell
the shares of common stock to the underwriters.
We and the selling stockholders have agreed that, without the prior consent
of Lehman Brothers Inc., neither we nor they will, directly or indirectly,
offer, sell or otherwise dispose of any shares of common stock or any
securities that may be converted into or exchanged for any shares of common
stock for a period of 90 days from the date of this prospectus. All of our
executive officers, directors and substantially all of our stockholders have
agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities that may be
converted into or exchanged for any shares of common stock until February 21,
2000. See "Shares Eligible for Future Sale."
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a
69
<PAGE>
lead manager or co-manager on 99 filed public offerings of equity securities,
of which 79 have been completed. Since that time, it also has acted as a
syndicate member in an additional 54 public offerings of equity securities.
Thomas Weisel Partners LLC does not have any material relationship with us or
any of our officers, directors or other controlling persons, except with
respect to the underwriting agreement.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information relating to this offering
to its brokerage customers, by way of outgoing emails, pager messages and
postings on Fidelity's Internet web pages. A copy of the preliminary prospectus
in electronic format will be made available on the Internet website hosted by
Fidelity, which is accessible to all Fidelity brokerage customers. All final
prospectuses will be delivered to Fidelity brokerage customers by regular mail.
Brokerage customers of Fidelity may not place indications of interest, orders
and confirmations by online means and such customer transactions are only made
possible by telephone conversations with Fidelity's representatives.
Our common stock is quoted on the Nasdaq National Market under the symbol
"ATON."
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act and
liabilities arising from breaches of the representations and warranties
contained in the underwriting agreement. We and the selling stockholders have
also agreed to contribute to payments that the underwriters may be required to
make for these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering. This means that they may sell more shares than
are shown on the cover page of this prospectus. If the underwriters create a
short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that, if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or
to stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members that sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we, any of the underwriters or any of the selling stockholders makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the common
stock. In addition, neither we, any of the underwriters or any of the selling
stockholders makes any representation that the representatives will engage in
these transactions or that these transactions, once commenced, will not be
discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the public offering price shown on the
cover page of this prospectus.
70
<PAGE>
As permitted by Rule 103 of Regulation M promulgated by the Securities and
Exchange Commission under the Exchange Act, the underwriters, if any, that are
market makers, referred to as passive market makers, in the common stock, may
make bids for or purchases of the common stock on the Nasdaq National Market
until the time, if any, when a stabilizing bid for the securities has been
made. Rule 103 generally provides that:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in the securities for the
two full consecutive calendar months (or any 60 consecutive days ending
within 10 days) immediately preceding the filing date of the registration
statement of which this prospectus forms a part;
. a passive market maker may not effect transactions or display bids for
common stock at a price that exceeds the highest independent bid for the
common stock by persons who are not passive market makers; and
. bids made by passive market makers must be identified as such.
LEGAL MATTERS
Cooley Godward LLP, Palo Alto, California, will provide Alteon with an
opinion as to the validity of the common stock offered under this prospectus.
Fenwick & West LLP, Palo Alto, California, will pass upon certain legal matters
related to this offering for the underwriters. As of the date of this
prospectus, certain partners and associates of Cooley Godward LLP own an
aggregate of 70,800 shares of common stock of Alteon through investment
partnerships and certain partners and associates own 12,727 shares of common
stock directly.
EXPERTS
The consolidated financial statements as of June 30, 1998 and 1999, and for
each of the three years in the period ended June 30, 1999 included in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing in this prospectus
and elsewhere in the registration statement, and have been included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered under this prospectus. This prospectus does not contain
all of the information in the registration statement and the exhibits and
schedule to the registration statement. For further information with respect to
us and our common stock, we refer you to the registration statement and to the
exhibits and schedule to registration statement. Statements contained in this
prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and in each instance, we refer you to the copy of
the contract or other document filed as an exhibit to the registration
statement. Each of these statements is qualified in all respects by this
reference.
We are subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended, and we file reports, proxy statements and
other information with the SEC. You may inspect a copy of the registration
statement and the reports without charge at the SEC's principal office in
Washington, D.C. Copies of all or any part of the registration statement and
information we file with the SEC may be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of fees prescribed by the SEC. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
Web site is http://www.sec.gov. The SEC's toll free investor information
service can be reached at 1-800-SEC-0330. Information contained on our website
does not constitute part of this prospectus.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and
quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information.
71
<PAGE>
Alteon WebSystems, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of June 30, 1998 and 1999................ F-3
Consolidated Statements of Operations for the Years Ended June 30, 1997,
1998 and 1999 ......................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1997, 1998 and 1999 ............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997,
1998 and 1999 ......................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999 and June
30, 1999............................................................... F-17
Condensed Consolidated Statements of Operations for the Quarters Ended
September 30, 1999 and 1998............................................ F-18
Condensed Consolidated Statements of Cash Flows for the Quarters Ended
September 30, 1999 and 1998............................................ F-19
Notes to Condensed Consolidated Financial Statements.................... F-20
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Alteon WebSystems, Inc.:
We have audited the accompanying consolidated balance sheets of Alteon
WebSystems, Inc. and subsidiary (collectively, the "Company") as of June 30,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended June 30, 1997, 1998 and
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 1998 and
1999, and the results of its operations and its cash flows for the years ended
June 30, 1997, 1998 and 1999 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
July 16, 1999
F-2
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents...................................... $ 9,047 $ 29,766
Accounts receivable (net of allowance of $465 in 1998 and
$1,369 in 1999).......................................... 2,567 3,853
Inventory................................................. 4,906 2,632
Prepaid expenses and other current assets................. 266 397
-------- --------
Total current assets.................................... 16,786 36,648
Property and equipment, net................................ 2,690 3,931
Other long-term assets..................................... 66 42
-------- --------
Total assets............................................... $ 19,542 $ 40,621
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 2,441 $ 3,561
Accrued compensation and related liabilities.............. 1,303 2,052
Other accrued expenses.................................... 1,623 3,783
Line of credit............................................ 802 --
Current portion of note payable to bank................... 542 1,363
Current portion of capital lease obligations.............. 232 348
Income taxes payable...................................... -- 53
-------- --------
Total current liabilities............................... 6,943 11,160
-------- --------
Note payable to bank....................................... 903 1,798
Capital lease obligations.................................. 468 121
Sublease deposits.......................................... -- 93
Commitments and contingencies (Notes 7 and 11)
Stockholders' equity:
Convertible preferred stock-- $0.001 par value;
authorized, 15,000,000 shares:
designated, 15,000,000 shares; outstanding, 10,248,764
shares in 1998 and 13,785,326 in 1999 (liquidation
preference $29,774 in 1998 and $58,272 in 1999).......... 29,862 58,294
Common stock--$0.001 par value; authorized, 300,000,000
shares; outstanding, 11,590,803 shares in 1998 and
12,987,109 in 1999....................................... 1,079 3,224
Notes receivable from stockholders........................ (848) (2,465)
Deferred compensation..................................... -- (196)
Accumulated deficit....................................... (18,865) (31,408)
-------- --------
Total stockholders' equity................................. 11,228 27,449
-------- --------
Total liabilities and stockholders' equity................. $ 19,542 $ 40,621
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $ 178 $ 13,572 $ 26,254
Cost of sales.................................... 637 7,893 13,385
------- -------- --------
Gross profit (loss).............................. (459) 5,679 12,869
Operating expenses:
Sales and marketing............................ 1,921 6,485 13,061
Research and development....................... 4,782 8,816 10,004
General and administrative..................... 744 1,505 2,538
------- -------- --------
Total operating expenses..................... 7,447 16,806 25,603
------- -------- --------
Loss from operations............................. (7,906) (11,127) (12,734)
Interest income.................................. 197 493 541
Interest expense................................. (75) (171) (277)
------- -------- --------
Loss before income taxes......................... (7,784) (10,805) (12,470)
Income taxes..................................... 1 1 73
------- -------- --------
Net loss......................................... $(7,785) $(10,806) $(12,543)
======= ======== ========
Basic and diluted loss per common share.......... $ (5.15) $ (2.18) $ (1.65)
======= ======== ========
Basic and diluted common shares used in
computation..................................... 1,511 4,951 7,610
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Preferred Notes
Stock Common Stock Receivable Total
----------------------------------------- from Deferred Accumulated Stockholders'
Shares Amount Shares Amount Stockholders Compensation Deficit Equity
------------ -------------------- ------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1996.. 5,194,804 $ 3,993 5,700,045 $ 38 $ -- $ -- $ (274) $ 3,757
Sale of Series A
preferred stock (net of
issuance cost of $5)... 398,000 358 358
Sale of Series B
preferred stock (net of
issuance cost of $20).. 3,178,000 15,870 15,870
Conversion of note
payable to Series B
preferred stock........ 300,000 1,500 1,500
Exercise of stock
options................ 1,156,269 62 62
Issuance of common stock
for services........... 251,794 13 13
Exercise of stock
options for notes
receivable............. 4,220,951 225 (225) --
Issuance of stock
options to
consultants............ 7 7
Net loss................ (7,785) (7,785)
------------ --------- ---------- ------ ------- ----- -------- -------
Balances, June 30,
1997................... 9,070,804 21,721 11,329,059 345 (225) -- (8,059) 13,782
Sale of Series B
preferred stock (net of
issuance cost of $2)... 84,000 503 503
Sales of Series C
preferred stock (net of
issuance cost of $20).. 1,093,960 7,638 7,638
Exercise of stock
options................ 336,092 59 59
Issuance of common stock
for services........... 185,064 83 83
Exercise of stock
options for notes
receivable............. 1,649,500 701 (701) --
Issuance of stock
options to
consultants............ 17 17
Repurchase of common
stock in exchange for
notes receivable....... (776,223) (84) 67 (17)
Repurchase of founder's
stock.................. (1,132,689) (42) (42)
Repayment of notes
receivable............. 11 11
Net loss................ (10,806) (10,806)
------------ --------- ---------- ------ ------- ----- -------- -------
Balances, June 30,
1998................... 10,248,764 29,862 11,590,803 1,079 (848) -- (18,865) 11,228
Sales of Series C
preferred stock (net of
issuance cost of $20).. 1,041,730 7,271 7,271
Sale of Series D
preferred stock (net of
issuance costs of
$45)................... 2,494,832 21,161 21,161
Exercise of stock
options ............... 159,417 74 74
Issuance of common stock
for services........... 60,889 171 171
Exercise of stock
options for notes
receivable............. 1,298,187 1,714 (1,714) --
Issuance of stock
options to
consultants............ 22 22
Repurchase of common
stock in exchange for
notes receivable....... (122,187) (45) 30 (15)
Repayment of notes
receivable............. 67 67
Deferred compensation... 209 (209) --
Amortization of deferred
stock compensation..... 13 13
Net loss................ (12,543) (12,543)
------------ --------- ---------- ------ ------- ----- -------- -------
Balances, June 30,
1999................... 13,785,326 $ 58,294 12,987,109 $3,224 $(2,465) $(196) $(31,408) $27,449
============ ========= ========== ====== ======= ===== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (7,785) $ (10,806) $ (12,543)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 264 907 1,688
Amortization of deferred compensation......... -- -- 13
Deferred rent................................. 65 93 240
Issuance of common stock for services......... 13 83 171
Issuance of stock options to consultants...... 7 17 22
Changes in assets and liabilities:
Accounts receivable.......................... (90) (2,477) (1,286)
Inventory.................................... (431) (4,474) 2,274
Prepaid expenses and other current assets.... (88) (177) (131)
Accounts payable............................. 745 1,606 1,120
Accrued compensation and related
liabilities................................. 475 665 749
Other accrued expenses....................... 239 1,239 2,066
-------- --------- ---------
Net cash used in operating activities....... (6,586) (13,324) (5,617)
-------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........... (644) (2,049) (2,926)
Other assets.................................. (19) (24) 21
-------- --------- ---------
Net cash used in investing activities....... (663) (2,073) (2,905)
-------- --------- ---------
Cash flows from financing activities:
Net proceeds from sale of preferred stock..... 16,228 8,141 28,432
Borrowings under note payable................. 1,500 1,535 2,465
Repayments of note payable.................... -- (90) (749)
Proceeds from exercise of stock options, net
of repurchases............................... 62 42 59
Repurchase of founder's stock................. -- (42) --
Repayment of note receivable for common
stock........................................ -- 11 67
Repayment of capital lease obligations........ (130) (197) (231)
Repayment (borrowing) under line of credit.... -- 802 (802)
-------- --------- ---------
Net cash provided by financing activities... 17,660 10,202 29,241
-------- --------- ---------
Net increase (decrease) in cash and
equivalents................................... 10,411 (5,195) 20,719
Cash and equivalents, beginning of period...... 3,831 14,242 9,047
-------- --------- ---------
Cash and equivalents, end of period............ $ 14,242 $ 9,047 $ 29,766
======== ========= =========
Noncash investing and financing activities:
Conversion of note payable to preferred
stock........................................ $ 1,500 $ -- $ --
Property acquired under capital leases........ $ 1,026 $ -- $ --
Exercise of stock options for notes
receivable, net of repurchases............... $ 225 $ 634 $ 1,714
Additional cash flow information:
Interest paid................................. $ 75 $ 167 $ 276
Taxes paid.................................... $ 1 $ 1 $ 20
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1998 and 1999
1.Organization and Significant Accounting Policies
Organization--Alteon WebSystems, Inc., formerly Alteon Networks, Inc. and
Acteon Networks, Inc. (the "Company"), develops, markets and supports Web data
center products which are designed to meet the challenges of managing Web
traffic as well as providing the high performance and availability of
networking infrastructure solutions. The Company was incorporated in Delaware
on March 18, 1996. The Company was considered a development stage company until
April 1997 when it began shipping products.
Basis of Consolidation--The consolidated financial statements include the
Company and its wholly-owned subsidiary, Alteon WebSystems International, Inc.
(a Delaware corporation). All significant intercompany accounts and
transactions are eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk--Financial instruments that potentially expose
the Company to concentrations of credit risk consist primarily of cash and
equivalents and accounts receivable. Risks associated with cash equivalents are
mitigated by banking with creditworthy institutions. The Company derives a
significant portion of net sales from a small number of customers. To reduce
credit risk, the Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended when considered
necessary, but generally requires no collateral. The Company maintains
allowances for potential bad debt losses.
Concentration of Manufacturing and Components--The Company uses a third party
in Thailand to manufacture most of its products. In addition, the Company
purchases a critical component, a custom integrated circuit, which is available
from a single supplier. These concentrations expose the Company to the risk of
manufacturing delays and the possibility of lost sales.
Financial Instruments--The Company's financial instruments include cash and
equivalents, notes receivable from stockholders and long-term obligations. At
June 30, 1998 and 1999, the fair values of these financial instruments
approximated their financial statement carrying amounts.
Cash and Equivalents--The Company considers all highly liquid investments
purchased with a maturity of three months or less at the date of acquisition to
be cash equivalents. Included in cash and equivalents are interest bearing
certificates of deposit, rates from 4.45% to 4.7%, totaling $22.5 million at
June 30, 1999.
Inventory--Inventory is stated at the lower of standard cost (first-in,
first-out) or market.
Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the lesser of estimated useful lives of three years, or the remaining lease
term.
Long-Lived Assets--The Company evaluates the carrying value of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
value of the asset may be impaired. An impairment loss is recognized when
estimated future cash flows expected to result from the use of the asset,
including disposition, are less than the carrying value of the asset.
F-7
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
Revenue Recognition--Revenue is generally recognized upon shipment. Service
contract revenue is recognized over the life of the service contract agreement.
Revenues are recorded net of sales returns and allowances. Product warranty
costs are accrued when revenue is recognized.
Research and Development--The costs of the development of hardware products
and enhancements to existing hardware products are expensed as incurred. The
costs for the development of new software products that are included in the
hardware products and substantial enhancements to such existing software
products are expensed as incurred until technological feasibility has been
established, at which time any additional costs would be capitalized. Because
the Company believes its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.
Advertising--Cooperative advertising obligations are expensed at the time the
related revenues are recognized. All other advertising costs are expensed as
incurred and approximated $24,000, $54,000 and $209,000 in fiscal 1997, 1998
and 1999, respectively.
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) No. 25, Accounting for Stock Issued to Employees.
Loss Per Common Share--Basic loss per common share is computed by dividing
loss attributable to common stockholders by the weighted-average number of
common shares outstanding for the period (excluding shares subject to
repurchase). Diluted loss per common share is computed by dividing loss
attributable to common stockholders by the weighted-average number of common
shares and potentially dilutive common securities outstanding for the period.
Potentially dilutive common shares are excluded from the computation in loss
periods as their effect would be antidilutive.
New Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for the Company's fiscal year ending June 30, 2001.
The Company believes that this statement will not have a significant impact on
its financial results.
In March 1998, the American Institute of Certified Public Accountant, or
AICPA, issued Statement of Position, or SOP, No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-
1 requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. SOP No. 98-1 will be effective
for Alteon's fiscal year ending June 30, 2000. The Company believes that this
statement will not have a significant impact on its financial results.
Foreign Currency Transactions--The majority of the Company's sales and
expenses are denominated in US dollars. Gains or losses from foreign currency
translation are included in other income and were insignificant for all periods
presented.
F-8
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
2.Inventory
Inventory at June 30 consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Raw materials and subassemblies............................... $2,046 $ 973
Inventory at manufacturer in Thailand......................... 1,921 769
Work in process............................................... 755 394
Finished goods................................................ 184 496
------ ------
$4,906 $2,632
====== ======
</TABLE>
3.Property and Equipment, Net
Property and equipment, net at June 30 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Computers, equipment and software............................ $3,294 $4,653
Furniture and fixtures....................................... 327 778
Leasehold improvements....................................... 237 1,347
------ ------
3,858 6,778
Accumulated depreciation and amortization.................... (1,168) (2,847)
------ ------
$2,690 $3,931
====== ======
</TABLE>
4.Line of Credit
During fiscal 1998, the Company obtained a revolving bank line of credit,
under which the Company could borrow up to $1,500,000 subject to a $750,000
sublimit on letter of credit issuances. In December 1998, the line was
increased to $3,000,000. The line of credit will mature in December 1999. At
June 30, 1999, there were no borrowings outstanding under the revolving bank
line of credit. Borrowings under the line of credit agreement bear interest at
a rate equal to one half of one percentage point (0.5%) above the bank's prime
rate (7.75% at June 30, 1999) and are collateralized by substantially all of
the Company's assets. The line of credit also contains restrictive covenants,
including a minimum quick ratio of 1.5:1 and tangible net worth as defined by
the agreement of at least $7,500,000. At June 30, 1999, the Company was in
compliance with all covenants.
5.Other Accrued Expenses
Accrued expenses at June 30 consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Deferred revenue.............................................. $ 667 $ 711
Accrued warranty.............................................. 350 893
Marketing and related accruals................................ 160 275
Professional fees and related accruals........................ 78 907
Deferred rent................................................. 159 399
Other......................................................... 209 598
------ ------
$1,623 $3,783
====== ======
</TABLE>
F-9
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
6.Note Payable to Bank
The Company entered into a borrowing arrangement in March 1998, which was
modified in December 1998 to permit the Company to borrow up to $4,000,000 for
the purchase of equipment. At June 30, 1999, the borrowings bear interest at a
rate equal to three-quarters of one percentage point (0.75%) above the bank's
prime rate (7.75% at June 30, 1999) and are collateralized by a continuing
security interest in all equipment collateral, as defined in the agreement.
Each draw on the loan is payable in either 34 or 36 equal monthly installments
of principal and interest. At June 30, 1999, the Company had approximately
$3,161,000 outstanding, payable through June 2002.
7.Lease Commitments
Equipment with a net book value of approximately $478,000 and $136,000 at
June 30, 1998 and 1999, respectively (net of accumulated amortization of
approximately $548,000 and $890,000, respectively), was leased under capital
leases. Under the lease agreement, the Company has the option to make a balloon
lease payment equal to 20% of the equipment's original purchase price or to
extend the lease for an additional 12 months at the end of the lease period at
a rate of 1.85% per month on the equipment's original purchase price.
The Company leases its primary facility under a noncancelable operating lease
which expires in April 2003. Rent expense was approximately $270,000, $414,000
and $1,117,000 in fiscal 1997, 1998 and 1999, respectively. One of the
Company's facility leases is secured by a $697,000 letter of credit.
Effective September 1998, the Company subleased one of its facilities. The
cash received from this lease was $169,000 in fiscal 1999. The cash to be
received over the remaining lease term is $404,000. Effective July 1999, the
Company subleased a portion of another facility for 34 months. The cash to be
received is $1,221,000. In connection with these subleases, the Company has
deposits of $93,000 from the lessees.
At June 30, 1999, minimum future lease payments are as follows, excluding
sublease income discussed above (in thousands):
<TABLE>
<CAPTION>
Year Ending Capital Operating
June 30, Leases Leases
----------- ------- ---------
<S> <C> <C>
2000....................................................... $390 $1,359
2001....................................................... 141 1,459
2002....................................................... -- 1,234
2003....................................................... -- 977
Thereafter................................................. -- --
---- ------
Total minimum lease payments............................... 531 $5,029
======
Amount representing interest............................... (62)
----
Present value of minimum lease payments.................... 469
Current portion............................................ 348
----
Long-term capital lease obligations........................ $121
====
</TABLE>
8.Stockholders' Equity
Stock Split
During June 1999, the stockholders approved a stock split of three shares of
common stock for every two shares of outstanding common stock. The conversion
ratio of the Series A, Series B and Series C preferred
F-10
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
stock adjusted in accordance with stated antidilution provisions. All share and
per share amounts in these financial statements have been adjusted to give
effect to these changes. In addition, the stockholders approved an increase in
the number of authorized shares of common and preferred stock.
Convertible Preferred Stock
Significant terms of the convertible preferred stocks are as follows:
. Every share of Series A, Series B, Series C and Series D preferred stock
is convertible into one and one half shares of common stock at the option
of the holder, subject to certain antidilution adjustments. Each share of
preferred stock will automatically convert upon the earlier of the
closing date of an underwritten public offering of the Company's common
stock at an offering price of at least $6.40 per common share and
aggregate proceeds that are at least $10,000,000 or upon the affirmative
election of the holders of at least a majority of the preferred shares.
. Holders of the preferred stock are entitled to one vote for each share of
common stock into which such shares may be converted.
. Stockholders are entitled to receive annual noncumulative dividends in
preference to holders of common shares, if and when declared by the Board
of Directors. The dividend rate for Series A, Series B, Series C and
Series D preferred stock per share per annum is $0.06, $0.40, $0.56 and
$0.68, respectively. No dividends have been declared as of June 30, 1999.
. In the event of a merger, consolidation, sale, transfer or lease of all
or substantially all of the Company's assets, holders of Series A, Series
B, Series C and Series D preferred stock are entitled to receive $0.77,
$5.00, $7.00 and $8.50 per share, respectively, plus any declared and
unpaid dividends with respect to such shares. After the payment of the
full liquidation preference to the preferred stockholders, any remaining
assets of the Company will be distributed to the common stockholders.
Common Stock
At June 30, 1999, the Company had reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock.................................. 20,677,972
Issuance under Equity Incentive Plan........................... 10,364,446
Employee Stock Purchase Plan................................... 1,500,000
----------
Total........................................................ 32,542,418
==========
</TABLE>
Restricted Stock
The Company has the right to repurchase the unvested portion of restricted
common stock at the original purchase price. The Company's right to purchase
these shares expires over 48 months from the grant date. Additionally, certain
officers and employees exercised unvested stock options with full recourse
notes. The related shares of common stock are subject to repurchase by the
Company at the original purchase price per share upon the purchaser's cessation
of service prior to the vesting of such shares. The restricted stock continues
to vest in accordance with the terms of the original stock option. The related
notes bear interest at 6.5% and mature three years from the loan date. At June
30, 1999, 4,067,341 outstanding shares of such stock were subject to
repurchase.
F-11
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
Stock Options
Under the 1999 Equity Incentive Plan (the "Plan" and formerly the 1996 Stock
Option Plan), incentive stock options may be granted to employees and
nonstatutory stock options may be granted to employees, non-employees and
directors. The number of common shares reserved under the Plan was increased to
18,810,000 in June 1999. The share reserve will increase each year, from June
30, 2000 to June 30, 2009, by 5% of the outstanding shares of common stock. The
number of shares available as incentive stock options may not exceed
18,810,000. Incentive stock options are granted at fair market value (as
determined by the Board of Directors) at the date of grant; nonstatutory
options may be granted at 85% of fair market value. Options are exercisable at
any time with any unvested shares subject to repurchase at the original
exercise price. Options generally vest over four years and expire ten years
from the date of grant. Upon a change in ownership of the Company (as defined
in the Plan), 25% of the unvested shares become vested.
Option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
---------- --------
<S> <C> <C>
Outstanding, July 1, 1996............................. 570,000 $0.05
Granted (weighted average fair value of $0.02 per
share)............................................. 6,579,327 0.09
Exercised........................................... (5,375,764) 0.05
Canceled............................................ (217,875) 0.05
----------
Outstanding, June 30, 1997 (43,593 options
exercisable)......................................... 1,555,688 0.21
Granted (weighted average fair value of $0.13 per
share)............................................. 3,237,375 0.49
Exercised........................................... (1,985,592) 0.38
Canceled............................................ (440,096) 0.17
----------
Outstanding, June 30, 1998 (307,705 options
exercisable)......................................... 2,367,375 0.45
Granted (weighted average fair value of $0.51 per
share)............................................. 3,909,300 2.93
Exercised........................................... (1,457,604) 1.23
Canceled............................................ (480,407) 0.54
----------
Outstanding, June 30, 1999 (608,913 options
exercisable)....................................... 4,338,664 $2.42
==========
</TABLE>
Additional information regarding options outstanding as of June 30, 1999 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05-0.33 784,050 8.10 $0.32 237,568 $0.31
0.67-1.00 745,163 8.82 0.72 182,440 0.67
1.63-2.00 1,430,651 9.55 1.89 64,793 1.94
2.83-5.10 535,800 9.92 4.15 362 3.80
5.67 843,000 10.00 5.67 123,750 5.67
----------- --------- ----- ----- ------- -----
$0.05-$5.67 4,338,664 9.30 $2.42 608,913 $1.89
========= =======
</TABLE>
F-12
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
At June 30, 1999, 6,025,782 shares were available for future grant under the
Plan.
Stock and Stock Options Granted to Non-employees
The Company has granted equity instruments to non-employees for consulting
and other services. During fiscal 1998 and 1999 the Company issued 185,064 and
60,889 shares of common stock to non-employees in exchange for services. The
fair value (as determined by the Board of Directors) of the common stock
issuances totaled $83,000 and $171,000 in 1998 and 1999, respectively, and was
expensed at the time of issuance.
The Company has also granted stock options to non-employees with vesting
periods ranging from six months to three years. Stock options issued to non-
employees are accounted for in accordance with the provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and Emerging Issues Task Force Issues
(EITF) No. 96-18, "Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services." In connection with the vesting of these options, the Company
expensed $17,000 and $22,000 in fiscal 1998 and 1999, respectively.
1999 Employee Stock Purchase Plan
In June 1999, the Board approved the 1999 Employee Stock Purchase Plan (the
"ESPP"), which allows eligible employees of the Company to purchase common
stock through payroll deductions. A total of 1,500,000 shares of the Company's
common stock has been reserved for issuance under the ESPP. The share reserve
will increase every year, starting in 2000, by the greater of 1% of outstanding
shares or the number of shares issued under the ESPP in the last twelve months,
up to a maximum of 24,000,000 shares over a ten-year period. The purchase price
will be the lower of 85% of the fair market value of the common stock on the
day the employee began participating in the offering, or 85% of the fair market
value of the shares on the date of purchase. The first offering will begin on
the effective date of the initial public offering.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its employee
stock-based awards using the intrinsic value method in accordance with APB No.
25, "Accounting for Stock Issued to Employees," and its related
interpretations. Accordingly, compensation expense has been recognized in the
financial statements for employee stock arrangements in which the fair value of
common stock at the grant date was greater than the option exercise price. In
connection with 250,500 options granted in fiscal 1999 at an exercise price of
$2.00 per share, the Company recorded deferred compensation of $209,000 and
amortized $13,000 as compensation expense.
SFAS No. 123 requires the disclosure of pro forma net loss as though the
Company had adopted the fair value method as of the beginning of fiscal 1996.
Under SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which differ significantly from the
Company's stock option awards. These models also require subjective
assumptions, including estimated stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the minimum value method with the following
weighted average assumptions: expected life, two years average risk-free
interest rates, approximately 5.6% in 1998 and 4.8% in 1999; and no dividends
during the expected term. The Company's calculations are based on a single
option valuation approach, and forfeitures are recognized as they occur. If the
computed fair values of the 1997, 1998 and 1999 awards had been amortized to
expense over the vesting period of the awards, pro forma net loss for June 30,
1997, 1998 and 1999 would have been as follows:
F-13
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss: As reported............................. $(7,785) $(10,806) $(12,543)
Pro forma..................................... $(7,825) $(10,933) $(12,817)
Loss per share: As reported--basic and diluted.... $ (5.15) $ (2.18) $ (1.65)
Pro forma--basic and diluted................ $ (5.18) $ (2.21) $ (1.68)
</TABLE>
9.Employee Benefit Plan
In fiscal 1997, the Company adopted a 401(k) tax deferred savings and
investment plan (the "Plan") to provide retirement for its employees. Employee
contributions are limited to a maximum annual amount as set periodically by the
Internal Revenue Service. The Company may make contributions at the Board's
discretion. The Company made no contributions to the Plan for the years ended
June 30, 1997, 1998 and 1999.
10.Income Taxes
No federal income taxes were provided in 1997, 1998, and 1999 due to the
Company's net operating losses. The provision for income taxes for these
periods represents foreign income taxes and state minimum franchise taxes.
Deferred tax assets have been fully reserved as the Company believes that, due
to its history of operating losses and the expiration dates of the
carryforwards, it is more likely than not that such benefits will not be
realized.
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to the loss before income taxes as
follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Taxes computed at federal
statutory rate........... (35.0)% (35.0)% (35.0)%
State income taxes, net of
federal benefit.......... (6.7) (8.4) (8.2)
Federal research and
development credit....... (1.7) (4.1) (3.9)
Other..................... -- (4.1) 6.7
Change in valuation
allowance................ 43.4 51.6 41.0
------ ------ ------
Total provision......... -- % -- % 0.6%
====== ====== ======
</TABLE>
Deferred tax assets at June 30 are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Accruals and allowances.................................. $ 1,054 $ 2,171
Net operating loss and tax credits carried forward....... 5,758 9,435
Depreciation............................................. 141 443
Capitalized expenses..................................... 2,116 2,128
------- -------
Total gross deferred tax asset before valuation
allowance............................................... 9,069 14,177
Valuation allowance...................................... (9,069) (14,177)
------- -------
Net deferred tax asset................................... $ -- $ --
======= =======
</TABLE>
At June 30, 1999, the Company had federal and state net operating loss
carryforwards of approximately $20,464,000 and $2,119,000 available to reduce
future federal and state taxable income, respectively. The
F-14
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
federal and state carryforwards begin to expire in 2012 and 2005, respectively.
The Company also has research and development credit carryforwards of
approximately $1,600,000 and $807,000 available to offset future federal and
state income taxes, respectively, as of June 30, 1999. These federal
carryforwards begin to expire in 2012. The Company also has a state investment
tax credit of approximately $226,000 as of June 30, 1999 which begins to expire
in 2007. The extent to which the loss and credit carryforwards can be used to
offset future taxable income or taxes may be limited, depending on the extent
of ownership changes within any three-year period as provided by Section 382 of
the Internal Revenue Code and applicable California state tax law.
11.Contingencies
The Company is involved in litigation in the normal course of business. On
March 2, 1998, Alteon Incorporated, a pharmaceutical company, filed a lawsuit
against the Company alleging trademark infringement and related claims arising
from the Company's use of the name and mark Alteon. An answer denying these
claims was filed on May 1, 1998. The Company believes it has strong defenses
and it intends to defend the litigation vigorously. Management does not believe
the ultimate outcome of any such matters will have a material adverse effect on
the Company's consolidated financial statements.
12.Business Segment and Geographic Information
The Company operates in only one reportable segment.
The Company had net sales to individual customers in excess of 10% of net
sales for the years ended June 30 as follows:
<TABLE>
<CAPTION>
Customer 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
A (Stockholder).............................................. 35% 10% 14%
B............................................................ 49 42 --
C (Stockholder).............................................. 9 14 4
D............................................................ -- -- 10
E............................................................ -- -- 10
The Company had accounts receivable from individual customers in excess of
10% of gross accounts receivable at June 30 as follows:
<CAPTION>
Customer 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
A (Stockholder).............................................. 55% 7% 16%
B............................................................ -- 12 --
C (Stockholder).............................................. 15 -- --
D............................................................ -- 10 --
</TABLE>
Sales to customers by geographic area for the years ended June 30 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ------- -------
<S> <C> <C> <C>
United States........................................... $152 $ 9,652 $19,716
United Kingdom.......................................... 9 289 1,221
France.................................................. -- 137 1,236
Japan................................................... 17 2,981 1,611
Other................................................... -- 513 2,470
---- ------- -------
Total................................................. $178 $13,572 $26,254
==== ======= =======
</TABLE>
F-15
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Years Ended June 30, 1997, 1998 and 1999
Substantially all of the Company's long-lived assets are in the United
States.
13.Related Party Transactions
Third-party manufacturing services have been provided by a related party in
1998 and 1999. The total value of inventory purchased from the stockholder is
$1,971,000 and $8,694,000, respectively. The Company also has accounts payable
of $947,000 and $799,000 as of June 30, 1998 and 1999, respectively, to this
stockholder.
14.Net Loss Per Share
The following is a reconciliation of the denominators used in computing basic
and diluted net loss per share at June 30 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Shares (denominator):
Weighted average common shares outstanding............... 6,939 10,775 12,004
Less weighted average common shares outstanding subject
to repurchase........................................... 5,428 5,824 4,394
----- ------ ------
Shares used in computation, basic and diluted............ 1,511 4,951 7,610
===== ====== ======
</TABLE>
For fiscal 1997, 1998 and 1999, the Company had securities outstanding that
could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented as their effect would have been antidilutive. Such outstanding
securities consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Preferred stock............................. 13,531,201 15,373,134 20,677,972
Stock options............................... 1,555,688 2,367,375 4,338,664
---------- ---------- ----------
Total..................................... 15,086,889 17,740,509 25,016,636
========== ========== ==========
</TABLE>
F-16
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
-------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents.................................. $29,766 $107,103
Accounts receivable--net.............................. 3,853 4,934
Inventory............................................. 2,632 4,550
Prepaid expenses and other current assets............. 397 866
------- --------
Total current assets................................ 36,648 117,453
Property and equipment--net........................... 3,931 4,861
Other long-term assets................................ 42 41
------- --------
Total assets........................................ $40,621 $122,355
======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................................... $ 3,561 $ 6,292
Accrued compensation and related liabilities.......... 2,052 2,962
Other accrued expenses................................ 3,783 6,229
Current portion of note payable to bank............... 1,363 1,363
Current portion of capital lease obligations.......... 348 394
Income taxes payable.................................. 53 92
------- --------
Total current liabilities........................... 11,160 17,332
Note payable to bank.................................... 1,798 1,560
Capital lease obligations............................... 121 10
Sublease deposits....................................... 93 93
------- --------
Total liabilities................................... 13,172 18,995
------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 par value,
15,000,000 shares authorized, shares outstanding:
June 30, 1999 13,785,326; September 30, 1999 none.... 58,294 --
Common stock, $0.001 par value, 300,000,000 shares
authorized; shares outstanding: June 30, 1999
12,987,109; September 30, 1999 39,124,197............ 3,224 153,220
Notes receivable from stockholders.................... (2,465) (6,133)
Deferred compensation................................. (196) (183)
Accumulated deficit................................... (31,408) (43,544)
------- --------
Total stockholders' equity.......................... 27,449 103,360
------- --------
Total liabilities and stockholders' equity.......... $40,621 $122,355
======= ========
</TABLE>
See notes to condensed consolidated financial statements.
F-17
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
September 30,
-----------------
1998 1999
------- --------
<S> <C> <C>
Net sales................................................... $ 5,127 $ 12,750
Cost of sales............................................... 2,549 5,447
------- --------
Gross profit................................................ 2,578 7,303
Operating expenses:
Sales and marketing....................................... 2,516 6,820
Research and development.................................. 2,165 3,989
General and administrative................................ 492 1,283
Stock compensation to consultants......................... -- 7,638
------- --------
Total operating expenses................................ 5,173 19,730
------- --------
Loss from operations........................................ (2,595) (12,427)
Interest income (expense), net.............................. 65 331
------- --------
Loss before income taxes.................................... (2,530) (12,096)
Income tax expense.......................................... -- 40
------- --------
Net loss.................................................... $(2,530) $(12,136)
======= ========
Basic and diluted loss per common share..................... $ (0.39) $ (1.20)
======= ========
Basic and diluted common shares used in computation......... 6,540 10,095
======= ========
</TABLE>
See notes to condensed consolidated financial statements.
F-18
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
September 30,
-----------------
1998 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(2,530) $(12,136)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 323 581
Deferred rent............................................. 143 4
Charges from common stock for services.................... 6 410
Issuance of stock options to consultants.................. 4 7,638
Changes in assets and liabilities:
Accounts receivable...................................... (617) (1,081)
Inventory................................................ 957 (1,918)
Prepaid expenses and other current assets................ (242) (469)
Accounts payable......................................... 60 2,731
Accrued compensation and related liabilities............. (439) 2,481
Other accrued expenses................................... 403 910
------- --------
Net cash used in operating activities................... (1,932) (849)
------- --------
Cash flows from investing activities:
Purchases of property and equipment........................ (908) (1,497)
Other assets............................................... 36 --
------- --------
Net cash used in investing activities................... (872) (1,497)
------- --------
Cash flows from financing activities:
Net proceeds from sale of preferred stock.................. 7,272 --
Net proceeds from sale of common stock..................... -- 79,579
Repayments of note payable................................. (136) (238)
Proceeds from exercise of stock options, net of
repurchases............................................... -- 341
Repayment of notes receivable for common stock............. 37 66
Repayment of capital lease obligations..................... (55) (65)
------- --------
Net cash provided by financing activities............... 7,118 79,683
------- --------
Net increase in cash and equivalents........................ 4,314 77,337
Cash and equivalents, beginning of period................... 9,047 29,766
------- --------
Cash and equivalents, end of period......................... $13,361 $107,103
======= ========
Supplemental schedule of noncash investing and financing
activities:
Exercise of stock options for notes receivable, net of
repurchases............................................... $ -- $ 3,734
Cash paid during the period for:
Interest.................................................. $ 81 $ 87
Income taxes.............................................. $ -- $ 1
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of presentation
The unaudited condensed consolidated financial statements contained in this
report have been prepared by Alteon WebSystems, Inc. ("Alteon" or the
"Company"). In the opinion of management, these financial statements include
all normal recurring adjustments and accruals necessary for a fair presentation
of the Company's financial position as of September 30, 1999, and its results
of operations and cash flows for the quarters ended September 30, 1998 and
1999. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission for interim financial
statements. This unaudited quarterly information should be read in conjunction
with the audited consolidated financial statements of Alteon and the notes
thereto for the year ended June 30, 1999.
Note 2. Initial public offering of stock
On September 29, 1999, the Company completed the sale of 4.6 million shares
of common stock in an underwritten initial public offering at a price of $19.00
per share. Offering proceeds to the Company, net of the underwriting discount
and aggregate expenses of approximately $7.8 million, were approximately
$79.6 million. Simultaneously with the closing of the initial public offering,
all 13,790,494 shares of the Company's outstanding convertible preferred stock
were converted into 20,685,741 shares of common stock at a conversion rate of
1.5-to-1.
Note 3. Inventory
Inventories consist of:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
-------- -------------
(in thousands)
<S> <C> <C>
Raw materials and subassemblies.................... $ 973 $ 2,815
Inventory at manufacturer in Thailand.............. 769 1,023
Work in process.................................... 394 146
Finished goods..................................... 496 566
------- -------
Total............................................ $ 2,632 $ 4,550
======= =======
</TABLE>
Note 4. Contingencies
Alteon Incorporated, a pharmaceutical company, filed a lawsuit against the
Company on March 2, 1998 in the United States District Court for the District
of New Jersey, Civil Action No. 98-940 (DRD), alleging that the Company's use
of the name and mark Alteon and Alteon Networks (the former name of the
Company) constituted infringement and dilution of its rights in the Alteon name
and mark. The Company filed an answer denying these claims alleged by Alteon
Incorporated. Alteon Incorporated and the Company entered into a settlement
agreement dated July 22, 1999 whereby, among other things, Alteon Incorporated
agreed to dismiss this lawsuit.
F-20
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes To Condensed Consolidated Financial Statements--(Continued)
(Unaudited)
Note 5. Net loss per share
Basic loss per common share is computed by dividing loss attributable to
common stockholders by the weighted-average number of common shares outstanding
for the period (excluding shares subject to repurchase). Diluted loss per
common share is computed by dividing loss attributable to common stockholders
by the weighted-average number of common shares and potentially dilutive common
securities outstanding for the period. Potentially dilutive common shares are
excluded from the computation in loss periods as their effect would be
antidilutive.
At the closing of the initial public offering, all outstanding shares of
convertible preferred stock were converted into common stock at a rate of 1.5-
to-1.
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Quarter Ended
September 30,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Net loss (numerator), basic and diluted............ $ (2,530) $ (12,136)
======== =========
Shares (denominator):
Weighted average common shares outstanding....... 11,592 14,363
Weighted average common shares outstanding
subject to repurchase........................... (5,052) (4,268)
-------- ---------
Shares used in computation, basic and diluted.... 6,540 10,095
======== =========
Net loss per share, basic and diluted.............. $ (0.39) $ (1.20)
======== =========
</TABLE>
As of September 30, 1998 and 1999, the Company had securities outstanding
that could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented as their effect would have been antidilutive. Such outstanding
securities consist of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ -----
<S> <C> <C>
Convertible preferred stock.................................. 16,936 --
Shares of common stock subject to repurchase................. 5,052 4,088
Stock options................................................ 2,327 5,878
------ -----
Total...................................................... 24,315 9,966
====== =====
</TABLE>
Note 6. Comprehensive loss
The Company had no items of other comprehensive income to report through
September 30, 1999.
F-21
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Notes To Condensed Consolidated Financial Statements--(Continued)
(Unaudited)
Note 7. New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for the Company's fiscal year ending June 30, 2001.
The Company believes that this statement will not have a significant impact on
its financial results.
The Company adopted Statement of Position (SOP) No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," in the
first quarter of fiscal year 2000 and its adoption had no material impact on
the Company's results from operations or financial position.
F-22
<PAGE>
[Description of Inside Back Cover Graphic]
[Graphic depicts profile of screaming man. Caption states "Because people hate
(really hate) web wait." Graphic also contains reproductions of our products
including WebICs, Web Switches, Web OS and Server Adapters. The graphic
contains our name and logo in the lower right hand corner with the phrase "Web
Speed for e-Business." The graphic also has the following captions:
"WebICs
Custom network processing semiconductors form the heart of Alteon Web
switches and server adapters enabling high performance and scalability.
Web Switches
Alteon Web switches deliver high availability and performance for Web
infrastructure.
Web OS
Our Web OS software provides Web traffic management services integrated
within Alteon Web switches.
Server Adapters
Our server adapters, with ultra high speed capabilities, increase Web server
performance."
<PAGE>
5,000,000 Shares
[Logo Of Alteon WebSystems]
Common Stock
------------
PROSPECTUS
, 1999
------------
Lehman Brothers
Robertson Stephens
Thomas Weisel Partners LLC
Dain Rauscher Wessels
<PAGE>
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $138,138
NASD filing fee.................................................... 30,500
Nasdaq National Market listing fee................................. 17,500
Printing and engraving costs.......................................
Legal fees and expenses............................................
Accounting fees and expenses....................................... 150,000
Blue Sky fees and expenses.........................................
Transfer Agent and Registrar fees..................................
Miscellaneous expenses.............................................
--------
Total............................................................ $
========
</TABLE>
Item 14. Indemnification of Directors and Officers
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that
we must indemnify our directors and executive officers and may indemnify our
other officers and employees and agents to the fullest extent permitted by
Delaware law.
In addition, our amended and restated bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
. we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise required by law,
our certificate of incorporation, our bylaws or agreements;
. we are required to advance expenses to our directors and executive
officers as incurred in connection with a legal proceedings against them
for which they may be indemnified; and
. the rights conferred in the bylaws are not exclusive.
We have entered into indemnification agreements with each of our directors
and some of our officers. These agreements, among other things, require us to
indemnify each director and officer for expenses such as attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of Alteon,
arising out of the person's services as our director
II-1
<PAGE>
or officer, any subsidiary of ours or any other company or enterprise to which
the person provides services at our request.
The underwriting agreement provides for cross-indemnification among us and
the underwriters for indemnification by the underwriters of our directors,
officers, employees and controlling persons and for indemnification by the
selling stockholders of the underwriters for some liabilities, including
liabilities arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
All the share amounts and prices per share set forth below have been adjusted
to reflect the 3 for 2 split of our common stock in June 1999.
Since inception, we have sold and issued the following unregistered
securities:
(1) From March 1996 through November 1999, we granted stock options to
purchase an aggregate of 17,849,152 shares of common stock at exercise prices
ranging from $0.05 to $66.00 per share to employees, consultants, directors and
other service providers pursuant to our 1999 Equity Incentive Plan. As of
November 30, 1999, we had issued 10,187,477 shares upon the exercise of these
options.
(2) From April 1996 through November 1999, we issued an aggregate of
1,296,241 shares of common stock to consultants at prices ranging from $0.0067
to $19.00 per share.
(3) In April 1996, we issued an aggregate of 4,404,255 shares of common stock
to 4 purchasers at $0.0067 per share for an aggregate purchase price of
$29,362.
(4) In May 1996, we sold an aggregate of 7,792,203 shares of Series A
preferred stock to 13 purchasers at $0.51 per share for an aggregate purchase
price of $3,999,998.
(5) In September 1996, we sold an aggregate of 462,750 shares of Series A
preferred stock to 15 purchasers at $0.51 per share for an aggregate purchase
price of $237,545.
(6) In December 1996, we sold 75,000 shares of Series A preferred stock to 1
purchaser at $0.67 per share for an aggregate purchase price of $50,000.
(7) In February 1997, we sold 12,000 shares of Series A preferred stock to 2
purchasers at $0.67 per share for an aggregate purchase price of $8,000.
(8) In March 1997, we sold 3,750 shares of Series A preferred stock to 2
purchasers at $1.67 per share for an aggregate purchase price of $6,250.
(9) In April 1997, we sold 22,500 shares of Series A preferred stock to 1
purchaser at $1.17 per share for an aggregate purchase price of $26,250.
(10) In April 1997, we sold 21,000 shares of Series A preferred stock to 2
purchasers at $1.67 per share for an aggregate purchase price of $35,000.
(11) In May 1997, we sold an aggregate of 5,216,998 shares of Series B
preferred stock to 37 purchasers at $3.33 per share for an aggregate purchase
price of $17,389,993.
(12) In August 1997, we sold an aggregate of 45,000 shares of Series B
preferred stock to 3 purchasers at $3.33 per share for an aggregate purchase
price of $150,000.
(13) In September 1997, we sold an aggregate of 30,000 shares of Series B
preferred stock to 1 purchaser at $3.33 per share for an aggregate purchase
price of $100,000.
II-2
<PAGE>
(14) In February 1998, we sold an aggregate of 51,000 shares of Series B
preferred stock to 1 purchaser at $5.00 per share for an aggregate purchase
price of $255,000.
(15) In June 1998, we issued an aggregate of 1,640,933 shares of Series C
preferred stock to 24 purchasers at $4.67 per share for an aggregate purchase
price of $7,657,687.
(16) In July 1998, we issued an aggregate of 1,562,595 shares of Series C
preferred stock to 9 purchasers at $4.67 per share for an aggregate purchase
price of $7,292,110.
(17) In June 1999, we issued an aggregate of 3,742,243 shares of Series D
preferred stock to 44 purchasers at $5.67 per share for an aggregate purchase
price of $21,206,044.
(18) In July 1999, we issued an aggregate of 7,752 shares of Series D
preferred stock to 1 purchaser at $5.67 per share for an aggregate purchase
price of $43,928.
The sales and issuance of securities described in paragraphs (1) and (2)
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 701 of the Securities Act in that they were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701.
The sales and issuances of securities described in paragraphs (3) through
(18) above were deemed to be exempt from registration under the Securities Act
by virtue of Rule 4(2) or Rule 506 under Regulation D promulgated thereunder.
With respect to the grant of stock options and restricted stock awards
described in paragraph (1), an exemption from registration was unnecessary in
that none of the transactions involved a "sale" of securities as such term is
used in Section 2(3) of the Securities Act.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with
any subsequent sales of any such securities. All recipients either received
adequate information about us or had access, through employment or other
relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
4.1+ Specimen Common Stock Certificate.
4.2+ Investor Rights Agreement dated June 30, 1999 between Registrant and
holders of the Registrant's Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock.
5.1* Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement.
10.2+ 1999 Equity Incentive Plan and related documents.
10.3+ 1999 Employee Stock Purchase Plan.
10.4+ License and Stock Purchase Agreement dated April 19, 1996 between
Registrant and Essential Communications Corporation.
10.5+ Loan and Security Agreement dated March 20, 1998 between Registrant and
Silicon Valley Bank, as modified on May 29, 1998, July 15, 1998,
September 4, 1998 and December 8, 1998.
10.6+ Master Equipment Lease Agreement dated September 9, 1996 between
Registrant and Phoenix Leasing Incorporated and related schedules and
attachments.
10.7+ Lease Agreement dated December 24, 1997 between Registrant and South San
Jose Interests, as amended on April 20, 1998.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.8+ Sublease dated April 7, 1999 between Registrant and Silicon Valley
College.
10.9+ Memorandum of Understanding between Registrant and International
Manufacturing Services, Inc. (Celestica Thailand Ltd.).
10.10+ Offer letter from Registrant to Mr. Joe T. Booker dated January 17,
1997 and related side letter dated May 9, 1997.
10.11+ Offer letter from Registrant to Mr. Barton M. Burstein dated December
2, 1996.
10.12+ Offer letter from Registrant to Ms. Selina Y. Lo dated January 17,
1997.
10.13+ Offer letter from Registrant to Mr. Dominic P. Orr dated October 11,
1996.
10.14+ Offer letter from Registrant to Mr. Shirish S. Sathaye dated May 5,
1997.
21.1+ List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-82605) or amendments thereto and incorporated herein by reference.
* To be filed by amendment.
(b)Financial Statement Schedules
Independent Auditors' Report on Schedule
Schedule II--Valuation and Qualifying Accounts and Reserves
Item 17. Undertakings
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereinto duly authorized, in the
City of San Jose, State of California, on the 20th day of December, 1999.
ALTEON WEBSYSTEMS, INC.
/s/ Dominic P. Orr
By:__________________________________
Dominic P. Orr
Chief Executive Officer,
President and Chairman
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Dominic P. Orr and James G. Burke, and
each of them, his or her true and lawful agent, proxy and attorney-in-fact,
with full power of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign
and file such certificates, instruments, agreements and other documents as may
be necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any
such amendment or any subsequent registration statement filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and (iv) take any and all
actions which may be necessary or appropriate to be done, as fully for all
intents and purposes as he or she might or could do in person, hereby
approving, ratifying and confirming all that such agent, proxy and attorney-
in-fact or any of his substitutes may lawfully do or cause to be done by
virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Dominic P. Orr Chief Executive Officer December 20, 1999
______________________________________ President and Chairman
Dominic P. Orr (Principal Executive
Officer)
/s/ James G. Burke Chief Financial Officer December 20, 1999
______________________________________ (Principal Financial and
James G. Burke Accounting Officer)
/s/ Joe T. Booker Chief Operating Officer, December 20, 1999
______________________________________ Vice President of
Joe T. Booker Operations and Director
/s/ Tench Coxe Director December 20, 1999
______________________________________
Tench Coxe
/s/ Andrew W. Verhalen Director December 20, 1999
______________________________________
Andrew W. Verhalen
/s/ Adam Grosser Director December 20, 1999
______________________________________
Adam Grosser
</TABLE>
II-5
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of Alteon WebSystems, Inc.
We have audited the consolidated financial statements of Alteon WebSystems,
Inc. as of June 30, 1998 and 1999 and for each of the three years in the period
ended June 30, 1999, and have issued our report thereon dated July 16, 1999
(included elsewhere in this registration statement). Our audits also included
the consolidated financial statement schedule listed in Item 16(b) of this
registration statement. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
July 16, 1999
San Jose, California
S-1
<PAGE>
Alteon WebSystems, Inc. and Subsidiary
Valuation and Qualifying Accounts and Reserves
Years Ended June 30, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Additions Reclassifications
Balance at Charged to and Charges Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- ----------- ---------- ---------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended June 30,
1997:
Allowance for doubtful
accounts............... $-- $ -- $-- $-- $--
Product return reserve.. -- 70 -- -- 70
Accrued product
warranty............... -- 50 -- -- 50
Year ended June 30,
1998:
Allowance for doubtful
accounts............... -- 150 -- -- 150
Product return reserve.. 70 245 -- -- 315
Accrued product
warranty............... 50 300 -- -- 350
Year ended June 30,
1999:
Allowance for doubtful
accounts............... 150 284 -- 20 414
Product return reserve.. 315 1,376 -- 736 955
Accrued product
warranty............... 350 711 -- 168 893
</TABLE>
S-2
<PAGE>
Exhibit Index
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
4.1+ Specimen Common Stock Certificate.
4.2+ Investor Rights Agreement dated June 30, 1999 between Registrant and
holders of the Registrant's Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock.
5.1* Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement.
10.2+ 1999 Equity Incentive Plan and related documents.
10.3+ 1999 Employee Stock Purchase Plan.
10.4+ License and Stock Purchase Agreement dated April 19, 1996 between
Registrant and Essential Communications Corporation.
10.5+ Loan and Security Agreement dated March 20, 1998 between Registrant
and Silicon Valley Bank, as modified on May 29, 1998, July 15, 1998,
September 4, 1998 and December 8, 1998.
10.6+ Master Equipment Lease Agreement dated September 9, 1996 between
Registrant and Phoenix Leasing Incorporated and related schedules and
attachments.
10.7+ Lease Agreement dated December 24, 1997 between Registrant and South
San Jose Interests, as amended on April 20, 1998.
10.8+ Sublease dated April 7, 1999 between Registrant and Silicon Valley
College.
10.9+ Memorandum of Understanding between Registrant and International
Manufacturing Services, Inc. (Celestica Thailand Ltd.)
10.10+ Offer letter from Registrant to Mr. Joe T. Booker dated January 17,
1997 and related side letter dated May 9, 1997.
10.11+ Offer letter from Registrant to Mr. Barton M. Burstein dated December
2, 1996.
10.12+ Offer letter from Registrant to Ms. Selina Y. Lo dated January 17,
1997.
10.13+ Offer letter from Registrant to Mr. Dominic P. Orr dated October 11,
1996.
10.14+ Offer letter from Registrant to Mr. Shirish S. Sathaye dated May 5,
1997.
21.1+ List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-82605) or amendments thereto and incorporated herein by reference.
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the use in this registration statement of Alteon WebSystems, Inc.
on Form S-1 of our report dated July 16, 1999, appearing in the prospectus,
which is part of this registration statement, and of our report dated July 16,
1999 related to the consolidated financial statement schedule appearing
elsewhere in this registration statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such prospectus.
/s/ Deloitte & Touche LLP
San Jose, California
December 20, 1999
